What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man.-Ludwig von Mises
There is something wrong with the system[1].
That comment came from an exasperated Defense Secretary Voltaire Gazmin who caviled over why relief goods have barely found its way to the victims of the storm.
Before I proceed to elaborate on this, let me add more compelling quotes from Ground Zero[2]:
But there is another reason the looting had abated.
"There is nothing left to loot," said Pedrosa. [Note: Christopher Pedrosa is a government aid worker]
You must have heard a popular saying: Money can’t buy everything. Here is a living proof, from the same article:
Rusty Lacambra, 42, is joining the exodus along with his wife, two sons and niece. On Monday night he hitched a lift in an army truck bound for the airport to wait with hundreds of others hoping for a free flight on a cargo plane to Manila.
"My house is destroyed," he said. "Even if you have money there is no food to buy. There is nothing here.
Massive Supply Disruption and Money Throwing Solutions
Two very important insights from the two quotes above.
First, massive supply disruption in the aftermath of Typhoon Yolanda on crisis stricken areas have been the central problem that has led to a near breakdown of community relationships.
Trade or voluntary exchanges has been incapacitated for the simple reason of lack of access to basic goods (food, water, medicine) to fulfill physiological needs (Maslow’s Hierarchy of Needs[3]).
The basic question is why this, when there had been copious number of relief goods waiting to be distributed? This is the kernel of the Defense Secretary’s griping.
Second, the same comments put into the spotlight money’s role as medium of exchange: money’s exchangeability is ultimately founded on its purchasing power. Plenty of money with no goods or services to acquire equals zero purchasing power.
The unfolding developments from the unfortunate Typhoon Yolanda tragedy represent a testament to the fundamental economic truism where money, in and of itself is not wealth, rather it is the purchasing power of money (or what money can buy) that reflects on wealth.
Curiously every ‘expert’ seems to know of costs of the destruction and what is required for a recovery.
One expert jumps to the conclusion that the Philippine President’s 18.7 billion pesos funds may not be enough, where the Philippines should immediately resort to borrowing from the bond markets given the low interest rate and abundant liquidity[4].
[As a side note, funds available from the Office of the President are Php 16 billion in ‘savings’, Php 6 billion President’s Social Fund and Php 1 billion from calamity and contingency funds[5]]
A local politician, who is an economist and recently appointed as the head of a multilateral environmental agency, predicts Php 604 billion (USD 14 billion) impact to the economy, based on economic modelling data from a climate modeller. He postulates that the Philippine government should spend anywhere this amount to replace lost economic capacity[6].
These are what I call as populist politically correct shortcuts in approaching social ailments, specifically, throwing money at problem, replacing the politically incorrect authorities, demanding for more regulation or prohibition and or taxing the problem. Little goes beyond these.
But there are major problems with the above.
One, the accuracy of actual costs of damages. These are estimates; some of them are model based which barely seem as reality.
Typhoon Pablo (December 2012) and Typhoon Pepeng (October 2009) have been the most destructive with costs pegged at Php 42.2 billion (USD 1.04 billion) and Php 27.7 billion (USD 608 million) respectively[7]. Note these typhoons have been recent.
From a back of the envelop assessment of the potential costs from Typhoon Yolanda, looking at the National Statistical Coordination Board’s data[8], we can note that Eastern Visayas, which has been the hardest hit region, represents 2.29% of the 2012 statistical economy (constant prices).
If we add Central and Western Visayas, these regions account for 12.7% of the economy. But while the damages vary from locality to locality, my impression is that the damages in other regions won’t be as substantial or unlikely comparable with the scale of the damages in the epicentre: Eastern Visayas.
But given that I am not in the position to assess on the actual costs from the Typhoon, I will leave the tallying to those involved and will refrain from quibbling over statistics.
