The Public Choice Theory Applied to the Philippine Pork Barrel Scam

Public Choice represents “theories and methods of economics to the analysis of political behavior” founded on the notion that instead of political authorities acting to “faithfully carry out the “will of the people”” they act to fulfill self-interested goals.

Economist James Buchanan calls the public choice theory "politics without romance" from the illusion of the superiority of government fixes which instead can do more harm.

The Public choice on pork barrels, from economist William F Shughart II (bold mine)

Ballot initiatives, referenda, and other institutions of direct democracy aside, most political decisions are made not by the citizenry itself, but by the politicians elected to represent them in legislative assemblies. Because the constituencies of these representatives typically are geographically based, legislative officeholders have strong incentives to support programs and policies that provide benefits to the voters in their home districts or states, no matter how irresponsible those programs and policies may be from a national perspective. Such “pork barrel” projects are especially likely to gain a representative’s endorsement when they are financed by the taxpayers in general, most of whom reside, and vote, in other districts or states.

In short, political dispensation of taxpayer resources by incumbent politicians have concentrated benefits, which are seen by the public, and becomes focal point for localized vote generation. 

However these comes with diffused costs or burdens by taxpayers that has  largely been unseen by the public.

Let us apply this to du jour Philippine politics setting which involves the unfolding Pork Barrel scam via the Disbursement Acceleration Program (DAP)

From today’s Inquirer:  (bold mine)

Among the projects approved by Aquino were the P6.5-billion augmentation of lawmakers’ Priority Development Assistance Fund (PDAF) under the item “various local projects,” some P6.5 billion in “LGU support” and P2 billion in road works for his home province of Tarlac, said Bayan secretary general Renato Reyes Jr….

Reyes said the approved projects amounted to P32 billion, including P2 billion for Tarlac roadworks and another P8.3 billion “various local projects.”

Now, how about the public choice perspective of “logrolling” or trading votes in exchange of support for political goals? (bold mine)

In the first DAP memo issued by the DBM dated Oct. 12, 2011, the President signed and approved the release of P72.110 billion.

Another document, dated Dec. 21, 2011, or 10 days after the House of Representatives voted to adopt the articles of impeachment against then Chief Justice Renato Corona, showed the President approving additional projects worth P13.379 billion.

On June 27, 2012, or about a month after the Senate voted to impeach Corona, Aquino signed and approved another Abad memorandum seeking the “omnibus authority to consolidate savings/unutilized balances and their realignment.”

The connection? From another Inquirer article:

In a privilege speech in September 2013 defending himself in the pork barrel scam, Sen. Jinggoy Estrada alleged that senators who had voted to convict Corona had been “allotted an additional P50 million.”

“Honest” government or publicity PR ruse? 

From Bubble economy to bubble politics.

Listverse: 10 Outrageous Broadcasts That Caused Mayhem

Listverse.com enumerates 10 broadcasts (from error, prank or publicity gimmickry) which sparked episodes of turmoil. [hat tip Lew Rockwell.com]

My favorite three…

#9 Sea Monster Attacks Tokyo
May 20, 1947

In a scene straight out of Godzilla, the US army’s radio station WVTR announced that a giant sea monster had risen off the coast of Tokyo and was rampaging its way toward the capital. Although the perpetrators intended the broadcast as a humorous part of their station’s anniversary celebration, it instead sparked panic among the local populace and the occupying forces, with US personnel and Japanese police mobilizing to track down the monster.

One British officer called to verify the station’s reports because his men were demanding weapons to fight the beast. According to one station member, even MacArthur himself called in to confirm their broadcast.

After the hoax was revealed, the US army’s top brass lambasted the perpetrators and removed them from the station. Although their fates were not announced after the debacle, they were likely sent to Korea afterward as punishment.

#7 The Sibuxiang Beast
September 19, 1994

Residents of Taiyuan in China’s north erupted into panic when a TV station reported that a terrible animal known as the “Sibuxiang Beast” was nearing their city. The frightened populace locked themselves up at home while others frantically called the authorities for help. Eventually, the beast did arrive—only in the form of a new brand of liquor.

The “Sibuxiang Beast” TV spot had been an ad. But viewers used to commercials mundanely narrating and presenting products had taken it as an actual news report.

