P. J. O.Rourke on the Free Market

P.J. Has an excellent piece on how the Republicans 'blew it'. Here's an interesting paragraph:

What will destroy our country and us is not the financial crisis but the fact that liberals think the free market is some kind of sect or cult, which conservatives have asked Americans to take on faith. That's not what the free market is. The free market is just a measurement, a device to tell us what people are willing to pay for any given thing at any given moment. The free market is a bathroom scale. You may hate what you see when you step on the scale. "Jeeze, 230 pounds!" But you can't pass a law making yourself weigh 185. Liberals think you can. And voters--all the voters, right up to the tippy-top corner office of Goldman Sachs--think so too.

I agree. The market fundamentally provides a bunch of signals. You can ignore them -- and this is true whether you're an automaker or a lawmaker -- at your peril.

The article offers a lot of insight with less-than-usual, but still good, humor. I recommend you give it a read.

Here's another sample of what you can expect:

If we do have morals, where were they while Bosnians were slaughtered? And where were we while Clinton dithered over the massacres in Kosovo and decided, at last, to send the Serbs a message: Mess with the United States and we'll wait six months, then bomb the country next to you.

The whole thing here.

The case for Barack Obama

The economist makes it:

[Compared to McCain,] Is Mr Obama any better? Most of the hoopla about him has been about what he is, rather than what he would do. His identity is not as irrelevant as it sounds. Merely by becoming president, he would dispel many of the myths built up about America: it would be far harder for the spreaders of hate in the Islamic world to denounce the Great Satan if it were led by a black man whose middle name is Hussein; and far harder for autocrats around the world to claim that American democracy is a sham. America’s allies would rally to him: the global electoral college on our website shows a landslide in his favour. At home he would salve, if not close, the ugly racial wound left by America’s history and lessen the tendency of American blacks to blame all their problems on racism.

So Mr Obama’s star quality will be useful to him as president. But that alone is not enough to earn him the job. Charisma will not fix Medicare nor deal with Iran. Can he govern well? Two doubts present themselves: his lack of executive experience; and the suspicion that he is too far to the left.

There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and out-fought the two mightiest machines in American politics—the Clintons and the conservative right.

Political fire, far from rattling Mr Obama, seems to bring out the best in him: the furore about his (admittedly ghastly) preacher prompted one of the most thoughtful speeches of the campaign. On the financial crisis his performance has been as assured as Mr McCain’s has been febrile. He seems a quick learner and has built up an impressive team of advisers, drawing in seasoned hands like Paul Volcker, Robert Rubin and Larry Summers. Of course, Mr Obama will make mistakes; but this is a man who listens, learns and manages well.

It is hard too nowadays to depict him as soft when it comes to dealing with America’s enemies. Part of Mr Obama’s original appeal to the Democratic left was his keenness to get American troops out of Iraq; but since the primaries he has moved to the centre, pragmatically saying the troops will leave only when the conditions are right. His determination to focus American power on Afghanistan, Pakistan and proliferation was prescient. He is keener to talk to Iran than Mr McCain is— but that makes sense, providing certain conditions are met.

Our main doubts about Mr Obama have to do with the damage a muddle-headed Democratic Congress might try to do to the economy. Despite the protectionist rhetoric that still sometimes seeps into his speeches, Mr Obama would not sponsor a China-bashing bill. But what happens if one appears out of Congress? Worryingly, he has a poor record of defying his party’s baronies, especially the unions. His advisers insist that Mr Obama is too clever to usher in a new age of over-regulation, that he will stop such nonsense getting out of Congress, that he is a political chameleon who would move to the centre in Washington. But the risk remains that on economic matters the centre that Mr Obama moves to would be that of his party, not that of the country as a whole.

There's much more on the economist piece, endorsing Barack Obama. More than anything else, it's a heavy indictment of how John McCain has run his campaign. It's a cautious, calculated endorsement; no orgasmic (and naive) blabber about how inspiring he is. I can't endorse Obama, but I can endorse the article.

