Chart of the Day: “Overcharging” Governments

I pointed out last night that we should instead put pressure on the governments for “overcharging” taxpayers for the provision of so-called “public goods”.

the table should be turned where overcharging should also be pinned on the extravagance and insatiability of governments to incessantly work on extorting more taxes from the entrepreneurs, capitalists and investors by using “social justice” as pretext to benefit political boondoggles

In the US, the chart below courtesy of EPJ’s Bob Wenzel shows of the “cost overruns” by select government agencies.

Governments recklessly and relentlessly waste taxpayer’s money. Yet the paradox is that the government penalize taxpayer, and simultaneously award themselves for such foolhardiness with even more resources extorted from the taxpayers. What is "social justice" as implicitly defined by the political class has, in reality, been a parasitical relationship enabled by mandated coercion.

I just hope that there would be a local counterpart of this chart.

Quote of the Day: Infrastructure is the Effect of Economic Progress

Nor is it true that a substantial infrastructure is a precondition of development….  The suggestion that ready-made infrastructure is necessary for development ignores the fact that the infrastructure develops in the course of economic progress, not ahead of it.  The suggestion is yet another example of an unhistorical and unrealistic attitude to the process of development.

I am sharing Café Hayek’s or Professor Don Boudreaux’s quote of the day which is from the late Peter Bauer’s invaluable 1976 collection (page 111), Dissent on Development (Revised Edition); specifically, it’s from Bauer’s 1969 Scottish Journal of Political Economy essay

The popular notion where “infrastructure drives economic progress” which justifies for government interventions simply accounts for the fallacy of confusing cause and effects. This popular fiction has been peddled by media and politically captured institutions, which accounts for as either utter ignorance, political inculcation or propaganda aimed at brainwashing the gullible public.

In reality as recently pointed out, the industrial age had been largely driven by private sector infrastructure. This serves as evidence that growing economic activities motivates people to build and invest in infrastructure to augment their existing conditions with accumulated capital from earlier transactions.

As Professor Ludwig von Mises noted,

saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material ends

This means capital don't appear from nowhere!

The mystic of government’s supposed magical potency on the economy has not only been based on fallacies but on the poor understanding of capital, opportunity costs and the law of scarcity.

Moreover, such popular misimpression have been backed by the assumption that governments possess omniscience, which in reality they don’t.

Quote of the Day: Private Sector Infrastructure Investment and the Industrial Age

Any growth theory where government investment plays a crucial role in stimulating growth immediately runs afoul of the historical record, however.  The first countries to industrialize did not require extensive government involvement to make these investments.  In England, it was apparent that neither early capital accumulation nor social overhead investment depended heavily on the public sector, as Phyllis Deane (1979) notes when commenting on traditional explanations of growth that rely on government involvement to overcome lumpiness and externalities:

“The consequence is that social overhead capital generally has to be provided collectively, by governments or international financial institutions rather than individuals, and the mobilization of the large chunks of capital required is most easily achieved through taxation or borrowing.  The interesting thing about the British experience, however, is that it was almost entirely native private enterprise that found both the initiative and the capital to lay down the system of communications which was essential to the British industrial revolution.” [p. 73]

Private returns were, apparently, sufficiently high in the late eighteenth and early nineteenth century to induce the private sector to make the necessary infrastructure investment required by the Industrial Revolution.

(bold mine)

This excerpt is from John Wallis’s Chapter 13 of the 1994 essay “Government Growth, Income Growth, and Economic Growth,” of Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R. M. Hartwell (John A. James & Mark Thomas, eds., 1994) (link added) as quoted by Professor Don Boudreaux at the Café Hayek.

The above dispels the popular myth that only governments can provide the required infrastructure investment (e.g. roads, bridges, and etc…) for a society.

And an even more important point is that such initiative from the private sector came about when the world had been less economically prosperous.

In other words, the miraculous economic development, or the rags to riches story, or the magnificent transformation of human society from the medieval age--through the industrial age--to today’s information age, during the last 200 years as depicted by Hans Rosling in this video has been rooted from private sector’s infrastructure investments.

Costs are not benefits. Contrary to another popular misperception, capital does NOT just emerge out of nowhere. They are accumulated by the private sector through savings and investments. And that the resources that government has always accrue from, or have been coercively taken from, the private sector.

This means that outside the ambit of regulatory and political obstacles or interference, the private sector could have used these resources to finance and build the required infrastructure ala the industrial age.

The problem is that politicization of infrastructure investments emerges from its capacity to deliver votes.

It’s also a mistake to see the world as operating in a vacuum, such that only governments can make the “right” decision based on presumed "superiority" of knowledge, for infrastructure spending.

After all, the government is comprised of people too.

This means that politicians and bureaucrats have similar limitations like anyone else except that they have the privilege of using guns and badges against their constituents to meet their goal.

Yet any erroneous actions from centralized institutions will have far greater “externalities” or impact to the society than from the decentralized private sectors.

The entrenched belief that governments “know better” accounts for as one of the greatest myths of our time.

Quote of the Day: The Unintended Consequences from China’s Infrastructure Spending

Why aren’t China’s leaders spending much more as they did in late 2008 and 2009 to boost economic growth? It might be because much of what they built was defective as a result of widespread corruption. The 8/4 issue of the London Times reported there were 99 road cave-ins in Beijing between July 21 and August 21 of this year. Roads and bridges are collapsing in other cities as well. Most are relatively new including a bridge that was built just 10 months ago.

