Tuesday, October 21, 2008

My two cents on Economic Stimulus plans

I'm no Economist - and perhaps that isn't such a bad thing - if all economists do is dream up stupidities like the economic stimulus plan. (I allude to the $600 check that Bush and company sent every resident earlier this year and are threatening to do something similar again this year).

Because, as an engineer (and mind you, not an economist), I see that what got the whole world into this mess was, basically, Americans spending more than they could earn. (This is pretty much an American Mantra - just look at the US' fiscal deficit - which is more than India's GDP).

So, basically, America does not produce as much as it consumes. If America were a family, here's what an analogous scenario would look like:

Dad and Mum earn enough money to pay for groceries, but not enough to bankroll trips to the mall every week. But the daughters love going to the mall and buying their high fashion dresses; the sons like going to the sports shops and purchasing rifles to go hunting every week. The family likes to go on long vacation getaways and cruises to Bermuda in winter and Alaska in summer.

If they were living on a fixed income, this would never do. But what they do do is take loans, sink themselves deeper in debt. They were considering taking loans ad-infinitum to bankroll the said excesses.

If you are a family, you run into one problem: your credit history is well known. You just can't keep taking loans ad-nauseam. The lenders will know when to stop giving you money - because the lenders will lend only if there is reasonable a probability of getting the money back. The Mum and Dad are in for a rude shock one day.

But if you're the world's pre-eminent super power, things are a little different. You can keep borrowing money until ... well, until, probably, you're no more a super-power - but that's going to take a lot more time.

America is currently cutting taxes, spending like crazy on a war it it had no business starting (killing more than a million innocents (this tally includes 5000 odd coalition troops) - but let's not get started on that now). The American government is also bailing out companies such as AIG, Goldman Sachs and Freddie Mac (companies which contribute nothing directly to society) - swallowing all their sins, so to say.

On top of all that, America wants to send some more money to its citizens to spend. Given that the problem was essentially created by hedonistic overindulgence, the American government wants to rescue people from this mess by more hedonistic overindulgence. After all, alcholism has only one cure: alcohol. Or that's what Bernanke thinks.

To me, currently, the whole west is grossly unsustainable - both from an economic perspective and even more so from an environmental perspective.

What keeps me optimistic is that the current western model is so hopelessly inefficient that there's almost (almost) infinite room for improvement if prices of certain inputs go up. Suppose real "gas" prices go up from and stay at $5/gallon in the US - then the economy can adapt by becoming a little more efficient - increasing the number of hybrids, for instance and using more rail road transit. With little or no sacrifice on the standard of living front, Americans can live more "efficiently". I am sure they can do without all the useless junk mail in the mailbox, excesses as times square.....

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