[1921] Of back to the definition of stimulus

Have you ever engaged in animated conversion with friends, debating intently on a point only to find out later how off tangent the discussion had become? How about a time when asked what was the original contention, all involved in the little discussion somehow had trouble answering the question? Well, something like that has happened to the discussions surrounding the stimulus package for Malaysia.

I think I have seen a fair share of suggestions and criticism related to the composition of an economic stimulus. The perception I have is that a majority of them involves the typical tools of macroeconomics: fiscal and monetary policies. Between the two, the debate on fiscal policy is probably the one that takes center stage, as proponents of government spending and tax cuts rattle sabers only to come to a uneasy compromise of having a little bit of both.

While the two giants wage an intellectual war against each other, a notable minority refuse to participate in the age-old debate. Instead, they are convinced that in order to stimulate a faltering economy, we must go beyond fiscal and monetary policies. Almost always in place of traditional policies, they propose long term measures which perhaps nobody could argue against.

How could anybody say no to their suggestions?

It is impossible to say no to them because more often than not, they touch on the need to improve the framework of the economy. This includes improvement of rules and regulations. The enlightened few have cited Nobel Prize laureate Douglass North on emphasizing the need for strong working institutions, which sadly, Malaysia sorely lacks these days if events of recent weeks are anything to go by. Others call for improvement of real income of Malaysians by pushing industries in the country up the value chains. To put a cherry on top of cake of wonderful ideas, CEO of CIMB group Nazir Razak suggested for the country to focus on strategies and not just on fiscal and monetary policies.

These paths beyond fiscal and monetary policies must be taken and that is for sure. The crucial caveat is that they have to be taken regardless of economic situation.

Sure, as the cliché goes, behind every crisis there is an opportunity. It is in times of crisis when it is easiest to stress the importance of these efforts. We saw how the inefficient fuel subsidy regime in Malaysia — as well as in other countries — was finally reformed much to the benefits of the long term health of the economy. Without the energy crisis, such liberal reform would be unlikely and Malaysia would continue to waste good money on artificially supporting the economy rather than investing in things that matter — like in our education, our security, our instititutions — that really build up the economy.

One however does not have to wait for disaster to strike to commit to structural improvements. To commit to those improvements only in times of crisis is to take that cliché too close to heart and miss the entire reason for those structural improvements.

Those structural improvements, be it diversification of export markets, closer integration among ASEAN members state for a European Union-style entity, revision of the New Economic Policy, strengthening of the judiciary, greater investment in human capital by way of having better curriculum and teachers, etc, are developmental in nature.

That is right. These measures beyond the traditional fiscal and monetary policies are meant to develop the countries in the long run. It takes time, almost definitely far longer than it is required to complete a business cycle.

That of course does not mean any of those improvement, if it has not started yet, should be delayed. The point which I want to stress again is that these structural improvements of the economy should take place regardless of business cycle. Because it is developmental in nature, it almost by definition takes the noble long term view.

I am reluctant to quote Keynes mostly because I abhor half-baked Keynesianism practiced in far too many places at the moment by newly self-discovered Keynesians, which is worse than Keynesians calling for proper Keynesian counter-cyclical policy. Nevertheless, his words here at this juncture are most appropriate for rhetorical purpose: ”Long run is a misleading guide to current affairs. In the long run we are all dead.”

Malaysian trade fell by about 30% in January on year-on-year basis. How exactly do these long term proposals immediately deal with immediate fall in external demand?

In the first week of March, Flextronics shared that nearly 1,400 workers of its workers in Shah Alam, Selangor were laid off. How exactly do these long term proposals immediately deal with the immediate increase in unemployment rate or the immediate reduction of disposal income of Malaysians?

Structural improvements do not address these immediate concerns. If a person’s goal is to address immediate concerns, then he or she will face an obvious temporal problem.

That very reason is why most structural improvements of the economy if not all — while it may help in no little way in future crises — does little to address the current crisis.

The idea of a stimulus is to address these immediate concerns. It does not seek to address developmental concerns, which forward looking structural reforms — regardless of philosophies — are meant to do.

Notwithstanding criticism directed at government spending as a stimulating tool that I personally agree with, it at least seeks to solve immediate problems. So too tax cuts except that it seeks to do it in a faster manner while maneuvering away from the weaknesses of government spending. The effect of monetary policy is probably even faster in this age of light speed communication. One announcement by the Governor and everybody from single individuals to large institutions will quickly react to it.

This is why fiscal and monetary policies remain and will remain the thrust of the economic stimulus in Malaysia, or any stimulus for that matter. The pillars of economic stimulus will remain revolve around fiscal and monetary policies, even if they are becoming stale and frustrating.

Hence, the fixation with fiscal and monetary policies is not a symptom of short-termism, as some have begun ridiculing the advocates of government spending, tax cuts and monetary policy. Quite the contrary, the focus on fiscal and monetary policies is about putting one’s feet on the ground and settings eyes on the targets, which many have unfortunately forgotten to do.

First published in The Malaysian Insider on March 9 2009.