The country's former railway minister, Liu Zhijun, was expelled from the Communist Party of China for corruption in May following the high-speed train collision that left 40 people dead and 172 injured near the eastern city of Wenzhou last year. In March of this year, part of a high-speed railway line due to open in May between the Yangtze river cities of Wuhan and Yichang collapsed after heavy rain. Engineers working on some projects have complained of problems with contractors using inferior concrete or inadequate steel support bars. Consider this excerpt from the 2/17/11 issue of the NYT:

“The statement underscored concerns in some quarters that Mr. Liu cut corners in his all-out push to extend the rail system and to keep the project on schedule and within its budget. No accidents have been reported on the high-speed rail network, but reports suggest that construction quality may at times have been shoddy. A person with ties to the ministry said that the concrete bases for the system’s tracks were so cheaply made, with inadequate use of chemical hardening agents, that trains would be unable to maintain their current speeds of about 217 miles per hour for more than a few years. In as little as five years, lower speeds, possibly below about 186 miles per hour, could be required as the rails become less straight, the expert said. Strong concrete pillars require a large dose of high-quality fly ash, the byproduct of burning coal. But the speed of construction has far exceeded the available supply, according to a 2008 study by a Chinese railway design institute.”

This is from Dr. Ed Yardeni on China’s slowdown.

China announced last week a 1 trillion yuan $157 billion infrastructure spending program which is much less than the 2008-2009 version.

Nonetheless, the above serves as further proof that infrastructure spending projects by governments, not only waste taxpayers money, but importantly promotes unethical transactions which results to MORE economic and social problems.

Public Work Failure: US Stadiums Burn $4 Billion

Devotees of public work (infrastructure) spending, who see such measures as necessity to lift statistical economic growth, should learn from the experience of US taxpayer funded stadium spending binges.

From Bloomberg,

New York Giants fans will cheer on their team against the Dallas Cowboys at tonight’s National Football League opener in New Jersey. At tax time, they’ll help pay for the opponents’ $1.2 billion home field in Texas.

That’s because the 80,000-seat Cowboys Stadium was built partly using tax-free borrowing by the City of Arlington. The resulting subsidy comes out of the pockets of every American taxpayer, including Giants fans. The money doesn’t go directly to the Cowboys’ billionaire owner Jerry Jones. Rather, it lowers the cost of financing, giving his team the highest revenue in the NFL and making it the league’s most-valuable franchise.

“It’s part of the corruption of the federal tax system,” said James Runzheimer, 67, an Arlington lawyer who led opponents of public borrowing for the structure known locally as “Jerry’s World.” “It’s use of government funds to subsidize activity that the private sector can finance on its own.”

Jones is one of dozens of wealthy owners whose big-league teams benefit from millions of dollars in taxpayer subsidies.Michael Jordan’s Charlotte, North Carolina, Bobcats basketball team plays in a municipal bond-financed stadium, the Time Warner Cable Arena, where the Democratic Party is meeting this week. The Republicans last week used Florida’s Tampa Bay Times Forum, also financed with tax-exempt debt. It is the home of hockey’s Lightning, owned by hedge-fund manager Jeffrey Vinik. None of the owners who responded would comment.

$4 Billion

Tax exemptions on interest paid by muni bonds that were issued for sports structures cost the U.S. Treasury $146 million a year, based on data compiled by Bloomberg on 2,700 securities. Over the life of the $17 billion of exempt debt issued to build stadiums since 1986, the last of which matures in 2047, taxpayer subsidies to bondholders will total $4 billion, the data show.

Those estimates are based on what the Treasury could have collected on interest from the same amount of taxable bonds sold at the same time to investors in the 25 percent income-tax bracket, the rate many government agencies assume. In fact, more than half the owners of tax-exempt bonds pay top rates of at least 30 percent, according to the Congressional Budget Office. So they save even more on their income taxes, a system that U.S. lawmakers of both parties and President Barack Obama have described as inefficient and unfair.

There hardly are major nuances when government undertake projects in the form of Public-Private Partnership, monopolies or public outsourcing to private contractors, or other forms of concessions to the politically favored private enterprises. The incentives guiding private enterprises will be directed towards attaining political objectives of the political masters rather than servicing the consumer.

Importantly, not only have these been a waste on taxpayers money, they become sources of rent seeking, corruption and other unethical relationships.

They have even become sources of public disasters.

And as I recently pointed out, the proposed 407 billion pesos spending by the Philippine government on infrastructure has been seen by media as signs of progress. They see this, under the impression that the incumbent government has been “clean” enough to undertake them.

All these signify a grand delusion. Populism ignores economic reality.

The public fails to understand that NO government have the requisite knowledge of the value scales and time preferences of individuals or of the the knowledge of the particular circumstances of time and place (Hayek) from which serves as the foundation of economic activities. Economic activities basically represent a bottom up phenomenon.

Second, government projects are likely designed under the influences of vested interest groups or cronies or if not by bureaucrats who will be designating them to the same groups for implementation.

Third, the private sector collaborators will benefit from the exposure of taxpayers money through guarantees or subsidies.

In many instances, both parties will find ways to game the system.

Moreover, money spent on public works focuses on short term political goals to promote media popular unproductive employment (to generate approval ratings and votes) at the expense of productive enterprises which provides real productive jobs.

As the great Henry Hazlitt wrote,

For then the usefulness of the project itself, as we have seen, inevitably becomes a subordinate consideration. Moreover, the more wasteful the work, the more costly in manpower, the better it becomes for the purpose of providing more employment. Under such circumstances it is highly improbable that the projects thought up by the bureaucrats will provide the same net addition to wealth and welfare, per dollar expended, as would have been provided by the taxpayers themselves, if they had been individually permitted to buy or have made what they themselves wanted, instead of being forced to surrender part of their earnings to the state.

Of course, all these leads to higher taxes and to price inflation (if these debts will be funded by politically directed credit expansion).

Finally, as shown by the US Stadium experience, politicization of resource allocation leads not only to inefficiency, wastage, but to immoral relationships between officials and their private sector lackeys.

The impression where government will be “virtuous” enough to undertake “honest” public work spending has been founded on utopian fantasies.

