Showing posts with label law of unintended consequence. Show all posts
Showing posts with label law of unintended consequence. Show all posts

Monday, August 20, 2018

Metro Retail Stores Group’s Orwellian Press Release; the Unintended Consequences of Anti-Smuggling Regulations: Rice Shortages!

Here is an example of an Orwellian press release.



9.5% increase in sales! Php 344 million in profits!

Here is MRSGI Financial Statement (2Q/1H) 17Q published at the PSE:



Lower Sales. Reduced profits. 

Although they could be referring to stores unaffected by the January fire accident, the numbers above don't seem to support such an idea. Look at the lower pane in the above chart, MRSGI’s revenue % change has been in a decline since 2016. Hardly has TRAIN 1.0’s wondrous income tax cuts helped.  The 1H drop was a continuation of a 2 and a half year trend! 

Or, could they, perhaps, be alluding to old records or performance of competitors?

These are signs of times. It is related to endless price fixing. Misinformation. Manipulation. To push up stocks. Whatever it takes.

How Smuggling Regulations Spurred Rice Shortages

Below is an example of the law of unintended consequences:

Agriculture Secretary Emmanuel Piñol said the successful campaign against rice smuggling had led to rice shortage here, sending rice prices skyrocketing to more than P50 per kilogram.

“It’s a good job gone bad,” Piñol said.

“Good job because smuggling (of rice has) stopped. But bad because Zamboanga is experiencing rice shortage,” Piñol said at a visit in Zamboanga City.

By raising the cost of inventories, unilateral anti-smuggling edicts reduce the available supply of rice in the face of increased demand financed by the BSP. Result: Shortages! 

Wednesday, November 13, 2013

In India, Child Labor Ban Leads to More Child Labor

Just one of the many examples of how noble-sounding statutes backfire when faced with economic reality. 

A ban on child labor sounds like a policy move that would yield nothing but favorable results. But a new paper on the fallout from such a measure in India finds that isn’t the case.

The title — “Perverse Consequences of Well Intentioned Regulation: Evidence from India’s Child Labor Ban” — captures the conclusion that families’ welfare diminished rather than improved after India’s 1986 prohibition against labor by children under age 14.

The authors focused on particular jobs that the ban prohibited children from doing, such as working in mines, handling toxic substances, making cigarettes or providing food at rail stations. The ban didn’t extend to agriculture or family businesses, but the legislation set forth limits on how many and which hours children could work. Penalties for flouting the law included fines or prison time.

After the ban, the authors found, child labor actually increased — while wages for children, relative to those of adults, decreased. In addition, since fewer children were being paid, families became poorer, consumed and spent less and all told, found themselves struggling more financially than they had before the ban.
The abstract of the NBER paper by Prashant Bharadwaj, Leah K. Lakdawala and Nicholas Li (bold mine)
While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness. In this paper, we examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. Using data from employment surveys conducted before and after the ban, and using age restrictions that determined who the ban applied to, we show that child wages decrease and child labor increases after the ban. These results are consistent with a theoretical model building on the seminal work of Basu and Van (1998) and Basu (2005), where families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor. The increase in child labor comes at the expense of reduced school enrollment. We also examine the effects of the ban at the household level. Using linked consumption and expenditure data, we find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban
At the end of the day, arbitrary edicts intended to safeguard certain constituents end up going on the opposite direction. Such is the law of unintended consequences

Saturday, May 05, 2012

Quote of the Day: Unintended Consequences of Regulations

Unregulated, a business’s reputation is its most valuable asset. A regulated business does not have the same problem, so long as it obeys the regulations. Regulations replace the overriding need for a business to protect its reputation, and it is no longer solely concerned for its customers: the rule book has precedence. And the more regulation replaces reputation, the less important customers become. Nowhere is this more obvious than in financial services…

The regulators assume the public are innocents in need of protection. They have set themselves up to be gamed by all manner of businesses intent on using and adapting the rules for their own benefits at the expense of their customers. These businesses lobby to change the rules over time to their own advantage and hide behind regulatory respectability, as clients of both MF Global and Bernie Madoff have found to their cost.

That’s from Alasdair Macleod at the GoldMoney.com

Actually this has represented more of the anatomy of crony capitalism and too big too fail corporations. Interventions upon interventions, through regulations, ultimately leads to politically captured industries.