However in my view, while Typhoon Yolanda may top Pablo and Pepeng, which I have reservations on, I am even vastly suspicious of the Php 604 (USD 14 billion) estimates—which based on a non-statistical argument, particularly the use populist politics to justify a splurge in government spending via alarmism
As the great journalist, essayist and libertarian Henry Louis “HL” Mencken warned[9],
the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary
As of this writing property damages have been estimated at P10,339,290,061[10]
And a possible example of the “focusing illusion” or “anchoring” or the human tendency to rely too heavily on the first piece of information offered[11] could be the status of Yolanda as the “strongest” Typhoon to hit the country.
The Wall Street Journal notes that based on “maximum sustained winds”, it turns out that Typhoon Yolanda represents the 7th strongest—based on Pag-Asa data[12]. There may be technical contentions on these but a more important aspect will be the degree of destruction and overall impact on society.
Two, these experts assume that it is the responsibility of the government to undertake all the reconstruction efforts as if the private sector exists in a vacuum.
What guarantee will government spending “replace lost economic capacity”? If government spending equals the economy then why not let government spend ad infinitum and we just enjoy the fruits of their undertaking? The problem is, what government spends it has to take from someone. And that someone is us, the taxpayer, and us, the Peso holders.
Three, who determines where all the spending should be focused on or what constitutes as lost economic capacity? Recall that the dead victims from the storm had been part of the lost economic capacity, can the government spend to bring back these lost lives?
The problem with speaking in aggregates is like talking political motherhood statements, they rely on opaque presumptions. They sound plausible, but will this be practical or even feasible?
Fourth, all these “throwing money” solutions assume free lunches or no consequences from government borrowing and spending. However bigger spending means more taxes and inflation which tends to reduce economic capacity, or worst, shrink the purchasing power of the peso. What guarantees that additional debt burdens will not increase the risks of an economic Typhoon Yolanda, via a debt default or hyperinflation?
Yet these pathetic obsession to use statistics as policy setting instruments or image enhancement has been illustrated by the Philippine President’s attempt at rebutting the initial 10,000 estimated death toll.
Interviewed by the CNN[13], the Philippine president dismissed 10,000 estimates as ‘too much’ and offered a range of 2,000-2,500 instead. The Philippine president also even blamed global warming from the catastrophe.
In response to critics, the Philippine President even reportedly sacked the Police General[14] who allegedly had been the source of the 10,000 casualty estimates.
Obviously the President sees rising death toll as negatively influencing his popularity instead of the addressing the apparent mismanaging of relief operations post-Typhoon Yolanda.
As of this writing, official figures via National Disaster Risk Reduction and Management Council have been posted at 3,681[15] far larger from the President’s estimate. The United Nations tally has been at 4,460[16].
This focusing on the death figures leaves a bad taste in the mouth especially for the victims of the storm. “The death of one man is a tragedy, the death of millions is a statistic” is quote popularly (mis) attributed to USSR despot Joseph Stalin[17].
Each lives lost is a tragedy. And tragedies, used as tools to promote political goals, are reprehensible.
As for climate change as the cause of Typhoon Yolanda (Haiyan), a Time report says that scientists “can't yet find a clear signal between global warming and killer tropical storms”[18]
All these shows that the popularity addicted President appear to be grasping at the straws to pass the blame of the catastrophe to save his image.
The Failure of Centrally Planned Disaster Relief Operations
We will hardly ever know the fatalities incurred directly from the powerful typhoon as distinguished from government failure.
In the same article where the Defense Secretary bemoaned “There is something wrong with the system”, a foreign aid team Médecins Sans Frontières (Doctors Without Borders), complete with medical supplies, arrived in Cebu as early as Saturday looking to fly to Tacloban but this group hasn’t left even by Tuesday.
How many of the people, who perished just after the typhoon could have been saved by this volunteer medical aid group?
Yet what has kept relief goods from reaching the victims?
The Defense Minister’s lamentation has actually been an allusion to the “inclusion of politics in distribution of relief goods”[19]. This seems to have been affirmed by Cabinet Secretary Jose Rene Almendras who said that survivors complained of distribution of goods based on “political considerations”.
In short politics inhibited the flow of goods to fill in the supply-side disruption.
