By Marial A. Yol, 12/06/202
Economies are like humans. They can fall sick, hibernate and recuperate when the conditions become right. When a disaster, such as the coronavirus pandemic, floods, earthquakes or tsunamis strikes, economies are the first to fall victim. The current episode of coronavirus is not exceptional. When a calamity strikes, firms react to cut production costs by laying off workers. These cost-cutting measures set in motion a series of economic fallouts.
First, unemployment will emerge and consequently, aggregate demand for goods and services fall as incomes from employment falter.
Secondly, as unemployment rises, firms’ output falls, giving rise to domestic inflation. To prevent or limit the devastating consequences of such crisis, governments put in place necessary measures to boost public spending, lower taxes and interest rates in order to stimulate the economy. In regard to the current coronavirus pandemic situation, many governments in developed countries have hurriedly put in place economic stimulus packages or bailouts in attempt to moderate the effects of Coronavirus conundrum.
In this regard, governments performs six fundamental functions in market economies. First, governments provide the legal and social framework for economies. Governments create laws and provide courts, provide information and services to help economy function better, establish monetary systems, define and enforce property rights. Second, governments maintain competition. Governments create and enforce antitrust laws and regulate natural monopolies. Third, governments provide public goods and services. They provide goods and services that markets or individuals are unable or unwilling to provide, such as national defense, education or clean air. Fourth, governments redistribute incomes. Governments can charge higher income tax rates for rich than for poor so that to transfer income from rich to poor, provide social security, and aid to dependent children, various medical services such as Medicare and Medicaid in the USA. Fifth, governments correct for externalities. Governments can impose taxes to reduce negative externalities such as environmental pollution; subsidies to encourage positive externalities, such as education. Externalities exist when some of the costs or benefits associated with the production or consumption of a product “spill over” to third parties other than the direct producer or consumer of the product. Sixth, governments stabilize economies during downturn and turbulence. During economic downturn, government use budgets and/or monetary policy to promote economic growth, control inflation, and reduce unemployment.
During such crisis, governments provide stimulus package measures to protect both the producers and consumers, and, hence, the overall economy. Stimulus package measures aim at reinvigorating economies and preventing or reversing potential risk of recession by boosting public spending and employment. A stimulus package aims at averting any possible recession or depression that may arise from such crisis. The package normally stimulates aggregate demand through increased consumer spending, employment, and investment.
A stimulus package may involve expansionary fiscal or monetary policy or both. A fiscal stimulus package normally includes a number of incentives and tax rebates to boost public spending in an attempt to pull an economy out of a recession or to prevent an economic slowdown. When a government chooses a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive a floundering economy. Cutting taxes allows people to have more incomes at their disposal. This implies that consumers will have more money to spend on goods and services that can boost the country’s economic growth. A monetary stimulus package increases government spending by injecting more money into the economy. This allows firms to have more money to invest, leading to a fall in unemployment, increase in spending, and eventually, countering the impact of a recession.
A monetary stimulus involves cutting interest rates to stimulate the economy. Cutting interest rates gives investors more incentives to borrow as the cost of borrowing is reduced. An increase in borrowing means there will be more money in circulation, less incentive to save, and more incentive to spend. Lowering interest rates could also cause the country’s exchange rate to depreciate, thereby leading to a boost in exports. When exports are increased, more money is injected into the economy which can encourage spending and boast economic growth.
Another form of monetary stimulus is quantitative easing. This is an expansionary monetary policy in which the central bank of a country purchases a large number of financial assets, such as bonds, from commercial banks and other financial institutions. The purchase of these assets in large quantities increases the excess reserves held by the financial institutions, facilitates lending, increases the money supply in circulation, drives up the price of bonds, lowers the yield, and lowers interest rates. Governments usually opt for quantitative easing when a conventional monetary stimulus is no longer effective.
In response to the current economic downturn, the IMF has designed the so-called rural-based fiscal stimulus measures which aim at: cash transfer to low income liquidity-constrained households; and shovel-ready productive public investments to improve the rising unemployment rates and increasing jobless claims, leading to improvement in economic downturn.
Currently, the U.S. and several other countries have organized and coordinated stimulus package measures in response to the global coronavirus pandemic. These packages include cutting interest rates close to zero and providing stabilization mechanisms to the financial markets in conjunction with tax breaks, sector bailouts, and emergency unemployment support to those workers who have lost their jobs. Countries without sufficient resources have even approached international financial institutions such as the International Monetary Fund (IMF) and the World Bank Group to lend them money for the purpose. In that regard, the U.S. has already approved a stimulus package of $ 2.2 trillion to help workers and small firms in order to save its economy. The package, described as the biggest economic stimulus in American history, includes expanded worker protections, $500 billion rescue fund for helping beleaguered U.S. industries and providing many Americans with cash of $1,200 for individuals and $2,400 for married couples.
Similar packages are under way in the United Kingdom, France, Germany, Australia, Denmark, Argentina, Italy, and Russia, which are intended to increase government spending and lower taxes and interest rates in order to pull economies out of a recession or depression. This increases aggregate demand through increased employment, consumer spending, and investment.
As far as the developing countries are concerned, there is no even mention on what governments should do to mitigate the catastrophic consequences of fallouts from the current coronavirus pandemic on their citizens. Since governments are unwilling to implement economic stimulus packages to minimize the disastrous effects of such crisis on firms and consumers, governments should commit themselves to pay civil service workers their salaries regularly. A salary, no matter how small it may be, is a moral consolation that ties employees to their jobs so that they do not shirk. Research has found a positive relationship between pay and performance, motivation and job satisfaction. The evidence support the claim that money motivates people to work harder, perform better, engage more and be more satisfied. Therefore paying citizens money to mitigate the harmful effects of a crisis may be regarded by some half-baked experts as a waste of resources but it is helping people help their economies.
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(The views expressed herein are author’s and not Ramciel Broadcasting’s)