Old Policies Don't Simply Die

In an interesting paper of The Political Economy of Controls: American Sugar, by Anne Krueger, the closing paragraph reads:

"...at the very least, economists advocating government intervention in markets would be well advised to recognize that the measures they advocate will, once enacted, have a life --including supporters-- of its own.."

I think this is why the series of measures introduced by well intended Indonesian economists decades ago --rice price stabilization and import restriction, fuel subsidies, to name a few --, are still fiercely defended by many supporters regardless their irrelevancy to the current situation.

Capitalism is Dead. Not.

For those who wished that capitalism would die due to the current US financial crisis --and socialism to arise--, this editorial from the usually liberal (in US politics term, that is, a left-leaning) Washington Post, may come as a bugbear. The first paragraph reads:

Is this the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways (...the bold is mine...). The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Also, it would be interesting to see what's gonna happen to Hugo Chavez's oil-financed socialism as the world (ironically, capitalistic) economic growth decreases and brings the country's oil demand and price down.

And What Happens to Indonesian Economy

So you want to know what the impact of current global financial meltdown on Indonesian economy is? Dede Basri of Diskusi Ekonomi gives you some of the answers in this readable economic (mind you, economic) writing.

To get a better grasp for the center of his argument, you need to understand at least the straightforward national income accounting and balance of payment identities (ask your economist friend to tell you this concept over a coffee, if you don't).

On what makes BI raise interest rates, he wrote that the step is justifiable as an attempt to stem the domestic demand for import (while export declining) at the time of low capital inflow. The failure to do so might deplete the foreign reserves and lead to deeper Rupiah depreciation.

It is also to give signal that in the medium term, the BI still concerns with and runs its main job -keeping the inflation low. In this respect, Ross McLeod of ANU's Indonesia Project wrote why monetary expansionary policies, including lower interest rate, might not be desirable:

(But) base money has already been growing far too rapidly to be consistent with the current target level of about 5% inflation, which has risen from about 6% in the middle of 2007 to more than 12% in September this year.

How The Baristas Here Usually Think About Thing

I read in Kompas, now the price of cooking oil --the palm oil -- decreases. Sounds good? Hang on a sec. What about this report from the same daily: the cost of growing crude palm doesn't add up to the market price for farmers like Bahori and Syaifudin.

Economics would not tell you whether this development is a good or bad thing (You've been warned: be curious to economist who loves to play around with too much normative statements based on moral grounds). Instead, economics can tell you that as world demand slows down, the price goes down, and some of input producers adjust their production based on their cost structure --and the other way around.

It is why in the first lecture of any Econ 101, the first lesson is that economics deals with positive argument --what it is, not what ought to be. It applies cost benefit framework in looking at thing, and argue for, if not a Pareto efficiency, a Kaldor-Hick efficiency --what gives you larger net benefit or least cost. The students are trained, as simple as it may sound, not to think single-handedly but to always look at the other side of story and apply the simple idea of opportunity cost while estimating the cost of an action.

That is why I often feel desperate when reading the media or upon hearing politicians'/pundit's comments.

Don Paulson Way

Michael Corleone in the classic Godfather once said:

I'll make him an offer he can't refuse. You see, Johnny, we feel that entertainment is going to be a big factor in drawing gamblers into the casinos.

Last Monday, I can imagine Treasury Secretary told the nine US largest bank's executives:

I'll make you an offer you can't refuse. You see, folks, we feel that banking is going to be a big factor in drawing the economy out of the depression.

By that, the US effectively partially nationalize their banking system. How cool (and scary) it is.

But how can he make sure that they will lend the capital they just got? Another mafia-way?

It shows that the market does work!

I once heard that the US economy will never collapse because of three industries: music, books and film. The music industry seems to be fading away due to piracy and MP3s. But this and that articles show that the industry is searching for a new model. Apparently we shall never underestimate how the market economy works.

Now tell it to our fellow Malaysians...

Crunching Lebaran, Hidden Fear ... or Power?

