From the Manager

Hi all. Happy Chinese- and Islamic New Year.
Free first drink (but do make a second one) today until Tuesday.

Our themes this week: 1. Take Five (of The Dave Brubeck Quartet -- not the messed-up Al Jarreau's version); 2. Freddie Freeloader (Miles Davis); and 3. Rose of the Rio Grande (The Fabulous Sidney Bechet).

Cheers,

Property rights, neglected

(Before you get bored, read the last two paragraphs first)

One thing that's so challenging everytime we start talking about public economics (i.e. economics that involves you, me, them, and the government simultaneously -- ahem, looks like everything is public economics, no?) is the issue of property rights. Sadly, it is almost always taken as a cursory note. It might even be just a cameo in econ classes. Despite the fact that the issue of property rights is a key pillar in economics.

Here's an example.

Imagine you buy a gold in whatever form. You keep it at home as a "store of value". Due to high uncertainty in other form of investment (money, stocks, bonds, etc), you decide to keep it and sell it when "price is damn good". Question: are you committing a crime? Of course not (I know you're raising your eyebrow).

But now, try this thought experiment. Change the word "gold" into "rice". Does our conclusion still hold?

Apparently, not to one of my students. She said that when you stored rice and waited until the price was high before you sold it, you're "immoral". I asked her what's the difference with gold. She quickly responded: "You don't eat gold, you eat rice". So the nature of property depends on whether or not you "eat" it, eh?

That's a total neglect of the concept of "property right". And it's not unique to the student above. The same way of thinking is pervasive even in the House of Representatives and in the government. I heard, some lawmakers start thinking of punishing "rice speculators" -- those who buy rice in bulk, keep it, and sell when the price is high.

Property right, in plain words, is the right to do anything the beholder wants with regards to the property. When I bought this laptop, what I actually paid was the right to do anything I want to it. As per the transaction, the right was transferred from the IBM store to me. Next thing I knew, I could use this laptop to blog, to write, to calculate, you name it. But don't forget, I could also use it for other purposes I want. For example, when I got threatened by some jerk on the street, I could throw this laptop on his face, as a defense. I could even ... burn it, if I want. And IBM store has no right to complain. Neither does the parliament member, nor the government.

So, if you want to punish "rice speculators", you've got to be fair. Punish gold "speculators", laptop "speculators", car "speculators", et cetera.

Note however, two caveats:

One, when the government acts as "rice speculators", the above qualification might not hold. Why? Because it speculates using our money, not their own. When Bulog buys rice, some of the money they use come from our tax. Meaning, the people own part of the property right. The government cq Bulog is therefore subject to the people's consent.

Two, be very clear on the difference between the rice "speculation" story above and the practice of illegal mixing of fuel and kerosene ("oplosan"). When I buy lots of fuel, I own the property right of it. When I buy lots of kerosene, same story applies as well. I have all the right to do anything on those two "properties", including mixing them up. But, when I sell the mixed substance to the public as if it is fuel (not mixed with kerosene) at the fuel price (be it market or administered), I am committing a crime. I have to be punished for that. Because I lie to buyers -- if you know that my fuel contains kerosene, yet I sell it at the same price with un-kerosene-d fuel, there's no reason for you to buy it from me. (The story will be more complicated when I sell the mixed thing at a price lower than fuel's price but higher than kerosene's price, then I transact with you voluntarily and with perfect information; but let's save this for other posting; for now, let's think before calling it a crime).

Having said all that, let me go back to your favourite issue: Playboy magazine. I deliberately offered the "anti" camp an economic solution, namely: buy the magazine, and burn it. Now you see what I meant. When you buy the magazine, you have all the right to do anything on it. So it's perfectly legal for you to ... burn it. But you can't burn somebody else's magazine -- he (or she) has the right to keep it; he pays for it. (Note: the argument here does not hold for the case of, for example, bibles. What constitutes "property" in the case of bible is not the book in its physical form. It's the ideas that have become publicly owned. It's the religion. And the owner of a religion is of course the believer of the religion. The only private part of the bible is the production process of printing it, and the right to keep it at home. The content, on the other hand, is a public good. Burning a bible, therefore, means an offense to the "property owners": the believers).

