Uh Oh

It was the Black Monday of 2008, as the House of Representative rejected (no kidding)the bailout plan.

Along with the flip-flops of this kind of politicial drama, enter the episode of uncertainties. No good.

Will the capital flight follow?

I Hate To Do This Again and Again, and...

...I wish that Kompas had journalists like David Leonhardt, Gretchen Morgenson, or David Warsh in their economics desk, so that some misunderstandings like the following do not come up too often on the paper.

An economic revolution has been started in the late President Ronald Reagan's era. The President believed, in accordance to Chicago Boys (the University of Chicago alumni), that market would work more dynamic and flexible if unregulated. In other words, the role and existence of bureaucracy indeed becomes impediment and prevent market and economic flexibility.

OK, it makes sense, but then the author moves on.

This opinion beats the MIT economist's view, who opts for market regulation. The reason is that there are premises that can not be answered by market (mechanism), that is, the element of greed, that can induce the market players, including the ones in financial sector, to overly exploit their money-grubbing instinct, wanting to make profit by gambling in the speculative (financial) products.

Well, I am afraid that if you open any standard Econ 101 textbook, say from Paul Samuelson's classic, himself an MIT's giant, the reason for market regulation has nothing, I repeat, alas, nothing to do with human's greed. Instead the basic economics itself points out some reasons why market sometimes fails, hence needs some government intervention.

I give you hints: go to discussions on monopoly (or non price-taking behavior), externalities, asymmetric information, and public goods.

Things I Don't Get from The Media

So our friend journalist talked to Purnomo (10), Hamsidik (10), and Tino Saputra (12), and conclude that for street children like them, praying (shalat) is a luxury. Our friend journalist also wrote that:

During Ramadhan fasting month, they are not always able to fast because they have no money left for the early meal (sahur). The money they got during the day is always handed in to their parents. (but) The food bought out of that money sometimes finished before the next day's sahur.

Did you see the logic breakdown here?

If you don't fast, you eat during the day. And to eat, you need money to buy or make food. Yet, you managed to give the earned money left to your parents by the end of the day, that sadly, still couldn't cover the sahur meal. If that's the true reason for not fasting, can I propose something like delaying the daytime meal, save the money, and now, sahur is affordable?

I don't blame them for not fasting since life on the street is physically hard (beside, who am I to judge?). I also don't blame them to come up with that kind of excuse or logic, because they are 10 years old. But I have problem with a journalist who think that you can take such excuse from the 10 years olds at face value.

By the way, kudos to the organizer of the said pesantren (retreat) for street children.

Wall Street (Not So Much) Update

The US economy crisis is now getting more dramatic as the politicians in Congress enter the stage. The market is still very fragile as the stock index went roller-coaster, while some economists in the field start to develop the alternative of the Paulson plan --which is somewhat too late at this stage, I believe.

I am diligently taking note particularly on how they'll get rid of toxic assets and at what price they're gonna buy them --and what's the impact to their macro economic variables in the near future . This episode is too important to be skipped. So far nobody has yet talked about, probably, the most interesting part of the suspense, namely, the unregulated very very big credit default swap market.

And if you asked me what's the impact to Indonesian economy, I'd say that I don't even know what's gonna happen to the US economy, let alone to Indonesia.

Stay tuned.

How to Publish in AER and JPE: Think Like Detective (Among Many Other Things, Of Course)

While Ben Bernanke and Hank Paulson try to save the world, I am, in fact, enjoying the funny lyrics of two albums of The Smiths, The Queen is Dead and Louder than Bombs, and reading Fisman and Miguel's Economic Gangsters. It's a brand new popular book on the development economics of corruption that uses creative sherlock-holmes-like approach. In particular, I find two chapters on Suharto Inc and the diplomat's parking tickets in New York interesting.