Lebaran, the Eid Day in Indonesia is certainly something too interesting to take for granted. It can be religious, cultural, personal. And economic, too. A friend of the Café, Lynda Ibrahim shares her reflection. Like the barristers here, Lynda was at the Salemba School before she went to US. She's back in Jakarta now and among other things, writes for The Jakarta Post. Enjoy.

-- Manager

Crunching Lebaran, Hidden Fear... or Power?
by Lynda Ibrahim

Much has been written on Indonesian Idul Fitri rituals like mudik exodus, city slickers doing chores and herding to malls for food cause maids are off, or Jakarta’s empty streets and clearer air. Idul Fitri is supposedly the victorious day of rebirth, if a Muslim successfully atones for his or her sins through a series of purifying acts and prayers during the holy Ramadhan. Ideally, starting fresh with renewed hope, strength and limitless possibilities.

But how do you keep the spirit alive during a far less ideal time?

While living overseas I had to spend the period in starkly different settings than what I’d grown up in. Braving Ramadhan during winter, dying to gulp down hot chocolate while I had to simultaneously survive the weather and ace finals. Spending Idul Fitri as a student taking a comparative study in Chile, definitely the only Muslim within the school’s group and possibly the only one in the entire area by then. There’s something a bit surreal about swimming in one of Puerto Varas’ picturesque lakes that morning, while imagining my family celebrating back home. But I wasn’t sad. I’d just started my graduate school, was finally visiting the region I’d been so interested with while practicing my newly acquired Spanish, and plotting the next summer internship. Things were looking up and I felt fearless.       

Life changed dramatically just a couple of years later. I graduated right after the U.S entered a mild recession in early 2001. Many graduating Americans didn’t have a job offer, so I was grateful that I got one in my field of study. The company even sent me on a stint in a regional office outside the U.S., enabled me to momentarily taste the so-called high-flying expat life. All peachy until 9/11 dragged the U.S economy further down, causing massive layoffs. That year, I found Lebaran falling on my birthday while also marking my first official day out of employment.  

Surreal couldn’t even begin to describe how I felt that day. The irony of being supposedly reborn victoriously, compounded by supposedly doing better as turning a year older, while in reality you lost the fight thanks to a left-field attack you didn’t even see coming. I probably went through almost all steps of grieving as I moved through the day.

I was on denial of the awaiting downhill as Alika and her children woke me up midnight with birthday cake and candles. I felt anger as I went with Krisna to the morning Idul Fitri mass prayer, knowing that thanks to one misguided group’s actions other Muslims had to gather and perform prayer that day under authority supervision and Islamphobia in the air. I got sad as Bridget dragged me to a joint birthday dinner in the evening, sincerely wishing her the best for her birthday yet not knowing what to celebrate for my own. I missed my parents at such trying time, yet thankful they weren’t there to see their child so beaten and morose.

Looking back later, I realized there must’ve been some sort of inner energy prevailing somewhere in my deep unconscious mind by then that saved me from spiraling down and made me get out of bed the next day, bruised and afraid, to fight for better things that were yet to arrive. So while still going through the grieving cycle I eventually started anew, repatriated and made best with chances I saw.

It’s the same energy that I’m hoping to draw from this year. Granted, my Lebaran last week was within our usual traditions; my parents’ house full of friends and family, including my cousins’ screaming children who went from cheerfully picked Mom’s prized orchids to carelessly murdered her goldfish. But as I chatted up guests and chased the kids around, my mind was consumed with the embroiling turmoil and wondered if the USD 700 billion golden parachute would save the day.    

Thus certainly was unnerving to watched how worldwide markets negatively reacted this week; so wild the freefalling on Wednesday in Asia that JSX got suspended half through the trading, the UK bailout failed to lift Europe markets and 7 central banks interest cut only swung Wall Street violently without a positive ending. Panic bred more panic in a seemingly unison confirmation of global downfall, which isn’t a far stretch considering Iceland, an actual whole country, is bankrupting.

