Categories
Economics

[2752] Dude, where is my standard error?

When the economy grew 6.4% from a year ago, does it really mean it grew exactly at that rate?

Those kinds of statistics are supposed to give us the hard figures that we all can fall back as the one and only truth. Like the physical ones where a meter ruler is a meter long. But those with statistical learning would understand these macro numbers, from the GDP to industrial production to prices are not free from errors (even the ruler has an error but I would think that error here would be considerably smaller compared to that suffered by macro numbers, unless, it is an astonishingly bad ruler). The GDP for instance is not exactly an account of a small company that has in it all of the company’s expenditure. That macro figure is at best an estimation of what is happening in the economy. The fact that we keep restating (not rebasing) the GDP figures every now and then tells you that just as much.

Yet, after working in the financial sector, I am quite surprised to learn at how standard error/standard deviation plays a minuscule role in most analyses. I think this is a problem because without reference to errors, data providers in various government agencies as well as analysts and economists in the financial market give the illusion that their data and their analyses (strictly non-normative commentary of the data) come with absolute confidence (academic economists have better record at this). When the economy grew at 6.4% in a period, it is 6.4%.

But that confidence is overblown. It is not really 6.4% exactly. The truth is that it is possible the GDP had grown around that figure. What exactly, nobody knows. Maybe that is a technological question that would be solved some time in the future. In the meantime, there are some errors in the data.

Before we go on further, for the benefits of those without basic statistical training, I want to emphasize that these errors are not mistakes. They are simply uncertainty that comes along with the data. Uncertainties are there because we cannot know everything about the world. But we can know enough to know about the general situation. Hence the usefulness of these inexact macro figures. I call it inexact, because the true figures fall within a range and it is a stretch to suggest a point figure is the true figure with certainty.

I have no doubt that these economists, analysts and statisticians understand the meaning of errors and its importance. I am not overly worried about this group who work revolves around data. They know there are revisions and they know the numbers can change. They know there are errors. They know these macro numbers provide a useful guide to the happenings in the economy and these figures are not exact numbers. It is more of a sample — a good sample to generalize the population — rather than the actual universe. Whenever they refer to a number, they have the statistical caveat at the back of their mind.

I worry about the non-expert consumers of these data and analyses. These users do not understand this and they take the figures put down as the truth. Consider for example the discontent against the inflation rate in Malaysia, where there are critics who claim it is too low. I think the publication of standard errors of consumer prices would partly help address their concerns by telling them that there is uncertainty in the recorded prices. Still, this will not address the criticism against the CPI too much because the critics also appear fail to understand that the weight of the final CPI number is in such a way that it measures the middle Malaysians. But we have enough microdata that those weights can be reconstructed to fit more than the middle Malaysian. But I think this is a different issue which I have addressed in the past.

I am bringing up the non-reporting of standard error/standard deviation issue because I am bit peeved when I see news reports that goes something like ”Malaysian industrial production growth grew slower at 4.3% from 4.4% last month.” Or the GDP grew faster at 6.4% in 2Q versus 6.2% in 1Q. I mean really, is it truly a deceleration/acceleration? Are we not just sensationalizing it? I am particularly annoyed when economic-illiterate politicians start to sensationalize these figures, spreading uninformed views to the wider public.

(Another example is the idea that China is the largest economy in the world in PPP terms. But how about including the standard error inside too before making that pronouncement? I bet Chinese GDP has an outrageously big interval.)

Is it not enough just to say, ”hey, the economy is doing okay”?

When I see that kind of changes, I am more inclined to say it is stable. In fact, we can get more scientific about it. Calculate the index’s standard deviation and do hypothesis testing to see if the change is significant or not. It is very easy to do such testing these days.

I admit, it is less sexy and mouthful to say ”there is X% probability that the economy grew faster compared to the rate in previous period”, than to say ”the economy grew faster today versus yesterday.” But are we sacrificing truth for sexy, short, punchy, headlines?

I think yes.

I am guilty of not providing the standard deviation too, but I think we (can I use the pronoun we?) need to change our ways. Yes, I think we mainly write for each other, but we have to realize, these writings go out to the public as well. Our statistical caveat might not exist in others’ mind. We need to put those caveats explicitly in the open.

By sharing the standard deviation, I also think it shows others that we are being humble about our data. It says, “these are my best bets” instead of “this is it and there is no other way about it.”

