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COMMENTARY: BVI’s medicine austerity or stimulus?

Dickson Igwe

By Dickson Igwe, Contributor

The following story is on the economics of disaster. Hurricane Irma, a monster hurricane, struck the Virgin Islands on September 6. Irma was the strongest hurricane to have visited the Caribbean in recorded history. Its impact on the Virgin Islands meant the worst disaster to visit the Virgin Islands since the 1800s. Irma was the Virgin Islands 911.

Now, there are two classic models from the ‘mysterious’ world of economics that are relevant to a post-disaster recovery plan for the Virgin Islands. Thoughtful and sound economic planning is the key to a full recovery for the territory post-Irma.

And these two hugely-respected, but opposing efforts, at scarce resource management derives from the thinking and exertions of two of the 20th Century’s most influential economists: Milton Friedman and John Maynard Keynes.

OK. Friedman would have argued that the natural economic cycle and individual enterprise were enough to get the Virgin Islands economy back to firing on all six cylinders after Irma, but with a tweaking of interest rates, and sound management of the money supply.

Friedman was the apostle of Laissez Faire. He was a free trader. Friedman’s argument was that Trickle Down, Austerity, and uninhibited Free Enterprise, were enough to get even the most crisis-ridden economy moving. Friedman believed the businessman was king. The producer was the boss.  The role of the consumer was determined by the producer and his ability to satisfy consumer demand. Friedman was the apostle of supply sided economics.

Friedman would probably have recommended that the post-Irma BVI be allowed to self-correct. A self-correcting economy has at the root a belief in the inevitability of the economic cycle.

The economic cycle is an intangible odyssey. Friedman’s Economic Cycle is actually a winding path through a complex maze. That path takes a country from a bust economy and recession to a booming El Dorado, and then back to contraction and recession.

The start of the cycle is usually the ending of a recessionary period. From recession, economies either recover slowly, swiftly or somewhere in between. After recovery, economies can grow further, to prosperity, and even to boom. Boom times do not last forever.

Economies overheat after a period of strong prosperity, and in past years central banks have stepped in to stop this overheating leading to an economic crisis. An economy overheats when inflation threatens consumer and business confidence.

Central banks as a consequence use the interest rate setting process to cool economies down. Interest rate increases are a device used to tamper down both inflation and consumer demand by increasing the cost of borrowing. The time central banks step in usually signals the start of a period of recession.

The Economic Cycle, if wisely gauged, is the panacea that will eventually take the Virgin Islands from recession to recovery, and then to all-out prosperity, according to Friedman’s Austere Economic Model.

However, there is a caveat. Friedman would have been unable to give any length time for turning the corner out of recession. And that journey along the economic cycle is unpredictable, with unexpected twists and turns, and laden with traps and sudden barriers.

In any event, the Friedman economic recovery model would be unrealistic for a country that has little or no control over its national currency: the Virgin Islands uses the US Dollar as legal tender.

The Keynes model

Then, on the other side of the debate, the late economist John Maynard Keynes would have stated that government intervention in the form of fiscal and economic management was critical to putting the Virgin Islands back onto its pre-Irma footing.

Keynes believed strongly in government intervention in the form of public spending as the medicine for a slowing economy. He would have further argued that strengthening consumer demand was the panacea for placing the economy back on track. Keynes would have asserted that economic policy should focus on getting people back work, and back into shops, outlets, stores, warehouses, and so on and so forth, as consumers.

For Keynes, employing handymen, labourers, construction workers, and contractors to get homes and businesses back to a good and acceptable level of habitation, and use, was sound economic policy. Construction and rebuilding are drivers of economic stimulus. Both create consumer demand and generate job and business growth.

Keynes would have further asserted that this was the time to put cash into the pockets of Jack and Jill Consumer, and not allow fear to put a lock on people’s wallets. The consumer and his and her buying power were omnipotent in Keynes’ economic narratives.

To be continued

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7 Comments

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  1. Marcus. says:

    Like or Dislike: Thumb up 2 Thumb down 1

    It’s a bit of a stretch and slightly disrespectful to link September 11 with Irma. The rest is Mr Ingwe’s typical ‘wiki-like’ article. I don’t think it has much original thought or comment.

    • To Marcus says:

      Like or Dislike: Thumb up 0 Thumb down 0

      You just want to be heard- shut it if you got nothing positive to say- go read a book and get your brain in gear

  2. Albion says:

    Well-loved. Like or Dislike: Thumb up 4 Thumb down 0

    The only trouble with saying we should go with the “stimulus” model is that somebody needs to put up the cash in order to do the stimulating. And Government is broke.

  3. watcher says:

    Like or Dislike: Thumb up 2 Thumb down 0

    They used to bleed sick people to make them better. Now they give them help. Which works?

  4. Third Eye Of The Storm says:

    Well-loved. Like or Dislike: Thumb up 5 Thumb down 1

    Mr. Igwe,

    Rest assure that this country must and will rebuild but also rest assure that it will be hit with another storm and possibly another cat. 5.

    I say that to say this, storms come and go just like the earth continues to spin. The crossroad where BVI is at the moment is can we afford to continue to place our trust for tomorrow in the hands of our current leaders when it comes to the economics??? The answer is a blatant NO. This government does not believe in empowering the people through neither of the theories you mention. It’s them first, second, third, and the people fourth.

    Take note of what I am about to say.

    THE REBUILDING AND ENHANCEMENT OF THE BVI STARTS WITH A NEW GOVERNMENT. A NEW ELECTION FOR LEADERS WITH AN AGENDA OF GOOD GOVERNANCE THROUGH TRANSPARENCY AND ACCOUNTABILITY. UNTIL THAT HAPPENS THE BVI WILL NEVER BE ON THE RIGHT PATH TO REBUILDING AS A COUNTRY.

    IT CAN NOT BE BUSINESS AS USUAL, POINT BLANK!!!

  5. Scrutineer says:

    Like or Dislike: Thumb up 0 Thumb down 0

    The Keynesian model assumes that a Government has access to cash to provide a stimulus. This Government does not have the credibility or audited records to even be considered for loans. Handouts do not form part of this model.
    The Keynesian model assumes that there are jobs available, there aren’t.
    The Keynesian model assumes that the people know how to work and add value. Over the past 30 years the people within this economy have forgotten how to work and add value.
    Think again Mr Igwe.

  6. E.Leonard says:

    Like or Dislike: Thumb up 3 Thumb down 0

    Both the classical view(laisssez faire) and Keynesian view will bring the economy back to full employment. The Classical response to an economic recession and inflation is do nothing. The economy inches thru the business cycle peaks and values from contraction to expansion to decline to contraction.

    On the other hand, in a recession, the Keynesian response to a recession is to increase government spending and reducing taxes to spur aggregate demand. It promotes deficit spending to spur growth and return the economy to full employment. I promote fiscal policy adjustments to stimulate the economy. The multiplier effect of deficit spending accelerates economic growth.

    Hurricane Irma decimated the BVI economy; BVI is in a crisis situation. Per government sources, $3.6B is needed for the recovery. The VI does not have this type of cash in reserves and without some type of Marshal Plan iniative it will have to borrow the money to stimulate the economy. A fair question is how will the loan be paid back. As noted in other blogs, though residents may disdain taxes and fees, taxes will have to be increase to grow and sustain the recovery.

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