Categories
Economics

[2908] Defund non-critical ministries to fund the Ministry of Health more

The public health system is in need of more resources to manage the Covid-19 pandemic. We all talk about flattening the curve but government’s incompetence that caused the Tuesday fiasco means the peak will likely get higher and higher and the time needed to fight this will go longer and longer.

This is the time to direct more resources towards the public health system. Specifically, the budget for the Ministry of Health needs to be enlarged significantly so that they can build whatever capacity they can and need in this short period of time ahead of the peak.

Raising the overall budget might be difficult, with the current balance likely collapsing and legal requirements in the way. These legal requirements maybe artificial, but it is a barrier that not many at the Treasury I would imagine willing to break (in any case, raising the fiscal deficit is inevitable and even preferable). The chart below shows the little fiscal space the government has with respect to current balance.

So, I am suggesting the second best solution is to defund non-critical ministries, and redirect those money towards the Ministry of Health, and other relevant ministries crucial in making health measures effective fast. I do not know which non-critical ministries should be defunded, but there are indeed many programs across various ministries, even overlapping programs, that exist out of political considerations, but little social and economic functions.

The reallocation may require parliamentary approval. So we may need emergency parliamentary sitting ahead of the May 2020 schedule.

I know the government fears a vote of no confidence, but in time of crisis I think both sides should come together as one, and pass such reallocation quickly. We can delay our political differences to after the crisis is over.

Categories
Economics

[2907] No time for dry powder

With extreme social distancing in place, severe movements restriction and work disruption, it is unclear to me the role of economic stimulus. At the very least, its function to stimulate the economy is becoming irrelevant. There is little to stimulate with the supply-side frontier collapsing.

Moreover, the earlier stimulus must have been rendered inadequate. It is designed to address externally driven supply-side shock. It is not designed for domestically driven supply shock, which is essentially the whole economy running aground.

As I have written recently, Malaysia is experiencing its ultimate supply shock in terms of drastic labor supply cut. Given the massive shock we are facing domestically, there is a strong case for the stimulus to be enlarged quite significantly.

You could keep your powder dry a month ago, but the situation has changed so much since then. In fact in the last day or two, this incompetent government has botched the restriction order so much that a third wave is likely: a policy that was meant to restrict public gatherings ended up created massive public gatherings at the borders, at KL transport nodes and at police stations among others. I am suspecting a longer restriction period beyond 2-week to fight the likely third wave.

And so, if we are not already in recession, this government’s poor handling of our case is ensuring a deep one will happen.

Hence, this is the time for radical policy. We desperately need one.

Examples include: SMEs in particular will need hard cold cash, if they are to hoard labor and preserve their potential. One of my favorite ideas involving the central bank is for Bank Negara to buy SMEs’ assets like account receivables through repo facility. This essentially means the bank injecting cash into SMEs in return for SME account receivables. The whole exercise could be unwind in a year’s time. More assets could consider in fact.

Fiscal policy will also need to play its role. I have heard suggestions for withdrawal from EPF account 2. That is doable without hurting government finances. A more flexible borrowing scheme by the government is also necessary, especially given yields are so low these days. The deficit can wait. An A- sovereign credit rating is not the hill I would want to die on.

If our powder is still dry, we are just not doing enough.

Categories
Economics

[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.

Categories
Economics

[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.

Categories
Economics

[2904] Reintroducing GST now means austerity

Is this the right time to reintroduce the GST?

No.

It is definitely the wrong time to reintroduce the GST at the previous rate of 6%.

Why is it the wrong time?

Because in time when economic growth is dropping off the cliff, having GST at 6% is essentially having an austerity program. It will exacerbate the situation. If you are worried about government finance, remember, government finance is not the economy. Do not forget that.

Why is it an austerity?

The current SST level is approximately equivalent to 4% of GST. Possibly slightly higher than 4% as the new SST has been improved to cover new items. Having GST at 6% is effectively a tax hike from the status quo.

And a tax hike in time of economic slowdown will make the downturn worse. A tax hike is austerity.

How about GST at 4%?

No. Just do not mess with it at this time. There will be an appropriate time to do so. Do not be so noob about it.