Category: Economics

Categories
Economics

[2441] No target, no central planning

Milton Friedman once visited Hong Kong in 1963. He met John Cowperthwaite, the financial secretary of Hong Kong, whom was credited for enabling Hong Kong to become Asia’s foremost financial center through his free market policy. Friedman asked him “about the paucity of statistics” in Hong Kong. Cowperthwaite replied, “If I let them compute those statistics, they’ll want to use them for planning.[1]

Statistics has its uses and it does help us understand our society better. It describes phenomena objectively instead of forcing us to rely on conflicting anecdotes that are dependent on point of views. First and foremost, statistics has descriptive power.

But not all individuals believe in only the descriptive power of statistics. Some believe too much in the prescriptive aspect. Statists tend to belong in the latter group. PEMANDU is afflicted with it too, arrogantly trying to manage the economy when the economy itself is organic.

I reject targets placed on something as organic as the economy. While the government does have a role to play, to set a target on the economy mistakes the economy as a business entity or a firm, pretending as if the planner is the CEO, where there is none really.

The dangers of having a set of targets like having specific real GDP growth rate are plenty. One of them is the incentive for the government to spend too much just to meet its target. There is a conflict of interest when the target is set by the very entity that is meant to achieve it (this is also partly the reason why I am skeptical with a lot of KPIs set by the government: incentive to set them low to make themselves good).

This adverse incentive is bad for public finance and ultimately, for taxpayers.

More generally, having those targets encourages central planning.

But this entry is not meant to bash PEMANDU. I think I have criticized PEMANDU so much that I am bored of it already. This entry is meant to criticize Anwar Ibrahim.

Anwar Ibrahim is smart. When he realizes that the Najib administration is targeting possibly an unrealistically high real GDP growth rate given the global economic circumstances, he challenges it and demands accountability from the federal government. He wants a special parliamentary sitting to meet if the federal government fails to meet their target later in the year.[2]

I disagree to the demand for accountability. It is not so much I would like to give the Najib administration a free ride. It is only because I disagree with having a target in the first place. To demand accountability only strengthens the path to the target. That means central planning.

This is a case where accountability is not so hot.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved
[1] — The difference in the economic policies followed by Hong Kong and Britain was a pure accident. The colonial office in Britain happened to send John Cowper-thwaite to Hong Kong to serve as its financial secretary. Cowperthwaite was a Scotsman and very much a disciple of Adam Smith. At the time, while Britain was moving to a socialist and welfare state, Cowperthwaite insisted that Hong Kong practice laissez-faire. He refused to impose any tariffs. He insisted on keeping taxes down.

I first visited Hong Kong in 1955, shortly after the initial inflow of refugees. It was a miserable place for most of its inhabitants. The temporary dwellings that the government had thrown up to house the refugees were one-room cells in a multistory building that was open in the front: one family, one room. The fact that people would accept such miserable living quarters testified to the intensity of their desire to leave Red China.

I met Cowperthwaite in 1963 on my next visit to Hong Kong. I remember asking him about the paucity of statistics. He answered, ”If I let them compute those statistics, they’ll want to use them for planning.’’ How wise! [Milton Friedman. The Hong Kong Experiment. Hoover Digest. July 30 1998]

[2] — KUALA LUMPUR, Oct 10 — Datuk Seri Anwar Ibrahim today demanded Parliament reconvene for a ”special sitting” if Putrajaya fails to meet its ”unreasonable” gross domestic product (GDP) growth forecast.

The opposition leader today poured cold water over Datuk Seri Najib Razak’s Budget 2012 tabled on Friday, claiming the prime minister’s predictions and his administration’s alleged penchant for unbridled spending would likely worsen the country’s deficit.

Anwar also predicted the Najib administration would table a supplementary supply bill by mid-2012, seeking for additional funds just as it did in June this year. [Clara Chooi. Anwar wants special Parliament meet if GDP aim unmet. The Malaysian Insider. October 10 2011]

Categories
Economics Education Politics & government

[2440] Opposing double deduction for scholarship abroad

The government intends to give corporations double deduction for sponsoring students. While it is great to encourage the private sector to give out scholarships to students so that there are fewer reasons for government to do so, I think the double deduction is a bad idea. There two reasons.

