Monday, March 16, 2009

Weekly Hurriyet Column: The new crisis package and the news effect

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. This has been a really ill-timed column, as a couple of hours after I sent it in, the government announced that the package would be effective immediately, killing my news effect...

Reality does indeed bite. Before the ink had dried on last week’s column where I had hinted that growth was to contract more than the one to two percent currently expected, revisions to analyst growth forecasts began to appear, some which made it to the mainstream news media with catchy titles like “shocking revision to the economy”.

I will not dare to suggest that I was the inspiration to those revisions; on the contrary, I am relieved that my back-of-the-envelope forecasting model is in line with undoubtedly more complete ones, all of them (at least the ones I trust) suggesting a contraction in the vicinity of 5%. Fortunately, the government has responded with a new crisis package, in fact its fourth if we take its word for it.

To my knowledge, the only crisis package before was the aptly named “Sack Act”, which was ratified by the President at the end of February. The consensus economist’s view was that the law, which was basically a bunch of half-measures thrown in together, would not amount to much towards alleviating the economic contraction. Therefore, I felt really relieved that there were two other crisis packages I was not aware of. But I have yet to find out what those first two were about.

Leaving the past aside, while the details are somewhat sketchy, the new package hints that more than half a year after the first signs of the slowdown appeared, the government has finally got the diagnosis right. The package concentrates on measures in getting the credit flowing and consumers consuming again, two of the three main channels that have transmitted the global crisis to Turkey -the third is the trade channel, but that is harder to deal with in a short timeframe, especially in the midst of a global recession.

Despite the right diagnosis, we are still a long way from getting cured. In fact, for the credit channel, we do not have an idea what kind of medicine the government is to offer. Other than vague statements such as “steps towards improving credit flow between finance and real sectors”, there is not much else yet.

As for the consumption boosters, there is more clarity, albeit only marginally: A three-month reduction in the special sales tax (OTV) in automobiles and white goods. We are left in the dark on the size, timing and coverage of the reduction, so while even a quick and dirty assessment is impossible at this stage, the reduction does make sense from an economist’s point of view in that it is designed to give a temporary but quick jolt to consumption.

The news effect

While I am optimistic towards this new package, its method of announcement is definitely not very commendable. For one thing, I would have preferred more clarity on the credit mechanisms. As for the consumption measures, consumers will simply choose to delay consumption until the lower taxes are in effect. This is the well-demonstrated news effect, which every student of Macroeconomics encounters at some point. Therefore, the onus is on the government to kickstart the consumption parts of the package really quickly. Otherwise, half of the fourth crisis package will not amount to much more than providing empirical macroeconomists data for academic research.

Even if my optimism proves to be well-founded when the details of the new package emerge, I will have to ask: What took you so long? For, solutions in a similar vein have been around at least since October. Earlier action by the government could have also saved the Central Bank from taking on what I see as excessive risk, or at least rendered its monetary policy more effective. Go figure…

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