Category: Economics

Categories
Economics Politics & government Society

[2487] Religious conservativism and priorities

Words for Malaysian religious conservatives, maybe especially for Hasan Ali and his sympathizers.

In November, Hazem Salah Abu Ismail, an independent Salafist cleric and presidential candidate, was asked by an interviewer how, as president, he would react to a woman wearing a bikini on the beach? ”She would be arrested,” he said.

The Al Nour Party quickly said he was not speaking for it. Agence France-Presse quoted another spokesman for Al Nour, Muhammad Nour, as also dismissing fears raised in the news media that the Salafists might ban alcohol, a staple of Egypt’s tourist hotels. ”Maybe 20,000 out of 80 million Egyptians drink alcohol,” he said. ”Forty million don’t have sanitary water. Do you think that, in Parliament, I’ll busy myself with people who don’t have water, or people who get drunk?” [Thomas Friedman. Political Islam Without Oil. New York Times. January 10 2012]

Categories
Economics

[2485] Thinks the official inflation rate is wrong? Calculate it yourself

There are Malaysians who find it hard to accept the official inflation rate. They claim that it grossly underestimates the actual inflation on the streets.

Some of them are truly stubborn in the sense that no proof will convince them. Some derive their disagreement out of merely ignorance. Others raise nuanced argument against the official inflation rate as calculated from the consumer price index published by the Department of Statistics.

I typically dismiss the first two groups because I have learned to pick my fight over the years. For the third one, there is some concession to be made.

The truth is, the CPI itself measures the price levels of a basket of goods. The weight of each good depends on what the Department of Statistics thinks a typical Malaysian consumes. While there are ways to estimate the consumption of a typical Malaysian, it is quite easy to imagine and in fact it is the case that the hypothetical typical Malaysian differs from most of us. The difference depends on your preference for one. Your level of income for two.

Your preference is especially important. Do you smoke? Do you prefer bread to rice? Do you drink liquor? Do use your cell phone heavily? Do you drive? What kind of vehicle? Do you drive like a maniac or do you drive, like a friend of mine, like a grandmother? Are you an electronics freak purchasing every single new fancy gadget released out there? There are thousands of questions that if answered, they will reveal your consumption pattern.

The CPI has several components each representing a particular class of goods. These components are food, transportation, housing and apparels among others. There are 12 classes altogether. If you visit the website of the Department of Statistics, you can find out what is the exact weight for a particular component for the CPI.[1]

So, really, you, provided that you accept the reading for a particular component, can construct your own CPI that will be different from the official CPI.

Change the weight according to what you think reflects your consumption. If you do not smoke or do not drink, put zero as the weight for alcohol and tobacco class. If you do eat out often at restaurants, increase the weight for that class. If you do not pay for any education service, put it zero. If you are taking one, then assign them accordingly. If you spend a huge fraction of your disposable income on food like a lot of low-income people, then give it greater weight. Etc. Then multiply the relevant weight to the relevant component index. Voila! Your own personalized CPI.

From then on, you can calculate your own inflation rate. Just do not do it the way Anwar Ibrahim did it or else you will piss off Mr. Hisham. You do not want to do that.

The point is, behind the fancy economics is just elementary mathematics. There is no magic behind it. You really do not need to be an economist to construct your own CPI and calculate your personalized inflation rate. Just understand the basics, and off you go.

If you do not know your weights, then run an experiment. Record your spending and consumption for a couple of months or more and then you can find the weights.

This way you will see how inflation affects you personally and more accurately. In fact, it will likely come closer to your expectation than what the official inflation rate tells you.

What it will not do however is to justify one’s unreasonable opinion that the inflation rate should be, for instance, 10% instead of 3%. Some think the statistics have been fudged to make the government looks good. To them I say you are free to have any opinion on any matter. But not all opinions are valid.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — See for instance, the CPI for November 2011 at the Department of Statistics.

Categories
Economics

[2480] Two graphs for market monetarists in Malaysia

Before this, nominal GDP is hardly a statistics one would look at. Things are starting to change with the rise of market monetarism.

Here is  how the nominal GDP for Malaysia looks like, in comparison to real GDP. As you can see, there is a big gap between potential and actual output in nominal GDP.