Ideologically, from libertarian point of view, the humbleness is important. Libertarians believe in the superiority of the market over state actions. My belief (before I get banged up for being a blind market apostle, there are instances of market failure where the government needs to come in) in the superiority comes partly from the fact that we do not know everything about the world. I think the idea of standard error is part of that philosophy: the idea that we do not know everything. Again, there might be a time when technology will solve that and bring about a libertarian nightmare, but right now, there are enough cases out there to tell us to be humble.

Categories
Economics Politics & government

[2751] When should we cut fuel subsidy?

Ten months into 2014, I have now resigned to the fact that my projection for the annual inflation rate in Malaysia is too high, with the actual rate being relatively benign. The reason I had put it so high — it was in the region of 3.5%-4.0% compared to what it would likely be, which is 3.0%-3.5% — was that I had expected a drastic subsidy cut early on. It did not happen until yesterday. Even yesterday’s cut is not enough to salvage my projection. I have of heard drastic, crazily complicated plans to revamp the subsidy system that would definitely help me be right, but that has either been postponed, or canceled. While I like to be right, I hope the convoluted system will be canceled. I hope the government would just stick with subsidy cut-cash transfer policy.

Politically, subsidy cuts are always a hot potato. It attracts criticisms from a whole lot of people.

Me? While I have criticized certain cuts from time to time, I am generally supportive of it for various reasons. I have been a long-time supporter of transforming subsidies into cash transfer. This time around, I do not have much reason to oppose the cut. Government influence, at least from the GDP perspective, is coming down, suggesting less government spending with the wider economy in mind.

So, I think I would like to engage on two criticisms directed at the recent cut. One questions the cut on the basis that crude oil prices are coming down. Another goes, subsidy cannot be cut until there is a viable public transportation system in place first.

On oil falling prices, I have said it in the past and one person has brought it up on Twitter (where I spend most of my time these days neglecting this blog, my column, my book project … and work… maybe by just a bit), that the best time to eliminate fuel subsidies is when prices are low, like right now. Acting when prices are low is acting from a position of strength and not out of desperation. If the argument that says we should not cut subsidy when prices are falling down is a good one, then when exactly should we cut it?

Is it never?

If the answer is not never, consider the counterfactual. If prices are higher, would that be the best time to cut subsidy then? Under the scenario of the rising prices, the effect of subsidy cuts on consumers and the economy at large would likely be greater than when cutting it when prices are low, because at that time, the situation would have been more desperate and would probably demand steeper cuts. There would likely result more shocks to the consumers that make the pain of higher cost more acute than it should be. As I have written on Twitter in a snappier way, “[you] criticize the cuts because oil prices are coming down. If prices were going up, would you be happy with bigger, more desperate cuts?”

From government finance perspective, I think cutting it earlier makes more sense. It means more saving for the government to finance other stuff earlier. If we are to wait for the government to cut subsidy only when prices are rising some time in the future, then the saving would probably be lower. The saving can finance the cash transfer program, among others.

Besides, a responsible policymaker wants a countercyclical policy. You do stuff that are painful but necessary during the good times, not during when times are bad. Look at the effect of austerity. The criticism of European austerity is exactly because of the poor timing of its austerity program.

On the point that we should wait until the public transportation system is good, I think this is a costly wait-and-see game. It is also partly a chicken-and-egg issue.

I label it as a wait-and-see game because the last MRT line is scheduled to only be completed by 2020. Keep in mind that construction on the two other lines has not started yet. Even then, I am unsure the public transport system would be reliable with comprehensive coverage. Do we want to keep the subsidy regime running until we are completely sure the transportation system is completely up and running in donkey-years’ time? That is a lot of money, never mind who knows what will happen with crude oil prices until then.

I also box this particular criticism against the cut as a chicken-and-egg problem. I would even argue it is a case of Catch-22. We need the money to invest in public transportation, but we do not have the money to do so if we keep up with the subsidy regime. We need to break the loop and not engage in such mind-numbing logic. At the very least, the cut in the subsidy bill and in the deficit ratio could help bring yields on government debt down, allowing the government or the relevant government-linked bodies to borrow at a cheaper rate to fund infrastructure project.

“But,” you say, “we are going to have the GST!” Yes, but I think every saving helps. “But,” you go on, “what about corruption-wastage-leakage in government spending? Sure, I share your concerns there but I think that requires some political changes but that requires some effort. In the meantime, until that happens, it should not prevent us from doing other stuff. It is not a mutually exclusive problem and it is not a sequencing problem either.

