The global financial crisis resembles a conflict among family members. I do not like it, you do not like it, and nobody likes it, I can say. Exactly, amid that critical situation, what people have to do is to remedy the dispute. However, there are many possible resolutions, among which they must single out the one most beneficial to every party based on rationality, optimization theory. I use “happy-happy-happy principle”; both parties and the third party who intervenes are all satisfied with the solution.
Nonetheless, the only one thing, I mean at least to bear in mind is that leaders are obliged to love everybody indiscriminately. Let`s just imagine about a small dispute between children. If the parents blame one child, and do everything to help the others, what that be effective? As a result, the relationship between them would worsen due to the strategy the parents apply. Actually, they are brothers and sisters, and happiness, success, prosperity can be achieved when they love, help each other. The stronger the relationship among family member is, the better the status of that family in the society.
Okay, let`s come to the global financial crisis that ruptures to every edge of global economy. I agree to take action now, as soon as possible to restore the economic growth and reverse the global economic downturn. World leaders and the market players have to do everything necessary to fix the financial turmoil. Plans, projects must be designed based on the real situation, the rationality and the expectation out of what people are dealing with. Meantime, the most critical variable that policy makers could not fail to do is “how to do it to successfully remedy the problem and to achieve the optimal result”.
President-elect Obama promised, on Saturday, a massive public works project to resuscitate both the reeling U.S. economy and global economy. The plan, he argued, with billions of dollars of government expenditure, millions of jobs will be created and the unemployment problem will either solved. I do not say it is a bad policy; indeed, I just am not convinced that it is the best move that the United States should do now. Leaders have to do the right thing at the right time, and for the right reason. Let me convince you, by raising some criticisms or resistances of specialists and my own argument to deal with the must-be-solved the so-called global financial crisis.
The GDP (global domestic product) is, by one approach, defined by the formula GDP=C+I+G+Im-Ex, where C: consumption, I: investment, G: government expenditure, Im: import and Ex: export. From the equation, when government expenditure, G increases, then the GDP would not decrease further amid the crisis and even move upward. But the critical question is where to get the money to spend? Taxpayers` money, government budget, or borrow hundreds of billions of dollars from world financial institutions or other countries. What will happen next?
President George W. Bush and other republicans have resisted such an approach in part out of concern for the already soaring federal budget deficit, which could hit $1 trillion at the end of 2008. Why? Because of scarcity, people cannot afford to have everything they wish for. This world is a place fulfilled with opportunity cost and trade-off. To be successful, like Karl Marx used to argue that “people live with animal spirit”, they will do everything to grab what they want, to maximize their profit. Profit maximization is pure, ideal and constructive, the concept itself, but the problem is how they are applied and whether it is the right thing to do. Right here, the main point is that “It is easy to spend money, however, is it the best of the best ways to spend lies beyond that.”
Moreover, Konosuke Matsushita, founder of National which present day known as Panasonic, is prominent and well-known for his business principles.
1. Collective wisdom or bottom up management
2. Companies are driven by each employee
3. The margin between success and failure is very slight
This business model is applicable for policy makers in the economic world as well. First, the good interaction between the players is desirable. Second, companies represent the whole economy, and employees are market participants. So all players, either CEOs or employees, are not to be discriminated. And lower-class, middle-class and upper-class people must be treated fairly, indiscriminately, to maximize the social welfare in the whole economy. Third, the slightest difference in effort translates into a major difference in achievement. Right now, what world leaders, CEOs, people desire the most is the shiny day after the very long night of crisis.
My main point is that, government intervention into the economy is recommended. However, the plan proposed by Obama to make a massive investment in public works project is not the best solution to deal with unemployment and the global credit crunch. His policy is the right one; unfortunately, it is just not the right time to do so. He focuses too much on the middle-class American people. For instance, “Help for homeowners (subprime mortgage-backed holders and borrowers) facing foreclosure is a top priority for me,” he said less than 6 weeks before he takes office in Jan. 20, 2009.
“The economy is going to get worse before it gets better,” Obama said twice in the early moments of the interview on NBC television`s “Meet the Press”. However, he sidestepped a question about when he plans to raise taxes on wealthy Americans. “The key for us is making sure that we jump-start that economy in a way that doesn`t just deal with short term, doesn`t just create job immediately, but also puts us on a glide path for long-term, sustainable economic growth,” Obama added.
On the other hand, conservative economists have also long derided public works spending as a poor response to tough economic periods, saying it has not been a reliable catalyst for the short-term growth and instead is more about politicians gaining points with constituents. Barack Obama defeated John McCain, beyond that existed many variables. One is his policy focused on middle-class American, everybody knows the percentage of those American are higher than the percentages of people of other classes. Moreover, he is a smart politician, he always choose the right person to work with him, like veteran Democrats Joe Biden to be Vice-president, and Hillary Rodham Clinton as his secretary of state when he is inaugurated next January.