Observing the ups and downs of Suharto-linked listed companies in Jakarta Stock Exchange when there was rumor on then the President's health in 1996, they estimate that the value of political connection was around 25 percent of such companies' market value. It's a big number, by the way, because even when Apple introduced the new technological breakthrough of iPhone in 2006, its share's price was up merely by 8 percent.

It was such a simple way to estimate the value of being close to a dictator, but with the approach that nobody haven't thought about it before, and by that it managed to get published in the most prestigious American Economic Review journal. Actually the paper (read here, in pdf) is more interesting than the chapter on the book.

On diplomatic parking tickets chapter, the conclusion might sound like stating the obvious, that is, in corruption, both norms, or values, and legal enforcement, matter. But the real catch is really the fact that you can relate, of all things, parking violation in New York to reveal the nature of corruption. You can read the academic journal underlying that chapter, that will be published in another prestigious Journal of Political Economy, here (in pdf).

Oh by the way, between 1997 and 2002, Indonesian UN diplomats were in the 24th ranking (out of 149 countries) with 36.5 tickets per diplomat.

Alternative to (Mis) Using the Taxpayer Money

So the US government planned to launch probably the most expensive bailout ever by buying up the distressed mortgage to rescue the economy.

But Luigi Zingales of Chicago has different idea:

As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why no expert has mentioned it?

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition.

I think it's a worth-to-consider proposal to save capitalism and prevent the US to become the USSRA.

HT: Marginal Revolution

Freakonomics Digest The Current Turmoil

If you want to grasp some good ideas on what is happening in Wall Street these days in common laymen lingo, Freakonomics guest bloggers Doug Diamond and Anil Kashyap have an excellent piece here.

While waiting for a more elaborated academic working papers or journal articles --that might take months or years -- on this fascinating period, this writing should rightaway go to the FEUI's syllabus for Monetary/Banking/Financial Institutions courses.

And to the national press corps too.

And The Panic (may) Begin

Things are getting tensed here as the panic starts to unfold. Today, despite 85 billion USD of the US government bailout to AIG (that's around 10 percent of Indonesian GDP at purchasing power parity), the Dow Jones Index fell by 449 points. All the big names in financial world seem in trouble. The share price of Citi and Goldman Sachs were deeply down, Morgan Stanley is in a very big mess, and possibly would follow Lehman's or Merrill Lynch's suit. The more local-based institutions like Washington Mutual and Wachovia share the same critical situation.

I have been talking to several economists here, and yet, it seems that nobody really knows what the heck is really going on in Wall Street now. Not enough information to feel either optimistic or pessimistic, which is the least kind of situation that you want to have.

Let's see tomorrow. Good night and good luck.

Update: Just read today's Kompas headline online, in the second line of the first lead paragraph, the daily said:

Lehman Brothers went bankrupt due to the carelessness of the CEO Richard Fuld, who is dubbed as "the gorilla".

Umm, err... well, maybe (scratching my head). But what does it precisely mean? The rest of the article doesn't help me to understand this gorilla's fault, too.

Update 2, I've just learned from The Economist's Free-Exchange that AIG bailout might affect Manchester United too. They have to change the new logo (now the US Dept of Treasury) on their official jersey.

Fuel subsidy IS a subsidy!

Thanks to a newly published working paper by Cut Dian Agustina, Javier Granado, Tim Bulman, Wolfgang Fengler and M. Ikhsan, I can support my earlier argument that -- contrary to this and this opinions ignoring the concept of opportunity cost -- fuel subsidy is a subsidy. Read my full comment here.

My points are: 1) if you don't consider opportunity cost a cost, then you don't consider opportunity revenue as important either; 2) in the current oil prices, fuel subsidy is no longer just an opportunity cost -- it is already an accounting cost!

Sorry, Mr. Kwik, with all due respect, you are wrong (again).

Wall Street Gone Wild

When I wrote the previous posting, I never thought that Lehman would file for bankruptcy and Merrill Lynch was sold. The financial market was bad, but I never expect those giants to go under --at least, not that quick. But in the last two days, we've seen the Wall Street gone wild.

