Bloggable Links

A few links I liked, I could have blogged about..

• Dinidu de Alwis is no more. No he's not dead, just quit blogging. Pity.
• On Mumbai -- Two of my favorite Bombay-based bloggers offer their take on the Mumbai attacks. Here's Amit Varma and Ajay Shah
  
  
• Thoughts on Democracy Vs. Technocracy -- Will Wilkinson in fine form.
• In defense of Bobby Jindal
• Museum of Communism. Interesting Ad campaign.
• Look mom, I'm on TV. I learn I have the propensity to overuse the words "complex" and "interact".
• Addendum : How to raise income per capita (Please don't show this to Cabraal)
  

Illogical Protectionism

Today's Sunday Times economist's column is well worth a read. Here's an important observation,

The President when introducing the Budget said the cesses and increases in several import duties were to encourage local production of these commodities or substitutes for them, as is the case of milk, sugar, wheat and maize imports. The economic logic is that higher prices for these goods would raise domestic prices for them or substitutes and be an incentive for domestic production. Therefore the increase in prices is needed for this incentive effect. However the Minister of Consumer Affairs and other government parliamentarians are saying these increases in duties would not raise prices.The Minister of Consumer Affairs, an Economics teacher is on the contrary taking steps to control prices of these commodities. If prices do not rise then there is no way in which the measures taken by the budget are incentives for domestic production.

The whole thing here.

Logic was never a strong point of the present administration. Import substitution, which the administration's economic strategy is based on, will give the results it has always given -- higher prices, fewer choices, less quality of life and eventually, a resounding victory for the opposition.

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.

Budget-Econ 101

Friday's Daily Mirror Cartoon captures the economics of government budget proposals with surprising accuracy:

Yet I'm sure come next year, there will still be many who believe they can get something from the government for "free". More on the budget, later.

The iPod Nano Index (or where you should buy your electronics stuff)

At the moment it's Australia, followed by Indonesia and Canada. No surprises there. Anyone who has been watching the the exchange rate will know that the Aussie dollar has plunged more than 25% against the dollar over the few months.

CommSecs' iPod Index(pdf) takes after the Economist's Big Mac Index in trying to show the cost of local goods for foreign buyers (measuring PPP). Basically it denotes the price of 8 GB Apple iPods from 62 countries in USD terms. Here's the full index:

Sri Lanka is on the expensive side when it comes to electronics. But you'd be happy to note, we have the cheapest Big Macs.

Here's the full report on the Index. I thank Paul Kedrosky for the chart and MR for the pointer.

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. 

Cris Lingle on Globalization & Culture

About an year ago, I helped arrange a lecture by Christopher Lingle on Globalization and Culture. It's now up on youtube.

Among other things, Cris predicts an impending crash in China. He correctly called the last Asian crisis before it happened, so I'm thinking there's something to it. I think most of his work is based on Austrian Trade Cycle theory. I could be wrong. Here's part 2 of the talk. The wobbly camera work is mostly my bad. If you want more, here's a writeup I did based on the talk.

Joe the Plumber and America's License-Raj

Apparently, John McCain's favorite Joe the Plumber, doesn't have a plumbing license. My first reaction is : There's something called a plumbing license?? 

I invite senators, Obama and McCain to visit Sri Lanka where I will introduce them to Sunil the plumber (locally known as Sunil the Paiyppa-baas) operating legally without any need for licensing. The Soviet America really needs to modernize itself into a free-market system and get off from this license-raj stuff. 

If you are American, I'd recommend you consider voting for Bob the Builder. He runs with a Son of a Butcher.

More on Joe and plumbing at MR. I thank Whackster for the initial pointer.  

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.

Silly statements

Two silly statements I read today,

1.  "Government will not sell any state owned property under any circumstances" : President
   
2.  "No state institution will be privatized" : Minister.

Let's forget that 2. for the moment. Why does His Excellency think that the govt. should not sell any state owned land?

President Mahinda Rajapaksa adding that the future generations should be able to enjoy the benefits of these assets as we enjoy them today as a result of a great sacrific of the patriotic leaders of this nation. [link]

I see. Mr.President would not sell, for example, Water's Edge, because he'd like to preserve it for the future generations. Because Water's Edge you see, is "a result of the great sacrifice of the patriotic leaders".

Actually, I don't see. In fact, that strikes me as a whole lot of nonsense. The state owns 85% of the lands in this country. That's a lot of dead capital. A good proportion of this can be used for productive development. Instead it's locked away,  apparently preserved for future generations.  

Ironically, most people will find those two statements appealing. I think it's derived from a fundamental misconception about the nature government, this romantic, yet nonsensical idea that "government is us". So state enterprises, state-land is seen as somehow being collectively owned by "us". Hence the phrases like "selling" to describe the process of privatization. 

A lot of bad public policy can be averted if many of 'us' come to realize one simple thing : Government is not 'us', it's just government. 

Where your taxes go (where they actually think it will go edition)

This is how the government intends on spending your taxes. At least partly how it will be spent. We can't afford the whole thing so the rest will be financed by debt and aid (yes, yes, eventually paid by you). 

The largest expenditure is for defence, the largest ever allocation of Rs. 177 billion, about 18% of the total expenditure. The budget 2009  from daily mirror.

More on where your taxes are here and here.  For a related post see, the biggest big government. 

(HT: on Where Your Taxes Go concept, Amit Varma)

The atlas of the real world

is very interesting. It resizes the world map according to different criteria. Sri Lanka is really big in a few things:

First, number of book published (per million).

