[2906] Stimulus during a period of intense social distancing/partial lockdown

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:

  1. partial income replacement
  2. cost saving assistance
  3. facilitating restriction
  4. 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.


[2905] Stimulus is about expectation setting too

There are criticisms that some of elements of the stimulus announced by former Prime Minister Mahathir Mohamad do not have immediate impacts, and so it should be replaced with more immediate responses. Responses like bigger cash transfer and bigger spending now. And the new Cabinet seems on course to enlarge the stimulus.

I am here to say, this stimulus needs to address several time horizons. The present as well as the near future. And this is why medium run elements are crucial.

One aspect why it is important is the need to encourage the hoarding of labor in order to minimize job losses. It is about building expectation justifying that hoarding.

I have a simple chart to explain how that is possible:

The chart shows the level of employed labor for 3 types of period. There are two lines signifying a stimulus without medium term expectation setting (blue) and a stimulus with one (red).

A stimulus without medium term expectation setting: companies faced with an negative economic shock will shed labor. This will increase the national unemployment rate. Increased unemployment will affect income negatively and that in turn will adversely affect consumption growth, and inevitably the GDP growth. Companies will shed labor because they do not have a clear view of the medium-term horizon and will optimize their labor size now given current situation.

In constrast, a stimulus with medium term expectation setting will provide these companies with clearer view of the medium-term. It tells them they will need the labor soon, but not now. So, rather than shedding labor, they would try to conserve it and in doing so, not reduce their capacity (by too much). In effect, it will help cushion the unemployment rate from rising as fast as it would under a stimulus without medium term expectation.

So in theory, a stimulus with medium term elements will shed fewer workers than a stimulus without.

Here is the thing: we can do both immediate and medium term elements in a stimulus. There is little reason to decide which one should come in and which one should go out. Both time horizons can be addressed. Both need to be addressed.

There is also another element in play to justify medium term plans: while we are facing both demand and supply disruptions, stimulus is not good at handling the latter. Pumping more money will not solve the supply-side. This gap can be addressed by expectations.


[2902] e-Tunai Rakyat under Stimulus 2020 is gravely flawed

For the most parts, the point of having a stimulus is to encourage spending, especially domestically. Someone’s spending is someone else’s income. This is a corollary to the necessacity of a stimulus being timely in order to be effective.

The Ministry of Finance under Lim Guan Eng has been working on all of the measures, but with the political maneuvering over the weekend, he did not get a chance to defend them. Near the end of the stimulus preparation sprint, the PMO had full control of the process though they had no real time to revamp anything, except by cancelling measures or quibbling with minor details. Some of the quibbling involved unenlightened changes to the e-Tunai Rakyat design.

The e-Tunai Rakyat in its current stimulus form as announced by the Prime Minister will like fail to meet any stimulus purpose. As revealed yesterday, cash transfer recipients under the Bantuan Sara Hidup or BSH would receive RM50 in the form of e-Tunai. Given the qualification, that means up to potentially 3.9 million people would receive the RM50.

Here is the qualification, based on the exact wording from the stimulus measure book:

30. In the spirit of shared prosperity, the Government will enhance BSH as follows:

i) bring forward BSH payment of RM200 scheduled by May 2020 to be paid in March 2020;
ii) additional one-off cash payment of RM100 will be made to all BSH recipients in May 2020; and
iii) a further RM50 will be subsequently channelled through e-tunai.

There is one big problem here: giving e-Tunai to BSH recipients would very likely result with little of that money being spent. The fact is many of BSH receipts who are largely members of the bottom 40% of Malaysians in terms of income do not own mobile devices capable of facilitating mobile and electronic transactions. Without such devices, there can be no transactions.

For a better policy design, we should look no farther than the first e-Tunai Rakyat program executed by the Finance Ministry in January 2020. That government program could benefit up to 15 million Malaysians aged 18 and above, who earned less than RM100,000 yearly. With the program ending in mid-March 2020, the current statistics have it that 6.9 million people have claimed the money. That translates into a use rate of 46% out of total eligible recipients after nearly 2 months of operation.

Remember, it reached 46% utilization, likely hitting 50% by the end of the program, because the money with an expiry date (policy innovation!) went to many whom use smartphones. If we limited it to a group that has very low smartphone penetration rate, that utilization rate will come down. Now, you can encourage the program among the low income groups, but this is not the right way.

Therefore, the stimulus form of e-Tunai Rakyat, mutilated as it is, with its smaller reach among the low-income demography would likely struggle to follow the same trajectory and success. It has been mistargeted to the point of irrelevance. This defeats the purpose of having e-Tunai Rakyat as a stimulus. It is a grave design flaw, making the program incapable of hitting any stimulus objective. It is not even a good signalling.

The solution to this: return to the original MOF design, or repurpose the money to something else.

Economics Politics & government

[2640] Welcome back, LDP

I do not understand the intricacies of Japanese politics. I simply do not follow it closely. But I do know that Japan can play a significant role in Asia, if it finally decides to take up that role, which it has not under the uncertain leadership of the Democratic Party of Japan.