World Competitiveness: Philippines Jumps to 65th Place

The World Economic Forum (WEF) recently released, The Global Competitiveness Report for 2012-2013 which attempts to measure relative competitiveness among 144 nations that provides “insight into the drivers of their productivity and prosperity”

It is important to highlight that the competitive ranking have been defined by the WEF as

as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. The productivity level also determines the rates of return obtained by investments in an economy, which in turn are the fundamental drivers of its growth rates. In other words, a more competitive economy is one that is likely to sustain growth.

Here is the roster of the top 30 most competitive nations.

Notice that the WEF says the ranking is about productivity, and not about “cheap labor”.

If competitiveness is about the “cheap labor” then the Philippines and Africa will be on top of the list. Unfortunately mainstream demagoguery has obstinately been focused on this, so as to justify the inflationist-interventionists doctrines.

Also notice that the most competitive nations have been developed economies. The GCI rankings have been closely aligned with the list of most economically free nations (Heritage Foundation: 2012 Index of Economic Freedom).

It is important to note that the above rankings are comparative or relatively based. This implies that changes in standings may not necessarily translate to advancement or deterioration in domestic policies but about quantified comparative measures.

First the good news.

According to the report, the Philippines leapt from 75^th to 65^th

Yet despite the huge gains, which obviously will be construed and used by the mainstream and political forces to grab credit as “achievement” for the administration, the Philippines trails vastly behind the ASEAN peers.

Curiously Africa’s Rwanda has even been ahead.

The bad news is that despite the remarkable gains, the gap in the per capita GDP figures has been widening relative to our developing Asian peers.

This means that yes the Philippines has shown material progress but such gains has not been enough to cope up with the scale of advancement in the region.

Lastly, the reason for the lag in productivity has been about over politicization of the domestic economy which has been manifested through a bloated bureaucracy, lack of infrastructure (which has been politically determined—see below), tax and labor regulations and high tax rates.

Of course corruption has still been the biggest deterrent to business. But, in truth, corruption signifies as symptoms of interventionism expressed through arbitrary policies and regulations, the bureaucracy, welfare-warfare state and state determined allocation of resources.

The informal economy, which is also a symptom of interventionism, takes up a huge chunk of economic activities. This is a clear manifestation of the failures of interventionism and of the incumbent political institutions.

Ironically the salutary conditions of the shadow economy could be suggestive of the alternative positive aspects of corruption, where people pay bribe money to authorities in order to do productive endeavors. This in spite of the major negative attribution on the survey.

The burgeoning informal gold mining sector, which comes mostly in response to recently imposed higher taxes should serve as a wonderful anecdotal example.

Yet the media and the social desirability bias afflicted pop culture cheers about the Php 407 billion proposed infrastructure or so-called “investment” spending without the realization that productive money will be diverted to the pockets of cronies (who will get the contracts), bureaucrats (who will pick the winners) and politicians (which most likely will be the source of electoral finance for the upcoming 2013 national elections).

chart from US Global Investors

All these supposed stimulus will only translate to greater inequality (enrichment of the political class and of the politically connected enterprises), more debts, higher taxes (for the middle class and the politically unconnected), more PRICE inflation (which will be blamed on the private sector) and importantly adds to the ballooning bubble dynamics driven by current easy money policies.

These so-called public work policies are a chimera, as the great Professor Ludwig von Mises explained.

The fundamental error of the interventionists consists in the fact that they ignore the shortage of capital goods. In their eyes the depression is merely caused by a mysterious lack of the people's propensity both to consume and to invest. While the only real problem is to produce more and to consume less in order to increase the stock of capital goods available, the interventionists want to increase both consumption and investment. They want the government to embark upon projects which are unprofitable precisely because the factors of production needed for their execution must be withdrawn from other lines of employment in which they would fulfill wants the satisfaction of which the consumers consider more urgent. They do not realize that such public works must considerably intensify the real evil, the shortage of capital goods.

For media and the dumb downed (“madlang people”) electorate which sees this as good news hardly understands that effects of so-called government stimulus would be based on the illusions of statistics [mainstream economic statistics are based on Keynesian formula constructs] and not from real growth.

Thus, temporary good news will eventually become long term bad news.

However, despite such realities, the relatively better competitive standings today will likely continue to improve. Again, this is hardly because of internal ‘business friendly’ improvements but because of positional standings which will mostly be determined by the political responses to the unfolding crisis abroad.

Again the WEF’s GCI

The global economy faces a number of significant and interrelated challenges that could hamper a genuine upturn after an economic crisis half a decade long in much of the world, especially in the most advanced economies. The persisting financial difficulties in the periphery of the euro zone have led to a long-lasting and unresolved sovereign debt crisis that has now reached the boiling point. The possibility of Greece and perhaps other countries leaving the euro is now a distinct prospect, with potentially devastating consequences for the region and beyond. This development is coupled with the risk of a weak recovery in several other advanced economies outside of Europe—notably in the United States, where political gridlock on fiscal tightening could dampen the growth outlook. Furthermore, given the expected slowdown in economic growth in China, India, and other emerging markets, reinforced by a potential decline in global trade and volatile capital flows, it is not clear which regions can drive growth and employment creation in the short to medium term

The big picture gives us an objective dimension of the real developments rather than fall for trap to political demagoguery

Updated to add:

I was unaware when I wrote a few hours back that the competitiveness issue accounts for today's main headline story.

Will Urbanization Save China’s Capital Spending Bubble?

Mr. Stephen Roach, Chairman of Morgan Stanley Asia, writing at the Project Syndicate thinks so,

Reports of ghost cities, bridges to nowhere, and empty new airports are fueling concern among Western analysts that an unbalanced Chinese economy cannot rebound as it did in the second half of 2009. With fixed investment nearing the unprecedented threshold of 50% of GDP, they fear that another investment-led fiscal stimulus will only hasten the inevitable China-collapse scenario.