Ultimately, I see the argument on public transportation as one that prefers to do nothing.

Categories
Politics & government

[2750] Malaysia is bigger than Malaysia Airlines

Until AirAsia and the liberalization of the airline sector in the past decade or so, Malaysia Airlines was the only real option for most of us when it came to flying. It is easy to argue that for us Malaysians, flying meant Malaysia Airlines.

My first flight was with them. The feeling of sitting by the window floating among the clouds for the first time is unforgettable. The carrier was part of my growing up story as I found myself crossing the Pacific and back around the other side of the world, travelling to places that as a kid I thought would be impossible.

So, Malaysia Airlines does mean something to me. I feel there is a personal connection between me and the brand.

When disasters struck the airline, part of me felt lost. I was not alone in feeling so. I looked around and I saw an outpouring sympathy for the airline from many. On the internet, on television, over the radio and even at bus stops and shopping malls for weeks after the Ukraine crash, there were signs and images imploring us to keep Flight MH17 in mind.

But now that the rituals are mostly done and the intense emotional reactions have subsided, I think this is the best time to write what I have been thinking for some time: We are taking the sentimentality too far.

I feel so because I see people equating the well-being of Malaysia Airlines to Malaysia the country and expressing it so strongly. While this may suit the narrow intention of those who want to save the carrier, I think it demotes the idea of Malaysia the country to that of a petty commercial entity.

The equation sets a limit by necessarily defining Malaysia as a business, instead of an ideal society, whatever that may be. After a while, I no longer know what we Malaysians collectively want the country to be with all of our competing dreams and contradictions.

But I am certain the country would be a depressingly sad, meaningless place if the idea of Malaysia is confined to us measuring our worth with the profits we make, gauging our performance with self-limiting unimaginative indexes. Such culture would turn us into drones, ever chasing benchmarks which are meaningless outside of business. ”1 Malaysia” might be that, but Malaysia is more than that. There is much more to life than business.

An example of equating the airline to Malaysia comes from the prime minister himself when he delivered the Merdeka Day address. He used patriotism to justify the need to financially aid the troubled commercial airline, yet again. The platform he used is enough to prove the exploitation of patriotism as a persuasion device. He tried to build up a case to save the carrier. He said there was no other choice.

But he did not need to try very hard. On the ground, I feel the idea presents itself more blatantly and organically, implying that the carrier is a national icon, that it is Malaysia itself.

The crashes made it politically easy for the government to bail the airline out. There is little political opposition to the corporate exercise since to oppose meant irreverence to the victims of the crashes. Nobody with a heart wanted to be seen to be that insensitive. Those who did were shouted down.

So, Khazanah Nasional as the government’s agent gets all the support it needs to privatize Malaysia Airlines. The public is chattering about the details but the idea of saving the carrier itself is taken as necessary without much question. The majority seems to agree with the prime minister that there is no other choice.

Here is the other impact of the unfortunate equation. The idea that Malaysia Airlines is Malaysia automatically kills off the other choice: It is unthinkable not to save Malaysia Airlines, it is unthinkable not to save Malaysia. It limits the grasp of the mind. The loss of our faculties is the cost of the equation.

The equation is also an example of the merging of government and commercial interests. There have been other examples in the past but I find this one particularly disappointing because just several years ago, the prime minister promised to let the private sector drive the economy and reduce the government’s stake in various Malaysian corporations.

This is not the only broken promise around judging from the government’s recent enthusiastic use of the old Sedition Act.

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 Malay Mail on September 5 2014.

Categories
Politics & government

[2749] For separation, we need a consensus

Because of my politics — the libertarian kind — I always find representing the collective will as something hard to do. I would think of voting as a way of settling such matter but there is always something to disagree with and I am mindful of the times when I might find myself in the opposition camp. It is tough accepting the result that one disagrees with. Even in a democratic system we use to decide on things — at least a liberal democracy, the one I like — the power of the majority is always limited to secure the rights of the minority.

In a mature democratic society, we must accept the results of an election under normal circumstances. Win or lose, we need to respect the results for if we only respect it whenever we win, why would others respect it whenever they lose? Trust in democratic institutions would quickly evaporate into thin air that way.

But I think acceptance is conditional on the understanding that the winner would not change anything significant, or effectively changing the institutional structure of the country, after winning the election. We are not playing a modified Calvinball. We are deciding the direction of our society. The winner does not take all.