The DPJ wanted a closer relationship with Asia and less of the US. Contrary to what it hoped to achieve, a DPJ-led Japan has not successfully engage China and Japan now needs to forge a strong relationship with the United States in time when China is rising and growing more assertive against its neighbors. DPJ’s economic management itself has not been stellar but I think there it is unfair to blame to DPJ for that.

Unhappy with China, I welcome the reelection of the more conservative Liberal Democratic Party and a Japan with a backbone. That is so because it is almost certain that the LDP will strengthen its relationship with the US. With a stronger relationship with the US and a strong US presence in East Asia (and Southeast Asia), hopefully China will think twice in asserting its weight around the region. China has been an irresponsible giant so far, escalating crisis when a mature power would have handled it with care instead. For instance, is it really necessary to send a plane over the Senkaku islands?

A more hawkish (not too much I hope) Japan will tell China that it cannot bully its way through the region any longer. Rather than a hawk-dove strategy, now China faces a hawk-hawk scenario, which is more complicated and may force China to rethink its assertive, bullying regional policy into something more cooperative and amiable.

A hawkish Japan does have its own problem but at the moment, I do want a Japan that is willing to stand up in the region. China needs to learn that its bully tactics does have consequences and an LDP Japan can push back and say, no, play nice.

One big issue with LDP is its economic policy of Japan. First is the government interference in monetary policy. The Bank of Japan is losing its independence with the government trying to force the central bank to target for higher inflation rate. While I do think Japan needs a bit of more inflation, I am unsure how the interference will pan out. Lack of independence can be a recipe for too much inflation. There is some nuance in the interference in the sense that LDP government wants a stricter (but higher inflation) rule for the BOJ to follow but it does create a precedent of interference nonetheless.

On the same track, the LDP government will embark on a massive stimulus program to revive the economy. I prefer monetary to fiscal stimulus. The preference presents me with a problem: BOJ itself is too conservative to my liking and that probably makes the executive infringement into monetary policy somewhat palatable. Nevertheless, with expansive and coordinated fiscal and monetary policies, I suppose you will get inflation.

Finally, while I welcome the return of the LDP, I do not think the election of DPJ was a mistake. The Japanese system needs a shake-up and the DPJ did just that, even if it did not fulfill its promise. Being in power for too long can be dangerous to a political culture because it implants the party into the state apparatus. For a healthy democracy to prevail, the state has to be ultimately separate from the party. In the case of Japan, there is an additional dimension: the civil service is too influential. From my readings, the DPJ did have some successes in reigning the influence of the Japanese civil service, and that is good.


[2592] The stimulus was not the cause of the rebound

Economist Nor Zahidi Alias at Malaysian Rating Corporation wrote in The Edge Financial Daily today that there was too much concern for the fiscal deficit. I will accept that (while I am concerned about the deficit, concerns shown by the public  is overly excessive, especially about the debt limit) although I do still believe the government revenue should aspire to reduce its deficit in the long run.

But I am writing here not to discuss about the deficit per se, but rather an assertion by him that:

In Malaysia’s case, its budget shortfall widened to 6.7% of GDP in 2009 as the government implemented measures to avert deeper economic contraction. As a result, the economy rebounded strongly by 7.2%, whilst revenue growth accelerated by a double-digit pace by 2011. At the same time, the budget deficit as a percentage of GDP narrowed to 4.8% in 2011 from 5.4% in the preceding year. [Nor Zahidi Alias. Budget shortfall no cause for sleep deficit. The Edge Financial Daily. September 5 2012]

First, a small issue of clarification. The economy grew by 7.2% in 2010. Government grew by 16% in 2011. I think the langauge can be a bit confusing.

Now, to the beef. I am disagreeing with the causality cited here. The author wrote that as a result of government spending in 2009 or really, the stimulus, the economy rebounded strongly in the following year.

In 2010, real government spending in real terms slowed to 2.9% from 4.9% in 2009. The economy did rebound in 2010 but given the trend in government spending, it is really hard to attribute the 2010 rebound to the government. This is especially so when government spending typically formed only 11% of total real GDP.

How about gross fixed capital formation (i.e. investment) of the public sector? It grew by 2.9% in 2009 and 5.0% in 2010. The 5.0% is more or less the typical growth in the immediate years before the recession.

In fact, the first three quarters in 2010, GFCF by the public sector contracted. Only in the last quarter of the year did it grow by 34.7%, which was huge. If GFCF had not grown at all in that quarter, overall real GDP growth would have still grown by about 6% in 2010. If the GFCF had contracted at about the same average magnitude in the earlier three quarters, the economy would have still rebounded. So, clearly, the source of the rebound came from somewhere else, not the stimulus.

One might try the multiplier story but given how late the stimulus came, I doubt it, along with the stimulus, really was relevant.

Truly, private consumption and private GFCF growth recovered before the stimulus really came into force. Private consumption registered year-on-year shot up by the first quarter of 2010 and private GFCF registered its first growth in the last quarter of 2009. Both happened well before the stimulus had a chance to act. If one compares the numbers on quarter-on-quarter basis, one will realize that the recovery came even earlier.

So, I cannot agree with Nor Zahidi’s assertion that the 2010 economy rebounded strongly because of the stimulus. The numbers do not show that.