Thursday, April 07, 2011

Socialized Healthcare: Intentions versus Reality

Socialized healthcare always seem as politically correct. That's because it is easy to sell compassion as a political theme. Gullible economically ignorant voters elect politicians who seem to connect with the needs of their constituents.

Unfortunately, free stuff in a world of scarcity is a fraud.

This from BBC, (bold highlights mine)

Surgeons say patients in some parts of England have spent months waiting in pain because of delayed operations or new restrictions on who qualifies for treatment.

In several areas routine surgery was put on hold for months, while in many others new thresholds for hip and knee replacements have been introduced.

The moves are part of the NHS drive to find £20bn efficiency savings by 2015.

The government said performance should be measured by outcomes not numbers.

Surgeons have described the delays faced by patients as "devastating and cruel". Peter Kay, the president of the British Orthopaedic Association (BOA), says they've become increasingly frustrated that hip and knee replacements are being targeted as a way of finding savings.

"We've started to get reports over the last nine months that access to these services are being restricted.

From Daily Mail, (hat tip: Dan Mitchell)

A former NHS director died after waiting for nine months for an operation - at her own hospital.

Margaret Hutchon, a former mayor, had been waiting since last June for a follow-up stomach operation at Broomfield Hospital in Chelmsford, Essex.

But her appointments to go under the knife were cancelled four times and she barely regained consciousness after finally having surgery.

Her devastated husband, Jim, is now demanding answers from Mid Essex Hospital Services NHS Trust - the organisation where his wife had served as a non-executive member of the board of directors.

Healthcare consumes scarce resources. The problem is, who determines the resources to be used: us (via the marketplace) or bureaucrats (rationed based on political guidelines or connections).

For the latter, apparently good intentions end up with bad outcomes.

Tuesday, March 29, 2011

Earth Hour And Reality

Bjorn Lomborg writes, (bold highlights mine)

When we switch off the electricity, many of us turn to candlelight. This seems natural and environmentally friendly, but unfortunately candles are almost 100 times less efficient than incandescent light bulbs, and more than 300 times less efficient than fluorescent lights. Using one candle for each extinguished bulb cancels the CO2 reduction; two candles emit more CO2.

That’s basically the law of unintended consequence at work. Populist political ‘feel good’ actions tend to defeat the noble intentions which it tries to achieve in the first place.

The economic implications is that:

First, we get inefficient and more costly ‘alternative’ energy (this reduces people’s purchasing power—thus we become POORER). Making us poor saves the environment (duh!).

Second, atavistic lifestyles poses more environmental hazards than the current one.

As a Latin proverb goes, Aegrescit medendo or the cure is worse than the disease...

Monday, December 13, 2010

Video: Law of Unintended Consequences-Best Intentions, Bad Results

Many bear this silly or oversimplistic notion that laws and or regulations are immaculate. And that all it takes is for people is to have the right sense of ethics to conform or comply with them.

They believe that the way to prosperity is no more than actions via best intentions. Such naive outlook ignores the fact that best intentions are defined or qualified differently by different individuals (value preferences).

And people are not automatons. People’s actions, operating in a world of scarcity, have intertemporal effects. This means some actions may have positive results over the short term at the expense of the long term and vice versa.This applies to laws and regulations as well.

Bottom line: many laws predicated on best intentions, produce bad results.

This video from Reason shows some great examples



Wednesday, November 17, 2010

QE 2.0 Equals Capital Flight

We have been told that QE 2.0 has been designed to help the US economy grow its way out of the recession.

However evidence seem to show otherwise. Capital investments appear to be flowing out of the US as a result of present policies putting at risk a recovery in employment conditions.

This from Bloomberg, (bold highlights mine)

Southern Copper’s plans illustrate why the Fed’s second round of bond buying may not reduce unemployment, which has stalled near a 26-year high. Chairman Ben S. Bernanke and his colleagues appear to be fueling a foreign-investment surge, underscoring the difficulty of stimulating the economy through monetary policy with interest rates already near record lows.

“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”

U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.

Instead of addressing issues which genuinely distorts the balance of the US economy mostly concerning (bubble) policy induced malinvestments, the left, as always, would most likely pin the blame of capital flight on “evil” China for having an artificially suppressed “manipulated” currency.

