1. Finally, the cat is out of the bag. The government made the big announcement that everyone is waiting for. While many is waiting on how much the government is going to spend but I was more interested in the strategies of spending.
2. For the benefit of those who do not understand this whole issue of financial crisis, allow me to explain it in simple terms. The problem in Malaysia is not the same as the one in America. In our case being a producer and exporter of goods, we are suddenly faced with a situation where the buyers do not want to buy the luxury items. They do not want to spend money. The buyer is mainly in Europe and the USA who has been a victim of the subprime crisis.
3. Without the buyers, we have with limited options. To get the economy to be active, we need to encourage domestic spending. We need to encourage Malaysian and foreigners to spend in Malaysia. To spend, people must have the excess cash on hand. In example, if every Malaysian has RM 10 extra to spend and if everyone spends the money then the multiplier effect of RM270 mill will become about 1 billion.
4. In a nutshell, the government did announce some good measures but if it is look in totality and from the objective of the budget, it fails to excite the economy. The downtrend of KLSE supports this view. It failed to address two important elements in the mechanics of trying to stimulate the economy. The first, failure to increase the household liquidity and the second is lack of encouragement for people to spend locally.
5. I will publish the whole reasoning on why I feel as such on a separate publication as the details are rather long. As it is my argument is eight pages long and it is till not done. If it is too long, I am worried that no one will read my writing.
6. The move to fill up vacancies in government agencies via contract measures is good. It will mop up 120 000 unemployed people from the street. People who do not work will be hungry and those who are hungry tend to be angry. Providing job to 120 000 people only brings small economic multiplier value compared to the value create by the rest of the population of 27 million.
7. The downside of the measures related to creating employment is the action of retraining and promoting entrepreneurship via the various government agencies is an action that does not give an immediate impact. It takes time. It is better to ensure companies employs people, the employer does retraining, and government provide the necessary financial and tax incentives. The same argument applies in providing RM 20 mill grant for postgraduate studies.
8. Malaysians are choosy lot when it comes to finding a job. The government move to reduce foreign workers will create opportunity for the people in some sectors that Malaysian CAN work. Choosy people will go hungry and at the end of the day, they will have to work. This will reduce the large amount of money that is being repatriated overseas.
9. The above measures only deal with the small aspect of the whole problem. The government has failed to significantly increase the family disposable income. Some insignificant measures was mentioned. For e.g. tax break on housing loans (up to 10,000 per year). This is not enough. I would expect that oil price is reduce significantly, cost of essentials food to be control. Tax break on the cost of employing domestic maids and banks to reduce the current monthly instalment in line with the reduction of BLR. A BNM regulator told me that if banks were to pass on the benefit of BLR reduction it will create an excess liquidity in the market by RM 2 billion a month.
10. If we reduce the price of oil, cost of transportation will drop. If someone spend 200 litres of petrol a month and the price is drop by 50 cents, it is equivalent of to creating an excess liquidity of RM 100 per month. If there were 10 mill families in Malaysia, the total liquidity would be equal to RM 1 billion in the market. With reduction of diesel price, there will be a significant reduction of cost of goods and services. This means that purchasing power has boosted tremendously. In summary, the government had partly address the problem of unemployment but failed to improve family liquidity.
11. Creating excess liquidity is important but making people to spend is equally important. There is no point if all the excess disposable income monies are kept in the bank or under the pillow. People need to spend. The problem is people are too scared to spend with all the over amplified news that is being pushed trough the media. I think the situation has been made far worst than it actually is.
12. The government need to stimulate expenditure. The move to give discount on the purchases of local cars are good for the nation. It will stimulate economy in the industry that employs 200,000 people. However this is not enough. We need to psyche people to spend. We need to encourage domestic tourism. Hotel room rates must be reduce. The current cost of hotel room rental is about 10-15 x the actual operational cost of maintaining a room.
13. People must be encouraged to buy houses, invest in businesses and to spend extra then they normally do. I quote what Najib said in his speech in Parliament where he said, “We cannot depend on orthodox economic recovery policies. We must be bold in formulating innovative approaches to deal with the crisis.” Sadly, I think the government did the total opposite thing.
