If one plans to read only one economic analysis article for this year, this is it.
From time of time, economists are criticised as being out of their minds. Keynesian economic theory supporting governmental intervention to stabilise the economy was considered by mainstream economists at the time as being short-sighted.
Economic policies should aim for long-term stability, not short-term results. Keynes even burst out that "In the long run, we are all dead." Now Keynesian theory is backed by governments around the world.
Former chair of the Federal Reserve of the United States, Ben Bernanke's decision to launch several large Quantitative Easing (QE) programmes to save the US banking system after the destruction of the subprime mortgage market was considered suicidal as the policy would lead to runaway inflation and a sure collapse of the US dollar, critics said.
None of that happened and the world narrowly escaped the Great Recession. His daring theoretical challenge won him the Nobel Prize in Economics in 2022.
The helicopter money strategy which the Pheu Thai Party's 10,000 baht universal money handout essentially is, could be a game changer for Thailand. Why? I would like to caution readers that this article must be read with an open mind because this is academic analysis of the policy, not propaganda for a certain party.
First, let us understand what is "helicopter money"? This is a direct quotation of Nobel-winning economist, Milton Friedman, from his famous paper The Optimum Quantity of Money (1969).
"Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated."
If one changes the words "helicopter flies over this community and drops $1,000" to "government hands out 10,000 baht to all", wouldn't one get the same 10,000 baht universal handout policy?
To me, the economic impact would be the same, only the money distribution method is changed from a helicopter to a digital money transfer.
Second, what kind of economic impact did Friedman expect? He expected people would grab this once-in-a-lifetime free money and spend without thinking twice.
This would be a more efficient way than traditional monetary policies to increase aggregate demand, especially compared to QE. This is because money is put directly in the hands of consumers for rapid spending rather than channelling it through banks and large corporates.
Third, under what circumstances should this type of policy be introduced? When the economy is facing crisis? Not necessarily.
Helicopter money is appropriate for jump-starting the economy particularly in the wake of deflation and a long period of stagnation. It was suggested by Ben Bernanke to former Japanese PM Shinzo Abe as a way to jump-start the Japanese economy from a long period of low economic growth, known as the lost decade.
Fourth, why would Thailand need to increase aggregate demand? This is the argument I hear most. The economy is on a clear path to recovery from GDP growth of 2.6% last year to 3.4% this year and 3.6% next year (based on the IMF's latest projections).
Further, tourists are storming into Thailand at an unprecedented level. Helicopter money is therefore not necessary, some say. Worst of all, the policy will jeopardise fiscal discipline and spoil people who will come to rely on governmental assistance. A wicked political ploy, indeed!
Really? If 3-4 % growth is okay for the country, why do half the Thai adult population (25 million people) have to borrow to the max to survive, and 10.5 million Thais have to beg loan sharks for additional cash?
Do people not think that Thailand can do much better than 3-4% growth? My attached table explains the last sentence.
The table shows Thailand's industrial capacity utilisation rates compared with various selected countries.
A capacity usage of 80% is considered desirable, which economically strong countries are able to achieve. The rates are 72.6% and 72.3% for the Philippines and Indonesia respectively. At present, the country with the highest capacity utilisation rate in the world is South Korea with a perfect 100% rate.
Thailand is consistently below the world standard with a peak of 68.6% capacity utilisation rate in 2018. As of February, capacity utilisation is 61.9%.
## note to design: place graphic image hereThere are two ways to manage an economy -- reactive and proactive. If one thinks the economy is already as good as it gets, one would remedy those lagging behind with government support like a welfare card programme and universal basic income scheme.
But if one thinks the economy is below potential, you would go with economic stimulus programmes such as tax cuts, large government spending, QE and helicopter money.
Here is a good point to make a clear distinction between support programmes and stimulus programmes. The former is target-specific as it would be foolish to support those who can support themselves.
The latter, on the other hand, is non-target specific. If one wants to boost aggregate demand, it does not matter that the demand comes from the rich or the poor.
I hope readers have unbiased minds now and understand there are different types of programmes for different purposes. Not all fiscal policies have to be directed to the needy.
With only 61.9% capacity utilisation rates, shouldn't Thailand aim for 80% utilisation rates like elsewhere? If Brazil can achieve a 79.3% rate, why can't Thailand? If we were able to reach a standard level of capacity utilisation, our national industrial output would be raised by 30%. At such time, GDP growth of 5% would be an underachievement.
Helicopter money might be the answer to such a success as it could push aggregate demand to meet potential aggregate supply of 80% utilisation rate. Don't believe me? Read more of great economists like Milton Friedman and Ben Bernanke. I would like to note that if industrial output can be raised by 30%, wages would be raised as much as 30% as well because output per worker increases. One automatically gets two birds with one stone.
Risk? All policies are risky and costly. After turning down the idea of helicopter money suggested by Mr Bernanke, Prime Minister Abe went with Abe-nomics with big fiscal deficits and low interest rates. The cost is 31%-of-GDP increase in government debt. Unfortunately, Japan's GDP growth is still stagnant. Maybe the late prime minister should have listened to Mr Bernanke.
This article is not meant to convince readers to agree with a certain party's policy, but to open reader's minds to asking the right question about the best ways to manage the economy --by helping those being behind, or helping (almost) everyone move up front?