But again the “smoke and mirror” reasoning would not be substantiated by evidence, that’s because much of the ongoing outflows appear headed towards the relatively higher valued currency of the Eurozone.

From the same Bloomberg article,

U.S. corporations’ overseas investment in the first half of 2010 exceeded the amount that foreign firms spent in the U.S. on factories and acquisitions at an annual rate of almost $220 billion, according to the Commerce Department. In the first half of 2006, the last year before the financial crisis, the net flow favored the U.S. at an annual rate of about $30 billion.

More than half of outbound investment this year landed in Europe, Commerce data show. In April, Valmont Industries Inc., which manufactures light poles and communication towers, issued $300 million in 10-year notes. The Omaha-based company said it would use the proceeds to help fund its $439 million acquisition of Delta PLC, a London-based maker of similar products.

So again, the above circumstances only goes to show that the currency elixir (snake oil panacea) embraced by mercantilists, via QE 2.0, to solve the supposed global imbalances seems to be having an opposite effect.

Yet capital flows into the Europe has occurred in spite of the unresolved debt crisis in the periphery, the PIIGS.

So it seems another vindication for Friedrich von Hayek who once wrote

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Central planners seem to mostly get their designs backwards. It’s called the law of unintended consequences.

Saturday, March 13, 2010

Example of Unintended Consequences From Tax Hikes

As we earlier noted in Competitive Global Tax Structures As Major Investment Determinant, tax policies play a significant role in shaping an economic environment.

Here is an example how policymakers underestimates the public response to tax increases.

This from the Wall Street Journal, (all bold highlights mine)

``Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state's top marginal individual income tax rate to 4% from 3%. He'd better hope this works out better than it has for Maryland.

``We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they'd collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn't fled the state.

``Well, the state comptroller's office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

``Yes, a big part of that decline results from the recession that eroded incomes, especially from capital gains. But there is also little doubt that some rich people moved out or filed their taxes in other states with lower burdens. One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)"

At the end of the day, when the society's productive agents get fed up by the sanctions imposed by the government to pay for profligacy, misdeeds or for the maintenance of the interests of bootlickers, the law of unintended consequences applies.

Others calls this "Atlas Shrugged"


Wednesday, March 03, 2010

From Noble To Cruel Intentions: The Chemist's War of Prohibition

This article from Slate Magazine is a lurid example of how government policies that are initially meant to attain noble goals turn up as violating human right to life and liberty. (hat tip: Cafe Hayek)

As the Chicago Tribune editorial quoted by article in 1927, ``It is only in the curious fanaticism of Prohibition that any means, however barbarous, are considered justified."

Some excerpts... (bold emphasis mine)

``Frustrated that people continued to consume so much alcohol even after it was banned, federal officials had decided to try a different kind of enforcement. They ordered the poisoning of industrial alcohols manufactured in the United States, products regularly stolen by bootleggers and resold as drinkable spirits. The idea was to scare people into giving up illicit drinking. Instead, by the time Prohibition ended in 1933, the federal poisoning program, by some estimates, had killed at least 10,000 people.

``Although mostly forgotten today, the "chemist's war of Prohibition" remains one of the strangest and most deadly decisions in American law-enforcement history. As one of its most outspoken opponents, Charles Norris, the chief medical examiner of New York City during the 1920s, liked to say, it was "our national experiment in extermination."

The origins...

``The saga began with ratification of the 18th Amendment, which banned the manufacture, sale, or transportation of alcoholic beverages in the United States.* High-minded crusaders and anti-alcohol organizations had helped push the amendment through in 1919, playing on fears of moral decay in a country just emerging from war. The Volstead Act, spelling out the rules for enforcement, passed shortly later, and Prohibition itself went into effect on Jan. 1, 1920.

The unintended consequences...

``But people continued to drink—and in large quantities. Alcoholism rates soared during the 1920s; insurance companies charted the increase at more than 300 more percent. Speakeasies promptly opened for business. By the decade's end, some 30,000 existed in New York City alone. Street gangs grew into bootlegging empires built on smuggling, stealing, and manufacturing illegal alcohol. The country's defiant response to the new laws shocked those who sincerely (and naively) believed that the amendment would usher in a new era of upright behavior."

