Economic downturn leads to a stronger government
Sunday, 29 March 2009
A.F.M. Mainul Ahsan
IN every recession, people lose their wealth that they accumulated over years. But one thing very surprising happened in every financial crisis: governments get stronger. Freedom gets constrained, i.e., choice of alternatives vanishes. Government puts all the restrictions on free trade which hinders normal pace of trade in the name of protectionism to gain popular support. If the government gets stronger and starts axing the private sector, then who suffers most? Surely, the poor. Governments pursue populist policies during an economic meltdown to assume more power which might impede normal pace of recovery. Here are some recent populist policies from the Obama team in Washington that will hamper not only domestic trade and growth, but also will affect growth in international arena.
Though there is so much controversy about whether Keynes's multiplier is relevant in today's complex economy, during an economic downturn, as a part of populist policy, governments still follow Keynes's simple multiplier rule blindly to put money in empty pockets to make citizens happy! In a full-employment situation, increased government spending would largely replace private spending, so the net stimulus to gross domestic product (GDP) would likely be quite small. However, in the present environment with growing unemployment of both labour and capital, the net stimulus would be larger since the additional government spending would put some unemployed resources to work. For instance, if the government spent money to build new homes with unemployed labour, the stimulus to GDP might be close to, even larger than, the amount spent.
Surprisingly, most of the spending in the President Obama's stimulus plan is targeted toward sectors of the economy where unemployment is the lowest, and thus, government is mainly going to draw resources away from private sector's uses. For instance, December unemployment rate was only 2.3 per cent for government workers and 3.8 per cent in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3 per cent and 15.2 per cent respectively. Yet 39 per cent of the $550 billion in the bill would go to state and local governments. Another 17.3 per cent would go to health and education - sectors where relatively secure government jobs are also prevalent. If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment rate is at the lowest level? Harvard economist Robert Barro, in an interview with the Atlantic, says, "This is probably the worst bill that has been put forward since the 1930s". However, critics started saying that Obama administration has taken such a huge stimulus plan to satisfy different interest groups, e.g., United Auto Workers (UAW), that supported him.
Not only the above, the U.S. government has also taken other popular policies in current ongoing recession. During prosperity, all of us become promoters of free trade. But suddenly we prefer protectionism over free trade if economy is not in good shape. Truth is-free trade is good in all the situations, even in a recession. The House of Representatives' version of the economic stimulus bill contains a provision, "Buy American". It requires that all "manufactured goods" bought by taxpayers for the stimulus be produced domestically. For example, foreign steel in federal projects would only be allowed if domestic products were either unavailable or drove up the cost of the projects by 25 per cent or more. In economic meltdown protectionist sentiments get a boost to "save" jobs. Though "Buy American" provision invites retaliation by other nations, governments still prefer to resort to such populist policy.
On February 04, 2009, President Barack Obama's unveiled another popular policy rules on executive pay caps and expense disclosure. The plan includes salary caps of $500,000 for top executives at firms that accept "extraordinary assistance" from the government. It also restricts severance packages, known as "golden parachutes," for dismissed executives and requires the disclosure of policies on luxury spending on things such as holiday parties, corporate jets and office renovations. And on March 19th, 2009, the House passed legislation to impose 90 per cent surtax on bonuses granted to employees with household income of more than $250,000 at companies that received at least $5.0 billion from the government's financial rescue program.
What Wall Street did in the name of innovation or encouragement should be regulated doubtlessly. Using shareholders' money for luxury does not make sense. Since shareholders are the owner of a public listed firm, it must be the shareholders who should control compensation packages of the Chief Executive Officers (CEOs). Unfortunately, shareholders can hardly restrict CEO compensation, luxury spending under the existing company law. Rather than controlling corporations' "unethical" expenses through empowering shareholders so that they can participate effectively to control firm's unnecessary spending, the U.S. government can turn to another popular policy through direct interference in the executives pay.
In the stimulus bill, there is also a provision that companies that are getting taxpayers' money won't be able to sponsor H1 visa. That means jobs for Bangladeshi, Chinese, Indian or other international students in the auto or financial industry is almost closed. Even other sectors that are not receiving any bailout money also stopped recruiting international students. International students also contributed to the U.S. enormously in achieving prosperity and innovation.
Though sponsoring H1 visa will prohibit corporations to recruit international talents and thus will hinder growth, it is just another way to keep crowd happy. The U.S. even also tried to nationalise its banking system which nobody ever thought of.
Government's dictation in market system is proportionate to the degree of economic meltdown. But more and more government participation in the market creates moral hazards for individuals as well as the market system as a whole and thus hampers normal pace of recovery. Only private sector can distribute resources justly and efficiently. If private sector works well, all of us will be better off. The experience of 1930s tells us that government interference not only prolongs depression but also induces moral hazard in the whole economic system. Whatever is the economic situation, everybody will be better off if government focuses on removing trade barriers and follows certain principles. Following popular policy is not the right solution.
1976's Nobel prize-winning economist Milton Friedman wrote "the combination of economic and political power in the same hands is a sure recipe for tyranny." And looks like Friedman is right: the U.S. started dictatorship in the market which surely is not a wise move. However, dictatorship through adopting populist policy is much easier than building confidence among the market participants. Unfortunately, choosing easier option won't lead any nation towards any "change."
