Categories
Economics

[2849] The next step: from cash transfer to negative income tax

One of the better things Malaysia experienced on the policy front is the abolition of fuel subsidy and the introduction of targeted/conditional cash transfer as a replacement.

While the mean-tested nature of the transfer has been less the ideal (due to loose conditions) and appears uncorrelated to what the subsidy would have been (its discretionary nature means the transfer policy is increasingly digressing from its original purpose), the policy is still better than the very costly and inefficient subsidy regime Malaysia had. I have advocated the shift from subsidy to cash transfer for a very long time now, and I still support it.

But cash transfer should not be the end of progress. Perhaps the next step is to push the conditional cash transfer towards a more rule-based approach. In that spirit, I think the next step is the introduction of negative income tax system to replace the cash transfer system that we have now.

A negative income tax system works like this: it pays a registered taxpayer money if the person earns below a certain income level determined by the government. One easy benchmark would be the minimum wage level (in doing so, it could make minimum wage policy obsolete). The size of the payment could be a portion of the difference between the determined level and the person’s income.

In short, if you earn below that benchmark, the government pays you some money. If you earn above it, you pay tax. A brief introduction to the policy is available at the Library of Economics and Liberty.[1]

The current cash transfer program Malaysia has, BR1M, has some resemblance to the negative income tax. Those earning below a certain income threshold get the cash transfer. Negative income tax does the same thing, but more.

It goes further by institutionalizing the cash transfer arrangement and eliminates the latter’s discretionary nature, which is susceptible to corruption in its widest sense. It guarantees the payment will be paid out every year based on transparent formula. There will be no grand announcement about the payments by ministers, party members, leeches and definitely no more mock-checks and unnecessary conflict of interest/suspicious handover ceremonies.

The institutionalization also brings about one thing: a real basic income for all Malaysians. It is also an automatic stabilizer for the economy, which means in case of economic troubles, the urge for discretionary fiscal stimulus can be reduced. That also means less corruption on the procurement side.

Payments itself can be done just like how tax returns are done every year. If cashflow is of concerned, the payments can be broken up in stages just like how BR1M is being paid this year.

I do not think the jump will be that big, unlike the previous shift from fuel subsidy to cash transfer. But I do think in terms of benefits, it might be bigger the cash transfer as it could make redundant other welfare policies while streamlining administration cost of supplying or enforcing these other policies.

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

[1] — The NIT would thus be a mirror image of the regular tax system. Instead of tax liabilities varying positively with income according to a tax rate schedule, benefits would vary inversely with income according to a negative tax rate (or benefit-reduction) schedule. If, for example, the threshold for positive tax liability for a family of four was, say, $10,000, a family with only $8,000 of annual income would, given a negative tax rate of 25 percent, receive a check from the Treasury worth $500 (25 percent of the $2,000 difference between its $8,000 income and the $10,000 threshold). A family with zero income would receive $2,500. [Jodie T. Allen. Negative Income Tax. Library of Economics and Liberty. Accessed February 15 2017]

Categories
Economics WDYT

[2848] Guess the 4Q16 Malaysian GDP growth

The final quarterly GDP figures will out next week on February 16. The GDP grew 4.3% YoY in the third quarter, up from 4.0% YoY in 2Q16. In the first quarter of 2016, it was 4.2% YoY. So, as the game goes…

How fast do you think did the Malaysian economy expand in 4Q16 from a year ago?

  • 3.0% or slower (13%, 3 Votes)
  • 3.1%-3.5% (0%, 0 Votes)
  • 3.6%-4.0% (9%, 2 Votes)
  • 4.1%-4.5% (35%, 8 Votes)
  • 4.6%-5.0% (39%, 9 Votes)
  • 5.1%-5.5% (0%, 0 Votes)
  • Faster than 5.5% (4%, 1 Votes)

Total Voters: 23

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Judging from industrial and import figures, I would think the domestic demand part of the economy grew reasonably okay in the fourth quarter although other statistics like car sales remain depressed, suggesting not all is well.

The labor market says as much. Unemployment rate is relatively high at 3.6%. That suggests the recent economic growth recovery has not brightened up the labor market. It is not that there is no job creation, but the pace of job creation is not happening as fast as the growth of the labor force.

