Categories
Economics

[2100] Of credit card service charge; the government should look into the mirror

I am in no position to give full opinion on the proposed 2010 federal government budget tabled earlier today. That is mostly because I need to read the whole text first. Nevertheless, I feel strongly against the idea of imposing service charge on credit card; as stated by the Finance Minister, the purpose of the charge is to curb reckless spending by individuals.

According to the budget, RM50 is to be charged on main credit card while RM25 is to be charged on each additional credit card. I would assume the fee will be charged to new users of credit cards during application period. I am unsure how preexisting users will be charged.

But no matter because as long as it is charged as fixed amount annually, here are my first thoughts that lead me to disagree with it.

Firstly, the charge is too small to be significant and on top of that, it is a yearly charge. If a person cannot afford to pay RM50, I would think that the credit card company would notice the financial status of the user and refuse the user the card. Therefore, the effectiveness of the charge deserves skepticism. If credit card companies do not filter their customers, then the companies deserve to go under.

Secondly, this is a blanket policy. Individuals with good and bad spending patterns are being punished. Of course, it is just RM50 but it is the idea of being punished for other individuals’ stupidity that makes this maddening. Recklessness should be punished while prudence should not. The free market already provides for that mechanism: bankruptcy. It works superbly. But the government has other idea it seems.

Thirdly, if RM50 is significant, which I really doubt, it mainly punishes those in the middle income bracket and more so of those in the lower income bracket who use credit cards to smoothen their consumption pattern instead of committing “reckless spending”.

Fouthly and more importantly, it suggests that the government knows better than the individual in managing their finance. Can you say, paternalism? Is the era of government knows best over? I think not.

Finally, the intention of introducing the charge, so reasoned the Finance Minister, is to curb reckless spending by individuals. To that which I will say, the government should look into the mirror.

Categories
Economics Liberty

[2099] Of Ostrom’s Prize in Economics, commons, coercion and libertarianism

Libertarians celebrate two winners of the Prize in Economics of whom one of them is Elinor Ostrom. That is because her works show that commons can be managed efficiently by groups of users rather than the State. I am unsure, however, if libertarians, especially the free market purists quite absorb the full implication after accounting for footnote associated with Ostrom’s works.

Her findings do very little to expunge coercion from solutions relating to large tragedy of the commons. This fact, through my observation, is what many libertarians have missed.

On purists, I know, I know, I have been accused as a purist myself but if I am a purist, then you are in for a big surprise at how other people can be purer in this thinking that me. These purer purists, if I may say so, are more anarchist than libertarian, with their hostility against the State bordering madness. I may sympathize with these anarchists however but I am convinced that the state of anarchy is unstable and in fact, detrimental to individual liberties. I am becoming more convinced of that position as I finally begin to read Robert Nozick’s Anarchy, State and Utopia, further settling in the minarchist pool of libertarians.

Many, I have seen, tend to celebrate one conclusion of Ostrom’s work but tend to ignore the other consequence that comes from the footnote to the celebrated conclusion. Most unfortunate, that footnote does not eliminate the case for intervention. Such intervention or really, coercion, may not originate from the State but by groups of individuals nonetheless.

A group of individuals should really be no different from the State if there is coercion. Coercion is really the key here and it is not whether it is the State or not. This is what most libertarians, when discussing this, have overlooked. To miss it is to miss the entire point of libertarianism.

When it comes to commons, I have long accepted the need for government, or any kind of intervention for that matter, for fear of tragedy of the commons occurring. I first accepted it when I first learned of it as an undergraduate in economics. Concern for tragedy of the commons, is perhaps, the only remnant of environmentalist thinking that remains with me.

That is the reason why, if I want to differentiate myself from other libertarians, I identify myself as a green libertarian. The green symbolizes my concern for market failures, which is what tragedy of the commons really is.

Market failures here are not as left-wingers tend to define it, which is more of rhetoric wrongfully attacking free market principles through mischaracterization and misleading definition but rather it refers to the economic definition, which is when there is a large difference between public and private costs, or more concisely, when there is externality. Examples include emissions of carbon or harvest of the ocean. It is for this reason too that I am largely supportive of Pigovian taxes: I definitely would like, for instance, to see fuel subsidy in Malaysia be replaced with carbon tax.

