The US recession is getting longer and the end is not in sight. The future is muddied by political and economic mismanagement that borders on the burlesque. In recent months, one seat of the government has proposed a plan and the other disposed it. The bail-out or the rescue bill was first proposed by the White House and then disposed by the House. On the second attempt, the House acquiesced as the economic crisis deepened. The very fact the Lehman Brothers bankruptcy precipitated the meltdown suggests that the Treasury Secretary, Mr. Henry Paulson, did not anticipate the consequences of letting it go under. The freeze in the commercial paper market was not an accident, Lehman Brothers played a role of a market-maker in the commercial paper market. Before letting Lehman Brothers go, the Treasury Secretary ought to have set up alternative mechanisms for keeping the commercial paper market liquid. A secondary effect of the credit freeze was its effect on trade credit for exporters in emerging markets. Their exports plummetted as trade credit dried up.
Now the wrangling over the auto bail-out is showing similar confusion. The Senate sees clearly that a hand-out to the automotive companies is not going to help. The one thing that stands out is the difference in the attitude of auto companies in the South and in the North. None of the Southern auto companies are looking for assistance from the Government. The unions in Detroit are not budging over wage cuts. A Chapter 11 will work the magic to bring them to their senses. Clearly, they are hoping that the new administration will prop them up. Yet the White House is now suggesting that some funds should be used from TARP to keep the auto companies solvent till they end of January next year.
The poverty of ideas is pervasive. A massive stimulus package has been initiated by Nancy Pelosi. During the lost decade of Japan, close to ten stimulus plans with a total expenditure of one trillion dollars were implemented in the 1990s and they did not help. Japan's world competitiveness score went from number one to twenty two today. You have to wonder why nothing was learned from the long period of stagnation. Japan had a brief period of growth during Prime Minister Koizumi's term when he implemented reforms in the financial sector of the economy.
Leadership in the USA is showing the same signs of an intellectual impasse as in the lost decade of Japan in the 1990s. This is bizarre given that the USA has the world's best economists with a reputation for finding pratical solutions for policy problems.
Simply put, the way to kick-start economic growth is to lower the cost of doing business. This can be done by lowering costs of risk-management, lowering the cost of providing social services, regulatory and legal compliance and improved infrastructure. In all of these areas, the USA could make huge improvements.
A great deal of money is lost on farm subsidies. The Doha Round of negotiations, focussed on freeing international trade could be a major boost to business confidence as it will lower the cost of producing agricultural commodities and increase incomes in poor countries of Africa. Western farmers resist the discontinuation of subsidies because they fear the impact of sharp swings in commodity prices and weather related disasters. The reality is that a switch to leisure activities, such as hunting, will compensate for lost revenues and lower risks. Catastrophic insurance for the farm sector will help as well.
The health sector is a huge drag on the American economy. A single payer system will only aggravate the problem as it will have no in-built mechanism to lower costs. The alternative of consumers buying is a possibility although chances are that many individuals will not be able to shoulder the additional risk. In all likelihood, a freer market in health services will encourage intermediaries to strike deals with insurance companies and provide advice to individual customers.
American public schools are a disaster. Too many graduate without the minimal skills to do their jobs and businesses have to incur costs to train them. The school reform in Washington DC is uncovering the challenges of switching public schools to something that resembles private schools. Teachers are reluctant to trade the security of unionized schools for higher wages.
American economic recovery will not be quick this time as the latent pathologies in the society stand in the way. Change, the much bandied buzzword, will run into conflicting perceptions of reform. Worse, we have bumbling idiots for leadership.