Economics: Swami Recession-ananda’s Unsolicited Economic Advice

Times are tough. The current morning temperature in Vancouver, Canada is – 3 degrees centigrade. Taking the wind chill factor into consideration, it feels like – 9 degrees centigrade. My new-found friend, a local black squirrel, who shows up at my apartment balcony every morning looking for a food bail-out (like many of us these days), did not stop by today. It is too cold for him this morning, I guess. It is also too cold for me to go running in the local park.

So I thought I would put on my economist hat and give my blog readers unsolicited economic advice. President Obama launched his US $ 800 billion stimulus package with great fanfare day before yesterday. Why am I focusing on the US economy and not India? Because whatever people may say about China (and to a lesser extent India), the US is still the heavy hitter of the world’s economic system. Over the last six years, as the US prospered, China enjoyed 11% annual GDP growth. India had 9% economic growth. The economic fate of the whole world depends on how quickly the US economy recovers. When America prospers, the world prospers. Make no mistake about it.

If Obama's stimulus package does indeed stimulate large-scale public works in the US, it will stimulate demand, put money in the pockets of consumers, and hopefully stimulate demand in other industries. This is classical Keynesian economic theory at work.

If this happens, the US (and consequently the rest of the world) will be pulled out of the recession. If it doesn’t, things are going to get a lot scarier than they are currently.

Large-scale government spending has worked before, most notably during the Great Depression of the 1930s, when President Franklin Delano Roosevelt’s “New Deal” helped pull the world out of a recession. Of course, the Second World War also played a big role in reviving the world economy, but I am not advocating a Third World War.

So how do we get out of the current economic mess? Swami Recession-ananda(me) has some unsolicited advice to give. Everybody else is weighing in with their opinions, so why should I be left behind? So here goes:

1. American banks are just not lending, even to creditworthy customers. Short-term interest rates are close to zero. As far as monetary policy is concerned, there is nothing further that the US Federal Reserve can do. Fed Chief Ben Bernanke has used up all the bullets in his arsenal. So how does Obama ensure that the flow of credit, the lifeblood of commerce, is restarted? In my opinion, he has got to temporarily nationalize banks. For example, the US government has already spent US $ 45 billion on trying to nurse the ailing Citigroup back to health. This constitutes 8% of Citigroup’s equity share capital. It hasn’t worked. Citigroup now needs another US $ 175 billion just to survive the next quarter. If Obama gives it to them, this would mean the US government will own more than 40% of Citigroup. Why not just take over Citigroup (and Bank of America and AIG while you are at it) temporarily?

This would mean that Citigroup would be forced to start lending again, which would then inject credit into the US economic system. Conservative Americans do not like the word “nationalization”, because it smacks of socialism. But what is the alternative? There is none. Go ahead, Comrade Obama, nationalize ailing US banks, at least for the next one year! Swami Recession-ananda is not alone in saying this. Many economists, including Nobel-Prize winning Paul Krugman are also saying the same thing.

Fire the current managements of these companies. Put temporary caps on salaries of top executives, at least till their companies become profitable again. Ensure that the top managements who gave themselves millions of dollars in bonuses when their companies were bleeding and begging for handouts are put in prison for defrauding investors and shareholders. Put their summer homes in the Hamptons and the Bahamas up for sale.

2. Consider re-enacting the Glass Steagall Act. This Act came into force in the 1930s, and ensured that depository institutions such as banks could not invest in stock markets. The pros and cons of re-enacting the Glass Steagall Act need to be debated before it is re-enacted.

3. Do not give General Motors and Chrysler the US $ 40 billion they are asking for, unless there is a complete overhaul of the top management of these dinosaurs. Use the bailout to force them to re-negotiate their pension contracts with auto unions. In fact, don't make it a bailout. Make it a loan instead, repayable to the US government in ten years. Force them to start investing in clean, alternative technologies. Make these conditions explicit before giving them the money. Twist their arms until they comply. If they don’t, break their arms. This may sound harsh, but it is the only way that American auto makers will become competitive. I would not have advocated a bail-out for US auto manufacturers at all, but one in ten US jobs depends directly or indirectly on the US auto industry.

4. Raise taxes for the rich. This is also going to be deeply unpopular, especially among the conservatives. But it will help pay for Obama’s stimulus package and also for healthcare reform, which is the next time bomb ticking away in the US. Bush’s tax cuts were only for the super-rich. Families earning less than US $ 250,000 a year are not going to sympathize if taxes on the super-rich are raised anyway. If you are rich, you can afford to pay a little more in taxes. It is not a drastic tax increase, and it won’t kill you. Other states are finding innovative ways to raise taxes. The state of California has a proposed legislation that will legalize the personal consumption of marijuana. If this happens, the cash-strapped state will earn an additional US $ 2 billion every year in tax revenue. Marijuana is a cash crop, it is non-addictive, it is less damaging than alcohol, and it is used by millions anyway. Please do not get me wrong. I am not advocating marijuana use in this blog. All I am saying is that legalizing it will bring in billions of tax dollars. If alcohol, a far more damaging drug, is legal and brings in billions of valuable tax dollars, why not do the same with marijuana? By all means regulate the sale of marijuana, just like alcohol.

In summary, do I believe in principle, that the government is better than the private sector in running the economy? No. I do not. I am a capitalist, and come from a country which has been ruined by wasteful and corrupt socialist policies for decades. I am not partisan - I am neither "conservative" nor "liberal". I am just another middle-class average joe trying to ride out tough times. I am not wealthy, and becoming rich is something I aspire to. But what we have seen over the last decade or so in America is the pursuit of wealth at the expense of everything else - regulation, equity, fair play. That is not right.

In normal times, I would have opposed many of the economic plans Obama has in mind. But these are extraordinary times. The stimulus package will have its flaws. There will be some wasteful, “pork-barrel” spending. But as long as the majority of the money is used for long-term beneficial projects, the US economy (and the world economy) will benefit. Put Vice-President Joe Biden to work. Make him accountable for the success of the stimulus package. If he needs help from a Project Manager who has considerable prior experience in managing and tracking tough projects, I am available!

Obama’s opponents, the ones who are criticizing him at the moment, do not have an alternative plan. Just reducing taxes for the rich, holding hands and singing “We Are the World” does not constitute an alternative plan and isn’t going to cut it, unfortunately.

I am not a blind Obama supporter. I do have objections to some of Obama’s ideas, such as his rhetoric opposing outsourcing and his proposal for more military aid to Pakistan, for example. But I do support his economic plan, because there is no alternative to it (at the moment anyway). He is also an intelligent man, who at least understands economics.

What are your thoughts, dear reader? Do post your comments on my blog. Thanks.