Monday, February 2, 2009


It is ever more clear that the 819 billion package will do little to improve the U.S. economy's outlook. In the current situation, precautionary savings are growing at a higher rate than consumption. It is possible to conclude the latter since the monetary base has grown more than two fold since monetary easing begun in mid 2007 and prices along with consumption have fallen.

Let's thing of a stimulus from an increase in spending.This kind of stimulus has a 100 per cent probability of being spent, however, political strains must be pulled in order to allocate efficiently those resources. This is costly both in terms of time and effectiveness. Of course this policy will increase public debt since there is no promise of a tax increase nor a future spending reduction.

About a decrease in the tax burden, it has the clear advantage of preserve progressivity -assuming a correct design- and create the right incentives to work and invest. Against the latter, government would be taking the risk of implement tax rebates with an increase in savings. Moreover, it increases debt too.

The 820 billion stimulus is composed of both expanding demand policies, it is natural to distinguish ups and downs of the stimulus package, but a more important question must be address soon: is an stimulus package the only way to deal with the crisis? Clearly not. It is not the best way either. Why?

China's trade balance surplus implies a net capital outflow. Chinesse capital must be allocated. "Assume" China's government is risk averse -actually every government outside Arabia is-, thus an increase in the demand of the "safest" asset in the world occurs. If the so called safe assets are U.S. Trasuries, the latter story explains how the "twin" deficits grew to the current levels. There is an ever growing consensus about the latter.

Furthermore, this explains how was it possible to have a constant level of unemployment after the recession of 2000-2002, and an increasing rate of economic growth. It turns out that there was not subemployed techonology, nor an expansion of U.S.' productivity, the economy was "overheathing" -economic growth was pulled by agggregate demand only- financed by mortgage loans.

Sadly an stimulus package is an attempt to cure a disease with the very cause of it. Further increases in government spending -or tax cuts- without a schedule of tax increases -or government spending cuts- will imply increases in loans to the U.S. in the form of Treasuries. They would probably increase spending in the short run, but just through the demand side, overheathing againg the economy. Officials hope that the stimulus package works as a "jump start" for the economy, however likely, this would just delay reality: U.S.' ctizens and government must reduce their indebtness.

In fact there are some figures that lead to conclude that people from the U.S. are actually reducing their debt. At least, savings are growing as pointed above. So, this is a great hint of what should economic or financial policy should address: provide a jump start to the financial markets without increasing debt, and if possible, reducing it. The latter must not imply to use public funds to save private banks. John Cochrae provides a feasible way to accomplish this. It does implies to re-open the credit markets for firms, this would prevent layouts and maybe, just maybe will increase exports.

Another advantage of this alternative plan is that it is easier to take back debt, selling private debt, than cutting public spending, this is an overlooked fact by U.S.' policymakers. Understandibly they are in a hurry to stop economic downturn, but it is important to preserve long run stability and low inflation. Not to mention a plan to repay debt.

The latter provides a feasible alternative for the U.S.' to re-start economic growth in a sustainable fashion, more government spending is just a band-aid waiting for failure. It is true that the situation claims drastic measures, but history and science can not be ignored. Increases in spending are not among any macroeconomist's prescription, just policy makers.