I’d seen my portfolio shrinking and don’t even want to know how much that intended life-saving lost this week as stockmarket rebounds eventually. My worries are on whether our once shaken, though-restructured banking system can withstand this time and keep safe of small cash I have left. On how much more spending power will drop and whether my budding businesses will find enough customers to survive. On when our factories don’t get the usual much-relied Christmastime export orders, how that will trickle down to the average Indonesians early next year, just in time before our election when even in normal time fear would breed more fear, and where majority of our voters are still low-educated, less-exposed citizens who may fail to understand that this time the crisis is largely an unavoidable effect from a global recession rather than, as mostly was the case of ’97-’98 crisis, a mismanagement of the ruling government. On whether I and my unmet husband could save enough for our unborn children’s college funds, because at the age group when one is supposedly most productive the global recession befalls on us.     

Dogged determination. Blind faith. That all isn’t lost yet. Or even sheer pride of not letting myself get defeated. Whatever gets me through the day. Because fear, I have some this week.

And The Nobel Prize Goes to....

Paul Krugman of Princeton and NYT columnist.

His academic work on increasing returns to scale in the international trade as well as economic geography are surely worth the Nobel-- although his partisanship tone in his NYT op-eds somewhat discounted it. But no doubt, Krugman is a prolific writer and as an economist, one of the best.

My favorite book is Pop Internationalism when he debunked those funny pundits' faux international economics theories by not only pointing names, but also deploying superb writing skills. Before becoming columnist, he was the most effective guardian against the economics illiteracy in public discussion. Lately, ironically, as a pundit, he has been the subject of the same contention.

He also earned fame for being 1998 Asia crisis analyst, partly due to his somewhat unrelated pre crisis column in the Foreign Affairs in 1994, The Myth of Asia's Miracle. Borrowing Alwyn Young's Asian countries' TFP analysis, he concluded that the high growth, the miracle, was not a result of total productivity but very much capital accumulation which is subject to diminishing return. I think this piece was my first encounter with Paul Krugman.

To me, and the baristas here, (early) Krugman's are the example for popular yet effective, no-nonsense, writings that get the economic theories right.

Slamming Neoliberalism by Setting Up A Straw Man

Martin Manurung wrote an op-ed on the US crisis in Kompas daily. I think he made some points.

First, the US administration doesn't give you a good example of neo-liberalism (or to be precise, classical liberalism). My take: agree and by that, it is wrongheaded, like many of us would like to do, to identify classical liberalism with what US administration does and has done.

Second, when it comes into what makes the crisis, Martin said:

Initially, many corporations have been given incentives to grow by excluding them from regulations that impede wealth (or capital?) accumulation. They are "being facilitated" by regulations that deliberately made easy that let moral hazard through the creation of various "peculiar" and high risk financial products.

Yes, some government regulations seemed to facilitate that peril. Fannie Mae and Freddie Mac, for example. They are government sponsored programs.

Third, he also said:

It strongly suggests that the return of state role in the US tends to become an effort to protect more capital owner than public. The thesis of the state as capital owner's benefactor, as had been said by Karl Marx, is really manifested in the US crisis.

If so, can we just get rid of minimize the role of the state?

Well never mind, but can we just see the bailout as an attempt to save the economy in general, too --regardless whether you like the idea or not?

p/s: I am reading an open letter to my friend on the left (HT: Aco)

Overheard on Facebook: Why (many) Economists Prefer Obama

Apparently triggered by The Economist's recent survey:

Guy 1: Huh? Pro-market economists now prefer Obama, the Democrat? Whatever happened to the Republican bias? Ah. Maybe the magazine's assertion is true: Bush has ruined everything. Even its market ideology.

Guy 2: Or... possibly because McCain's more likely be supported by more "established" economists, which also are less likely to respond to surveys...

Guy 1: Possibly. But if it's true then I want to know why "established" economists and their younger peers would have such different views. In any case this "survey" is probably as (un)scientific as the list of 500+ economists endorsing McCain's economic plan. But this comes with pretty graphs.