For a slightly different take on Obama and McCain, see Swaminathan Aiyar for the Times of India.

Politically Incorrect guide to politics

This is a fantastic episode from John Stossel's 20/20. Part 1 is below:

Here's part 2, 3, 4, 5 and 6. Part 2 discusses the financial crisis. 

The funniest president

This is probably the best speech McCain has given. We now know the funnier candidate in this election:



Here's Obama's response. I am also reminded of Reagan's humor.

Krugman wins the Nobel

Paul Krugman has won the Nobel prize for economics. He wins it for trade theory and location theory. I recall Jagdish Bhagwati, himself in the running for the prize for several years mention somewhere that Krugman, who also happens to be his former student will one day get the prize for this very contribution. 

I must say, I'm not particularly enjoying this Sitglitz-Krugman pattern in the prizes, but when Krugman stops his anti-Bushism, he's a very good economist and he's no protectionist. Krugman also has the rare privilage of having a permenent link from my blog, on a list which is otherwise dominated by libertarians or classical liberals. As you can see, I read the right people. 

So far, the best synopsis is from Tyler Cowen. More to come I'm sure.

Obama Camp

Move over Jesus, the world has a new messiah:



Cute or Creepy? Till about 1.30 it is kinda cute, but then it gets creepy. Very very creepy. I can imagine a conversation between a typical American Mom and her child, in the summer of 2009 after Obama becomes president,

"Mom! I wanna go to Obama Camp"
"Obama Camp? you mean like Jesus camp honey?"
"Mom, who's Jesus?"

Heh.The good people at Reason has made the Pyongyang version. I'm waiting for the Nazi one.

Foreign policy 'Hit'

Here's something for you Sarah Palin/Asif Zadari haters. The two met recently in New York and here's what happened:

On entering a room filled with several Pakistani officials this afternoon, Palin was immediately greeted by Sherry Rehman, the country's Information Minister.

"And how does one keep looking that good when one is that busy?," Rehman asked, drawing friendly laughter from the room when she complimented Palin.

"Oh, thank you," Palin said.

Pakistan's recently-elected president, Asif Ali Zardari, entered the room seconds later. Palin rose to shake his hand, saying she was “honored” to meet him.

Zardari then called her "gorgeous" and said: "Now I know why the whole of America is crazy about you."

"You are so nice," Palin said, smiling. "Thank you."

A handler from Zardari's entourage then told the two politicians to keep shaking hands for the cameras.

"If he's insisting, I might hug," Zardari said. Palin smiled politely.

I'm not going to even comment. I just think someone should make Zadari the admin of Sara Palin:VPILF group on facebook. He earned it. And what did Palin think of all this?

"It's going great," Palin said. "These meetings are very informative and helpful, and a lot of good people sharing appreciation for America." [link]

God Bless America. The whole thing is on youtube. I told you these Paks are horny.

[The story via Sepia Mutiny]

Why I love P.J O'Rourke

Because he says things like this :

From Parliament of Whores (1991) 

• Giving money and power to government is like giving whiskey and car keys to teenage boys.
  
• The whole idea of our government is this: If enough people get together and act in concert, they can take something and not pay for it.
  
• Every government is a parliament of whores. The trouble is, in a democracy, the whores are us. 
  

Eat the Rich (1999):

• Your money does not cause my poverty. Refusal to believe this is at the bottom of most bad economic thinking.

Give War a Chance (1992) :

• You can't get good Chinese takeout in China and Cuban cigars are rationed in Cuba. That's all you need to know about communism.
  

FromThe Liberty Manifesto (1993):

• There is only one basic human right, the right to do as you damn well please. And with it comes the only basic human duty, the duty to take the consequences.
  
• If you think health care is expensive now, wait until you see what it costs when it's free.