(Interestingly, the core inflation has been stable at about 2.0%-2.2% in annual terms. Nerdy stuff to note: core inflation fell as unemployment rate rose. This is cool, assuming the GST had minimal impact on the core inflation. Cool because unemployment rate and demand-pull inflation that the core is supposed to measure tell something about the output gap: it may suggest the gap has not changed by much despite 2015-2016 economic weakness. One would start to worry if unemployment rate goes up but core inflation remains unchanged, which suggests the output gap might be widening. A worse worry is when unemployment rate goes up together with core inflation: gap is shrinking but potential is decreasing)

The other good news is that exports did great. But with strong import growth, trade balance for the quarter will not help the GDP. Indeed, from the merchandize goods trade stats, 4Q16 net exports actually fell in the quarter by nearly 10% YoY.

So, in the end, I am thinking the 4Q16 GDP growth will be somewhere in the mid-4.0%, leaving the full year 2016 GDP growth at 4.2%-4.3%.

Categories
Politics & government Society

[2847] We care because we are capable of empathy

It’s a big, big interconnected world out there. And that interconnectedness, ironically, makes the world smaller is a non-physical sense. Economically, socially and politically. Our lives are no longer affected purely by domestic matters. To some, the foreign affairs segment in the newspapers is an abstraction but for some others, the lines demarcating domestic and foreign concerns are blurry.

These remain the days of globalization still, however the Trumps, the Le Pens, the Farages and all those who long for a smaller world are trying to rewind the clock. They may yet be successful but for now they have a lot to undo. In the meantime, many have multiple homes and multiple affiliations with friends traversing national boundaries, opposing such undoing and rewinding.

For Malaysians, the war in Ukraine so far away across the Asian continent painfully proves the fact foreign affairs are home affairs too. Many Malaysians could not find the country on the map, but it still has an impact on the Malaysian psyche. And Malaysians did care for development in Bosnia during the Balkan War and in Kosovo. They do care about the conflicts in Palestine, in Syria and in Iraq. And to take a trivial example, there are Malaysians who care about the fate of foreign, English Premier League teams, despite not being English themselves.

The refugee crisis in Myanmar is also a Malaysian concern, because these oppressed men, women and children are coming to or passing by Malaysia. Whether we like it or not, we have to act in one way or another. Pretending the imaginary lines on a 2-dimensional map as an impregnable wall ensuring that is not our problem will not help by one bit. And to turn back the boats is not just an illiberal policy, it is heartless.

In the several years after the 9/11 attack, I became a victim of profiling at US airports, just because of my nationality and my Arab-sounding name. Security personnel would put me under extra security measures and screening. That discouraged me from leaving the US for home for the next four years for fear I would face immigration troubles upon reentry at the airports. I knew of other international students who needed to report to the Homeland Security office regularly, and I feared being subjected to the same requirement as an entry condition.

And so, I spent my entire time as a student in Michigan travelling throughout the US, reaching New York, DC, Miami, San Francisco, St Louis, Chicago, Sioux Falls and more. I remember how it felt like to drive the car through the Great Plains from the Great Lakes, or how peaceful it was staring into the night sky from the bottom of the Tuolumne Canyon just north of Yosemite in California. I learned to love America for the wonders it brought to my young mind.

Indeed, my political beliefs to a large degree were shaped in the US. However flawed the US is with all of its hypocrisies, it is still the greatest liberal democracy that the world has. It is the Athens, the Rome, the Baghdad, the Cordoba and the Delhi of our time. Just because of that, I looked up to it. Because of this and because I spent a significant portion of my early adult life there, if I had a second home, the US would be it.

When Trump and his followers do what they do, and among others equating the US to Russia, I feel that is an undoing of what the United States of America is supposed to be in my eyes, a foreigner, who looks kindly to the east across the Pacific. Trump is killing the US that I know, and by that, threatening the idea of liberal democracy all around the world (even in Malaysia where our democracy is becoming increasingly flawed and more authoritarian). That makes me angry.

The Trump’s ban, now challenged in the courts, adds further to the anger. My alma mater, the University of Michigan, is celebrating its 200th anniversary this year. And I am entertaining thoughts of returning to Ann Arbor to catch the festivities and walk down the memory lane. Trump’s ban, could potentially affect me. I still remember my experiences at various US airports during the Bush era. I thoroughly dislike the discrimination and I do not wish on others what I went through.