Although Jing Huiwen, the owner of the advertising firm behind the commercial, was later forced to apologize and pay a fine, the overwhelming publicity turned the Sibuxiang brand into a household name and quadrupled the firm’s roster of clients. Foreign analysts hailed the event as the beginning of capitalist creativity in China. 

#1 War Of The Worlds (Ecuadorian Edition) 

February 12, 1949 

Residents of the Ecuadorian capital of Quito rioted after local station Quito Radio aired a Spanish dub of Orson Welles’s famous broadcast. People panicked in the streets, some running to the nearest church to hear a last service. However, fear quickly turned to rage after they realized that they had been hoodwinked. Consequently, a mob formed and set fire to the building that housed the radio station. They also ganged up on staff members who tried to escape the blaze.

The station suffered more than $300,000 in damages, and an estimated 6–20 people died. Only the arrival of the police and military ended the chaos.

In true urban legend fashion, it was said that the announcer who aired the broadcast, Leonardo Paez, was last seen standing on top of the burning building before disappearing. His daughter, however, later revealed that Paez understandably went under the radar for a while before having his case reviewed—and ultimately dismissed—by a court. After that, he relocated to Venezuela.

Pls read the entire list here.

Aside from the amusement aspect, the article demonstrates of the frailties of crowd psychology and their vulnerability to ‘trusted’ sources of information. 

Prior to the internet age, where information dissemination has been mostly centralized, it is easy to understand the public’s sensitivity to centralized information.

In the information age, this should unlikely be the case.

But not for the Philippines which has a cameo role here...

#3 Philippines Flesh-Eating Disease Hoax
February 24, 2014

In a classic case of mass hysteria with a modern twist, residents of the Philippines province of Pangasinan and netizens erupted into hysteria after linking an Indian preacher’s April 2013 prophecy about a flesh-eating disease to two patients with a “mysterious illness.” It didn’t help that that the country’s leading news station, ABS-CBN, investigated the incident and had its reporter wear full protective gear while interviewing the patients.

While local residents understandably panicked, the response took on epic proportions on the Internet, as evidenced by 80,000 Twitter users who hashtagged “#PrayforPangasinan.”

Eventually, health authorities who closely examined the two patients disclosed that they were suffering from nothing more than leprosy and psoriasis respectively. This revelation forced the news station to issue an apology, although they also stated that they really just wanted to find out if the flesh-eating disease was real or not.

The internet age should have provided the public opportunities to investigate on the validity of such sensationalist claims. Unfortunately, this “classic case of mass hysteria with a modern twist” looks like a sorry state of affair where social media has functioned instead as loudspeakers for misinformation. This also reveals of the gullibility of the so-called local netizens to populist-tabloid journalism.

As British essayist Gilbert Keith Chesterton once wrote

Journalism is popular, but it is popular mainly as fiction. Life is one world, and life seen in the newspapers another; the public enjoys both, but it is more or less conscious of the difference.

Quote of the Day: Why GDP is an Enron-Style Accounting Fiction

First up, it’s worth it to address the number’s origins. Though attempts to measure country economic growth go back to at least the 17th century, Coyle writes that what we know as GDP today “is one of the many inventions of World War II.” War is the health of the state as Randolph Bourne correctly uttered long before WWII, so it wouldn’t surprise him that a number explicitly designed to increase the size of government reached full flower during the last global war.

Where it gets interesting is that prewar measures of economic growth explicitly showed “the economy shrinking if private output available for consumption declined, even if government spending required for the war effort was expanding output elsewhere in the economy.” Of course those numbers did. Though it would be folly on the best day for number crunchers to divine economic growth, there was at least some honesty in the numbers: government spending correctly subtracted from growth. 

If the reason why government spending reduced growth isn’t apparent, it’s important to remind readers that governments have no resources. This is true no matter one’s ideology. They’re only able to spend what they tax or borrow from the private economy first. In that case, for government spending to be counted as economic growth would be for those attempting to measure economic activity to engage in fraudulent double counting. The growth already took place; that’s why there were resources for government to consume in the first place. Thinking about this further, while WWII will be discussed in greater detail in a little bit, readers ought to think about the popular view inside the economics profession about WWII “ending” the Great Depression with all of this in mind.

For now, what’s important here is Coyle’s acknowledgment that for the longest time “’the economy’ was the private sector.” (my emphasis). Government couldn’t add to economic growth through spending simply because government spending very definitely was the process whereby government shrank the real economy through political consumption of capital extracted from the private sector. The money that politicians spend must come from somewhere, so for every dollar spent by politicians, that’s one less dollar for the private sector to allocate toward consumption, investment, or both.