This was a genuine surprise. And the annual rate of forest depletion :

And not so surprisingly, we do "well" in the number of deaths due to war:

Much more info and maps at Creative Review. Sri Lanka is also quite large in the rate of abject poverty (measured at $2 per day, but as I recall it's quite low at 1$ per day). Here's another interesting set of maps.

[Maps 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. 

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.

Austrian Economics in Sri Lanka?

Emailing me about to my last post, a reader asks me whether I know any Austrian economists in Sri Lanka.

Personally, I don't. I'm pretty sure it's not taught in any university. I'd say the popular Sri Lankan business portal LBO has Austrian leanings, especially the fussbudget column focusing on monetary policy. 

About an year ago, I helped arrange a couple lectures by Cris Lingle, an economist of the austrian tradition also a fellow at CCS.  He spoke about Globalization for a Youth group I'm involved with and also about imbalances at global markets at the Chamber of Commerce.  That pretty much sums up what I know about Austrian economics in Sri Lanka. 

Personally, I'm a student of the austrian tradition as much as I am a student of the neoclassical tradition and not really prepared (or know enough) to pass judgements on either. 

Austrians are also committed classical liberals or Libertarians. Sadly, I don't know many Sri Lankan libertarians either. If you have any info about Austrian economics in Sri Lanka or Sri Lankan libertarians, leave a comment or better yet, drop me an email. I'd be interested in knowing.

Seminar on Austrian economics

Foundation for Economic Education has put up podcasts of its seminar on Austrian Economics. Sri Lankans might find the two podcasts on monetary equilibrium and costs of inflation interesting. You'd need some background in economics and at least some familiarity with the Austrian school to fully appreciate it. The cost of inflation lecture might still be useful for anyone given the current circumstances.

Austrian theory is certainly not mainstream econ, but it has informed the mainstream throughout the last century. Austrian monetary theory in particular, is probably more valid here, in developing countries where central banks truly do suck, like the Austrians like to think.

Non-economists, especially those not trained in the neoclassical mainstream would probably find Austrian econ easier to appreciate and understand. There's no hunt for the elusive equilibrium, there's no emphasis demand curves (austrians think it's more like a demand fog than a curve), no assumptions about perfect competition. It's logical and commonsensical, until your probably get a sense where the austrians are taking it. I wouldn't do away the Friedmanites just yet, but If you want to give it a go, Mises.org have excellent resources on the subject. 

For daily doses of Austrian econ, both the Mises blog and even more so the Austrianeconomists blogs are highly recommended.  

Updated. 

Budget-air, No-plane

Finally, it dawned on me why they call Mihin Lanka a "budget airline". From LBO:

Sept 11, 2008 (LBO) - Sri Lanka's troubled state-run budget carrier Mihin Air is to ask for another three billion rupees in peoples' money in the next budget to revive operations, an official said.

It's financed by government budgets you see. Budget-airline, get it now?. Anyway Moving on.. 

The airline is now without aircraft after having lost its start-up capital and also money borrowed from state-run Bank of Ceylon, and was said to be in the red by more than two billion rupees. [..]

With no source of revenue, the firm is paying salaries with difficulty and out 200 workers about 40 have already left the airline the official said.

Ok so let me this straight, Mihin. You are an airline with 200 employees and you don't have any planes? 

All I can do is clap for such brilliant entrepreneurial ingenuity. No further questions.

For a Colombo Reform Process

Finally, there's some good news on the reform front :

Sri Lanka has been rated the top South Asian reformer in an annual business regulation study by the World Bank group, with a new company law and credit information improvements boosting its scores. [link]

That's according to the World Bank's Doing Business Report 2009, an annual study which analyzes and ranks countries on easy it is to do business in countries are. The bad news of course, is there's still a long way to go. Although Sri Lanka is the top regional reformer for the last year, it still languishes in 102nd position globally and behind regional countries like Pakistan (rank 77) and Maldives (rank 69), south-asia's richest and most business friendly economy. India is further behind in 122nd position, but I think the study ignores the impact of SEZs and other regional disparities in terms of policy.

Sri Lanka does especially badly with regards to paying taxes with a total of 62 payments and a total tax rate of 63.7%, which frankly is insane. This ridiculously high number of interactions with the bureaucracy is one of the reasons for bribes and corruption in the public sector. Maldives, as LBO notes, only has to make 1 payment as opposed to our 62.

We also door horribly poorly when it comes to property registration, dealing with construction permits and enforcing contracts. Labour laws are inflexible as well, something that will really hurt Sri Lanka in a low-tariff, post-GSP world.

That said, it's great that we have done some reform in the past year. The type of reforms undertaken are just mainly improving legal framework rather than getting into more politically-explosive issues, which is, at least for the moment, a decent strategy. Another thing we can probably improve is trade facilitation, which will have enormous benefits without being a political hot-button issue.

I have been thinking for some time about, what I decided to call the Colombo Reform Process. The idea is kind of modeled similar to the Copenhagen Consensus. The idea is to bring together, perhaps bi-annually, bunch of experts (mostly economists) and get them to come up with the top 10 (or 20) reforms which Sri Lanka could peform and rank it according to effectiveness and political feasibility and produce a report. I think that could really speed things up.

But this is not something that I'm in a position to do at the moment, so here's a shoutout to all the policy people at IPS, Chamber of Commerce, and the likes -- try and do this!. It might just work.