Friday, April 20, 2012

(Probably) Some Philosophical Suggestions

1. You don't confuse between the idea of free market and (US) government intervention.

For example: The US sanction against Iran, that our philosopher condemn as raising oil price at the cost of oil importer countries, is not a free market idea. It is a government (political) intervention.

2. You don't set double standard.

If you condemn the US unfairly manipulate its exchange rate (which I don't get why, because the US is also major importer), you should also applies the same level of condemnation against China.

.. and more to come

Monday, April 02, 2012

Argumentum ad confusion #743

"... Because a rich person pays more tax, he/she deserves for receiving higher fuel subsidy than what a poor person receives..."

This argument came up to justify a very disturbing fact that more than 40 % of fuel subsidy in Indonesia is received by top 10% of the riches..

But, isn't this line of argument crazy? You don't pay tax as one-on-one payment for subsidy you get. Tax is to finance public goods production -- goods/services you can not exclusively consume and would not decrease if other also consumes, so that market price (supply and demand) will produce below optimum quantity.

Does gasoline falls into the category of non-excludables and non-rivalrous goods? Hell, no.

Even more puzzling to me, the other purpose of tax is actually to reduce consumption/production -- because there are some goods/services that produces negative externalities to the bystanders, like pollution.

How come then paying tax justifies for more consumption?

This is really an upside-down logic fueled by lack of very basic economics, which brings me to a question: when you complain (in twitter, facebook, on TV, and on the street) about tax and subsidy, do you really understand what you're talking about?

An Alphard buying subsidized fuel is rational

Statement: "Look, that Alphard buys a subsidized fuel! Shame, shame, shame!"

Why it is a fallacy: Is it illegal? No? Is it shameful if a rich guy eats in a warung Padang in a kakilima, instead of in a flashy mall? No? Case closed. [On a more serious note: people respond to incentive. It is on every consumer's instinct to find cheaper price. Now you offer two commodities that are close substitutes with significant price gap. It shouldn't be surprising that some people choose to buy the cheaper one, despite the slightly lower quality. My point is, if you let the BBM price shows the scarcity of the oil correctly, hence the price gap not too big between the substitutes, you might see rarer case of subsidized-fuel-drinking Alphards, because now the owners think it is not worth the switch, given the different qualities. So point is: correcting the incentive is more helpful than cursing at the "rational fool" - if you permit the term.

Addendum: a friend @NickyYuventius just tweeted me that the analogy to warung Padang is not accurate, for the warung is not subsidized. He offers another analogy: rich people buys/owns a unit of apartment in rusunawa (subsidized apartment). While it is possible that a designated location for street vendors incl. warung Padang kakilima are subsidized (like those in Solo, so rental fee of space is cheaper), I think his example is more useful. Thanks, Nicky!

OK, this is not about BBM price, we just can't stand the govt anymore

Statement: "You don't get it. You can go all nerdy on the numbers and what not on the BBM price and on the subsidy. But hey, this is actually not about BBM price. You can adjust it whatever you want. But the reason why we oppose the price hike is simply because we can't stand the government anymore. They have been very disappointing to us lately"

Why it is a fallacy: Because it is akin to a mother whose son is in a serious illness and she refuses a treatment from the only certified medical doctor in town, simply because the mother doesn't like the doctor. [On a more serious note: by adjusting the price closer to its economic price, aka market price, you actually give less room to the government to interfere in your life. Isn't that what you want?]

Sunday, April 01, 2012

The Baptists, The Bootleggers, and The Fuel Subsidy by Pram Oktavinanda

Hi all, here's another contribution by Pram Oktavinanda. Today Pram looks at the fuel subsidy debate. Enjoy! - Kate

The Baptists, The Bootleggers, and the Fuel Subsidy

By Pramudya A. Oktavinanda

There is a very interesting case study in Public Choice literature. Once in the United States there was a law called Sunday Blue Laws which basically prohibited the sale of alcohol in Sunday. One of the supporting groups for this law, we call them "Baptists", was a group consisting of people who wanted to prohibit such sale of alcohol based on moral and religious values. The other group, "Bootleggers", was the seller of illegal alcohols. They also supported such law but not based on altruistic or moral values, rather it was because such restriction increased their profits. The stricter the restriction is, the less the supply for the alcohol, the bigger the price that they can charge for their illegal products.