From All the Trouble in the World (1994):

• A politician is anyone who asks individuals to surrender part of their liberty — their power and privilege — to State, Masses, Mankind, Planet Earth, or whatever. This state, those masses, that mankind, and the planet will then be run by ... politicians
  
• Of course, the humans in Haiti have hope. They hope to leave.
  
• War is a great asshole magnet.

Why I Am a Conservative (1996):

• There is no virtue in compulsory government charity, and there is no virtue in advocating it. A politician who portrays himself as caring and sensitive because he wants to expand the government's charitable programs is merely saying that he is willing to do good with other people's money. Well, who isn't? And a voter who takes pride in supporting such programs is telling us that he will do good with his own money— if a gun is held to his head. 
  

P.J. is an awesome satarist, journalist and a political commentator. I'd highly reccomend his two books, Parliament of Whores and Eat the Rich.

Myths and Realities of the U.S financial crisis

There is a financial crisis in the U.S. and we are hearing the same old silly arguments. Apparently, in the last few weeks capitalism has collapsed, Bush has become a socialist and it's all the fault of the World Bank and the IMF. If you belive any of that, you should really update your feed reader.

But if your concerns are more serious, the ever impressive Ajay Shah does some myth busting:

Myth: Governments are bailing out rich people. 

Reality: Acute pain is being inflicted on shareholders and top managers of financial firms.

Myth: unregulated hedge funds are dangerous.

Reality: The unregulated hedge funds were fine. The problems were created in the heart of regulated finance, in banks giving out home loans.

Myth: The crisis has demonstrated the failure of financial capitalism.

Reality: Financial capitalism has delivered $50,000 per capita of GDP in the US.

Myth: This is the failure of laissez faire ideology in the US

Reality: The US ‘Federal Register’ publishes over 50,000 pages of new regulations every year. Regulatory expenses rose 44% from 1990 to 2008 in the US. US financial regulation is far from laissez faire! What failed was dysfunctional governance structures.

Myth: The crisis has demonstrated that credit derivatives are dangerous

Reality: The crisis has demonstrated that OTC derivatives are dangerous.

Myth: Innocent bystanders have got hurt because of the shennanigans of millionaire rocket scientists. 

Reality: US GDP is doing surprisingly well.

The above is based on slides (PDF here) from a talk Ajay delivered on the financial crisis. Obviously, it would have been better to hear the man speak along with the slides. 

The presentation goes into broader range of issues and well worth a look for anyone trying to understand what went on in the financial markets. 

Mirror on Me on Obama

This probably some kind of cheating. It's useful when you have friends in the media. In any case, here is Dinidu writing on something I (supposedly) said about the U.S. elections:

Deane would vote for: Barr–Root (Libertarian)

He says he would vote for the Libertarian candidates because "I agree with Obama on some things and with McCain on others. But I don't agree enough with either one of them to actually vote for them. At least I agree with Barr on most things." But interestingly, Deane goes onto say "Now pretending we are Americans is cute, but the fact is, we are not. Sure Obama knows how to work the teleprompter and give a great speech, and Sarah Palin is one hot governor but surely, those are not good enough reasons to root for anyone."

He explained his stance by saying, "Unfortunately 'talk' is all what most twenty-something Sri Lankan Obama supporters have considered. They might give all sorts of sophisticated policy-wise reasons for it now, but the fact is most decided to support Obama just by listening to him and not by examining his policies. Obama for example proposes to 'save American jobs', now I can understand why some Americans might support that, but why on earth would Sri Lankans want to save American jobs? I'm sure the American union bosses would find it rather cute. Protectionism of one country directly opposes opportunity of others. That's the great Obama plan."

"Like Rudy Gulliani said, "change" is not a destination and "hope" not a strategy, and I think Americans are waking up to empty cheesy rhetoric, and that's why Obama is going down in the polls and loosing the election. There is one good reason though Obama should win – he's black. If he loses, all the media here and in other countries will put it down to racism and would argue the fact that not even in America can a person from a minority win an election. That's not good for minority groups anywhere."

