Wednesday, March 9, 2016

Is Stimulus the Right Response to Global Slowdowns?

The world economy is at risk of recession. According to the OECD growth in the G7 is slowing and without immediate action it is difficult to move from the low growth stages back to prosperity. "Economic derailment" is seen as just around the corner unless nations act now. Their recommendation is to provide costly economic stimulus to turn the tide but may not be using the right tools.

Is stimulus the right approach?

IMF indicates rising risks to global economy putting European nations, and the world at large, in a slower growth mode. Problems in the U.S. are related to age-related spending and infrastructure needs. Direct stimulus is seen as one of the only tools to improve the economy.

The problem is that stimulus is a short-term growth strategy that comes with long term costs. As stimulus improves economic activity it also erodes the natural competitive nature of firms to adjust to new market realities. The stimulus becomes a focal point for short-term corporate investment but doesn't necessarily return the investment money to tax payers or improve market fundamentals.

Is there a long-term cost to stimulus?

A few years down the road we are in the same, or worse, position as now because we only received short-term gains with lots of debt.

The pathological need to spend and incur debt is what got us in this situation in the first place. Europe is known for taking on large liabilities making business prohibitive resulting in pushing investors into foreign markets where costs and barriers are lower. The U.S.must avoid this path as costs rises and infrastructure weakens.

Is there stimulus with long-term benefits?

Improving infrastructure focuses on fundamental aspects of the economy in a way that reduces the overall costs of conducting business. Investing in infrastructure works like a stimulus in the sense that it improves short-term business associated with construction but also has the ability to improve upon the economy as a whole. As the cost business transactions (moving and buying goods) decrease economic activity increases.

Infrastructure also impacts multiple industries equally. Consider the implementation of fiber optic cables in a city. It would impact all of the businesses, governments, colleges, and households that connect to it. Information speeds and reduces the costs of transactions thereby improving development opportunities. The same idea applies to roads, airports, docks, and utilities.

Why we waste money on low return projects?

Politics influences how we spend and where we spend taxpayer money. Businesses socialize with and seek to influence where money is spent. In many cases it is put back into political supporter coffins and have little or no benefit for the American population. Ensuring money is spent for maximum return on those areas that have the greatest impact. This means making decisions based on data, science and logic over the need to make decisions for friends and political maneuvering.

Fell free to share with appropriate attribution. Dr. Murad Abel

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