Will Cash handouts work?

Many countries are trying it.

Japan’s FY08 second supplementary budget, which was passed in January 27, 2009 included a provision for JPY2 trillion in cash handouts of JPY12,000 per person.

Taiwan also attempted with a variant of cash handouts with everyone in Taiwan will be given more than 100 US dollars in shopping vouchers in a government bid to boost the economy amid the global credit crisis. The programme would cost some 82 billion Taiwan dollars, while those people who donated their coupons would be able to file for tax deductions.

Australia unveils a new stimulus package, promising 42 billion Australian dollars ($26 billion) in spending that will send the budget into the red for the first time in nearly a decade. Among of it, direct payment of up to $950 to individuals and household and one-off cash payments from the government focusing on the lower-middle income households. Among of the key measures - the $950 Single Income Family Bonus to support 1.5 million families with one main income earner, the $950 Farmer's Hardship Bonus paid to around 21,500 drought affected farmers and farm dependent small business owners, the $950 per child Back to School Bonus to support 2.8 million children from low- and middle-income families etc.

And many more countries, including Malaysia will go for this option as the conditions worsen further. To me, this is the speediest way to stimulate the economy, but the opposition will claim that the cash handout scheme could be meaningless in terms of Ricardian equivalence.

In the Japan’s Regional Promotion Tickets distributed in spring 1999, of which totaled 20,000 yen for every household with children aged 15 or under and elderly person, study by the Cabinet Office suggests that the consumption did increase, mainly in clothes and other semi-durable goods. The marginal propensity to consume (MPC) rose from 0.18 to 0.3. About 35% of the distributed funds was used for consumption.

And the case of Taiwan, preliminary study shows that the coupon program will add 0.64% to GDP. Based on the latest surveys, 46% of the respondents said they used their benefit to repay debt, 31% said they saved it and 41% said they spent it, mostly on daily essentials.

Traditional methods like tax cuts, infrastructure spending etc might work, but it has quite a lag effect. Perhaps, it is the high time for government of Malaysia to think out-of-the-box in coming up with innovative ways in the expected second stimulus package soon.