how do you stimulate an economy?
without going into great economic detail, the stronger measures you can do one of two things: encourage people to spend, so that more money enters circulation, and encourage businesses to invest, so that production increases, and there are more jobs for producers (you and me), which means more money passed out in income, thence more money in circulation.
so a good idea is to give money to people who don't have enough to meet their needs. they will definitely spend it.
a bad idea is to give money to people who already have enough. they will probably not spend it. even some of the middle class won't. some will pay down debt, for instance. which is nice, but it doesn't change their spending habits, unless they use the space on their credit card to spend it up again.
giving money to the wealthy is ridiculous, because they are likely to save it. this is bad. when an economy is in difficulties, you do not want people to squirrel money away. recessions happen because money is sequestered, not put into circulation.
a further problem is that increased spending may stave off the recession, but it does not fix the problems in the economy that caused the downturn in the first place.
i am working on an interesting book about the great Japanese recession of a few years back. the conventional wisdom is that it was the fault of the banks (which should ring a bell) but the author says that it was more likely caused by a fall in asset prices, which led to companies' paying debt down instead of borrowing money to invest. with no demand for money, banks could not lend it, so the usual monetary stimuli did not turn the economy round. companies will not borrow money, even at zero interest, if they are paying debt down.
it will be interesting to see whether company borrowing rises in the next year or so. if it doesn't, we're going to have a bumpy ride.
Friday, January 25, 2008
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