Sorry, but we are not all “Keynesians.”

It is a well-known quote commenting economic policies:”We are all Keynesians right now.” It is true, at least in political arena, and even for free-market economists becoming careered politicians. Stimulus plans, aimed to substitute the lost purchasing power due to the financial crisis, are setup just within such a short time and are so roughly planned and enormously empowered comparing to their sizes and authority. However, majority public opinions overwhelming support these government expansions since “this crisis is not measurable and never had happened before.”

I am not a macroeconomist and done poorly in macroeconomics and finance. However, I do remember the cost of government substitution to civil purchasing power inevitably exits, and stimulus plans are by no mean to excuse from these effects of pushing up price level, or even worse, causing inflation due to the nature of public spending. The cost of “reviving” from recession is to accept a higher price level, by the Keynesian story.Interestingly, in the debate of public policy, it seems this kind of effect is totally ignored. At least it is the case in Taiwan.

Since I am not an expert at these fields, I planned not to discuss the current problem in the manners of macroeconomics and finance. To my limit knowledge of the ongoing economic crisis, the origin of the crisis is partly because of the evaluation of performance of financial firms. The performances, and the bonus, composing the most part of their income, of executives are determined by the company’s short term profit, or few years at most, and they would get compensated if they are fired due to the performance, or golden parachute in Wall-Street sense. The incentives scheme is to create short-term profit and disregard the long-run effects to the shareholders. Financial institutions, holding many assets from the public, will cause much more severe damages than other kind of firms. If the major financial firms take the same strategy on performance evaluation, aggregately there would be too much resources allocated at the assets with too much risk. Clearly, it is a principle-agent problem.

If we agreed the financial crisis is a principle-agent problem, the financial supervision is a solution to the problem. However, another problem arises: to the limited knowledge we have, how can we measure it is professional or self-interest decisions made by the executive. This is the essential problem of regulation: the information problem. Moreover, in the cases of stimulus plans, it is likely to empower the administrations with plenty of resources and less restrictions to fight recession due to the time constraints. The term of a government is merely measured as “long term.” The time constraint caused by elections forces a democracy government to achieve the results of “fighting recessions” as fast and obvious as they can. Long-run effects are often, and almost always, forgotten. For politicians, the government “dies” in less than ten years anyway. Social optimality conflicts with politicians’ goals. Thus, the paradox of government policies is: The solution proposed to solve a principle-agent problem causes another principle-agent problem with a larger scale!

I am not implying government has completely nothing to do to cope with the economic problems. As I mentioned before, some failures of coordination can be solved by the move of government policy. Nevertheless, it shall be more skeptical to government policy due to the purpose of avoiding damages by the inappropriate measures out of the kindness to relieve the suffering from economic recession. Standing on the other side of majority, I shall say: “Sorry, but I am not a Keynesian, because long run is not as long as we, especially politicians, imagined, and we would have not dead or be dying then.”