For instance, in Malaysia, if you want to abolish the office of the Agong, I think winning a general election alone is insufficient to do so, especially if the election is a divisive one. Or if the winner suddenly decides to do away with elections to become a pure dictatorship, then it is hard to respect the authority granted by the election to the aspiring dictator. You would need a strong consensus to do so.

I think the need for a strong consensus is especially important where there is no opportunity to undo a policy that fundamentally changes the structure of a country. Winning the simple majority vote is not enough a backing. A strong consensus does.

I am writing this because I am thinking of Scotland. Scotland tomorrow will vote on whether they would stay within the United Kingdom, or become independent. I think it is safe to say that there is little chance for a u-turn if Scotland becomes independent, and opinion polls show voters are divided right in the middle. There is no consensus among the stakeholders, the Scots.

I do not know much about Scottish politics and while I think I prefer Scotland to stay in the United Kingdom, I do not have a strong opinion on the matter. I am not a citizen, I have never been too far north of London and it is quite an effort for me to think of ways which a Scottish independence would affect me directly. So, my opinion matters less than a Scot’s.

But clearly, the referendum is a template to further separatist agenda all around the world peacefully. This is the mature way of doing things, not by throwing those with separatist sentiment into prison or by going to war.

Here, I think of Sabah within the Malaysian context. But also on a more general level, within the context of a new country.

A country where the 50%+1 votes for independence and the rest opposing it sounds like a country that is  heading for a political disaster. There is little consensus to start with and the effort of building national institutions will be a big problem. How can you start when you disagree on the fundamentals at the very starting line?

If you had the consensus, then perhaps there would be a wide common ground to begin a new grand political project.

I wrote political disaster because I wonder, what would the 50%-1 resort to? Not everybody everywhere will conduct themselves in a peaceful way. At midnight Malaysian time, I am having trouble thinking and looking for examples. I wanted to use the Partition of India as one, but that might be stretching it since there was no voting. I looked through Wikipedia and I found the Partition of Bengal. While they voted in their legislative hall, I am too tired to read and make sense of it. I am so tired, I think I am making a lot of typos and grammatical mistakes more than usual. But in both cases, there were violence and even ugly population exchanges.

But I think the point I am making is that with such a large fraction of society, almost a majority even, disagreeing, you as a country will have recurring existential issues. It might not be violence but politically, I think there will be hostile exchanges and that will set you back.

Besides, would it not be utterly unfair for the 50%-1 to suddenly find themselves living in a different country that they do not want to be in? Such a new country will not begin with a clean slate. They will have a very large almost a majority fraction to appease. Again, it is not a case of winner takes all. The losers will form an important component of the new country.

I do not know what the “consensus benchmark” should be. All I know is that it has to be considerably higher than 50% but not too high as to make the referendum a joke. If 100% is a practical sign of consensus, then why bother have one? The 100% level risks a referendum its credibility, dishonestly tilting the results toward the status quo.

Two-thirds benchmark sounds reasonable to me only because it is the usual ratio used to amend the constitution in Malaysia. But I do not know. Finding a benchmark seems like an arbitrary exercise to me.

What I know is that in my ideal world, there need to be a strong consensus. In the context of Scotland, the need for a strong Yes before the Yes is actually implemented, and not merely a simple majority. But Scotland has agreed to their referendum and their benchmark. So they will have to live with it and I sincerely wish them all the best.

But for us Malaysians, if it ever comes to that somewhere in our federation, I think we need a higher benchmark. It has to be higher that 50%, beating some higher level signifying consensus. I think this is for the well-being of the almost majority in that state, and for the good of the Malaysian citizens, too.

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Books & printed materials Society

[2748] Edward Said on distortion and inaccuracy

My two fears are distortion and inaccuracy, or rather the kind of inaccuracy produced by too dogmatic a generality and too positivistic a localized focus. In trying to deal with these problems I have tried to deal with three main aspects of my own contemporary reality that seem to me to point the way out of the methodological or perspectival difficulties I have been discussing, difficulties that might force one, in the first instance, into writing a coarse polemic on so unacceptable general a level of description as not to be worth the effort, or in the second instance, into writing so detailed and atomistic a series of analyses as to lose track of the general lines of forces informing the field, giving it it’s special cogency. How then to recognize individuality and to reconcile it with its intelligent, and by no means passive or merely dictatorial, general and hegemonic context? [Edward Said. Orientalism. 1978]