Fitting Recession Solutions

images2Economists are much sought after during the recession periods. Although they are responsible for both good and bad prescriptions governments keep them close to its time-to-time advices. Like the popular bipolar socio-economic ideologies – capitalism or socialism, recession solutions too are neatly divided. Hayekian or Keynesian solutions dominate the tables. In this age of private sector collapse many governments are compelled to go for Keynesian solution. This model makes the establishment to spent a large amount of its funds in the social sector. The USA administration under George Bush II spent injected $2 trillion to cool down the boiling economy.


 A Keynesian recession is a sudden trip down in demand and it can be remedied by pumping in adequate money in the hands of people. Some countries are fancying the idea of airdropping currency notes on the rooftops of rural households. Keynesian solution envisages six months to rescue the bad economy to get back to normalcy after giving enough purchasing power to the people.


On the contrary Hayekian model wants long term to correct the imbalances in the economy. The structural adjustments or solutions are advocated to the set the economy straight. Economist of Hayekian order quote the grave crisis during the great oil problem in the seventies and successful rescue operation carried out by its ideologues. The Oil shock of 1973 attracted initially heavy Keynesian solution. But the trade union activism diluted the huge pumping of money into the public services and stopped the intentions of the government and attracted Hayekian method. For nearly three decades this model worked may be due to the absence of various detrimental factors rather than the good effect of Hayekian principles.


A careful study into the economy tells that neither of the two in full dose is detrimental. Long term abandoning of social sector by the government and structural adjustments are equally dangerous. While doing the former the latter should not be forgotten.  Swaminathan S Anklesaria Aiyar writes in the Economic Times (28.1.2009, p.16) “The current recession is deeply structural. For decade, the US has run the biggest trade deficits in history, matched by corresponding trade surpluses of China, OPEC and other Asian countries. After the financial crisis of 1997-99, any Asian countries swore to build large forex reserves to avoid another debacle. So they deliberately undervalued their exchange rates, ran large current account surpluses, and so generated large forex reserves. This had to be mirrored in correspondingly large current account deficits in some other countries. The biggest turned out to be the US.”


This defied conventional economic logic. Normally, rich countries run trade surpluses and send their excess savings to poor countries with scarce capital that are running trade deficits This normally was turned on its head by Asian countries determined to build large forex reserves after the trauma of 1997-99. These forex reserves went mainly into US gilts.


“These bubbles have now burst. A Keynesian stimulus amounts to an attempt to re-inflate those bubbles. That is neither practical nor wise. The US government in 2008 mailed $80 billion to households to stimulate spending, but households spent only $1.2 billion of that and saved the rest they knew, even if politicians did not that the old spending spree had to stop.”


Now the governments are in do or die situation. It should follow Keynesian model at the moment and take Hayekian course in the long run. An adequate mix of both is necessary to keep the economy on track. A mere spending on the public programmes is not sufficient. There should be satisfactory outcomes. As the global development depends on the correct prescriptions of the economists and other important knowledge holders, they should constantly strive to advise the governments with suitable policies. Just marshalling out few archaic theories and outdated data is not enough. The world needs visionary thinkers to steer the governments to a right course.


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