When we are faced with a slowdown in earnings, it is always natural to seek to reduce spending and hunker down for more difficult times. This reaction is logical when we are faced with uncertainty and is the principle behind business and consumer confidence measures. Naturally if you have tremendous earning power then you will go out and spend today what you expect to earn in the future.This is what the world did, particularly the US and Jamaica, which ended up in the financial crisis we saw emerging in 2007. If, on the other hand, you are uncertain about your future income, you will feel the need to cut back and spend only on essentials as you want to preserve your lifestyle as long as possible.
So too it is with a country's fiscal accounts. When times are good there will be the urge to spend, spend, spend. Jamaica did this when we had bauxite money and so too did Trinidad with their financial wealth from oil.
But is this the best approach to ensure economic or personal development, or is it a sure way to continue on a downward spiral? After all, you can never improve if what you are doing is simply saving the income you already have, as you will still have to eat and soon your income will be depleted if there are no new financial.
In the 1920s there was a soft drink called Moxie, which was more popular than Coca Cola and Pepsi, and in fact was the most popular soft drink in the US at the time. It is still produced today, and is in fact the longest continuously produced soft drink in the US, but is only a strong regional brand today. In the depression of the 1930s, Moxie Company decided to cut back on its advertising spending, and instead focused on building sugar reserves. Coca Cola on the other hand, through Robert Woodruff's leadership, took the decision to expand its advertising during the depression, and in fact marketed the brand globally during that time.
Today the results are there to see, as I am sure that not many of you reading this column knew about the Moxie soft drink and its history.
This flies in the face of the natural motive of wanting to cut back on expenditure in the lean years, and in fact supports the case for stimulus funds. In other words how can you sustain a company, economy, or person if the solution to lean times is to cut back on spending continuously? A strategy focused around continuously chopping expenses, without seeking more revenues will inevitably lead to one consequence.
This is why I believe that the recent action taken by the UK to slash fiscal expenditures in the face of a declining economy will only further weaken that economy. This is especially so in the light of the stagnant global climate.
The concept of the need for government spending in times of a retreat of private sector spending is the argument behind Maynard Keynes' economic arguments. And this I think is what saved the US, and by extension the world, from economic collapse. If the US had gone the route of the UK we would all be literally "sucking salt through a wooden spoon".
This is why I have always made the case for carefully calculated stimulus funds to be injected into the economy by the government, and why I welcome the concept of the JDIP and the recent acquisition of a US$20 million loan to the SLB. I welcome this type of spending in particular because of what the funds are targeted for. In the case of the JDIP the spending is targeted at improving the country's infrastructure, and we have recently seen how fragile and underdeveloped our infrastructure is. And in the case of the SLB loan, it is always welcome to see increased funding for access to higher learning.
After all, it is this type of spending on infrastructure and education that is needed to drive this country forward. They will not only have the short-term effect of immediately providing short term stimulus to the economy but will have the more beneficial longer-term effect of creating value added in the economy, which will in turn contribute to productivity and investments.
I am happy to see these initiatives in the face of the contractionary effects of the IMF programme.
It is important to understand, however, that not all increases in expenditure are good, whether in times of excess or scarcity. It is very important that we understand this concept, and not focus on cutting back on expenditure when times are bad but spending unwisely on all sorts of consumption when times are good. I am sure that many OLINT and Cash Plus victims today wish that they had saved some of the excess they received during the days of prosperity, instead of the lavish spending of monies they expected.
Similarly when the world was expanding rapidly, and everyone was willing to lend us money, we borrowed as much as we could and spent primarily on consumption,using borrowed funds. In fact in 2004 our fiscal budget saw less than 5 per cent being allocated to capital expenditure. After all, times were good and we thought that Jamaica could always get money to borrow. In fact one thing that always surprised me, as an accountant, was our seemingly stupid celebration of the fact that we were able to always go to the market and get loans This was hailed as a success,but I could never understand the wisdom behind that viewpoint.
As an accountant I am always wary of debt, and manage it carefully within what we refer to as the debt to equity ratio. Or in economic terms, the debt to GDP ratio.
One may feel tempted to argue that based on this argument we should not borrow anymore, but that also is a nonsensical argument, as debt as an absolute is never bad, no matter how much it is. What is bad about debt is how it is used. In other words ,as long as the marginal revenue of debt is greater than the marginal cost of debt, then debt is theoretically always good. There are of course other factors that enter into the equation but these require much more discussion which can be undertaken at a future date.
The point I am trying to make is that even though we do not have the reserves or power of the US, we still need to provide stimulus to move the economy forward. It is because of the slowdown in government and private sector spending that led to the increase in poverty levels. And a country, company, or person that seeks to continuously cut back on spending in order to avoid crisis, actually only shifts the crisis to a point where it starts to feed on itself for survival until there is nothing left. That is the law of nature.
I therefore welcome the JDIP and SLB loan, and look forward to similar well thought-out projects of that nature. This is not the time for the timid. We need to be bold like Coca-Cola but we must do so guardedly and ensure that the expenditure is made wisely, by using the right minds to implement the policy, otherwise we will end up much worse than where we are today.
We must avoid the arguments like the one I read in the article reporting on the SLB loan, which hailed it as increasing the access for poor people. It is not about poor and rich people, but rather about where the expenditure adds the greatest value.