14. I am not an economist. I am just a simple man that looks at simple measures. I am prepared to argue my case with any economist in the country privately or openly. If you are one, please email me your views to drrafick@gmail.com. I want to hear them.
15. I disagree with Najib when he said that, “We must draw upon our past experience to overcome the crisis” I believe he is referring to the 1997/98 financial crisis. Dato Sri, in 1997, the whole world economy is OK but ours was bad. As such, we could depend on the foreigners to buy our goods and services. Today the whole world economy has gone bonkers. We can only depend on our own people to generate the economy.
16. The one question that I want to ask is what is this consolidated fund where this RM 60 billion being drawn? How much is in that fund and how much is left after RM 60 billion withdrawal.
17. In conclusion, I would say that this budget not only fail to stimulate orgasm and is not likely to stimulate the economy within the desired time frame at the desired pace!
Related Reading material
1. Dr Rafick Perception Item by Item Analysis on the Budget Speech
Thanks Doc for pointing out the government or Najib has no clue at all how to generate the economy.
It all cronies bailout.
This is the first time I commented here and I should say that you provide genuine, and quality information for other bloggers! Great job.
p.s. You have an awesome template . Where did you find it?
The Lower income folks don’t get to save much money, unfortunately. And if they are given some cash, they will spend it.
So one of the most effective measures to pump the economy would have been direct assistance to the poorer members of society. Goodness, the certainly need help.
That was one of the most glaring omissions in the “Mini Budget”.
The simple solution is a demand pull economy. Increase peoples’purchasing power by giving money to the general masses through increase in real wages.
The supply is never been the worry as the rich will know how to increase productivity to satisfy the demand.
[...] Non economist view of Malaysian ESP – RM60 billion… WOW! 1. Finally, the cat is out of the bag. The government made the big announcement that everyone is waiting for. While [...] [...]
Dr. Wholeheartedly agree with most of your views. Even a layman like me with no training in economics am not stimulated in any way with the stimules package.
I am attaching a piece I received by email which makes more sense that all the cliches of Najib; a bit long, but you will find it stimulating.
The Global Financial Crisis: What Caused it, Where it is heading?*
by
Ravi Batra
© November 15, 2008
Professor, Department of Economics
Southern Methodist University, Dallas, Texas 75275, USA
Two thousand eight was year extraordinaire. It started off in a rather nonchalant way, but ended with a bang. Its myriad and breathtaking events caught the world off guard, but please allow me to say, arrogant as it sounds, that they did not surprise me, including the epoch-making victory of Barack Obama in the US presidential election. I had anticipated them all in two books more than two years ago. The first, Greenspan’s Fraud, was written in 2005, and the second, The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos, was finished before October 2006. In fact, the title of the second work itself reveals that I had anticipated an Obama-like revolution in the United States.
It now appears vain to remind the people of my forecasts, but see what I had to endure after I made them. Both books had served to reinforce my reputation as a crack pot, who sought public attention with bogus claims and phony prophecies that occasionally came true. Greenspan’s Fraud was especially galling to my fellow economists, even some of my colleagues. Alan Greenspan was still the chairman of the Federal Reserve in the United States, and had been so for the past 18 years. Some people regard the Fed chairman, with his all-encompassing ability to influence interest rates globally, as the most powerful man in the world.
This is perhaps an exaggeration, but Greenspan, who had actually been in the limelight for over three decades, was more than just a Fed chairman. Investors around the world came to worship him in the 1990s, as share markets broke record after record in many nations. Best-selling author Bob Woodward, who achieved celebrity writing about the Watergate scandal, declared Greenspan as the Maestro in 2000 in a book with the same title. Others were equally euphoric about him. Some called him a rare genius, the best economist ever; even Queen Elizabeth chipped in and knighted him in 2002 as Sir Alan Greenspan. Here I was, a mere professor at Southern Methodist University, who had the temerity not just to criticize him but call his policies self-serving and fraudulent. My book’s title shocked the people, who in turn mocked me without reading my facts and arguments. But sometimes one has to bear insults to bring out the truth.
