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?

Worse:

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.

2 Responses to “[2024] Of stimulus may be hurting recovery”

  1. on 03 Jul 2009 at 15:42 Mrazwan

    That potential raise of wages may be caused by distortion created by the government, more than anything else.

    Agree on this. It actually happening in Germany, where many ppl receiving unemployment aid from the state refuse to look for permanent job simply bcos the aid is so much better than the wage in the industry.

    But what unclear to me is the content of the retraining programme. And how it can help those retrained workers get at least a better wage. Please have a look into this, will ya?

    Furthermore, the industry insider will always try to use this caveat to justify their preference on hiring cheap foreign labour. I probably agree with your premise that the stimulus do more harm than good to the economy as a whole. Especially when sustainablity was never in the picture.

  2. […] I also wonder how much resources had been deprived from the private sector due to government spending. The crowding out effect is a concern given that a considerable chunk of this spending was done in time when the stimulus is not required. Signs of crowding out were seen as early as July 2009. […]

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