Guy 3: Is it because *established* economists think responding to surveys is irrational? (LOL)

Guy 2 to Guy 1: One possible hypothesis is if establishedness is correlated with age, there may be greater homophily with McCain amongst nonrespondents.

Guy 2 to Guy 3: Opportunity costs for established economists in responding to surveys may be higher. (But this can go both ways).

Guy 4: Or maybe, just maybe, many that responded was reflecting politics over economics. Many sane economists are liberal (in classical terms, i.e. libertarians). And many of classical liberals/libertarians oppose war. Obama opposes Bush's wars, esp Iraq. McCain is going to continue it.

Guy 1: That's a very plausible explanation. The survey merely reflects which candidate the respondents will vote for, all things considered. The war is one thing, the general notion that the administration and the social conservative wing of the GOP are at odds with science (e.g. intelligent design vs evolution) is another thing.

Guy 4: Or, (while i'm speculating, haha), NBER is in MA. MA is a blue state (LOL) Yes, of course the NBER economists come from different places, but being housed in MA, they're exposed disproportionally in favor of Democrat Party's campaign, I guess (speaking of imperfect information)... i'm talking about what the survey calls "unaffiliated economists" (those not identifying themselves as democrat or republican)... Again i'm speculating (LOL)

Guy 5: Or.. (nonsense talking)... those who responded are inspired, young-mid aged economists who are keen to see capitalism to have market self-discipline, not market orgy/gang-bang of capitalists. While established economists are like dead men walking (they're as old as Friedman) and had enough of those parties in the mid 80s - late 90s

What A Monday

Another negative news from here, DJIA was closed at slightly below psychological benchmark of 10K, dropped by 369 points low -a recovery from 700 point low at around 2.45 pm. The future is also negative as reported by Financial Times:

The Chicago Board Options Exchange Volatility index, known as Wall Street’s “fear gauge”, surged 18.7 per cent to 53.60, above 50 for the first time in its 18-year history.

In Indonesia, the same paper reads:

The decline in commodity prices took its toll particularly in Indonesia, where the composite index finished 10.03 percent lower at 1,648.74 points, its biggest one day percentage fall since October 2002 after bomb blasts hit Bali, killing more than 200 people. PT Bumi Resources, coal producer, slid 32 per cent to 2,175 rupiah and PT Astra Agro Lestari, a plantation company, lost 23 per cent to 10,000 rupiah.

I think this is probably the end of the commodity boom and easy money from international market.

NKOTB or Sarah Palin?

This morning, on the metro, I read this line from a column in the Express, the commuter's free paper.

Had I known that VP debate would be tonight and that Sarah Palin would be the Republican candidate, I would have told my girl, "Hell, no, I'm not goin to no NKOTB concert on the night of this historical debate!"

--(a blogger who) attended NKOTB concert Thursday night, after buying tickets a couple months ago

I could not help but grinning.

Barking Up The Wrong Tree

It was not just until two days ago that I realized here the laymen's opposition to the bailout, that was quickly taken up by politicians in the House to vote down the plan, was based on serious flaw: they think that the bailout is all about giving the taxpayer money to the undeserved Wall Street, the crooks who had just messed the things up.

You may agree or disagree with the plan, but I think it is imperative to at least understand that this is about how to deal with credit market, the heart of the economy that keeps its lifeblood flowing, that doesn't work. One lesson from the 1930 Great Depression and 1998 Asian Crisis is that the failure to do so will bring a prolonged credit crunch and output contraction. It could become indeed very nasty.

Unlike our fellow laymen, when economists disagree on that plan, they generally fall into three positions. First, the bailout lacks of convincing economics argument and detail to credibly support its claim to deal with the severely depressed credit market --and you can use different institutional setting. Or, second, they think that even without bailout, albeit painful, the current credit market will be able to recover by itself without plunging into the economic armageddon, the great depression. Or, third, the benefit of bailout doesn't add up with the cost, including the problem of (future) moral hazard.

To get you informed to the pro-bailout standpoint, these leader column and briefing from The Economist may help. Also apparently David Leonhardt has been trying to educate The Times' readers in his column here.