So, I do care for things that if happening in the US. The world is interconnected enough that I have real attachments to the US. Needless to say, I have friends in the US too.

But one does not need to have personal ties to the US to be worried about development in the US. It is just like how some of us are concerned about the oppression in Xinjiang, or in Iran, or in Egypt, or in the Philippines or anywhere else without the need to have any personal connection.

Even if we cannot think of ways which a reclusive, protectionist US could affect Malaysia — it will by the way: HSBC economists think Malaysia will be one of the top four economies to be worst affected by a protectionist US — we can still care because we have empathy for other human beings. Injustice or discrimination anywhere is still wrong and we can take a position on the matter. We can make personal judging based on our values. We have enough room for empathy those near and far beyond our shores.

Because of our capacity of empathy and because of the interconnectedness of the world we live in, it is outrageous to think we have to choose between caring US-based or Malaysia-based issues. Both are causes for concerns. I care for the deplorable things happening in the US, and at the same time, I care about the 1MDB corruption scandal, or the blockade in Kelantan, along with other injustices in the Malaysian society I am living in.

Indeed, it is a false dichotomy having to choose the US or Malaysia. There is no reason why a Malaysian needs to choose between the two. We can be concerned for both, and more.

More importantly, there are liberal values and among them are that we all are created equal and all should have the same fundamental rights. This applies all around the world, not just in and around your small neighborhood.

In time when anti-liberal populists are turning national policies inward, it will be most disappointing to have liberals retreating to a small-world cocoon as well. Such inward retreat would be a betrayal of liberal belief, that liberal values are universal in nature and not provincial. We fight racism, discrimination and everything bad out there by staying true to our liberal values, not by abandoning it.

Categories
Economics

[2846] Unfairly casting aspersion on the Gini coefficient

There is a very good article published in the Malay Mail over the weekend.[1] It is about the brisk sales of high-end cars like BMW and Mercedes in Malaysia while entry-level, compact cars like Perodua are doing badly, and the consumption pattern in the economy by income levels.

[The divergence car sales by prices are part of the weird macroeconomic statistics that have been coming out of Malaysia since the GST was introduced back in April 2015, along with the collapse of oil prices. Weirdness like the consumption growth is rising nicely while big ticket items like cars and homes are not doing so well in terms of growth. In fact for cars as a whole, it has been declining. It may be some non-business cycle explanation behind this, like the widening of train network in Malaysia but for now (a person driving BMW rarely if ever take the train, for instance), let’s put that aside and maybe discuss that on another day.]

But I have one, tiny issue with the article, way, way down. The author questions the accuracy of the 2014 Gini coefficient, which suggests inequality, decreased compared to 2012, while pointing to the latest car statistics (2015-2016), which may say otherwise:

While BMW Malaysia posted its highest ever sales growth last year, its rival Mercedes posted record sales for the second straight year in 2016. A total of 9,047 Mercedes vehicles reported to have left its showrooms in the first nine months of 2016, marking a 10 per cent growth compared to the same period last year, according to Malaysia’s leading automotive online magazine Paultan.org.

In 2015, when the local economy appeared to be slowing, Mercedes sold a total of 10,845 vehicles, a record increase of 56 per cent from 6,932 units in 2014.

[…]

Based on the sales data, slower economic growth was not affecting all segments of the country equally. While those in the lower income brackets are complaining of rising costs, their more well-off counterparts have been splurging.

”What it indicates is that while the low and middle income earners are experiencing fiscal constraints, it is business as usual for the higher income group,” Muhammed told Malay Mail Online in a phone interview.

Global trend

Putrajaya has so far shrugged off the idea. According to official statistics, the country’s Gini coefficient series shows a downward trend in household income inequality from 2004 to 2012, after which it falls off drastically — the Gini coefficient was 0.46 in 2004 and only dropped by 0.3 percentage point after eight years. But in 2014, it dropped to 0.40.

I find the final paragraph (especially the final sentence) in this excerpt as slightly confusing. After laying out the situation in 2015 and 2016, the article goes on talk about the 2014 Gini data, which might not describe 2015 and 2016 very well.

