Club Soda and Salt

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Posts Tagged ‘Economics’

Free money for all: a fresh new approach

Posted by clubsodaandsalt on April 27, 2008

The continuing spike in food prices seems to be making people say deeply silly things. On the one hand, you had the recent comments by the Consumer Affairs Minister, in which he declared that he’s had just about enough of this “specialization of labour” fad, and told everyone to plant vegetables in their backyard. Then today, I chance upon this.

Government should reconsider its refusal to subsidise basic food items for T&T citizens, as publicly announced by Prime Minister Patrick Manning.

Economist Dr Dhanayshar Mahabir said Government did not base its decision on a detailed consideration of subsidies and how such a programme could be implemented and managed and should be reconsidered in light of the hard times being suffered by citizens.

“I completely disagree with the Government,” Mahabir said during a telephone interview last week.

“There is no basis why we can’t offer a subsidy to consumers on rice, flour, cooking oil-if the price of that is also to rise-and milk.”

Really? You’re an economist and you can’t think of why subsidies on specific products might be a bad idea? You’re a professor at the main tertiary insitution in the Anglophone Caribbean, and you can’t think of a reason? I would like to suggest that UWI serious consider opening a vacancy in their economics department, because, yikes.

Anyway. He continues.

“But given the information technology available to us now, [black markets, and other inevitable results of this kind of plan] need not happen. For example, of the total cost of a package of flour, if it is to be $55-it is easy now for a company like the National Flour Mills to send a package of flour to a supermarket, charge the supermarket $35 and then send a bill to the Government for $20.

“At the same time, the flour can be stamped ‘Maximum Retail Price $40’, so the consumers are aware.

Oh, thank GOD we can use technology (ink? paper?) to stamp an MSRP on the packs of flour. Surely when there are flour shortages (which there will be if the government does this), people will not happily ignore those kinds of controls and pay whatever the market will bear. Because that never happens.

“I think that in the short period, given the incredible hardship being faced by the poor and middle class, the latter also slowly slipping into poverty, I now call them the working poor, the Government has to re-think its position on the four basic items.”

Emphasis mine. I hope he doesn’t think that using the term “working poor” to refer to the lower end of the middle class is somehow creative. In any case, this illustrates the problem I have with this sort of thing quite nicely. He is assuming that flour, rice, milk, and cooking oil are the “basics” for everyone, and would have the government assume the same. But why? I actually tend to eat more vegetables rather than starches. Why don’t I get a subsidy?

Also: Mahabir is correct to say that the working poor are struggling with the jump in food prices. But his subsidy plan doesn’t transfer money to just the working poor who need it – it transfers money to *everyone* (except me and my quasi-Atkins eating habits — I’m bitter!). If you want to help the poor, why not just help them directly with food vouchers and/or plain old cash? Then they could spend it as they saw fit, rather than having the pointyheaded elite decide for them, Dr. Mahabir.

Mahabir pointed to what he said was a fact being lived by thousands across the country-four years ago, a food bill that was around $1,000 has now doubled while salaries have remained the same.

We are in agreement that this is a huge problem, for the record. I just don’t think we should be subsidizing food purchases for people in Westmoorings and Fairways to solve it. Call me crazy.

But the good doctor isn’t done yet.

Along with subsidies on food items, he also suggested the removal of Value Added Tax (VAT) on more items, including electricity.

“There is no good reason why the Government, in its healthy fiscal position, can’t subsidise a basic commodity like electricity,” he said, noting that a subsidisation programme does not have to be permanent.

Oh. My. God.

In a country that is already one of the world’s most prodigious polluters (per capita, granted), and a country with comically heavily subsidized energy costs, we should encourage *more* pollution? In fact, you’d like us to subsidize it?

Dr. Mahabir and John McCain should really hang out.

Also, the idea that the government could remove VAT on electricity, and then have the nuts required to put it back is either really stupid or really naive.

He also argued that it was time that T&T adopted the long-held European method of subsidy, where a cash transfer was made to farmers should prices fall below a mark set by the State and it was found that farmers’ profits were reduced.

You know, having given this a little thought, this isn’t the worst thing in the world. It sure beats price controls, and it’s not like the Trinidadian market is big enough for this to cause the problems caused by subsidies in the US and EU. On the other hand, it would direct capital to farming when it could be better applied elsewhere. Yes, this might be OK as a temporary effect, but things like farm subsidies have a funny habit of becoming permanent.

