Bailout Economics

This is just another term future economists and management students have to deal with in their text books. A lot of post Morten analysis of different country’s booster dose of Viagra to their economies will be done in due course.

Let’s try to unfreeze this entire prescription of a stimulus package for the economies and evaluate effectiveness and modus operandi. If Keynesian Economics is what doctors advocating a stimulus package follow, then what they mean is “when there is spare capacity in the economy, demand and employment can be boosted by Government Spending, Borrowing and cut in direct and indirect taxes. So stimulus package necessarily follow Keynes advice on Government Spending, but did Keynes specified where to spend and are the Governments necessarily following his advice. Well he said employ people to dig holes and later tell them to fill the holes, so that they have employment, and when they have money, they will demand and thus consumption and demand will be boosted in the economy.

So is the “Booster Dose of Viagra” doing that or is it just going around protecting big industries by offering them fancy bailout packages as Christmas Gifts. The stimulus package in US (TARP) is more of a Bypass Surgery for their financial sector, wherein the clogged arties are being cleared. But what concerns me is the nonchalance towards the basic problem of unemployment. People are being clobbered and churned out in big numbers by the private companies and they have no where to go, but look for jobs while making a living out of their savings. Bailout for financial institutions, automakers or sundries will no way help the basic problem of low levels of demand in the economy. The reason given for of these industries is that they are too big to fail and any stumble of these institutions will not be good for the economy and increase the problem of unemployment.

Well I say who allowed them to get so big, as that their sheer size is putting the entire US economy at risk. The size is giving them an advantage of creating a financial mess and being able to get away with it. In order to restructure their companies with bailout money they will anyways issue a lot of pink slips. Another thing baffles my mind is, the interest of internal stakeholders like employees not being taken care of by US government when offering the companies bailout money. Is it being ensured that the companies will not fire in the near term in order to restructure. If you are giving money to save a company only to find the company retrenches a lot of staff later in order to restructure, the Keynesian Economics certainly is in unsafe hands.

A better way out would have been strengthening of social infrastructure (by developed countries) with investments in educations, healthcare and security (yes you can actually employ more policemen and increase the size of your army). Instead of helping rich and famous save their companies focus should be to put money directly in the hands of consumers. Ensure the TARP funds generate employment opportunities by investment in the Public and Government sector. Let’s not reward companies who lack financial prudence by helping them out with tax payer’s money. Instead lets spend this money on the tax payer it self by putting the money directly in his pocket. By helping troubled banks and car makers we are indirectly penalizing the good performers of this industry as their financial prudence and good performance is ignored. Rich and Famous seem to been the mantra for Keynesian Economists of modern times.