While I am admonishing libertarians here, I too made a mistake of celebrating Ostrom’s work prematurely, thinking that it solved my problem. I am well aware how hard it is to reconcile my concern for market failure with free market libertarianism that I hold. So, I was happy to see Ostrom seemingly offering a solution to me by stating users of commons do spontaneously organize themselves to prevent tragedy of the commons. Alas, upon further reading, I realized that I initially failed to comprehend the full conclusions by overlooking the footnote. And I do think libertarians who are celebrating Ostrom are misreading her conclusions by not reading the footnote too.

Traditional solutions to tragedy of the commons do not fall within the compound of pure free market libertarianism that completely intolerant of government intervention save for the classical liberal purpose of the state and that is the protection of individual negative rights. Such solutions typically involve the allocation or assignment of rights to users of resources of commons. In other words, to price such rights to internalize externality and then auction to it to achieve allocation efficiency.

In commons with multiple claims on it, some entity — government or some local body — has to be the final arbitrator for allocation of rights purpose and that will require coercion. These rights may be in form of permits that expire regularly or outright privatization (privatization is attractive but it does present complications; for instance, how do you privatize the atmosphere with respect to climate change? Clearly, enforcement of such rights is impossible, at least with current technology). Ostrom simply discovers that local groups may be better managers of the commons than government. She does not specifically say that it is will be done voluntary.

Yes, these local bodies can be voluntarily formed by users of commons. Self-organization out of spontaneous order which of voluntary in nature can be achieved but as stated in a write-up by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences[1] and Ostrom’s article in Science Magazine[2], size of users and engagement time length matter, among others, affect the success of having such spontaneous order. There are multiple other factors but I am in the opinion that these two are the most important. The bigger the size, the harder it is to agree on voluntarily act to prevent exhausting the commons and make everybody worse off. The shorter the period of engagement, the harder it is to reach to an agreement.

The issue on number of users is really a matter of cost. As in the case of climate change, which is really the biggest common of all, bringing 6 billion individuals together is clearly unfeasible. Consider also the fact that even with hundreds of representatives sitting together in one hall, an agreement is hard to achieve. The planned climate summit in Copenhagen organized to find a replacement for the failing and expiring Kyoto Protocol is widely expected to fail.

On top of this, monitoring activities are costly. Monitoring is important because there is a strong incentive to — out my lack of creativity in selecting a word — cheat in the case of tragedy of the commons. Monitoring and enforcement are important in discouraging cheating.

On time length, it is a matter of repeated game. To make it more explicit, it is a repeated prisoner’s dilemma where cooperation is clearly a better option for both to failure to cooperate but there exists strong incentive to not to cooperate. Repetition of that game with the ability to communicate could bring about cooperation but again, that is highly dependent on the size of participants. Ultimately, achieving cooperation may take too long a time before the system collapses.

Further strengthening the argument, status quo effect is strong. Look at the Israeli-Palestinian conflict. Such conflict can be modeled as hawk and dove model, which is essentially another form of prisoner’s dilemma. They could cooperate and skip the deadly conflict, but they do not. In a game like this, it is crucial for trust to be built at the very beginning.

Trust simply takes a long time to rebuild once broken, if it is to be rebuilt at all, if the first step proved to be disastrous. This, known as tit-for-tat game, is one of the basic important lessons of game theory, in my humble opinion.

Given that, solving the problems of the commons through voluntary means, are likely hard if not impossible. Thus, intervention is still required to introduce market instruments like quotas, permits or taxation. Intervention may originate from the government, or some local groups but it is an intervention nonetheless, with not too implicit coercion demanding certain positive action, positive as defined by Isaiah Berlin when he differentiated between positive and negative rights.

If Ostrom is to be celebrated, then it is decentralization from government to local groups. That however should be mistaken as solving the problem of tragedy of the commons by voluntary means. Someone or something has to assign rights to users to commons. That means, the element of coercion, unfortunately, is still present.