First, I am with the idea that the government is spending too much money on sending undergraduates abroad. When the destination countries are developed countries like United States and the United Kingdom, the scholarship program as a whole will be awfully expensive. If you are to attend the University of Michigan as a government-sponsored student in a typical 4-year undergraduate program for instance, the tuition alone can surpass half a million ringgit, just like that.[1]

Of course, Michigan is not your typical university and there are of course cheaper universities out there in the US but most of those cheaper universities do not bring value to public money when there are better alternatives closer to home. You do not want to pay half a million ringgit to send something to a school like, oh, I don’t know, Ohio State University maybe?

Okay, that is uncalled for but you get my drift. OSU is a good university, only that Michigan is way better, in every single way. Including, thank the heavens, in football too!

I prefer the government to use the money on improving the local tertiary education instead. Money of course can only do so much. There are other factors like freedom on campus (Malaysian public universities seriously lack this) to develop a free inquiry culture but money does matter.

There are exceptions to my opposition to public scholarship to abroad, but these exceptions are so small that even putting them up while drastically reducing the program will free up tons of money for other uses. In the double deduction policy, since awards for places abroad is costlier than local spots, companies have the incentives to send students abroad, at taxpayers’ expense.

Secondly, the double deduction reduces government tax revenue only to do what the government is doing in the first place. It is only fee-shifting or paper-shifting so to speak. It does not matter who spends it because in the end, it will use taxpayer money. If the number of awards—for local and overseas spots—stays the same, then this policy will only increase the cost, explicitly or implicitly, of maintaining the policy, explicitly or implicitly. When the result is the same, why do it convolutedly? Such an accounting trick will add more cost than necessary to the government.

If the government is reducing scholarship award, then the money will flow out anyway before it gets in. It will show lower revenue and lower spending and then, maybe, smaller government. That is only because of that accounting trick. Like all accounting tricks, it is superficial.

At the very least, I think the double deduction should come with a caveat: only for sponsorships at local schools. If anybody wants to send somebody abroad, they should use their own money entirely.

Or otherwise, maybe just reduce corporate and service tax altogether so that this problem with double deduction would not be a problem to start with. That would truly be more substantial than that particular 2012 budget provision.

Or yet another or-case, the government should only give out less than 100% deduction while reducing the number of public scholarship awards to abroad.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved
[1] — [Office of the Registrar. Full Term Tuition & Fees. University of Michigan. Accessed October 9 2011]

Categories
Economics

[2438] Malaysia could have smaller deficit

The 2012 budget is an election budget. From civil servants to police officers to students to teachers to the armed forces, the whole public sector workers, even pensioners, will get their own share of handouts next year if this budget is passed, which it will.

With all the handouts, it got me thinking. We could do better with the federal government’s fiscal deficit. A lot of this handouts with the exception of the 2% annual increase of salary for civil servants and free education are one-off gifts. If those gifts were not made, Malaysia would have smaller fiscal deficit.

I will expand this thought for my column at The Malaysian Insider.

Categories
Economics

[2435] Oh the fickle markets

The stock markets all around the world are on a rollercoaster ride. It is yet another proof of the interconnectedness of our world and in a time like this, such interconnectedness can be a bane. The slightest news of little relevance—never mind the more substantial developments—from the other side of the world can rally or rattle the markets. These are days of pessimism and this kind of pessimism it is a little bit unhealthy.

It is painful to observe the stock markets. If to keep an eye on it is an exercise perfectly suited for sadists, to have a direct stake in the markets makes the whole enterprise all the worse.

Each day brings a kind of consternation. Will tomorrow be better or worse? Should I buy or sell now? Will tomorrow be delightfully unexpected or depressingly expected? Is that light at the end of the tunnel? Or is that a headlight for a speeding train?

These questions and its variants have been asked increasingly frequent over the past few weeks. The answers are not always forthcoming unfortunately. Sometimes, there is none to be had.

