Focus on Stimulating Supply not Demand

The problem is not that so many economists have gone berserk, the problem is that the y are still at the helm of affairs trying to get the world out of a massive financial crisis which would not have occurred if they were not running the economy in the first place. One definition of madness is that you continue to do the same things and expect different results. Policy makers, in their effort to pull the world out of the global economic crisis continue to pursue the same policies which they pursued to bring it to a brink. Economies the world over have gone into tail spin and millions have lost their jobs because of the policies put in place by these worthies and they still continue to pursue the same policies and expect us to believe that the results this time around will be different. At best of times economists are known to be experts who will know tomorrow why the things they predicted yesterday didn’t happen today. Politicians all over the world have done precious little to boot them out and bring in people who are in touch with reality and the markets and are capable of keeping things simple.
One of the simplest lessons one learns when one begins to study economics or sociology or even psychology is that human beings have unlimited needs, wants and desires. I think that translates to mean that there is unlimited demand and that it does not need to be stimulated. But the ivory tower economists whether they are in China, USA, Europe or India, are busy advising their political masters to throw money out of the window by way of stimulus packages to boost demand. One of the easiest things to do is to spend money when you have it. USA perhaps has the money because all they have to do is get the printing presses to work overtime and as long as the world trades in dollars they have no problem in announcing one stimulus package after another. But it is not the same with countries like India. We do not have that luxury. We should be very wary of following the US lead and implement stimulus packages. We just need to go back to basics and remember demand needs no boosting. The solution for India and even the USA lies in focusing on boosting supply not demand.
Let us look at a few examples. Starting with basic needs for survival is there any way there will not be enough demand for food, fuel and gas. These things are mandatory and we have to buy them whatever the price. For other things which we call discretionary ‘wants’ and on which the health of an economy really depends; we will buy them when the price is right. Who wouldn’t buy all those items like an iphone, another car, a plasma TV, a handyman, if they were available at a price which is affordable for the consumer and profitable for the manufacturer. Demand will surface the moment the price dips to the right level. The problem is that manufacturers are unable to supply products at a price at which people are willing to buy. If the government was to focus on the supply side of the equation and help manufacturers improve their manufacturing facilities by giving them monetary incentives to implement technological improvements to boost supply at affordable price we will see the light at the end of the tunnel. The government could cut excise duties and other taxes. That will at least keep the factories running and keep people in jobs. By focusing on boosting demand by pouring money into the market the economists and the politicians, who are unfortunately in charge at the moment are, as a wit put it, hell bent on switching off the light at the end of the tunnel.
One of the reasons why products are not available at affordable prices is because a lot of capacities were built at a time when prices of everything were bloated because of the policies of the economists focused on boosting demand. Subprime crisis is a result of the effort to boost demand by putting money in the hands of people to buy houses who could not afford them. They obviously bought ‘assets’ at uneconomical prices meaning they overpaid. Similarly industrial capacities were built by unsuspecting entrepreneurs and are now realizing they spent too much creating them. The policy makers should focus on helping these owners who will obviously be capital constrained, to cut their losses and sell their assets to people who can make them viable at a price they are viable. The more they delay this worse will the situation become. The government should play an active role in identifying these assets and insure they do not sit idle or run unprofitably. Every asset is profitable at some price. The government should go all out to insure the transfer of assets which have become economically unviable because of the high price of acquisition of the current owners to new owners at lower economically viable price. This is where the government should be spending its money and not waste it in trying to artificially boost demand. The government has to help the market find its own level of efficiency and not try to impose its decision on it. No government can ever dictate the market. The best it can do is identifying the trend correctly and help it along and not go against the trend. There is no other reason to explain the failure of the massive infusions that the governments have made without making the slightest dent in reversing the tide of the current crisis. Let us face it the current owners who acquired their assets at a high price during an era of easy credit are now feeling the pinch and would want to get out and minimize losses. This will help create supply at lower prices and thus stimulate demand.
The current policies the governments are pursuing are the same as the ones they followed to bring on the financial Tsunami. By flooding the economies with massive amount of money in an effort to stimulate demand they are sowing the seeds of an even bigger disaster. Ten years from now they will be trying to stop an avalanche of inflation that infusion of money today will definitely trigger. The world economy will not emerge from the recession unless the price of goods and services falls to prices at which demand emerges. When you put unearned money in the hands of people the prices will go up, not down. Till the production houses start churning out products at reasonable prices the demand will not return. Focus on supply the demand will take care of itself.