Which brings me to a question: does the series of the US government bailouts work at all? We know ex post that the bailouts to Bear Stearns and Freddie Mac and Fannie Mae do not prevent the adverse effect of the subprime mortgage fiasco to the whole structure of financial market as seen from the fall of Lehman and Merrill. But do we know ex ante that should the government not bail them out at that time, things would get better?

The two presidential candidates here, being a politician, are quick to blame and ask for more regulations on the market. But I think the best regulation, as unfortunate as it may sound, is to let the market send companies, even as big as Lehman, to bankruptcy if it's deemed necessary. At the moment, market painfully learns that nothing is too big to be failed --which is a very good lesson, by the way --so next time they themselves need to ensure that everything is in check, even without regulatory bodies that at times were simply dysfunctional and full of political clouts.

Yet it seems that the US government, perhaps after observing 500 points Dow Jones Index drop in as single day without any improving sentiment at sight, may have different idea. The latest news tells that for the time being the Fed asked Goldman Sachs and JP Morgan Chase to help AIG, the deep-troubling big insurance company in the country.

Stay tuned.

A Kind of Déjà vu --In a Reversed Course

Prior the 1998 Asia financial crisis, money flew in from the US and any other developed countries to then the rosy Asian capital market. Then when it turned out that the Asian economies did not live up to expectation, --and fueled by god-knows a sudden lost of confidence--, the investors frantically pulled out the money. Asia went to a devastating crisis.

Now ten years later, the US government bailed out and took over Freddie Mac and Fannie Mae. Of course they did it to prevent the collapse of their huge domestic housing market, as well as their financial market related to it. But so much for the problem they may face, it doesn't justify the radical step for a take-over. The government can just provide more channels to capital without effectively nationalizing the agencies. Arguably, there might be something bigger than that.

And that is the Chinese Central Bank --along with other Asian counterparts-- factor. As the Chinese has been investing 340 billion USD to the agencies' perceived as risk-free government backed securities, any slight doubt against the US government and its economy to live up to expectation would lead them to move the money out of the country. And that would be catastrophic, even to the US economy, since the very large chunk of capital inflow to US comes from the Chinese and petrodollar countries.

Washington clearly understands that the Uncle Sam can not afford to have those capital fled and suffer the way Asian countries did ten years ago, so they stepped in to restore the market confidence.

To make a stronger case on how much now Asian money is being important force in the US economy, let us look at the latest crisis in the Lehman Brothers. The free fall of Lehman's share price in the last two days was mainly due the fact that they can not close the deal with the Korean Development Bank to provide the much needed capital.

Of all countries, it's Korea, the country that went deep under ten years ago as the US investors, perhaps including Lehman, pulled the capital out of the country, that their refusal put Lehman, a very mighty financial firm of the world, on the brink of collapse --and perhaps the whole US financial market, too.

Now you see, this becomes very interesting. Stay tuned on this dangerously alarming period for the US economy and financial market and how the US government may, or may not, manage to get out of troubles.

Footballnomics #10: will protection work?

UEFA just imposed the so-called "home-grown rule", which forced Champion League teams to have at least eight home-grown players. At least four must have been produced by their own academy, the other can be graduates from other local academy. This is a version of imposing nationality requirement. Under EU ruling, workers (including footballers) from EU member countries are treated as locals. So it will be illegal for UEFA or local FAs to force clubs to have a certain number of local players.

This article, and the related discussion thread, reminds me on the classical free trade vs. protection debate. Free traders argue that protection will reduce overall competitiveness. The other side of the camp argue that some kind of protection will serve as incentives for local business (clubs) to invest more.

In the case of football, I must say, both camps have valid arguments. However, we can not assess the impact now - maybe in two World Cups. Historical data doesn't help provide conclusion as there are mixed results. Italy's youth development system is pretty solid, and it is translated to the national team's achievement. The Netherlands also have a good system (Ajax and PSV are well-known as producers of young talents), but they never won any World Cup (I know, the won the 1988 and 1996 Euros). On the other hand, Brazil and Argentina's system are not better than the Europeans, but they have abundant skilled talents to guarantee the national teams always perform well. Same thing can be said for France.

