There have been some signals that the next recession is due. It’s probably only a matter of time before it kicks in. With the pace of growth of economies, I believe we should expect the length of the economic cycle to be shortened – the law of averages will catch up sooner rather than later. We are more likely to see shorter bursts of boom juxtaposed between periods of slightly longer recession. Therefore, it pays to anticipate recession. With the frequency of recessionary cycles increasing, it would be worthwhile to mix conventional as well as unconventional policies to get a firm grip on things.
First and foremost, it is extremely important to build a war chest for recession. Governments and companies should reserve funds which are not to be touched at all unless the recession bell sounds. The size of the war chest could be determined as a percentage of GDP or as a percentage of the total spending of the previous five years. The war chest can be utilized for increased public spending by the governments without seriously disturbing the fiscal deficit calculations. This is a route which needs to be seriously looked at as a measure of preparedness. When you are prepared, you can tackle just about anything that comes your way. Governments should also categorize corporate recession war chests as investments on which tax benefits could be given, provided the entire war chest has been utilized.
Countries and regions are at loggerheads with each other these days. When a recession happens, these differences should be shelved and there should be an avenue for increased fiscal cooperation between countries. Funds of two or more governments should be pooled together for what is called Collaborative Public Spending. With the synergy of pooling of funds, spending will be more worthwhile and projects can be executed with a joint effort. Countries in groups such as the G7, EU, ASEAN and SAARC should implement these radical collaboration measures during a recession. The results will be positively dramatic not to mention the thawing of relations.
Governments should establish economic think-tanks for gathering intelligence during a recession. The group should be comprised only of economists. Adding bureaucrats and politicians into this mix will only exacerbate the situation. Economists can see things from a different perspective and the volume of intelligence gathered and processed can be of immense value not only in tackling the bad times but also in increasing the gap between two recessions.
Zero-interest rate regimes should be established but with a rider. These should be for a pre-defined term, for example for six months. The information gathered during this six-month time should be the fodder for determining if the regime should be further extended. The economic think-tank I mentioned before can be a great group to analyse this information. We know that a prolonged period of zero-interest rates is not good which is precisely why these should be for short bursts. The costs of zero-interest rates can be borne by governments by giving tax credits.
Finally, governments should provide for temporary laws to mandatorily merge troubled companies with the healthier ones. These laws can provide for a demerger of the companies after the recession is over. During a recession, it’s important to keep the fittest together and club the unfit with them. But once things start looking up, the concept of ‘the more, the merrier’ applies. To incentivize companies to demerge after a forced merger, tax benefits could be doled out.
When in a recession, it’s important to battle it with measures that are offensive. We need to kill the dragon by entering its den and blowing its head off. Recession can subside naturally but interventions with a mix of the traditional and the radical can upset the natural progression and turn things to a more promising direction.