This stunning quote is a demonstration of what has led to Tacloban’s near social breakdown. (bold mine)
“If you want to make it fast, the government can open every airport in the Visayas then the [United Nations] and other entities can come in immediately,” Abdul Mutalis, of the private Putera Malaysia club, said.
“People are hungry. People need help,” he said, adding that the slow delivery of relief is prolonging the suffering of the typhoon survivors.
“We have to expedite [the delivery of aid] if we want to help them now. Action speaks louder than words,” he said.
For the last 20 years, Mutalis’ club has been responding to disasters, including the 2004 tsunami in Indonesia and the 2011 earthquake and tsunami in Japan.
“This is the mother of all disasters. There’s no word I can use right now (to describe this Philippine tragedy),” Mutalis said.
Again another private volunteer group wanting to reach the victims but has been impeded by politics.
Let me just say that the key for any recovery from a disaster is to incentivize people to stay within their territories for them reestablish their sources of livelihood and lifestyles.
As the illustrious 19th century English philosopher and political economist John Stuart Mill explained[20] (bold mine)
The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production. If there is as much of food left to them, or of valuables to buy food, as enables them by any amount of privation to remain alive and in working condition, they will in a short time have raised as great a produce, and acquired collectively as great wealth and as great a capital, as before; by the mere continuance of that ordinary amount of exertion which they are accustomed to employ in their occupations.
This is the role played by temporary relief operations which politics almost crippled
Apparently the supplyside bottleneck has forced people to consider fleeing depressed areas, not because of security, but mainly because of the lack of goods to fulfill physiological needs. Reports say that people stampeded into the airport wishing to be flown out, as Tacloban seemed to have been “thrown back to the primitive age”[21] says an official.
Based on all the accounts that I have gathered, it seemed that the incumbent administration originally planned to conduct relief operations from top-to-bottom process. Unfortunately Typhoon Yolanda exposed on the administration’s knowledge problem through several unforeseen factors that proved to be major hindrances:
-scale of devastation from the storm
-breakdown of local and national governments at the storm stricken areas
-rapid depletion of basic goods (e.g. “Money seemed to have no value in the city—people would rather have food, water, electricity and means of communication”)
-damaged roads and infrastructure
-insufficient logistics (teams from Philippine government teams have reportedly been ferried by the US military planes)
-partisan politics in the grassroots level (e.g. distribution of goods, closed roads on adjoining areas)
-political obstacles such as red tape that inhibited volunteer groups to conduct decentralized relief missions
Remember this is the same government which earlier trumpeted “implementing precautionary measures” with the aim for "zero casualty” as I pointed out last week
Yet unfolding events above seem to be validating my observations[22]
Leyte’s natural disaster tragedies (Typhoon Uring 1991, Typhoon Yolanda 2013 and 2006 Southern Leyte mudslide) have hardly been random: Destitution, steep cultural dependency on political solutions and geographic vulnerabilities account for as a deadly cocktail mix when confronted with Mother Earth’s tantrums.
Spontaneous Order Helped Saved the Day
I noted of observations where “spontaneous order” supposedly “failed” to emerge as social disorder dominated. This view confuses cause and effect. The reason why money became of no value is that, as pointed above, this has been due to a major dislocation, particularly the lack of access to basic goods (food, water, medicine) to fulfill physiological needs. There had been plenty of money but nothing to eat or drink.
Voluntary trade has been undermined because what has been demanded has been unavailable. The absence of basic goods led many towards desperate acts just to survive. Some resorted to looting. Others scampered away from Tacloban. Others just died.
On the other hand, the distribution of available relief goods have been politicized.
Remember people respond to incentives. When people perceive unfairness or polarization due to the politicization of distribution of goods, some people may resort to violence or aggression. Co-opting the resources of others has been one of the relevant evolutionary impulses[23] on why some people resort to violence.
I don’t deny that there have been criminal elements who employ dastardly acts such as the random stabbing of a 13 year old child[24]. But this hasn’t been a sign of failure of spontaneous order. Criminals exist everywhere at any class or category of community.
