Due to some of my commitments (which includes play) I have neglected my blog for awhile. Since the end of the exams I have read Robert Frank and Philip Cook's "The Winner Take All Society," wrote an op-ed "Microfinance Institutions: Friend or Fiend" for SNED's website, wrote a report reviewing KIVA's organisational practice and have now completed my draft proving theoretically on how a U of T Eng Sci degree can act as a signalling mechanism for information assymetry when it comes to hiring Engineers with U of T Engineering Degrees (So it probably has to be polished, get nasty stuffs commented on how this is a lousy paper before I get to send it for publication, have it sent back for review, resend and whatever circus acts one has to go through to publish in a journal in the Cirque du Soleil that is academia). I am currently reading Justin Fox's The Myth of the Rational Market.
The highlight of my Winter Break was my trip to Toronto. I had a great time sight-seeing around Toronto but the best part was spending time with all of my friends. (To the drunk guy hailing North Korea and Kim Jong Il at LCBO, it was weird bumping into you). Incidentally the Toronto trip also provides real life examples of economics principles in action, which may be featured in subsequent posts.
Happy 2011 everyone,and to us in Quebec it means an effective consumption tax of 13.5% after midnight. Here's to a year with more solutions to our pressing problems.
Friday, December 31, 2010
Thursday, December 16, 2010
Co(r)n Law
This essay is among my few amateurish attempts to argue in the realm of normative judgements. To be fair to readers I ought to point out that my political view is that of a moderate liberal. This essay is also written in inspiration from a spiritual-economics post from Mr Wise, a former Grade 12 English teacher of mine whose virtue and honesty as a good, pious Christian taught me a lot about life. I am not knowledgable in religion or well, anything at all, but I hope this adds weight to your concern with a perspective of Economics, a subject that I am at most moderately capable of articulating.
Fast forward to the 21st Century, the social classes of old is non-existent. The humble diner owner down the street where I live is a capitalist in all sense; but a neurosergeon, a "worker", makes more money now than he does. So now that social classes cannot be delineated by job functions alone, the social class war is now a war between the rich and poor, the right and the left. And just like how the social class was had never truly extinguished but merely changed in its appearance, so had the Corn Law. It's successor is of course, the Con Laws.
(Here's a review of what constitutes an economic rent. In economics, an economic rent is the excesses beyond the minimum required to prevent something from being directed to an alternative use. If a factor is compensated at the minimum of what its owner is willing to receive to prevent it from being used in an alternative method, then it is paid at its transfer earnings. Economic rent = Excesses + Transfer Earnings. The following example illustrating the concept assumes that there are no non-monetary advantages.
Keat Yang is a soccer player making $5 million per year. If his pay is reduced to just less than $2 million per year he would decide to become a model for Adidas instead. The money paid to me to prevent me from leaving the soccer club and model for Adidas is thus $2 million, my transfer earning. The economic rent I get is $3 million, what is paid in excess of the transfer earning. An important caveat of course is that what constitutes an economic rent or a transfer payment varies across individuals/firms. For the whole professional soccer player association as a whole, the $3 million from my $5 million wage is an economic rent because if I were to be payed any lower I'd still choose to be a soccer player anyway if I am paid anything above the minimum of $2 million that is my transfer earning. To my soccer club, say Arsenal, that $5 million is a transfer earning because if they do not pay me that much, a small club called Real Madrid might walk in with an offer an hijack me away).
The principle problem with the Con Laws is that they are an institutionalised mechanism meant to extract economic rent at the expense of the greater good. I admit this argument will probably rile up my Conservative counterparts, especially honest ones who think that people should not have what they rightfully earn taken away. I must say this is a belief I share with conservatives. I do not object to Russel Peters, Fernando Torres or Steve Jobs making their millions, because society clearly benefit from their work efforts. Wealth distribution is among the chief causes of idealogical faction between the left and the right, and a pertinent argument is to what degree is government involvement required to distribute wealth in an "equitable manner." I do not have the moral authority to decide how much of wealth have to be taken away from Bill Gates to be given to the poor homeless person on the street, because I cannot make the poor person better off without making Bill Gates worst off.
Yet it would be an overarching argument to say that all the wealth of the rich are well-earned. My major concern is that when the system is tweaked to institutionalise economic-rent seeking behaviour for dubious, overinflated "contributions" to the world of certain people that spreading the wealth around would be desirable. Take the financial sector as an example. A lot of start-ups that benefited mankind like Google were made possible in part because of bankers and the financial market. However, some quarters in the financial sector, the derivatives market for instance, are manipulating the system (New York Time coverage) to guarantee to themselves the economic rent at the expense of potential competitors and to the potential "Googles" hoping to have cheaper accessibility to the derivative markets. It is in this that a standard approach in positive economics can be used to illustrate the inefficiencies caused by such Con Laws, as David Ricardo did to help repeal the Corn Laws. Using a standard Welfare Economics Analysis, we have a strong case that such "cartelisation" empowered by such Con Laws had essentially guaranteed economic welfare inefficiency. The market price for derivatives can be reduced with the addition of more suppliers in the trading house. As the gap between what consumers would be willing to pay and how much they actually have to pay increases; the gap between what suppliers would like to receive and what they actually receive increases, we have an increase in social welfare up to the point of equilibrium. Even when the size of the gap between what consumers would be willing to pay, and what suppliers are willing to receive, and what they actually pay and receive remains the same as it was, an electronic trading system would reduce industrial cost and hence we also have a strong case for productive efficiency.
Another strong example of the Con Laws (Or in nerd-speak you can call it Corn Law V2.0) we have the lobbying group and lobbying firm employed by farmers for agricultural subsidy. Part of the food crisis we are facing now can be attributed to such subsidy scheme, which essentially yet in a twisted manner serve the same function as the Corn Law in Ricardo's era. An unjustifiable subsidy to inefficient producers distorts the price signal for the planning of crop cultivation and raises the relative price of imports that would have been "cheaper" were it not for such artificial impositions. The result is of course and badly-coordinated argricultural sector that brought along with it a food crisis.
Given what we understand from Public Choice Theory and the Impossibility Theorem, I understand that people plead apathetic to political and economic issues. Why incur the cost of examining these issues when its marginal effect on each individual is so small? Yet we continue to fume over our social class war of the rich versus the poor. The poor would see a conservative party in the mould of the Sheriff of Nottingham, the manifestation of a political power to stymie the efforts of their Robin Hood. The Rich would see a liberal party as a mould of the dreaded Robin Hood, a manifestation of political power to rob from the not-evil Rich to give to the poor.
Arguing in such a vacuum is a futile exercise with no physical reality. Conservatives or Liberals, Democrats or Republicans, a common threat to us all are the Con Laws.
PS: Tea-Partyers and fanatical Conservatives, I don't really understand your economics. Congressman and Senators who bend on over to secure economic rent for vested interests, I admire your ability to say what you will do "for our children" in camera only to enact laws that makes me and my future generations starving and dying. For people who are gaming the system, I wish they give me an Inception-style dream device and I can recreate Dante's Inferno for you.