To state the obvious, GDP was and is perfect for the political class simply because the false accounting that has defined it from day one promotes the obvious fiction that government spending adds to economic growth. Coyle is clear about the latter, that there was substantial resistance to what GDP became precisely because it was so blatantly false in its accounting, but she’s also clear about what informs its modern definition: “GDP was constructed around Keynes’s model of how the economy works,” and the Keynes model was one that said government could use “both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy.”

In short, Keynesianism is the ultimate economic fantasy, which helps explain why it’s so popular with the deluded types who enter politics, not to mention academic economists shielded from the real-world implications of their droolings. Wouldn’t it be nice if government spending could boost growth during troubled times, but by definition it can only reduce it. If readers feel otherwise, they must explain how it is that Barack Obama, Mitch McConnell, Harry Reid, Nancy Pelosi, and John Boehner can allocate capital better than you, Amazon’s Jeff Bezos, FedEx founder Fred Smith, Paul Tudor Jones, Warren Buffett, and Ken Fisher. This isn’t about ideology. Politicians simply can’t allocate capital more skillfully first because they’re arguably not suited to it, but most important because they lack the market signals that happily starve the bad ideas of Bezos, Smith, Jones, Buffett and Fisher.

Some will reply that government must consume when the citizenry is not consuming, but this form of thinking is every bit as silly as the thought process that says political allocation of capital is the path to future Microsofts, Intels and Cisco Systems. Lest we forget, short of stuffing money under a mattress, money saved does not lay idle. Banks don’t take in deposits in order to stare lovingly at the cash; rather they pay for deposits (liabilities) by immediately turning those liabilities into assets. Money saved is immediately lent to those with near-term consumptive needs, or it’s lent to entrepreneurs and businesses eager to grow. Keynesianism presumes a world that has never existed in which banks warehouse deposits, and that is defined by politicians who are more expert than the private sector at investing funds extracted from the private sector.

That’s what’s so interesting about Coyle’s faux evenhandedness about whether or not the comical notion of a “fiscal multiplier” is real. She writes as though sometimes it multiplies growth and sometimes it doesn’t, but whatever government spending does to the false measure that is GDP, it can’t boost real economic growth. It can’t unless Coyle and her fellow astrologers really can say with a straight face that Sens. Ted Cruz and Chuck Schumer are better allocators of capital than are Cliff Asness and Tom Steyer. Not very likely. And if they believe it, it’s time for this debate to take place.

Considering the calculation of GDP, expenditure is the most common approach; and it’s one that reveals the Enron-fiction that is GDP in living color. Once again, government spending adds to growth despite it plainly subtracting from it, and then if we import more than we export, GDP actually declines. In short, that which reduces the size of the private sector boosts economic growth in the deluded GDP sense, while that which plainly reveals a growing private sector (imports which reflect increased production stateside, and increased foreign investment in the U.S.) actually reduces the economy’s size per GDP.

(bold mine)

This is from a critical review by John Tammy at the Forbes.com on Diana Doyle’s new book GDP: A Brief But Affectionate History. 

The whole article is a recommended read

Phisix and the Manny Pacquiao Post Hoc

The boxing legend Manny Pacquiao 35 will try to regain lost glory with a return bout against Brandon Rios 27 for the vacant WBO welterweight bout at Macau SAR.

The Bloomberg presents an interesting “chart of the day” on how the Phisix reacts to Mr. Pacquiao’s historical fight performances

The CHART OF THE DAY shows the Philippine Stock Exchange Index has risen 73 percent of the time in the first trading day after a Pacquiao win, compared with 52 percent for all days since 2007. The gauge climbed an average 0.5 percent the day after fights, versus an average 0.04 percent increase for the entire period.

“Pacquiao’s victory in the ring creates a nationwide euphoria that things will get better -- positive sentiment, positive investment,” said Jonathan Ravelas, chief market strategist at BDO Unibank. “A victory by Pacquiao will help lift the Philippine spirit at a time when it’s facing the impact of calamities. The nation definitely needs to hear something positive right now.”