That certainly does not solve my problem of reconciling concern for tragedy of the commons and free market libertarianism.

To summarize: it is a common and somebody or someone has to take control and assign rights to solve the problem of externality, i.e. tragedy of the commons. It does not have to be the government and local groups may be better manager but something or someone has to act as the assigner. And the footnote to Ostrom’s works indicate that it is hard to do so voluntary, save for, I think, localized commons. In the end, the element of coercion exists.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — See Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009: Economic Governance. Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences. October 2009

[2] — See A General Framework for Analyzing Sustainability of Social-Ecological Systems. Elinor Ostrom. Science Magazine. July 24 2009.

Categories
Economics

[2097] Of first comment on the proposed federal budget by DAP: culture of entitlement

The Democratic Action Party released its proposed 2010 federal budget this week.[1] This is definitely a good move as it brings substance to debate. It gives all of us an opportunity to debate on policies rather than engaging on ultimately empty rhetoric that boils blood.

This is not the first budget proposed by the DAP. The consistency on producing such document thus far deserves commendation and future production should be encouraged to develop policy debate in public sphere. PKR and PAS need to work with DAP or emulate DAP on this front.

Now that the pleasantries have been dispensed off, it is time to get down to business.

While I have yet to read fully the proposal, I disagree with a number of issues. One is the tweaking of contributions to the Employees’ Provident Fund (EPF). Two is the creation of entitlement culture.

For the uninitiated, the EPF is a social security fund providing retirement benefits for its members that, basically, includes all employees employed in Malaysia, making EPF a payroll tax. Employees in Malaysia are required to contribute a certain percentage of their wages into the fund. Employers are also required to contribute some kind of percentage into their employees’ account. Employees will be able to withdraw that money after retirement or at any other point of time before retirement for certain purpose that is not worth going into here.

Early in the section (Section 9.1.3 on page 37), the proposal begins by stating how important savings is, how low-income Malaysians have trouble saving and how unequal wealth distribution in Malaysia is. After stating so, it proposes that employers’ contribution to EPF account of low-income and middle-income workers be increased.

The problem with this relates to a typical argument against such benefits and payroll tax. Employers will compensate whatever required payment on top of direct pay to employeees imposed on them by law by reducing total wages and benefits paid to employees. The idea is that there is only a certain amount of total wages and benefits, which includes the contribution, that employers are willing to pay. Increasing the contribution requirement affects only the composition of total pay, not the pay itself, at present time.

For low-income worker, this is particularly worrying because it reduces their take-home pay. This in turn goes back to the problem of intertemporal choice. While savings is important, it is useless to individuals who are desperately in need of consumption today in the following sense: what is the point of having one million dollar of savings if one cannot use it today to avoid death from hunger?

The example is extreme but it aptly captures the time value of money and intertemporal choices. The time value of money remains material even if death is removed from the equation.

Furthermore, there is enough empirical studies to suggest that low income earners spend large proportion of their income compared to those with higher income. This impresses further on the need to strengthen these workers’ take-home pay given a certain total pay, making their savings less of an issue. I stress, not unimportant, but less of an issue compared to take-home pay.

However, different path is laid out several paragraphs later, with respect to EPF contributions.

As part of its FairWage initiative, DAP proposes to decrease workers’ contribution to EPF for those earning from RM900 to (but not inclusive of) RM1,400 and waive entirely for those earning below RM900. This addresses the concern on take-home pay but notice how it starts to contradict DAP’s point on insufficient savings for retirement of low-waged Malaysians.

As part of its FairWage initiative as well, employers’ contribution is proposed to see reduction to make these workers more employable. This is the right idea but again, this proposal suffers the same contradiction as the first FairWage point.

The third component of the FairWage initiative is a set of entitlements that comes partly in cash transfer and partly transfer from government coffers into the account of certain classes of workers. This perhaps plugs the the gap in saving caused by the two FairWage points but it raises a question of unnecessary complexity.