Co(r)n Law
In the 19th Century much debate raged about the Corn Laws, a tariff designed to shield local producers of corn in England from cheaper imports. The acrimonious debate was ostensibly about the inefficiency the law entailed and the burden it encumbered on the poor, but in all sense it was a proxy war regarding the distribution of wealth among the then prevalent social classes in England - the capitalists, the landowners and the workers. It took superhuman analytical skills and very lucid arguments, chiefly in the contributions of David Ricardo and his penetrating analysis to repeal the Corn Law. Along with its repeal, went also the inefficiency of merchantalism as a great empire rose in the surfeit of its disproportionately distributed "wealth of nation" brought about by free trade.Fast forward to the 21st Century, the social classes of old is non-existent. The humble diner owner down the street where I live is a capitalist in all sense; but a neurosergeon, a "worker", makes more money now than he does. So now that social classes cannot be delineated by job functions alone, the social class war is now a war between the rich and poor, the right and the left. And just like how the social class was had never truly extinguished but merely changed in its appearance, so had the Corn Law. It's successor is of course, the Con Laws.
(Here's a review of what constitutes an economic rent. In economics, an economic rent is the excesses beyond the minimum required to prevent something from being directed to an alternative use. If a factor is compensated at the minimum of what its owner is willing to receive to prevent it from being used in an alternative method, then it is paid at its transfer earnings. Economic rent = Excesses + Transfer Earnings. The following example illustrating the concept assumes that there are no non-monetary advantages.
Keat Yang is a soccer player making $5 million per year. If his pay is reduced to just less than $2 million per year he would decide to become a model for Adidas instead. The money paid to me to prevent me from leaving the soccer club and model for Adidas is thus $2 million, my transfer earning. The economic rent I get is $3 million, what is paid in excess of the transfer earning. An important caveat of course is that what constitutes an economic rent or a transfer payment varies across individuals/firms. For the whole professional soccer player association as a whole, the $3 million from my $5 million wage is an economic rent because if I were to be payed any lower I'd still choose to be a soccer player anyway if I am paid anything above the minimum of $2 million that is my transfer earning. To my soccer club, say Arsenal, that $5 million is a transfer earning because if they do not pay me that much, a small club called Real Madrid might walk in with an offer an hijack me away).
The principle problem with the Con Laws is that they are an institutionalised mechanism meant to extract economic rent at the expense of the greater good. I admit this argument will probably rile up my Conservative counterparts, especially honest ones who think that people should not have what they rightfully earn taken away. I must say this is a belief I share with conservatives. I do not object to Russel Peters, Fernando Torres or Steve Jobs making their millions, because society clearly benefit from their work efforts. Wealth distribution is among the chief causes of idealogical faction between the left and the right, and a pertinent argument is to what degree is government involvement required to distribute wealth in an "equitable manner." I do not have the moral authority to decide how much of wealth have to be taken away from Bill Gates to be given to the poor homeless person on the street, because I cannot make the poor person better off without making Bill Gates worst off.
Yet it would be an overarching argument to say that all the wealth of the rich are well-earned. My major concern is that when the system is tweaked to institutionalise economic-rent seeking behaviour for dubious, overinflated "contributions" to the world of certain people that spreading the wealth around would be desirable. Take the financial sector as an example. A lot of start-ups that benefited mankind like Google were made possible in part because of bankers and the financial market. However, some quarters in the financial sector, the derivatives market for instance, are manipulating the system (New York Time coverage) to guarantee to themselves the economic rent at the expense of potential competitors and to the potential "Googles" hoping to have cheaper accessibility to the derivative markets. It is in this that a standard approach in positive economics can be used to illustrate the inefficiencies caused by such Con Laws, as David Ricardo did to help repeal the Corn Laws. Using a standard Welfare Economics Analysis, we have a strong case that such "cartelisation" empowered by such Con Laws had essentially guaranteed economic welfare inefficiency. The market price for derivatives can be reduced with the addition of more suppliers in the trading house. As the gap between what consumers would be willing to pay and how much they actually have to pay increases; the gap between what suppliers would like to receive and what they actually receive increases, we have an increase in social welfare up to the point of equilibrium. Even when the size of the gap between what consumers would be willing to pay, and what suppliers are willing to receive, and what they actually pay and receive remains the same as it was, an electronic trading system would reduce industrial cost and hence we also have a strong case for productive efficiency.
Another strong example of the Con Laws (Or in nerd-speak you can call it Corn Law V2.0) we have the lobbying group and lobbying firm employed by farmers for agricultural subsidy. Part of the food crisis we are facing now can be attributed to such subsidy scheme, which essentially yet in a twisted manner serve the same function as the Corn Law in Ricardo's era. An unjustifiable subsidy to inefficient producers distorts the price signal for the planning of crop cultivation and raises the relative price of imports that would have been "cheaper" were it not for such artificial impositions. The result is of course and badly-coordinated argricultural sector that brought along with it a food crisis.
Given what we understand from Public Choice Theory and the Impossibility Theorem, I understand that people plead apathetic to political and economic issues. Why incur the cost of examining these issues when its marginal effect on each individual is so small? Yet we continue to fume over our social class war of the rich versus the poor. The poor would see a conservative party in the mould of the Sheriff of Nottingham, the manifestation of a political power to stymie the efforts of their Robin Hood. The Rich would see a liberal party as a mould of the dreaded Robin Hood, a manifestation of political power to rob from the not-evil Rich to give to the poor.
Arguing in such a vacuum is a futile exercise with no physical reality. Conservatives or Liberals, Democrats or Republicans, a common threat to us all are the Con Laws.
PS: Tea-Partyers and fanatical Conservatives, I don't really understand your economics. Congressman and Senators who bend on over to secure economic rent for vested interests, I admire your ability to say what you will do "for our children" in camera only to enact laws that makes me and my future generations starving and dying. For people who are gaming the system, I wish they give me an Inception-style dream device and I can recreate Dante's Inferno for you.
Tuesday, December 14, 2010
Velk on QE2
Tom Velk from McGill's North American studies observed that the market is not responding to the Federal Reserve's QE2 programme. In the same commentary Velk also provided the underlying principles of the financial market as we understand it and argued that because prospects of growth are anticipated to be grim and that the counter-recession programmes have hampered the perceived solvency of most countries, the markets simply won't budge.
(For readers with no economics background, Quantitative Easing is (typically) the purchasing of government securities to lower the interests they pay by using money printed by the central bank, as empowered in the law of its creation. The purpose is to create additional supply of money so that commercial banks will lend them out and hopefully, spur growth to bring a country out of a recession. There are a few psychological factors that should in theory, spur investments and spending in an economy.
1. When short-term interest rates are low and firms are not responding, lowering the yield of long-term interest rates by purchasing government securities (or other financial instruments) will create more money in the economy so that no one has the incentive to hoard it as a store of value.
2. If the economy expects that there are prospects for growth, borrowing when it is cheap right now might pay off in the future when the economy recovers.
3. A slightly more "evil" twist to see this is that when investors think that inflation(rise in price of goods) that is about to accompany growth when the economy recovers will decrease the value of their assets, they will be be more inclined to invest in assets; or in the case of firms, instead of holding the money they have as part of their capital, will invest it instead. Either way, because of the fear that their assets might lose value, these individuals or firms will spend right now, thus collectively veering the economy to recovery.)
For a take on QE in combating a liquidity trap that mired us in this depression, I recommend Paul Krugman's Return of Depression Economics. Alternatively you can read this post from some lousy wannabe.
