Categories
Economics Society

[2505] Limits to wisdom of the crowd

Liberal Malaysians in general are happy to stress on the wisdom of the crowd. In a context where the government holds a condescending attitude towards the public and in times when information spreads faster before the government can act, it is an appealing point to subscribe to.

Travel around and try to talk politics among critical and liberal urbanites especially, and somebody in that circle will remind you that the public is not stupid. Whether it is an honest opinion or words tailored to appeal to the post-2008 crowd, even Prime Minister Najib Razak said the days of government knows best are over. That is an acknowledgement of the idea from the very institution that traditionally sits opposite of the liberal crowd in Malaysia.

In heated political discussions, it is easy to take the black-and-white approach and engage in hyperbole stating that the crowd or the public is always right. Put a liberal and a statist in the same room and the game is on.

The truth is more nuanced. The crowd can be brilliant at times, and utterly stupid at others. The validity of the idea depends on the situation at hand. The examples that strengthen and undermine the idea exist all around us if only we care to see.

The chaos at the KTM Komuter train station at KL Sentral on Thaipusam Day provides contradictory examples all at once.

The trains were late. The platform was full of impatient commuters. When the trains arrived 30 minutes late, those on the platform found the coaches were full. If that did not make things bad enough, everybody wanted to go Batu Caves. With the roads closed, the trains were the most convenient means of transportation for ordinary folks.

The adjective convenient, is of course only used in superlative terms. There is nothing convenient about the service provided by KTM Komuter. For those who depend on the service daily, every day is a battle to be won in the scrappiest of all manner. The least painful way to go through the day is to embark and disembark as quickly as possible. This was what the crowd did exactly on Thaipusam day at KL Sentral.

The crowd did it by ignoring one unrealistic policy introduced by KTM and the government: the ladies’ coach. The ladies’ coach is meant to address complaints about sexual harassment that have happened before. The intention is good. Yet as with any policy, there will always be sacrifices that need to be made and the ladies’ coach policy sacrifices efficiency.

It just takes too much time to choose coaches to start with. For those who travel together, like families, friends or lovers, separation on the train is a hassle. And at least in theory, because the ladies’ coach is meant only for women and children while everybody is free to board the other coaches, the other coaches will be filled up quickly while the ladies’ coach will be relatively empty. Its inaccessibility effectively reduces the capacity of the train. All that means slower embarking, slower disembarking, and longer waiting time on a crowded platform.

With an already lamentable train service and a spike in ridership, something has to give. The crowd throughout the system implicitly and collectively decided to ignore the ladies’ coach policy and treat all coaches as the same. In doing so, they immediately improved the train efficiency by themselves without relying on good-hearted bureaucrats and politicians holding public office, whom by the way do not ride the KTM Komuter train and are essentially divorced from the reality on the platform.

That is one point for spontaneous order arising from the wisdom of the crowd. In the ladies’ coach, nobody minded men boarding it because it solved a big problem painlessly while the KTM policy, if adhered to, only exacerbated the issue at hand. All they wanted to do was to get on the train and get to Batu Caves either as tourists or Hindu devotees.

At the other end of the spectrum is a thoughtless mob of sheep.

The sun was strong but it was on its way down. The visitors were now tired and weary. They began to head to the Batu Caves station so that they could get back to the city. In the station, the crowd packed up a small compound. Even as there was no more space to stand, more came in.

With nowhere to go and too many standing too close together, restlessness set it. Some was pushing and shoving, struggling to get into the train, which was characteristically late. Some were shouting and others were panicking, making the scene surreal. Instead of spontaneously finding the solution, they were clueless until they made a danger out of nothing.

KTM officials and the police were there to monitor and eventually address the situation, albeit poorly. Nevertheless, they did prevent the situation from turning worse.

The fact that it did not turn worse when it easily could have, and the fact that the situation did not need to be like that if there had been proper crowd management, highlight the limit of what a crowd is capable of.

The same contradictory lessons from the very bottom of society can be applied nationally too. The majority knows what corruption is when they see it. Given a chance at the ballot box, they will possibly do the necessary to address it, as they had done in 2008.

On the other extreme, the majority is happy to receive handouts from the government but does not realize that somebody has to pay for those handouts. Either higher debts or higher taxation, it will come sooner or later. The separation between cause and effect in public finance is so great that they cannot see what these handouts mean on a wider scale.

With the folly of economic populism coupled with a magnified replication of what happened at the Batu Caves station, the wisdom of the crowd will be harder to argue for. The wise mob of Greece resorted to sticks, stones and Molotov cocktails wanting more when there is no more, with only the few to reason their way through with less.

This is a piece of advice to those liberals referred to in the beginning. They who overly emphasize the wisdom of the crowd need a more nuanced view of the argument.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on February 26 2012.

Categories
Economics

[2502] A too convenient instance of government spending

The Malaysian GDP figures for the 4th quarter came out today, with the full year growth being slightly above 5%. Judging by the components of the GDP and their respective growth, I find the growth rate of 5% to be too convenient for the government, which projected the 2011 economy to grow between 5% and 6%. The reason is that government spending grew by close to 17%.

I shared this last month, and the 4th quarter growth for government spending was even higher than the previous quarter: 23.6% from a year ago.

I did a little calculation just now while I was finishing a GDP report for my bank. I found out that if government spending had not grown at all, that would have shaved almost a complete percentage point out of the 5% annual GDP growth. If the spending increase had been slightly more modest, the overall growth would have missed the government’s target easily. Really, it would not take much to miss the target.

I know there is a low base effect given that there was hardly any government spending growth in 2010. It is very likely that spending planned for 2010 was postponed to 2011.