The whole thing here

Ok ok that going down on the polls and loosing the election part was stretching it. But I stand by everything else. I could have written anti-McCain something as well. But what's the point in making fun of an old white guy, of whom everyone hates anyway? Obama-bashing is much more fun. And did you know he just flip-flopped on net neutrality? gasp!

On Barr, he's toast. He just lost Ron Paul's endorsement by playing bad boy. He (and frankly Paul) screwed up what could have been Libertarian Party's best year yet. 

More on Obama, McCain and the U.S. elections.

Early warning on the financial crisis

In as early as 2003, someone had the wisdom to see what was coming. Who said the following?

One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out.

Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market. I therefore hope this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.

The answer is Ron Paul in a speech he gave in September 2003. The pointer from the Mises Blog. Now most financial experts wouldn't have agreed with Paul then, and probably won't agree with him now. But the bottom line is the Austrian analysis is the only one which predicted what was coming.

In late 2005, Tyler Cowen, himself no Austrian, put a post on "If I was an Austrian post" on his influential Marginal Revolution blog. In it he made several predictions as to what would happen if he were to follow the Austrian business cycle theory. As Tyler later admitted, most of it has come true. He said however, loose monetary policy, like the Austrians thought was only one of several and less important triggers to the problem. Here Paul seems to suggest that apart from loose monetary policy, government guaranteed line of credit to Fannie and Freddie was at fault for creating the 'mal-investment' and the high risk-taking.

Whether you comepletly agree with the analysis or not, you have to hand it to Ron Paul, he called this one. That's why he's all over the media now.

A Palin Theocracy in a bikini

It strikes me as rather odd when the most right-wing of the Sri Lankan media is retardedly leftwing when it comes to reporting about U.S. politics. But this choice picture for an anti-Palin piece on the Sunday Times takes the cake. Here's a screenshot : (Also see it in the ST site)

I mean, Christ..

Oh wait, I shouldn't say that. That would make me an extremist fundamentalist christian who wants to shoot women in cases of rape, incest and have a fondness for pigs with lipstick. No, I dont think I have that quite right.. but you get the picture. Oh and by the way, the bikini pic is fake. 

Racists playing the 'Obama' card

Obama is down in the polls, including on InTrade, which means lots of people are quite literally betting he will loose. So the Sri Lankan communalists are now pointing to racism to explain this turn of events. Case in point  --  this Island piece by some fellow called Mano Ratwatte.  The writer makes number of claims, 

1. Obama is loosing because there is a racist conspiracy against him. Majority of the people in the southern states will not vote for a black candidate because of racial prejudice and tradition. 
   
   
2. He says, "No one other than a Christian will ever have any chance of seriously running for public office even for a small city council (perhaps, with the exception of San Francisco)".
   
   
3. Iraq war was about oil.
   
   
4. Sarah Palin is a rightwing christian extremist. These people brainwash innocent people, doesn't care about Iraqi IDPs and calls Obama a baby killer.
   
   
5. On the other hand, Sri Lanka is wonderful. There are lots of instances where Sinhala Buddhists majorities voted for Muslims, Christians and Tamils. 
   
   
6. Ranjan Ramanayake and Janaka Perera are devout catholics. They got highest preferential votes in the buddhist dominated Sabaragamuwa and North central provinces. Sinhala-buddhists are not so bad like the newspapers say. 

In sum, Obama is loosing because of racism, We are so much better. Yay!

If Obama continues his downward trend and eventually looses, expect to hear more of this, and not just from Sri Lanka. If there was ever one good reason for Obama to win the election, it's because he's black. Just that. For the sake of proving that it can be done. and deny all those other communalists the pleasure of making  "look it can't even be done in the U.S., so why here" type arguments.