An important caveat: The success of any round of QE is contingent of the Federal Reserve and by extension, the government's ability to persuade the market that the recession is but a glitch and prospects for future growth is solid. Velk's commentary is arguing that as of now, the Fed and the government has not succeeded in doing this thus far).
Instead of piling their faith on the government programmes and the central bank, as Velk argued, investors are flocking to a more "tangible" store of value in commodities like oil, gold etc. The gold-bug camp argues that because investors are jitterish about the run-away inflation that seems plausible when the economy recovers and that the Federal Reserve might not be able to rein-in the excess of supply of money, the price of gold is skyrocketing.(For non-economics readers again, what we mean by this is that investors are worried that the excess supply of money will make their money worthless because inflation caused by the rise of the price of goods will take away the value of their money. Think about the stories your parents told you about how Char Mee Hoon used to cost 5 cents.An illustration can be found here, linked from Greg Mankiw's blog). In this I share the view of economists who disagreed. Scott Sumner for instance, argued that the increasing price of gold is not due to the fear of inflation afflicting North America, but rather the increase in demand for gold from China, where the people are hedging against the inflation in an overheated market. (Scott Sumner's post was made accessible from Hisham's blog).
It is in this that I think using the soaring price of gold to argue that investors are spooked by inflation overstates the case against QE2. I admit however, the credibility of governments and central banks are under siege. What we need right now is not the fear of inflation, but rather inflation to hurtle us out of this mess. The key in achieving that while assuring the market that it will be placed under control would require the satisfaction of these conditions:
a) That policy makers explicitly target an inflation rate.
b) To provide a stable macro-economic conditions for investors.
c) Enact policies (tax cuts, government spending etc) to boost real income and create a feedback loop of recovery.
In all sense the economy is analogous to a game of music chair. If everyone pretends that the music hasn't stopped and keeps on passing the parcel, the game goes on. What we need then is to get all these players to continue to pass on the parcels by making them believe that the music is still going on, regardless of what it may be objectively. When the music is played back, we'd all still be trudging along.
On what I think about austerity packages right now, I quote Keynes " In the long run we're all dead."
(For readers with no economics background, Quantitative Easing is (typically) the purchasing of government securities to lower the interests they pay by using money printed by the central bank, as empowered in the law of its creation. The purpose is to create additional supply of money so that commercial banks will lend them out and hopefully, spur growth to bring a country out of a recession. There are a few psychological factors that should in theory, spur investments and spending in an economy.
1. When short-term interest rates are low and firms are not responding, lowering the yield of long-term interest rates by purchasing government securities (or other financial instruments) will create more money in the economy so that no one has the incentive to hoard it as a store of value.
2. If the economy expects that there are prospects for growth, borrowing when it is cheap right now might pay off in the future when the economy recovers.
3. A slightly more "evil" twist to see this is that when investors think that inflation(rise in price of goods) that is about to accompany growth when the economy recovers will decrease the value of their assets, they will be be more inclined to invest in assets; or in the case of firms, instead of holding the money they have as part of their capital, will invest it instead. Either way, because of the fear that their assets might lose value, these individuals or firms will spend right now, thus collectively veering the economy to recovery.)
For a take on QE in combating a liquidity trap that mired us in this depression, I recommend Paul Krugman's Return of Depression Economics. Alternatively you can read this post from some lousy wannabe.
An important caveat: The success of any round of QE is contingent of the Federal Reserve and by extension, the government's ability to persuade the market that the recession is but a glitch and prospects for future growth is solid. Velk's commentary is arguing that as of now, the Fed and the government has not succeeded in doing this thus far).
Instead of piling their faith on the government programmes and the central bank, as Velk argued, investors are flocking to a more "tangible" store of value in commodities like oil, gold etc. The gold-bug camp argues that because investors are jitterish about the run-away inflation that seems plausible when the economy recovers and that the Federal Reserve might not be able to rein-in the excess of supply of money, the price of gold is skyrocketing.(For non-economics readers again, what we mean by this is that investors are worried that the excess supply of money will make their money worthless because inflation caused by the rise of the price of goods will take away the value of their money. Think about the stories your parents told you about how Char Mee Hoon used to cost 5 cents.An illustration can be found here, linked from Greg Mankiw's blog). In this I share the view of economists who disagreed. Scott Sumner for instance, argued that the increasing price of gold is not due to the fear of inflation afflicting North America, but rather the increase in demand for gold from China, where the people are hedging against the inflation in an overheated market. (Scott Sumner's post was made accessible from Hisham's blog).
It is in this that I think using the soaring price of gold to argue that investors are spooked by inflation overstates the case against QE2. I admit however, the credibility of governments and central banks are under siege. What we need right now is not the fear of inflation, but rather inflation to hurtle us out of this mess. The key in achieving that while assuring the market that it will be placed under control would require the satisfaction of these conditions:
a) That policy makers explicitly target an inflation rate.
b) To provide a stable macro-economic conditions for investors.
c) Enact policies (tax cuts, government spending etc) to boost real income and create a feedback loop of recovery.
In all sense the economy is analogous to a game of music chair. If everyone pretends that the music hasn't stopped and keeps on passing the parcel, the game goes on. What we need then is to get all these players to continue to pass on the parcels by making them believe that the music is still going on, regardless of what it may be objectively. When the music is played back, we'd all still be trudging along.
On what I think about austerity packages right now, I quote Keynes " In the long run we're all dead."
Sunday, December 12, 2010
A Cartel in the Derivatives Market
The New York Time's latest coverage alleging a cartel formed amongst "big banks" in the oligopolistic derivatives market is an interesting one. In standard Economics textbook it is often said that the stability of a cartel lies on its ability to enforce its ground rules among its members.
In this case it appears that the cartel might actually be strengthened on the legislative side with the support of a Republican-controlled Senate. But then a Judiciary that is interested in interpretting law rather than focusing on upholding the law might thwart that.
As an added twist, if a cartel were to be formed there are incentives for outside firms to stay out of the cartel and then cheat by producing more and selling at the price created by the output restrictions of the firms involved in a cartel. However in this case, since total market power is created by law to be concentrated on the hands of the members of the cartel, only members in the inner circle benefit.
In my humble normative judgement, I think economics should be a focal point of the impending debate. In an utilitarian view point, the cartel should be broken down and transparency is paramount because the benefits accrued to society in greater and cheaper accessibility to derivatives far outweights the cost (profits of "Big Banks", whatever "Big Banks" mean). On a Just Deserts theory viewpoint, it is hard to make a case that the members involved in his cartel deserve the economic rent (which mean institutionalised guarantee of maximum profits, which may be negative,zero or positive) by virtue of their contribution in providing a valuable service, because the additional value attested by the profits is artificially sustained by forcefully keeping potential competitors out.
In this case it appears that the cartel might actually be strengthened on the legislative side with the support of a Republican-controlled Senate. But then a Judiciary that is interested in interpretting law rather than focusing on upholding the law might thwart that.
As an added twist, if a cartel were to be formed there are incentives for outside firms to stay out of the cartel and then cheat by producing more and selling at the price created by the output restrictions of the firms involved in a cartel. However in this case, since total market power is created by law to be concentrated on the hands of the members of the cartel, only members in the inner circle benefit.
