I am holding the view that the RM67 billion government spending-based fiscal stimulus as announced will not be helpful. The market will show a swing independently of spending.
The swing is already happening in spite the fact that government spending has been insignificant so far. Furthermore, the magnitude of government spending is pale in comparison to the drop of external demand. If there is to be any recovery, it will be driven by external demand, just as the recession has been caused by external demand. All this makes the government spending-based stimulus irrelevant.
Due to temporal issue between the effectiveness of the spending and market cycle, when proper recovery takes places, private firms will suffer from crowding out effect since the stimulus is financed through local sources. Interest will have to go up higher when compared to a situation where there the size of government spending is absent.
Well, I might be wrong. My position is too kind. There is a piece yesterday that may indicate that the stimulus is hurting recovery:
GEORGE TOWN: Penang’s electronics industry is facing a shortage of production workers after orders started to pick up early last month, according to a job outsourcing company.
The problem is compounded by local workers who prefer to enrol instead in the government’s retraining scheme where they are paid more, said Inter Resources Consulting Global Search (M) Sdn Bhd managing director Michael Heah.
He said locals were not keen to work long hours in factories for RM500 to RM600 a month, preferring the retraining scheme for unemployed graduates and retrenched workers where they were taught new skills and received a monthly allowance of between RM500 and RM800. [Penang electronics firms unable to cope with demand. The Star. July 2 2009]
Firms are actually competing — gasp! — with the stimulus package for labor, making them incapable of meeting demand in the short run.
How is that for a stimulus?
Heah said the electronics industry started to recover last month with the semiconductor and consumer electronics sector stepping up their recruitment drive to get more locals to fill vacancies.
“To make matters worse, the intake of foreign workers has been frozen. We appeal to the Government to lift the freeze in the sector,” he said. [Penang electronics firms unable to cope with demand. The Star. July 2 2009]
Unless productive firms can find individuals that are not enrolled in the retraining program, they will need to raise wages.
I am a fan of raising wages only to accommodate inflation, to compensate improvement in productive for the labor factor of production or competition from firms for labor.
I see none of those here. That potential raise of wages may be caused by distortion created by the government, more than anything else.