June 13th, 2012 by Hafiz Noor Shams
There was a piece of news recently that the government plans to introduce unemployment benefits in Malaysia. By default, as a libertarian, this should be a repulsive idea to me. But really, I can be supportive of the benefits on at least one condition.
I like rule-based policy and I mostly dislike discretionary one, especially when it comes to fiscal policy. I distrust the government in managing its finance because the government, especially one that is especially susceptible to populist demand, may easily spend with much disregard to public finance. This is especially so in times of recession. I in fact distrust the government in even committing to a complete counter-cyclical spending. The typical reaction to a typical recession by those in government is a Keynesian one: spend. In good times, the necessary austerity is not taken.
I dislike stimulus program not only because of ideological reason but also because of practicality. Stimulus spending is slow and open to abuse if one wants to make it effective and quick. It is open to abuse because, after all, it is a large discretionary spending. Besides, its multiplier effect is not really that clear and because it is slow, government demand may crowd out private demand especially during recovery period.
An unemployment benefit system is like a fiscal stimulus except that it is an automatic stabilizer. That means it is fast, direct and it is more transparent than a discretionary orthodox fiscal stimulus. It is based on rules.
The presence of an automatic stabilizer may reduce the temptation to engage in a massive fiscal stimulus like what happened in 2008 and 2009 in Malaysia and indeed all around the world during the now-dead Keynesian resurgence.
True, it does cost money and it does increase the size of government. But I have a suspicion that an automatic stabilizer like the unemployment benefits, if properly designed to help the unemployed rather than take away the incentive to work, can be cheaper than a fiscal stimulus. It can prevent a worse evil.
There is an added benefit to having an unemployment benefit mechanism in place: better and timely data to gauge the labor market. In the US, labor data through initial claims is produced weekly and lagged by only a week. Professional economists in Malaysia will appreciate this. Right now, only the heaven knows, economic reporting in Malaysia is lagging behind advanced countries by a long shot. Economic data is not really forthcoming.