In my humble normative judgement, I think economics should be a focal point of the impending debate. In an utilitarian view point, the cartel should be broken down and transparency is paramount because the benefits accrued to society in greater and cheaper accessibility to derivatives far outweights the cost (profits of "Big Banks", whatever "Big Banks" mean). On a Just Deserts theory viewpoint, it is hard to make a case that the members involved in his cartel deserve the economic rent (which mean institutionalised guarantee of maximum profits, which may be negative,zero or positive) by virtue of their contribution in providing a valuable service, because the additional value attested by the profits is artificially sustained by forcefully keeping potential competitors out.
Thursday, December 9, 2010
Towering Prosperity
To its proponents, towering skyscrapers bustling with economic activities encapsulate the progressive nature of the community.They are grandiose architectural successes etching closer and closer to the sky as communities engage in an arms race to boast that only the sky is the limit. To its staunch opponents, they are but hollow phallic symbols showcasing garish extravagence. Fervent supporters of skyscrapers are quick to point out that major global city centers have one - the Empire State Building in New York; Taipei 101 in Taipei etc. Some would even go as far as arguing that the construction of skyscrapers causes economic growth.I am skeptical of such arguments on the basis that correlation is not causation.
Just because skyscrapers are found in major city centers in the way doesn't prove that their construction brings economic growth. In an ironic(and iconic) twist, Burj Dubai, the skyscraper that was to be inaugurated as the tallest skyscraper in the world was renamed Burj Khalifa in gratitude to the U.A.E for bailing Dubai out of a property bust. Using skyscrapers to predict economic boom or gloom would yield a prediction no more accurate then say, flipping a coin.
There is always a "construction lag" between the time investment decisions are made and the time a skyscraper is completed. The fact that skyscrapers tend be completed in times of boom doesn't mean that investment in skyscrapers per se contribute to growth. Rather the macroeconomic conditions were such that investors expected inflation to pose enough justification to invest now in a skyscraper (because their money will be worth much less in the future); or are expecting interest rates to increase as the Reserve Banks try to cool down an overheated market. Either way, the decision to build skyscrapers is an effect of a booming economy rather than the other way around.
Of course, a keen reader might observe that the flip side can also be true. The completion of a skyscraper might also predict a bust. (Hence the Skyscraper Index). If investment decisions are made in a market fuming with irrational exuberance, where nobody entertains the idea that the bubble will burst, then the completion of a skyscraper under such condition is inevitably accompanied with a period of gloom. When the dust settles in the aftermath of the bubble's burst, what we are left with are a glut of towering buildings appraised with low values that would have seemed preposterous months ago.
By now, how confident can we be with the causal relationship between skyscrapers and economic growth?Skyscrapers can't even be used reliably to establish a correlational relationship with a boom/bust outcome. And in what sense is a skyscraper beneficial for growth? In thinking of building one we also have to take into account the high cost in maintenance such buildings incur. If the presence of a skyscraper signals to investors on how serious a party is in the development of an area, as an economics student I have to ask, would the same be achieved by building a vast network of infrastructure connecting to the site?
So hopefully you can all see that not only is it dubious to claim that building skyscrapers drives growth, correlating skyscrapers with specific outcomes is equally questionable.
I am not opposed to growth and I am willing to entertain the idea that skyscrapers can contribute to growth if I am presented with strong evidence. What I am unwilling to accept is the junk-economics people try to sell me by cherry-picking data and packaging dubious correlational arguments into undisputed causal ones.
Just because skyscrapers are found in major city centers in the way doesn't prove that their construction brings economic growth. In an ironic(and iconic) twist, Burj Dubai, the skyscraper that was to be inaugurated as the tallest skyscraper in the world was renamed Burj Khalifa in gratitude to the U.A.E for bailing Dubai out of a property bust. Using skyscrapers to predict economic boom or gloom would yield a prediction no more accurate then say, flipping a coin.
There is always a "construction lag" between the time investment decisions are made and the time a skyscraper is completed. The fact that skyscrapers tend be completed in times of boom doesn't mean that investment in skyscrapers per se contribute to growth. Rather the macroeconomic conditions were such that investors expected inflation to pose enough justification to invest now in a skyscraper (because their money will be worth much less in the future); or are expecting interest rates to increase as the Reserve Banks try to cool down an overheated market. Either way, the decision to build skyscrapers is an effect of a booming economy rather than the other way around.
Of course, a keen reader might observe that the flip side can also be true. The completion of a skyscraper might also predict a bust. (Hence the Skyscraper Index). If investment decisions are made in a market fuming with irrational exuberance, where nobody entertains the idea that the bubble will burst, then the completion of a skyscraper under such condition is inevitably accompanied with a period of gloom. When the dust settles in the aftermath of the bubble's burst, what we are left with are a glut of towering buildings appraised with low values that would have seemed preposterous months ago.
By now, how confident can we be with the causal relationship between skyscrapers and economic growth?Skyscrapers can't even be used reliably to establish a correlational relationship with a boom/bust outcome. And in what sense is a skyscraper beneficial for growth? In thinking of building one we also have to take into account the high cost in maintenance such buildings incur. If the presence of a skyscraper signals to investors on how serious a party is in the development of an area, as an economics student I have to ask, would the same be achieved by building a vast network of infrastructure connecting to the site?
So hopefully you can all see that not only is it dubious to claim that building skyscrapers drives growth, correlating skyscrapers with specific outcomes is equally questionable.
I am not opposed to growth and I am willing to entertain the idea that skyscrapers can contribute to growth if I am presented with strong evidence. What I am unwilling to accept is the junk-economics people try to sell me by cherry-picking data and packaging dubious correlational arguments into undisputed causal ones.
Sunday, October 31, 2010
Unabashed self-promotion
Thursday, October 14, 2010
The Microfinance Debate at McGill
So in between academics and getting my life in order I also involve myself in some of the clubs that interest me here at McGill. The student body is very active and discourses are often intellectual or inane, depending on context. (Topics range from changing the world, gender inequality etc etc to well why the Toronto Maple Leaf is suddenly on a hot streak, killing the Pittsburgh Penguins 4-3 yesterday night).
Anyway I have also successfully obtained a position as a contributor to Student Network for Economic Development so the goal is to turn in an article on microfinance every week.
Being the contributor can be a very humbling position because quite often you have to be prepared to answer question and engage in discussions. Sometimes I correspond on behalf of the club with the school's paper and well basically anyone who is interested in anything about Microfinance. This is the interview with SNED and my response on behalf of it.
Do you think that Microfinance, due to its effectiveness, has diminished the credibility of the World Bank and IMF?
Yes, if you look at the resources that the World Bank and IMF have poured into tackling the issue of poverty the results are dismal and even counter-effective at times. What the World Bank and IMF didn't understand was that there is no one-size-fit-all policies when it comes to tackling something as tacky as poverty. Glocalisation would be a more effective way of approaching it. Microfinance is not always successful in all parts of the world, and a good example that comes to mind is India(government mandated loan requirement forces Microfinance Institutions to be reckless in handing out loan and not informing borrowers that these are loans and not handouts). What we have to understand is that any approach in microfinance has to be tailored to the varying needs of different communities. So in terms of incorporating such understanding in their business models, MFIs (Microfinance Institutions) are successful and hence the perceived diminished credibility of the World Bank and the IMF.