Where did I learn my economics? The question makes me nostalgic and takes me back into the 1960s, when I was a masters’ student at the Delhi School of Economics. There I studied under luminary professors such as K. N. Raj, Jagdish Bhagwati, Amartya Sen, and India’s current prime minister, Manmohan Singh. They were great teachers and taught me the fundamentals of modern economics.
However, there was one other teacher, whose theories were remarkably different and unknown. He was not even at the Delhi School. I met him in Lucknow, at the time a rather small town in India. He was Shri Prabhat Ranjan Sarkar, a wonderful man of vast knowledge in many different areas. He had written books on history, economics and philosophy among others. Two points stood out in his theories. First, the foundation of prosperity is people’s purchasing power; second, rising inequality eventually destroys any economy.
I left India for the United States in 1966 to do a Ph. D., but Sarkar’s ideas stayed with me and followed me wherever I went. I studied classical economics, Keynesian thought, and numerous other schools, but none focused on what Sarkar had stressed. Finally, I decided to write about his ideas and introduce them to the world, because few paid attention to the gems he had offered. I wrote a number of books based on his theories, starting in 1978, but here I want to emphasize how his ideas enabled me to see through the vacuity and deception of Greenspan’s policies.
The Wage-Productivity Gap
Greenspan focused on company profits and labor productivity as the main engines of economic growth and prosperity. He believed that high profits generate high employment and high wages lead to joblessness. I will now show how this view is myopic and the sole cause of most of the economic travails afflicting the world.
Let me start with a universally acceptable statement. A healthy economy requires that there is a balance between supply and demand. Here supply means the production of goods and services offered to entire society, and demand means society’s demand for such things. Thus, economic balance requires that
Supply = Demand
Without this balance, there is either high unemployment or high inflation. The main source of supply is labor productivity, whereas the main source of demand is the real wage, or people’s purchasing power in Sarkar’s nomenclature. When productivity rises, production or supply goes up and when the real wage increases, consumer spending, and hence investment spending, go up. Because of this investment and new technology, productivity grows over time, which means supply rises over the years. Therefore, demand must also grow proportionately to maintain the economic balance, implying that the real wage must rise in proportion to productivity. However, Greenspan loved to see the rise in productivity but hated the rise in the real wage. He even wanted to abolish the minimum wage, and always argued against its rise, although relentless price increases in the United States had all but demolished its purchasing power. In this respect, the maestro had a lot of company, including the support of President George W. Bush and economic establishment. As a result, the U.S. minimum wage, which peaked at $10 per hour in 1969 in terms of 2008 prices, is now less than $7. Incidentally, the unemployment rate in 1969 was just 3.5 percent, among the lowest in US history.
If the real wage fails to grow as fast as productivity, then over time, a wage-productivity gap develops and
Supply > Demand
Then how do you maintain the indispensable economic balance? This is where the special genius of Greenspan, along with that of conventional economics, came into play. This is where liberal and conservative economists alike, some of them Nobel Laureates, preached their gospel and in the process failed the world.
There is another way through which demand can be raised—new debt. It is an artificial way, and cannot be used forever, but it can postpone the problem for a long time, while the potential economic imbalance builds and cumulates. From 1981 on, U.S. budget deficits, with Greenspan and company advising President Reagan, grew apace. Economists called it fiscal policy, but in reality it was a debt-creating policy. This is how the supply-demand balance was maintained in the presence of the rising wage gap. Thus, for a while, economic balance occurs when
Productivity growth = growth of the real wage plus debt
and
new debt = supply – demand
The Profit and Stock-Market Bubbles
Once productivity outpaces the real wage and debt fills the supply-demand gap, company profits skyrocket, because the entire fruit of rising productivity goes to capital income. However, these are debt-supported profits, because without this debt goods will be unsold and profits will fail to materialize. With rocketing profits come rocketing share prices, so everybody becomes happy and begins to dance. This is how Greenspan won the world’s adulation, and no one looked at the magical role played by debt.
