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Sakmongkol ak 47

Friday 12 December 2008

Our Economy

The economic problem.

DS Najib studied industrial economics at the U of Nottingham. While knowing some economics myself, I don’t know what the subject matter of that specialised branch of economics is. Perhaps it is about industrialisation, economics of industrialisation, locational issues, cluster theory and so forth. He must have also been instructed in the fundamental principles of microeconomics, macroeconomics and so forth. So I assume he understands economics and therefore recognises the basic problem facing or country now. By going to parliament with a RM7bn package, that indicates he does know economics.

The real problem is on the demand side of the economy. Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down. I is investment. Take out or reduce consumer spending, businesses are not going to invest. Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And strange as it may sound as people put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might want to buy, if the Dollar is used, from the rest of the world more expensive.)

That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted the American economy out of the Great Depression as Franklin Delano Roosevelt found out after hesitating on Keynes suggestion. FDR saw Keynes as a queer English mathematician. It may be the only instrument we can use here in Malaysia for lifting Malaysia out of our own Mini Depression. My only reservation is my suspicions that DS Najib as finance minister may have come before parliament with a proposal of government stimulus, the size of a baby carrot.

But at least he knows that monetary policy won't work if there's inadequate demand. So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend much more than the RM7bn stimulus package.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. I would like for example to see a rail line built from Kelantan linking KT and Kuantan. That would certainly stir up the economy. Or built a railway from Gua Musang to Kuala Lipis to KL, exposing the Malay heartland to mainstream economy.

Conservative economists generally are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack several benefits at once: they create lots of jobs, and they make the economy work better in the future. But take note of this Important qualification: To do this correctly and avoid pork barrel politics, the government will need to have a capital budget that lists infrastructure projects in order of priority of public need.) Government should also spend on health care and education. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfil vital public needs.

Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run into massive sums( see Tony Pua’s analysis of the 2009 budget) given the amounts to be spent bailing out companies represented by Valuecap and perhaps our auto industry, and providing extended welfare payments to help those in direct need. The hawks will argue that the nation can't afford giant deficits. At least a fiscal hawk like Tony Pua can advance some good arguments. What irks me are those totally unschooled in economics who ape around saying deficits are not good and raise the alarm if any state government presents a deficit budget.

Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.

The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons.

(1) First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Malaysians pay more in payroll taxes than in income taxes.

(2) Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services.

(3) Third, even when individuals purchase goods and services, those purchases tend not to generate as many Malaysian jobs as government spending on the same total scale because much of what consumers buy comes from abroad.

Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.

But I am not going to be imprisoned by doctrinaire arguments. The government must take whatever actions necessary to allow our economy stay the course. Even within the ambits of fiscal policy, we can still argue whether to spend or carry out tax reductions. That will depend on the spending and tax cuts multiplier. At the moment, evidences gathered in the American economy are not conclusive. The Harvard economics don, Greg Mankiw cited empirical studies carried out by economists. One group produced evidence that the spending multiplier is larger than tax cut multipliers. Another group forwarded evidence that tax cuts multiplier is larger than spending multiplier. It does not matter which, as long as the government knows that it must stimulate the economy.

I hate those who go on saying publicly that we have nothing to worry. Hello, we are a trading nation and plus the fact that our domestic market isn’t large enough to cushion the shocks. It is better to warn the public to brace for the future rather than giving palliatives about the soundness of our economy.


Anonymous,  12 December 2008 at 10:51  

Agree with U on both counts of fiscal stimulus.

But the BIG question is can these stimulus do two things;

1) 'reach far & wide' to the targeted s

2) make every RM counts

Big govt spending is not the silver bullet, if it's not implemented 'vigorously' & under 'hawk-eyes'.

Under the current admin, this could be castle in the air!

It can turn into another 'rescuses'.


mekyam 12 December 2008 at 11:24  

even though i don't know economics, i think i understand the reservations anomie raised.

oversight on government activities, especially on spending, has been almost non-existent of late in our country, hasn't it?

all that talk about transparencies, little did we know those leaders were talking about their holey integrity. :D

Ariff Sabri 12 December 2008 at 13:22  

ahhh..wait for my post, why i actually support reduction in taxes- more money in OUR own hands, means more DEMOCRACY!. cant trust these govt jocks with OUR money!

Anonymous,  12 December 2008 at 15:27  

Very nice, Datuk.
If I may add, please do not overlook the software part too.

>>> The greatest challenge in UMNO today is changing the mindsets of its people. An organization can only change if the mindsets of the people change. Changing the system, process, technology, structure and strategy is not enough. How then do you get people to change their mindset?
Experts recommend the following:

1. Getting people to unlearn the old ways.
2. Getting people to see the need for change.
3. Communicating the rationale for change.
4. Getting people out of their comfort zone.
5. Getting people to change positively. <<<<

Confuseus says " Kalau tidak, ibaratkan menjirus air didaun keladi "

Saya... 12 December 2008 at 16:59  


Terer la Dato punya writing skills:

"It is better to warn the public to brace for the future rather than giving palliatives about the soundness of our economy."

Ish ish ish...envious, envious...

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