Do you think that Professor Yunus, whose area of expertise is in Banking, is going in over his head by now endeavouring to change the health of Bangladeshi Citizens? Shouldnt that be the government of Bangladeshes job?
No, Grameen Bank is a social enterprise that has a different objective compared to other types of firms in the market. A social enterprise is utility-maximising rather than profit-maximising,so the priorities of social enterprises are to maximise community welfare with market-based solutions, rather than to be solely driven by profit and shareholder value per se. You can see a social enterprise as an entity that bridges the efficiency of businesses with the soul of humanity. While governments are mandated by its citizens to implement policies to look after the well-being of society, they are notorious for enacting costly, sinkhole projects in spite of the noble intentions behind such initiatives. What makes it more difficult for any government to function is the scarcity in resources that it has to grapple with, particularly in terms of funding. Fiscal austerity is a perennial concern for foreign investors, or government treasury bond holders; in a similiar vein the issues of taxation, transparency in government also cripples governments in a way. Professor Yunus's initiative is desirable in a way in that it steps up to the expectations that the government failed to meet. If Grameen is able to come up with social-business models that can cater to the health needs of Bangladeshi citizens then it would be a gain to the economy (sinkhole projects are a deadweight loss). Social-enterprises can have a comparative advantage in certain projects (as results in microcredit can attest), and it certainly is better for governments to allow social enterprises to replace them in areas where these social enterprises have a comparative advantage in.What this differs from say,privatising social welfare programmes is that social enterprises still take into account social welfare rather than to be profit driven. So it is one thing to look at privatisation of public goods in askance, but there is a distinction between social enterprises and firms that seek to maximise only profit. In fact I would go as far as saying that part of the government's major objective is to allow an efficient distribution of resources, so having social enterprises replacing them in certain roles in the economy is their job. This is why I don't think Professor Yunus is overeaching in terms of trying to work on this healthcare project
Will social business deter FDI within a country because it will make it appear greedy if they are working for - profit? Is that such a bad thing?
There are no empirical data that I have seen that links FDI flows with the fear of appearing to be greedy, so what I have to offer is plausible conjectures but is nonetheless backed up by my observation (though I ought to remind you that I might have an observer bias in this). What is plausible is that it will probably not have that huge an impact on FDI flows on two grounds. First,at the short and medium run at least, FDI's generally flow to regions that act as manufacturing hubs rather than consumption hubs. So regions that offer cheaper materials and labour are attracting FDIs because they are cheaper to operate and not because they have a potential market that can be tapped into.As in the case of China, it might be the second biggest economy in the world but it is still dependent on exports and the market of potential consumers is not the number of its population, but is estimated to be in the region of 300 million,roughly the size of the population in the USA. So even if they are profit-driven, workers in impoverished regions offering cheap labour to attract FDI will not stop working on accounts that the companies they are working for is profit-driven or greedy, simply because the need for wages is higher.Consumers who are also workers in this region then will exert little pressure on the foreign firms investing in the country, so this is where there is minimal impact on FDI flows. Secondly, under the pressure from "ethical shareholders" and consumer activism, firms seem to be altering their behaviour when it comes to operating their business. While they remain committed to shareholder value and profitability, we are seeing firms who are incorporating some degree of community welfare in their business. (Think of Starbuck's fair-trade policy, environmental-friendly commitment. These are ways to promote themselves as green companies for sure, but at least such marketing efforts is good for the communities that they operate in).
An altered behaviour of firms is not a substitute for social enterprises to be sure. But in their difference in goals, social enterprises are offering consumers around the world to compare the behaviour of social enterprises and the mainstream profit driven enterprises. This gives purely profit-driven firms pressure to put on their best behaviour. So overall I think social business do not affect FDI's flow, but it does provide consumers around the globe to compare the behaviour of social businesses and purely-profit businesses, which in turn altered the behaviour of profit-driven firms to take into account any externalities they impose on the community, and ways to enrich the community that they operate in. So the impact is not only minimal, it also brings about a good change.
Yes, if you look at the resources that the World Bank and IMF have poured into tackling the issue of poverty the results are dismal and even counter-effective at times. What the World Bank and IMF didn't understand was that there is no one-size-fit-all policies when it comes to tackling something as tacky as poverty. Glocalisation would be a more effective way of approaching it. Microfinance is not always successful in all parts of the world, and a good example that comes to mind is India(government mandated loan requirement forces Microfinance Institutions to be reckless in handing out loan and not informing borrowers that these are loans and not handouts). What we have to understand is that any approach in microfinance has to be tailored to the varying needs of different communities. So in terms of incorporating such understanding in their business models, MFIs (Microfinance Institutions) are successful and hence the perceived diminished credibility of the World Bank and the IMF.
Do you think that Professor Yunus, whose area of expertise is in Banking, is going in over his head by now endeavouring to change the health of Bangladeshi Citizens? Shouldnt that be the government of Bangladeshes job?
No, Grameen Bank is a social enterprise that has a different objective compared to other types of firms in the market. A social enterprise is utility-maximising rather than profit-maximising,so the priorities of social enterprises are to maximise community welfare with market-based solutions, rather than to be solely driven by profit and shareholder value per se. You can see a social enterprise as an entity that bridges the efficiency of businesses with the soul of humanity. While governments are mandated by its citizens to implement policies to look after the well-being of society, they are notorious for enacting costly, sinkhole projects in spite of the noble intentions behind such initiatives. What makes it more difficult for any government to function is the scarcity in resources that it has to grapple with, particularly in terms of funding. Fiscal austerity is a perennial concern for foreign investors, or government treasury bond holders; in a similiar vein the issues of taxation, transparency in government also cripples governments in a way. Professor Yunus's initiative is desirable in a way in that it steps up to the expectations that the government failed to meet. If Grameen is able to come up with social-business models that can cater to the health needs of Bangladeshi citizens then it would be a gain to the economy (sinkhole projects are a deadweight loss). Social-enterprises can have a comparative advantage in certain projects (as results in microcredit can attest), and it certainly is better for governments to allow social enterprises to replace them in areas where these social enterprises have a comparative advantage in.What this differs from say,privatising social welfare programmes is that social enterprises still take into account social welfare rather than to be profit driven. So it is one thing to look at privatisation of public goods in askance, but there is a distinction between social enterprises and firms that seek to maximise only profit. In fact I would go as far as saying that part of the government's major objective is to allow an efficient distribution of resources, so having social enterprises replacing them in certain roles in the economy is their job. This is why I don't think Professor Yunus is overeaching in terms of trying to work on this healthcare project
Will social business deter FDI within a country because it will make it appear greedy if they are working for - profit? Is that such a bad thing?