And more than that, a 5,000 strong communist rebel group operates in Leyte. The rebels initially became an obstacle to aid groups whom feared of being kidnapped. The rebels only declared a ceasefire last November 16th almost a week after the ferocious storm[25]. Yet how would one determine if the illegitimate acts during the post-storm transition have been committed by rebels or by criminals or by a dysfunctional society?
What you see depends on where you stand. When we do data mining to prove a point while ignoring the other evidences, such would be selective perception[26]—ignoring data that contradicts one’s belief. Maintaining rigid biases are hardly helpful in learning or discovering truths.
What then is spontaneous order?
If I go by the great Austrian economist Friedrich von Hayek’s definition[27], Spontaneous order would represent a “system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error” (bold mine)
The reason I earlier placed in bold emphasis voluntary aid groups as Doctors Without Borders or the private Putera Malaysia club has been to show “voluntary exchange, cooperation, and trial and error” in motion.
And these have been only two of the stream of voluntary groups from NGOs, to private enterprises, individuals, family members or even publicly listed companies undertaking relief efforts[28].
I was even surprised when one of the US financial based website I frequently visit has a “Typhoon Haiyan Holiday Drive: Please Help Now”[29]
The internet has internationalized “spontaneous order”.
Even from the local levels we see “voluntary exchange, cooperation, and trial and error” in action. One private shipping company Starlite Ferries, offered at its expense, services to the Philippine Red Cross for a week to carry relief supplies and aid workers on calamity stricken areas.
A Tacloban based gasoline station businessman gave away his fuel inventories to people within the area as part of his relief effort[30].
One may object to the idea of charity as way of cooperation, but as John Stuart Mill pointed out above, disaster recovery would have to begin at home. People will have to rebuild their lives, and charity is one of the main paths to bridge any deficits brought about by calamities in order to attain this goal.
During the post Typhoon Ondoy calamity, I wrote that Charity is the province of the Marketplace[31] (bold original)
Remember it is in the vested interest of the private sector to be charitable.
This is not only due to self esteem or social purposes but for sustaining the economic environment.
Think of it, if retail store ABC's customer base have been blighted by the recent mass flooding, where a massive dislocation- population loss through death or permanent relocation to other places- would translate to an economic loss for the store, then, it would be in the interest of owners of store ABC to "charitably" or voluntarily provide assistance of various kind to the neighborhood in order to prevent such dislocation from worsening, or as a consequence from indifference, risks economic losses.
Hence, such acts of charity is of mutual benefit.
The benevolent acts of the Tacloban businessman and of Starlite Ferries reinforce my view.
And spontaneous order shouldn’t be mistaken for impulsive or knee jerk reactions but of a social process which evolves through time. Again F.A. Hayek[32] (Fatal Conceit)
To understand our civilisation, one must appreciate that the extended order resulted not from human design or intention but spontaneously: it arose from unintentionally conforming to certain traditional and largely moral practices, many of which men tend to dislike, whose significance they usually fail to understand, whose validity they cannot prove, and which have nonetheless fairly rapidly spread by means of an evolutionary selection — the comparative increase of population and wealth — of those groups that happened to follow them. The unwitting, reluctant, even painful adoption of these practices kept these groups together, increased their access to valuable information of all sorts, and enabled them to be 'fruitful, and multiply, and replenish the earth, and subdue it' (Genesis 1:28). This process is perhaps the least appreciated facet of human evolution.
A good example would be private aid groups who respond to natural disasters. They have organized their institutions to specialize on catering to communities suffering from natural disasters. This has been why their comments with regards to political shortcomings have been especially noteworthy and influential
The great F. A. Hayek[33] in the Law Legislation and Liberty presciently wrote about how the spontaneous orders are undermined
The spontaneous order arises from each element balancing all the various factors operating on it and by adjusting all its various actions to each other, a balance which will be destroyed if some of the actions are determined by another agency on the basis of different knowledge and in the service of different ends.
