Thu, Dec 04, 2008 - Page 8 News List

Consumer vouchers are no panacea

By Shu G.Wang 王卓脩

To battle the recession caused by the global financial crisis, the government is hoping to bolster the economy by issuing NT$3,600 in consumer vouchers to Taiwanese and their foreign spouses. However, this policy is basically a cash subsidy scheme and carrying it out in this economic climate will not only have a limited effect on the economy, but will also involve huge administrative costs as these cash subsidies will be given in the form of vouchers.

With no regulations regarding the use of the vouchers, consumers will be able to buy goods they would normally pay cash for. This is, therefore, a mere substitution of cash for vouchers, making the vouchers a form of cash subsidy. Some people have expressed concerns about consumers exchanging their vouchers, but those fears are groundless because anyone who tries to sell the vouchers would not make any money, or even lose money from doing so. Only subsidies in kind will encourage people to try to exchange their vouchers for cash. This is because subsidies in kind could create a situation where the subsidized goods do not meet the needs of the targeted beneficiaries, creating incentives for them to change their vouchers for cash — sometimes at a discount—for cash or other goods that suit them better.

All the current discussion about the vouchers being exchanged for cash is basically unnecessary. What the government needs to do is discourage the public from doing so by providing clear definitions of what would constitute fraud.

In economics, there is a term known as the marginal propensity to consume (MPC) that measures the increase in personal consumer spending that occurs when a consumer gains more disposable income. For those who are careful about how much they spend, the MPC will always be higher than zero and smaller than one. In other words, these people will save the unspent part of this extra income. For those who are habitually trapped in debt, the MPC will most probably be very close to one or even larger than one, which means that they could very well spend all this extra income or even borrow more money to spend.

Economic depression affects consumer confidence, which is also highlighted by a decrease in the MPC. Therefore, in times of economic depression, it is very common for more people to tighten their belts and try to save more money. Because people in Taiwan have always viewed saving money as very important, a one-off NT$3,600 subsidy is really just a drop in the bucket and will not have a major impact on spending habits. It is also conceivable that the multiplier effect of this subsidy will decrease as the MPC drops.

While cash subsidies are a negative form of income tax, the vouchers’ effect on the economy will diminish when the MPC decreases. Therefore, in a broad sense, they will have a limited effect on improving the economy. In addition, a product’s intersectoral input-output linkage with other industries is also an important factor in economic growth. This linkage has to do with the number of manufacturing processes involved in a the production of a product, from raw materials to the final finished product.

Sectors such as construction industry and automobiles are the best examples of industries that produce products with high levels of intersectoral input-output linkage. The economy will become much stronger if money is spent in such industries. However, overinvestment in such industries can also result in a chain reaction that leads to a more severe downturn.

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