There are no empirical data that I have seen that links FDI flows with the fear of appearing to be greedy, so what I have to offer is plausible conjectures but is nonetheless backed up by my observation (though I ought to remind you that I might have an observer bias in this). What is plausible is that it will probably not have that huge an impact on FDI flows on two grounds. First,at the short and medium run at least, FDI's generally flow to regions that act as manufacturing hubs rather than consumption hubs. So regions that offer cheaper materials and labour are attracting FDIs because they are cheaper to operate and not because they have a potential market that can be tapped into.As in the case of China, it might be the second biggest economy in the world but it is still dependent on exports and the market of potential consumers is not the number of its population, but is estimated to be in the region of 300 million,roughly the size of the population in the USA. So even if they are profit-driven, workers in impoverished regions offering cheap labour to attract FDI will not stop working on accounts that the companies they are working for is profit-driven or greedy, simply because the need for wages is higher.Consumers who are also workers in this region then will exert little pressure on the foreign firms investing in the country, so this is where there is minimal impact on FDI flows. Secondly, under the pressure from "ethical shareholders" and consumer activism, firms seem to be altering their behaviour when it comes to operating their business. While they remain committed to shareholder value and profitability, we are seeing firms who are incorporating some degree of community welfare in their business. (Think of Starbuck's fair-trade policy, environmental-friendly commitment. These are ways to promote themselves as green companies for sure, but at least such marketing efforts is good for the communities that they operate in).
An altered behaviour of firms is not a substitute for social enterprises to be sure. But in their difference in goals, social enterprises are offering consumers around the world to compare the behaviour of social enterprises and the mainstream profit driven enterprises. This gives purely profit-driven firms pressure to put on their best behaviour. So overall I think social business do not affect FDI's flow, but it does provide consumers around the globe to compare the behaviour of social businesses and purely-profit businesses, which in turn altered the behaviour of profit-driven firms to take into account any externalities they impose on the community, and ways to enrich the community that they operate in. So the impact is not only minimal, it also brings about a good change.
After this, the Daily's contributor wrote an article about microfinance and the social changes it has brought.
Of course, not everybody agreed. A graduate student with the pseudonym Ted Sprague disagreed and instead assailed microcredit as a tool in exploiting and enslaving the poor. In it he is also critical of the capitalistic system as a whole and his arguments, while well-intended does strike me as being too dogmatic and not objective enough.
(Note: I consider myself centre-left leaning, so don't get me wrong and think that I am here espousing market-fundamental values, I subject my view to skepticism too and that is why I limit whatever I present).
My commentary will be published on Monday's issue and I will then post a link to this post.
Update: The commentary I mentioned about can be accessed here.
Update: The commentary I mentioned about can be accessed here.
Monday, August 30, 2010
Steroid-fuel growth
I do not share the enthusiasm of China's spectacular GDP growth nor celebrate the "inevitable" rise of the country as the biggest economy of the world. Recently it has usurped Japan as the world's second biggest economy and market sentiments are mixed, with one camp predicting the country to hurtle with the same feverish expansion rate while the other predicting a sluggish growth and possibly a collapse due to speculations and "gluts." I lean towards the skeptics of China's growth in the latter.
The New York times recently published this article on the Chinese government's expansive (and expensive) influence in the economy. To be sure state mediated growth is crucial to a country's development. On the other hand I doubt that the massive clout granted to State-Owned Enterprises in crowding out the private businesses in China is sustainable and efficient. In a country where the Gini Index (measuring income inequality) lingers around 40 (but admittedly improving from 2009 to 2010), I wonder how much of the growth in GDP actually trickles down to improving the quality of life of the working class citizens. Real-estate that is unfortunately plunged in feverish speculation remains out of reach and unaffordable to many.
Which poses an interesting thing to look into. Could the spectacular growth in GDP be mostly a circus performance of State Owned Enterprises exchanging money and overcrowding the domestic and international market with moderate impact in enhancing the quality of life for the workers toiling away in factories?
For fans of history, the Japanese model of Keiretsu could be seen as a classic market failure with severe repercussions on the economy. With a business alliance formed around a bank, corporations are under no pressure from shareholders or alternative capital markets to make wise investments and even worry about sustainable profit (if any at all). So the strategy was to break into the world market by pricing competitors out even though it means taking a hit in the short run. Eventually it all broke down and despite it's technological progress, Japan was caught in a lost decade. (Insight gained from Paul Krugman's "Return of Depression Economics")
Similarly without the limitations imposed by private financial institutions, state-owned banks can dole out money like sugar daddy to state owned enterprises which might make imprudent investment decisions, and all the while crowding out efficient private businesses while they are at it. Apart from that, I wonder if there is really a demand for the capacity of the infrastructures constructed under the stimulus plan. All of these seems to point to a "growth-recession" to me.
Note: "Growth Recession" is when the economy is expanding but not enough to utilise its excess or "glut" of capacity. This is also something I learned from Krugman's "Return of Depression Economics."
I could be very wrong, but I don't see any reason to celebrate China's triumph but plenty of reasons to worry about it.
Thursday, August 12, 2010
Inflate out of Deflation?
Suppose you were the Vice President of Sales for the Coastal Region of Acountrylah of Crazy for Coconuts, a cafe specialising in offering refreshing drinks. Acountrylah has a tropical climate, though the coastal regions are exposed the monsoon season periodically. As it is now a monsoon season, your sales have been plummeting and demand for your drinks has fallen. In order to narrow the gap in sales caused by seasonal variation, you have decided to issue vouchers to stimulate sales.
Even though your vouchers are trading at 10 cents over the Ringgit (So in this case a RM50 voucher costs only RM5) - sales are still not picking up. Perplexed by this response, you spoke to your QC manager and even employed the service of a consultation firm to see if there is something wrong with your product. The customers surveyed assured you that your product is fine and tastes as good as they are accustomed to. So again, you remain confused. If the vouchers are picked up by customers, why isn't anybody using them?
A little bit of investigation shows that most customers are hogging the vouchers so that they can use it when the monsoon season ends. To your greater annoyance, there is a "carry trade" going on where people buy the vouchers from your coastal region and sell it to people in the non-coastal region at a higher price, but still less than the face value of the voucher. (This exploitation of arbitrage opportunity is profitable to those who are exploiting it). Essentially you are trying to sell your drinks for "free" (vouchers can only be used when there are purchases of a certain amount on a single receipt of course). This outcome has stymied, even rendered your efforts to stimulate sales futile. Even though there is a huge amount of vouchers circulating around, nobody is using it and thus your little economy is in caught in a "liquidity trap." (Liquidity Trap = plenty of money around but little transaction)
In a stroke of genius, you decide to choose one of these two options. First, you can declare that vouchers that are worth RM50 will be worth, say only RM5 at the end of the monsoon season. Two, you put an expiry date on the vouchers, and will no longer acknowledge it when it is not a monsoon season. As a result, sales are picking up again and people are using the vouchers. Your cafes are selling drinks and you have successfully narrowed the gap in sales due to seasonal variation.
Of course, the parable above is an exercise in theory on what to do with the US economy. With the Federal Reserve Bank's recent revision of outlook from "moderate" to well, a more gloomy outlook and unemployment rate at an obstinate 9.5%, the Federal Reserve Bank has decided to maintain its monetary base with a $2 Trillion by buying more Treasury Securities with the proceeds from its mortgage backed security that has matured. With deflation now a major source of concern, and that the expansion of monetary base (which must be said, is substantial by historical standards) having no impact on inflation (and spending), it seems pretty likely that the US is now caught in a liquidity trap. The drop in productivity and fall in consumer spending suggest that this is highly likely.
So recall the two options the VP of the Coastal Region of Crazy for Coconut in Acountrylah faced. Option one is essentially a form of inflation (when a voucher worth RM50 is worth only RM5), and what this tells us is that inflation can potentially lift us out of a liquidity trap. So perhaps printing more money (quantitative easing) to induce inflation can help stimulate the economy once again as people will spend now(if they spend later their money becomes weaker because of inflation) instead of hogging it for fear of their money losing its value? Inflation also helps to reduce the real value of debts the US currently holds in addition to paying off some of the outstanding debts.
