Ever since the 2008 economic crisis caused the downturn the world is still experiencing, Western nations have used two opposing methods to respond to these problems. One method proposes expansionary policies and an increase in spending on government aid, infrastructure and social welfare to stimulate stagnant economies.
Economist Paul Krugman is one key proponent of this school of thought.
The other method is to cut expenditure and shrink the government deficit to restore confidence in the bond market and avoid having the national credit rating downgraded, as this would cause overly high interest rates for public debt and make it difficult to raise money. At present, the ruling parties of the UK and Germany are representatives of this line of thinking.
Taiwan’s media seldom report in detail on these two approaches and their pros and cons. However, when the debate surrounding the year-end bonuses for retired military personnel, civil servants and public school teachers started, there were many calls for the government to decrease expenditure. Different groups cited what they called a “black hole of national debt” to demand that benefits to other groups get cut.
Given the nation’s traditional emphasis on saving, it is no surprise that an increase in national debt sparked such a reaction. However, judging from the way the UK economy and other EU economies have kept worsening, it is questionable whether it is good policy to emphasize cutting down public expenditure during sluggish economic conditions.
A few days ago, Chen I-chung (陳宜中), an associate research fellow at the Research Center for Humanities and Social Sciences at Academia Sinica, questioned the validity of the austerity craze currently prevailing in Taiwan. He made two main points: The first was that, apart from a drop in exports, one of the main reasons the economy is suffering is the lack of domestic demand, and cutting back on government expenditure is not conducive to increasing domestic consumption.
His second point was that the main reason for the financial deficit is that the government does not dare to tax the rich, which has led to a lack of state revenue — not that too much money is being spent on social welfare.
Expanding on Chen’s point, one of the main reasons for the lack of domestic demand is that the real incomes of wage earners are not increasing. This, in combination with skyrocketing housing prices, means that most of the money made by income earners is either being saved to buy a house or goes toward paying off mortgages. Given this, how can one expect the public to be able to consume more? Increasing the incomes of wage earners and providing cheaper rent or more reasonably priced houses are most likely the best ways to increase domestic consumption while calming public discontent.
Regardless of whether the government cuts down on public spending or opts to stimulate the economy, both of these policies will have significant effects that will be determined on how they are implemented and who they target.
Many pundits overseas have said that the most effective way to quickly stimulate the economy is to ease the burden on those with lower incomes because these people will spend money on daily necessities.
Conversely, the US has aimed most of its quantitative easing measures at investment banks and senior management in these banks use bailout money to cover up the huge holes they have dug. By contrast, average income earners that have been hurt by sub-prime mortgages have not received any of the benefits of quantitative easing measures and seen their houses foreclosed and auctioned off, as small business remain unable to secure loans. This is why, while the scale of bailouts in the US may seem huge, the actual rate of economic recovery has been painfully slow.