In my view this represents a great example of the cognitive bias called clustering illusion—or looking for patterns where there have been none, which also serves as a convenient “post hoc” rationalization for the relationship between Mr. Pacquiao fights and the Phisix.

Some facts...

Mr. Pacquiao unfortunately lost his two last bouts in 2012 (Tim Bradley June 9, 2012 and to Juan Miguel Marquez December 8, 2012—Box Rec) 

And a coincidence is that Mr. Pacquiao’s surprise loss to Marquez in 2012 coincided with the Typhoon Pablo December 2-9 2012, which turned out to be the “most destructive” storm for the Philippines-which Typhoon Yolanda has been widely expected to top.

The final tally from Typhoon Yolanda has yet to be reported. For now agricultural losses (php 10.59 billion) and infrastructure damage (php 1.98 billion) which adds up to php 12.57. The government estimates production losses at Php 8.6 billion. So total losses is at Php 21.7 billion halfway from Typhoon Pablo. (inquirer)

While it may be true a day after Pacquiao’s victories resulted to mostly gains in the Phisix in terms of frequency (73%) and scale (.5%), Mr. Pacquiao’s alleged contribution in “uplifting the Philippine spirit” has not been supported by trends seen from the longer frame. [Note I did not bother to take a look at the Phisix returns post Bradley and Marquez fights]

Proof?

The Phisix roared to its highest level in May 2013 despite the twin losses by Mr. Pacquiao to Mssrs Bradley and Marquez. Again the loss to Marquez has been coincidental with Typhoon Pablo. 

In short, there has hardly been a relationship between Mr. Pacquiao’s performance (or Typhoon Pablo) and the Phisix which media and the experts try to associate and sensationalize by appealing to emotions.

The above also shows how desperate industry participants have become since the losses from June (which have been Non-typhoon or Pacquaio related but about the renascence of the global bond vigilantes) 

The Phisix has posted losses for three consecutive weeks, namely 3.5% week ending November 8, .14% November 15, and this week’s 4.12%, for a total of 7.76%. 

My hunch: unless Monday should turn out with a surprise deterioration from our neighbors, Indonesia and Thailand (which I believe have signified as the key sources for the weakness in the Phisix), the oversold conditions of the Phisix should translate to a temporary bounce, whether Pacquiao wins or losses.

As for Pacquiao’s boxing career, whether he wins or he losses, I believe that he has reached his peak, and is on the way to a decline for the simple reason that Mr. Pacquiao is human and mortal. 

Mr. Pacquiao’s insistence to refrain from retirement is I think not only about money and prestige but about the denial of this reality. The same denial we see in industry participants facing what seems as increasing risks of a full scale bear market for ASEAN. 

As a former boxing aficionado, while I respect Mr. Pacquiao as one of the greatest boxers ever, that respect remains limited to the four corners of the boxing ring.

Quote of the Day: The Myth of Public Interest

The gist of it is that public servants, so called--politicians, bureaucrats, and their colleagues--tend to promote goals of their own even as they claim to be serving the public interest.  And this is not very difficult to grasp.  

The public is, after all, a vast number of citizens whose interests vary enormously so it is a pure myth that there is a public interest that can be served by public servants.  Given this plain fact, whose interest will public servants serve?  The interest they consider important. 

In the last analysis the so called public interest is really the private interests public officials like best.  Even the democratic process cannot sort out what the public interest is. (The best approximation is put forth by Thomas Jefferson in the Declaration of Independence where he identifies securing the protection of our basic rights as the purpose for which government is established, i.e., the public interest.)

Despite the hopelessness of pursuing and serving the public interest, politicians and their cheerleaders keep pretending that they have managed to overcome the hurdles facing them and assert that they are public servants instead of folks whose objectives are determined by lobbyists who represent innumerable, often conflicting, private and special interests.

That’s from professor Tibor Machan on the much overlooked Public Choice Theory on his blog.

IMF to Central Bankers: Keep Blowing Bubbles

The IMF’s advice to central bankers is an example why we can expect central bankers to keep blowing asset bubbles. 

That’s of course until bubbles pop by their own weight, or until the stagflation menace emerges or a combo of both.

But stagflation has been absent based in the econometric papers of the IMF, that’s according to the Bloomberg:

Monetary stimulus deployed by advanced countries to spur growth is unlikely to stoke inflation as long as central banks remain free of outside influence to react to challenges, according to a study by the International Monetary Fund.