That is partly the fickleness of the markets resulting from the markets trying to incorporate everything it could. That fickleness grants rest to none, forcing all to stand guard around the clock.

The fickleness and volatility of the market are tiring. Whatever the benefits of the markets as a leading indicator of the wider economy, all the attention it demands is tiring. It consumes too much time and energy, all just for the small satisfaction of not losing money in a blink of an eye in this kind of prevailing environment we live in.

As a graduate student once, I had to model certain relationships involving the stock market. The volatility of the market presented a challenge because too much data can lead to the wrong conclusion. The data series was too “noisy.”

A friend suggested cutting the frequency of data from daily to weekly as a solution. Others suggested logarithmic difference. There was a bunch of other novel methods aimed at doing the same: filtering out the incessant noise in hope of squeezing something tangible and real out of the data series.

The stock markets do tell something, but its fickleness neither tells everything nor is everything it tells is necessarily true or relevant.

There lies some wisdom to go beyond the mathematics and economics puzzles. I find the wisdom helpful in keeping myself from frowning yet again, sighing continuously and from suffering mood swing as wild as the market.

I have decided that I will not go mad over the market. I have applied less weight to the importance of the stock market with respect to myself.  At least for now, I have decided to have less exposure to the craziness of it all.

If European politicians and bureaucrats could go on summer holidays amid a frighteningly global crisis, surely others inconsequential to world’s history can take some justifiable break of their own. The grand narrative of world’s history is unlikely to twitch for me.

I do not want to be the guy who sits in front of the screen staring in a broker house, hoping for the slightest opportunity to make money. Or that guy drawing meaningless lines trying to outsmart the market, the efficient-market hypothesis be damned.

No, I have decided to live a life more, and worry a little less.

There is money to be had, and it is always nice to have a little bit more money in the pocket. Yet, one has to asked, at what cost?

There is more to life, and the economy even, than the fickleness of the stock markets.

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 Sun on September 30 2011.

Categories
Economics Liberty Politics & government

[2434] Is bailout of government preferred to bankruptcy?

Not all bailouts are the same. When a bailout socializes losses but privatizes gains, it can easily be judged through moral lens on top of existing economic reasoning. The interaction between government and the private entities is deplorable exactly because of lemon socialism. I find it harder to make a damning judgment when it is a bailout of government.

Some of the same crucial points applicable in the case of government bailing out private enterprise to me appear to assume lesser weight when it is the government which is being bailed out.

I do not see such bailout as a duty. Duty is too strong a word to describe what I feel but I do experience some grudging willingness to not oppose the bailout. What is troubling for me is that I am struggling to justify that willingness.

Why is a national government any different from a private entity that is too big to fail? Should the bailout in both cases be treated differently?

My initial take is that we individually and collectively do make mistakes sometimes and these mistakes are innocent in the sense that we are unlucky or that we did not know better. This line of reasoning is appealing when the direct stakeholders are the people. The national government, the reasonably democratic one at least, may have made bad decisions on behalf of the people but idea of letting the government fails appears absolutely cruel too me.

Maybe, a second chance is in order and whomever who bail the government out is an angel. What is important is that the government and the people learn their lesson. In some sense, this makes me supportive of the bailout of Indonesian and South Korean governments by the International Monetary Fund. These bailouts impressed upon the governments and its society the lessons of failure. These countries eventually experienced improved overall outcome, not just in terms of government finance and its economy, but it restructured the countries’ politics for the better, especially Indonesia.

Yet, wide suffering of the people cannot be the factor differentiating bailout of government from lemon socialism. In the case of too big to fail that plays a huge part in lemon socialism we have seen in recent years, the absence of bailout can adversely affect the lives of so many individuals indirectly. If lemon socialism is to remain despicable, then regardless of directedness of the stake holding, the suffering factor does not provide a clean cut. The eventual result is suffering in times of crisis however one looks at it.

The magnitude of suffering could partly be the answer, but I find it hard to make objective decision with such a subjective qualifier.