But the pessimists’ hype overlooks one of the most important drivers of China’s modernization: the greatest urbanization story the world has ever seen. In 2011, the urban share of the Chinese population surpassed 50% for the first time, reaching 51.3%, compared to less than 20% in 1980. Moreover, according to OECD projections, China’s already burgeoning urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States. With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas.

Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990’s quickly became a fully occupied urban center, with a population today of roughly 5.5 million. A McKinsey study estimates that by 2025 China will have more than 220 cities with populations in excess of one million, versus 125 in 2010, and that 23 mega-cities will have a population of at least five million.

China cannot afford to wait to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely.

All of this is part of China’s grand plan. The producer model, which worked brilliantly for 30 years, cannot take China to the promised land of prosperity. The Chinese leadership has long known this, as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns’” critique – warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable” economy.

I have deep respect for Mr. Stephen Roach but I think his “urbanization” argument hardly distinguishes from the other public work projects such as infrastructure and transportation. They are all anchored on justifications of centrally planned interventions that presupposes omniscience or the superiority of knowledge of political authorities, as well as, the incontrovertibility of such trends (which for me accounts as the folly of reading past trends into the future; or “fighting the last war”).

In short, urbanization, based on government design, seems like a lipstick on a pig.

Urbanization according to Wikipedia is closely linked to modernization, industrialization, and the sociological process of rationalization.

Urbanization is characterized by, again Wikipedia.org

Cities are known to be places where money, services and wealth are centralized. Many rural inhabitants come to the city for reasons of seeking fortunes and social mobility. Businesses, which provide jobs and exchange capital are more concentrated in urban areas. Whether the source is trade or tourism, it is also through the ports or banking systems that foreign money flows into a country, commonly located in cities.

Urbanization in reality are symptoms of the 20^th century model of intertwined centralized social activities based on mass production, mass media and markets which drew development and population to urban areas that paved way for the age of urbanization.

But are we still in the industrial age or are we shifting to the information age?

While Urbanization has still been an ongoing phenomenon, signs are that current centralized trends have been shifting.

For instance in China, demographic trends show that population and development has been moving inland. This may be partly due to government projects, China’s spontaneous economic response to the unfolding events around the world and the alleged reshaping or “rebalancing” of China’s economy (The Economist)

But what mainstream seem to ignore is that mass production has been transitioning towards specialization, which is why Asia became a supply chain network.

Moreover, future trends points to home based production for simple products (3-D printing anyone?)

Chart from KPCB’s Mary Meeker

Decentralized social media via the internet has also been challenging mass media. In terms of advertising, mobile and internet have been dramatically gaining at the expense of Radio and Print. Even revenue growth from ads on TV has been stagnating.

Also, mass markets are being turned into niche or specialty markets.

Specialization of production and niche markets has led to grassroots development.

Proof?

The expansion of the booming Business Process Outsourcing has not only been within cities but to secondary cities and to rural areas as well. This applies both to India and the Philippines.

As I previously wrote,

Also business focus will increasingly be directed to specific needs (niche marketing) rather than mass production and also on where the consumers and markets are.

In the Philippines, shopping malls have sprouted not only in major cities but also in capitals of provinces or secondary cities. Take for example the largest shopping mall chain the SM Group which has 43 malls nationwide and growing. This is a noteworthy example of the deepening dispersion trends, where facilities have been mushrooming outside of mega cities.

I might add that SM has reportedly been targeting rural or provincial areas for expansion due to a booming agricultural economy and has been on a land-buying binge in Bacolod, Tacloban, Baguio, Bulacan, and Laguna, Quezon and Pangasingan.

Of course the agriculture economy has been part of the boom, but as noted above, even BPOs are headed towards rural areas. There may also be other telecommuters or home based technology businesses, aside from the large informal economy and remittance based income.

What the point?

Decentralization is bound to upend centralized based social activities of the 20th century

As the prescient Alvin Toffler wrote in Third Wave (p. 298-299)

The Third wave alters our spatial experience by dispersing rather than concentrating population. While millions of people continue to pour into urban areas in the still industrializing parts of the world, all the high technology countries are already experiencing a reversal of this flow. Tokyo, London, Zurich, Glasgow, and dozens of other major cities are all losing population while middle-sized or smaller cities are showing gains…

This redistribution of and de-concentration of population will, in due time, alter our assumption and expectations about personal as well as social space about commuting distances, about housing density and many other things.

This has gradually been happening today.

Bottom line: Urbanization will unlikely save China’s Keynesian centrally planned capital spending boom from turning into a bust.

China’s Public Works Disasters

Here is another example of the unintended nasty effects from China’s centrally planned capital-infrastructure spending boom

From the International Business Times

A collapsing bridge in northern China killed three people and injured five others on Friday.

The Yangmingtan Bridge stretched across the Songhua River in the Heilongjiang province, according to the BBC. But the collapsed section, which was about 328 feet long, came from a ramp over dry land. It was about 5:30 a.m. when four loaded trucks spilled onto the ground as the road beneath them fell apart.

The worst part is that nobody is surprised by Friday's tragedy; this was China's sixth major bridge collapse since July of 2011.

Note: This incident has been the SIXTH major bridge collapse since July 2011. This appears to be the result of the 2008-2009 stimulus program, which prompted the Chinese government to rush public works for the sake of keeping up with statistical job growth via Keynesian policies.

Other grand “public work” projects have also experienced accidents. Again from the same article…

The Yangmingtan Bridge, a multi-million-dollar project, was finished just nine months ago. It is one of many infrastructure projects undertaken by the Chinese government in recent years. These include over 4,200 miles of high-speed rail tracks, which may increase to 12,000 miles by 2020; the Three Gorges Dam on the Yangtze River, which is the largest hydroelectric project the world has ever seen; and the rapid construction of new airports that, if all goes according to plan, will bring China's total up to 230 by 2015

But for all their successes, each of these grand projects has been marked by serious failures.

