Anti protectionism

 

Our biggest fear today should not be  ‘how long will the recession last?’

What we should fear is protectionism as these are like many other indulgences – feel great in the short term but are harmful in the longer run and for the larger self. A bit like chocolate and alcohol, they are addictive too, and can lead to greater evils – in this case jingoism. Unfortunately, protectionism is a popular story, easily sold while the logic of comparative advantage across countries needs better PR. It will take much juggling and manouvering to get public opinion and policy makers to actively and publicly support what must be done.

In response to the global slowdown, governments have responded, albeit slowly to the symptons. They are curing the fever, not the disease. Most governments – at least the larger ones seem to have come up with the formula – protect your economic borders, give cash (ish) handouts and tax the future incomes of the nation.  How, but how can this be right? Why is this any different from the retail profligacy of the past few years? Is there virtue in the aggregation of unsustainable debt? Or is the securitisation of possible future streams of taxable incomes any different from what the banks have done?

While in an earlier blogpost I had argued that the government must – and indeed is the only entity that can – pump money into the economies to stimulate demand, I must say I am apalled at the way it is being done. Cash handouts at the retail level, incentives to buy houses and cars, subsidised interest rates…how is any of this sustainable. Or, to rephrase – is this the best use of the money (future taxes) to stimulate demand?

Given the mess we are in, governments and central banks will certainly have to dance the fiscal and monetary dance. There will be a series of  expensive stimulus packages followed by severe cutbacks and taxes. It is up to each sovereign government to decide the beat and the rhythm of this dance. This much is certain. What is interesting is what comes next in the decision tree.

The key question today really is – what should the money be spent on? Should governments use the money to close their borders (almost) and seek to stimulate local demand and local production? However populist this measure may be, it should be obvious to all that this is a very expensive way of doing things. To coin a soundbyte: a global problem cannot have a local solution.

Or should they, as I think they should, invest in the long term needs of the country. Investment in infrastructure, education, skills, productivity, innovation, research – all of these, among others will be the determinants of future success. Spending on these will also release funds into the economy. With good PR and public education campaigns (again, income for some), these investments can serve the dual purpose of riding out the storm and preparing for the good times ahead, while holding the rudder steady.

Will politicians have the guts to invest in the future rather than pretend to protect the present and steal from the future?

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