Why keynes is popular during recession?

With this recession, we again see keynesiasm raising its head vis a vis monetarists and all the major governments including United States, Britain, China taking the path of spending out of this recession. In his landmark thesis, Keynes said that to get out of recession, fiscal measures are critical since that will lead to increase in demand and hence finally getting out of recession. Mr. Roosvelt followed the advice in bits and pieces and the notion of large government took centre stage in American politics. But during times of Regan, Margaret Thatcher, Bush, Clinton and Blair, monetarists took a precedence over Keyneisians and we saw the government taking a back seat letting the invisible hand of market to take care of business cycles. But with this recession , now both the American and British government has announced broad fiscal measures to start public spending and hence increasing the role of government in economy essentially following the prescription of Keynes disregarding the monetarists "who believe that government intervention is going to make the situation worse and the government shall allow the natural business cycle to take its own course".

The question is why keynes becomes popular whenever there is recessionary tendencies in the economy. The answer can be found in what types of government are in power. Britain is currently governed by Labor party whose leader Gordon Brown has distanced the party from "New labor" belonging to era of Tony Blair. The new budget with measures to tax the rich gives the notion that this Labor party wants to capture the imagination of policies using the socialist mantra of old labor with cries of class war etc. Similarly in United States, we have a democratic president who will be regarded as socialist if some of the republicans have their way. Certainly Mr. Obama is not a socialist but his policies are left to the centre where the belief in large government interventions in health care, education etc and taxing the rich being major part of his policies.

So after estabilishing that we have political parties in power in the top two developed countries which are left to centre and hence they are spending and taking fiscal maesures to spur the economy. But underlying this is why these parties become popular during recession. The reason why these parties are in power may be mutifold but I belive one of the reason is their love of keynesiasm during the times of recession. Recession invariably leads to increase in unemployment, worsening of living conditions of people etc. If the government follows the monetarists' advice, then the politicians will be telling their electorate that the misery is part of business cycle and this will pass and we shouldnt intervene because in long term, any measures hence taken will come back to bite us. Instead if the government follows Keynes, the politicians would be giving the impression of doing somethinng to ward away the recession. They will look busy and always announcing spending policies and the electorate will be safe in the notion that the politicians are doing something to get out of this economic condition.

This, I believe, is the major reason that the politicians in power would like to follow Keynes rather than monetarists and do nothing. Keynes make the politicians look powerful and that is what all leaders want. Either prove that they have powers to change the destiny of their followers or "give the impression" that they do have such powers.

Another reason that Keynesiasm works that the government fiscal measures increases the expectation of people that economy will improve since someone is doing something. The confidence in economy is a virtuous circle which has the power to finally bring the economy out of the recessionary cycle. Thats why possibly the talks of "green shoots" by all the politicians and bankers. The argument against this is that people may think that the government spending in long term will lead to higher taxes in future and hence one shouldnt invest now. But people generally are not long sighted and took these short term fiscal measures as confidence building and start investments and spending.

Management steps during recession

Possible management steps in recession in decreasing order:
Reduce operating costs
Increase productivity
Introduce new products/market offerings
Reduce capital investments
Restructure
Hire talent that otherwise would not have been available
Seek merger or acquisition opportunities
Leave certain markets
Increase Hedging
Other
No steps


No action is the step followed by majority of the companies since the belief is these are temporary changes or even if permanent changes then what else they can do. Communication to investors is one of the prior steps to increase confidence among investors before share buy back.

(Source: One of the online polls )

Is globalisation under pressure to survive?

The globalisation in its second birth after the highly globalised world economy before the first world war has been kicking and raring to transform the world. With the technological innovation of internet and new business models like global business delivery and outsourcing in manufacturing and services, the globalisation seems to have been turning a new leaf with the possible results of being fully connected everywhere. The migration of goods across the borders was made easy and there has been spectacular increase in world trade after agreement on GATS principles. Agreements on trade policies turn the tide towards enforcement of national treatment for multi-national companies and hence flow of investment from west to east and north to south did occur. The nature of investments may be debatable but the specatacular growth of economies of south east asian countries and china does owe a lot to the world trade.

But this recession which is supposed to be as bad as great depression is going to test many governments and economists with the decisions on whether to encourage globalisation or not. Global depression of 1930s is supposed to be one of the prime reasons why globalization in the first phase reduced and finally led to an era of over-protectionism. Looking at this recession and the noises emnating from various quarters in government and society in general, the fears of the re-emergence of bottlenecks for globalization cant be ruled out. There has been demands of protecting indingenous industries both in America and European countries. To quote French president Nicolas Sarkozy "I want us to stop out-sourcing and if possible in-source. If we give money to the auto industry to restructure itself, it's not so we can hear about a new plant moving to the Czech Republic or wherever" . Euro which is " the charming example of a possible united global order" is under pressure in the new recession. In one of the articles at troymedia.com, Dr. Stephen Murgatroyd outlines the challenges faced by Euro in this recession. All the countries by adoption of Euro has lost control on their monetary policies and it is now the European Central Bank that will decide the interest rates who will need to take care of whole of Europe and not of individual countries constituting European Union. When such a challenge like a recession is present before the countries, then the real mettle of unity in a single union is rightly tested.
Demand for protectionism is the foremost reaction for any society whenever there is increase in unemployment which will definitely be one of the consequences of this recession. The bigger countries in the European Union will have to drag along the other poorer countries in Europe which aimed to take advantage of being part of European Union.
China on the other hand has decided on a large fiscal boost so as to encourage domestic demand and hence reduce its dependence on exports for growth.
Is the time coming where after 5 years from now we will see a reverse trend in globalization and see a reduction in world trade levels from now? Well that is an ominous news for the LDC countrires which were hoping to use world trade to get out of poverty...........