In a chapter of its World Economic Outlook released today, the Washington-based IMF said that inflation has become less responsive to swings in unemployment than in the past. Inflation expectations have also become less volatile, according to the report.

“As long as inflation expectations remain firmly anchored, fears about high inflation should not prevent monetary authorities from pursuing highly accommodative monetary policy,” IMF economists wrote in the chapter called “The dog that didn’t bark: Has inflation been muzzled or was it just sleeping?”

Considering the distinctive political-economic structure of each nations, such pursuit of bubble policies will translate to varying impacts on specific markets and economies. For instance, emerging markets are likely to be more vulnerable to price inflation.

And by simple redefinition and measurement of inflation as based on econometric models and statistics, the IMF has given the green light for central bankers do more.

This also means that the IMF has prescribed to central bankers to throw fuel on the inflation fire.

Based on mainstream’s twisted definition of inflation, such as being predicated on demand and supply “shocks”, hyperinflation ceases to exist. 

Interestingly too the IMF hardly see current policies as having “compromised” central bank independence.

Again from the same article:

The BOJ’s new policy “is something that we hope will lift inflation durably into positive territory, which would help the economy,” said Jorg Decressin, deputy director of the IMF’s research department. “We see in no way the operational independence of the BOJ compromised at all.”

This is a rather absurd claim. When central banks buy government debt, they effectively encroach into the realm of fiscal policies. 

Instead of voters determining the dimensions of fiscal policies via taxation, central bank financing of fiscal deficits motivates government profligacy that enhance systemic fragility through higher debts and the risks of price inflation (stagflation) or even hyperinflation.

As fund manager and professor John Hussman notes at HussmanFunds.com in 2010:

Historically, and across the world, the primary driver of inflation has always been expansion in unproductive government spending (think of Germany paying striking workers in the early 1920s, or the massive increase in Federal spending in the 1960s that resulted in large deficits and eventually inflation in the 1970s). But unproductive fiscal policies are long-run inflationary regardless of how they are financed, because they distort the tradeoff between growing government liabilities and scarce goods and services.

For instance, Japan’s government will increasingly become dependent on the Bank of Japan via Kuroda’s “shock and awe” Abenomics policies. This makes Japan vulnerable to a debt or a currency crisis.

And recent interventions on the fiscal space by central banks of developed economies essentially reveals of the closely intertwined relationship between governments and central banks. (charts above from Zero Hedge)

This only validates the hypothesis of the Austrian school of economics that the fundamental role played by the central banks has been to support the government (welfare-warfare state) and the cartelized crony banks, which essentially means that central bank independence is a myth.

As refresher let me quote anew the great dean of Austrian economics explained: (bold mine) [The Case against the Fed page 57]

The Central Bank has always had two major roles: (1) to help finance the government's deficit; and (2) to cartelize the private commercial banks in the country, so as to help remove the two great market limits on their expansion of credit, on their propensity to counterfeit: a possible loss of confidence leading to bank runs; and the loss of reserves should any one bank expand its own credit. For cartels on the market, even if they are to each firm's advantage, are very difficult to sustain unless government enforces the cartel. In the area of fractional-reserve banking, the Central Bank can assist cartelization by removing or alleviating these two basic free-market limits on banks' inflationary expansion credit

Yet here is the IMF’s prescription for more bubble blowing, from the same article:

“The dog did not bark because the combination of anchored expectations and credible central banks has made inflation move much more slowly than caricatures from the 1970s might suggest - - inflation has been muzzled,” the IMF staff wrote. “And, provided central banks remain free to respond appropriately, the dog is likely to remain so.”

As I explained before, inflationism represents a political process employed by governments to meet political goals. Inflationism, which is an integral part of financial repression, signify the means (monetary) to an end (usually fiscal objectives). And when governments become entirely dependent on money printing from central banks, hyperinflations occur.

Just because money printing today has not posed as substantial risks to price inflation, this doesn’t mean such risks won’t ever occur.

And that the current low inflation environment basically implies "free lunch" for central banks.

Price controls, market manipulations (via central bank), the Fed’s Interest rate on reserves (IOR) and even productivity issues have also contributed significantly to subdue price inflation over interim.

And again since monetary inflation represents a process, such take time to unfold via different stages, which is why price inflation tend to occur with suddenness to become a significant threat.

IMF’s reckless advocacy of bubble policies will have nasty consequences for the world.

