Friday, June 04, 2010

The nature of adjustment economic policies

Sometime ago, Robert Gordon (Author of the book :Macroeconomics, 1983) asked whether recession was the only way to fight inflation or for this matter, the implementation of any stabilization program. The question itself might be an interesting issue of academic value, but it deals with the complicated problem of allocation of the cost of adjustment which economies must face, when expenditures are over expand above incomes, and a reduction is necessary. It deals with the way things happen , instead of the way it should happen.
Recently, another way to cope with this issue, has been the concept of socialization of losses, and privatization of benefits .It means that when it is the time to correct the excesses ,the average citizen get the burden of such cots, while the benefits was concentrated in just a few . Both Roubini and Krugman, have been quite assertive about it, during the 2008 financial and economic recession .-
On the other hand, it has been usual for economic stabilization policies, to stress the demand side of the equation, which emphasizes unemployment cost ,production losses and welfare reduction, which is the usual for stabilization program designed not to foster further up potential economic growth, but to adjust expenditures to the current level of economic growth. In other words, with growth capacities fixed in the short run, there are hardly any different options other than to focus on expenditures, which are supposedly more flexible to adapt. Besides, the safety social net based on unemployment subsidies, perversely reinforce this approach. Latin America stabilization programs in the eighties to cope with external debt ,were based on this premises .The result was massive unemployment , higher poverty and inequality levels than desirable.
Thus, the issue goes on not only as much as to reshape the nature of stabilization program, but to reshape the incentives influencing their implementation as well. Let get first with the later. This does not mean to eliminate unemployment subsidies, but to complement it with unemployment insurance financed with resources coming from both from the firm and the worker. This way of financing the unemployment, increase the net economic cost of recessions to the State because of decreasing tax revenues, but coupled with lower political benefits. After all, subsidies create a sense of either dependence or protection arising from the State, and it is the State´ s interest, to foster that sentiment to support its political expected gains.
What about the former?. The nature of stabilization program assumes that everything should stay the same way as before ,expect that the expenditures levels must decrease. A different approach should consider more actively the supply side , specially the small and medium size enterprises because of their flexibility and adaptation abilities to the new conditions , improving their access to financial assistance, and debt renegotiation opportunities. Besides, it should decrease the transaction cost of moving from those business areas with losses, to that ones with profit expectations. It follows, that adjustment policies, should be an opportunity to support reallocation of resources from inefficient to efficient uses, based not exclusively on expenditures reductions but also on improving the conditions for private sector to do better and more efficient business, without excluding better regulation whether it is relevant . Actually, it seems that most of the stabilization programs, are designed for the State purposes of keeping its role in the economy, higher than necessary. Thus, it should also be based on the reallocation of resources to be done mainly by the entrepreneurs -