A Stimulus that’s short of Stimulating

Nupur Samantray
Princy Naik
Bipin Bihari Samal
Master of Finance & Control
Utkal University

As the world’s attention shifts from financial rescue to financial reform, the quiet success stories
deserve at least as much attention as the spectacular failures we need to analyses the scenario
which the stimulus package has created and the implication of the entire revival package granted
by U.S.A to the free economic fundamentals of the global economy.

Global financial meltdown has been viewed by analyst in different scenarios. But the basic
system risk remains there. The financial crisis is merely a symptom of another, deeper crisis,
which is a systemic crisis of capitalism itself. According to Samir Amine, an Egyptian Marxist
economist, the constant decrease in GDP growth rates in Western countries since the early 1970s
created a growing surplus of capital which did not have sufficient profitable investment outlets in
the real economy. The alternative was to place this surplus into the financial market, which
became more profitable than productive capital investment, especially with subsequent
deregulation.[94] According to Samir Amin, this phenomenon has led to recurrent financial
bubbles (such as the internet bubble) and is the deep cause of the financial crisis of 2007-
2010.[95]

Now the question before the policymakers remains that are we giving stimulus to contain this
systemic risk or are we viewing the crisis in a totally different aspect visualizing the fact that a
stimulus package can contain the crises, and so bailing institutions one after another. The extent
to which the stimulus is stimulating has been skeptical till now and economist and financial
analyst still doubt whether the pros of economic revival package really exceed the extent to
which the fiscal deflect could cost the nations if not USA in time to come. This article analyses
the extent to which the stimulus packages has proved to be stimulating in case of countries
including ours.

As far as USA is concerned the stimulus packages has been used more for bailouts of the
distressed institutions that for supporting the market and economy in general. The entire
economic revival packages which actual cost is far more than what is being projected is as
follows. The American Recovery and Reinvestment Act of 2009—the $787.2 billion economic
stimulus package proposed by President Barack Obama and passed by Congress in mid-February
[2009]—is intended to put America back to work and to help shorten the recession.

According to the Congressional Budget Office (CBO), the stimulus package is expected to
increase gross domestic product (GDP) growth between 1.4 percent and 3.8 percent by the fourth
quarter of 2009 and to create up to 2.3 million new jobs during the same period. More than $71
billion will be invested in green initiatives—from energy conservation and efficiency to mass
transit to environmental cleanup—along with $20 billion in green tax incentives.

Now as far as present scenario is concerned the stimulus package has not been able to attain its
goals. The employment figures still lag behind and with less confidence in markets, the indices
especially those of USA has turned out to be more volatile than ever. Major Banks have posted
losses for third quarter. The economy has gotten worse than the Obama administration had
predicted it would be even if Congress had spent nothing on “fiscal stimulus.” Although some
are arguing that this gap is proof that more stimulus is needed, it really shows that the cost of the
American Recovery and Reinvestment Act of 2009 — and laws like it — far exceed their
benefits in the form of economic stimulus.

By June 2009, the unemployment rate had reached 9.5 percent, as compared to the 7.6 percent it
was in January 2009 when Congress passed, and President Obama signed the $787 billion
stimulus bill. The Obama administration had predicted that the June 2009 unemployment rate
would be less than 8 percent — almost a half of a percentage point bigger than it would have
been without a stimulus bill. The Obama team had predicted that the stimulus law’s effect would
always be less than two percentage points, even at its peak potency. This somewhere or the other
raise question on the very validity behind the packages for revival of economy. Some of us
thought that the fiscal stimulus would do essentially nothing to improve the economy. But even
stimulus advocates admitted that economic improvements coming from the stimulus law —
about a half a percentage point (by their estimates) — would be small when compared to the
shocks hitting the economy.

Based on this comparison, a few economists have suggested that the stimulus bill should have
been larger. Their logic is that a half of a percentage point improvement could have been one
percentage point if we have spent twice as much and two percentage points if expenditure would
have been four times as much. An even more massive stimulus, they say, would actually have
effects that we could notice, and that we need.

But fiscal policy is not merely a dial that can be turned to any desired amount. If it were just a
dial, then those of us who thought the stimulus bill would have a tiny effect would be supporting
an even larger stimulus than the Obama administration proposed! An impotent fiscal policy dial
would have to be turned a lot to have a given effect.

This faulty logic comes from ignoring the costs of fiscal stimulus, and failing to ask whether the
costs are commensurate with even the most optimistic estimate of the benefits.

As far as Europe is concerned with countries like Greece and Iceland bleeding and the England
leading the entire euro zone we need to be less critical to the bailout and the stimulus they have
provided to their economy. Now Will the European plans work? There is one hopeful precedent,
in Sweden, which in the early 1990s solved its own banking crisis by guaranteeing deposits,
injecting huge amounts of liquidity into the banking system via the central bank, and forcing
banks to write down the value of their assets very quickly. In describing why that bailout
worked, Urban Baeckstroem, the former Swedish central bank president who played a central
role in the rescue, has identified some other vital measures. But times have changed and we need
to recognize the systemic crisis the globe is facing because of increasing integration we need to
face the question that are these bailout packages actually appropriate when we have propagated a
free market theory and at the same time is this stimulus somewhere or the other does not out the
efficiency of market and the entire financial system in question.

As far as our economy is concerned we were able to save ourselves because of strict regulation.
Yet the RBI and the finance ministry announced a lot of measures including reduction of CRR
and repo and a deflect budget increasing the fiscal deficit. The government expects the Indian
economy to grow at 7.1% in the current financial year ending March 31, the slowest pace in six
years.

So far, government has announced two stimulus packages, one on December 7, 2008 and the
other on January 2, 2009 besides the several monetary policy measures undertaken by the
Reserve Bank of India. Now the efficiency of the stimulus package is still to be seen in the latter
half of 2010. But with inflation hitting above 7 and with no significant rise in job creation along
with the RBI increasing the CRR the impact of a high fiscal deflect can be seen and it is yet to be
seen how much stimulating the stimulus package proves to be. With the Indian economy
recovering faster than USA we can be less skeptical about the revival policies and the fiscal
deficit it creates and the stimulus package can be a more stimulating than it has been in case of
USA and Europe.

References

J. E. S t i g l i t z : The fruit of hypocrisy, Guardian, 16

http://www.guardian.co.uk/commentisfree/2008/sep/16/economics.wallstreet.
2 Ibid.
3 R. Reich: Government needs to rebuild trust in markets, in: USNews and World Report, 16
September 2008, http://www.usnews.com/articles/opinion/2008/09/16/robert-reich-government-
needs-torebuild--in-the-markets.html.
4 A. G u r r í a : Responding to the global economic crisis – OECD’s role in promoting open
markets and job creation, 21 May 2009, http://

www.oecd.org.