The IMF experts or bureaucrats, who are paid tax free and are tax consumers, hardly realize such blight will affect them too. 

The existence of the IMF depends on quotas or contributions from members which come from taxes. Such applies to other multilateral agencies such as the UN, OECD ADB or etc, which is why these institutions almost always campaign for more state interventions.

Yet should a crisis of a global dimension emerge, and where a chain of defaults by governments on their liabilities (such may include developed economies, BRICs, Asia and elsewhere), their privileges, if not their existence, will likewise be jeopardized, as governments retrench or have their respective budgets severely slashed or faced with real "austerity". 

Let me venture a guess, such scenarios haven’t been captured by the IMF's econometric models. 

When the late Margaret Thatcher warned that "the problem with socialism is that eventually you run out of other people's money [to spend]", this applies to multilateral institutions too.

Quote of the Day: Invoking Democracy to Destroy Freedom

People are taught that, thanks to democracy, coercion is no longer dangerous because people get to vote on who coerces them. Because people are permitted a role in choosing who will be in charge of the penal code, they are free. Being permitted to vote for politicians who enact unjust, oppressive new laws magically converts the stripes on prison shirts into emblems of freedom. But it takes more than voting to make coercion benign.

The fiction of majority rule has become a license to impose nearly unlimited controls on the majority and everybody else. The doctrine of “majority rule equals freedom” is custom-made to turn mobs of voters into spoiled children with a divine right to plunder the candy store. The only way to equate submission to majority-sanctioned decrees with individual freedom is to assume that individuals have no right to live in any way that displeases the majority.

The more confused people’s thinking becomes, the easier it is for rulers to invoke democracy to destroy freedom. The issue is not simply Lincoln ‘s, Roosevelt’s, Clinton’s or Bush’s absurd statements on freedom but a cultural–intellectual smog in which politicians have unlimited leeway to redefine freedom. If politicians can redefine freedom at their whim, then they can raze limits on their own power.

This is from libertarian author and lecturer James Bovard at the Freeman.

It is important to distinguish constitutional/liberal democracy with that of social democracy and of mob rule (Ochlocracy)

How Earth Hour Policies (Green Energy) Hurt Consumers: UK Edition

In UK, the push for green energy has only been prompting for higher energy bills.

The editorial of UK’s news outfit the Telegraph decries on the political obsession for green energy (hat tip AEI’s Professor Mark Perry)

With the worst snow conditions in the country since 1981, it’s worrying, to say the least, that gas supplies are running low. A month ago, The Sunday Telegraph warned in this column of the problems of an energy policy that puts expensive, inefficient green power before coal-fired and nuclear power. There have been a few signs that the Coalition is at last turning its attentions to the issue but, still, not nearly enough has been done. Now we are reaping the consequences. Because of a misguided faith in green energy, we have left ourselves far too dependent on foreign gas supplies, largely provided by Russian and Middle Eastern producers. Only 45 per cent of our gas consumption comes from domestic sources. All it takes is a spell of bad weather, and the closure of a gas pipeline from Belgium, to leave us dangerously exposed, and to send gas prices soaring. Talk of rationing may be exaggerated, but our energy policy is failing to deal with Britain’s fundamental incapacity to produce our own power.

Ed Davey, the Energy Secretary, may have granted planning permission this week to a new nuclear power station, Hinkley Point in Somerset. But one nuclear power station, with two new reactors, isn’t nearly enough. Moreover, it will take a decade to build and, even then, will only provide seven per cent of the country’s energy needs.

It is time for the Coalition to tear up its energy policy before the lights really do go out. The first priority must be to repeal the Climate Change Act of 2008, with its brutal, punishing targets: reducing carbon emissions by 80 per cent by 2050, and 26 per cent by 2020. These targets have already had a disastrous effect, forcing the closure of coal-fired power stations, and increasing tax-funded subsidies on wind power. Next month, electricity bills will soar even higher, thanks to a new tax on carbon dioxide produced by coal-fired and gas-fired power stations.

There are good intentions behind a green energy policy, and no one would wilfully want to damage the environment. But green technology – in its current incarnation, anyway – is just too inefficient and expensive to meet our energy needs. In some of the worst weather for more than 30 years, green power still only provides a tiny fraction of our energy needs. Solar power is of limited use in our cold, dark, northern climate. And wind power isn’t much better – cold weather doesn’t necessarily mean windy weather.

