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What if surveys steer the economic administration?
What do you think? What happens if public opinion surveys would be indicative about how the economy will be administered? According to the article Professor Christina Romer, Chair of the US Council of Economic Advisers, wrote in the English the Economist this week, bad things happen. Furthermore, as Romer suggests, this was already observed in the past, in 1937's America. And the results were bad. Unemployment, which began to fall down as of 1932, go back to rise again due to the introduction of contractionary policy, which was "wrong". Recovery was pushed back to the end of Second World War. According to Professor Paul Krugman, on the other hand, there is no need to go back to 1930s: Check the Japan of 1996 and the expansion of the depression period because of "wrong" decisions. But, what were we talking about? Where did this discussion break out from? It broke out from a survey published both in New York Times (NYT) and Wall Street Journal (WSJ) dailies on June 17. Let us see how.
We are going through a unique period we are not familiar with. Remember, exactly for this reason we said "do not be angry at economists, they are shocked as they did not experience such a period for a long time". Unusual periods require unusual measures. And unusual measures make those who are not used to think in unusual ways drive forward usual fears with an ill-timing. There are ample of such people in Turkey. They, assuming that what they know still applies, go on talking. And as they repeatedly tell it, they become more credible in the eyes of others. After all, what they tell is the generally accepted "truth" that used to apply. So, everyone becomes prone to believe in them.
Just as this example shows: Out of 895 people that participated in the survey by American NYT and WSJ dailies by telephone, 63 percent supported president Obama. However, 58 percent of the participants said that the top priority of the President and the Congress should have been taking measures to tackle budget deficit. They maintained that the priority should be the budget discipline even in the expense of the delay of recovery. It is so nice, isn't it? In Turkey, we have been talking about the cost of the deviation from budget discipline. Therefore, the emphasis put by the US citizens seems nice. But, it is not yet correct; there exists a problem of timing.
First, let us take your attention to one point: They are talking about "the rise in budget deficit and deterioration of budget discipline stemming from the measures implemented to tackle the crisis". They examine the fiscal expansion packages and say "the trend to increase expenditures seems to become dangerous". While the problem in Turkey is the bad budget administration and a budget disabled due to a structural problem, the straight-forward problem in the US is that they spend much more. Because, in such a period, it is necessary to spend more to compensate the deterioration in economic coordination with public spending.
What does Master Keynes say? In periods of depression, economic decision makers prefer to direct the resources they hold to financial instruments and wait rather than directing those to production. So, there appears a coordination failure. This is so because the "future anxiety" and rising ambiguities force people to wait. In periods of transition from one phase to another, it is of importance to remain liquid. And in such a milieu, public sector must step in to rebound the economy and repair the coordination failures. Intervention of the public sector infers a rise in public sector debt stock. In such periods government debt securities (GDSs) can go like hot cakes. Those preferring to stay liquid due to future anxiety gather and invest their money in GDSs.
Then, the old discussion begins. The GDSs issued today must be paid back in the future. So, it becomes important to define a plan for how to pay those back. Provisions of that plan have an impact on the current spending-unemployment trends. And the story goes on like this. These are all true. But, it seems that there is no problem considering one point: In a milieu where the imbalances go on, the state must step in to ensure the functioning of the coordination among economic actors by making cautious spending. So where does the problem arise? It arises when deciding to which area and how much to spend.
The surveys announced this week and ongoing discussions in the USA show that in the current period those using public spending to eliminate economic problems have to make decisions under big pressure. Economists have hard tasks to accomplish. Economists who design public policies and always have to argue that the designed policies are correct have even harder tasks to accomplish. On the one hand you will be in a different period you are not accustomed to looking around wondering "To what extent you are right", and on the other hand you will be surrounded by a series of arguments and public opinions stating that you are wrong. Don't you think this is though?
Paul Krugman takes the surveys published in NYT and WSJ and saying "measures must be taken for the budget" and outs the surveys carried out in 1935 and 1936 underneath. In 1935, 70 percent of the participants say "the budget must be balanced immediately". The rate for 1936 is 65 percent. Indeed, that year Roosevelt administration did what the surveys say. Things went in the exact opposite direction in 1937 where expansionary fiscal policy was switched from. Moreover, in 1936 July Fed said that "credit expansion will lead to inflation" and increased reserve requirements. It sounds similar, right? It is a sort of double danger situation. Process of economic growth averaging over 9 percent since 1933 stopped suddenly. (Thank God, this time it is possible to examine 1930s and see examples.)
So, what? Sometimes disregarding the survey results and going on with what you think right can give better outcomes. That everybody believes and that is usual may not necessarily be right. This is the first point. And the second point is: as we highlighted above, it is possible to exemplify the damage caused by not doing the right thing in 1937. Back then there also were the same "we start to see green shoots" talks. This is the second result: After all crises, markets forget about the crisis and start green shoot talks because markets open every day and they need stories. And the third result is: Recently transactions in both stock exchange markets and future exchange markets are being carried out based not on information but on imagination. Recent rise in prices is in fact related more with imagination than reality.
Keynes, exactly for this reason, proposed that entry to stock exchange markets should be hard and expensive as is to casinos for the sake of social benefit. He thought that market is interested not with the usage value but with the exchange value of a good had a negative effect on resource allocation. But different than Uncle Karl, he thought this was a situation not valid for all markets as a whole but specific for stock exchange markets. He did not know about the "efficient" post-dated future transactions. And you can take this as the fourth result.
Prices went up and profits were recorded. Stock market increased 60 percent since the beginning of 2009. Oil prices rose by 40 percent since March. What is bad about these? There is nothing bad up to this point. However if people designing policies say "Oh my God! These are green shoots. The rise in prices is the indicator of the forthcoming spring. We don't need to do anything. Look, it the problem disappears already" (which is a tendency that starts to gain prominence here in Turkey), the probability to make mistakes will be higher than the probability not to make any mistake. This is what the history tells. And this is the fifth result.
Now is not the time to get deceived by the green shoot talks but to be precautious. It is wise to reach an agreement with the IMF. We are tired of repeating it.
This commentary was published in Referans daily on 20.06.2009