Meanwhile, Alan Viard, an economist at the American Enterprise Institute, addressed congress recently that “public works spending should not be authorized out of the illusory hope of jobs gains or economic stabilization.” “If more money is spent on infrastructure, more people will be employed in that sector,” he told the House Ways and Means Committee. “In the long-run, however, an increase in infrastructure spending requires a reduction in public or private spending for other goods and services. As a result, fewer workers are employed in other sectors of the economy.” Alan elaborated.
Obama implicitly argued that by invoking the federal interstate highway program, widely seen as one of the most successful public works efforts in American history, introduced by President Dwight D. Eisenhower in the 1950s, International Herald Tribune reported. Besides, people learn from different economists, leaders, but it is not to do the same thing like what those people did in the past, it is to create something new and to innovate the even better model or policy for the interests of all people. One can argue against Obama that the creation of federal interstate system did work during President Dwight Eisenhower but now it is different, people live in a totally different new world.
A substantial part of the proposed economic package will go toward creating so-called green jobs, those that benefit the environment or save energy. The blueprint for such spending, can be found in a study, financed by the Political Economy Research Institute at the University of Massachusetts and Center for American Progress, a Washington Research Organization (founded by John Podesta, a co-chairman of Obama`s transition team.)
The study, released in November after months of work, found that a $100 billion investment in clean energy could create 2 million jobs over 2 years. Nonetheless, Daniel Weiss, an environmental analysts at Podesta`s center, argued that the government should start by providing fresh money to the deteriorating auto industry, preserving hundreds of thousands of jobs, on the condition that they commit to cleaner and more fuel-efficient cars, like plug-in hybrids.
Meantime, some concerns about unemployment and inflation have been raised and policy on how to deal with the crisis is also proposed. Global economy is in recession, unemployment is on the rise, and from day to day, more people are losing their jobs. Consumers lose confidence in the markets, investors` incentives slump due to declining sales and profits. Putting much effort in public works project requires a reduction in spending in other sectors of economy. Why Obama wait to create million of jobs in the future, without preserving hundreds of thousands of job being shed every month. It would be better if he afford to help the auto industry or financial sectors to be able to survive during this critical situation. Then the unemployment rates would not increase too high to create jobs in the future.
The Bush Administration has so far taken a largely ad-hoc approach to deal with credit crunch -- addressing problems instead of trying to get ahead of them. However, many market watchers say that is not going to be enough to cool down the current troubles, especially when asset prices drop and financial institution run into capital shortage. Whereas, Obama is likely to focus too much in the future, he assumed that millions of jobs will lose and his plan is to create jobs for those people. He expects that in the future, global economy will recover and now it is so difficult to keep the unemployment rate constant, some scholars can criticized him. Then, when is the future? For how long will the U.S. economy return to stabilization? He could not give the answer, I believe.
Another concern is Inflation. Just before the subprime crisis burst, before the crisis caused ruptures worldwide in terms of financial failures and credit crunch, the money supply and money demand was at an equilibrium point in the financial markets. Where did the money go then? Why there is a shortage of money supply in credit markets? Indeed, investment in subprime mortgage market, a great deal of capitals is converted to real estate assets. However, people do not consume, they lost confidence. Investors do not risk investing amid the financial crisis. To keep it simple, money is like the blood flowing in the body, when the cash does not flow smoothly, people are not healthy. The same thing for financial markets, cash flow was not operated very well. People just keep money at home, some of them even not deposit because they lost trust in banks.
In order to help restore the economy to health, world leaders, central bankers, policy makers injected billions of dollars into the markets to deal with shortage of capital of financial institutions and to provide those who have high demand of money to operate or pay debts when they face foreclosure or bankruptcy. Furthermore, short-term interest rates are nipped to the lowest level of the benchmark short-term interest rates, a major change of monetary policy. Now, indeed, it is not a problem yet, however, when the economy recovers to its original condition, some issues might happen. When people think that the crisis is over, they start to consume again, throw the money into the credit markets, and businessmen begin to invest to make profits because they face a lot of budget deficit during the crisis. Excess money supply would lead to a hyper-inflation (my projection).
Unemployment and inflation do not work well when they are together. There is a negative correlation between the two, that is, when one increases the other move in an opposite direction. Obama`s single largest investment is to create jobs for people, to reduce unemployment rate (right now 6.7% and is anticipated to grow) in the United States (The trade-off between unemployment and inflation is well explained by Phillip`s Curve). Then, the inflation would become visible just after the economy returns back to recovery.
The prophecy of “at the end of one crisis, it is the beginning of another” will be fulfilled if the right policy is not in place, at the end of global financial crisis. However, since the financial crisis is inevitable, people must accept the truth. They have to take advantage from the crisis, somehow, it can be an opportunity for mankind to learn about and innovate new strategies on how to protect the upheaval of the crisis in the future. People get stronger, they grow up after the crisis/obstacle or problem is solved successfully, rationally, and logically.
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