If we talk specifically about England, well, the problem lies on the input. The average talents of children entering the football academy (at the age of 10-12) is poor, according to an article I once read. I don't know what the reason is. This just illustrates that such 'home-grown' protection may not help countries like England much.

In other words, protection doesn't necessarily help a country in globalization.

Letter to the Attorney General

The Attorney General Hendarman Supandji, as reported in Kompas online, complained about the remuneration disparity between his subordinates, the attorneys' 2-3.5 million IDR per month; and the KPK's, Anti-Corruption Squad, investigators' 20 million IDR. So he wrote a letter to the President and proposes to the Minister of Finance an increase in the Attorney General Office's salary and operational money by 1 and 4 trillion IDR.

If I were the Minister of Finance, I would write back to him:

Mr. Supandji,
We completely agree with you that the salary level for the attorney is ridiculous and we herewith grant your institution the money you proposed. However, to ensure that the taxpayer's money goes to the right places and would be used efficiently, we need a cooperation from your side as well. By the end of fiscal year, we expect that the Attorney General Office would send corruptors to jail and return the money they stole at least in the amount of 5 trillion IDR to the State account. If otherwise, your Office has to give the money granted for that salary increase back to our account.

I am looking forward to hearing from you soon.

Yours truly

My question to you: should Hendarman Supandji take the offer or not? Or more precisely, do you think he will take the challenge?

Miles Davis and Transitivity Property

Philips of Berburuvinyl once texted me:

Give me a list of ten jazz albums you should have before you die.

It was probably a month ago, and yet I still can not make up my mind what to include (and to exclude) in that list. Ten is obviously too small number for the entire history of jazz, but the main problem is, contrary to my microeconomics training, I can not easily rank my preference. In more technical jargon, the transitivity property (A over B, B over C, therefore A over C) of my utility function turns out to be difficult when it comes into jazz.

One thing for sure, though, Bill Evans' and Miles Davis' albums would be there. Kind of Blue is definitely in, so is Bill Evans' Paris Concert Vol. 1 and 2.

This time I am not gonna write about those magnum opus, but a less known underrated gem of Miles Davis that I just bagged for just one buck: Miles by The New Miles Davis Quintet. There you have Miles himself on trumpet, John Coltrane tenor sax, Red Garland piano, Paul Chambers bass, and, my favorite drummer, "Philly" Joe Jones. When this album was released in 1955, those jazz giants had not earned their big names yet, and the peak performance of Miles had not yet arrived.

Yet, if you want to know how jazz giants are made --and you think that formative years and works are at times more interesting than subsequent establishment and magnum opus--, then this album might fit you. Now have a sit, relax, and enjoy your espresso, while I am working on that stupid list.

In Defense of Eko Patrio

Saiful Mujani of LSI and Freedom Institute worried that the comedian Eko Patrio might win over the economist Didiek Rachbini for a legislative seat. He wrote in a column in Tempo weekly:

In this case, the skill to make people laugh is electorally more valuable than the Professor's economics expertise. The problem is that Eko, in comparison to Didiek, maybe way more familiar to the voters in general. Although Didiek is more competent for legislation, voters do not know him and his competency. Voter's cognitive and behavior, or political market, determine the politician's political fate.

He also proposes more regulation on the law on general election to include competency, expertise background, and integrity requirement for lawmaker candidates in order to fix the current political market.

I am no political scientist. But I think Saiful made a wrong comparison here. The game is not about less competent Eko against more competent Didiek Rachbini. For voters, it is about Eko (and his celebrities friends) against those hundreds of unfamiliar, (more) incompetent and yet corrupt politicians that now occupy Senayan --to whom many voters share the disgust.

