Wednesday, January 14, 2009

Fiscal deficits and reviving 'animal spirits'

The most important discussions, in my opinion, this year, and particularly for the next 6 months, will be those that define and refine the fiscal stimulus debate. The most productive discussions seem to be coming out of Mark Thoma, Paul Krugman, Robert Reich, Joseph Stiglitz, and Brad deLong.

To round out the debate, I would also encourage interested readers to read the skeptical views of Greg Mankiw, and Tyler Cowen.

I myself am leaning more in favour of having an ambitious Keynesian-type fiscal stimulus from the government. Coming from a financial markets background, I am familiar with the need of plugging in occasional shortfalls in investment from various sources, particularly if the shortfall threatens to undermine the entire investment. More importantly, we need to shore up the confidence of those who have already invested, so they do not pull out, and further increase collateral damage.

I find this true whether in thinking of micro activities, or of the macro economy. There is no worse way to revive the “animal spirits” of legitimate businessmen than to show them that they’re on their own in propping up both their own investments, and the larger economy. And many legitimate small businessmen will only continue investing if they know the government is committed to doing its share in reviving the economy.

However, given that there is currently a coordinated worldwide slump, there is the added problem of finding the still cash-rich party who will fund these coordinated stimuli. Not all countries are created equal, and not all are equally capable of funding fiscal deficits.

As is already observable, those who most need a stimulus are already mired in debt, while those surplus producers who may have the excess cash are, if they lent to the deficit consumers, licking their wounds from debt losses, or if not, unwilling to start doing so now. This is again true, at the micro level of banks, and perhaps also by now at the macro level of nations.

The only feasible alternative I could think of now, as expressed here and here, is a reverse globalization. Perhaps the “animal spirits” of local businessmen will revive once they know that they can invest long-term in “risky” new ventures if they know that they will not suddenly be undercut by a low-cost foreign competitor once the local market for his business picks up.

In the same way, perhaps local investors, who may still be looking for a secure investment outlet for their remaining money, will be more than willing to invest in their local government, if they knew that the benefits will accrue to their own economy and not trickle away to surplus-producing countries. So it would seem that recovery is quicker achieved by nations separately, or at the most, by complementary trading blocs.

But that’s just my take. For sure, finding the right balance between globalization and reviving national economies, as well as choosing the right fiscal stimulus program, are the urgent matters of the day. Let’s see what the experts come up with. For the next few weeks, I defer the reader to fiscal commentaries of those mentioned above, who have more access to quantitative studies of fiscal programs, both real-time and historical. Let's see how the interaction of ideas and events play out.

1 comment:

Anonymous said...

might as well throw Fama in there,