A Stimulus that’s short of Stimulating

As the world’s attention shifts from financial rescue to financial reform, the
quiet success stories deserve at least as much attention as the spectacular failures
we need to analyses the scenario which the stimulus package has created and the
implication of the entire revival package granted by U.S.A to the free economic
fundamentals of the global economy.

Global financial meltdown has been viewed by analyst in different scenarios.

But the basic system risk remains there. The financial crisis is merely a symptom
of another, deeper crisis, which is a systemic crisis of capitalism itself. According
to Samir Amine, an Egyptian Marxist economist, the constant decrease in GDP
growth rates in Western countries since the early 1970s created a growing surplus
of capital which did not have sufficient profitable investment outlets in the real
economy. The alternative was to place this surplus into the financial market, which
became more profitable than productive capital investment, especially with
subsequent deregulation.[94] According to Samir Amin, this phenomenon has led to
recurrent financial bubbles (such as the internet bubble) and is the deep cause of
the financial crisis of 2007-2010.[95]

Now the question before the policymakers remains that are we giving
stimulus to contain this systemic risk or are we viewing the crisis in a totally
different aspect visualizing the fact that a stimulus package can contain the crises,
and so bailing institutions one after another. The extent to which the stimulus is
stimulating has been skeptical till now and economist and financial analyst still
doubt whether the pros of economic revival package really exceed the extent to
which the fiscal deflect could cost the nations if not USA in time to come. This
article analyses the extent to which the stimulus packages has proved to be
stimulating in case of countries including ours.

As far as USA is concerned the stimulus packages has been used more for
bailouts of the distressed institutions that for supporting the market and economy
in general. The entire economic revival packages which actual cost is far more than
what is being projected is as follows. The American Recovery and Reinvestment
Act of 2009—the $787.2 billion economic stimulus package proposed by President
Barack Obama and passed by Congress in mid-February [2009]—is intended to put
America back to work and to help shorten the recession.

According to the Congressional Budget Office (CBO), the stimulus package

is expected to increase gross domestic product (GDP) growth between 1.4 percent
and 3.8 percent by the fourth quarter of 2009 and to create up to 2.3 million new
jobs during the same period. More than $71 billion will be invested in green
initiatives—from energy conservation and efficiency to mass transit to
environmental cleanup—along with $20 billion in green tax incentives.

Now as far as present scenario is concerned the stimulus package has not
been able to attain its goals. The employment figures still lag behind and with less
confidence in markets, the indices especially those of USA has turned out to be
more volatile than ever. Major Banks have posted losses for third quarter. The
economy has gotten worse than the Obama administration had predicted it would
be even if Congress had spent nothing on “fiscal stimulus.” Although some are
arguing that this gap is proof that more stimulus is needed, it really shows that the
cost of the American Recovery and Reinvestment Act of 2009 — and laws like it
— far exceed their benefits in the form of economic stimulus.
 By June 2009, the unemployment rate had reached 9.5 percent, as compared
to the 7.6 percent it was in January 2009 when Congress passed, and President
Obama signed the $787 billion stimulus bill. The Obama administration had
predicted that the June 2009 unemployment rate would be less than 8 percent —
almost a half of a percentage point bigger than it would have been without a
stimulus bill. The Obama team had predicted that the stimulus law’s effect would
always be less than two percentage points, even at its peak potency. This
somewhere or the other raise question on the very validity behind the packages for
revival of economy. Some of us thought that the fiscal stimulus would do
essentially nothing to improve the economy. But even stimulus advocates admitted
that economic improvements coming from the stimulus law — about a half a
percentage point (by their estimates) — would be small when compared to the
shocks hitting the economy.

Based on this comparison, a few economists have suggested that the

stimulus bill should have been larger. Their logic is that a half of a percentage
point improvement could have been one percentage point if we have spent twice as
much and two percentage points if expenditure would have been four times as
much. An even more massive stimulus, they say, would actually have effects that
we could notice, and that we need.

But fiscal policy is not merely a dial that can be turned to any desired
amount. If it were just a dial, then those of us who thought the stimulus bill would
have a tiny effect would be supporting an even larger stimulus than the Obama
administration proposed! An impotent fiscal policy dial would have to be turned a
lot to have a given effect.
 This faulty logic comes from ignoring the costs of fiscal stimulus, and
failing to ask whether the costs are commensurate with even the most optimistic
estimate of the benefits.

As far as Europe is concerned with countries like Greece and Iceland

bleeding and the England leading the entire euro zone we need to be less critical to
the bailout and the stimulus they have provided to their economy. Now Will the
European plans work? There is one hopeful precedent, in Sweden, which in the
early 1990s solved its own banking crisis by guaranteeing deposits, injecting huge
amounts of liquidity into the banking system via the central bank, and forcing
banks to write down the value of their assets very quickly. In describing why that
bailout worked, Urban Baeckstroem, the former Swedish central bank president
who played a central role in the rescue, has identified some other vital measures.
But times have changed and we need to recognize the systemic crisis the globe is
facing because of increasing integration we need to face the question that are these
bailout packages actually appropriate when we have propagated a free market
theory and at the same time is this stimulus somewhere or the other does not out
the efficiency of market and the entire financial system in question.

As far as our economy is concerned we were able to save ourselves because

of strict regulation. Yet the RBI and the finance ministry announced a lot of
measures including reduction of CRR and repo and a deflect budget increasing the
fiscal deficit. The government expects the Indian economy to grow at 7.1% in the
current financial year ending March 31, the slowest pace in six years.

So far, government has announced two stimulus packages, one on December

7, 2008 and the other on January 2, 2009 besides the several monetary policy
measures undertaken by the Reserve Bank of India. Now the efficiency of the
stimulus package is still to be seen in the latter half of 2010. But with inflation
hitting above 7 and with no significant rise in job creation along with the RBI
increasing the CRR the impact of a high fiscal deflect can be seen and it is yet to
be seen how much stimulating the stimulus package proves to be. With the Indian
economy recovering faster than USA we can be less skeptical about the revival
policies and the fiscal deficit it creates and the stimulus package can be a more
stimulating than it has been in case of USA and Europe.