This is a short paper I just wrote for a macroecon class (extra credit of course) hence the odd style & separation of paragraphs. I am quite proud of it, to say the least, as I feel I am finally grasping some of the more intricate and subtleties of economics and how it can all play out in real life.
Here’s to hoping that sticks enough to earn an A on my final on the morrow!
On a more, how shall I say, lamenting note: I fear I am being sucked into the realm of the “Economist Elitists” (from whence my article of inspiration came) I used to decry, Senior year of high school, as hoards of my friends (really 3 or4, but allow me my hyperbole in telling this epic tale) began getting their exhorbitantly pricey subscriptions, and weekly brandished not only their fresh copies– full of haughty British spellings and slang, implicitly pissing on America’s seemingly low class z’s in favor of their slick “esses”– but also their sciolism, which seemed to say look at me, I am smarter than you, and I can prove it (points to reading material in hand). Oh fond memories…
But nay! I now realize what wit it possesses! What a vast array of knowledge and insight and news and current events that I too can now comment on! I’ll make every effort to interject my ideas in the office small talk on the newest form of Globalisation and associated rationalisations and how I can both analyse and criticise them (seductively stroking those esses in my mind everytime I say them, no more z’s for me– too low class, too low class…) I can pontificate at length on any subject, provided of course it was addressed in the weekly publication. Oh the joy and wonders between the pages, I can nearly feel soaking in my palms as I sit reading and chuckling to myself, and feeling that small bubble of arrogance that keeps me warm at night grow ever so slightly…
But onto the point of this post, and away from my sardonic musings:
“The Perils of Incrementalism”
Bold, unorthodox remedies are needed to jolt the world economy back to life
This article discussed the recession, which is dramatically affecting not only our US economy, but also those of the other G8 countries as well as developing nations, because of the syndetical nature of globalized world economies. After the seizure of credit markets about a year ago, the US, EU, Britain, and Japan are in a recession, which is one of the worst most of these nations have seen in decades. Consumers are cutting spending, as well as firms. As banks withdraw credit, and consumer demand contracts, economies are experiencing a deflationary spiral, more profound than what many would have predicted months ago. Consequently, policymakers have been scurrying to offset any further damages to the world economy, using primarily traditional means thusfar. These include, cutting interest rates, and injecting money into both banks and markets. Surprisingly though, these means do not seem to be as effective as one might expect, and are weakened in this credit crunch.
The authors suggest that the nations need to first augment the traditional ways of addressing recessions, through strengthening banks, increasing fiscal stimulus and further cutting interest rates. They next emphasize the need for more unconventional means to save the world economy. These include risky moves such as, printing extra money to finance budget deficits, which is an extreme move, putting inflation at high risk, but is still better than dreaded deflation. Countries need to continue to pump money into banks to avoid failure, as was recently done with Citigroup, but they should also attempt to remove dangerous assets from the balance sheets, which largely contributed to its collapse. The authors commend the US Federal Reserve’s strategy of printing more money to buy credit assets, which could potentially prevent many large-scale corporate closures following the number of bankruptcies filed this past year.
At the end of the day, it is clear the authors feel too cautious action taken in incremental steps will not only fail to halt the recession, but could possibly exacerbate the issues, and advocate innovative, unorthodox economic policy to lurch the world economy back into line. However, in my opinion, this unorthodox policy seems to be nothing more original than bigger and more drastic government spending in the form of bailouts.
II. Related Macroeconomic Topics
This article obviously deals with a number of different topics covered in this course, as it lists a number of recommendations to rescue world economies. The primary topic it addresses is the role of government in economic crisis, and how it uses both monetary and fiscal policy in attempt to offset deflation and a decrease in demand. It also discusses more “radical” measures the government could potentially take, which deviate from more conventional stabilization measures. Keynesian theory that government should actively stimulate aggregate demand to offset consumer pessimism, is also called into question, when one considers the potential outcome of some of these measures.
The beginning of the article discusses the decrease in aggregate demand, which has resulted from consumer insecurity in their jobs, and assets. Policy makers have responded in some traditional ways such as lowering interest rates, in an attempt to stimulate investment spending and increase demand for goods. They have also increased the quantity of reserves in the banking system to strengthen the ability of the banks to make loans, and extend some of the credit they so rapidly snatched away from people in panic. The suggestion that the Federal Reserve print more money to inject in the economy, with the likely result of inflation is also a more conventional, albeit undesirable method for stabilization of aggregate demand.
These measures have not proven to be very effective, as the root of the problem is people have been spending far beyond their means, riding on the coattails of archaic notions of the “American Dream” now spiraled out of control, and landing consumers in the midst of a credit crunch. The aid of Federally subsidized entities such as Freddie Mac & Fannie Mae have only irresponsibly provided the auspices for financially capricious individuals and institutions to live in a bubble of credit that inevitably had to burst. This differs from other recessions in that we were dealing with money that simply does not exist. Keynesian policy for “stabilization” has only fostered plans for ineffective bailouts, which seem only to attempt to restore the economies to how they were before, at the expense of taxpayers. I fail to understand the desire to return to the status quo, as it was nothing more than government backed, debt-based consumerism. Rather than advocate more of the same, policymakers should be investigating ways to utilize capital to generate a real return in the future, and allow the free market to bring itself into balance. Hastily decrying capitalism, and begging the government for intervention only gives it more controls over the economy, which it has already clearly abused, and advocates a sort of “fair weather” liberalism that moves us into uncomfortably socialist territory. It seems to be an opportunity for all—from small households holding large amounts of unnecessary credit card debt, to the government backed corporations who lent so wantonly to turn a profit— to finally learn that the piper indeed must be paid eventually, and living in a culture so entrenched in credit is truly a foolish mistake.
(2008, Nov 29). The Perils of Incrementalism. The Economist, 389 (8608), 12-13.