Once federal debt began to sore in the United States from 1981 on, it took barely a year, before the Dow Jones Index (the Dow in short) began to rise. The Dow ended the year around 800, but climbed above 2,000 by mid-1987. It had taken the ballyhooed index about 100 hundred years to go past 1,000, but the next 1,000 came in merely two years. A grateful Reagan appointed Greenspan as the Fed chairman in August 1987, but two months later the maestro had to face the music of his own handiwork. The debt-built stock market bubble, founded by that debt-built profit bubble, crashed in the month of October. Greenspan had no idea of how the rising wage gap generates the supply-demand gap. Instead of focusing on wages, he turned to the other way of creating debt. He flooded the world with money and trimmed the interest rate to lure consumers into borrowing. New debt was now created with the help of fiscal policy as well as what economists like to call monetary policy. However, such euphemisms only mask the truth, which is that these policies solve the problem only by generating new debt.
With increasing use of computers and the Internet, productivity began to rise faster than before, while government policies restrained wage growth. So the wage gap continued to rise and actually accelerated. Not surprisingly, new debt played an even larger role during the 1990s. The government did not borrow as much as before, but the public did more than its share. The mushrooming U.S. trade deficit also made a contribution in this regard, because the rest of the world bought American government bonds with its trade surplus that resulted in its dollar hoard. Consequently, American interest rates remained low for a long time and lulled Greenspan and the fawning world into believing that his policies were actually responsible for the surface prosperity.
So the debt-and-stock-market party that had been derailed by the 1987 crash returned with a gusto. This time the world got drunk on the dot.com boom that took share markets to stratosphere, with the Dow crossing 10,000 in 1999. Still no one realized the crucial role played by new debt in the ever growing mania. For a variety of reasons, the US federal government enjoyed a budget surplus in 1999. Since the wage gap continued to rise, I became convinced that the budget surplus would soon generate a supply-demand gap and hence a crash in profits and share prices. That is when I wrote my book, The Crash of the Millennium, predicting that share markets would collapse in 2000 and beyond. This is exactly what happened, because in an environment of the growing wage gap, the moment debt stops growing, supply exceeds demand, over production results, profits tumble and share prices sink. The stock-market crash of 2000-2001 was the worst since the great crash of 1929.
The Housing Bubble
Somehow Greenspan loves bubbles. As the stock market plummeted in 2000, he panicked and slashed interest rates to depths that had not been seen since the depression of the 1930s. He knew consumer demand was inadequate but did not attribute it to the stagnant real wage. He would rather have the public spend money through borrowing than through higher salaries. Greenspan also encouraged people to use their home equity to secure loans and asked banks to lower their lending standards. The banks dutifully followed as they and their CEOs began to make bushels of money. Add to this his deregulation spree that freed banks to trade in the stock market, and bubbles started to emerge in home prices and credit markets. Soon the new bubbles bested even the dot.com balloon of the 1990s. Greenspan still had not realized that since debt cannot grow exponentially all bubbles burst in the end, and when they do the consequences are very painful.
I have just given you a capsule of Greenspan’s follies and policies; there is much more that cannot be presented in a brief article. But the main point is that the maestro succeeded in hiding the true consequences of his actions and tailored his advice to the ideology of whoever became the American president. In the process Greenspan contradicted his earlier policies, mainly to secure his reappointment as the Fed chairman by the incoming president. Today people realize that Greenspan is mostly to blame for the global crisis. In fact, the cable television channel CNN recently included him among the top 10 culprits responsible for the spreading fiasco, but the same CNN had once idolized the maestro.
Greenspan retired in January 2006 and was replaced by Ben Bernanke, who is no different from the former chairman. Mr. Bernanke is also unaware of the role played by sufficiently high wages in restoring economic balance. So he has rehashed Greenspan’s policies at even faster place, although it must be added in his defense that the current mess is not entirely of his making.
Where Are We Headed?
In The New Golden Age, I predicted that economic chaos would begin in 2007 with a housing meltdown in the United States, followed by a banking crisis and share price declines in 2008 and 2009. I now foresee that this crisis would last at least till 2010, and possibly longer. This is because conventional economists still do not understand the nasty economic effects of the wage-productivity gap, which has grown enormously all over the world. If the doctor does not diagnose the sickness properly, the patient has to suffer for a long time. That is why I am afraid the global financial debacle will turn into a steep recession and be the worst since the Great Depression, even worse than the painful slump of 1980-1982 that afflicted the whole world. I have offered a number of economic reforms deriving from the theory of the wage gap in my two books explored above, and it is possible to come out of the recession within a year, but alas conventional economists would not let us escape the looming disaster so quickly.