But the government spending growth is still convenient, too convenient, nonetheless. This may appear to be a case of perverse incentive.

It is much like a case in Liar’s Poker:

One trader remembers that ”Lewie would say he thought the market was going up, and buy a hundred million [dollar-worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course the market would then go up. After he had driven the market up, Lewie would turn to me and say, ”˜See I told you it was going up’”¦”

Categories
Economics Humor

[2501] Happy Valentine’s day

Via Greg Mankiw, from Elisabeth Fosslien.

p/s — Oh, Dr. Goose rounds up the econosphere’s Twitterverse:

Who says there’s no romance in monetary stimulus? Those outside of the Twitter econosphere may not know that the network was recently swept by a wave of #FedValentines, as the trend was hashtagged. It began with Penn economist Justin Wolfers, who tweeted: “Like fiat money, our love is built on trust.” White House economic adviser Austan Goolsbee chimed in: “Roses are red, violets are pink, don’t listen to gold bugs — no one cares what they think.” My personal favorite belonged to the FT’s Alan Beattie: “I’d like to borrow you overnight and then hold you to maturity.” Not to be outdone, Dr. Goose contributed: “If you’re not ready for a liquidity injection, I’ll understand.”

Categories
Economics

[2500] Will there be any saving in the MRT setup?

Here is a microeconomic contract theory puzzle with the incentives do not quite line up perfectly.

According to the Financial Daily today, the MRT project delivery partner (a joint venture between MMC Corp and Gamuda) will be punished by the project owner if the cost of the project exceeds 15% of some base. Any cost overruns beyond that limit will be borne by the PDP instead of being passed to the project owner, which really is the government.

In StarBiz today, it is reported that any cost saving will go directly to the government.

This makes me wonder, will there be any saving? What incentive is there to discourage the PDP from running 14.99% above the agreed base. Is it not rational for the PDP to eat up any saving that might exist, leaving nothing for the government?

But I guess we can take comfort that a cost overrun is a likelier outcome than any saving. After all, the last time a similar project was carried out in Kuala Lumpur more or less 10 years ago, the cost ran out of order so much that the developers had to be bailed out by the government.

Some comfort, eh?

Categories
Economics

[2499] Foreign exchange reserves in terms of imports? Non! Non! Non!

Does anybody know why whenever there is a discussion on foreign exchange reserves, it is typically measured in terms of imports and external debt financing?

I took these metrics for granted in the past. They seem intuitive at first. It provides a humanizing reference to what can be meaningless large numbers. But they lose their relevance after one reminds oneself of the purpose of foreign exchange reserves.

When one measured in these terms, there is an implicit understanding that the foreign exchange reserves are used for imports and external debt financing, an understanding which is false. The foreign exchange reserves are held by the central bank and the central bank is neither responsible in any payment with respect to export and import activities nor responsible in the repayment of external debts per se.

If the foreign exchange reserve is stated within the context of the ability to sustain for example 10 months of imports, does it really do so? If the importers, which is not the central bank by the way, suddenly face a liquidity crunch and unable to pay for its current and future imports, will the large foreign exchange reserves help? No, unless the central bank suddenly becomes the economy-wide importer, which diverges so far away from the traditional central banking functions.

If the foreign exchange reserves are stated within the context of the ability to finance for example 10 months of external debt, does it really do so? If private debtors suddenly go bankrupt, will the central bank take over those debts on behalf of those private debtors? No. The central bank is not a financier of private individuals or businesses.

And if the government suddenly finds itself unable to finance its debts through traditional means, either through borrowing or taxation, will the central bank step in to pay the government’s debt (or specifically, Treasury’s debt in order to clarify the fact the when one speaks of government debt, it really refers to the government sans the central bank, and the Treasury essentially manages government-sans central bank-finance)? Not really. The government or more specifically, the Treasury does not and should not have access to the foreign exchange reserves controlled by the central bank.

The central bank can of course buy treasury to help finance government deficit. But it remains that the government borrows from the central bank. The government does not take the money and pretends that the foreign exchange reserves are some kind of treasury money saved in an account at the central bank. In fact, the central bank and the government collectively do not need the foreign exchange reserves to finance government deficit in time of crisis. The central bank can do so cheaply through debt monetizing process, i.e. through the printing presses or more accurately, money created electronically.

In short, foreign exchange reserves are not government savings.

Some governments take the foreign reserves and use it to fund a sovereign wealth fund. I suppose that is a somewhat more efficient use of the money, but that is essentially an institutional abuse.

The function of the foreign exchange reserves remain for the operation of — tada! — foreign exchange, especially for a country that runs on controlled foreign exchange regime. The reserves are huge exactly to defend the currency if need be. What has happened in Malaysia is that there is a hangover from the 1990s financial crisis. Malaysia continues to have one of the biggest foreign exchange reserves in the whole world, and that is not exactly efficient.

This is especially bad when laypersons catch up with the jargon. There have been several instances in the past when a drop in foreign exchange reserves are taken by some in the public as ominous outflow of funds from Malaysia. It makes discussion on the matter completely off track and irrelevant from the very beginning, just because everybody uses the jargon and nobody understands the function of the reserve properly.

So, somebody, please, share with me why foreign reserves are typically stated in context of imports or external debt.

I think if the metrics is used to convey what I think most individuals want to convey, there is another better concept that should be used. It is the balance of payment. The measurement in terms of imports still does not fit the bill exactly, but at least, it comes closer to being accurate than measuring the foreign exchange reserves in terms of imports will ever be. But the balance of trade is not money owned by any one person. It is money owned by the whole economy.