A market monetarist will want the loss in potential output in nominal terms be dealt with. If the person had gotten his way, there would not have been a drop in the nominal GDP. Or rather, the nominal trend would have been more constant instead of exhibiting large variation year after year.

The same loss can be seen in terms of growth.

A market monetarist at Bank Negara would have engaged in big expansion of money supply in late 2008 and 2009 to stabilize the nominal GDP. And he would have tightened supply in 2007 and much of 2008.

This raises a question for me. While I do see the virtues of market monetarism, especially when inflation is persistently too low like in the US, would it work in Malaysia?

The reason I am asking is that I am worried about stagflation. We know that the stagflation of the 1970s was terrible but would that be better than what we experienced in 2009?

Categories
Books, essays and others Economics History & heritage Science & technology Society

[2477] Diamond, consumer choice theory, marginal revolution, Marxian economics and the paradox of value

From those precursors of food production already practiced by hunter-gatherers, it developed stepwise. Not all the necessary techniques were developed within a short time, and not all the wild plants and animals that were eventually domesticated in a given area were domesticated simultaneously. Even in the cases of most rapid independent development of food production from a hunting-gathering lifestyle, it took thousands of years to shift from complete dependence on wild foods to a diet with very few wild foods. In early stages of food production, people simultaneously collected wild foods and raised cultivated ones, and diverse types of collecting activities diminished in importance at different times as reliance on crops increased.

The underlying reason why this transition was piecemeal is that food production systems evolved as a result of the accumulation of many separate decisions about allocation time and effort. Foraging humans, like foraging animals, have only finite time and energy, which they can spend in various ways. We can picture an incipient farmer waking up and asking: Shall I spend today hoeing my garden (predictably yielding a lot of vegetables several months from now), gathering shellfish (predictably yielding a little meat today)? or hunting deer (yielding possibly a lot of meat today, but more likely nothing)? Human and animal foragers are constantly prioritizing and making effort-allocation decisions, even if only unconsciously. The concentrate first on favorite foods, or ones that yield the highest payoff. If these are unavailable, they shift to less and less preferred foods. [Guns, Germs, and Steel. Chapter 6: To Farm or Not to Farm. Page 107. Jared Diamond. 1999]

A lot of words.

Luckily, any economics student who has his or her bases covered will understand this as [latex]\frac{dy}{dx} = \frac{P_x}{P_y}[/latex] in one way or the other. Simple! We can thank the marginal revolution that began in the late 19th century for that. Marginal revolution also solved the paradox of value. Indeed, marginalism is the foundation of modern microeconomics, regardless of your cup of tea.

And oh, did you know that the marginal revolution also made Marxian economics in its original interpretation completely obsolete?

Categories
Economics

[2476] Postponing the European crisis to 2013

I am in the opinion that the expected sovereign debt and banking crises in Europe have been postponed to the end of 2012 or early 2013. There are two reasons why I think so.

The crisis in Europe is essentially two-fold. One is due to government debts. Two is the risk of default by European banks. The two sides are interrelated but it is useful to separate them.

The sovereign debt crisis has been postponed thanks to the establishment and the expansion of the European Financial Stability fund. The EFSF would not be exhausted until the end of 2012 even if all debts repayment or refinancing by the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain) is financed through facility. The potential rating downgrade of sovereign debts of stronger economies, namely Germany and France, may hurt the likelihood of success of on the EFSF front but I will wait until that actually happens.

I am taking this position because by December 2012, total principal and interest payments made by the PIIGS government is projected to be EUR700 billion. That is below the total size of the EFSF.

The following graph shows principal and interest payment obligation of all the PIIGS government cumulatively. Looking at it, without the more permanent European Stability Mechanism which is supposed to kick start in the middle of next year, trouble will come only around February or March 2013.

The banking crisis meanwhile has been postponed until next year thanks to the soft loan facility provided by the European Central Bank. It has been reportedthat banks in Europe will require EUR700 billion next year to pay up their debts. Since the facility offered by the ECB is at the moment limitless (there will be a limit because already the total loans made by the ECB attract considerable question), the problem on this front too has been postponed to 2013.

This of course says nothing of recession and economic recession is another issue altogether.