Containing the Collapse

["schulte-baeuminghaus" <cresscourt@xxxxxxxxx>]

Title: Containing the Collapse

"If the Old Economy was an automobile, the New Economy is an airplane. In an automobile, if anything unexpected happens, the natural and correct response is to put on the brakes. But just as an airplane needs a certain airspeed to stay aloft, so the New Economy needs fast growth for high-risk investment in innovation to be worthwhile. And just as pilots have to learn how to deal with a stalled and falling plane by the counterintuitive maneuver of pointing the nose to the ground and accelerating, policymakers have to learn how to go against their instincts by cutting rates when inflation goes up. That's the only way to keep from crashing."

This emphasises an approach that we should have applied in the past. We should not have thought in terms of "slowing the economy down" but rather in terms of ensuring that the economy can maintain its momentum. More particularly, we should not have used higher interest rates to "fight inflation." Higher interest rates don't "fight inflation"; they are the friend of inflation. Higher interest rates make inflation worse. Higher interest rates reduce investment, productivity and production. Higher interest rates provoke, cause, intensify unemployment.
Now that the economy is threatened with collapse, should we think in terms of lowering interest rates? Yes, we should. We should always think in terms of keeping interest rates as low as practicable. The more readily available we can make funds for real investment, the greater the improvements in productivity and the higher production will tend to be. There will be limits to the extent that interest rates can be lowered. We must bear in mind the need for a viable banking system and effective mobilisation of capital within the community. We must bear in mind too the need to control the direction in which low interest rates cause funds to move.
That again suggests the need to be more versatile and imaginative in our macroeconomic policies than simply - and simplemindedly - to move interest rates up and down - too often in directions that defeat our own purposes. We should be prepared to use more direct controls to ensure that the flow of funds does not create unsustainable distortions, for example, in real estate, or on the stockmarket or in consumer spending.
  



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Once capitalist economies break down, they are hard to get running again.
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"If the U.S. economy gets stuck in a long Internet Depression, the appropriate strategy is to hunker down, cut back and invest as conservatively as possible. That will be the only way to survive and be ready to take advantage of the end of the Depression, whenever it comes.
The downturn could be not only the dominant economic event of the decade but also its major political event. If policymakers do not grasp the difference between driving a car and flying an airplane, the U.S. could be stuck in a long depression. At some point the recovery may require stronger measures than simply cutting interest rates and boosting spending.
Just as the New Deal involved government intervention in the financial and labor markets to stabilize them, so government may have to take a hand in the high-tech sector to stabilize the New Economy. That's not politically feasible now, but it's worthwhile to remember that the Great Depression did not end until the political and financial leaders who were committed to misguided deflationary policies were replaced.
In the words of economic historians Barry Elchengreen and Peter Temin, the world economy did not begin to recover when these people changed their minds; rather, recovery began when mass politics in its various guises removed them from office"


The experience of Japan in the last ten years should be a warning. It is indeed hard to get an economy running again when once it breaks down. First, we must try to ensure that the economy does not break down. If events have already gone so far that some measure of "collapse" is unavoidable, then we should promptly employ a range of policies and measures to ensure that the collapse is moderated in scope and depth to the extent practicable.
A lowering of interest rates is the first and most obvious instrument of moderation. But even a lowering of interest rates will not have an immediate effect, except on the psychology of the market which of course is important. The buzz-word obsession with balancing the budget, eliminating deficits, creating budget surpluses, paying off the national debt, has contributed to the downturn and could intensify the collapse. Governments need therefore to start thinking in terms of applying anti-cyclical budgetary policies, of using their surplus positions to control the downturn, of applying spending programs to stimulate consumer demand, of expanding public infrastructure and other public investment to supplement and stimulate private investment. They need to start thinking quickly and TO ACT PROMPTLY.
Taxation should be moderated and/or reformed so as to support and stimulate expansion of private investment and with it improvements in productivity and production.
Budgetary and taxation measures should be directed in these POSITIVE ways so as to moderate pressures to cut back on employment and instead to stimulate re-employment of the unemployed. That will not only moderate one of the most painful features of an economic downturn but will also relieve what, in a downturn, are often the largest and most immediate demands on government spending. More public funds will then be available to enable governments to apply other stimuli or to apply them more intensively, for example, on infrastructure spending.
In all this, a variety of programs should be used in a POSITIVE way to restore vigour to the economy. We should NOT think in NEGATIVE terms that a recession or depression is the inevitable cost of returning to a growth economy. If we do think in negative terms, we are likely to provoke a collapse of long duration - perhaps of a decade or more - and the way back to good health for the economy will require much more radical measures than if we respond quickly and POSITIVELY, with a variety of well-directed measures, to the threat which confronts us right now.  
That threat is not only economic but could also be even more profoundly social and political than it was in the Great Depression of the 1930s.


James Cumes