The writer can be reached at
e-mail: mainul.ahsan@ttu.edu
IN every recession, people lose their wealth that they accumulated over years. But one thing very surprising happened in every financial crisis: governments get stronger. Freedom gets constrained, i.e., choice of alternatives vanishes. Government puts all the restrictions on free trade which hinders normal pace of trade in the name of protectionism to gain popular support. If the government gets stronger and starts axing the private sector, then who suffers most? Surely, the poor. Governments pursue populist policies during an economic meltdown to assume more power which might impede normal pace of recovery. Here are some recent populist policies from the Obama team in Washington that will hamper not only domestic trade and growth, but also will affect growth in international arena.
Though there is so much controversy about whether Keynes's multiplier is relevant in today's complex economy, during an economic downturn, as a part of populist policy, governments still follow Keynes's simple multiplier rule blindly to put money in empty pockets to make citizens happy! In a full-employment situation, increased government spending would largely replace private spending, so the net stimulus to gross domestic product (GDP) would likely be quite small. However, in the present environment with growing unemployment of both labour and capital, the net stimulus would be larger since the additional government spending would put some unemployed resources to work. For instance, if the government spent money to build new homes with unemployed labour, the stimulus to GDP might be close to, even larger than, the amount spent.
Surprisingly, most of the spending in the President Obama's stimulus plan is targeted toward sectors of the economy where unemployment is the lowest, and thus, government is mainly going to draw resources away from private sector's uses. For instance, December unemployment rate was only 2.3 per cent for government workers and 3.8 per cent in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3 per cent and 15.2 per cent respectively. Yet 39 per cent of the $550 billion in the bill would go to state and local governments. Another 17.3 per cent would go to health and education - sectors where relatively secure government jobs are also prevalent. If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment rate is at the lowest level? Harvard economist Robert Barro, in an interview with the Atlantic, says, "This is probably the worst bill that has been put forward since the 1930s". However, critics started saying that Obama administration has taken such a huge stimulus plan to satisfy different interest groups, e.g., United Auto Workers (UAW), that supported him.
Not only the above, the U.S. government has also taken other popular policies in current ongoing recession. During prosperity, all of us become promoters of free trade. But suddenly we prefer protectionism over free trade if economy is not in good shape. Truth is-free trade is good in all the situations, even in a recession. The House of Representatives' version of the economic stimulus bill contains a provision, "Buy American". It requires that all "manufactured goods" bought by taxpayers for the stimulus be produced domestically. For example, foreign steel in federal projects would only be allowed if domestic products were either unavailable or drove up the cost of the projects by 25 per cent or more. In economic meltdown protectionist sentiments get a boost to "save" jobs. Though "Buy American" provision invites retaliation by other nations, governments still prefer to resort to such populist policy.
On February 04, 2009, President Barack Obama's unveiled another popular policy rules on executive pay caps and expense disclosure. The plan includes salary caps of $500,000 for top executives at firms that accept "extraordinary assistance" from the government. It also restricts severance packages, known as "golden parachutes," for dismissed executives and requires the disclosure of policies on luxury spending on things such as holiday parties, corporate jets and office renovations. And on March 19th, 2009, the House passed legislation to impose 90 per cent surtax on bonuses granted to employees with household income of more than $250,000 at companies that received at least $5.0 billion from the government's financial rescue program.
What Wall Street did in the name of innovation or encouragement should be regulated doubtlessly. Using shareholders' money for luxury does not make sense. Since shareholders are the owner of a public listed firm, it must be the shareholders who should control compensation packages of the Chief Executive Officers (CEOs). Unfortunately, shareholders can hardly restrict CEO compensation, luxury spending under the existing company law. Rather than controlling corporations' "unethical" expenses through empowering shareholders so that they can participate effectively to control firm's unnecessary spending, the U.S. government can turn to another popular policy through direct interference in the executives pay.
In the stimulus bill, there is also a provision that companies that are getting taxpayers' money won't be able to sponsor H1 visa. That means jobs for Bangladeshi, Chinese, Indian or other international students in the auto or financial industry is almost closed. Even other sectors that are not receiving any bailout money also stopped recruiting international students. International students also contributed to the U.S. enormously in achieving prosperity and innovation.
Though sponsoring H1 visa will prohibit corporations to recruit international talents and thus will hinder growth, it is just another way to keep crowd happy. The U.S. even also tried to nationalise its banking system which nobody ever thought of.
Government's dictation in market system is proportionate to the degree of economic meltdown. But more and more government participation in the market creates moral hazards for individuals as well as the market system as a whole and thus hampers normal pace of recovery. Only private sector can distribute resources justly and efficiently. If private sector works well, all of us will be better off. The experience of 1930s tells us that government interference not only prolongs depression but also induces moral hazard in the whole economic system. Whatever is the economic situation, everybody will be better off if government focuses on removing trade barriers and follows certain principles. Following popular policy is not the right solution.
1976's Nobel prize-winning economist Milton Friedman wrote "the combination of economic and political power in the same hands is a sure recipe for tyranny." And looks like Friedman is right: the U.S. started dictatorship in the market which surely is not a wise move. However, dictatorship through adopting populist policy is much easier than building confidence among the market participants. Unfortunately, choosing easier option won't lead any nation towards any "change."
The writer can be reached at
e-mail: mainul.ahsan@ttu.edu