Tue, Jan 20, 2009 - Page 8 News List

Vouchers are subject to ‘paradox of thrift’

By Eric Wang 王釗洪

Faced with the global financial crisis and the economic downturn, Council for Economic Planning and Development Minister Chen Tain-jy (陳添枝) suggested a consumer voucher plan that would result in NT$3,600 worth of vouchers issued to eligible citizens and residents based on previous plans in other countries that were not very effective.

Since then, the media have run almost daily reports on how consumer vouchers are going to save the economy.

However, there have also been many “anti-spending” reports.

Many companies that may have spent tens of millions of dollars on annual banquets and year-end bonuses in the past have this year either downsized such spending or canceled it altogether.

In the same way, many workers that used to spend NT$200 or NT$300 on daily lunches in a restaurant have now cut their spending and are instead only spending smaller amounts on lunch boxes.

Furthermore, some business leaders have downgraded their seats from business to economy class when traveling on the Taiwan High Speed Rail and they may also have reduced the number of business trips.

This phenomenon is a paradox.

The government claims that we should spend and consume more in order to expand domestic demand and boost the economy.

SPENDING MORE

If that claim is correct, then companies should spend more money on annual banquets and bonuses.

If all the companies listed on Taiwan’s stock market or over-the-counter markets were to spend tens of millions of NT dollars on company dinners and year end bonuses, the business of restaurants and places of amusement would pick up and their employees would have money to spend, which would lead to a multiple effect.

In the current economic downturn, businesspeople certainly hope that the public will be able to spend more money on their products or services in order to boost their business.

UNWILLING

But to reduce costs, they themselves often try to save money whenever they can, and they are unwilling to purchase products or services from other companies.

Meanwhile, high-tech and other white-collar workers with high incomes are nervous about becoming unemployed or being forced to take unpaid leave.

According to the government’s logic, if these groups were to spend a lot of money immediately, the economy would take a turn for the better and they would be able to keep their jobs.

The consumer vouchers were issued as planned on Sunday.

SAVING

I think that after they collect their vouchers, those with medium or high incomes will probably continue to save what they can and spend their vouchers while saving the money that they had originally planned to spend.

It is precisely this phenomenon that the economic concept of the “paradox of thrift” refers to: If everyone saves more money during times of recession, they will actually become poorer as the economy slows down.

If the Council for Economic Planning and Development wants to ensure that the consumer vouchers really have the intended effect on the economy, it should first consider how to resolve the “paradox of thrift.”

Eric Wang is a professor in the Department of Economics and Graduate Institute of International Economics at National Chung Cheng University.

TRANSLATED BY EDDY CHANG

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