China's high-speed trains, for instance, may be going a bit too fast; there have been several accidents over the last few years. In July of 2011, a two-train collision killed 40 people. In March of this year, a 980-foot stretch of track along the Yangtze River collapsed due to nothing more than heavy rains. And in the Heilongjiang Province on Thursday evening, a minor crash injured 24 people.

The Three Gorges Dam has plenty of issues too, though it generates enough watts to power Switzerland. It has necessitated the relocation of over a million people, and its construction has come at a huge environmental cost. Lately, a change in the reservoir's water level has resulted in dangerous landslides, and Reuters reported this week that another 100,000 people will soon have to head for higher ground.

Man made disasters and accidents account for some of the unintended consequences.

But there is more, many upcoming projects risk underutilization or becoming white elephants…

And if all goes to plan, China's planned airport development will put a full 80 percent of the population within 65 miles of an air transport hub. Some argue that this might be a little excessive for a country where, just last year, two-thirds of China's current 180 airports were unprofitable. (Chinese officials argue that air travel is a burgeoning industry, and that an extensive network of transit hubs will generate the traffic needed to make it profitable.)

Japan’s bubble bust legacy of “socialization of investments” from numerous money losing taxpayer funded public airports should be an example.

Assuming the noble intentions of political authorities, central planning implies omniscience and the superiority of knowledge over the marketplace which simply isn’t true. Political authorities cannot know of the individual preferences and values and of the particular circumstances of time and place with respect to individual actions.

Also this also disregards the notion of the incentives guiding policymakers

Virginia Postrel in her 1998 book, The Future and Its Enemies as quoted by Professor Don Boudreaux,

To centralize knowledge for the sake of planning and “efficiency” – the technocratic dream – we have to throw away vast amounts of local knowledge.

Depending on topsight can easily lull us into imagining that we see not only the “big, big, big, big, big, big, big, big picture” but the whole, including the critical details. At a distance, it is easy to think that other people just don’t know what they’re doing – especially when you can override their decisions by decree rather than through persuasion or competition.

Yet most seem to forget that political authorities tend to itch on spending other people’s money.

Politicization of the allocation of resources leads not only to waste, deaths from accidents and corruption, but to systemic fragility from centralization of policy errors—the hemorrhage of resources and capital on unproductive undertaking (capital consumption), of mounting debts to finance political boondoggles (debt crisis) and of the loss of civil liberty.

Fiscally Pressured Governments go for Crony based Privatizations of ‘Public Goods’

Money pressured governments are looking to privatization of parts of politically sensitive functions such as security services.

The Telegraph reports,

Private companies will be running large parts of the UK's police service within five years, according to the world's biggest security firm.

David Taylor-Smith, the head of G4S for the UK and Africa, said he expected police forces across the country to sign up to similar deals to those on the table in the West Midlands and Surrey, which could result in private companies taking responsibility for duties ranging from investigating crimes to transporting suspects and managing intelligence.

The prediction comes as it emerged that 10 more police forces were considering outsourcing deals that would see services, such as running police cells and operating IT, run by private firms.

Privatization of government functions are akin to Public-Private Partnership (PPP) enterprises on political controlled or regulated sectors. They really NOT about free markets but about cronyism.

As I previously pointed out

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

In the US even Keynesian high priest, Paul Krugman, who I vehemently disagree with on most issues, resonates with our perspective over the issue of phony privatizations (in Krugman’s case he refers to New Jersey’s “new kind of privately run halfway house” prison systems).

From Paul Krugman (hat tip Bob Wenzel, bold emphasis added)

So what’s really behind the drive to privatize prisons, and just about everything else?

One answer is that privatization can serve as a stealth form of government borrowing, in which governments avoid recording upfront expenses (or even raise money by selling existing facilities) while raising their long-run costs in ways taxpayers can’t see. We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.

Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.

But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. As more and more government functions get privatized, states become pay-to-play paradises, in which both political contributions and contracts for friends and relatives become a quid pro quo for getting government business. Are the corporations capturing the politicians, or the politicians capturing the corporations? Does it matter?

The point, then, is that you shouldn’t imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage.

Additional thoughts:

This is proof that governments have really been getting desperate over their state of finances.

But, privileges are hard to let go. Instead, politicians have used austerity from today’s crisis as opportunity to dispense concessions to friends, allies or favored special interest groups for political goals. This signifies a form of economic fascism

Politicians use accounting trickery to shield reforms.

Moreover, such privatizations represent fundamental admissions that even the most sensitive ‘public goods’, whether security or defense and prison services, can be delegated or outsourced to the private sector. This implies that these services can be depoliticized and delivered, through the competitive marketplace or (hold your breath) even without government.

The answer isn't to privatize (euphemism for fascism-cronyism) but to depoliticize and liberalize the sector.

Lastly, these are writings on the wall in favor of the growing forces of decentralization.

When governments become totally bankrupt then the de-politicization or decentralization process of political functions will become apparent.

Japan’s Bubble Legacy: Airports Bleeding Taxpayers Dry

Japan’s financially floundering airports represent as classic examples of Keynesian policy of “socialization of investments” gone awry intertwined with the dynamics of a busted bubble.

From the Japan Times

Japan has 98 airports, and most of them are operating in the red as a result of exaggerated demand forecasts and rampant, costly and arguably pork-barrel construction projects.

The transport ministry hopes to mitigate the problem by selling off the management rights to 27 state-owned airports as soon as 2014. The ministry also plans to issue an airport reform blueprint by summer

And guess which among Japan’s airport business remains profitable?

Again from the same Japan Times article, [bold emphasis mine]

In most cases, the central and local governments manage the runways, aircraft aprons and other regulated facilities while private companies or joint public-private ventures run the terminal buildings and parking lots. Of the 98 airports, 28 are run by the central government and 67 by local governments…

Not all but most facilities specifically linked to flight operations are running at a loss, even though most terminal buildings and parking lots are turning profits.