As sound as this proposal might seem in a hypothetical world, it could lead to serious negative repercussions in the real world, especially when applied to the context of present day US. Inflation and quantitative easing spooks investors and bond-holders. If a inflate-us-out-of-here policy is in place, bond-holders will likely demand higher interest rates to protect their investments (and also a high premium to compensate for the risk assumed). In addition, it is hard to quantify how such a policy will negatively impact on market confidence on the US government's ability to implement and coordinate sounds fiscal policy and how it casts doubt on the Federal Reserve Bank's ability to exercise sound monetary policy. A currency crisis is very likely and a feedback-loop inherent in such currency crises might exacerbate the problem more, provoking a crisis as severe as that of Argentina,Mexico or even the Asian Financial Crisis of 1997.
This sounds like too huge a risk to run.
So now we have option 2. Slightly unlike the parable, I do not suggest pulling out the Greenback out of circulation. Instead, a sub-money can be introduced to the economy in coordination with the tax cuts enacted under the fiscal stimulus programme (American Recovery and Reinvesment Act 2008). Yes,various studies have proven that tax cuts can be more effective than government spending, but this recession is unlike any other and the uncertainties it entails makes it more sensible to many to hold on to their money in lieu of spending. (To be fair I have no empirical data to back this up, though intuitively speaking it seems like this is the case. Perhaps a study on the spending and saving habits of those who received their tax cuts could be useful).
Instead of granting citizens Tax Credits, perhaps the citizens can be made to pay the full amount of taxes they owe, and the tax cuts they are entitled to be given in the form of spending vouchers. Such vouchers should be stripped of their function as a store of value by law (so banks and other financial institutions will not pay interests on it) to prevent an incentive of hogging it. However it must be indexed to inflation by having the government guaranteeing the real value of the voucher when it is pulled out of circulation and transferred into cash to ensure that people will use it as a form of money (but without its function as a store of value). An expectation of inflation in the future and the fact that this sub-money is non-interest bearing is likely to build up the momentum to escape from a liquidity trap, though I will not go as far as saying that this is guaranteed. In short, this sub-money is a medium of exchange and an instrument of accounting. If it were me, since I get no interest in saving this sub-money and that things are relatively cheap (because of deflation), I'd spend/invest right now and get ready to reap rewards in the future.
On whether or not the government has the right to force people to spend their money indirectly (as in introducing a sub-money that cannot function as a store of value to force spending) is beyond the scope of this post.
I must also say that I have not given it thorough politico-economic thought so I am in no position to elaborate on that side of it. Though it must also be mentioned that isn't the Federal Reserve empowered by law to do whatever it takes in extenuating circumstances to prevent a downward spiral of the economy. If that were the case doesn't that also apply to a government trying to veer the economy to recovery?
Even though your vouchers are trading at 10 cents over the Ringgit (So in this case a RM50 voucher costs only RM5) - sales are still not picking up. Perplexed by this response, you spoke to your QC manager and even employed the service of a consultation firm to see if there is something wrong with your product. The customers surveyed assured you that your product is fine and tastes as good as they are accustomed to. So again, you remain confused. If the vouchers are picked up by customers, why isn't anybody using them?
A little bit of investigation shows that most customers are hogging the vouchers so that they can use it when the monsoon season ends. To your greater annoyance, there is a "carry trade" going on where people buy the vouchers from your coastal region and sell it to people in the non-coastal region at a higher price, but still less than the face value of the voucher. (This exploitation of arbitrage opportunity is profitable to those who are exploiting it). Essentially you are trying to sell your drinks for "free" (vouchers can only be used when there are purchases of a certain amount on a single receipt of course). This outcome has stymied, even rendered your efforts to stimulate sales futile. Even though there is a huge amount of vouchers circulating around, nobody is using it and thus your little economy is in caught in a "liquidity trap." (Liquidity Trap = plenty of money around but little transaction)
In a stroke of genius, you decide to choose one of these two options. First, you can declare that vouchers that are worth RM50 will be worth, say only RM5 at the end of the monsoon season. Two, you put an expiry date on the vouchers, and will no longer acknowledge it when it is not a monsoon season. As a result, sales are picking up again and people are using the vouchers. Your cafes are selling drinks and you have successfully narrowed the gap in sales due to seasonal variation.
Of course, the parable above is an exercise in theory on what to do with the US economy. With the Federal Reserve Bank's recent revision of outlook from "moderate" to well, a more gloomy outlook and unemployment rate at an obstinate 9.5%, the Federal Reserve Bank has decided to maintain its monetary base with a $2 Trillion by buying more Treasury Securities with the proceeds from its mortgage backed security that has matured. With deflation now a major source of concern, and that the expansion of monetary base (which must be said, is substantial by historical standards) having no impact on inflation (and spending), it seems pretty likely that the US is now caught in a liquidity trap. The drop in productivity and fall in consumer spending suggest that this is highly likely.
So recall the two options the VP of the Coastal Region of Crazy for Coconut in Acountrylah faced. Option one is essentially a form of inflation (when a voucher worth RM50 is worth only RM5), and what this tells us is that inflation can potentially lift us out of a liquidity trap. So perhaps printing more money (quantitative easing) to induce inflation can help stimulate the economy once again as people will spend now(if they spend later their money becomes weaker because of inflation) instead of hogging it for fear of their money losing its value? Inflation also helps to reduce the real value of debts the US currently holds in addition to paying off some of the outstanding debts.
As sound as this proposal might seem in a hypothetical world, it could lead to serious negative repercussions in the real world, especially when applied to the context of present day US. Inflation and quantitative easing spooks investors and bond-holders. If a inflate-us-out-of-here policy is in place, bond-holders will likely demand higher interest rates to protect their investments (and also a high premium to compensate for the risk assumed). In addition, it is hard to quantify how such a policy will negatively impact on market confidence on the US government's ability to implement and coordinate sounds fiscal policy and how it casts doubt on the Federal Reserve Bank's ability to exercise sound monetary policy. A currency crisis is very likely and a feedback-loop inherent in such currency crises might exacerbate the problem more, provoking a crisis as severe as that of Argentina,Mexico or even the Asian Financial Crisis of 1997.
This sounds like too huge a risk to run.
So now we have option 2. Slightly unlike the parable, I do not suggest pulling out the Greenback out of circulation. Instead, a sub-money can be introduced to the economy in coordination with the tax cuts enacted under the fiscal stimulus programme (American Recovery and Reinvesment Act 2008). Yes,various studies have proven that tax cuts can be more effective than government spending, but this recession is unlike any other and the uncertainties it entails makes it more sensible to many to hold on to their money in lieu of spending. (To be fair I have no empirical data to back this up, though intuitively speaking it seems like this is the case. Perhaps a study on the spending and saving habits of those who received their tax cuts could be useful).
