Category: Economics

Categories
Economics

[1373] Of 50 basis points cut!

Whoa!

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.  Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year.  However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.  The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco. [Press Release. Board of Governors of the Federal Reserve System. September 18 2007]

Categories
Economics Liberty

[1369] Of Greenspan criticizes Republicans

Through the New York Times, a beautiful quotable quote:

They swapped principle for power. They ended up with neither. They deserved to lose… [The Age of Turbulence: Adventures in a New World. Alan Greenspan]

The article starts like this:

WASHINGTON, Sept. 14 — Alan Greenspan, who was chairman of the Federal Reserve for nearly two decades, in a long-awaited memoir, is harshly critical of President Bush, Vice President Dick Cheney and the Republican-controlled Congress, as abandoning their party’s principles on spending and deficits. [Fed’s Ex-Chief Attacks Bush on Fiscal Role. New York Times. September 15 2007]

The statement by Mr. Greenspan must remind everybody of another quotable quote of old that has been allegedly made by Benjamin Frankin:

Any society that would give up a little liberty to gain a little security will deserve neither and lose both.

Categories
Economics

[1367] Of diesel subsidy removal and tradable coupons

On Tuesday, I expressed my disbelief of NST advocating for an elimination of fuel subsidy based on economic reasoning. Mainstream media controlled by UMNO is not known for its economic rationale but are only good at sucking up at anything that UMNO says. Therefore, I opined that the support is possibly due to the NST sucking up to the power that be. Today in the NST, it is revealed that the government of Malaysia is conducting a study on the effect of diesel subsidy removal.

KUALA LUMPUR: The government is studying the implications of removing the diesel subsidy, but has not decided to increase the price of petrol following rising global crude oil prices, the prime minister said.

Datuk Seri Abdullah Ahmad Badawi said while a decision had to be made on the subsidy for diesel, the needs of the poorest consumers, especially low-income fishermen, had to be considered. [Study on removal of diesel subsidy. New Straits Times. September 14 2007]

While I may be disgusted by the NST’s move, I would like to applaud the government’s intention to remove diesel subsidy. The current fuel subsidy in Malaysian is an awfully blunt tool that do more harm than good. I have suggested that the government should reduce tax instead of maintaining subsidy.

If the government wishes to eliminate the subsidy but still would like to support certain groups like fishermen, that is easily done. There is another alternative to the current fuel subsidy policy and the answer is coupons. Specifically, tradable coupons.

The government could simply distribute fuel coupons to these groups, presumedly deserving of it, and let members of the groups to either purchase diesel with the coupons or sell it for hard cold cash at any price. The distribution of coupons however does still constitute as subsidy. Yet, the beauty of this policy is that it curb smuggling of subsidized fuel: smugglers could only purchase subsidized fuel through coupons and rational coupons holders would sell it close to market prize in most cases.

What is more important is that this precise policy is designed to accurately channel specific funds to specific identified groups, instead of a blanket subsidy practiced now in Malaysia which the society at large suffers deadweight loss. A coupon based subsidy policy reduces the deadweight loss, enabling more precious resources to be invested in productive fields like education.

Categories
Economics

[1366] Of Stiglitz is a fan of Malaysia

I seriously think Stiglitz is a big fan of Malaysia. His latest column at the Guardian has nothing less than high praises for the country (hat tip to the Economist’s View):

August 31 marked the 50th anniversary of Malaysia’s Merdeka: independence after more than 400 years of colonialism. Malaysia’s peaceful, non-violent struggle may not have received the attention that Mahatma Gandhi’s did in India, but what Malaysia has accomplished since then is impressive – and has much to teach the world, both about economics, and about how to construct a vibrant multiracial, multi-ethnic, multicultural society.

The numbers themselves say a lot. At independence, Malaysia was one of the poorest countries in the world. Though reliable data are hard to come by, its GDP (in purchasing power parity terms) was comparable to that of Haiti, Honduras, and Egypt, and some 5% below that of Ghana. Today, Malaysia’s income is 7.8 times that of Ghana, more than five times that of Honduras, and more than 2.5 times that of Egypt. In the global growth league tables, Malaysia is in the top tier, along with China, Taiwan, South Korea, and Thailand.

Moreover, the benefits of the growth have been shared. Hard-core poverty is set to be eliminated by 2010, with the overall poverty rate falling to 2.8%. Malaysia has succeeded in markedly reducing the income divides that separated various ethnic groups, not by bringing the top down, but by bringing the bottom up.

Part of the country’s success in reducing poverty reflects strong job creation (pdf). While unemployment is a problem in most of the world, Malaysia has been importing labour. In the 50 years since independence, 7.24 million jobs have been created, an increase of 261%, which would be equivalent to the creation of 105 million jobs in the United States. [The Malaysian miracle. Joseph Stiglitz. September 13 2007]

This is not the first time he sings for Malaysia. He has mentioned Malaysia several times in his books too. If I am not mistaken, two of those books are The Roaring Nineties and Globalization and Its Discontent. There is possibly one big reason why he loves Malaysia: country’s audacity to say no to IMF during the Asian Financial Crisis in the late 1990s and then came out well and alive.

There might be some background to this article too: he was in Malaysia recently for a public lecture organized by Khazanah Nasional Berhad, the government of Malaysia’s investment arm. That might have sincerely encouraged him to write something about Malaysia.

Nevertheless, while Malaysia may have achieved what many others failed, there are others that are more successful than Malaysia. I fear Stiglitz’s praises for Malaysia may come a little too early. The future beacons and Malaysia must adapt to the brave new world, or risk being overtaken and left behind by other countries.

Categories
Economics

[1365] Of dear minister, it takes two to tango

A minister on TV earlier refutes chicken vendors’ assertion that there is shortage of chickens in the market by pointing out that chicken supply has increased by 120%. I wonder why he did not mention how high the chicken demand has increased as we enter Ramadan?

And oh boy. It annoys me to no end when people within the mainstream media as well as the government talk about prices without any understanding or worse, disregard of economics.