Most of the income to cover the operations of runways, aprons and other aircraft-related facilities, however, comes from landing fees, which have suffered for years at airports nationwide amid the sluggish economy and lack of passengers.

And how the losses came about? [bold emphasis mine]

One key reason is overcapacity. The government built too many airports based on overrated demand projections, experts say.

Because airports are considered public infrastructure, profit is not the only consideration taken into account when building them.

The nation has many remote islands whose only transportation link to the outside world is by air, even when demand for travel is minimal and steers aviation operations into the red.

But the situation was compounded in large part by politics, with decisions made to build airports in rural, virtually no-traffic areas where turning a profit was never a realistic proposition but just a way to get voters government-backed jobs from more pork-barrel projects.

Another drawback has been the "pool system" of state budgetary allocation, a one-size-fits-all policy for financing airport operations that did little to clarify which airports were at risk of habitually losing money, experts say.

The more or less blanket operations of all state-run airports provided little incentive for individual hubs to seek more efficient operations, Sayuri Hirai, a senior consultant at Daiwa Institute of Research, told The Japan Times.

The easiest way to spend money is to spend other people’s money. Since politicians and their bureaucracy are not held accountable and are not disciplined by profits and losses and lack stakeholdings for their decisions, miscalculations, inefficient allocations and wastages are the common or typical outcome. This is exactly what has transpired with Japan’s airports which have been bleeding Japanese taxpayers dry. Hence the recent thrust to privatize parts of these.

Besides, political actions have mostly been about short term vote enhancing considerations, hence the proclivity to undertake on grand projects regardless of their feasibility such as “build airports in rural, virtually no-traffic areas”.

Not included in the report are the influences by vested interest groups on the decisions of policymakers, which again makes government spending sensitive to the allures of venality.

Moreover, politicians have not been incented to acquire or don't possess the knowledge to take upon viable projects for the same reasons—they are not subject to market forces. There hardly has been any efforts on these, as evidenced by “one-size-fits-all” financing.

Another reason for such massive scale of miscalculation and malinvestments had been that the real estate boom days may have influenced the decision of policymakers. Japan's bubble had been fueled by a credit boom that had been designed to offset the US dictated Japan's policy to appreciate the yen that gave the artificial impression of lasting prosperity which eventually was unmasked.

Also I would surmise that many of these projects had been from the pump priming or fiscal stimulus undertaken by the government to offset the economic decline. This again tells us how government dictated efforts results to resources mostly going down the drain.

As the great Ludwig von Mises wrote,

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

Apparently Japan fell for the enticements of interventionism and still endures the consequences for their sins.

Entrepreneurial Knowledge and Failure as Virtue

Entrepreneurial knowledge and the societal acceptance of failure should be seen as stepping stones or building blocks to economic progress.

From the Wall Street Journal Blog (bold emphasis mine)

Economists at Harvard University and Massachusetts Institute of Technology have just released what they claim to be the crystal ball of economics: a model for predicting a nation’s future growth more accurately than any other techniques out there.

“The Atlas of Economic Complexity” ranks 128 nations based on their “productive knowledge” — the skills, experience and general know-how that a given population acquires in producing certain goods. Countries with a high score in the report’s “economic complexity index” have acquired years of knowledge in making a variety of products and goods and also have lots of room for growth. Essentially, the more collective knowledge a country has in producing goods, the richer it is — or will be.

The 364-page report, a study led by Harvard’s Ricardo Hausmann and MIT’s Cesar A. Hidalgo, is the culmination of nearly five years of research by a team of economists at Harvard’s Center for International Development.

“The essential theory … is that countries grow based on the knowledge of making things,” Mr. Hausmann said in a phone interview. “It’s not years of schooling. It’s what are the products that you know how to make. And what drives growth is the difference between how much knowledge you have and how rich you are.”

The above seems quite applicable to the Philippines. As I have been pointing out, four out ten college graduates are unemployed and about 13% of college graduates emigrate.

The Philippine economic predicament has hardly been about the lack of education but mainly the inadequacy of the relevant entrepreneurial knowledge or “knowledge to make things”. And most importantly, a conducive environment for entrepreneurs to underwrite on such risks.

And because risk-taking is an integral part of the market economy, the outcome of either success or failure is indispensable. Failure should also be seen as capitalist virtue from which entrepreneurs can build on, learn and innovate from.

This excerpt from an insightful article by Professor Steve Horwitz and Jack Knych at thefreemanonline.org (bold emphasis mine)

Economists, especially those of the Austrian school, often emphasize how entrepreneurs discover new knowledge and better ways of producing things. But entrepreneurial endeavors frequently fail and the profits thought to be in hand often don’t materialize. According to the U.S. Small Business Administration, over half of small businesses fail within the first five years. But failed entrepreneurial activity is just as important as successful entrepreneurial activity. Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentive to correct them. It’s not that entrepreneurs are just good at getting it right; it’s also that they (like all of us) can know when they’ve got it wrong and can obtain the information necessary to get it right next time.

On this view failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.

The seeming preference by the Philippine society to focus on mass ‘public’ education and on the growing web of regulations will serve as constant source of perpetual socio-economic frustrations because these policies have not been dealing with the fundamentals of the problem: Mass graduates in a political environment that seems unfriendly to business or to entrepreneurship which only places additional strains on current unemployment figures.

Yet fear of failure converted into public policies known as public goods or safety nets encourages political dependency, abdication of personal responsibility, indolence and importantly the curtailment of civil liberties.

From the economic dimension, this implies diversion of scarce resources from productive activities. The obverse side of each safety net underwritten or regulation imposed means employment losses somewhere.