The circumvention of laws, the counter policies and the aftermath....

``Rigorous enforcement had managed to slow the smuggling of alcohol from Canada and other countries. But crime syndicates responded by stealing massive quantities of industrial alcohol—used in paints and solvents, fuels and medical supplies—and redistilling it to make it potable.

"Well, sort of. Industrial alcohol is basically grain alcohol with some unpleasant chemicals mixed in to render it undrinkable. The U.S. government started requiring this "denaturing" process in 1906 for manufacturers who wanted to avoid the taxes levied on potable spirits. The U.S. Treasury Department, charged with overseeing alcohol enforcement, estimated that by the mid-1920s, some 60 million gallons of industrial alcohol were stolen annually to supply the country's drinkers. In response, in 1926, President Calvin Coolidge's government decided to turn to chemistry as an enforcement tool. Some 70 denaturing formulas existed by the 1920s. Most simply added poisonous methyl alcohol into the mix. Others used bitter-tasting compounds that were less lethal, designed to make the alcohol taste so awful that it became undrinkable.

``To sell the stolen industrial alcohol, the liquor syndicates employed chemists to "renature" the products, returning them to a drinkable state. The bootleggers paid their chemists a lot more than the government did, and they excelled at their job. Stolen and redistilled alcohol became the primary source of liquor in the country. So federal officials ordered manufacturers to make their products far more deadly."

Gruesome.

Read the rest of the article here

As self-development author Robert Ringer rightly argues, ``just because government mandates something to be right or wrong doesn’t mean that it is right or wrong. If a government mandate calls for the violation of even one individual’s sovereignty, it is wrong in the eyes of Natural Law — or what can also be referred to as the Law of Non-aggression. Aggression is always the sacred measuring stick of right and wrong — period."

Sunday, August 09, 2009

The Fallacies of Inflating Away Debt

``In an inflationary world, deficit spending and an easy-money policy have other reasons. Deficit spending is resorted to simply because of inability to balance the budget. It is purely involuntary. An easy-money policy is advocated because it seems to make possible a speedy reduction of the interest and debt burden of the government and the balancing of the budget without imposing higher taxes. Sometimes it is urged also as a command of social justice. The latter argument is of course based upon pure illusion. Small savers pay the bill directly or indirectly via savings banks and insurance companies, whereas large capitalists, who are interested chiefly in equities, harvest the profits from refunding operations.” L. Albert Hahn The Economics of Illusion

In the US, many harbor the delusion of inflating away the massively expanding debt levels as the ‘best alternative’ policy. Such advocates appears guilty of the following sins:

One, interpreting past performance as future outcome. A semblance of success during the previous incidences allowed for the deferment of the day of reckoning because debt levels had been low, or otherwise said, the economy can yet afford to pay for such policies.

Nonetheless, the untold truth is that the subsequent growth in such imbalances has ensured the reemergence of such boom-bust cycles with greater magnitude of impact.

Two, extensive “blind” faith on governments, to ably prevent collapses in spite of evidences, proved to be a myth.

The multifaceted ‘innovative’ Fed programs (TARP, TALF, Maiden Lane LLC, TSLF, MMIFF, Reciprocal currency swaps et. al.) failed to prevent or forestall the 2008 meltdown, this serves as another patent example of government failure.

Figure 6: Federal Reserve Bank of Minneapolis: Duration of Current Recession

Another fiction is the idea that inflationary policies has shortened the duration of recession period (see figure 6) or has alleviated its depth (figure 7).

Figure 7: Federal Reserve Bank of Minneapolis: Depth of Recession

Despite all expenditures thrown at the expense of the taxpayers, the 2007 recession has been the worst among the 10 post war recessions.

Lastly, they blithely ignore the unseen or unreckoned with ramifications of the shifting but continually expanding debt loads while depleting productive resources of the economy.

In other words, such advocates underestimate the degree of the impact from present policies.

Inflation Is A Political Process, From Risk To Uncertainty

Given the extent of the rapidly expanding debt levels, not only in the US but elsewhere too, relying on inflation to diminish real debt value could make the stagflationary period of 70s look like a picnic in the park.

This likewise risks provoking political unrest or war from prolonged or extended depression.

In short, those who embrace inflationary policies parochially forget that inflation is a political process and thus has political consequences.

