Press "Enter" to skip to content

Fighting the Recession Through Spending

  • The Philippine economy appears headed for a recession this year, after two decades of continuous growth.
  • Sometimes, a “black swan event”—a disaster that no one could ever see coming—like the coronavirus, could start a recession.
  • The textbook solutions to the recession are increased government spending and reduced interest rates so that more money can be pumped into the economy.
  • Visit The Financial Today’s homepage for more stories.

The Philippine economy appears headed for a recession this year, after two decades of continuous growth.

Recessions arise from the ground up.

In a modern economy, the cycle of recession begins with an event that shakes consumer confidence, usually involving large layoffs. This causes newly-nervous individuals to stop spending, saving money for an emergency. It drains company profits, which start laying off employees when they lose customers.

However, every laid-off worker was a customer of another. Thus those newly unemployed consumers clutch their savings even tighter, further weakening spending confidence and causing even more companies to lose revenue. It is called the recession’s negative feedback loop.

This process can be caused by any number of events, from a stock market downturn to a shortage of raw materials within a vital industry. Sometimes, a “black swan event”—a disaster that no one could ever see coming—like the coronavirus, could start a recession.

It would be hard to fight the recession that is to come. Young people and recent students are about to experience challenges in their careers. Retirees will need to consider their investments carefully while employees of all ages face an impending wave of layoffs. However, the government has the tools to fight off the crippling effects of a recession. It is just not going to be easy nor cheap.

The textbook solution: increased government spending.

The textbook solutions to the recession are increased government spending and reduced interest rates so that more money can be pumped into the economy.

With additional money in circulation, economic growth is stimulated and simultaneously acts as an antidote to the consumers’ normal reaction to hold on to their money and postpone spending or investment plans for fear that the economic recession may last longer than expected.

Income replacements for laid-off workers.

It’s not enough to guarantee a single payment for each Filipino, not even two, to push back on the recession. The government would have to guarantee those who lost their jobs due to the pandemic a short-term income.

Businesses are either closed by government order or by consumers who are worried they will be laid off next. This will not be resolved by one-time cash assistance. People don’t know when, or if, the next check might arrive so they tend to hoard and keep that money as much as possible.

The fear can be repressed only by certainty. The government can’t just give Filipinos one-time cash assistance to fight the coming recession, and get people to spend on establishments that remain open. They’re going to have to give consumers the confidence to spend money by assuring people this isn’t the last check they will see. Policymakers will need to focus on providing income replacements than providing one-time cash assistance to laid-off workers.

Revenue replacements for closed establishments.

The average business has capital on hand that could only last for a few days. The quarantine would cause many of these establishments to stay closed for months. They will need the means to cover their costs to survive.

Small businesses will scale back some costs by halting new orders, disconnecting services, and laying off workers—all of which have ripple effects on other businesses and consumers. There is nothing a business can do to avoid rent, taxes, basic utilities, debt, and other monthly bills being paid out. Without revenue coming in, those liabilities will bury most in a few weeks’ time.

Businesses deserve extraordinary relief right now because we have asked them for an extraordinary thing, as a nation. They were ordered for an unspecified period of time to cease operations entirely. The only thing that will effectively ensure that they reopen when quarantine lifts is a straightforward guarantee: we will make sure that you have the cash to meet your minimum operating requirements.

The fact is, fighting this economic war is going to be a unique challenge for economists and policymakers in our country. Turning off an economy and then on again is something new and exceptional. This will require solutions that are equal to the scale of the problem and its novelty.

Those measures are just the beginning. For the government to truly prevent the country from slipping into a deep recession or even depression, it will have to launch sustained, committed programs. But this can be done.

Be First to Comment

Leave a Reply