Yet all is not lost. There is an effulgent silver lining lurking behind the pal of dark clouds. Sarkar’s historical cycles that I have repeatedly used in my forecasts also show that eventually the world will see a wonderfully prosperous era enshrined in the new golden age. This, I feel, could happen by the end of the next decade.
Spot on. Totally agreed with you. Najib and his people have no clue as what is ailing the country and the World. Made me want to laugh when I saw the amount and his plan.
Remember reading an article by Mathias Chang mentioning about the Govt wanted to raise RM73 billion through foreign currency bond, the first since 2002. He mentioned about our financial institution’s problem and all is not well. Look at the financial index on KLSE, even Public Bank share price is heading south. The Government (Big Brother) have been tying very hard to artificially boost the Composite Index by using our money to suppport share prices. I think the CI will tumble soon. Watch out the CI is heading to 500 soon. If breeched, i cannot see the bottom.
Nasir (Najib CIMB CEO brother) have been hinting all these while and we should take note. This man is smarter than Najib and luckily he has a role in the current Mini-budget, otherwise Najib will still be dreaming that Malaysia wont be affected by the Global Financial Tsunami. Nasir need to try harder…
Look like the bonds put up by the government for sale is the money that generate the 60Billion…
If the housing loan apply for the previous 2 years, I believe it help many Malaysians on whole.. What is the budget can help to spurn the housing industry if only house bought in march 2009 till 2010 is exempted from tax ? Think again PM….
“The one question that I want to ask is what is this consolidated fund where this RM 60 billion being drawn?” Must be on the “billions and billions” of funds allocated for all the “Corridors” the govt spoke of prior 8th March kot..muekeeekek…
No offense Drrafick but you dunno which crony this might help give a hard on.
1. I am also not an economist but I believe credibility and clarity are important issues. I don’t trust the Finance Minister which means I don’t trust in what he says.
2. Overcoming this crisis is like the country facing a war and in a war ALL people must act as one. A united front.
3. BN has been antagonistic towards all the 5 pakatan states which account for 60% of the country’s GDP. Now how can we overcome this crisis when BN does not want to channel funds to these 5 states.
4. Why appoint its own federal tourism agencies, own village heads and order federal officer not to cooperate with state governments.
5. Why cause anarchy in Perak.
6. Most importantly. People lose trust in the government when the police, MACC, the courts and the bureaucracy acts as UMNO tools. See how they bully the Perak Pakatan Govt. No rule of law, no economic recovery!!!!
i, for one, think it has been a total disappointment. you got it right when you pointed to local consumption, which i understand is what china is trying to do. but evidently, not what this govt is trying to do.
where is the income tax rebate? how about cash handout? the money put in our hand can be used to stimulate the economy, but none of these two is forthcoming. instead, what do we see — RM480 mil to pay the tol cons so as to “ease” our burden, no need to increase toll, hurray! — podah.
years of paying tax, and not a spit’s worth in return — no improvement in public transport, no better roads, more tolls to pay, more favoured monopolistic companies getting all the breaks.
tak guna betul.
Dear all
I refer to item 9 in my writeup and the clarification by IRB under the following article “Tax cut on One property“. It appears now that it is quite clear that this measure has extreme remote impact on stimulating the economy. For the record it does not even stimulate anyone sex drive, what more the economy.
http://www.jeffooi.com/2009/03/rm60b_how_confident_2.php
Allowing for a certain biased POV.. but it doesnt inspire anyone with confidence either?
BIG numbers.. but will it translate to really helping the rakyat? Not just the poor but all the middle class also? It just sounds more like bailouts for their crony companies etc..
sigh..
Just for your FYI: http://www.thestar.com.my/news/story.asp?file=/2009/3/12/minibudget/3456970&sec=minibudget