Western nations are in urgent need of common sense policies to regenerate their ailing economies.
Clearly the monetary and Keynesian fiscal policies that were instituted during the recession, can hardly be regarded as a success. Yes, there has been some recovery, especially in the US, but this is not because of President Obama’s economic team’s Keynesian policies and Federal Reserve Governor Ben Bernanke’s “quantitative easing” or money printing.
Natural economic forces, not intervention, causing revival
Economic revival came about because of natural economic forces, notably the rebuilding of business inventories and replacement of equipment. The equity market rally from the 2008/2009 bear market nadir also helped as banks and other companies were able to raise capital. The decline in bond yields helped companies refinance themselves.
Now that the inventory and capital equipment replenishment cycle has tapered off and the stock market has traded aimlessly since late 2009, Cassandras have come to the fore once again. These pessimists, notably Keynesians such as Paul Krugman and money printing junkies such as Professor Bernanke and Bank of England Governor Mervyn King, are preaching the dangers of deflation and depression. Whenever these central bankers reach for their microphones, investors flee and stock markets fall.
Deflation predictions have proved to be excessively pessimistic
Deflation predictions of the Federal Reserve and Bank of England have not materialised. The UK is experiencing inflation of 3% to 5%, depending on which definition the government uses. The US’ inflation is lower, but the consumer price index has yet to fall. Indeed, with the exception of Japan, none of the major industrial nations have encountered deflation while emerging market nations are coping with accelerating inflation. Remarkably Professor King said this week that he was surprised by the extent of inflation. He appears to have forgotten his first year economics. Money printing brings in its wake currency devaluation and inflation.
Common sense economics the way forward- Models a proven failure
Perhaps it is time to step away from mathematical forecasting models and stale macro economic policies that have failed in the past and are likely to fail in the future. Perhaps straight forward common sense is the way forward.
Here are a few suggestions which are open to debate:
* Central to the common sense thesis is that the market, albeit imperfect, works better than government and central bank intervention. Economic cycles have to be accepted so prices and wages should be allowed to fall and rise, allowing demand to increase or decrease. Generally Asian and emerging market nations pursue these policies, but unfortunately these regions cannot divorce themselves from US and European economic failures.
* Instead of making predictions on whether there will be deflation or inflation, policy makers should concentrate on what is happening now. The US, UK & Europe are suffering from stagflation in varying degrees. Finance ministers such as Britain’s George Osborne are creating a climate of fear with pessimistic predictions to justify government spending cuts. Central banks with excessive monetary ease are embarking on competitive devaluations with all the inflationary dangers. These policies increase uncertainty causing businesses and consumers to reduce spending.
*To counter stagflation business should be backed. Companies should not be threatened with excessive regulation. Economic growth comes from the private sector, not the State. Equity capital should be preferred to debt. To encourage investors to invest in shares, dividends should be taxed at a lower rate than interest. Interest on corporate borrowings should not be tax deductable. These measures would hopefully raise the value of stock markets. Since the cost of equity capital i.e share issues would be lower than borrowings, corporate leverage would decline.
* Unemployment, currently estimated at around 48 million in the Organisation For Economic Cooperation & Development (OECD) nations, is the West’s biggest economic problem. Selective Keynesian multiplier measures would be helpful to regenerate areas. Governments and local authorities should embark on infrastructure improvements such as roads, bridges, railways, canals, hospitals, schools and clean air projects. The money could be borrowed initially but the projects would be self funding with road tolls and regional and local taxation. Gasoline taxes could rise to help the funding and reduce dependence on oil. These projects would employ more workers and private companies, causing them to spend money thus boosting business and employment elsewhere.
* State spending can be cut via bureaucracy cut backs. Instead of government managed projects, they can be micro managed in local communities.
* To boost productivity and lower the level of strikes and discontent there should be worker participation in profits of large, medium and small corporations. This incentive has been a major success for John Lewis, a UK department store.
* The demographics of aging baby boomers is potentially a major problem. Retirement villages with healthy, enjoyable living e.g. exercise, diet and interesting and creative activities, should be encouraged. Such an expansion would create jobs for young and old.
* Countries such as the UK should follow the example of Norway, Alaska and Singapore and establish a fully funded pension that invests in UK public and private corporations at home and abroad.
* Monetary policy must remain stable as the current erratic system raises uncertainty. Politicians should not pressurise banks to lend regardless as that is the path to another bubble economy and credit crisis.
To sum up there should be devolution towards micro economies and the State and central banks should stop tinkering with the market place.
Neil Behrmann is author of financial thriller, Trader Jack- The Story of Jack Miner (HandE Publishers)