Category: Economics

Categories
Economics

[2622] A large open economy is pretty close to a closed economy

The United States Federal Reserve has come under criticism for its third round of quantitative easing – or QE3 – from many countries, especially emerging ones, who are concerned it will lead to the creation of asset bubbles that will cause problems within their economies.

What will be the effect of this QE3 on Singapore’s economy and how is it likely to affect its people in general?

In QE3, the buying of mortgage-backed securities by the Fed will increase the money supply in the US economy and, given the Fed’s policy of low interest rates, the additional money is intended to spur spending by individuals.

The idea is that this increased spending will improve the housing market as well as other industries, which are then likely to employ more workers, thus reducing unemployment. Unfortunately, this scenario is likely to happen only when an economy is a closed one – that is, there are restrictions on trade and capital flow across countries. [Sundaram Janakiramanan. QE3 and the S’pore economy. Today. November 1 2012]

But, but, but… is it not that a large open economy that the US is is pretty much close to a closed economy, professor?

Categories
Economics Science & technology

[2619] Why are critical values always at 1%, 5% and 10%?

I was running some regressions at work just now and I realized my overdependence on computers had made me forgotten how to calculate certain statistics manually. Modern regression softwares automatically calculate various statistics less than a second and I hardly think of what happens in that virtual blackbox.

But just now, I was following up on a technical economic debate which revolved around some statistics where the report reported its t-stats but not its probability. I was curious about its probability and so, I had to translate the t-stats into probability manually by reading the t-stats distribution table. I struggled at first. I found myself embarrassed at my inability to read the table after 6 years worth of education in economics, and another 3 or 4 years in econometrics. But I managed. I guess, it is like riding a bicycle. Once you learned it, you know it. It may take some stimulus to remember if you have not been riding, but you can really do it.

One thought came to my mind after I was done with that.

I know there is a criticism about whether the critical values—the 10%, the 5%, etc—means anything. Indeed, the critical values are rules arbitarily made up out of convenience. It is highly possible that if the calculated value breaks a particular critical value, a hypothesis can still be true despite rejection. It is all a matter of probability and probability does not work so discretely as the typical critical value rejection rule suggests. If there is a 99% possibility of a hypothesis is untrue, that 1% can still pan out to be true however unlikely. (Let us not get into the Error I and II debate)

Too many people like yes and no answer. The rejection-rule gives them that, rightly or wrongly.

But I am thinking, why, throughout the economics and econometrics world, are the critical values always the same numbers? It either 1%, 5% or 10% (I have seen 25% but… ehem). Why not 4.7%, or 7.1%?

I think I found an answer to that after looking at the t-stats table for the first time in at least 2 years.

Powerful and cheap computers were only available in the last decade of the 20th century. Because of this, many students in the olden days relied on tables for their rejection rules. Tables being tables on pieces of papers, space was at a premium. So, publishers of tables could only print sexy numbers and obviously not too many numbers over the natural number space, never mind real numbers. Either you use the tables, or calculate the critical values yourself, which is a pain.

So, that convention sticks after awhile. From early econometricians to students of econometrics, the same tables get used over and over again. It becomes a tradition.

Maybe?

Categories
Economics Politics & government

[2617] Is the Selangor state government being a hypocrite by owning a stake in IPPs and highways?

Member of Parliament for Rembau, Khairy Jamaluddin yesterday repeated the accusation he made at a forum organized by Chevening alumni association last week. He said that Pakatan Rakyat is being hypocritical about its criticism of government policy regarding highways and independent power producers. As he pointed out, PR opposes these policies to the point that they want to nationalize those highways and power plants but at the same time, the Selangor state government holds shares in those private companies which operate the assets in Selangor. So, the state government enjoys dividend from the investment.

First off, I oppose government involvement in these matters and I balk at nationalization. At the same time, I dislike monopoly. These two concerns force me to adopt a gray area because while these highways and power plants are now operated by private companies (the definition private is increasingly blurry these days with state funds owning significant shares of these private companies), they were granted excessive monopoly power or overly generous concession at the expense of consumers, especially in terms of electricity generation in the past.

So, I do not want the government, state or federal, to nationalize highways or power plants, and I do want to see those monopoly power granted by the government curb. So, I am stuck. On these matters, I will bark at both both Barisan Nasional and Pakatan Rakyat’s policy. The former is responsible for granting the monopolies and perpetuating the status quo with limited improvement possibly because of political entanglement with the business community and the latter trying to do too much to overcome those monopolies with too much state power.

