Friday, February 01, 2008

And the US now is Keynesian

Something odd is going on here in the US. As you know, the country suffers from the excessive borrowing and lending, on sub-prime mortgage, the bubble went bust and seemingly dragged the economy down to recession.

I feel a kind of dejavu. Apparently the US does not learn the very same lesson from the series of Asia and Latin America crisis. And even more surprising, US administration took different set of policies than what they had suggested to the rest of the world on how to overcome recession, that is, tighter monetary and fiscal policies.

Instead they go for relaxing policies and launch an aggressive economic stimulus plan. In this package, the Fed cut of key interest rate (monetary) and tax rebate plan (fiscal).

Whether you agree with this Keynesian counter-cyclical policy or not is a matter of not only empirical, but also difference in school of thought. Some argue that economy needs a bail out (from government) to get out from the mess, the others prefer to let the (market) economy pays for its mistake.

The debate aside, apart from the positive response from stock market index, we do not know yet the impact of such stimulus scheme on output. Nevertheless as Krugman, Hausmann, and Landsburg point out, the tax rebate plan is likely doomed to failure by design. The bulk of rebate would go to relatively financially OK household, so it would not be spent, hence little multiplier effect (Krugman); or it is less likely to put American into work, and enhance domestic investment (Hausmann and Landsburg).

If US economy were truly resilient, dynamic, and strong --as many of us would like to believe--, I think it's time for them to be tough in this difficult time, the way we, East Asians, stood up and recovered, following their very own prescription.


  1. forgive me to question...
    u suggest that Americans should follow their own advice in the effort to overcome a financial crisis that sustains it's ripple to countries on the other side of the world.

    would it be appropriate considering that it affects not only their own economy, but others as well?

    please, flood me with knowledge..

  2. Juji, I do not take any particular stand on the issue --Keynesian intervention or not. But if they want to proceed with such economic stimulus, at least, they should do it more properly, that is, getting the right size of interest rate cut (against the possible inflation and standard policy credibility problem), and more pro production fiscal stimulus (not the tax rebate).

    On the other side, if East Asian could endure the severity of structural adjustment even without proper market institutions and social security net at place, why can the more sophisticated US economy not?

    Obviously, it's the US interest, not the rest of the world, that they want to protect, and it's perfectly fine. The lesson the rest of the world needs to learn, however, is not too much to rely on what Washington decides to do.

    Yes, the size of US economy is too big to be failed, but bear in mind, we still have not only our own domestic economy but also the rest of the world.

  3. rizal,
    i should agree with you on the first paragraph saying that the US should do it more properly instead of what they are doing right now. that is, cutting rates and tax so arbitrarily that it seems like a child's play.

    regarding the third paragraph, in my opinion, the US may not try to save the world, but their action bought some time for Asian countries to develop an immunity to overcome the ripple effect, to not too much to rely on what Washington decides to do, as opposed by you.

    i believe that it is not bogus to say that the Asian learn some lesson in the sub-prime mortgage failure, that they should strengthen any defense against the ripple and, obviously, needed some time to restructure that defensive strategy..

    it is true that the Americans design a strategy in which we cannot certain the outcome. but, on the other hand, the effect based on this short run and possibly pragmatist observation is really something that we should put into account, shouldn't we?

  4. Juji, I can not agree more on taking the US policy into equation, and seizing the opportunity as well.

    If they launched that tax-rebate scheme, so that US households think they're now richer, we can deliver consumption goods/services they need -as Landsburg said. But alas, even China now gets their economy bit heated up, their product price is no longer as low as before.

    Or, as they decrease the interest rate, the money capital should flow out to the rest of the world. Yet the risk factor is apparently still unfavorable in our side.

  5. let me confirm,
    "Yet the risk factor is apparently still unfavorable in our side"

    by risk, did you mean the risk of economic bubbles (again?)? or the risk that some day, there won't be any goods/service to be delivered in the case of bigger recession?

    btw, thanks for replying.. :)