As James Kunstler rightly explains, ``It would be sententious to explain how this destroys currencies, but wherever ‘monetizing debt’ has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.” (emphasis added)

In addition, while it is true that today’s monetary and fiscal deficit spending policies momentarily benefits asset market participants (that includes me), this view neglects the possible adverse repercussions from regulators to misjudge or miscalculate on the application of untried or untested tools that may trigger disorderly adjustments in the financial markets and the economy system.

Morgan Stanley’s Manoj Pradhan has this insightful observation,

``Central banks correctly describe programmes like quantitative easing as ‘unconventional'. Being far from the norm, policy-makers do not have much experience in dealing with such unconventional policies with nearly the same familiarity as the interest rate tool. When downside risks were dominating, policy-makers were only too willing to throw everything including the kitchen sink at the problem. For the most crucial passage of time in the past two years (the time since September 2008 when markets froze), central bank purchases of risky assets and government bonds (i.e., ‘active' QE) contributed to lower yields and spreads. Outright expansion of these programmes or the implicit threat that they could be enlarged in scope and/or size also kept yields and spreads from rising too much, and the real economy benefited from these developments. Selling assets purchased according to these ‘active' QE programmes could easily reverse those moves, particularly with a return to growth and the risk of inflation. With very little experience in handling such large unwinds along with the risk of derailing a hard-fought recovery by sending yields and spreads higher, central banks are unlikely to move particularly rapidly.” (emphasis added)

When policymakers ply on uncharted territories, instead of dealing with risks, we are transformed into dealing with non-Priceable Knightean “uncertainties”.

The underlying difference against risk, to quote economist Frank H. Knight is that “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”.

In short, the law of unintended consequences has been increasing its role in the unfolding inflationary cycle.

The Bureaucratic Incentive Problem**

Besides, there has always been the question of incentives underpinning the actions of policymakers involved.

When unelected officials (e.g. Treasury or Central Banks) dabble with economic or financial policy tools or regulations or assume greater bandwith of power over their constituents, their accountability essentially remains the same.

Any adverse outcomes arising from their actions on the economic or financial sphere will only lead to, at worst, a job loss-but in most cases the same officials get enlisted with private firms they regulate. Since, to quote Ludwig von Mises, ``A bureaucrat differs from a nonbureaucrat precisely because he is working in a field in which it is impossible to appraise the result of a mans effort in terms of money”.

In short, it cost little for them to commit a policy error, since they’re not punished for it and are measured not based on money performances but on the impact during their tenure.

Hence, policymakers are likely to take actions that are designed for generating short term “visible” benefits at the cost of deferring the “unseen” cumulative long term risks, which are usually are aligned with the office tenure (let the next guy handle the mess) or if they happen to be politically influenced by the incumbent administration (generates impacts that can win votes).

So bureaucratic myopia seems in a natural state of conflict with the long term interest of the marketplace and can function as another vital factor in amplifying the risks of enabling future crises.

**Update: I forgot to include this portion


Thursday, April 23, 2009

Emerging Labor Protectionism In Japan

In 1850 Frederic Bastiat wrote in his prologue the magnificent must read essay, That Which is Seen, and That Which is Not Seen

``In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil."

In other words, laws always constitute an economic trade off between the present and the future. Policymakers are usually predisposed to respond to short term visible effects arising from crops of present concerns but ignoring the larger costs from unforeseen consequences.

We have a very good example of this phenomenon unfolding in today's crisis laden environment.

In Japan, the current deep recession has compelled policymakers to repatriate its migrant workers as reaction to widening unemployment.

According to the New York Times, ``But the nation’s manufacturing sector has slumped as demand for Japanese goods evaporates worldwide, prompting job cuts and pushing the jobless rate to a three-year high of 4.4 percent. Japan’s exports plunged 46 percent in March from a year earlier, and industrial production is at its lowest level in 25 years.

``So Japan has been keen to help foreign workers go home, thus easing pressure on domestic labor markets and getting thousands off unemployment rolls.

“Japan’s economy has hit a rainstorm. There won’t be good employment opportunities for a while, so that’s why we’re suggesting that the Nikkei Brazilians go home,” said Jiro Kawasaki, a former health minister and senior lawmaker of the ruling Liberal Democratic Party.