Let's take some of these "arguments" by the writer. First of all, isn't it criminal that in the days of Google and Wikipedia, these 'journalists' don't bother to using them? 

If  Ratwatte did manage to use a search engine, he would find that there have been plenty of Jews who have been American politicians including at least a couple of Muslims, Buddhists, Sikhs, Hindus, and at least one Atheist.  Some of these people have been Governors, congressmen, mayors, senators and Republicans from 'red states'.  So.. Can't run for city council? Ratwatte is lying or most probably have no idea. Let's also bear in mind we are taking about a country where non-christian religious beliefs comprise of just 5.2% of the population, including Jews. 

But let's go back to his first point, Now I don't claim to know why exactly Obama is loosing ground. If I did, I'd be a Washington strategist, not a Sri Lankan blogger. Perhaps Obama is following a flawed strategy, perhaps Americans are waking up to the naive "Hope" and "Change" stuff, can't be sure. But claiming that it's racism is just nonsense.

As for the 'Southern states', they are called red states for a reason, they go Republican whether the opposing candidate is black, white or luminous green. The battle is not fought in Texas or Alabama like Ratwatte suggests, it's fought in swing states like New Hampshire and Virginia. One needs to understand how the U.S. presidential electoral college system works, it's not like the guy with the most votes win as in Sri Lanka.

Finally, anybody who thinks Sarah Palin is a christian extremist needs get his/her head examined. If evangelicals are in control of the Republican party like some liberals like to think, Mike Huckabe would be on the top of the ticket, not John McCain. 

Now I don't know about Sinhala-Buddhist majorities voting in Muslims, Christians and Tamils, but if that is indeed the case, as a litmus test, let's put a Tamil to run in Hambantota, A Sinhalese in Jaffna and get one of the major parties to nominate a Muslim in one of the presidential elections, let's see how that go. I won't be that optimistic.  I wouldn't read too much into the Ranjan, Janaka Perera situation other than achievements of an actor and a Military man. 

To summarize, yes, I do think there are racial prejudices which play a part in the election, and yes, there are intolerant Christian fundamentalists U.S. politics, but they are not in control of this election and unlikely to make a deterministic impact in the future. Nor can Sri Lanka hope to compete for a prize in multicultural politics with the United States.

More on Obama at Deaned.

Convention speeches

I just managed to catch John McCain's full speech on Youtube. I think he did a reasonable job, and his VP Pick and the convention bump means he's now leading in the polls for the first time. The thing is with Sarah Palin in it, the Republican ticket looks likable, and have this thing going on which Obama had when he first came in. We will have to wait and see how things play out.

My favorite convention speech though is by Ronald Reagan, not his own nomination speech, which is also good, but the speech Reagan gave in support of Barry Goldwater in 1964. I think it eloquently articulates the values and principles which would fundamentally change the way government worked in the U.S. ever since the Reagan presidency.

A small excerpt of the speech is below. But do see the full version (Video| text)



Here's a few quotes from the speech I really liked:

"You and I are told increasingly that we have to choose between a left or right, but I would like to suggest that there is no such thing as a left or right. There is only an up or down--up to a man's age-old dream, the ultimate in individual freedom consistent with law and order--or down to the ant heap totalitarianism, and regardless of their sincerity, their humanitarian motives, those who would trade our freedom for security have embarked on this downward course."

"No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this Earth."

" the trouble with our liberal friends is not that they are ignorant, but that they know so much that just isn't so"

"You and I know and do not believe that life is so dear and peace so sweet as to be purchased at the price of chains and slavery."

"You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on Earth, or we will sentence them to take the last step into a thousand years of darkness.

We will keep in mind and remember that Barry Goldwater has faith in us. He has faith that you and I have the ability and the dignity and the right to make our own decisions and determine our own destiny"

Barry Goldwater's son, Barry Goldwater Jnr, himself a former congressman was not at the GOP convention last week. Instead, he was at Ron Paul's convention. Interesting times.

