Tan Kin Lian - Perspectives How to deal with a recession
The mainstream and financial media makes a recession sounds like a big disaster. They sensationalize its impact. Let me explain. 

If the economy contracts by 2%, it means that the total output of the economy drop by 2%. It could mean that 2% of the workers gets unemployed. While this is serious to those who are impacted, it is not a big disaster. 

Actually, the number of unemployed people is larger. If the population increases by 2%, an additional 2% of young people will enter the workforce. They need the economy to grow by 2% to provide the jobs for these new entrants. 

Furthermore, let us say that another 5% of the workers are already unemployed. So, the total unemployed workforce could be 9% and not just 2%.  

If the unemployed people do not have any income, they have to cut down on their consumption. This could cause the economy to drop further. 

However, many countries have an state run unemployment benefit scheme. The unemployed people have access to the benefits, perhaps for one or two years, to tide over. They can survive on their unemployment benefit. 

For countries that do not have unemployment benefit, such as Singapore, the state should provide an alternative. I suggest that they be allowed to withdraw from the retirement savings, namely the Central Provident Fund. The amount allowed to be withdrawn should be capped by amount and allowed for a certain period, say up to a year. 

For those who have used up all of their retirement savings, they should be allowed to run a negative balance on their CPF account, up to a limit. This is better than forcing them to rely on loan sharks. Some of these loans will have to be written off when the borrower is not able to repay it from future savings. However, the write-off is likely to be bearable for the state.

If the workers are protected by unemployment benefit (in some countries) or withdrawal from retirement savings (as I have suggested), they will not face financial hardship. They can continue to meet their living expenses, and consumption will continue as normal. There is no need for the employed workforce to reduce their consumption in the fear that they might become lost their jobs in a shrinking economy.

I now suggest how the country can deal with unemployment that  runs at 10% for a longer period. A simple answer is to reduce the working hours of the employed workforce by 10%, say from 44 hours to 39 hours a week. A 10% reduction in statutory working hours will create 10% more jobs. 

As productivity grows, it is sensible to reduce the working hours over time. This will lead to a better living standard for all.

Each country has the means to deal with a recession or unemployment, but it requires the government to be more pro-active and to deal with this matter differently from the economic practice adopted in the past. 

​​​​​​​Tan Kin Lian 


 

Add Comment

---