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The Economics Dichotomy

Dickson C. Igwe. Photo: VINO/File
By Dickson C. Igwe

In pursuing and realizing a vision for the Virgin Islands, policymakers must understand a key divergence in economic thinking.

Now a little preamble: the issue of global debt remains the least of concerns for economists. The world is swimming in unused cash as consumers hit the stop spending switch after the 2007-2009 Recession ended. 

Inflation and overheating is not an issue as savings sit in banks offering savers little or no interest. The world has a lot of scope for investment and lending as western banks remain saturated with cash from savings.

Countries such as the USA, and European states that print their own currencies, including the European Central Bank, are not concerned with debt this mid 2019, and possess the capacity to print hundreds of billions more dollars and Euros, without any fear of inflation, as cash velocity remains well within the parameters to take care of goods and services produced and demanded by business and the public. Inflation is not an issue.

And one of the great mysteries in economics is that individuals and families can adopt austerity and frugality as a measure to improve their finances. History appears to show that frugality and saving, work much differently for countries. In fact, frugality may actually be bad for countries in the long term.

Peter Coy of Bloomberg asserts that ‘’ a single household can dig itself out of a hole by cutting spending.’’ The effect on the wider economy of one single household’s behaviour may be negligible. However, the aggregate behaviour of millions of households doing the same is the substance of economics. The reason: one household’s spending is income for another household. Therefore if everyone cuts back this affects consumer demand and can trigger a recession.

Individual and family spending is the bedrock of demand within an economy. The Virgin Islands economy is import oriented, for example. It is a consumer-driven economy internally and it is hugely dependent on financial services and tourism as twin pillars in its exports.

The cash from the twin pillar industries drives the internal market. This is the money that Virgin Islands residents use to spend on everything from cars and homes to food and drink. The health of domestic demand decides the health of the internal market. That health depends on the cash in the pockets of local residents who are consumers.

Banking depends on the health of residents finances. Banks are businesses interested in lending. But banks will only lend where they will get their cash back with interest. Again, the money in the pockets of residents from national revenues from exports is the basis of bank lending.  

The preceding offers the government a narrative within which to decide policy. There are two areas of economic thought that guide the management of a country’s economy. Economic policy drive governments that are interested in ensuring its voters, supporters, and residents, are gainfully employed, and their basic, mid, and higher needs are met. That will only happen when the economy is producing the goods and services required by the population at sustainable prices.

Now the two most discussed ideas in economic thinking are the divergent models of Austerity and Stimulus. Both ideas are two opposite sides of a coin. And both models are roads to the land of milk and honey also called EL DORADO.

The first economic model is the Austere Model. Under this model, the government seeks to drive up consumer confidence with fiscal policies that stress cutting public spending and reducing annual deficits. The Austere Model has also been termed Supply Side as it fosters the idea that business is the key driver of economic prosperity. Consequently, what is good for Jack the Businessman is what is best for the economy.

On the opposite side of the coin is the Stimulus Model. And in effect, this is the opposite of austerity. Under the stimulus model government is the key organization in managing the economy, not the businessman. Deficit spending is the norm and governments are willing to run up annual deficits to spend on both social and physical infrastructure.

The Stimulus Warrior views consumer spending as the key driver of economic growth. Government is willing to ‘’stimulate ‘’ the economy through increased public spending and tax cuts, or both.

Stimulus spending is for creating jobs and putting cash into the pockets of consumers. The idea is that stimulus drives consumer demand which in turn spurs economic growth or prevents a recession.

The businessman is viewed as a facilitator, not a key driver of economic growth, under the stimulus model.

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