``“Naturally, we don’t want those same people back in Japan after a couple of months,” Mr. Kawasaki said, who led the ruling party task force that devised the repatriation plan, part of a wider emergency strategy to combat rising unemployment in Japan. “Then Japanese taxpayers would ask, ‘What kind of ridiculous policy is this?’ ”

``Under the emergency program, introduced this month, the country’s Brazilian and other Latin American guest workers are offered $3,000 toward air fare, plus $2,000 for each dependent — attractive lump sums for many immigrants here. Workers who leave have been told they can pocket any change.

The idea is, in order to ease statistical unemployment, Japan's policymakers simply decided to send the laborers away! Reduced workers equals low unemployment rates-what genius!

Next, such reactionary program possibly unmasks of Japan policymakers' narrowmindedness and antagonism to global cultural integration.

More from the New York Times, ``But Mr. Kawasaki, the former health minister, said the economic slump was a good opportunity to overhaul Japan’s immigration policy as a whole.

``“We should stop letting unskilled laborers into Japan. We should make sure that even the three-K jobs are paid well, and that they are filled by Japanese,” he said.

``“I do not think that Japan should ever become a multi-ethnic society” like the United States, which “has been a failure on the immigration front,” Mr. Kawasaki added. That failure, he said, was demonstrated by extreme income inequalities between rich Americans and poor immigrants.

Another, Japan's recent actions reflects discrimination and protectionism...

Again from the New York Times, ``Japan’s repatriation offer is limited to the country’s Latin American guest workers, whose Japanese parents and grandparents emigrated to Brazil and neighboring countries a century ago to work on coffee plantations...

``The plan to fly immigrants out of Japan has come as a shock to many here, especially after the Japanese government introduced a number of measures in recent months to help jobless foreigners, including free Japanese-language courses, vocational training and job counseling. Guest workers are eligible for limited cash unemployment benefits, provided they have paid monthly premiums.

``“It’s baffling,” said Angelo Ishi, an associate professor in sociology at Musashi University in Tokyo. “The Japanese government has previously made it clear that they welcome Japanese-Brazilians, but this is an insult to the community.”

Lastly the article showcases Japan's structural long term problems...

``The program comes despite warnings that the aging country needs all the foreign workers it can attract to stave off a impending labor shortage.

``Japan’s population has been falling since 2005, and its working-age population could fall by a third by 2050. Though manufacturers have been laying off workers, sectors like farming and elderly care still face shortages...

``Critics denounce the program as short-sighted and inhumane, and a threat to what little progress Japan has made in opening its economy to foreign workers.

``“It’s a disgrace. It’s cold-hearted,” said Hidenori Sakanaka, director of the Japan Immigration Policy Institute. “And Japan is kicking itself in the foot... we might be in a recession now, but it’s clear it doesn’t have a future without workers from overseas.”

The present recession will not last forever. And as its economy recovers, Japan's dwindling population (see the above chart from japanfocus.org) will endure strains from labor shortages.

While Japan can easily absorb more foreign workers when it is deemed as politically convenient, it would bear additional costs from the "learning curve" to integrate foreign workers to its society.

Moreover,
Japan's selective application of repatriation policy will likely incur a political backlash with affected Latin American countries which may lead to policy retaliation and even more protectionism.

Finally, Mr. Kawasaki's bigoted anti "multi-ethnic" society remarks will be faced with harsh reality. The persistence of a dwinding population will lead to societal extinction and economic regression.

Hence without raising its fertility rate, in order for Japan to maintain its status quo "society" means to adopt a culture of multi-ethnicity. (Unless cloning or other artificial scientific means of adding people comes into the script)

This noteworthy remark from Kyohei Morita chief economist at Barclays Capital in an interview with Finance Asia,

``But in Japan, the opposite is happening. Japan’s population has been shrinking since 2006, which will continue to put downward pressure on GDP. In 300 years, at the current rate of decrease, Japan’s population will be extinct." (emphasis mine)

After over a hundred years, Bastiat's message is more than relevant as it is universal.

Tuesday, March 10, 2009

Protectionism: Clear and Present Danger

In a crisis or a recession, populists demands from growing "nationalism" increases the odds for governments to embrace protectionist policies out of political exigency, regardless of the geopolitical or macroeconomic consequences.

