Financial crisis outcome – searching for the right direction

Here comes the question of how can we get out of the crisis? Jens Weidmann the Chief of the Germany Central Bank said that the crisis would continue for the next 10 years. The main issue is to solve a public debt problem where in the EU it is 90% of GDP. The governments try to increase taxes to cover the debt but it slowdowns the economy and makes consumers refrain from spending and moving to other countries where taxes are lower (a famous case is of the actor Gerard Depardieu who protested at having to pay 75% income tax in France and was offered tax residency in Russia from President Vladimir Putin).

Why do governments raise taxes when the effect of the Laffer curve is well known in economics? Tax is quite a powerful tool for the government in economic management but it seems that the basic and fundamental rules of the fiscal policy in economics are not really treated seriously by the politicians and decision makers. One of the fundamentals: when a government spends more than it collects and consumption decreases and GDP also decreases. When we have a sluggish economy or crisis the fiscal policy should stimulate spending and taxes should be lowered. Another idea is to cut interest rates to force consumers to spend more but there are no jobs created by the government at the same time. The Consumers propensity to spend is lower as they are more afraid of the unstable situation so they chose to save than to spend and as a consequence businesses don’t invest and further layoffs of workers and tax inflow to the government’s budget in that way decreases further. Also multiplier will boost the effect of the increase or decrease of taxes.

As of now it seems that the financial crisis is a “vicious circle” where all negative effects are built-up. It needs to be noted that the size of the national debt or budget deficit itself doesn’t imply that the economy is in bad shape. These need to be analyzed together with GDP growth, unemployment rates, productivity and industrial development. All of these items are issues of policy and politics rather than pure economics. If so, does it mean that the global economy is pending much on politics or something else? The answer to that question seems obvious that today's economy is politics driven not an economy driven and more and more wealth is concentrated in a small number of transnational companies’ hands. Considering that it can be difficult to establish a mechanism of global economic control because it will contradict the current status. A good example of how the crisis was overcome is Iceland’s case, is where the Swedish Model was applied immediately. According to Economic Minister Mr. Sigfusson, the first important thing was the security of the society. Then the lower and middle income classes must be protected from austerity measures. Their purchasing power must be maintained so that their consumption can contribute to the revitalization of the economy. Internationally that case is often overlooked. The fact that the US and the EU did not follow suit may imply a different agenda, in the opinion of the Author. From the economics and rationality perspective there are some rules and indications which could be implemented to get out of this deadly trap. There has to be trust between the government and society otherwise nothing will work (security of the society should be a priority for any government as in Iceland’s case). The first rule should be applied to spending “Spend only what you have in your hand.” That means no credit cards, cash advances or loans from the International Monetary Fund etc. It may sound like getting back to the 17th century but it is like a medicine pill, you need to take it to get well. Another rule applies to business: “No politics in business and do not do the business of politics.” The third rule is for any government is “Do not harm society by your decisions, build trust and security.” That requires from the heads of governments to act pro-socially and to avoid greediness. It is like “Stop playing the lottery on derivatives.” Another rule applies to the society “Trust and respect your government.” Is it possible to create a global mechanism which could be based on these rules? We do not live in a perfect world and it will be kind of utopia to believe that it will happen. In fact we need to have an Economic Armageddon to understand that nothing will work without trust and security.

(from Robert Dygas The Economic Security of Business Transactions / Management in business/ Edited by Konrad Raczkowski and Friedrich Schneider 2013)

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