Friday, February 20, 2009

Fiscal stimulus package:How effective can it be ? (I)

These days of economic crisis, Governments have become the only source of expenditures. Consumers and firms alike, are evaluating its future prospects based on their markets behavior expectations , concerning employment, production and inventory respectively. Government looks like it is above those concerns, because it does not face such a constraint for its actions , other than politics one .From time to time ,it get the evaluation of voters. Thus ,it becomes more a matter of political judgment , the way Government should behave in time of crisis .Economic theory provide the necessary tools to understand the economic implication of this political judgment ,which by no means solve the issue of effectiveness of government expenditure.
Keynesian macroeconomics worked out these model of political foundation for Government expenditures, with the multiplier concept which refers to the expected effect that an increase in government expenditures would have on aggregate output. Free of transaction cost and inefficiencies , such expenditures would increase product by a certain magnitude depending on the level of saving. At its basic approach ,it refers to consumer saving . The lower the consumer saving ,the higher the impact of government expenditures. Based on this approach ,most of Governments world wide, have implemented fiscal stimulus package to overcome the current global economic recession with different characteristics and magnitudes as a percentages of GDP. Just to have a perspective ,with the parenthesis indicating the magnitude as a percentage of GDP, the list of stimulus package start with China (15% ),USA (5,8%),Italy (4,3%),Germany (3,1%), Chile (2,8%),Canada (2,0%),Japan(2,0%).(Source
An important issue deals with the effectiveness of Government expenditure ,and the requirements for a strong impact on aggregate demand. Leaving aside for the moment ,the transaction cost (bureaucracy),and the issue which it deals with conflict arising between manager and the public organization owner(government ),concerning the implementation of the program, we focus on the design variables:
1.- While an economic crisis goes along, at the bottom of it, income goes down so it does consumption and , because of precautionary behavior saving goes up, therefore the impact of government expenditure, might be less than expected. It also follows that tax cuts are helpful, while it goes quickly to the markets expenditure flows.
2.- From a short run perspective ,Infrastructure expenditure are on top on the list, because it goes direct to markets expenditures flows. On the long run perspective , education and health care expenditure programs, have a positive effect on productivity ,helping to keep under control future inflationary pressures.
3.- The timing upon which government expenditure is implemented do matter. On this regards, either, It goes ahead of the market or, it goes behind of the markets. The most effective Government expenditure programs, are the ones on the first group ,because it acts before the precautionary behavior takes a stronger stand among consumers and firms. Therefore, It is not just about the magnitude of resources involved.

Friday, February 06, 2009

Beyond Davos 2009:The rescue of Global economy

It has been an usual comment these days, about that Davos gathering, did not provided answers to the current global economy crisis. However, what it started as an academic forum ,can not all of the sudden become a platform for economic policy implementation. Taking a broader view , Davos probably helped to pave the way building consensus, for what it is the next meeting on April this year, which it should be really aimed at provide some responses from finance ministers working on solutions since last December the 20th.
What is it the point?.The current global economy crisis seems close to be out of control, as far as global economy policy respond is concern, Governments and monetary authority becomes frustrated with Banks behavior reluctant to lend when risk aversion is very high, no matter that some positive signals( although weak ones)of economic recovery, can develop toward the end of the fourth quarter, as long as all tools are focused in the right target at the right time. Besides, expectations, confidence and trust from markets and consumers, go hand in hand with economic policy implementation which imposes the need for strong leadership. However ,as others analysts have already emphasized, for this outcome to happen, it is key to have clear what the relevant variables are, and what the nature of this crisis is about .
1.-The scheme of ”do something approach”, does not mean to do randomly anything . Whether the goal is to get this economy recession shorter, before it becomes a more severe depression, policy action must be specifically focus on those target with the higher and faster impact on the economy prospect for recovery. -
2.-This time ,it is a matter of global economy recovery, which means coordination must be a plus, when it comes to implement policy responds. It is not just about the US economy, given the fact that there is stronger interconnection between economies, and there is reluctance from American consumers point of view, to be the ones to lead the recovery.-
3.- Most of the focus seems to be orientated toward the demand side of the equation. Well, policy makers can not leave the supply side on the second place. This means, that the focus should be on solving first the financial weakness of banks(the whole financial system) which still have in its balance sheets bad toxic assets, thus affecting their ability to go out to lend to those who can be ready to respond to new business opportunities , arising from demand variables. The nature and core of this crisis, is still a financial one.
4.- The faster the financial sector become the engine it is used to be, the better the chances to have a positive impact from the demand side stimulus package, therefore the higher the probability to have an economic recovery sooner . Right now the financial side of the equation , is at the least of its power, if not it is still off.