Notwithstanding the contradiction (it seems to me that there was a war between the left and the right in preparing the proposal; what else can explain the inconsistency? Or is it a case of trying to please everybody?), looking at the FairWage initiative as a whole, the bottom line is really about cash transfer from the government to those who the DAP considered as earning low and medium level income. In the proposal, the DAP states that this is practically an earned income tax credit scheme. It is basically a negative income tax regime where those earning below a certain level of income gets money or tax credit instead of paying tax to the government. In a sense, it is already in place in Malaysia, where, if I am not mistaking the number of I saw on my tax form, the government of Malaysia gives Malaysians tax credit worth RM8,000 for living expenses. I think the proposal by DAP only enhances it.

Whatever it is, the whole design seems overly complicated. Ignoring the normative issue which I will touch later, would it not be easier to not tweak the EPF configuration and just do the transfers instead? Instead of tweaking EPF, the government can, or rather, DAP could, tweak the composition of transfers instead to achieve the same goal sought by the reduction, or in general, changes in contributions to EPF by employees and employers.

That is issue one.

Issue two is the normative aspect of the whole proposal and perhaps, more seriously and more holistically. Without writing too many words, it risks creating a culture of entitlement. The FairWage is just one factor that suggests how entitlement mentality predominates the proposal. RM1,500 is proposed to be given to non-working spouse whose partner earn less than RM3,000 (per month, I assume). This simply robs incentive to work. Individuals are rewarded for not working. This may potentially lower local labor participation rate and eventually, lower output for the economy. To note, low labor participation rate is much worse than low employment rate.

Greater suggestion of creation of entitlement culture is the granting of citizenship bonus labeled as Malaysia Reversed Bonus. That is not the only citizenship bonus. Senior Malaysian Bonus another one. These bonuses are mentioned in other sections which I have yet to read thoroughly.

There is one aspect of the proposal that I like that falls within the section. It is a limit to employers’ contribution for those earning beyond a certain level of income. That decreases cost of doing business and even increases take-home pay of workers.

I will comment on the proposed federal budget by DAP further as I go through it slowly.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — [Democratising Malaysia’s Economy: DAP Alternative National Budget 2010. DAP. 2009]

Categories
Economics

[2078] Of a good sign?

I should really be at University Library right now but I just could not resist blogging about this.

The latest Industrial Production Index produced by the Department of Statistics has it that electricity output increased and more importantly, it increased based on year-on-year basis in July 2009. This means, electricity output has been increasing on year-on-year basis for two consecutive months. It first registered positive year-on-year growth in June 2009 after months of output reduction. This is another blow to government spending-based stimulus advocates because it indicates that the economy is recovering well before the effect of stimulus spending comes into play.

Electricity output, or rather consumption (but really, the two should be almost the same) has been argued as a good indicator of economic performance. See this. The following table is taken from the Department of Statistics.

Sectors

Index July 2009

% Changes Year-on-Year

% Changes Month-on-Month

IPI

104.8

-8.4

7.1

Mining index

99.6

-1.9

10.0

Manufacturing index

106.2

-12.0

6.2

Electricity index

118.7

3.1

3.5

I will blog about this later. For now, I need to make a dash to the University, which is, like, 100 meters away. Oh, so far away!

Heh. I love my life.

Categories
Economics

[2076] Of anti-trust laws can defeat protectionism

Opponents of economic liberalization fear, among many other things, the possibility of giant foreign companies dominating the local market at the expense of local businesses. For those who are simply interested in better quality goods and services, market liberalization introduces competition in the market to improve quality, much to the benefits of consumers. While the war between the two camps is much relished, there is a middle ground for both to tread on and it involves anti-trust laws.

Increasingly in Malaysia, protectionist argument is becoming less and less relevant each time the sun rises and sets to rise again. Intellectually, it is bankrupt. Empirically, it has resulted in missed opportunities and needless sufferings. Examples of protectionist failures and its subsequent ejection are aplenty for all to observe.