In focusing on the wrong factors evidently we get the wrong outcomes. Worst, since current woes reflect on the failures of political policies, the effect has been noticeably widespread. Yet politicians tend to pass the blame on someone else.

Unfortunately, accountability from these policy failures has practically been absent or are imperceptible from the public’s perspective. In other words, the opportunity cost from each political action have been intangible, unseen or unnoticed by the public.

Thus, the underlying populist tendency to the current social ills has been to ask for more of the same wrong prescriptions or ‘doing the same thing and expecting different results’ a quote on insanity prominently attributed to Albert Einstein.

In politics, a culture of ‘insanity’ seems to be the norm.

Lessons from the Joint Resignations of the Chiefs of Turkey’s Armed Forces

Turkey’s highest ranking military officers has reportedly resigned en masse.

According to the SFGate,

The chiefs of staff of Turkey's military stepped down Friday as tensions dramatically increased over the arrest of dozens of officers accused of plotting to overthrow the Islamic-rooted government.

The resignation of so many top commanders, a first for Turkey, a NATO member, signals a deep rift with the government, which has confronted a military that once held sway over Turkish political life. The arrests of high-ranking military officers would once have been unimaginable.

The resignations of Turkey's top general, Isik Kosaner, along with the country's navy, army and air force commanders, came hours after a court charged 22 suspects, including several generals and officers, with carrying out an Internet campaign to undermine the government. The commanders asked to be retired, the state-run Anatolia news agency said.

In Brussels, a NATO spokeswoman declined to comment on the resignations. Turkey's military is the second largest in the 27-member alliance. It has about 1,800 troops as part of NATO's 140,000-strong force in Afghanistan.

The Turkish government responded by quickly appointing the remaining highest-ranking commander, Gen. Necdet Ozel, as the new land forces commander and the acting chief of staff, the office of Prime Minister Recep Tayyip Erdogan announced. President Abdullah Gul approved the appointment.

This puts to light the question “who protects us from our protectors?” when men in uniform try to exert political pressure on the civilian government.

Nevertheless, these events can present themselves as windows of opportunities for the Turkish people to even pare down on the vertical hierarchical structure of the world’s sixth largest armed forces that should free up resources for the private sector to use, and importantly, to reduce dependency on so-called ‘protectors’, who in reality signify as instruments of state initiated violence on her people.

Bluntly put, a shrinkage of government equates to the advance of civil liberties.

From Google Public Data

While it isn’t clear in the report on what has prompted for such an incident (except for the charges of plotting to overthrow government), my suspicion is that these protestations could signify adverse reaction to, or symptoms of a resistance to change, to Turkey’s recent transition towards greater economic freedom.

Evidence of this can be seen by the substantial decline of military expenditures as % to GDP.

And coincidental to the diminishing expenditures of Turkey’s government on her military, is the significant liberalization of the economy as shown by the chart above from the Heritage Foundation.

Of course the Turkish people may choose to consider the privatization of national defense route.

As Gustave de Molinari (1818–1912), a prominent Belgian-born French economist, student of Jean-Baptiste Say, and teacher of Vilfredo Pareto wrote in his article “De la Production de la Securité” of February 1849. (bold emphasis mine)

If there is one well-established truth in political economy, it is this: That in all cases, for all commodities that serve to provide for the tangible or intangible needs of consumers, it is in the consumer’s best interest that labor and trade remain free, because the freedom of labor and trade have as their necessary and permanent result the maximum reduction of price.

And this: That the interests of the consumer of any commodity whatsoever should always prevail over the interests of the producer.

Now in pursuing these principles, one arrives at this rigorous conclusion: That the production of security should, in the interests of the consumers of this intangible commodity, remain subject to the law of free competition.

Whence it follows: That no government should have the right to prevent another government from going into competition with it, or require consumers of security to come exclusively to it for this commodity. . . .

Either this is logically true, or else the principles on which economic science is based are invalid. (Gustave de Molinari, Production of Security, J.H. McCulloch, trans. [New York: Center for Libertarian Studies, 1977], pp. 3–4)

Read here for a multi essays or treatises of how national defense can be provided for by the private sector—The Myth Of National Defense: Essays On The Theory And History Of Security Production

Or as the letter below from US founding father Samuel Adams to militia James Warren

A standing Army, however necessary it may be at some times, is always dangerous to the Liberties of the People. Soldiers are apt to consider themselves as a Body distinct from the rest of the Citizens. They have their Arms always in their hands. Their Rules and their Discipline is severe. They soon become attachd to their officers and disposd to yield implicit Obedience to their Commands. Such a Power should be watchd with a jealous Eye. I have a good Opinion of the principal officers of our Army. I esteem them as Patriots as well as Soldiers. But if this War continues, as it may for years yet to come, we know not who may succeed them. Men who have been long subject to military Laws and inured to military Customs and Habits, may lose the Spirit and Feeling of Citizens. And even Citizens, having been used to admire the Heroism which the Commanders of their own Army have displayd, and to look up to them as their Saviors may be prevaild upon to surrender to them those Rights for the protection of which against Invaders they had employd and paid them. We have seen too much of this Disposition among some of our Countrymen. The Militia is composd of free Citizens. There is therefore no Danger of their making use of their Power to the destruction of their own Rights, or suffering others to invade them.

Can Government Prevent Disasters?

I am disheartened by the news of the recent bus tragedy in Benguet whereby some 41 people died when the Bus fell into the ravine.

Yet we hear some sectors intuitively propose government to intervene, in the assumption that government can indeed forestall disaster. Again “romancing the government” without examining the cost benefit tradeoffs.

Here is why I think government can’t help in preventing disasters, (even if you install a communist government)

1. Government officials don’t know and can’t tell the future.

2. Government officials don’t know and can’t tell ALL the ongoing changes in the environment.

3. Government officials don’t know and can’t tell ALL the spontaneous actions of tens of millions of people.

4. Government officials don’t know and can’t tell ALL the conditions of the vehicles that people use.

5. Government officials don’t know and can’t tell ALL the impact of the interactions of the people, the vehicles and the environment.