And I do not really trust BN in fighting PR because BN has proven to oppose PR’s proposal only in words but in action, they would do what PR proposes anyway. Proof: the Eastern Disperal Link in Johor which the government took over and abolished the toll. The EDL has another disturbing dimension to it: it is really a bailout of MRCB by the government. MRCB was in trouble because the government did not have the political will stick to its words. This by far is not the only example.

But, on the issue at hand, I am unsure if it is hypocritical of the Selangor state government to hold a stake in companies operating the same highways and power plants that PR proposes for the government to take over, as Khairy accused.

Would it not be wise for the Selangor state government under Pakatan to own interest in these power plants and highways in Selangor so that the state has a say in the respective companies’ board of directors?

One has to remember that the reason PR proposes to take over these assets is that PR claims that the companies or rather the arrangements which allowed these companies to profit in the first place are burdensome to Malaysians. PR claims that nationalization is a cheaper option to the status quo. As far as I understand it, it is not really about some socialist dream. It is really a matter of which is cheaper, which I think is a technocratic approach. Technocratic in the sense that it is number driven.

I actually am swayed by that technocratic argument but not to the point of nationalizing those private assets. I say so because nationalization is not the only conclusion to that technocratic argument. I am sure if we sit down and think about it, there are multiple ways which any party can achieve so.

One way is to have a say in the Board of Directors of those companies. The state government can voice its discontent over any possible revision to prices charged to consumer. This has its own conflict of interest issue—if one is profit-driven, then the state itself may want to optimize its returns; in this sense, Khairy is right—but like I wrote, it is also a way to influence companies’ decision from within towards the objective of reducing burden to Malaysian consumers.

Is that hypocritical?

On the net, maybe yes, maybe not.

Now, I do not know whether the Selangor state government has a seat in the Board of Directors or if the state does, then whether that rep’s voice is in line with PR’s rhetoric. If Khairy’s accusation is to be credible, I think he has to go one layer deeper to the dynamics of the Board of Directors.

Categories
Economics

[2610] GDP measures output, not welfare

It may seem strange that GDP rises if there are more road accidents. This is partly because  of greater activity by emergency services. On the contrary, one would intuitively like to see GDP diminishing in such circumstances. But this would be to confuse a measure of output (GDP) with a measure of welfare, which GDP is not. At most, GDP is a measure of the contribution of production to welfare. There are a great number of other dimensions to welfare that GDP does not claim to measure.

[…]

While the national accounts system has the above major limitations, it should not be criticised out of misunderstanding about its objectives and definitions. For example, many people fail to understand why GDP does not fall following major natural catastrophes (or terrorist attacks). This is because they misunderstand the definition of GDP, which, as we have seen, measures output during a given period. People tend to confuse GDP with the country’s economic wealth. Undoubtedly, major calamities destroy part of the economic wealth (buildings, houses, roads and infrastructure), but they do not, per se, constitute negative production and so do not directly contribute to a decline in GDP. Destruction can indirectly affect production in a negative or positive way. When a factory is destroyed it ceases production, but it also has to be rebuilt and this constitutes production. For this reason, paradoxically, it is possible for a natural catastrophe to have a positive impact (in the purely mathematical sense of the word “positive”) on GDP. [Page 37. François Lequiller. Derek Blades. Understanding National Accounts. OECD Publishing. 2006]

Categories
Economics Politics & government

[2609] Income equality. Isn’t it wonderful?

Since coming to power 14 years ago, Mr. Chávez has manufactured dependency on a scale unseen elsewhere in the post-Soviet world. He has nationalized farms, steel mills, cement factories, telecoms and the assets of foreign oil companies. His government subsidizes everything from oil to milk. Government spending, much of it on cheap housing, has risen at a blownout rate of 30% in the past year alone.

The result? Chronic shortages of everything from oil to milk. A 24% inflation rate. A homicide rate that in 2011 clocked in at 67 per 100,000 people-nearly five times the rate in Mexico. Latin America’s lowest growth in GDP per capita over the past decade, despite record-high oil prices. Constant devaluations. The diversion of an estimated $100 billion in recent years to a slush fund controlled exclusively by Mr. Chavez. Rolling blackouts. A credit rating on a par with Ghana’s and Bolivia’s. The steady degradation of the country’s once formidable oil company, PdVSA.

The only bright spot, according to the BBC, is that Venezuela “now boasts the fairest income distribution in Latin America.” Isn’t that wonderful? [Bert Stephens. Chávez and the 47%. The Wall Street Journal. October 10 2012]