Suffering could be a necessary condition regardless of magnitude, but it alone cannot qualify as a sufficient condition. Somehow, suffering is merely a side issue irrelevant to the consideration of acceptability of bailout.

And there are a lot of sufferings in the world. Some of it is a case of accident and those are most unfortunate. Others are just, in the sense that you reap what you sow. That has to be differentiated. But I do not see how this is helpful in differentiating actions of the two bailouts. In lemon socialism, bad luck and consciously risky action gone bad can affect different people but at the same time. In many times, separating the two in a bailout is extremely hard if not impossible. Observe the bailout of corporations in the US where executive received bonus out of bailout funds aimed at aiding “Main Street”. In that case, one saves the innocents by saving the guilty.

So, I am forced to address the issue from another angle.

What if a government defaults? More than default, a government goes bankrupt. A lot of sovereign national governments have defaulted its financial obligations before but what if a government goes bankrupt?

If creditors assume control of the government, then this may make a bailout appear favorable. If the democratic way of life is cherished, the government would become undemocratic, being firstly answerable to the creditors rather than the citizens. This is probably the most extreme case where the government is effectively colonized because it will have to be put under receivership or the creditors. This is probably the most anti-democratic possibility under national bankruptcy. It is possibly anathema to libety as well, assuming national sovereignty is directly derived from individual sovereignty.

Due to its anti-democratic ending, maybe a bailout is favorable. Still, the recipient of the bailout itself will be beholden to its rescuer. Perhaps, a bailout is only a nicer of collar. The Asian bailouts by the IMF were not pretty, although the alternative was uglier.

(By the way, this is not applicable to Greece and Germany. Germany and others within the Eurozone have to bail Greece and others because they want to defend the Euro. That essentially changes the question from bailout of national government to the favorability of maintaining the euro. Also, the economies are closely-linked that bailing out Greece is the only viable solution, while ignoring moral hazard problem. I am probably thinking the US bailout of Mexico in 1995, or as I mentioned, the IMF Asian bailouts)

But I am in the opinion that such extreme case is unlikely to happen. But what other alternative would prevail in the event of bankruptcy?

It could be something like Germany-like with reparation post-WWI? But the point of bankruptcy is that the national government could not repay the loan. To have the reparation route seems like an abuse by the creditor. But if the route is taken, the “bankruptcy tax” to make up for the default might be a good alternative to a bailout, the problem of seigniorage notwithstanding.

What about the stripping of the government by creditors to claim whatever left as theirs? Would that mean the collapse of government? If the government does collapse and along with the state, would it not be easy to set up a new government and state? Sounds like a good idea and actually strengthens the anti-bailout position. But this would make a mockery of the process. Would the new state be essential a new one or is it really the same state in new clothes? If the new state is actually a new state, then no default in the world would matter because everything can be start anew.

Starting afresh however is outrageous. That is obviously a flawed thinking. It is likely that the market will see the new state as the old state, thus would treat the new state however it treated the old one: demand for high yield is one treatment.

There is a precedent: Argentina in 2002. That ended with merely debt restructuring, and along with grave civil disturbance, capital flight and depressed economy, although most of these were the results of ongoing economic crisis that caused the default in the first place. I said merely because the creditors did not have a hold on the government, the government escaped any retribution from the creditors (despite it suffering economic backlashes) and in fact, the creditors were punished through the debt restructuring. And this actually makes default favorable to me (although it is unclear to me if that default is equivalent to bankruptcy).

This is turning out to be a rambling where I bite more than I can chew.

So what exactly will happen if a national sovereign government, or better, a state goes bankrupt? Does it only mean outrageous yield? Collapse? Effective occupation by creditors?

In the end, whether or not I prefer a bailout to bankruptcy depends on the end results. I am a consequentialist as far as bailout is concerned. But this is unhelpful and goes against my preferred way of deriving an issue from the principle, in the sense of John Rawl’s Veil of Ignorance. What good is it to be able to decide after the fact?

Maybe I am thinking too much from the perspective of the state. I will continue to think more about this. But for now, time to read.