Confusing, because the Gini coefficient is a low-frequency data done, at the moment, every 2-3 years together with the household income survey. Not only that, it lags severely, published only after the survey was done months earlier: the 2014 data was released in June 2015 while the 2012 data was released in July 2013. You can see its low frequency in the chart below:[2]

In contrast, car sales statistics are high-frequency data available monthly.[3] 

High-frequency data do have a lot to say about the present time. But I feel it is unfair to cast aspersion on low-frequency data from all the way back by using more recent information (2015-2016 car sales) the way the article does. It is unfair because the two datasets describe two different points of time. They are not contemporaneous data and not comparable, at least in the way it is being done.

I am aware of the paper by Lee Hwok Aun and Muhammed Abdul Khalid which the Malay Mail article cites. But the paper utilizes car sales data that is contemporary to the Gini coefficients it uses (before that, I would like to say it is a shame that Lee had to leave University of Malaya because of the short-sighted government spending cuts). You can read the working paper here.

In contrast, the Malay Mail article is taking post-2014 car sales data to question a 2014 Gini coefficient.

So, I think the attack on the 2014 Gini coefficient from the Malay Mail angel might be overdone, and different from the Lee-Muhammad criticism. The 2014 coefficient is just unable to describe the 2015 and the 2016 situation, especially since the GST was introduced in April 2015. There was a significant structural break since the 2014 coefficient was released.

[Also, I feel it is important to note that the Gini we have here measures income inequality, not consumption inequality. We have the Household Expenditure Survey though. Just saying]

In any case, the next Gini coefficient may come out this year or the next. The Household Income Survey is supposed to be done twice in five years (last done in 2014). The latest coefficient may yet go up.

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

[1] — Syed Jaymal Zahiid. What BMW and Perodua sales data says about the economy. Malay Mail. January 21 2017.

[2] — 2014 Household Income Survey. Department of Statistics. Accessed Jan 23 2017.

[3] — Malaysian Automotive Association. Accessed Jan 23 2017.

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

p/s — I am not defending the Gini coefficient per se. I am saying the criticism mounted in that particular way is off the mark.

Categories
Personal

[2845] A generous migrant worker

I just got off work. I just got off the train. The sun was coming down and the tropical heat was subsiding.

The train station is not that far away from home and so I decided to walk home instead of getting on a bus or calling a cab.

I was not feeling that hungry but I figured, maybe I should get something light just in case. There was a Monday market nearby. I made a detour, looking for something I could munch on later at home.

The entrance was a narrow pathway with brick walls on both sides leading into a small square. Narrow, only because food vendors set up their stall on one side of the wall. They sold noodles, fruits, nasi goreng and other items typical in this corner of Asia.

Several beggars lined up along the opposite wall. The passing crowd had to navigate between the stalls, the beggars and those who stopped in the middle of the path, deciding what to buy, apparently oblivious to the foot traffic and the space constraint.

A blind old Malay man sat on an old worn tool wearing a white skull cap, ignored by the crowd. A foreign woman, possibly a Bangladeshi, in her Muslim headscarf, sat on the pavement with her palms extended out, not far from the old man. Her eyes looked down, seemed too ashamed to look up into the eyes of others. A kid, with lines on his face, sat farther away, hoping for a stranger’s generosity by selling ersatz serviette that nobody really needed.

I have been here before and I did not think much of the crowd, or the begging men and women. I was tired. I went on with my business. I walked past the crowd at the entrance, made a quick circuit in the square before deciding on a cheap meehoon for slightly more than three ringgit, packed in a white polystyrene container, apparently banned now. The seller placed the container into a flimsy red plastic bag before handing it to me. I said my thanks and he gave me a weak smile.

I headed out, passing the several beggars I mentioned earlier.

On my way out, a migrant worker was walking in. He stopped, reached out from his torn and worn wallet and pulled out a ringgit for the blind old Malay man on the stool. It did not look like he could afford to be generous, but he was generous to the old man anyway.

I walked on. I was tired and I wanted to get home as quickly as possible.

Halfway to home, walking up the hill, I slowed my pace. A sense of guilt filled my being. I felt so ashamed.

I felt ashamed for the rest of the day.

I wish I had pulled a note or two for those men and women. But no I did not.