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Sakmongkol ak 47

Sunday, 15 March 2009

Politicians just love stimulations.

The government plans to inject RM60 billion into the economy. It will do so under 4 main thrusts as the finance minister says. The description is very apt- after you stimulate, you thrust. You might be forgiven into thinking our economic managers were doing something else when formulating our economic strategies.

In this short article, I am just trying to instigate some thinking. As we all know, the rage now is to embrace Keynesian economics. Starting from when Milton Friedman first uttered it to when Nixon famously rephrased the term, Keynesian economics is now on the ascendency.

Politicians and civil servants liked the ideas of Keynesian economics. They give them excuses and reasons to meddle in the economic system. In Malaysia, meddling into the economy can also be a means to make hay while the sun shines. All too often, bureaucracy and other regulations provide opportunities to make money on the side.

What is the basic idea of Keynesian economics? It is the idea of deficiency in aggregate demand. Simply put, it says that private citizens routinely spend too little. After working to produce to earn incomes they neither spend nor invest those incomes. According to Keynesian economics, it's this failure to spend and invest that keeps AGGREGATE DEMAND too low. And with total demand too low, businesses can't sell all that they produce. So the economy contracts and unemployment rises.

The solution recommended by Keynesians is for government to spend whatever private citizens don't — for government to buy what private citizens won't.

I am just curious; could all this be a red herring to give the government reasons to disturb the market? Is it possible that such an explanation is to also provide the excuses to hide the weaknesses and flawed economic policies? That really, the falling aggregate demand is the product of economic mismanagement?

Let us see. Keynesian economics says that after people work, they neither spend enough nor invest enough. The question then, why should they? We have already defined and determined that people don't spend enough or save enough. So why should they earn higher income when they will not spend and invest? I can put it more graphically by asking why would people strive and take risks to accumulate pieces of paper that they stuff under inside their pillows.

Savings of course can be translated into investments. People don't save by hiding them in pillows. They save by placing them in banks, or loaned them to governments when they buy treasury bills and other bonds or other government IOU's. Savings can be invested in many other ways to earn returns for those who save.

Here is the poser. Could it be that the reason why people neither want to spend it now nor to invest any portion their savings is because too few trustworthy banks or other potential users of these savings exist?

Our next question therefore is what repels the investors? Or what can prevent banks from lending to investors who can earn returns for depositors? The common answer given by Keynesian economics, is because there's little demand from people, investors won't want to produce things. This reasoning may not be the only one or even the correct one. Investors shy away because it is also possible that government policies are excessively hostile to investment and enterprise.

The forms by which government policies are hostile to investments take many forms. In some countries, governments can nationalize industries and that scare investors away. In less extreme examples, investors' enthusiasm is often dampened by assaultive economics policies. Examples of these include high capital-gains taxation, burdensome regulations, lack of transparencies, and too much red tape, arbitrary regulations might well scare investors away.

I am willing to concede that they be grounds to accept falling aggregate demand as the reason for this recession. But I would also like the government to examine that maybe the slackening aggregate demand is the product of their assaultive economic policies- in the manner that I have outlined above? Could it be that the reduction in aggregate demand be caused by the government trying to circumvent the market? For example, why should the government intervene in the market by lending Valuecap RM5 billion so that it can save itself? Wouldn't it make more economic sense to allow the market to correct the anomaly known as Valuecap? Is it sound economic policy for government to save Valuecap by entering the market lending it RM5b? In my opinion, that's not sound policy because to do so would divert scarce resources from other uses more valuable to people and the country.

Could it be then, this RM60b stimulus package is the excuse for politicians to justify meddling further into the economy? And they can justify it intellectually by saying that's what Keynesian economics prescribes? In that process, the normal corrective adjustments in the market which could allocate resources more efficiently are thwarted? It will also mean that government's power over the private economy grows dangerously. In our country as the government becomes more invasive in a market economy, private investors get more intimidated. As government grows bigger, the power and patronage of politicians will too.

I am just thinking out loud, that maybe, this unholy alliance between Keynesian economics and opportunistic politicians is fueling today's enthusiasm for fiscal stimulus. Are we being suckered? I hope not for this country's sake.


lordapes 15 March 2009 at 23:24  

"The description is very apt- after you stimulate, you thrust." lets hope that the wife is not waiting at the door. :)

and yeah, I hope we are not being/will not be suckered too. I get the feeling that we have been so for a long time now. hmmm.

GreenBug 16 March 2009 at 00:00  

When the pump price of fuel shot up 61% from RM1.92 to RM2.70 per litre for RON97 last June, retail prices of essential items went sky high. These prices have remained high eventhough price of fuel has declined to RM1.80 now. Read up on PRICE and how this affect aggregate demand in macroeconomics and you will find that what you said above about "aggregate demand being screwed big time" is defitnitely true. The government screwed up this economy big time!

Both Pak Lah & Najib must take responsibility & pass the baton to TRH to do one term of repair works...

kuldeep 16 March 2009 at 00:10  

in all honesty I believe PM2B wanted a big huge stimulus number..and the number crunchers didn't have the guts to say no to him nor the vision to create an effective and realistic plan.

Thus they came out with a compromise i.e a big number as the PM2B wanted BUT without the big immediate commitments.

Now,deep down they are praying that the world economies and commodity prices will uptick and the guarantees,PFIs ,GLCs investment as such will not be needed.

I hope someone in govt will review the stimulus 2 package and fine tune it to resolve the current problems we are facing.

Its no good and downright dangerous shooting in the dark; even with an AK 47

walla 16 March 2009 at 09:42  

The country's peak in reserves was USD139 Billion last April; including forwards, it's now USD86 Billion, the largest drop of 38 percent in the region.

As one also understands, government deficits depress sovereign ratings which magnify loan costs and debt-to-service ratios.

The "'notes' of promissories' that form the major part of this megastimulus package should be reassessed in those lights.

PribumiPerkasaMedia 16 March 2009 at 12:47  

Ingin menjemput semua Pribumi untuk ke hadhir Perhimpunan dan Sidang Kemuncak Pribumi Perkasa Negara seperti berikut:

Tarikh: 22 hb Mac,2009
Hari: Ahad
Masa: Perhimpunan: 9 pagi
Sidang Kemuncak: 2 petang
Tempat: Kelab Sukan TNB, Ibu Pejabat TNB, Jalan Bangsar Kuala Lumpur
Ucaptama: Tun Dr Mahathir Mohamad
Pembahas: 10 pembicara berkenaan isu-isu Pribumi, termasuk isu-isu Sabah dan Sarawak.

Buktikan KITA tetap BERSATU

Blog Tidak Rasmi:
Laman Rasmi:

Anonymous,  16 March 2009 at 15:06  

Yeah. Politicians are gatal. Even when thinking about stimulus (economic and sexual), they are always searching for the uplifting kind

bongkersz 16 March 2009 at 16:20  

Some of us are having quite an interesting discussion on Keynesinan economics as well here. Check out the comments :) I quote:

Ah, talking about Keynes. Looks like the Malaysian government is very Keynesian in its approach eh? Which advocates deficit finance and increase public spending in order to get out from recession. Too bad, Keynesian demand deficiency model is not appropriate in the context today’s recession.

We need a balanced budget, controlled expenditure and cutting off unnecessary wastages. Increasing public spending is not going to solve the problem which is not there in the 1st place - lack of demand in the market. The word’s economies are not suffering from the lack of demand! What we need is a sound fiscal and finance discipline.

I am suprised not much emphasize is given to tax cuts, which is a very important ingredient to curb recession.

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