(Quizz: Ape and Dewa (see comments in the foregoing posting) suggest to the anti camp not to buy Playboy magazine. I suggest otherwise. Why?)

Banned in Indonesia

Before you throw cups on me, I should say: I'm also concerned with porn ubiquity. But let's get some perspective.

I'd like to warn the Playboy protesters in Indonesia that you're actually campaigning for the very thing you hate. By holding demonstration and all that, you're actually advertising for it. (The Playboy magazine should thank you for that). Look, many fourth graders are now asking their parents: Dad, Mom, what's that Playboy, people are fighting about on TV? More "sophisticated" teens will go find out themselves through internet -- piece of cake, it's three clicks away. In fact, even if they don't find it, everything is available on the street: cheap tabloids, dirty novels, nude pictures, you name it. Even the glossy ones: FHM, Cosmopolitan, Matra. Don't forget the TV itself. Or chic-lits. Porn is everywhere.

Do you think banning Playboy will solve the problem?

So what's the solution? Frankly I don't know. How about you buy each and every piece of Indonesian Playboy magazine everytime it is issued, then you burn it right away?

Or maybe our problem is education, not information? Comments welcome.

More choice in education IS better

Well, in the last post I said that more choise is not always better. But the following case is an example why more choice IS better.

ABC News published an article about how lack of choice lower the quality of U.S. education. The article argued that the quality of public schools in the U.S. is getting worse and worse because of zoning system. The zoning system works like the previous "rayonisasi" in Indonesia. Only students living in a certain district can go to the public school in that area. But basically, this creates a monopoly for the schools (because they are not competing for students with the other public schools). At the same time, it limits consumers' choice. Ask ecnomists what are the results. Right; either: 1) consumers are overcharged, 2) no incentives for producers to improve quality, or 3) both.

The zoning system of public schools has created the following condition:

1. Parents and students are stuck with the public school in their neighborhood, no matter how bad the school is.
2. Schools in relatively poor areas will have lower income because those areas will have lower tax revenue, hence they can not maintain their quality. Conversely, the quality of schools in the richer areas will be guaranteed because they can have higher tax revenue.
3. No incentives for poor quality schools to improve because they will have students, no matter what. And they are subsidized based on the number of students.

Add to the situation the strong teacher union, making it very hard to fire or 'punish' teachers due to poor performances.

In line with the story, the Economist published a similar article. It reported a case of an lternative policy, which is to give for poor families vouchers to send their kids to school of their choice. Under the voucher system, instead of chanelling the government subsidy to schools, the subsidy is sent directly to the students.

The results? According to the Economist, "Vouchers not only offer better education more cheaply to the children who receive them; they also force rotten public schools to improve, by pinching their students if they don't, as at least four studies in Florida have shown."

So, who says that competition is evil?

Is more (always) better?

We economists always argue that a rational individual would be better off if there are more choices than less. But psychologists may not. This book is one example. The author shows that modern day consumers are facing too many choices - from the choice of cereal or biscuits in the supermarket, to choices of insurance, retirement plan, education, even how to marry and build family (but ironically, less choice on politicians, he said).

This influx of choice may make consumers worse off, at least not better off, he argued, for some reasons:

1. It needs more efforts to make one small decision ("tyranny of small decision"). Which cereal has less calories? Which insurance company offers higher benefit?
2. More choice means the probability of getting the "right" choice declines. Especially for the "maximizer" type of consumer.
3. The psychological consequence of choosing the "wrong" option can be severe. The thing is we like to compare, even if what we got is actually good enough. We hate when people who shops in the other store gets the same stuff with a discounted price. We hate when realizing that we can get cheaper airline ticket had we waited for another week. (People who couldn't get to Harvard, Princeton or Yale while their classmates could should not be too pissed off when reading this...)

[Aco once raised this issue and provided a fourth answer -- that was after a "quarrel" with his wife...]

The book is in line with Prof. Kahnemann's work that brought him a Nobel Prize several years ago. The big question is whether our famous assumption regarding individual rationality is still valid.

I'd say, after reading the book, we won't need to revise that assumption. Especially for teaching purposes. I want to elaborate my reasons. But unfortunately, I have too many options to do now. And deciding which one I'm going to do may take a few minutes.... Oh well, maybe I'll just surf this website. Or this? Or this?

