A Civil Servant writes in today’s ET:
- Received wisdom, in the form of economic theory, has relatively little to offer. There is the brilliant Keynes advocating deficit spending to boost sagging demand and depressed business expectations. But there is also the no less brilliant Nobel Laureate, Friedrich von Hayek pointing out that while the main deficiency during recessions is investment, the world’s troubles are because of imprudent borrowing and lending by public authorities, who mortgage budgets of the future and tend to drive up the rate of interest. According to Hayek, the right way to help revival is to abolish old habits of lavish expenditure, and abolish the restrictions on free trade and free movement of capital.
Questions at stroke:
- What is the nature of the particular economy in respect of which prescriptions are being made? Is it an open economy or a closed economy? Is it a free-market economy or a planned economy, and if so to what extent? Is the nature of the economy likely to change with the answers to the basic question being debated, and how will that impact the fundamental impulse to progress, which has been the bedrock of progress in that economy? What is the current level and nature of unemployment in the economy? How will this be affected by the decision to spend or save?
- A second set of questions pertains to the specific fiscal parameters of the particular economy. What has been the level and nature of past deficits and government and private debt, which determines the present scope for incurring deficits? What has been the level of past economic growth? Does this limit the prospects for future economic growth? What are the likely fiscal multipliers? If positive in overall terms, which are the specific sectors where they are highest? How will the impact of fiscal deficits be shared as between the domestic and external economy in a flat, and yet not quite flat world?
- There is a similar set of questions with respect to the potential for monetary policy effectiveness . What is the level of interest rates? Of inflation? Other possibilities of quantitative easing? Are there ways of making credit move to deserving sectors, without leading to irresponsible lending, as seemed to have happened when crisis first struck?
Truly, the caveat lies here when this civil servant muses:
- Keynes and Hayek, would then be not on different streets, nor would Wall Street and
Main Streetor Fleet Street for that matter! Truly a utopian vision, but one worth working towards.