Friday, August 14, 2009

Economic Policies in Dystopia

I have previously written about the near-term monetary and fiscal policy options that were available to decision makers for responding to the then emerging economic crisis in Implications of the Financial Crisis as offered by Dr George Cooper (2008, “The Origin of Financial Crises,” Vintage). The policy options he offered at the time included the “free market route,” which entails allowing the credit contraction and underlying asset deflation to play out. His second option was for policy-makers to continue applying fiscal and monetary stimulus in an effort to trigger a new economic expansion that might have the power and momentum to negate the current credit contraction. Dr Cooper’s final option was for policy-makers to “unleash the inflation monster,” which means simply “printing money” in order to negate debt through either state-funded handouts or deliberate inflationary spending policies. Of course, none of these options is particularly attractive. My conclusion at the time was that the US had probably already set out on a course towards inflation.

Since last December, Western countries have implemented an unprecedented array of fiscal and monetary initiatives designed to expand the economy and mitigate the severity of the ongoing economic crisis. Almost all of these initiatives entail heavy spending and borrowing by governments. The scale of these actions suggests that Western nations have elected to embark on programs to stimulate the global economy in an effort to restore capital flows and financial stability. The good news is that there are at least some indications that the economic crisis has bottomed-out, but no one really knows at this point.

However, should the stimulus programs eventually fail to place the global economy on track to a robust recovery, then the looming question will become how Western governments might eventually pay for the spending spree they gleefully embarked upon. Prof Kenneth Rogoff (2009, The Confidence Game, Project Syndicate) suggests that governments may have few policy options remaining:
Within a few years, Western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.
If Prof Rogoff is correct in suggesting that Western governments may soon have to choose from these dreary options, then the economic future for society is arguably bleak. None of these policies would be popular or easy to implement. Nevertheless, there is a certain reality found in the multiple approach-avoidance content of these choices, and it may be time for policy-makers (and voters) to begin thinking about which option (or combination of options) they might prefer.

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