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.
The best example of this can be seen from the way the automobile industry in the US suffered immediately after the financial crisis was sparked from a troubled housing market. NT$3,600 is not enough to encourage people to buy a car or a house. Rather, it will likely be used to buy products from industries that produce daily necessities like food and clothing, which have less extensive connections to other industries.
Consumer electronics would not be a bad way of spending the vouchers, because the industry has an extensive linkage with other industries and also because many electronic items can be purchased for about NT$3,600.
Conversely, buying imported products only helps the economy of the export country. If consumers use their vouchers to purchase products from foreign companies that were manufactured by Taiwanese subcontractors, the foreign branded companies will gain most of the profit and the consumer vouchers will not have much benefit on Taiwanese manufacturers.
In addition, consumer subsidies are also inadequate to remedy the market and price distortion that occur as a result of cutthroat competition between upstream suppliers of consumer electronics in their battle for market share.
Finally, the issuance of vouchers involves the printing of anti-counterfeit vouchers, the enforcement of laws to combat counterfeiting, expensive printing costs as well as the mobilization of a large number of civil servants across the country to distribute the them. Problems will also be caused by having to verify the vouchers and mobilizing the financial system to allow businesses and the public to exchange the vouchers for cash.
Giving out vouchers or cash is not the best way of giving out cash subsidies. The best remedy would be to offer tax cuts. The National Tax Administration can utilize their existing computer database to easily carry out auditing or use the existing tax return system to give money to those who are less fortunate. The cost of such measures would be minimal.
Shu G. Wang is an associate professor of economics at National Chengchi University.
TRANSLATED BY DREW CAMERON
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