Monday, February 2, 2009

Private Virtue - Public Vice

This is attributed to Keynes - in the context that excessive thrift on the part of you and me will only help in prolonging the downturn.

Harish Damodran in the article " How Rational Behavior Begets recessions " on Business Line touches on this very Topic.

The question is when people around us are losing their jobs (returning Newly bought cars ) and livelihoods , would you be interested in going out and Buying a Flat even if the prices are rock bottom and even if there is a Mercedes thrown in with the flat. You get the drift - its not likely to happen.

So the current policy of the Government here and elsewhere to decrease interest rates might not see any immediate revival in spending. People are scared , they were exuberant 6 months ago now they are scared - fearing for their jobs - so the medicine will take sometime taking effect - if it really does.

The other option for the government to increase public spending - which is investing on infrastructure projects in a Big way - is a stronger medicine. But, for this medicine to work the our system should be efficient. Which it isn,t. Much of Government spending tends to land in private pools.

So what are the options?