Central Bank to protect local employment

BI, the Central Bank, sets the new regulation that limits the number of foreign employees in foreign-owned lenders to provide jobs for local workers and encourage them to increases their credit to domestic firms (see this Jakarta Post link, non-permanent).

The limitation of the number of foreign employees is not new as Indonesian WTO-GATS specific commitments, on the general condition for banking sub-sector, states that:

1. With respect to the presence of natural persons no economic needs test will apply. A non Indonesian employe a manager or as technical expert shall have at least two Indonesian under studies during his/her term.
2. In addition to the Horizontal Measures, temporary entry will be granted to technical expert(s)/advisor(s) of branch office of the foreign bank and joint venture bank for no longer than 3(three) months per person for any given year.

Apology for you who are not familiar with the terms, it is confusing indeed. It basically says that foreign employment is restricted in banking sector.

But I fail to understand the reasons given by the BI Governor, that is to help with the situation 12 millions Indonesian unemployment, let alone with the idea of to encourage the foreign bank increasing their credit to domestic firm. The unemployment figure is unlikely affected by this policy; and can anybody help me on the second?

I can understand if it is to facilitate technology and expertise transfer in banking industry --although it is a very problematic argument, too. Yet, those expertise transfer should be gained through competition, not protection. Beside, I do not see any point for those foreign bank to hire expats --you know they are expensive--; unless they find that Indonesian bankers are really incompetent.

Are they? OK suppose they are; then let them compete with their foreign counterpart to get those millions dollar salary. And do we really want our money being managed by incompetent persons-- even if they are our fellow countrymen?

Moreover, why bothers that the foreign banks lends less than the domestic one? Surely any bank has its own risk calculation. And if those foreign banks miss the boom of the expanding local economy by channeling less credit, it is their fault. Otherwise, it is the domestic banks that is doomed.

Opp cost and Agnes Monica

Wecome to the class, I hope we’ll have fun this semester. Your syllabus and all that is on my web. You’re welcome to disagree with me in anything. Keep those damn hand phones silent during my class, or you talk outside. You can cheat during your homework or exam, but make sure you outsmart me, because I will catch you and boy, the punishment, is no fun, I guarantee you. I don’t care with attendance, it’s you who’ll miss, not me. Questions, comments, objections? No? Let’s do the first quizz...

That’s how I usually start my classes. I give first quizz in the first day, to “test the water”. I need to get the feel of who are in the room and what’s the variation within. Here’s an example question. It’s about the “opportunity cost”, the backbone concept of economics. It’s a version of Ferraro-Taylor test for economists, reported in their shocking paper (here is Bob Frank’s column about it in the NYTimes, and here is Tyler Cowen’s posting on it). Applying this quiz to three classes in different levels, I confirmed the Ferraro-Taylor’s result: the concept of opportunity cost is one of the most difficult concepts for students. In my undergraduate intermediate micro class (thus, students who have passed introductory micro), only 5 out of 38 students got it right (2 of which with wrong reasons) – about 13 percent. Idem ditto in the graduate level.

What went wrong? Introductory courses are vital. Failure to explain and understand opportunity costs and other key concepts (marginal-approach, comparative advantage, zero profit, the role of incentive, the role of price, the role of expectation, and the difference between economic cost and accounting cost) is one of the reasons why we see so many fallacies in economic analysis and reasoning. Be it in academic papers or especially in newspapers and media.

I was told by wise people, when you talk, use your audience "language". That's why I use Peterpan and Radja in the quizz given to sophomores and juniors. (For graduate levels it’s way more complicated: “Who the he** is Radja?” Try the Beatles, but some youngsters in the back fall asleep).

So far, I find it easier not to use textbook examples to the students. Instead, I use examples they like, or at least are familiar with. (Did I tell you how I managed to make them understand the concept of marginal rate of substitution using somay and teh botol, with no math?). Whenever I find interesting article with economics innuendo in it, I keep it for illustration in class.

