Today we are facing an economic famine.  Not a shortage of food, but instead a shortage of credit in exactly those parts of the economy that can drive a recovery. 

Consumers have had their credit cards cancelled or the interest rates on them greatly increased.  Small businesses find it impossible to get lines of credit to expand.  And homeowners, despite efforts by the government, cannot get their homes refinanced.  This has caused consumer spending, small business expansion and the housing market to stagnate.  Economists tell us that these are the areas of the economy that need to heat up if we are to have a robust recovery. 

Admittedly, in the past (particularly in the housing market) we extended credit to people who were not credit worthy.  I’m not arguing we should go back to that policy, but today we are denying many consumers, small businesses and homeowners who are creditworthy the credit they need to expand our economy.

Amartya Sen was awarded the Nobel prize in Economics for his work showing that there has never been a food famine in a democracy.  He found that when governments are accountable to the people, they find a way to avoid famine, even when terrible events occur.

Let’s take as an example the great Irish potato famine in the mid 1800s.  During the famine, Ireland grew enough potatoes to feed all of its people.  But the landowners, responding to market forces, exported most of the potato crop.  Other countries had the money to buy the potatoes, while farmers, wiped out by the blight, did not.  History tells us that if the government had been accountable to the Irish people (Ireland was ruled by Britain at the time and had no representation), the government would have found a way to buy potatoes from the landowners and get them to the people who were starving.  The landowners were not evil; they were just running their operation as a business.

In a similar way, the banks today are not evil; they are just responding to market forces and running their businesses.  But while they can borrow money from the government for no or almost no interest, for a variety of reasons (some of them our stricter banking standards), it is better for them, from a business perspective, to put that money into very safe investments.

We need our government to do what it would do in a food famine, to find a way to move resources, in this case credit, to the areas that are starving.  Unlike a stimulus that peters out once the money is spent, this credit can create a sustainable recovery.  And if the government is unwilling or unable to do that, we need to hold them accountable, just as we would if there were a food famine.  Perhaps then, we can look forward to a day when we can say no economic famine ever occurs in a democracy.

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