As previously pointed out, earth hour/green energy policies are essentially misanthropic for such policies promote economic hardship and even death. The above is just an example.

Popularity or popular themes don’t make ideas valid or sound. Take it from Albert Einstein: 

What is right is not always popular and what is popular is not always right

Quote of the Day: Elections Are and Always Mostly a Sham

Scholars have been slow to appreciate that elections are and always have been for the most part a sham – a mere ceremony intended to make people believe they have some control over their fate even as they are mercilessly bullied, bamboozled, and fleeced by their rulers.

This is from Robert Higgs’s 2004 volume, Against Leviathan; particularly from the “Escaping Leviathan?” as quoted by Professor Don Boudreaux at Café Hayek

Does Unemployment Cause Deflation?

I was apprised by a dear friend that in a part of the US, call center jobs have been migrating to the Philippines. Such phenomenon he sees as having a “deflationary” impact on the US economy. 

Such popular reasoning is fairly simple. Lack of jobs equals a fall in aggregate demand. Falling demand leads to falling prices. Falling prices result to more job losses. Thus the circular reasoning translates to an endless loop: a deflationary spiral.

The bottom line from such aggregate demand framework is that unemployment causes price deflation.

Of course, the alternative implication is that the Philippines, like China through alleged currency manipulation, has been “stealing jobs” from Americans.

And equally this means that for them, the optimal political solution is to inflate or apply protectionist measures or apply both against countries like the Philippines or China.

Have job losses or unemployment resulted to price deflation as alleged?

Here is a list of the largest world unemployment rates from Wikipedia.org.

Since there are many nations with over 10% in unemployment rates, I will only reckon with nations with over 50% in unemployment rates

Nauru 90%

Vanatu 78.21%

Turkmenistan 70%

Zimbabwe 70%

Mozambique 60%

Djibouti 59%

Given the huge unemployment rate, then we assume that these countries, according to the aggregate demand theory, to be in a deflationary depression.

Note: there is no price inflation figure for Nauru

Vanatu’s inflation rate (chart from Index Mundi) Positive inflation.

Turkmenistan price inflation rate (chart from tradingeconomics.com) Positive inflation.

Zimbabwe’s post hyperinflation CPI (chart from tradingeconomics.com) Positive inflation.

Mozambique’s inflation rate (chart from tradingeconomics.com) Positive inflation.

Djibouti’s inflation rate (chart from tradingeconomics.com) Positive inflation.

Surprise, ALL 5 nations with the largest unemployment have ZERO account of price deflation!

So what’s wrong with such a claim or theory?

The fundamental premises are essentially misplaced:

-People all think the same or people don’t think at all. People mechanically and homogeneously follow the circular reasoning that falling demand leads to falling prices in a perpetual feedback loop to an eternal hellhole.

-People’s don't have marginal utility. All people share the same set of values, priorities, incentives and time preferences. 

-People are not human. People simply stop eating, drinking or clothing or finding shelter under a deflationary spiral. Maslow’s hierarchy of needs have been jettisoned out of the window. People are caught in a stasis, freeze like a deer caught in headlights, where demand totally evaporates.

-When people don’t think or when people think the same or when people stop being people then obviously the demand and supply curve, the law of scarcity and opportunity costs becomes inapplicable or ceases to exists.

-Capital has been nonexistent to people who act or behave in aggregates.

-Inflation is NOT a monetary phenomenon so does the consequent deflation.

In the real world, economies are vastly complex, with millions of spontaneously operating parts such that wages represents only part of the myriad of factors that influence the economic environment.

Other real factors are equally or even more important, e.g. proximity to markets, size and categories of markets, state of basic infrastructure, access to credit, connectivity, technology and labor, quality of labor force, comparative advantage/s, state of legal, political and regulatory institutions and environment, tax levels, state of economic freedom, depth of capital markets, monetary regime and much more.

Most important is property rights. When property rights are not secure, no one will dare to invest no matter the relative lower, if not the lowest costs, in terms of labor wages. Who invests in North Korea or in the above 5 nations with the largest unemployment (presumably the cheapest labor force) in the world where one's capital are likely to be arbitrarily seized by the incumbent authorities?

These are real factors that can't be seen as having neutral effects on people's incentives or which operates on a vacuum. 

