Wednesday, April 1, 2009

American Recovery and Reinvestment Act: Is Pendulum is swinging the other way?

24th Feb 2009, US president Barak Obama made his first speech to the Congress. He started with very strong point motivating the whole country and conveying the steps his government has taken to fight this Financial Crisis. The speech was very good. We can say that this is the speech which is the need of the hour. Government has made the Law name ‘American Recovery and Re investment Act’. With this act Government of US will start spending in those areas which generates most jobs in the market including Infrastructure and Education.


According to this plan US citizens will receive a tax cut that will reflect in the pay checks from April 1st. This is a very good sign. US government is putting money in the people’s hand so that they can spend this extra money and which will generate demand which will help to revive the economy.


But one thing which raises eyebrows across the world is that from now on their will be no tax benefits for those companies who outsource their work to other countries. Is this the indication of a swing of pendulum from open economy to Protectionism? Human psychology suggests that whenever Pendulum is on the right side people will love to see it on Left and vice versa. When economy was booming every one in Russia was crying for open economy and now when world is under the biggest crisis everyone seems interested in Protectionism including the most liberal and open country in the world in terms of its economic decisions.


After the 1929 financial crisis when Economists found the reason for the crisis was a closed economy and under spending nature for people. In other words we can say that the US economy was not that encouraging that people would think of starting their own business, taking some risk which stopped them from asking more and spending more and this was the reason for the 1929 financial crisis. After then US economy was open for all and we have seen its fruitful results. In fact US taught other countries to open their economy allow your businesses to expand beyond their country which will help them to grow, which will allow country to gain foreign exchange. This step will bring in competition and it will help consumers with choices. And when you have different choices people will start spending as with these choices they get tempted to spend.


Protectionism can not be a solution for any countries growth. If you check India where the internal demand is so strong that even in such high crisis time Indian economy has not affected much. Before 1992 when Indian economy was not that open and even having Democracy, government was working with the socialist thinking. Even during that such protectionism has not helped India to make its mark on the global Finance chart even after having such a great internal diversity and internal demand. Such protectionist steps will not help US as US has no great internal demand, and such stopping of outsource sing will affect the other countries such as Europe and China which largely dependent on export of their medical and hardware stuffs respectively to US. The best way to tackle this financial crisis is to injecting money in the market and allowing people to spend more. And for this it is very important that all the countries in the world start working together and for that open economy is very important.


Even the WTO chief Lamy Pascal has urged US president not to become Protectionist and lead other countries to tackle such a financial turmoil. Even today while having a press conference at London US president Barak Obama has said that we should not become protectionist. now we can only hope that this pendulum swing the other way and again the world economy start flourishing.