“There is nothing wrong at all with subsidising the farming sector of the economy,” said Mahabir, noting a significant decline in agriculture-the farming community has shrunk from 30,000 in 1988 to 20,000 today while the acreage cultivated has also declined, with lands either being abandoned or going to housing and other industries. Following the closure of Caroni (1975) Ltd, the contribution of agriculture to the Gross Domestic Product (GDP) went from four per cent to half a per cent, he also noted.

1. What’s wrong with the land being used for housing? People need houses.

2. The decline in acreage tells me nothing about the food being produced on the land (yields may well be down too, but he doesn’t talk about that). Ditto the decline in the number of farmers.

3. That tidbit about Caroni, if true (sounds pretty hard to believe to me), really drives home what a great idea closing Caroni was (no wonder both the UNC and PNM supported it when each was the party in power). Apparently, 3.5% of our economy was tied up in a horrible inefficient and unprofitable industry, and now that land and capital can be used for better things, like, say, planting food.

“We need to look at the capabilities of the existing 20,000 farmers and at their impediments. Their impediments are largely State-induced. They are not getting the research that allows them to produce high-yielding crops. We have to put the farmer at the centre and gear all policy-making towards that.”

If they don’t have information about high-yielding crops, then why not give them that information, instead of the taxpayers’ money? I don’t see how dulling competition with subisidies is going to solve this at all.

To Dr. Mahabir’s credit, he does point out the obvious: that the run up in food prices is *global*, something that frequently gets lost when Trinidadian media address the issue. There are a lot of things that are the PNM’s fault. This isn’t one of them. Of course, he makes some rather stupid comments about how farmers are UNC and so the PNM hates them, as though (1) the UNC did much of anything for poor farmers when it was in power and (2) the PNM doesn’t depend on people who, you know, have to buy food for its votes. So it’s a mixed bag, but it’s like 80% crap.

Frankly, it’s pretty disheartening to see an economist spouting this sort of thing. Neither of these plans is likely to work. Perhaps it’s a reflection of how desperate the food situation is becoming that learned folks are running around calling for price controls and farm subsidies and other plans that just. don’t. work.

Not that I can think of anything better, to be honest.

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In which I foolishly read a Brooks column

Posted by clubsodaandsalt on January 25, 2008

Tyler Cowen generally runs one of the best blogs out there, so when he praised a David Brooks editorial this morning, I decided to have a look. Now, by Brooksian standards, I suppose the column isn’t that bad, but still… I’m going to have to be more careful with Cowen links going forward. This made me nauseated:

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

Talk about your strawman. The condescension is practically dripping from the paragraph (‘zillionaires’? Really, dude?). No-one this side of Dennis Kucinich (or Ben Stein) is actually making the argument that the subprime crisis is entirely driven by some evil fat cat banker conspiracy (the bankers have also lost a ton due to this crisis, and will probably lose a lot more). Rather, the argument made by sensible people is that *some* bad actors acted irresponsibly, and that irresponsibility was both aided and exacerbated by the complexity of MBS. I’m sorry, but when large commercial banks are running ads talking about “how much more house you can afford” with their ridiculous teaser rates, they are partly responsible when things go awry as rates creep up. When you have brokers and banks treating stated income like an actual tax return, well, they bear some blame for the problems down the road.

Here’s the thing: the real Greed Narrative is right. The refi boom dried up in 2004/5, and originators needed to keep the transactions flowing, so they started writing a bunch of – pardon me – shit. Thanks to MBS, they didn’t have to hold it, so they didn’t care how shaky the loans were.  Besides, as long as prices kept rising, people would refi before defaulting, right? You don’t have to be a communist to see that greed and a bad memory (the 90s, people!) were behind a lot of the current mess. So when Brooks breaks this drivel out,

When a new instrument enters the market, it takes a while before people understand and institutionalize it. Whether the product is high-yield bonds or mortgage-backed securities, there’s a tendency to get carried away.

I have to roll my eyes at his naivete. They weren’t being greedy. They just got a little carried away! Give me a break.  Did David Brooks not see the ads IN HIS VERY OWN PAPER for mortgages with like 1.5% teaser rates? With the Teaser Rate Dancers? Also, can we please drop this nonsense about MBS being some brand new idea? They have grown in complexity, but the basic structure of a collateralized obligation has been around since the 80s (did Brooks not read Liar’s Poker?).

And of course we get a whole speech about those brave soldiers of Fairfield County:

 As Sebastian Mallaby of the Council on Foreign Relations has pointed out, time and again hedge funds have dampened market instability. If a currency, a company or a stock market starts to spiral downward, deep-pocketed funds, smelling bargains, will come in and stabilize its assets. If a company’s price is rising to unsustainable levels, contrarian funds bet against the hype.