And I just found another one today in an article in the Jakarta Post (sorry, it's not a permanent link, just google up). It features an interview with a teenage star (I assume a college students magnet she is, no?). She is nineteen, energetic, ambitious, and most importantly, she gives examples of economics – rightly and wrongly. There’s a true application of opportunity cost (“I love studying. It’s just something weird of me. If my career weren’t this big, I’d probably study all the time”). Incorrect case of comparative advantage (“I have to do my best in everything I do. And hopefully the result is the best, too"). A good starter for understanding tradeoff and marginal rate of substitution (“I want everything to be at the first level, meanwhile, I know that my body can’t cope with that”) or interior versus corner solution (“We should not just listen to pop or dangdut but also listen to jazz, blues, pop-rock”). And, a kicker really: “I want to be at a point where my idealism and the market can walk the same path”.

She'd make a good econ major.

People were mad at me...

... when I thanked the high world oil price. And when I said I didn't think world crude oil would hit $75, they stared at me, like I was insane.

Fast forward.

Well, I suppose, they forget already what I said, even when now my prediction comes close. Here's a recent example. And don't forget this and this.

My professor once told me: if you think you're an economist, wait until many people condemn you, before you can call yourself as such. Maybe he's right.

Some results from my paper

Just finished my paper for the labor economics class. It was on the determinant of wage and gender discrimination on wage in the Indonesian urban areas. Some of the results are obvious. Some not-so-obvious ones:

Does education matter? The coefficient of education was not significant for male (very significant for female). My guess because the labor market in 1999 (I was using the 1999 Sakernas data) was still affected by the economic crisis. And the biggest casualties of the crisis were workers in the urban and modern sector (due to the nature of the crisis), as well as skilled male workers (because they are less flexible). This situation might have affected the data very much.

Vocational education. Everything else constant, having secondary vocational education raised hourly wage a little for both genders. But that was not the case for tertiary vocational education (DI/II/III).

Wage discrimination. A large portion of the female-male wage gap was attributed not to difference in skills, but to the 'unobserved' factors -- discrimination. About 68 percent of the gap was due to discrimination. Even after controlling for regional and sectoral characteristics, discrimination factor still accounted for 53 percent.

Selection bias. The selection bias coefficient is negative. Meaning that if those who are not working or not in the labor market - for any reasons - were working, they would receive higher wage than those who are already in. This is a bit surprising, although not impossible. If this is correct, then one possible explanation is most of those that did not work in 1999 went out of the labor market because they did not want to receive low(er) wage.

No reason for you to economize

Yet another blatant example of ignorance to the natural role of price. Minister of Industry warns processed food producers not to produce abroad. He says, "There's no reason for domestic firms to outsource their production process abroad". Read here.

In fact, there's every reason to do that. One of which is very obvious: cost. There wouldn't be any such outsource had it been not cost saving. The Minister was (is?) an entrepreneur; how come he doesn't know this? He basically is saying: I don't care if you find it cheaper to produce your stuff out there -- you should produce it here. You should live with high cost economy, no matter what.

Ask this minister. How about we be fair to other countries. Urge their governments not to outsource to our country -- regardless of cost whatsoever. Autarky -- that's what you want? Why don't you also forbid TKI/TKW to go abroad? They outsource themselves!

And what would you do, Minister, jail them?

Unholiday

"Sometimes people forget the beauty of a holiday is in the simple fact that we can just do absolutely nothing." (Tiara Lestari, from her blogspot).

Unfortunately, that's not the case for me. Holiday means more time... to do the other works...

Are economists undemocratic?

Currently trying to finish this book (yes, I'm trying to catch up with readings, something I couldn't do before the break). It contains several criticisms to the so-called neoliberalism. One of the criticisms raised is:

"Neoliberal theorists are, however, profoundly suspicious of democracy. ... Democracy is viewed as a luxury, only possible under conditions ofrelative affluence coupled with a strong middle-class presence to guarantee political stability. Neoliberals therefore tend to favour governance byexperts and elites. A strong preference exists for government by executiveorder and by judicial decision rather than democratic and parliamentarydecision-making. Neoliberals prefer to insulate key institutions, such asthe central bank, from democratic pressures. ..." (p.66).

An article in Tempo Magazine by Prof. William Liddle indirectly replied this criticism. Apologize if you can not access the article as it requires subscription, and in Indonesian. Prof. Liddle's article is actually about new economic team led by Dr. Boediono. But we can make a generalization of his arguments to answer the question whether a technocratic government is democratic:

1. Technocratic government and independent central bank does not necessarily mean undemocratic. Their policies and actions will be monitored and evaluated. by the parliament members.
2. The parliament members have the mandate to reject the policies offered by the technocrats.