I'd say perhaps the current political market works. It drives the unfamiliar and incompetent politicians out. And arguably they might be less corrupt than the existing politicians for a good reason: the cost of getting caught is very high for them, that is, not only the five-years political career, but also their lucrative lifetime celebrity career. As public figures, they are also subject to more closer public scrutiny --think of those bloody annoying gossip shows.

Voters might be rationally ignorant, but maybe not that stupid. And on the idea that the celebrities candidacy breaks the party's internal reward mechanism for their 'real' politicians, you should ask those party leaders (themselves the 'real' politicians) why on earth they recruit Eko and friends on the first place --if they think they will be out-voted.

And trust me, Eko will not easily win because his opponents, the current 'real' politicians, are equally, if not more, funny in their own way.

On increasing the budget for education

I second the opinions from Daoed Joesoef, Ichan Loulembah, and Ross McLeod. Somehow I am not too enthusiastic when I heard that the government will allocate 20% of the budget for education sector, as mandated by the constitution. Of course I am happy to have an increased budget for education. But achieving an x% of the budget for education should be a result of a careful policy calculation, and a clear plan on how to spend it, rather than just meeting the constitutional mandate.

Here are some important points:

1. [The president's speech] was based on the assumption that lack of budget was the main issue and the main reason for the impotency of our education sector ... But such assumption was wrong ... And now the Ministry of Education was allocated a very significant proportion of the budget without a clear action plan (Daoed Joesoef).
2. Other sectors are also in a need for budget; 20% is too big to be allocated for a single sector. The Ministry's current capacity to absorb and spend the budget efficiently may not be adequate. Also, 20% of the budget is very 'tempting' for many interests (Ichsan Loulembah).
3. Lastly, "perhaps the Constitution is not the appropriate place to set out aspects of government economic policy in fine detail. It should be left to elected governments to determine the extent to which they involve themselves (and taxpayers) in promoting education, and the nature of such involvement. This should not be a matter of law, but of responding to the wishes of the electorate" (Ross McLeod).

I once wrote that although budget is important, the devil is in detail (of allocation). Should we spend more on teacher salaries, or on buildings and equipment? Should more be spent on primary and secondary education, or on tertiary education?

There have been some indication that one of the Minstry of Education's priority is to increase the number of vocational tertiary schools. The ratio of SMK (vocational high school) to SMA (general high school) is targeted to be 70:30 in the next five years, from currently 30:70. This is not the best idea, I should argue (some colleagues are working on this issue, but I am yet to be able to quote and share the results).

Is Import Bad?

Kompas daily said (translated):

In 2000, Indonesia imported 6.037 million tons of wheat. Five years later, in 2005, wheat import increased by almost 10 percent to 6.589 million tons. In 2025, import of wheat is projected to increase three times as much to 18.679 million tons. Soybean import, in the last five years (2003-2007), amounted to on average 1.091 million tons or 60.5 percent of total need.

Good or bad news?

But before answer it, hold on a second, you should hear my story.

In 2000, I bought not a single vinyl LP from the record store next door. Eight years later, in 2008, my vinyl purchase increased a lot to, say, 100 LPs. In 2025, my purchase of LPs is projected to increase god-knows-how-many-times as much to 300 LPs. My comic purchase, in the last five years (2003-2007), amounted to on average 5 books, or 60.5 percent of my total need.

It is a very good news for me, don't you think? Although I run a trade deficit against those record and bookstores, every purchase I made or plan to make implies that I somehow have the money to pay them in order to get those stuffs. In fact, part of the reasons why I work, sell the product or services to anyone but myself (read: export), and earn the money, is to buy those LPs and comic for myself (read: import).

And on independency issue: of course I depend on them. I have to live with the fact that I can not make a record at all and even if I try to draw a comic book, it would be obviously way costlier for me than doing economics (in comparison to, perhaps, Art Spiegelman on comic drawing and economics). It's no dependency, it's just a free trade.