1) No-one was talking about hedge funds, Brooks. Nice non sequitur.  2) Why is any of this unique to a hedge fund? Only hedge funds buy things that look cheap? What is David Brooks talking about? Why am I reading this? I can feel myself getting dumber. Soon I’ll be talking about how Joe Lieberman is a model Senator, or something. Yet I cannot look away. He also trots this out:

Then, finally, maturity sets in. Those who have lost great gobs of money get fired. People still find the new product useful, but within parameters and with greater safeguards.

The lesson of the Ecology Narrative is that, in most cases, the market corrects itself. Maybe this year banks will change their pay structure so there’s not so much emphasis on short-term results. Maybe companies will change their boards to improve scrutiny over complex new instruments. In short, markets adapt.

Yeah, maybe. And maybe this is the year that the Knicks will go all the way. How is it that after 7 years of Bush’s corporate government, people still think that our corporations can self-police? Hey, maybe the market will magically get rid of carbon emissions too. After all, markets adapt.

Seriously, can we please stop this? The market gave lenders a STRONG incentive to write bad loans. The need to produce flow resulted in comical teaser rates, high LTVs, and no documentation all being given a pass. The tendency of humans to make errors meant that everyone forgot that house prices can go down, and that when they do, people start walking away from their negative equity. This forgetfulness meant that people were willing to buy the crap that lenders were producing. And, unfortunately, the lack of understanding of complex structures meant that many borrowers didn’t really get just how much risk they were taking. The point is, the market failed. It does that sometimes. I don’t think that we need a massive overhaul of the SEC or OFHEO, but some controls over brokers and teaser rates might not be a bad idea, and could help the market work better.

Look. I don’t disagree with Brooks’ conclusion, which is that the financial innovation of the last couple of decades has been immensely beneficial to the economy, and that we shouldn’t let this crisis lead us to create bad legislation (no more SOX, please). But this point has been made far more sensibly elsewhere. On the other hand, part of the innovation process is that when things go awry, we can learn from it, and build structures that help the market work more smoothly. That’s part of the product maturation that Brooks loves so much. All that an article like this is going to do is FURTHER convince liberals that the pro-market crowd doesn’t get it, and generate even more support for like, banning ARMs, or whatever other stupid nonsense Congress has planned.

So, in conclusion, I wish David Brooks would stop writing things about my industry (stick to the McCain worship), and I really hope Marginal Revolution works on its quality control in the future.

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Competition = scary!

Posted by clubsodaandsalt on January 15, 2008

I’ve spoken before about the reluctance of Caribbean governments to allow their citizens to benefit from airline competition, and here we have another example:

The Government has, for the time being, rejected Caribbean low-cost carrier Airone’s formal application to the Civil Aviation Authority for a licence to operate in Jamaica.

Airone, the brainchild of a group of Irish entrepreneurs, including Digicel’s vice-chairman Leslie Buckley, is seeking to establish a Low-Cost Carrier (LCC) with the Norman Manley International Airport in Kingston serving as its hub.

Ostensibly, though, this time there’s a “good” excuse:

However, last Thursday, the minister without portfolio in the Ministry of Finance, Don Wehby, and a team of Government officials took the decision not to grant the new airline a licence now, essentially because the Government is in the process of divesting the loss-making Air Jamaica and it was felt that a decision to grant another carrier a licence at this time would adversely effect the divestment of the national carrier.

Now, I guess they have a point here. The government does need to weigh the potential cash windfall to the taxpayers (assuming the proceeds are used to the taxpayers’ benefit) against the benefits of a low cost competitor. On the other hand, the article makes clear that the government claims that they’d be willing to issue a license after AJ is divested, which… wouldn’t that also affect the value of AJ for potential buyers? One could imagine the eventual AJ investors lobbying against a license, and then, of course, the excuse would be some bullshit about how AJ represents Jamaican national character, or whatever. All this is to say nothing of the fact that the competition (and extra seats to a tourism dependent island) almost certainly outweighs the likely money from divesting AJ, especially given the tortured history of Caribbean airline privatization (see, also, BWIA).

But there’s a silver lining to all this:

“If we are unsuccessful in Jamaica we will set up operations in Barbados. If Air Jamaica is not divested in 12 months’ time, then Jamaica would have missed out on having an affordable, reliable carrier that would have been a boon to the tourism industry and Jamaicans living around the world.”

PLEASE oh PLEASE come to the Eastern Caribbean instead! I’d love to have another competitor to the horrible planes and service from BWIA Caribbean Airlines available.

Unrelated: As of this post, I am switching to using tags, rather than categories. In case you care.

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