Sunday, 24 May 2009

on stimulating the Economy

The issue: How to stimulate an Economy, very a la mode these days, is part of a wider (perennial) issue, "competitiveness, growth and employment".

Stimulants: The Australian case

The Australian government is giving a rebate/cash gift to about half of the population with the request that they spend it. Each "gift" is worth the equivalent of USD 700 and it's going to cost a total of USD 33 billion.

A similar gift (or handout) was given last year to pensioners and parents and it is considered to have had an effect on consumption and that growth.

On top of the effects of the global economic crisis, Australia's economy is plagued by the effects of the collapse of its mining sector.

Other recent stimulants:

The Bush government gave a tax rebate last year, as well as the Spanish government.

How much of such gifts or rebates are actually spent on retail consumption rather than pay debt or go into savings depends on the level of debt owed by individuals in each economy.

The German as well as the Spanish and other governments have also offered rebates for specific uses only, in their case, purchase of cars. Why? Because Germany and others consider their car industry as a "backbone" of the overall economy.

Which brings us to the issue: Do economies have certain sector(s) that act as a "backbone" to these economies and how much of a backbone are they. Plus, are these backbones to be preserved or replaced, over time?

Update: "Our auto industry is the foundation for economies all across the Midwest"
B. Obama, May 24, 2009


Economic Modeling considerations

And the even more crucial issue: Does having backbone sector(s) make an economy stronger or more stable or the opposite?

In the US, the car industry is viewed by many as a major backbone of the economy, and its survival is seen a crucial not only for the manufacturers but their suppliers as well as retailers/dealers as well, at least I have seen that argued if I am not mistaken, even by the current US president.

Again, the issue is whether having sich backbones is a sign of faulty economic modeling (de facto or as a result of planning).

Some 20 years ago, the European Union, via its then EU Commissioner for Industry, Martin Bangeman, a German, argued against supporting and protecting "national champions" or even sectoral "industrial" policies, arguing in favor of measures of "horizontal" nature, ie not applied to certain or specific companies or even sectors.

Confused? Add to that the theories of comparative advantage, that in short says that each economy should produce the types of products (and services) it has some form of comparative advantage (natural or "built") when compared to other trading economies on this planet, export them as well as import the ones it does have a comparative advantage in. This theory remains very popular among many, but it is also challenged by many, including yours truly! Why? Because whereas in theory it may work, in practice, in spite of the growth of world trade post WWII, it does not "function" that well. Eg some economies seem to have little or no comparative advantage in producing anything.

So what? Well, I will come back to this topic, but in the meantime, food for thought: what does "your" national economy have a real and durable comparative advantage in producing these days? And how sustainable is this advantage in times of global economic recession?

Plus, please consider this:

Are economic stimulants more effective when they are deployed via government - public investment - works (with the private sector contractors and suppliers receiving the direct effect of the money spent) or via these handouts given to people for them to decide where to spend it?

PS. Remember the recent problems in the US with attaching a "made in USA" requirement to the products used in stimulant financed public works (eg their incompatibility with a country WTO membership or bilateral agreeements with other countries). Yes things are THAT complicated!!!


1 comment:

  1. Hi Nick,

    the problem with cash gifts: In a globalised market the money spent does not stay in a certain region. If american or german government wants to give cash to the citizens, the money could end in the hand of chinese retailers. No problem with that, but it is not very effective.
    It works however with the car-bonuses because car-industry is our backbone and most citizens buy german cars. Well, you can replace a tooth perhaps, but you cannot replace a backbone!
    To have an industrial backbone makes the national economy less flexible, yes. But the "backbone" creates a lot of in the globalized world scarce jobs though.

    Needless to say, that our car-industry is one of our comparative advantages (Porsche, Mercedes, BMW, Volkswagen etc...)

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