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Is the "cash payout plan" the most effective solution for stimulating the economy?

Yoshihiko Fukushima
Professor at Faculty of Political Science and Economics, Waseda University

Financial instability triggered by the subprime-mortgage problem due to the decline in housing prices in the Unites State has drastically increased since the bankruptcy of Lehman Brothers last September. Besides anxieties for weak financial institutions in Europe and the United States, this instability generated worldwide credit crunch and steep fall in stock prices. In the United States, which is the origin of the current financial instability, Emergency Economic Stabilization Act of 2008 was enacted at the beginning of last October to soothe credit uneasiness. According to this act, bad loans will be purchased with public funds of up to 700 billion dollars. Further Federal Reserve Bank (FRB), European Central Bank, and other central banks all over the world repeated large cut of interest rates to eliminate credit uneasiness, but the global financial instability still remains. The global financial instability is also exerting serious influence on real economy. International Monetary Fund (IMF) estimates Japan's annual economic growths for 2009 is minus 0.2%, that of the Euro zone is minus 0.5%, and that of the Unites States is minus 0.7%, which implies there is a high risk that major developed countries will go into recession. Under such a circumstance, Aso's administration proposed the "cash payout plan totaling two trillion yen" as an effective solution for stimulating the economy. This paper discusses the macroeconomic effects of the cash payout plan proposed by Aso's administration as a measure for stimulating the economy.

Macroeconomic effects of the cash payout plan

Now, the administration considers implementing the cash payout plan totaling two trillion yen as effective solution for boosting the economy. In January 13, the second supplementary budget for fiscal 2008 including the two trillion yen cash payout plan was passed in the Lower House by a majority of the ruling party and others. Although the extra budget is expected to be rejected in the Upper House, it will be enacted because the Constitution gives final say to the Lower House on budget decisions when the two chambers are at loggerheads. Finally the cash payout plan will be enforced as a measure for stimulating the economy. In the cash payout plan proposed by Aso's administration, those over 65 years old and below 18 years old are given 20,000 yen and the others are given 12,000 yen. For example, a family having two children below 18 years old is given 64,000 yen in total. Though the administration expects the cash payout plan generates a macroeconomic effect called the multiplier effect in Keynesian economics, it is doubtful how much the effect will stimulate the economy. The multiplier effect is the macroeconomic effect where an increase in income due to some reason will in turn generate demand. In other words, a rise in income increases goods and services consumption (demand), which expand production. An expansion of production implies an increase in income of workers engaged in goods and service industries, which further stimulates consumption. Such an induced effect on economic growth is called the multiplier effect in Keynesian economics. If people do not spend increased income for consumption, however, no induced effect appears. The degree of the multiplier effect largely depends on how much part of increased income people spend for consumption. If we don't spend the temporally gained income and save it all for the future, no multiplier effect occurs. Just like the current case, temporal cash payout to people was implemented in the form of a "regional promotion ticket" by Obuchi's administration in 1999, the time when there still remained the aftereffects of the burst bubble. According to the estimate by the then Economic Planning Agency, a little above 60% of the regional promotion tickets were used for savings, while a little under 40% were used for consumption. Assuming that 40% are used for consumption in the current case, the multiplier (economic) effect of the 2-trillion-yen cash payout plan will be theologically around 3.3 trillion yen. After subtraction of two trillion yen payouts in total, the actual macroeconomic effect will be around 1.3 trillion yen. This amount, of course, is calculated based on the assumption that people spend cash payouts enough to encourage consumption. If people spend none or only a little of the cash payouts, the multiplier effect cannot be expected, and actually the macroeconomic effect itself will be very little. On the Yomiuri Shimbun last November, this fear was suggested by the result of a questionnaire conducted by private think tank to 1000 men and women nationwide. According to the result, most people spend cash payouts for savings and loan repayment, while 12% spend the entire cash payouts and 8% spend half for purchasing unplanned goods. It concludes additional consumption encouraged by the cash payout plan is limited to 320 billion yen. As for necessity of the cash payout plan, the nationwide research (via telephone) conducted by Yomiuri Shimbun in January 9 through 11 shows 78% agree "the government should withdraw the cash payout plan and devote the resource to employment, social security, and other purposes" and only 17% disagree withdrawal of the cash payout plan. Besides additional office expense each local government should incur in association with cash payout, it is unclear cash payout is implemented promptly because payment schedule largely depends on paperwork ability of each local government. That is, the 2-trillion-yen payout plan is doubtful for the macroeconomic effect, imposes a heavy burden on each local government that is actually responsible for payment, and gets little agreement from people. In spite of these, Aso's administration is pushing ahead with the cash payout plan.

Is there any more effective economic policies than the cash payout plan?

Though some say a total amount of two trillion yen should be spent for employment measures and enhancement of social security rather than cash payout, my opinion is cut in the consumer tax rate. Annual revenue from consumer tax over the last 10 years ranges from 9.5 trillion to 10 trillion yen. Assuming our consumption behavior is not affected by seasonal variations, 2-trillion cut in consumption tax is equal to reducing the consumption tax rate to 0% for about two and half months. Considering that 2-trillion revenue from tax income corresponds to 40-trillion consumption, a reduction in the consumption tax rate to 0% brings about far greater a macroeconomic effect than the cash payout plan. Besides, those who are most promptly react to the consumption tax rate reduced only for a limited period are consumers planning or thinking to purchase expensive goods including houses, cars, and sophisticated home electric appliances. Actually just before April 1997, when the consumption tax rate was raised from 3% to 5%, many people were rushed to purchase houses and cars. A reduction in the consumption tax rate can decrease the government's revenue from the consumption tax more largely than initially expected, while demands or purchase of expensive goods such as houses and cars will increase. Especially, the housing and construction industry as well as auto industry are most negatively affected by the current financial crisis. I think a reduction in the consumption tax rate for a limited period is more favorable than the cash payout plan that is opposed by many people.

Yoshihiko Fukushima
Professor at Faculty of Political Science and Economics, Waseda University


Professor at Faculty of Political Science and Economics and the Okuma School of Public Management, Waseda University. The author graduated from Faculty of Economics at Keio University in 1988. In 1990, he completed Master's program (Master of Arts in Economics) at Graduate School of Economics there and then joined Salomon Brothers Asia Limited. After work in Tokyo, New York, and London, he completed the Ph.D program at Department of Economics, Stockholm University, Sweden, in 2003. After the post as a professor at Nagoya University of Commerce & Business, he took the present post in 2007.