Sunday, May 18, 2014

Is Putin learning economics from Lincoln?

One of the very few good things to come from warfare is that occasionally, wartime economics proves wrong the prevailing economic conventional wisdom.  For example, the idea that balancing the federal budget is so important to many, even the presence of starving people during a depression is not enough to override their principles of fiscal "responsibility."  So when Roosevelt tried some mild stimulus measures between 1933-36 that raised the national debt, the balanced-budget types were so horrified and raised such a stink that he cut short the stimulus which triggered a nasty downturn in 1937 that was embedded inside the bigger Great Depression.  It was not until the much bigger spending stimulus of World War II that the Great Depression finally ended.  It took a war to finally overcome the objections of the fiscal conservatives.

But Roosevelt's experiments in what would be called Keynesian stimulus were quite mild compared to the huge deviations from the convention wisdom undertaken by Lincoln.  When Wall Street informed Lincoln that he must pay 14% for loans to fight the Civil War, Lincoln responded with his plan to roll the presses and issue debt-free Greenbacks.  The Greenback was such a smashing success that when they were cancelled in 1873, the country responded in outrage which included the formation of the Greenback Party whose essential aim was to bring them back.

Lincoln was also a huge believer in the idea that import substitution was essential to building a nation.  At one point, he was faced with a decision as to whether it would be better to import cheaper steel rails from England or buy more expensive steel from the fledgling steel industry appearing in places like western Pennsylvania.  He responded with the argument that if we bought British steel, we would have the steel but the money would be gone.  However, if we bought steel made in USA, even it was more expensive, we would would not only have the steel but the nation would still have the money in circulation.  Not only that, but spending money for domestic production meant we would get better at making steel so that eventually, our steel would become as inexpensive as the imports.

Anyway, Russia has recently realized that having parts of their military hardware made in the Ukraine is not a good idea if matters deteriorate further.  So Putin has decreed that all the parts necessary for the Russian defense industry should be made in Russia.  In the process, he is going to discover why Lincoln's economic thinking was so important, his face still appears on the money.  And if he watches closely, he will soon see that import substitution is a good idea not only for the weapons industry, but for MANY other parts of his economy.  What Russia needs these days is a modern incarnation of Peter Cooper—the inventor / philanthropist who so strongly opposed the Gold Standard, he became the presidential nominee of the Greenback Party in 1876.

Russian defense industry should obey ‘made in Russia’ principle – Putin

RT May 14, 2014

No branch in Russia’s defense industry should depend on foreign producers President Vladimir Putin said, saying everything the industry needs must be made at home.

"We must ensure that everything our defense industry needs is produced on our territory – for us not to be dependent on anyone, in any way concerning the supply of our army and navy with new weapons,"Putin said at a meeting at his Bocharov Ruchey residence in Sochi.

“I am sure this would benefit our industry,” he added.

The Russian leader admitted the measure would lead to extra costs, but it was the correct course of action to choose.

"Small additional funds will be needed," Putin said. "But the process is right.”

It would also mean adjusting the work of domestic research centers in accordance with the new objectives.

“We need to look at how work with research centers has been organized, and to work more closely with the Academy of Sciences,” Putin said.

A new round of negotiations dedicated to the defense procurement program will be taking place in the next three days, according to the president. These series of talks come six months after similar meetings.

"We have agreed on the unconditional implementation of defense procurement and efficient use of funds allocated for this," the president said. A total of 20 trillion rubles are allocated for these purposes and 3 trillion rubles for re-equipping defense industry complex companies, he said.

Last month the government was ordered to analyze the situation and calculate additional necessary resources related to the issue, and estimate the terms in which it can be implemented.

In his speech on April 28, Putin also voiced plans “to conduct import substitution,” a process he estimated would take between 1.5 and 2.5 years, depending on the type of products.

Back then Putin particularly referred to Ukraine, saying that Russia switching to domestic products would “likely lead to disaster” because Moscow is the only consumer the Ukrainian defense industry has.

For example, Ukraine was producing engines for most Russian military helicopters, including the Mi-24, the R-27 medium-range air-to-air missiles for the Russian air force and many critical components, like drogue parachutes and hydraulics for fighter jets. Ukraine also makes the gears used in many Russian ships and transport planes at the Antonov factory in Kiev. Many weapons the Russian military uses incorporate Ukrainian parts. more

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