Stimulating Stimulus Packages

The global economic slowdown is taking its toll in myriad ways: rising unemployment, decreasing demand, spiralling bankruptcies (both personal as well as corporate), all leading to an adverse impact on the standard of life (and in some cases, quality of life).

On the same subject, today, I read a great piece on the Economist website. Let me cite some excerpts, including a cool interactive graphic, from the article. 

Pl note that the interactive graphic feature details the stimulus packages announced by governments of major economies, including India. Pl move your cursor over the highlighted country to read the local stimulus package. 

"To stem the slump, governments are fighting back with an activism rarely seen outside wartime. .. Weighted by their economies’ size, the plans of 11 big advanced and emerging economies are worth an average of 3.6% of GDP—though spread over several years. The IMF expects tax cuts and spending worth 1.5% of global GDP to kick in this year.

"In many rich countries the stimulus has been matched—and often dwarfed—by the upfront costs of financial rescues, including the recapitalisation of banks and guarantees for troubled assets. America’s Treasury has so far promised about $1 trillion (7% of GDP) for the finance industry. 

"Emerging economies are spilling less red ink, both because their banking industries are in less of a mess and because their stimulus plans, in general, are smaller. But they, too, will shift from a budget surplus in 2007 to a deficit of 3% of GDP. 

"If fiscal stimulus is no substitute for financial clean-ups, it is an important support at a time of slumping demand." 

An important question here is: does a fiscal plan of spending huge amounts by the government the right response to fight a severe liquidity crunch of this scale?

"Economic theory suggests that makes sense. When firms and consumers are gripped with uncertainty, government spending is a surer way to boost demand. Consumers and firms might save the money. The empirical evidence, however, is less than conclusive. Economists’ estimates for the “multiplier” effect of government spending and tax cuts vary widely, with equally reputable studies showing opposite results. More important, the scale of the global slump means that historical multipliers may not mean very much. That suggests a broad strategy—involving both tax cuts and spending—is prudent."

To read the complete article, click here.

Source: The Economist