American Imperialism?

The Mises blog points me to this interactive map showing American troop levels. Apparently, Sri Lanka has 7 troops and U.S. pretty much has a presence in everywhere, execept for like 7 countries. Must confess though, I haven't seen a single U.S. troop in Colombo. Go see the map here, no endorsements.

Why we should listen to economists

Scot Adams makes the case. (yes, he's the guy who created Dilbert, but he majored in economics in college and nowadays runs a stellar blog). Scott writes,

If a weather expert tells you what the weather will be on a specific day next year, you can safely ignore him. If he tells you a hurricane is heading your way, it's a good idea to get out of the way, even if the storm ends up turning. That's playing the odds.

Likewise, if an economist tries to tell you where the stock market will be in a year, you can safely ignore that. But if he tells you a gas tax holiday is an unambiguously bad idea, that's worth listening to, especially if economists on both sides of the aisle agree.

If you think it is okay to ignore economists because they are so often wrong, you're looking at the wrong questions. Economists are generally wrong with complicated models but right about concepts. For example, they know that additional domestic drilling won't make much of a dent in the energy problem. And they know that free trade is generally good for all economies. (You can argue with my examples, but the point is that some things are generally known by economists while not being understood by the general public.) [link]

There's much more in his blog. Scott is also funding a survey of what some 500 economists think about some economic policies of the two candidates running for the American presidency. The results will be interesting.

As Scott finds in his survey, most economists are moderate Democrats. But also the kind who likes things like free trade, and in general freer markets than your average democrat. Jagdish Bhagwati, perhaps the one of the world's most staunchest free trade economists is a registered democrat and an Obama supporter from the start, although he disagreed with Obama's populist NAFTA bashing.

My general observation is that if you have a liberal/cosmopolitan upbringing and eventually learn economics, you tend to be more sympathetic to policy proposals and ideas of classical liberalism (i.e. support more individual freedom and freer markets) or as Scott says in the current American political language, be more socially liberal and economically conservative.

We report, You Decide Alliance.

Fox News is now on MTV Channel one. I Just watched O’Reilly Factor, which I used to follow through Fox's site earlier. It's good to see good old American-Conservatism on TV, really. Both channels are undoubtedly partisan, one on behalf of the GOP and the other one on behalf of the UNP, GOP's local buddy.

I think that's ok, all media is biased for something. Why not have it in the open. U.S. newspapers endorses candidates, Sri Lankan ones should do the same.

Peanuts and other nuts

We have had lots of nutty regulations recently. But there's room for comfort, at least Sri Lanka is not the only place with nutty regulations. Here's a peanut packet from the U.S:


The packaging says : produced in a factory producing peanuts and other nuts. Inevitable result of silly food processing regulations.Sigh. Democrats..

[pic via Don Luskin]

For inflation targeting

Ajay Shah has yet another article on India's inflation. Here's an important one-liner,

Professional economists agree with professional politicians on the importance of low inflation.

I think that sums up the case for inflation targeting.

I have previously been an advocate of currency boards, as the best institutional reform we can go for in the face of spiraling inflation in Sri Lanka, joining the camp of guys like Fuss-Budget and Steve Hanke. I have since changed my views, not so much because I have suddenly have faith in Sri Lankan institutions. I still think they are crap and I have have knee-jerk sympathy for abolishing government institutions (in this case, the central bank). But I think inflation-targeting regulation would better stand the political economy test than currency boards.

As Ajay points out, in this rare case, both politicians and economists (and the general public) agree on something -- low inflation is good. So a mandated low-inflation target for the central bank should be workable.

But I digress. This is the same country which removed inflation alcohol from the CPI index due to moral reasons and has perhaps the only central bank chief who thinks of more than a 9% of 'Core inflation' as being rather low. If there is an inflation target, perhaps the Central Bank would resort to Index manipulation. I guess I am taking a leap of faith afterall.