Prof. Harve's argument is also weak because his criticisms is not exclusive to market economy a.k.a. neoliberalism. It is a criticisms for representative democracy in general. His criticism, hence, implies that not only we need to revise neoliberalism, but also representative democracy. Off course, with all the cost.

P.S. Read also Alan Blinder, "Is Government Too Political?", Foreign Affairs, Nov/Dec 1997.

(Just another) reason to love football, not baseball

Am now reading this interesting book. Love to read the passage (pp.3-4):

U.S. sport leagues are closed. Team owners carefully control the number of franchises and their locations. Generally, each team is granted a monopoly over a given territory. Teams extract substantial public subsidies for their facilities. When leagues expand, existing owners charge a handsome entry fee to new owners. Limits are set on roster size. Leagues benefit from a variety of antitrust exceptions.

In the English model, leagues are open. In each country where soccer is played (save the United States), there is a hierarchy of leagues. Poorly performing teams from higher leagues can be relegated to a lower league, and strong teams from lower leagues can be promoted. New teams can enter leagues at the bottom of the hierarchy without paying an entry fee to existing owners and work their way up to hugher leagues. Teams are not conferred territorial monopolies and usually can not extort public subsidies from local governments to support facility construction.

Well, monopoly, high rent suprlus and limited competition on the one hand, versus greater competition and lesser rent surplus on the other hand. As an economist, I know which one to choose...

P.S. I made another entry regarding this book in "A Gallery of Mind."

Why aren't we all capitalists yet?

Just had a conversation with a fellow Bostonian-Indonesian regarding the left-wing governments in Latin America. The triumph of Bolivia's Evo Morales made the fourth left-wing governments in the region, after Brazil's Lula da Silva, Venezuela's Hugo Chavez and Argentina's Néstor Kirchner. Michelle Bachelet, of the center-left Concertación coalition looks almost certain to be the next Chilean president.

As I told my friend, the triumph of the left-wing parties does not mean the triumph of socialism. Lula's economic policy has been very conservative. It pays, though, by controlled inflation. His predecessor, Cardoso, was even the famous dependency theorist back in the '60s. Nevertheless, Cardoso appeared to have unsubscribed from his ideology when he became the president.

Apart from making controversial statements about the U.S. and appearing as a populist leader, no significant brekathrough from Chavez. And in Chile, despite ruled by the center-left party for the past few years, the country was one success story about establishing the fully-funded pension system. Something even have yet to happen in the U.S. And Mrs. Bachelet's economic advisor during the campaign is my Harvard Professor Andres Velasco, who is far from a left-winger in economic term.

Evo Morales is an interesting story (read a piece written by my leftist friend's blog). His first action was to cut the presidential salary (yes, his own) by almost a half. We'll see how he can write the success story of a modern left-wing government. Nevertheless, the instrumentalist and structuralist Marxians have long argued that once one become the ruler, he or she will either act as a capitalist (structuralist), or become the instrument of the capitalist (instrumentalist). Meanwhile, Maggie Thatcher once said, "There is no alternative (other than capitalism)!"

I am no Thatcheriam, nor a Marxian of any branches. But I'd say, unless you disagree that men are rational and will maximize own interest, why people still do not trust market economy?

By the way, A friend of mine forwarded a newspaper story that a former left-wing activist has been appointed commisionner of PT Pos Indonesia. I should've cheered that decision, but in fact I feel a bit sad. Read my personal take on it in my Gallery of Mind.

Back to "office" (BtO)

What's up what's upp !
Happy (belated) new year for you all. I wish you a very smashing year ahead.

For no good reason I choose this title to imitate my office director's behaviour (at the end of his trip, he allways circulates his travel log for his staff to read and perhaps ponder). The content may not be a straigtforward economics but who cares, I'm your host anyway.
So let me begin.

