State of the economy

In four days, a new President will be sworn in to the White House. The nation is nervous, yet hopeful, about how the economy will do under Obama's hands-on approach. Free market economists worry about too much government intervention, while the Keynesian people press for more stimulus spending. Who is right?

I am in the middle of the two extremes. In the extreme left, the Keynesian people put too much faith in a few elites in the government that the government can make sound economic investments when private sectors are gun-shy. On the other hand, the free market crowd put too much faith in the "invisible hand" of the market and its ability to self adjust, forgetting that free market in short term can be very inefficient and irrational, and takes a long time to self adjust. The current economic situation is a case in point. After several years of easy credit, the financial sector is almost grinding to a standstill. Private investment is almost completely frozen. Consumers all of sudden woke up, stopped their spending binge and have been tightening the belt to suffocation. The negative multiplier effect of declining investment and consumption has led to massive layoffs and production shutdowns. Under this situation, if the government does not step in to provide a backstop, the economy will certainly spiral down to depression, and remain there for a long time, until the markets gradually self adjust. We cannot afford to wait. Normally I do not like Keynesian economics and government intervention. But this is not a normal time. If the government has any use at all, now it is the time for it to step up.

There are three types of government interventions that can affect the economy: monetary, fiscal, and tax. We have tried the monetary. Federal Reserve has printed trillions of fresh dollars, only seeing those dollars being hoarded by the banks without being put to use to stimulate the economy. Reducing taxes, or even tax rebates, may not help either, because the private sector does not want to invest or spend the money they get from tax reduction or rebates. So that leaves only fiscal stimulus in the forms of government spending. I think prudent and targeted government spending at this critical juncture is necessary to create jobs for the laid-off workers, stimulate economic demand, and produce long lasting benefits to the society.

That is why I support a "shock and awe"-type of fiscal stimulus package, to increase investment in much needed infrastructure upgrades around the entire US. Still remember the bridge collapse in Minneapolis? Just a few weeks ago, the River Rd down here in Potomac Maryland became a real river road, because a massive water main break. For so many years, we have under-invested the nation's critical infrastructure because no-one likes to pay higher taxes. We should also increase the investment in projects that produce long lasting benefits to the country, such as increasing funding for scientific research, alternative energy, national broadband networks, and smart electric grids.

Yes, I am nervous, but I am more hopeful. I am carefully watching what Obama is saying. And I like what I have heard so far. I am hopeful.