It goes without saying that these two groups are ideological opponents, but with respect to political matters, they were in the same side and their cooperation as interest groups allow them to provide the necessary voting power in the legislative to support the promulgation of the Sunday Blue Laws, effectively prohibited the sale of alcohol even though both groups have completely different reasons to support such laws. Public Choice theorists also use the same analytical structure when they review a very famous case in the United States, i.e. the Lochner case which dealt with whether New York may legislate the maximum working hours for workers in bakery shops.

New York argued that the law was passed to protect the health of the workers since during the beginning of the 20th century, the working condition of many bakery shops was so poor and many workers work for a very long hour in order to compete with each other. Some politicians support this law on the basis that they need to protect the interest of their citizens, giving protections to relatively weak workers from the capitalists. But the researchers also found out that the other supporters of this New York law are groups of major bakeries that already comply with such law and want to cut the competition by imposing a law that will destroy the business of many small bakeries that depend on immigrant workers.

Again, we can see how the cooperation between Baptists and Bootleggers worked very well in this case. The US Supreme Court finally deemed the law unconstitutional although after the passing of the New Deal by Franklin Roosevelt, more paternalistic laws were issued and the Supreme Court was pressed by the President to support those laws. But that will be another topic of discussion. For now, let us focus with the case of fuel subsidy in Indonesia.

We can quickly see two groups rejecting the reduction of fuel subsidy. The first group argue that reducing fuel subsidy will harm a lot of poor people. The fact that most of the time the subsidy is enjoyed by those who actually do not deserve it does not matter since once the subsidy is reduced, it will affect the overall price of goods in Indonesia and the poor people will suffer. There is a grain of truth here. You do not need to be a genius economist to understand that when you increase the fuel price, since it affects the price components of many other products, producers will most likely also increase their prices as a response. Consumers will be the victim here.

The second group reflects the people who enjoy the existence of fuel subsidy, those who buy the cheap fuel and those who illegally export the cheap fuel to other countries for considerable profits. For those who buy the cheap fuel, it is simply a rational choice, at least for the short term. Whether there will be huge inflation and whether it damages the environment are things that will happen in the future and discounting the probability of having such catastrophe in the near future, they might conclude that in the long run, all of us (this generation) would already be dead when the Earth is being struck by such catastrophe. So, why the heck should we care anyway? It's the problem of future generations, not us.

Combined these two groups, and you will find that they consist of the majority of Indonesian people. They might have different agendas, but they have the same goal, preventing the fuel price from going up. As such, I do not see why I should be surprised with the recent political maneuvers in our legislative board. Politicians, considering their rational incentives for maximizing their own interests, would always consider the present condition in making their decision. And the future for them would always be about the next election, meaning that they are very short sighted. Whatever beyond the election period is another issue to be solved when they reach another election.

Of course in the context of Indonesia, it also means that the idea of reducing the fuel subsidy will never be a popular one. You can't argue about the needs to conserve the energy or to pursue alternative energy sources in a country where most of the people have bleak futures. They don't care about such issues. If they are pessimistic with their futures, how could they appreciate the fact that our environment is in danger? For them, whether the environment will be destroyed or not in the future will not alter the fact that their life sucks now and most probably also sucks in the future.

The question is, how could we avoid this vicious cycle? One thing that might happen is to wait until the fuel price has reached a point of no return where it would be impossible for the government to maintain the subsidy. I note that this might be the political compromise made a couple of days ago. At least when you need to take an unpopular policy, you take it after you are in a desperate condition. Might actually work, but I can't predict whether the end result would be beneficial for all of us, since it might also be too late.

