Is the “cash payout plan” the most effective solution to stimulating the economy?
Financial instability triggered by the subprime–mortgage problem due to the decline in housing prices in the United States has drastically increased since the bankruptcy of Lehman Brothers last September. Besides anxieties for weak financial institutions in Europe and the United States, this instability generated worldwide credit crunch and steep fall in stock prices. In the US, which is the origin of the current financial instability, the Emergency Economic Stabilization Act of 2008 was enacted at the beginning of last October to soothe credit uneasiness. According to this act, bad loans will be purchased with public funds of up to $700 billion. Furthermore, the Federal Reserve Bank (FRB), the European Central Bank and other central banks all over the world repeated large cut of interest rates to eliminate credit uneasiness, but the global financial instability still remains.
The global financial instability is also exerting serious influence on the real economy. The International Monetary Fund (IMF) estimates Japan’s annual economic growth for 2009 is minus 0.2%, that the EU is minus 0.5%, and that of the US is minus 0.7%, which implies there is a high risk that major developed countries will go into recession. Under such circumstances, Taro Aso’s administration proposed the cash payout plan totaling “two trillion yen” as an effective solution for stimulating the economy. This paper discusses the macroeconomic effects of the cash payout plan proposed by Aso’s administration as a measure for stimulating the economy.
In January of this year, the second supplementary budget for FY 2008, including the two-trillion yen cash payout plan was passed in the Lower House by a majority of the ruling party and others. Although the extra budget is expected to be rejected by the Upper House, it will be enacted because the Constitution gives final say to the Lower House on budget decisions when the two chambers are at loggerheads. Finally, the cash payout plan will be enforced as a measure for stimulating the economy. In the cash payout plan proposed by Aso’s administration those over 65 years-old and those below 18 years-old are given 20,000 yen and the others are given 12,000 yen.
For example, a family having two children below 18 years of age is given 64,000 yen in total. Though the administration expects the cash payout plan to generate a macroeconomic effect called the multiplier effect in Keynesian economics, it is doubtful how much the effect will stimulate the economy. The multiplier effect is the macroeconomic effect where an increase in income due to some reason or another will in turn generate demand. In other words, a rise in income increases goods and services consumptions (demand), which expand production. An expansion of production implies an increase in income of workers engaged in goods and service industries, which further stimulates consumption. Such an induced effect on economic growth is called the multiplier effect in Keynesian economics.
If people do not spend increased income for consumption, however, no induced effect appears. The degree of the multiplier effect largely depends on how much part of the increased income people spend for consumption. If we don’t spend the temporarily-gained income and save it all for the future, no multiplier effect occurs. Just like the current case, temporal cash payout to people was implemented in the form of a “regional promotion ticket” by Keizo Obuchi’s administration in 1999, the time when there still remained the aftereffects of the burst bubble. According to the estimate by the then Economic Planning Agency, a little above 60% of the regional promotion tickets were used for savings, while a little under 40% were used for consumption. Assuming that 40% are used for consumption in the current case, the multiplier (economic) effect of the 2-trillion-yen cash payout plan is theoretically around 3.3 trillion yen.
After subtracting two-trillion yen payouts in total, the actual macroeconomic effect will be around 1.3 trillion yen. This amount, of course, is calculated based on the assumption that people spend enough of the cash payouts to encourage consumption. If people spend none or only a little of the cash payouts, the multiplier effect cannot be expected, and actually the macroeconomic effect itself will be very little. In the Yomiuri Shimbun article last November, this fear was suggested by the outcome of a questionnaire conducted by a private think-tank on 1,000 men and women nationwide. According to the result generated, most people spend cash payouts for savings and loan repayment, while 12% spend the entire cash payouts, and 8% spend half of the money in impulse buying. It concludes that additional consumption encouraged by the cash payout plan is limited to 320 billion yen.
As for the need for a cash payout plan, the nationwide research (via telephone) conducted by Yomiuri Shimbun on January 9 through 11 shows 78% agree “the government should withdraw the cash payout plan and devote the resource to employment, social security and other purposes” and only 17% disagree with the withdrawal of the cash payout plan. Besides the additional office expenses each local government should incur in association with the cash payout, it is unclear the cash payout is implemented promptly because payment schedule largely depends on the paperwork ability of each local government. The 2-trillion-yen payout plan is doubtful for the macroeconomic effect, imposes a heavy burden on each local government that is actually responsible for payment, and gets little support from the people. In spite of this, Aso’s administration is pushing ahead with the cash payout plan.
Though some say a total amount of two-trillion yen should be spent for employment measures and enhancement of social security rater than cash payout, my opinion is to cut the consumer tax rate. Annual revenues from consumer tax over the last 10 years range from 9.5 trillion to 10 trillion yen. Assuming our consumption behavior is not affected by seasonal variations, a 2-trillion cut in the consumption tax is equal to reducing the consumption tax rate to 0% for about two and a half months. Considering that a 2-trillion revenue from the tax income corresponds to 40-trillion in consumption, a reduction in the consumption tax rate to 0% brings about far greater a macroeconomic effect than the cast payout plan.
Those who most react to the consumption tax rate reduced only for a limited period are consumers planning or thinking to purchase expensive goods, including houses, cars and sophisticated home electric appliances. Actually just before April 1997, when the consumption tax rate was raised from 3% to 5%, many people rushed to purchase houses and cars. A reduction in the consumption tax rate can decrease the government’s revenue from the consumption tax more largely than initially expected, while the demands of purchase of expensive goods, such as houses and cars will increase. Especially, the housing and construction industry as well as auto industry are most negatively affected by the current financial crisis. I think a reduction in the consumption tax rate for a limited period is more favorable than the cash payout that is opposed by many people.
(Yoshihiko Fukushima is a Professor of Political Science & Economics and the Okuma School of Public Management at Waseda University in Japan. He is a graduate of Keio University in 1988. In 1990, he completed the Master’s Program (M.A. in Economics) at the Graduate School of Economics there and then joined Salomon Brothers Asia Limited. After work in Tokyo, New York and London, he completed the Ph.D. program at the Department of Economics, Stockholm University in Sweden, in 2003. After teaching at Nagoya University of Commerce and Business, he took his present post in 2007.)