Government may cause the stagnation going forward by Shan Saeed
Quantitative easing or printing money is going global...Whether its USA or Japan or UK...QE wont solve the problem to fix the economy.
THE most underappreciated risk is not that policy makers do "too little, too late", but that they are doing "too much, too often". In my personal view, a global "lost decade" is getting more likely precisely because we're getting ever increasing government intervention—whether fiscal, financial, or regulatory. The economist and entrepreneur Jean-Baptiste Say put it best: "In times of political confusion, and under arbitrary government, many will prefer to keep their capital inactive, concealed, and unproductive, either of profit, or gratification, rather than run the risk of its display. This latter evil is never felt under good government."
Learning from Japan, regime uncertainty may well be a much bigger problem than generally appreciated. Japanese created Zombi banks in the 1990 and they never did much for the growth of the economy or credit growth. For example, what are private risk-takers and investors to think of the sharp about-turn that just happened: barely three months ago, policy makers were busy signaling "exit strategies" and the need to end big-government spending, while now we're back at listening to increasingly urgent calls for "QE2" and the need for a stepped-up supplementary fiscal boost. Stop-go policymaking reveals not just deep-rooted inconsistencies and the actual inability of policymakers to forecast better than the market. More worryingly, it serves a self-perpetuating dynamic that hides the ever-growing size of public policy intervention in the free economy. Clearspeak: animal spirits are being "crowded out".
Contrast this to Chinese policy makers. Whichever way you look, the actual focus of the regime there is to create markets and to build public infrastructure that allows private entrepreneurs and risk takers to multiply and invest in future wealth-creating ventures: a fountain of privatisation, deregulation, enforcement of property laws and free-market wage bargaining. How ironic that the world's largest "command economy" actually uses its policymaking powers primarily to empower private risk taking. In contrast, for the big free-market democracies even a relatively minor cyclical slowdown becomes an excuse for more taxpayer funds and more central bank intervention in private asset markets.
To be sure, the verdict on this summer's US slowdown is still out, but isn't it true that much of it was caused by the end of "emergency" policy taken after the Lehman Shock—the end of "cash for clunkers", the rolling-off of special tax relief in home buying etc.? Call it the "new normal" because yes, given the de-leveraging and absence of major technological innovation, the potential growth path of the major industrialised economies may well be as much as half a percentage point or so below what we've seen over the past decade. However, the more fickle policy makers get in trying to fine-tune minor cyclical swings, the bigger the risks that private risk takers will simply "keep their capital inactive, concealed, and unproductive". In my personal view, if you want to minimise the risks of a Japan-style stagnation, start empowering the private sector by withdrawing public support and "financial socialism". Failure to do so may mean that we'll never know what the "new normal" is, or rather, how good it could have been.
Spending cut and tax rationalization are the key to get the USA economy out of recession.........