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Affiliated with the University of Nicosia |
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THE WHYS OF U.S. ECONOMIC RECOVERY POLICY By Monroe Newman
Professor Emeritus of Economics, Pennsylvania State University
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Practitioners and students of economic life worldwide can no longer
overlook the importance of the institutional foundations which enable
their activities. The legal and credit institutions on which they rely
to assure that property and contract rights are enforced and that claims
on resources can be exchanged have always been fundamental, if
unnoticed. But now the reliability of parts of the credit
structure has been squandered. Along with the malefactors, far
more innocents have had their lives damaged. To use the demeaning
and heartless phrase of military conflict, they are the collateral
damage. In the U.S., virtually no one is immune.
Two
general types of damage have been done. Though they interact, each
has its special significance. There have been important income
effects and wealth effects. The income effects are much noted in
rising unemployment rates, extension of the average duration of
unemployment, changes in hours of work, loss of work related
(particularly health insurance) benefits, and the appearance of
unemployment among those in occupations in which this has rarely been a
problem. The immediate follow-on effect of declining purchases
exacerbates the ills. But most people have jobs and though their
level of concern has risen, their incomes are reasonably stable.
The
wealth effect, the declining net value of assets on balance sheets, is
far more ubiquitous. Few have escaped it. The value of their
homes, of their retirement funds, of their direct and indirect holdings
of bonds and stocks have all diminished. Revisions of spending
plans, education plans, retirement plans, life expectations are all
occurring. The emotional hardship is matched by the downward force
on economic activity. Over recent decades, Americans were told to
secure their future through the personal management of their wealth.
They were not told enough about risk and they relied too heavily on
effective government regulation and private institutional integrity.
Even the vaunted former Chair of the Federal Reserve admits to
this.
Two
types of short term policy responses are now underway with long term
basic reform promised.
The
first, and basically simpler, are designed to offset the income effects
of the recession.
Through
tax reductions, direct payments, job-creating programs, grants, and
income supplementation they are all intended to add to spending and
therefore incomes.
The
relative efficacy of each of these is disputed.
Some are claimed to be counterproductive and others are opposed
because they are said to initiate new programs that are likely to become
continuing features of an enlarged governmental role.
Others extol them for just that reason.
Still others find particular merit in educational, health care
and physical infrastructure programs that are designed to improve the
achievement of long term goals while aiding short term performance.
The
short term program to counter the wealth effect is harder to conceive
and implement.
The simplest
approach is to have government replenish wealth by buying assets –
houses or bonds, for example -- for more than their present worth. No
matter what the façade placed on this, it engenders reluctance even when
coupled with the hope that someday their values will rise to equal or
exceed the government’s cost.
The initial expenditures seem to fly in the face of logic, they
will replenish the wealth of the profligate as well as the collateral
damagees, they will only help those whose wealth was in assets the
government is buying, and they induce moral hazard.
They turn investment into a “heads you win, tails we lose”
bargain.
A
more complex approach is to stem the decline in asset values.
This is of particular pertinence to the declining value of houses
because it can also stem the dreadful process of foreclosure and
eviction.
If mortgages can
be realigned with present house values and housing payment abilities,
families would not be forced out and the market would not have the
overhang of empty, foreclosed houses waiting for a buyer.
In this case, and in others, the process is costly to the
government, costly to the initial lender, and complicated by the
ingenuity of the credit marketers who sliced and sold debt till it is
hard to discern to whom debts are owed.
Apparently,
many of
the debt holders are abroad, many are indirect holders through pension
and mutual funds, and many are the financial institutions which were
expected to assure satisfactory performance of credit markets.
In other words, many are the victims of their own machinations.
Preserving these institutions is proving costly and immensely complex.
Current discussion focuses partially on the semantic riddle of
whether we are in the process of “nationalizing” them.
Regardless of the meaning given the term, some things are clear.
For the foreseeable future, major financial institutions will be
increasingly subject to governmental scrutiny and their behavior
censored.
Their owners will
get little or nothing for their prior stake in them.
And until we return to a situation that features them as willing
lenders to willing borrowers, collateral damage will persist and grow.
Fortunately, the U.S. has operating examples of satisfactorily
performing financial institutions and protective practices on which to
build. |
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Cyprus Center for European and
International Affairs Copyright © 2009. All rights reserved |
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