How do you stimulate an economy during a period of intense social distancing or partial lockdown, with many workers not working, a majority of productions offline and most movements restricted?
It is the ultimate supply-side disruption.
Malaysia has just announced a movement restriction order, which is an eventuality especially given the 3-week the government came to a grinding halt that led to a significant loss in lead response time.
With the restriction in place, I think the earlier stimulus announced by the government may have lost some of its meanings. Its objectives have changed.
The social distancing like this is a severe form of supply-side disruption, with effective labor supply dwindling, except perhaps those with automated processes. No stimulus could stimulate growth, because the space for improved demand is limited by supply capability. There is no demand to be had beyond whatever provided by the supply-side frontier. Or perhaps the best we could do is to lower inflation once we hit that supply frontier.
And so, the priority of a stimulus would be transformed from stimulating demand to:
- partial income replacement
- cost saving assistance
- facilitating restriction
- perhaps more importantly, preserving output potential
For Point 1 and 2, it is about ensuring the population would meet the minimum level of wellbeing. In fact we should try as much as possible to maintain the welfare of the people. We clearly do not want people and businesses to die during a period intense social distancing or a lockdown. This is where cash transfer is helpful, and perhaps more liberal employment insurance too.
Point 3 is employing methods that make restrictions more palatable. Like encouraging delivery services and the use of cashless payments.
Point 4 is the ultimate objective. When things become normal, we want the economy to jumpstart and hit its pre-crisis mode as soon as possible. Here, we try to avoid having permanent, or prolonged potential loss. Permanent losses could happen as workers become out of work for too long, and losing their momentum to work or even their skills. So, the relevant policy is labor hoarding and incentives to keep firms in business. Both will need convincing expectation-setting by the government.
In other economies like in the US and Europe after the financial crisis, we know that recovery happened long after the crisis ended. In Greece for instance, the economy took a very long time to reach pre-crisis output, even after the crisis is over. So, it is a very possible scenario and that is something we should avoid.
We may need a “demand-side” stimulus later, but for now, our stimulus has very a different objective altogether.