In short, it will ALWAYS BE A KNOWLEDGE problem.

So unless, someone can enlighten me on the supposed omniscience of government, from such premises, no matter what the government does, they won’t be able to prevent disasters.

At worst, they could enhance it.

How?

First, every government intervention entails a bureaucracy.

Two, every bureaucracy comes with financing charged to taxpayers. So if the government plans to reduce accidents by having people NOT to travel by imposing onerous taxes, then this would be the way to go. That’s because people will be too poor to travel. Yet quality of life can be associated with impact of disasters (Think Haiti)

Three every regulations will benefit one group at the expense of the other.

A great example of this would be the Philippine Maritime industry.

Out of the world’s 176 worst maritime disaster, the Philippines owns 6 of them and has the inglorious status of having the worst, the MV Dona Paz.

Well, it’s NOT that the maritime industry has been lacking regulation. The fact is the opposite the industry have SATED with regulations.

As I previously wrote,

It is a peculiar development why despite the repeated accidents by the same shipping company, consumers continue to patronize such private entity. The answer is the lack of choice.

None in the media has brought out the fact that the domestic shipping industry is a very tightly regulated industry.

Imagine, aside from 5 agencies that directly supervise the industry; namely, Maritime Industry Authority, Philippine Ports Authority, Bureau of Customs Bangko Sentral ng Pilipinas and the Philippine Shippers Bureau, there are another twenty six (26) other agencies directly or indirectly regulate the inter-island freight shipping industry (NEDA’s Philippine Institute for Development Studies). Incredible red tape!

THIRTY ONE Agencies regulating the Shipping Industry yet the repeat disasters?! Why?

Because the bureaucratic red tape has served as a substantial barrier from competition to the benefit of the incumbent industry players.

And when consumers have been left with no choice, they will be forced to patronize even when the services offered are inferior or when their lives are put to risk. Ergo, the repeat disasters.

Another, there is such a thing called “regulatory capture”. It’s when the interests of the industry have “captured” the regulators, or when regulators and the protected industry dance the proverbial tango.

In many instances, regulators find their career outside public service in the industry which they once regulated. In short, the interest of the regulators tends to align with the interest of the regulated for personal motives such as career or otherwise. (As I said regulators are HUMAN Beings and look after their personal interest FIRST). Thus, by keeping chummy they open the doors for laxity in supervision and risk of disasters.

Four, regulators are obsessed with rules and NOT with pleasing the consumers. Yet rules don’t and won’t incorporate everything that is known for the benefit of society. The fundamental premise of which anew is the Knowledge problem and of the interest of diverse groups involved in shaping the laws.

So instead of looking for the welfare of their clients or the consumers, industry providers will be forced to pay attention FIRST to comply with the web of laws.

And the cost of compliance is the obverse side of disaster, industry players tend to stick by the standards (regulations) and ignore the cost of a potential disaster from a black swan or a random event.

Remember life is dynamic, new technology, environmental changes and evolving consumer patterns among others contribute to “randomness”. Even new laws contribute to changes in people’s behaviour, which add to randomness or life’s complexities.

At the end of the day, if an accident from a black swan event happens, then the industry players can go scotch free since they are outside the ambit of government imposed standards.

Of course, unless consumers are deemed to be so dumb, then always the excuse for government intervention.

But in contrast to this, consumers can always be empowered to render discipline on the providers, if given the chance.

That is if they allow competition to determine their cost-benefit tradeoffs relative to the price, quality and safety of the product they use or consume.

It’s funny and an irony how we tend to TRUST the people to make the “right” choices about the leadership in elections, yet degrade their capabilities when they account to choose for their own self-interest which they have a direct stakeholding, when dealing with personal needs and wants. It’s a reasoning gone backwards.

Another, outside regulations and the consumers, the other source of discipline are tort laws. If the judicial system will be facilitative into rendering judicious resolution and indemnity to the aggrieved parties, then obviously no business interests would in the right mind NOT to seek the interest of the consumers because they will and can be sued out of existence.

In short, you don’t need more government intervention, what you need is more competition and judicious facilitation of tort laws.

___
Update:

I’d like to thank Nonoy Oplas for his most valued input (see comment section).

Nevertheless, let me clarify that the Jeepney industry can’t be classified as an open competition but a regulated competition. As an analogy, if you have (x number of) pets in a cage and throw food into it, your pets will “compete” for the food you throw. There is “competition” but the competition is limited by your actions (as pet owner), or in the case of the Jeepney, the government.

Jeepneys are essentially covered by a slew of regulations, these includes franchise restrictions, territorial coverage, allowable fees to charge (public tolls), vehicle type and engine specifications, road use, traffic regulations—the latter, of which are vacillatingly implemented, and perhaps many more (this would need to be researched and a topic for another day).

Thus, I wouldn’t generalize that discourteousness of many Jeepney drivers as a result of “competition” but from a combination of many of these regulations which has skewed the behaviour of drivers towards “incivility”.

One shouldn’t forget the uneven application and occasional boorish behaviour of the implementing officers and notwithstanding the “palakasan” attitude as a result of political dependence could also be contributing factors. So there are many many many factors influencing the Jeepney industry.

Since buses have “higher barriers to entry”, one might say they seem more professional in competition. But I have my reservations. This needs more research before making any conclusions. Some like Victory Liner which has been a favourite of mine seem to respond to “competition”.

The transport sector is more a regulated competition than a free market competition. Hence, the beneficial effects from competition may NOT be apparent, since they are suppressed.

Of course, in agreement with Nonoy's suggestion, open competition, the abolishment of government agencies, facilitation of the tort laws, and the rule of law should matter most. One can use the this experiment as example.