Stimulus? What stimulus?! 7

Hardly a day goes by without another politician, an expert, or a civil servant thoughtfully talking about how they would like to stimulate the economy.

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Their near unanimity on desirability of the stimulus is strikingly at odds with the absence of such stimulus. Surreally, this all creates an impression that ‘stimulus’ is some sort of badly needed, but forbidden substance – that there is some kind of ‘stimulus embargo’ imposed by the evil IMF&Co. Watch how politicians gleefully report on how they succeeded in smuggling in some little stimulus to help the economy. What’s going on?

Well, if you give it some thought, there are more things that are at odds with the stimulus. Here are two more. Contradiction #1: ‘Stimulus’ is incompatible with deflation. Those same people tell you that deflation is a necessary evil, don’t they? Deflation is the path to restoring competitiveness of Latvian businesses internationally and domestically, isn’t it? Yet it doesn’t take a PhD in economics to understand that ‘stimulus’ and deflation are two mutually exclusive events. Prices just can’t drop if you’re pouring stimulus into the economy.

Contradiction #2: ‘Stimulus’ is incompatible with reasonable levels of public debt. Stimulus means expansive fiscal policy, as opposed to fiscal consolidation prescribed by the IMF program. That is, the public sector should spend more and, therefore, run larger fiscal deficits. Now, without the fiscal consolidation the budget deficit would probably be around 12% of GDP. So implementing a stimulus would imply deficit levels of 15%, 20% of GDP? More? Even with all the fiscal consolidation (including 1 billion euro cuts over the next two years) the level of external public debt is projected to increase to 60-70% of GDP in the medium term. These already are the levels that are considered to be rather dangerous for developing countries. What levels of public debt we’re talking about with the stimulus? 100% of GDP? 150%? Overtaking Greece?

I could go on and on by pointing more contradictions, but the point should be clear. Fiscal stimulus was never part of the stabilization package that the Latvian government agreed to in November 2008. The government (and the leadership of nearly all the political parties) must be aware of this. The IMF thinks they are aware of this. Quoting from the IMF’s Second Review on Latvia (p.15), “The authorities recognize that the program does not offer any space for expansionary measures (apart from social safety net and EU funds-related spending).” This begs the conclusion that any politician that talks about the stimulus either does not understand what he (or she) signed up for, or is knowingly misleading the public.

Why peddling the ‘stimulus story’ is such a thriving business (for politicians and experts) here in Latvia? I think there are three reasons. First, Keynes couldn’t have put it better when he said that "practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist…" Most people’s (in Latvia) knowledge of economics seems to amount to thinking that if there is a problem with the economy, one needs to add more money (i.e. stimulus). Second, it does seem to conform to what the developed countries are doing, i.e. running huge fiscal stimuli. Of course, the fact that economic crisis in most developed countries has different roots is a subtlety that is lost on your average layman. And finally, “the IMF doesn’t let us stimulate the economy” falls well with most Latvians’ instinctive distrust of and suspicion towards the foreigners. Another manifestation of Soviet after-effects, I guess.

Therefore, expect whining about the stimulus to continue.

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Komentāri (7) secība: augoša / dilstoša

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politics are not cool 13.04.2010 13:34
Latvian internet marketing experts:

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--> G.D. 01.04.2010 21:20
non-issue? Are you saying that that there is no tradeoff between stimulating the economy and achieving an internal devaluation? Think again.