In other words, when the forces of decentralization have been obstructed by the forces of centralization. This represents exactly the logjams or bottlenecks in the relief goods distribution encountered by the private aid groups post-Typhoon Yolanda tragedy
Nevertheless, I am very pleased to see how the forces of “spontaneous order” have managed to influence the political order.
From the opening of paragraph of Friday’s headlines[34]; (bold mine)
The distribution of food, water and medicine to typhoon survivors here picked up speed on Thursday after a barrage of criticisms from aid workers and the Philippine and international press forced the Aquino administration to bring order to its response to the calamity caused by Supertyphoon “Yolanda.”
Forces of spontaneous order have once again helped saved the day!
Phisix: Will Typhoon Yolanda be a scapegoat or relegated to the history pages?
As expected, Typhoon Yolanda became a popular post hoc rationalization of stock market behaviour. The Phisix fell 1.4% on Monday which has mostly been blamed on the storm. But through the week, the Phisix crept higher to recover most of its losses. The Phisix closed on Friday with a marginal loss of .14%. In my view, the weekly performance fits the current trend of sideways movement. And this only proves that typhoons are essentially a non-event for the stock markets.
And as also expected, we see the broken window fallacy and the obsession to statistical economic figures at work. This is an example “Economists say growth usually rebounds quickly after natural disasters, due to the lift from spending on reconstruction.[35]” These people have to be reminded that replacement is not value added.
The titleholder of the most destructive storm is Typhoon Pablo (December 2012) with Php 42.2 billion in property damages. Yet the Phisix soared to a new high in May of this year and statistical growth remains at 7% through three quarters of the year.
This has been due to the massive credit expansion in the banking system which has been largely channelled to the real estate-construction and allied industries, the key drivers of Philippine statistical growth.
Yet the costs to properties from Yolanda’s fury have still been one-fourth of Typhoon Pablo. I believe the gist of the casualty and collateral damage count will peak by the next two weeks.
Yet for as long as the banking system keeps pumping money to the real economy induced by zero bound rates, my guess is that Typhoon Yolanda will hardly be a factor in the statistical growth figures.
A Typhoon Yolanda version to the financial markets and to the statistical economy is when credit boom will morph into a credit bust.
I would rather be watching two neighbors, Indonesia and China, who seem to be experiencing re-emergent signs of financial market ‘tremors’ which poses as potential risks for a shock.
The USD-Indonesian rupiah is just .6% away from the September highs. The last time the rupiah hit a milestone this coincided with the turmoil in the ASEAN financial markets.
Yet the rising rupiah has been backed by a surge in Indonesia’s 10 year bond yields but still far (about 30 basis points) from the recent highs.
Also while Indonesia’s Credit Default Swap has fallen following a recent surge, it is not clear if the USD-rupiah breaks to new highs we will see a rebound in the CDS premium. The last time the USD-rupiah set new highs Indonesia’s CDS prices spiked.
Record setting US markets has failed to inspire Indonesia’s stocks. This week the JCI closed -1.69%.
Curiously all these lethargy comes as Indonesia’s central bank “unexpectedly” raised interest rates last week[36].
While I am not saying that a panic is imminent, I am saying that current conditions requires vigilance because Indonesia’s financial markets appear to be exhibiting signs of renewed stress. And if such market strains worsen, then risks of a contagion from a panic must not be disregarded.
Meanwhile the strains in the Chinese financial markets seem present in the overnight lending rates and 10 year bonds but hardly expressed in the CDS or the stock markets yet[37]. Whether the evolving development represents an aberration or a seminal trend has to be nonetheless established.
If the Philippine market does experience a convulsion in response to a possible deterioration of regional conditions, expect Typhoon Yolanda to be a favorite scapegoat.
[17] Wikiquote Misattributed Joseph Stalin. Wikiquote says that Kurt Tucholsky may have been the origin but David McCollough points at Joseph Stalin’s conversation with Winston Churchill in Tehran as possible source.