A brave president

Mr. Barak Obama in a speech at CIA headquarters said :What makes the United States special, and what makes you special, is precisely the fact that we are willing to uphold our values and our ideals even when it's hard, not just when it's easy; even when we are afraid and under threat, not just when it's expedient to do so. That's what makes us different" ..The speeches that we have heard but rarely implemented in our modern times. In this age of nationalistic jingoistic world of ours, I have rarely seen a president/national executive telling his armymen/intelligence that I am going to make your task harder. And here we have an American President saying it to its troops, sorry boy no torture, your job is to bring in good intelligence without torture.. that is surely a brave thing to do..right thing !! well we will know in the future..

In the same speech he said that we have made mistakes in the past and its time to admit the mistakes and go ahead. Accepting mistake by predecessor is easy to do..i would judge him when there are mistakes in his presidency(of course there will be) and then what he does abt it.. the "no torture" policy will also be trial when there is another terrorist attack( i pray not..but terrorists also pray) and we will see how much Obama is faithful to his values and ideals..

Ending torture as method of interrogration, talking to europe and south america as equals, speaking about a nuclear free world, this President has made all the right speeches and pressed the right notes in his first 100 days..On the home front, saving banks and pressing for clean energy has been the right steps in my view while there could be arguments on both sides whether he has been too conservative or lenient in fiscal measures..

This president is faced with the most difficult economic , social and political conditions when he assumed power.. the way foreward is only UP but it needs careful management to make sure that America and we world doesnt fall in abyss..

So after his 100 days , I will give a high five to his presidency and sincerely hope he continues on this path when it will be more difficult.....

the spirit of benjamin button....

Some years before I have heard a quote in my favorite soap "Seinfeld".
Thus spake George Constanza "The lord of losers"

"The most unfair thing about life is the way it ends.
I mean, life is tough. It takes up a lot of your
time. What do you get at the end of it? A death.
What's that, a bonus? I think the life cycle is all backwards.
You should die first, get it out of the way. Then you
live in an old age home. You get kicked out when
you're too young, you get a gold watch, you go to
work. You work forty years until you're young enough
to enjoy your retirement. You drink alcohol, you
party, you get ready for high school. You go to grade
school, you become a kid, you play, you have no
responsibilities, you become a little baby, you go
back into the womb, you spend your last nine months
floating......... then you finish off as an orgasm."

The movie "Benjamin button" seems to be inspired from this.
Though the end is not happy for Mr. Button in the movie as suggested
by George, the idea is something astonishing ..so simple and surprising...

The alternate thinking sometimes does bring surprising statements to the fore
which makes up for the fun in life...

soft learning from east asian

Hearing many times from fellow software engineers that we in India do all low grade software job in India while the real innovative work is done by Americans. The industry is based on wage arbitrage which will go away once the other countries catch up. Then either wages will go down or software industry will die in the same spectacular fashion as it has risen in India..

Studying up the Japanese and other East Asian tigers'growth in the last 40 years between 1950-90, I find an uncanny resemblance between current status of software industry in India and the manufacturing sector in East Asian Tigers at the start of their growth period. Many of the technologies for manufacturing sector were licensed from their American counterparts primarily acquired through extensive interaction from the export led economy. The wage arbitrage and government support through various government measures helped the nascent manufacturing sector. And what finally happened was remarkable. Japanese got their best engineers to work on the shop floor and not on the design and they improved the manufacturing processes. Total Quality control, Just In Time Inventory were the products of this process improvement and in due time these firms became more efficient than their American counterparts. Toyota though has gone in red for the first time in 20 years is in a much better position than GM and ford.

The software sector in India has also used the licensed technology mostly from developed world (America and European countries) and started an industry based on wage arbitrage and small government support(like export incentives). What the industry need here is to use this arbitrage opportunity to develop processes which makes the Indian firms more efficient and simultaneously move up the value chain. This will not only provide the industry required differentiation in the increasingly competitive industry ( competition from other low wage countries) and will also allow industry professionals to earn higher wages due to higher skill required when moving up the chain.
But what the industry require is that the best brains as in the case of Japanese manufacturers like Toyota to work and improve the processes and not crave for the high funda work which is the current norm in the industry. Design is what geniuses shall do but if customers are paying for the processes, that shall be the focus of the genius.

This will allow the software industry to grow and have a large impact on Indian GDP. Though the impact will not be same as what manufacturing did for east asian countries, as the labor intensity for the software industry is low and the level of education in India do require a growth in manufacturing and agriculture sector for India to achieve an inclusive growth.

life as mba

Joined MBA school in June .. writing about the time here is a like a cathartic exercise... The starting period that shall not be talked about and the secret taken to grave was certainly a tradition ingrained with stupidity, immaturity and totally idiotic ... Even now I can't believe that guys/gals of more than 22 years of age can engage in such a grand childish behavior .... and then starts the funda session.. it seemed like people come for an MBA course to learn how to give fundas to others... After observing people around you at that time and even now, I have this fear that is management only about giving fundas to others.. I sincerely hope that is not the case or I am certainly in the wrong profession .. or I have to become the exception to the rule....