The Great Recession will turn into the Great Depression II unless...

Great Depression: man dressed in worn coat lyi...Image via Wikipedia

Yes, it's sure to turn into the Great Depression II unless our governments STOP trying to reduce budget deficits and turn instead to what should be their top priority: job creation. Balanced budgets have become a political mantra, and the unemployed be damned!

And yet, as I blogged last week, the bottomline problem in this crisis is the LACK of jobs, especially among the young.

How could our political class get it so wrong? It's hard to understand. Yet one thing should be obvious: with the retreat of government as an economic agent in an economy that is still weak, economic indicators have but one way to go: DOWN. And that includes the revenue governments get from taxes. Which means that overtime budget deficits will grow larger rather than smaller. Politicians will have obtained exactly the reverse of what they had hoped for from their hallowed austerity measures. If you have any doubts, take a trip to Greece or Ireland.

Paul Krugman has recently published (see link below) a wonderful piece, entitled "Appeasing the Bond Gods: What will it take to break the hold of this cruel cult on the minds of the political elite?" Indeed, what will it take to make Cameron and Osborne see the light? There's no denying that the UK welfare state needed a lot of fat-trimming - but the diet shouldn't be so strong that it leads to waste and death. There's a need to realize that the State has a role to play in the economy, particularly when jobs have to be created.The animal spirits of entrepreneurs cannot and will not come to the rescue when they don't see any market wherever they look. So the State must step in.

A fiscal stimulus package? The last one didn't work too well in the States, probably because it was applied in a half-hearted manner. Too little and too late. But it seems to have worked wonders in China where the package was huge. Now the Chinese have even had to put on the brakes because of a looming real estate bubble and financial hubris. There's no doubt such packages, if applied in the right dosage, do work. But I would argue that what is needed is a more pointed type of policy, one that is clearly aimed at job CREATION.

We all know that unemployment has been with us for a much longer time than this crisis. It was there before and it is making this crisis worse. So unemployment is the one thing that must be tackled. And it's not just cyclical (and therefore amenable to classic monetary and fiscal policies) but also structural. That means more innovative policies are required - things like programmes to encourage investments in inventions, innovations and new areas like clean energy and more.

The "more" here is the key.

For example - and this is very encouraging - the US is investing heavily to find more efficient ways to fuel automobiles, as was recently reported by Matthew L.Wald in the New York Times. It has set up a new Advanced Research Projects Agency-Energy or ARPA-E meant to finance high-risk, high reward projects in the United States with a budget of US$400 million for two years.

Fine and good but compare that to the billions China plans to invest on electric and hybrid vehicles (as reported by David Barboza). It seems (according to official sources) that China could invest as much as...US$ 15 billion! Extravagent. That's more that thirty times the US Government is envisaging. As I've said before, China is really another planet. With that kind of money, the Chinese government is announcing that over the next three years it will have some 500,000 new energy vehicles reaching the market every year and they would soon account for 5 percent of all passenger sales (already totalling some 17 million vehicles). A small percentage perhaps, but larger than what is expected anywhere else on this planet...

The American private sector has taken note: for example, a Chinese company called BYD, in which Warren E. Buffett, the American billionaire and founder of Berskshire Hathaway has an interest, is into the development of battery-powered vehicles.

Great! So why isn't the American private sector pairing with its own government to invest in innovation? Why hasn't Warren E. Buffet an interest in ARPA-E?

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