Tag: fiscal policy

Categories
Economics Politics & government

[2454] Oh, Papandreou the socialist, the coward, the opportunist

If I were a European taxpayer seeing my money being used to bailout a near-bankrupt socialist government due to outrageous spending while I live responsibly, I would be angry. Why should I be the guarantor of a profligate? But if I wanted the Eurozone to stay intact, I would bite the bullet and angrily pay for the bailout.

If I were a European taxpayer funding the bailout, I would be fuming mad with the Greek Prime Minister Georgios Papandreou’s referendum plan. After all the hassles and the blows punched to get the money, however insufficient it is for the whole of Eurozone, Papandreou hides behind the angry masses, trying to deflect blame from the Greek government to the benefactors of the bailout facility.

The Greek government is a bunch of coward socialists, refusing to own up for its mistake, too insignificant to be bold and solve it. Papandreou may say it is done in the name of democracy, but he forgets the adjective representative. He could easily do it but no. He is afraid of the political cost and so he adopts direct democracy and gambles the whole structure for his own convenience. He wants to refresh his mandate but he has his mandate already. This is about passing the buck.

Oh, he is Papandreou the socialist, the coward, the opportunist.

But I am not a European. Yet, I am very angry at the Greek government.

I hope Greece burn. Let Papandreau fiddles while Greece burns, as Nero did when Rome did. Let us see how bad the austerity plan compares to a complete bankruptcy. Let Greece be demoted to the third world. On with the natural experiment on the socialists.

Categories
Economics Education

[2283] Of my issues with introductory macroeconomics

Although normatively one should not judge a book by its cover, positively, first impression matters. The first few lessons in economics are likely to affect a person’s perspective on the roles of government. Those who are familiar with economics and who ended up skeptical with the concept of activist government have to suffer those first lessons that suggest increased government spending in the economy is good.

Introductory macroeconomics at the undergraduate level typically presents the Keynesian consensus quite forcefully. Students tend to spend considerable amount of time studying the mechanics of simple IS-LM. The simplified model, while useful as a primer and for the cultivation of understanding in the workings of the economy, tends to overemphasize the effectiveness of government spending in the economy. In the jargons of macroeconomics for example, increase (decrease) in government spending positively (negatively) shifts the IS curve to increase (decrease) aggregate demand that eventually increases (decreases) economy-wide output, given all else the same.

Other complications do get introduced to shake that ceteris paribus assumption by a bit like the crowding out effect of higher interest rate on other components of the GDP and the dynamic of monetary policy. Here, for the first time, macroeconomics cautions students that sometimes, the effect of change in government spending can be ambiguous.

Add more complications and only then, government spending can be bad. Unfortunately, by adding more and more complications, the pedagogic value becomes marginal, making it wise for teachers of introductory macroeconomics to stop at the level where the lesson of the semester suggests that government spending is largely favorable.

By the time simple complications such as monetary policy are introduced, the perception that government is almighty will already have been ingrained in students. Consider the Keynesian multiplier. Students will learn this concept early, well before greater realism appears in the picture. Specifically, it is the idea that an increase in government spending has amplifying impact on total output, never mind that the rate of the multiplier itself is controversial.

My biggest grip has always been the silence regarding government finance. Increased government spending has to be funded. This concern is only answered at the later stage of introductory course, where Ricardian equivalence is finally mentioned. When it is mentioned however, it sounds like a minor curiosity only.

Given the bias, it is a miracle how anybody could finish undergraduate economics and become skeptical of government spending being the panache to short-term economic fluctuation.

Categories
Economics

[2172] Of did we need the stimulus package?

The fourth quarter of 2009 saw Malaysian economy recorded strong recovery on year-on-year basis.[1] So strong it was that the monetary authority of Malaysia went for a rate hike, making Malaysia the second country after Australia to adopt a hawkish monetary policy.[2] The question that should be asked now is, did we need the big stimulus?

The question is particularly relevant because the main driver of recovery has been external demand. This is something I have been stressing from the very beginning and it is the thrust of my opposition to economic stimulus, especially in the fashion of fiscal expansion, given the effect of the expansion on fiscal deficit, effect on future taxpayers as well as its potential adverse effect on private borrowers and therefore the economy sans the public sector.

Growth for external demand for domestic goods almost doubled the growth of domestic demand for goods.[3][4] Add the fact that external demand makes up a very large part of Malaysian GDP, in fact approximately 100% in terms of exports-to-GDP ratio,[5] the stimulus seems unnecessary.

Without the stimulus, recovery might have been less impressive than what was registered recently; it would be a recovery nonetheless. This however assumes that the government spending has no affect on interest rate and thus, the exchange rate. This is possible if the monetary authority, which is the Bank Negara, colludes with the executive branch of the government.

But expansion of fiscal policy does affect interest rate and the exchange rate assuming independence of the monetary authority, at least within the typical IS-LM model under open economy.

With that model with that particular settings, recovery without stimulus could have been just as impressive. If the extraordinary fiscal expansion were absent — the factor inhibiting exports that is higher exchange rate due to fiscal expansion would be absent — external demand for domestic goods could have increased much more than the already impressive level we saw at the end of 2009.

Remember, a lot of people were pleasantly surprised by the fourth quarter growth.

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

[1] — Malaysia’s economy expanded 4.5 percent in the final three months of 2009 from a year earlier, Prime Minister Najib Razak said yesterday. Economists expected a 3.2 percent expansion, a Bloomberg survey showed. Gross domestic product fell in the preceding three quarters as exports slumped amid the global financial crisis. [Malaysia May Beat Korea, India to Asia Rate Increase. David Yong. Bloomberg. February 25 2010]

[2] — March 3 (Bloomberg) — Malaysia may be the next Asian country to pull back monetary stimulus as its recovery strengthens, moving to raise borrowing costs or reduce excess cash in the economy ahead of neighboring Indonesia. [Malaysia May Pull Monetary Stimulus Before Indonesia . Shamim. David Yong. Bloomberg. March 3 2010]

[3] — The external sector performed favourably with both Exports and Imports turned over by 7.3 per cent and 6.9 per cent respectively. The improved demand for the products of Electrical & Electronics, Animal & Vegetables Oils & Fats and Chemicals have contributed to the increase in Exports. Meanwhile, the growth in Imports was due to the higher demand for intermediate goods and capital goods. [National Product and Expenditure Accounts Fourth Quarter 2009. Department of Statistics of Malaysia. February 24 2010]

[4] — Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%. [A tale of two recoveries: Malaysia vs. Germany. Rebecca Wilder. News N Economics. February 25 2010]

[5] — See trade profile of Malaysia at World Trade Organization. Accessed March 5 2010.