Instead of granting citizens Tax Credits, perhaps the citizens can be made to pay the full amount of taxes they owe, and the tax cuts they are entitled to be given in the form of spending vouchers. Such vouchers should be stripped of their function as a store of value by law (so banks and other financial institutions will not pay interests on it) to prevent an incentive of hogging it. However it must be indexed to inflation by having the government guaranteeing the real value of the voucher when it is pulled out of circulation and transferred into cash to ensure that people will use it as a form of money (but without its function as a store of value). An expectation of inflation in the future and the fact that this sub-money is non-interest bearing is likely to build up the momentum to escape from a liquidity trap, though I will not go as far as saying that this is guaranteed. In short, this sub-money is a medium of exchange and an instrument of accounting. If it were me, since I get no interest in saving this sub-money and that things are relatively cheap (because of deflation), I'd spend/invest right now and get ready to reap rewards in the future.
On whether or not the government has the right to force people to spend their money indirectly (as in introducing a sub-money that cannot function as a store of value to force spending) is beyond the scope of this post.
I must also say that I have not given it thorough politico-economic thought so I am in no position to elaborate on that side of it. Though it must also be mentioned that isn't the Federal Reserve empowered by law to do whatever it takes in extenuating circumstances to prevent a downward spiral of the economy. If that were the case doesn't that also apply to a government trying to veer the economy to recovery?
Friday, May 21, 2010
Unabashed Showoff
Ey! Who is that?
A thank you to the teachers who have nominated me. I am also flattered by those who will stop me just to offer their congratulations.
More posts soon.
Tuesday, January 5, 2010
Is China saving the world?
The obese, financially unrestrained , shopping binging American, the ideal customers for any retailer, is gone. With the world's greatest economy mired in the Great Recession after the 2008/09 Financial Crisis, export-driven economies around the world have been hit badly. This is yet another textbook example on how when American sneezes, the world catches a cold. The world have been pretty much dependent on American Consumers, who consumes 53 times as many products as that of the average Chinese (Green Living Tips).
Obama's visit to China and dialogue with President Hu Jintao on the need to "rebalancing" the global economy underscores the global imbalance that is hitherto too reliant on the consumption of Americans (Surowiecki). Can China be the engine that "hyperspaces" the world out of this recession, "Beam us up Scotty" style?
My favourite economist thinks so.
These graphs are taken from Professor Danny Quah's blog.
These graphs shows the growth of the GDP of the ESE economies prior to and after the 1997 Asian Currency Crisis. It includes the extrapolation of the graph were the 1997 Asian Crisis not to occur and impact on the ESE economies and an actual graph on the growth of the GDP of the aforementioned economies after taking in the impact of the Asian Currency Crisis.
Graph 1 shows the GDP growth of the ESE economies excluding that of Japan's when the Asian Currency Crisis hit. As the graph shows, there is a small cumulated underperformance of GDP caused by the ACC.(Of 5.1% according to Professor Quah).
Graph 2
Graph 2The impact of China's GDP growth on the entire ESE economy is striking over here. Without China, notice how large the underperformance is. The accumulated underperformance is 21% (Quah).
So an implication is that China's share of the GDP growth is 15.9%, by having graph 2 - graph 1.
In short, China has been silently playing the role of the propeller all along, contributing a lot to the GDP growth of ESE Asia and in a way, the world.
The question is, is China's ability to consistently and incrementally increase its GDP output good for the world? What if we indulge in some counterfactual thinking to make an assessment?
It is true that China's GDP growth in theory, should help increase the disposable income of the Chinese, thus increasing their consumption. More consumption means increased aggregate global demand, thus subsequently stimulating increasing aggregate global supply and directly , the global GDP output. The problem is, sometimes looking picture at the aggregate distracts us from peering at things that are fundamentally more important. The purchasing power of Chinese Consumers have increased, but it is still not enough than what it ought to be when its growth is based on the model of artificually reducing costs (not enforcing minimum wage, devaluing the Yuan by pegging it to the US Dollar at a lower rate than what it ought to be).
Counterfactual thinking leads me to think that if the Chinese workers are to be paid more, with higher disposable income, then global economic output could have been higher. Hence, I think there is a "Global Consumption Gap," and consequently a global GDP gap that is caused by not only unemployment and underemployment, but also of China's growth model.
Graph 3
So an implication is that China's share of the GDP growth is 15.9%, by having graph 2 - graph 1.
In short, China has been silently playing the role of the propeller all along, contributing a lot to the GDP growth of ESE Asia and in a way, the world.
The question is, is China's ability to consistently and incrementally increase its GDP output good for the world? What if we indulge in some counterfactual thinking to make an assessment?
It is true that China's GDP growth in theory, should help increase the disposable income of the Chinese, thus increasing their consumption. More consumption means increased aggregate global demand, thus subsequently stimulating increasing aggregate global supply and directly , the global GDP output. The problem is, sometimes looking picture at the aggregate distracts us from peering at things that are fundamentally more important. The purchasing power of Chinese Consumers have increased, but it is still not enough than what it ought to be when its growth is based on the model of artificually reducing costs (not enforcing minimum wage, devaluing the Yuan by pegging it to the US Dollar at a lower rate than what it ought to be).
Counterfactual thinking leads me to think that if the Chinese workers are to be paid more, with higher disposable income, then global economic output could have been higher. Hence, I think there is a "Global Consumption Gap," and consequently a global GDP gap that is caused by not only unemployment and underemployment, but also of China's growth model.
Graph 3
Graph 3 is taken from John Ross's blog, showing China's monthly changes in trade surplus "calculated as a three monthly moving average in order to avoid any purely short term distortions" (Ross).
This shows that the trade surplus of China has been decreasing, precipitiously to during the economic downturn. However, do note that the trade surplus is due to a decrease in export (because global consumption decreased during the financial crisis) compared to its import.
Ross notes that :"Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports."
Finally he summed up this wonderful post of his by stating that:
"This trend in China’s exports and imports would be by itself insufficient to offset the depressive effect on world trade of the fall in demand from the US."
Sure, China can save the world, but it could have played a greater role, if only China's consumer have the money...and appetite.
Notes:
I have focused too much on the comparatively lower per capita income of China in the lack of China's consumerism. This could be misleading because I have neglected some Chinese virtues like putting aside money to save, a Confucian value that shapes much of the character of the ethnically Chinese citizens. However, the Surowiecki post places much more weight upon other things, the economic system of China, the limited financing and so on. Ultimately though, Surowiecki and I both agree on the need for the Chinese workers to have higher disposable income, and a different approach towards growth.
This shows that the trade surplus of China has been decreasing, precipitiously to during the economic downturn. However, do note that the trade surplus is due to a decrease in export (because global consumption decreased during the financial crisis) compared to its import.
Ross notes that :"Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports."
Finally he summed up this wonderful post of his by stating that:
"This trend in China’s exports and imports would be by itself insufficient to offset the depressive effect on world trade of the fall in demand from the US."
Sure, China can save the world, but it could have played a greater role, if only China's consumer have the money...and appetite.
Notes:
I have focused too much on the comparatively lower per capita income of China in the lack of China's consumerism. This could be misleading because I have neglected some Chinese virtues like putting aside money to save, a Confucian value that shapes much of the character of the ethnically Chinese citizens. However, the Surowiecki post places much more weight upon other things, the economic system of China, the limited financing and so on. Ultimately though, Surowiecki and I both agree on the need for the Chinese workers to have higher disposable income, and a different approach towards growth.
Subscribe to:
Comments (Atom)