Proton, for instance, is still unable to compete fairly despite years of protection granted by the government to the national enterprise. It has also cost Malaysia an opportunity to become a regional center of vehicle manufacturing that Thailand has become. Thankfully, such government protection that once resulted in effective Proton’s monopoly of the local car market will end by 2010, in line with the ASEAN Free Trade Area Agreement.

Another example relates to the imposition of cabotage between Peninsular Malaysia and East Malaysia. With intention of nurturing local shipping companies, it has caused unnecessary increase in cost of living of Malaysians in Sabah and Sarawak by hiking up transportation cost. Tradable goods became more expensive than it would have been under free trade environment. Again, thankfully, despite protest from local ship owners, the removal of the protectionist policy has been successful. Malaysians in Sabah and Sarawak can expect their real wages, ceteris paribus, to go up, thanks to liberalization.

Even as the roles of government see expansion all over the world in the aftermath of the global recession through massive fiscal policy and more, the rationale of liberalization in Malaysia continues to take root. While guarded optimism is called for, recent liberalization of multiple service subsectors as announced by the Najib administration is a proof that — to paraphrase slightly the Iron Lady Margaret Thatcher — liberalization is on the move.

The liberals are winning the intellectual jousting. Yet, this is no time for liberals to rest. This excellent opportunity to push for greater freedom — either economic or individual freedom, although the two should be inseparable — does not come as frequently as it should. With a government seemingly friendly to liberalization policy, there is no better time to push for greater liberalization.

Greater liberalization is required because illiberal market structure like price and supply control mechanism on essential goods such as sugar and flour are still imposed by the government. Just weeks ago, shortage occurred to rudely disrupt routine to remind all of inefficient market.

With momentum on the side of the liberals, they can afford to push liberalization forward. Shoving the agenda is especially easy when discredited protectionist ideas are demonstrable as actual and not merely as theoretical failures.

In spite of cache available for liberals to rely on, continuous shoving of liberal economic agenda does not create ally and it only alienates losers of liberalization.

As a sidetrack, liberalization does create losers but the rationale of liberalization, or actually, free trade, is not that it does not create losers, but rather, on average, it lifts all boats up. This should be juxtaposed harshly with the effects of protectionist policy, which may or may not create winners but guarantees everybody, on average, worse off.

Liberalization exercises are definitely colliding with the New Economic Policy, or whatever is left of it. While it is unclear if there is a majority who supports the policy any longer, there is no doubt that there exists a large segment within Malaysian society who do support it and see liberalization exercises as threats.

On top of that, local business owners, Malay or non-Malay alike, are likely to be hugely unexcited with liberalization effort that inevitably invites large multinational corporations with enjoy economies of scale that these locals could only imagine.

Together, these groups have the political power to derail liberalization exercise in the future.
In order to reduce that possibility, it is imperative for liberals to reach out to the potential losers and their sympathizers to partly, wherever reasonable, alleviate their fear. And their fear of monopoly is reasonable.

Perhaps, the act of reaching out should be an afterthought. The fear of monopoly, after all, should not exclusively belong to only protectionists and their cohorts.

Economic liberals celebrate competitive market. Purely competitive market is of course unachievable due to a myriad of factors but that does not prevent liberals for achieving second best solutions that approximate idealized environment.

The practice of anti-competitive behavior especially by colluding companies with excessive market power hurts the prospect of superior competitive outcomes associated with the ideas of free market.

Anti-trust laws may be able to curb anti-competitive practice. It has the ability to reduce the entry cost for newcomers, which can realize the spirit of creative destruction that every incumbent and even more so, monopolies, fear, despite its positive effect on society at large. Through this, protectionists’ fear should be somewhat addressed. And when it is addressed, liberalization can continue with its forward march to actualize the idea of liberty.

For liberals, the law has to be applied in equal weight. All monopolies, either local or foreign, should be subjected to the same law. If it is unclear, this means it must include government-linked companies as well as local cartels formed by private firms.

This cannot be stressed enough. Anti-trust laws directed at only foreign companies is only a protectionist’s tool and not an enabler of competitive market. Worse, without covering government linked-companies, such imperfect anti-trust laws would only open the path towards greater government intervention in the market.

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 September 7 2009.