And since the outbreak of the crisis, the world has gradually lurched towards this high risk direction led by the US.

This from the IMF's latest report Swimming against the tide How Developing Countries are coping with the Global Crisis,

``Protectionism remains a serious threat in the current environment. Many countries are contemplating, or have already implemented, increased protection, which may be difficult to reverse and will slow the recovery. Since the beginning of the financial crisis, roughly 78 trade measures have been proposed or implemented, of which 66 involved trade restrictions. Of these,47 measures were actually implemented, including by 17 of the G20. In addition, anti-dumping claims and actions increased 20 percent in 2008 relative to 2007; and 55 percent in the second half of 2008 relative to the first half of 2008. (italics mine)

``Agricultural subsidies, not counted in these numbers, have increased automatically with the recent fall in commodity prices. In addition to changes in tariffs, nontariff barriers, such as licensing requirements and tighter application of product standards, are also being introduced. Governments are also taking measures to support specific industries through potentially trade distorting measures, including by increasing subsidies as part of fiscal stimulus packages. While government financial support packages do not necessarily distort trade, public intervention targeted at specific export-oriented industries or competing import industries are akin to protectionism and run the risk of starting a subsidy race among nations. In addition, there is a risk that governments providing “bailouts” to domestic banks may exert pressure on those banks to use those resources within their countries rather than to provide trade finance that would go to foreign countries."

Unfortunately economic ignorance will only aggravate the situation. As Ludwig von Mises warned, ``People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom the import duties discriminate are hurt. It is true the foreigners are hurt, but not they alone: the consumers who must pay higher prices suffer with them."

Wednesday, October 08, 2008

News from The 1990s Foretold of this Crisis

Debating who had been responsible for this crisis can take lots of academic vernacular to support or debunk the premises.

But we don’t need it.

By looking at the past, we can note that some news reports during the ‘90s appear to have actually “sensed” or predicted today’s fateful occurrence.

This excerpt from an LA TIMES article…

Minorities’ Home Ownership Booms Under Clinton but Still Lags Whites’

By Ronald Brownstein May 31, 1999

``All of this suggests that Clinton’s efforts to increase minority access to loans and capital also have spurred this decade’s gains. Under Clinton, bank regulators have breathed the first real life into enforcement of the Community Reinvestment Act, a 20-year-old statute meant to combat “redlining” by requiring banks to serve their low-income communities. The administration also has sent a clear message by stiffening enforcement of the fair housing and fair lending laws. The bottom line: Between 1993 and 1997, home loans grew by 72% to blacks and by 45% to Latinos, far faster than the total growth rate.

``Lenders also have opened the door wider to minorities because of new initiatives at Fannie Mae and Freddie Mac–the giant federally chartered corporations that play critical, if obscure, roles in the home finance system. Fannie Mae and Freddie Mac buy mortgages from lenders and bundle them into securities; that provides lenders the funds to lend more.

``In 1992, Congress mandated that Fannie and Freddie increase their purchases of mortgages for low-income and medium-income borrowers. Operating under that requirement, Fannie Mae, in particular, has been aggressive and creative in stimulating minority gains. It has aimed extensive advertising campaigns at minorities that explain how to buy a home and opened three dozen local offices to encourage lenders to serve these markets.

``Most importantly, Fannie Mae has agreed to buy more loans with very low down payments–or with mortgage payments that represent an unusually high percentage of a buyer’s income. That’s made banks willing to lend to lower-income families they once might have rejected…

``The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer. Although Fannie Mae actually has exceeded its target since 1994, it is resisting any hike. It argues that a higher target would only produce more loan defaults by pressuring banks to accept unsafe borrowers. HUD says Fannie Mae is resisting more low-income loans because they are less profitable."

From the New York Times article by Steven Holmes Fannie Mae Eases Credit To Aid Mortgage Lending, September 30, 1999

``Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the saving and loan industry in the 1980’s.

“‘From the perspective of many people, including me, this is another thrift industry growing up around us,’ said Peter Wallison a resident fellow at the American Enterprise Institute. ‘If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.’


Hat tip Prieur Du Plessis

As
author Steven Landsburg reminds us, ``Most of economics can be summarized in just four words: People respond to incentives. The rest is commentary." (Hat tip Mark Perry )