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G.D. 01.04.2010 18:25
Mostly I agree but I think Slava is arguing about a non-issue here.
1.The main problem is actually the meaning of the word ‘stimulus’. The author defines the word as “measures sufficient to keep the inflation rate above 0; if measures are less than that – it is not defined as stimulus”. I have not been too much into the subject but I have never heard of such a definition. As far as I understand usually in press and anywhere the term is understood as ‘measures on top of automatic stabilizers’. In this sense some Latvian measures can be regarded as stimulus.
2.Of course, any stimulus is limited by deficit, debt and potential output considerations. As the latter is pretty unclear it is difficult to say how much stimulus would be good/acceptable. There was a country ‘stimulating’ the economy in 2009 and illustrating the point. Her name is Greece.
3.I would not rely too much on Keynes’ quotation. First, I am not quite sure if it is precise. Second, it does characterize Keynes’ personality but not more than that. As far as I remember from economic history lessons it was usually the other way around: those were economists who took some well-known truths (promoted by some business interests) and then made a theory out of it. That is how it usually works with successful theories. There had been some exceptions, though, e.g. Marx. About Keynes it is difficult to say where it stands, e.g. Nazis had 'keynesian' ideas all through the 20ies and they implemented those successfully in the 30ies not knowing much about Keynes. And I am also quite sure they were not original but picked up the ideas somewhere around. Whether that ‘success’ was sustainable is another issue which is also quite relevant today.

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Jaņģs 01.04.2010 10:54
The West, which is being so much advertised as a panacea by Elerte, the Maeirovic Group, Vienotība, etc. has been seized by neo-liberal ideology ever since the demise of the Soviet Union. As a result, the West is facing a similar demise, indeed a certain demise--in the more or less near future.

The West stands these days, we ought to know, for Conspicuous Consumption, that is, consumption that is consuming the Earth's resources. This is why Conspicuous Consumption creates economic demise and its consequence, re shit. It is reasonable to say that the "near future" is long consumed. What remains is the "far future", because reactionism and perverted traditionalism does not encourage the stimulation of economy either in Latvia or elsewhere.

It is possible to stimulate the Latvian economy only by stepping over the calcified orthodoxies that have taken such deep root in Latvia. I have in mind those left over from Soviet times and then introduced by shock treatment a la neo-liberalism from the West, not to mention the promotion by repetition hate among the people living in Latvia.

Let us remember that historically stimulus comes from rejects in other economies. It is the orthodox who fear to mention by name what the stimulus is.

I will mention one such no-no stimulus, which has been suggested in the Netherlands: that people over 70 yrs old, who feel that they have attained their life's goals may request such medicinal assistance as will allow them to exit life. Latvia could well accommodate this need among the people of the West and elsewhere. It would bring to Latvia many such out-tourists. The Latvian countryside offers them the peace and quiet such a meditative time needs. Of course, once the necessary laws are passed, a whole series of other unorthodox stimuli will suggest themselves, such a legalization of marihuana (perhaps under the supervision of Latvian pharmaceutical companies), DNA research with the ultimate aim to clone the first human beings, which in turn will require the recreation of a family system that more closely resembles a "saime", the traditional Latvian social unit, and forsake the nuclear family. Last but not least, it will probably allow Latvia to prevent the desertification (more accurately "weedification") in process due to deforestation.

Shocking suggestion as to how stimulate the economy for sure.

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reality 31.03.2010 18:14
''Another manifestation of Soviet after-effects, I guess. '' - AK, ŠĶIET - par šito tēmu jau sociologs A.Zinovjevs kopš 1986.g. rakstīja un rakstīja:
''Социальные законы незыблемы. Вы можете уничтожить народ, но не можете уничтожить законы, по которым складываются и существуют народы.
– Это и есть – несовместимость социальных тканей, Александр Александрович (..)
(..) Тут и определенные исторические традиции, и определенный человеческий материал, и соответствующая социальная структура общества, вся система власти и управления, в которую включается эта так называемая демократия. Там она органична и естественна. А когда это переносят в другую среду, с другими историческими традициями, с другим человеческим материалом, и не просто переносят, а насильственно насаждают, тут неизбежно разрушаются и социальный строй, и система государственности. ''
Я мечтаю о новом человеке - Зиновьев Александр

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liberāls 31.03.2010 17:37
Precīzi. Labs raksts, paldies.

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Nu jā, bet 31.03.2010 15:21
But these cuts create their own externalities (rising crime, emigration, unemployment, return to the shadow economy and its attendant tax evasion, more bankruptcies etc).

Is there really no room for well-placed public investment to do something to break the downward cycle? We have (well I say 'we', but I wasn't asked) committed enough public money to the financial sector, after all.

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