The Economic of Constipation ( or how to deal with Exit Strategies)

The economic recession is not over yet, the recovery is more than questionable, but Financial Markets and Governments are already engaged in a debate regarding the timing and scope of the “Exit Strategy” (echoed by the mainstream press). For those not familiar with the terminology, “Exit” is a codename for the withdraw of the extraordinary Keynesian style measures applied by governments and Central Banks along the last economic crisis ( more spendings, bailouts, deficits, interest rates reduction etc.). Such a “preemptive” attitude looks somewhat weird considering the shortsighted economic policies carried out by the very same people which brought a financial calamity upon us. Is there any difference between then and now that could explain such a shift? Lets analyze the issue.

I will open with a small confession: I might have missed a few Macro Economics classes at the University, but as far as I remember the classic Keynesian model did not include any “Exit Strategy”. Keynes proposals were a sort of “passive activism” policies advocating for public intervention whenever the private sector is not able to maintain growth and full employment. Keynes was not anti markets, he just thought that markets could be too slow to restore economic activity and in the interim the result could be a huge social cost . Anyhow , the model we had in class showed that when the public sector got into the picture boosting demand and economic activity, it was supposed to remain around for a long time. The assumption was that unless someone could show that (the unreliable) private sector could lead the economy once again the govt. must remain in command. In the meantime , no “Exit” and no “Strategy” , just bigger government..... the equivalent to higher taxes (by the end of the day you cannot run deficits for ever). This is more or less the story of the Western economy for 40+ years since the 30.

An this is exactly what financial markets, their cronies in the political arena and cheer leading press are afraid of : They want big governments around only as saviors or liquidity suppliers , forget about taxes or limitations!. Any remote smell of higher taxes change their mind abruptly and this is the real motive for the “Exit strategy” talk, even in the midst of 16% (!) unemployment rates ( U6 in USA) . Their strategic objective is to restore pre crisis lost paradise : 30 years of smaller government, smaller salaries and ….higher profits.

Don´t bother to ask who is going to replace the government demand given the number of constrains and challenges the global economic is facing , just to name a few: Huge piles of private and public debts, record unemployment figures around the globe, international imbalances , global warming, elder population …... : if you insist on raising the question and you get the answer that market forces will solve the problems, than you can be sure that the lessons from the crisis have not been learned yet and the second round is just around the corner.