Despite that, I don't think abolishing the central bank will hold very well with both the electorate and most political parties. I can already hear the JVP and other lefties shouting that our monetary policy is set by Washington (in the case of a dollar-pegged currency board, this might actually be true!). Also, as the currency spate of monetary expansion in the U.S. shows currency boards are not without their problems.

Inflation-targeting on the other hand goes well with most economists I have met and seems to have stood the test of time globally, assuming it survives the current commodity hike. Realistically, this might be the best institutional reform we can get.

$500 Oil, are the Liberals happy?

Williem Buiter writing for Maverecon blog paints a gloomy picture about a world with $500 oil. He thinks when it comes to Oil prices, "sky is the limit". With ever increasing demand from places like India and China, he thinks Oil prices will continue to rise in spite of a global economic slowdown, all of which he thinks will adversely affect the poor.

I find that plausible. High oil prices may not be the driving factor behind Sri Lanka's inflation, but it does have a say in everyone's cost of living.

This reminds me of an exchange between me and Indi, where he (and a surprising number of my liberal tree-hugging friends, I might add) think that this high oil prices is actually a "good thing". Their argument is that high oil prices will lead to behavioral changes towards less energy use and incentivise alternative energy use. I certainly agree, but I don't think that's is enough to call high oil prices a "good thing". You will have to consider adverse consequences on the poor and commerce in general before coming into such conclusions. Forgetting all of that is succumbing into the church-of-gore global warming hysteria, which by the way, I don't think of as being "hippie", but simply, elitist. American-liberals shouldn't impose their values to people who cannot afford them. The same goes for democrat obsession about imposing environmental and labor standards in trade agreements for countries which can barely afford them.

For my part, I don't think of high oil as being either good or bad, high prices just are. In some ways, we should be happy about it. This means that millions of Indians, Chinese (and even some Sri Lankans) are climbing out of poverty and able to afford automobiles and in general, more quality of life. For some reason, this part of the story is often neglected.

However, I'm not as optimistic about the benefits of high oil rise, particularly for developing countries. There are several reasons for this,

First, thanks to high taxes and inefficient refinery, we already have higher gasoline prices at the pump, compared to the U.S. even without considering the heavy subsidies given to cover the daily losses of the state-run Ceylon Petroleum Corporation.

Secondly, any breakthrough from alternative-energy research is unlikely to be spawned by places like Sri Lanka, although my Indian friends might beg to differ. So while global price rise may indeed help incentivise alternative energy research and adaptation, it doesn't justify high taxes in places like Sri Lanka.

Thirdly, behavioral changes in the magnitude that we are seeing in the U.S. and other developed countries are unlikely to be seen in places like Sri Lanka. This is because, high consumption of gasoline in the U.S. is partly due to exuberance -- air travel, SUVs, long trips, so on. and when gas prices rise, Americans change their behavior. So SUV sales are down and Americans are driving less. But consumption of gasoline in places like Sri Lanka has more to do with necessity. Most Sri Lankans use public transport, which doesn't have good alternatives. As for people who are used to driving cars, public transport won't be appealing, given it's poor quality. So even if behavioral changes come (and it will) they will be smaller compared to the U.S. and at a greater cost in terms of living standards of average Sri Lankans.

So no, I don't think high oil prices are a good thing.

But I do have faith in human ingenuity, that when price of oil becomes unsustainable we will find alternatives. I don't know what that alternative is, I don't know whether it's solar, wind or nuclear. I don't know whether we will drive electric cars, or cars which runs on water or hydrogen. But what I do know is we will keep on driving.

For much of human existence, petroleum was a useless, gooey, waste product, until we figured out we can use it for energy. Similarly, we will find something else which can serve the same purpose. Humankind got out of the stone age, not because we ran out of stone, but because we found out new and better things. Similarly, we will come out of the oil-age, with something new and better. But in the meantime, let's be rational about the benefits of high priced oil.

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