Cash Cannot Revive Economy
Real economies are far more complex than a two-agent model which any textbook describes. The economy is developed over time, part spontaneously, part creatively and part in response to a policy action. Individual economic agents responding to incentives create, expand, and close enterprises in expectations of profits or to avoid losses. The complex web of relationship that knits a factory with its vendors, its suppliers, its workforce, its customers, its lenders, its investors, and its shareholders does not evolve in a day and never as a result of a central command. In a real economy, while cash is always a lifeline, cash is not everything. The lifeline is the web of transactions that create inter-dependencies. If you kill the transactions, and offer cash to the factory, the factory cannot function just with the cash.
The stimulus package is the cash. The web of firms and customers constitute transactions.
Malaysian government has offered a huge stimulus package to the businesses, worth more than US$60 billion (RM261 billion). This is cash, whether instant, or deferred. A small part is offered in the form of wage subsidies while a bigger portion in the form of loans and credit guarantees. The stimulus package follows the lockdown which bars businesses to operate except those included in the list of essential services. It is a government response to a natural disorder. It has also disrupted the spontaneous order that the firms and customers have evolved over time.
I am told that a factory producing processed food was included in the essential list. Also, a factory producing rubber gloves was included in the essential list. Both have stopped working and finding it very hard to operate. These factories were dependent on its vendors to provide raw material and packaging, which the government included in the non-essential list. The gloves manufacturer was dependent on the rubber being supplied which was included in the non-essential. Both, in turn, were dependent on logistics which were included in non-essential, but now relaxed. In each case, the transactions were brought to a sudden halt.
It is very much possible that now both type of factories, whether essential or non-essential will appeal to the government for assistance. The world’s largest low-cost airline, included in the essential list, already appealed for assistance. This distinction between essential and non-essential will soon become irrelevant.
If the basic intention of the government was to assist only those firms which are failing due to the pandemic, it will never be realised through an action today. The government will never have a reliable mechanism to get the information about them. The government’s package will never be able to reach all or most of those firms which truly needed assistance. The cash will never be enough to revive the transactions. The government cannot print its way out of the crisis without fuelling a worst crisis.
What should the government do?
My short answer is “government should do nothing”. Or nothing until the dust is settled and it is clear which firms really need assistance. My intuition is that most of the businesses will be able to survive this crisis. The process of creation of business is not a switch-on, switch-off mechanism. However, a lot of unnecessary movement by the federal government can create wrong signals. The access to the cash (read package) will also be influenced by political and ethnic relationships. We will see that large firms, already well established and operating on good reserves, may gain disproportionately larger share in the package. They know very well players both in the government and in the lending business. The small firms will be hesitant and may be crowded out soon by big firms. Therefore, a stimulus package cannot be deemed enough, as it only creates expectations of more.
In the meanwhile, the government needs to invest in the health system on a war footing which includes a robust testing ability, inventory of ventilators, safe isolation and quarantine centres. This is till, we can find a vaccine but until then we must be prepared to face this pandemic without closing transactions. The pandemic should not be a reason to embrace recession and fighting this as a war will enable more businesses to survive. The cash cannot revive transactions. Lifting of restrictions can.