You see, the problem of this kind of policy is that in the end it is made to support certain groups at the expense of other groups. Right now, the Government supports both of the Baptists and Bootleggers groups at the expense of tax payers money, though I will argue that the Bootleggers are the ones who enjoy most of the policy. From Game Theory perspective, it is also a prisoner's dilemma game. I personally for sure will buy the cheap fuel. It is paid by my tax without my consent, and I will enjoy it to the fullest. I bet that many other people will also think the same. It will turn out into the tragedy of the commons and everybody will eventually suffer.

The Baptists group may produce a nice argument on the need to support the poor. It is a valid argument, but it fails to see the overall human incentives. Rational choices of many people may produce a bad result, that is the essence of the tragedy of the common. Everyone will be better off had they conserve the energy, but in a situation where every people can benefit themselves at other people expenses and there is a lack of supervision, the rational choice will be to spend the resources as soon as possible before other people take the resources for themselves. Why bother conserve the energy if we can't be sure on whether everybody will do the same? See the irony?

Is this a premonition for a bleak future for us? Who knows? We can hope that suddenly a miracle will occur, maybe someone will be able to produce energy from water and humanity will eventually survive. But until that day comes, you better cross your fingers and hope for the bests. After all, we are all together in this situation.

PS: I only provide a positive analysis of our current condition. There are many other people who have provided excellent normative analysis on the policies that should be taken on fuel subsidy and I don't think that my thoughts on the normative aspects will give an additional value so I decide not to dwell on it.

Inconvenient consequence #23

Suppose I am an owner of an SPBU (fuel station). The government and DPR (parliament) has decided to not adjust the price of "premium" (subsidized fuel), but let the price of "pertamax" (non-subsidized fuel) free. What would I do? Well, because the price gap is too yummy not to take advantage of, I'll sell less premium and more pertamax. So be prepared that you'll often find "sorry premium is out of stock"-sign on my gas station. I know that my location is strategic and many of you coming here to buy premium will have no choice except to buy my pertamax. Sorry. And ow, I see a long line now; I can even increase the price! (Actually if I can even be more evil: I would mix the two types of the fuel underground and sell them both under the name "pertamax" on the nozzle - how many of you would check my tanks?). 

Did I forget to thank the DPR and protesters?

Argumentum ad hominem #965

I think it is now indeed a good time for taking stock of fallacies that came up around fuel-subsidy removal debate.

My favorite, because it is so funny I can not stop laughing at, is an argument that went, " support fuel subsidy removal because you got scholarship abroad..."

Hello? What if I got scholarship for studying biology or religious study?

In other words, another Jaka Sembung Naik Ojek moment for me.

Argumentum ad confusion #422

Statement: "I should have raised the price last year because the world price was increasing dramatically. But because I was very concerned with the people I didn't raise it"

Why it is a fallacy: 1) If you really care about the people, you don't act as if the supply of the good in question is abundant, 2) You knew that the world price was increasing and you knew that it was a reflection of a supply shortage (or else, increased demand given the same level of supply), but you didn't want the domestic price to transmit this signal; instead you put a subsidy to mask it, or else ration the limited amount of supply (forgetting the fact that the best tool for rationing is price, not quantity allocation by the government)

Conclusion: You were either not concerned about the people or you were in denial of what you knew.

Argumentum ad confusion #337

Statement: "Energy crisis? What crisis? Solving it by reducing subsidy? LOL"

Why it is a fallacy: 1) We're talking about entering an expected energy crisis given the current pattern of consumption, 2) Which means the energy at stake, non-renewable, is in decreasing stock, 3) A decreasing supply, given demand, should be reflected in a higher price, 4) But forcing the price so as not to move up, kills the function of the price as a messenger that otherwise tells us that the stock is vanishing; putting a subsidy on top of it kills it even more - consumers would think the stock is actually abundant, hence consumption may even increase 5) This is not just about one market, namely the particular energy at stake, but also about another market: the alternative energy, 6) Letting the price functions well in the market for the non-renewable energy, results in a price increase in that market, induces an increase in the demand for the alternative energy, and creates an incentive for firms to supply in response to the expected increase in the demand.

Conclusion: He who ridicules with that statement is either lying, just teasing,  or simply does not get the basic logic of supply and demand.