Crisis to be overcome by individual efforts: French University Professor of economics

Crisis to be overcome by individual efforts: French University Professor of economics

Azerbaijan, Baku, Feb. 13 / Trend /

University Paris-Dauphine Professor of economics and Mont Pelerin Society Ex-President Pascal Salin specially for Trend .

The US recovery plan proposed by president Barack Obama has just passed the Senate. It may amount to about $ 800 billions both in tax cuts and public spending. It is expected by US officials that it may give an important stimulus to the US economy where industrial production has declined by 11.5 % and the unemployment rate has risen to 7,6 %.

Unhappily, this plan is a pure illusion, as are all stimulus plans all over the world. Why that ? It is inspired by popular views which can be labelled as "Keynesian" and according to which, whenever there is unemployment and a decrease in economic activity, the solution consists in increasing total demand. The increase in demand would make possible for producers to increase their production, so that unemployment could be cured.

Now, it is well known - or it ought to be well known - that in any field of activity, a solution to a problem cannot be found if one does not care about the cause of the problem. And what is the cause of the present economic crisis? It ought to be obvious to everyone that this crisis has been mainly caused by the past expansionary monetary policy of the US and the corresponding excess creation of debt. This, in turn, caused distortions into the production structure, since some activities benefited more than others from the excess creation of debt. With very low interest rates, investors have decided investments which, in fact, would not have been considered as profitable with a normal interest rate, which in fact appeared when interest rates increased from 2004 to 2007. The crisis is nothing else than a period of adjustment to come back to the desirable structure of production and there is, unhappily, no other solution that to let it take its course.

We must not evaluate the effects of the stimulus plan without considering its financing. The plan does not create any additional wealth, it just shifts resources from private hands to public hands. It is clearly the case if it is financed through increases in taxes. But, if ever it is financed by debt, it also means that individuals and firms have less resources to invest. And financing by money creation also implies an inflation tax on people and the risk of a new business cycle. It is in fact quite paradoxical to increase public debt, as the crisis has been created by an excess of debt.

From this point of view, the stimulus plan can do nothing, except postponing the necessary adjustments. In a time of economic difficulties, one ought to care about the most efficient allocation of existing resources. Spending just to spend and to finance anything is not a wise answer. Keynes had said that one might even spend money to dig great useless holes in the earth in order to increase demand and stimulate production. This is completely foolish.

Now, the illusory character of the plan does not prevent us from evaluating its various aspects. From this point of view, it is preferable to have a decrease in taxes - which is one part of the US stimulus plan - than public spending. However, the US plan provides for a decrease in taxes of people with the lowest incomes, which seems to be justified. But president Obama had previously said that, meanwhile, he would raise taxes on higher incomes. This is dangerous, since it creates disincentives to innovate and to invest among some of the most dynamic entrepreneurs. There are no increases in wages and employment, if there are not enough incentives for entrepreneurial activity.

In short, the crisis will be overcome by individual efforts to adjust to a new situation, not by badly informed public decisions. But people do believe that the government has the possibility to solve all economic problems and public authorities have the feeling that they have to do something, whatever it is. A stimulus plan seems to be founded on a precise expertise, which is not the case. But this creation of illusions is one of the great challenges of our time.

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