Just got back from 2 weeks + 2 days of leave from a trip to Tokyo, Jakarta, and Surabaya. During the first leg of my trip, I had a chance to observe Japanese passionate on refining Western culture for local consumption. In Jakarta, as usual, I became a foreigner in my own town. I had a chance to attend a commercially sponsored celebrity wedding, talked with apartment developers and owners, observed interesting debates about our economy, experienced the "dividend" from Indonesia's domestic airline deregulation, talked with Aco (our cafe manager), read about the arrest of a "religious affair" officer of the President's office for a narc related crime (rumors that he was with a prostitute when he got arrested), talked with my antrhopologist friend Dave Lumenta, and watched bunch of local TV news with no positive outlook on Indonesia on whatsoever. In Surabaya I had chance to travel to Lawang, 120 km south of Surabaya. There I talked with local farmers which happened to be my relatives and experienced sort of contrasting culture compare to what I had in Japan. On the way back to Washington DC, I enjoyed benefit from accumulating air mileage but still puzzled by the real motive why people (including myself) enroll on a frequent mileage programs. At the end of the trip, I experienced degenerating and depressing service from a US domestc air carrier in their deregulated domestic market.

So hopefully my next postings will pretty much evolve around my last trip.

See all you again later.

Sjamsu

Pay it now, or later?

So the debate on debt-rescheduling is heated up again. This is not new. Remember Kwik Kian Gie against Dorodjatun Kuntjorojakti saga in the previous administration?

The bottomline is actually simple, as Aco texted me yesterday, that is, if you lend the money, you want it back. But the question is when we, as borrower, would pay that?

The argument for debt rescheduling goes that it is urgent to reallocate some money for infrastructure -that may, or may not, spur the economy, therefore, pay it later. While the other camp believes in more financial conservatism stance, which is, the rescheduling may jeopardizing financial situation in Indonesia -such as rating that may increase the cost of, foreign, capital which is stilll very much needed. So they opt to adhere on fiscal discipline,that is, to pay the loan on schedule and take the gradual plan to lower the debt stock-as stated in the Medium Term Development Plan (RPJM).

I do understand and admit that the former standpoint is valid. Yet I am more for the latter option for two reasons. First, debt rescheduling, feasible as it is, has its own cost. It is like that the lenders would think "fine, you can pay later, but I might be more reluctant to lend you again unless you pay higher interest rate" or even worse "okay, but, hey, i smell something wrong --in the economy. I think I should tell my buddy lenders". Second, would that be really critical now to have the rescheduling, let alone to finance the infrastructure that is more a long term investment? I still have, well at least until now, confidence for Boediono and Sri Mulyani to guard and maintain discipline for state budget management. I also worry that once we get rescheduling, it creates precendent for being less discipline in our fiscal management.

And again, we still have to pay the debt anyway, sooner or later.

Meanwhile, since the two points of view have their own merit, it is for the political mechanism to decide -ideally backed with strong data and empirical findings, of course. But, before that, a call for Coordinating Minister for Economy: please do come up with a single position from the cabinet. MoF-Bappenas' differing opinion should be settled internally at the first occassion. And actually taking the political mechanism --legislative involvement, I mean--may also fail and become cumbersome process. You know why :-) and certainly the last comment made in the above article would not help. (The problem lies within, and IMF has been out. You kicked them out already, remember? :-) )

Adoption, anybody?

Our friends Lydia and (her sister) Tessa have just adopted a baby. That's wonderful. Who says no one wills to pay for non-use value?

At the same blog, Lydia argues by illustration here why we don't always need the government to protect the environment.

Syndicate this blog.

Happy New Year

On behalf of the Cafe, I would like to wish you all a great new year. May God bless you.

A little digression if I may:

The Cafe was started in October 2005. The hosts had been in close contact one another through emails. Somehow we thought, it might be a good idea to share the musings with other people. That way, we can learn a lot. And we do learn a lot: the comments, arguments, questions have been very enriching for all of us. Thank you, all. We hope to continue the fruitful discussions.

Some friends ask, why the name? The last name is easier. "Salemba" is where the hosts come from, academically -- they were college mates. The surname "Cafe", on the other hand, is inspired by a famous economics blog, Cafe Hayek. We, however, take that term in a more fun way. We (try to) treat this blog as a virtual cafe. We serve food for thoughts, and you can complain when the food is bad, and you can even request a "song". We encourage disagreement -- looking at our mistakes through other people's eyes is sometimes far more effective way of learning.

Finally, we have a good news. Due to visitors request -- we can't agree more -- Rizal will keep playing in the Cafe. And stay tuned for more inspiring guests to come!

Happy new year!

Manager