How about the solution where government must step in to provide jobs, by inflation or protection? 

Well government, of course, comprises of people too.

Under the aggregate demand framework, the political class have been glorified as representing “superior” set of people in terms of knowledge and virtues, relative to the market which is seen as inferior non-political people, that lays ground for interventions on so-called “market failures”.

Such is an unalloyed myth. If the romance on politics is true, then inflation or deflation won’t exist. There won’t anything known as economics.

The reality is that inflation and protectionism represents two sides of the same coin: the political economy of destruction.

As the great Ludwig von Mises explained (bold mine)

By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners' fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.

The bottom line is that previous interventionists policies, e.g. policy induced boom bust cycles, regulatory mandates, entitlements etc..., have resulted to such lack of competitiveness which neo-mercantilists try to shift the blame onto the others. Yet they are asking for more of the same thing that led to this or they seek doing the same thing over and over again but are expecting different results.

The economics of aggregatism, thus, has mostly been about pretentious or pseudo-economics wrapped in populist anti-market politics constructed from heuristics, political religion and cognitive biases, or might I say, a grand deflation in logic.

IMF Supports Capital Controls

The IMF reveals their true color.

From Bloomberg, 

The International Monetary Fund endorsed nations’ use of capital controls in certain circumstances, making official a shift, which has been in the works for three years, that will guide the fund’s advice.

In a reversal of its historic support for unrestricted flows of money across borders, the Washington-based IMF said controls can be useful when countries have little room for economic policies such as lowering interest rates or when surging capital inflows threaten financial stability. Still, it said the measures should be targeted, temporary and not discriminate between residents and non-residents.

“Capital flows can have important benefits for individual countries across the fund membership and the global economy,” IMF staff wrote in a report discussed by the board on Nov. 16 and published today. They “also carry risks, however, as they can be volatile and large relative to the size of domestic markets.”

Countries from Brazil to the Philippines have sought in recent years to manage inflows of capital that put upward pressure on their currencies and threatened to create asset bubbles. The new guidelines will enable the fund to provide consistent advice, though rules prevent it from imposing views about managing capital flows on its 188 member nations.

Capital (currency) controls treat the symptoms and not the disease.

The real disease has been the unhinged central banking-paper money system that perpetuates the worldwide bubble cycles. Such unstable system distorts the pricing structure that destabilizes economic balance, promotes high risk taking and encourages reckless yield chasing dynamics, and worst, redistributes wealth to the political elites and their cronies, whom are the first recipients of easy money bubble policies (the latter incidentally operates with an implied guarantee or moral hazard, they are usually beneficiaries of bailouts)

Eventually they all end up in a bubble bust.

Countries with banking crisis exploded coincidentally after the Nixon Shock or the closing of the Bretton Woods gold exchange standard

Previously I warned that the penchant for greater interventionism in response to the recent crisis has sown the seeds of capital controls which risk the headway towards protectionism. 

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions

Capital controls has short term impact and spawns black markets as the price spread between official and unofficial rates widens.

Yet capital controls or exchange rate controls will hardly prevent the inflation of bubbles borne out of internal or domestic policies. The Philippines, which has been cited by the article, should be a good example. Loose monetary policies have been in the process of puffing a property and stock market bubble which has been misconstrued by the mainstream as economic “growth” story.

As Austrian economist Dr. Frank Shostak warned

The idea that capital controls and fixing the external value of a currency can strengthen economic fundamentals is flawed. While capital controls may help boost economic activity in terms of GDP, they cannot lift the real net worth of the economy. On the contrary, capital controls will only add to distortions caused by the monetary pumping and the artificial lowering of interest rates, thereby making the inevitable economic bust much more severe.

Quote of the Day: If Democracy Isn’t Working, It’s Not Democracy’s Fault

The idea of democracy is sacrosanct. To question it implies that you are in favor of despotism and tyranny. Democracy fans conveniently ignore the fact that despots and tyrants are freely elected every year.

President Hugo Chavez retained power in Venezuela this year, winning comfortably despite running his country’s economy into the ground with his socialist revolution of nationalizing key industries, tight exchange controls, and price controls on certain basic goods.

As the European economy continued to lurch toward meltdown, French voters elected Francois Hollande in 2012. The first three things Hollande did were raise the minimum wage, reduce the retirement age from 62 to 60, and raise the top tax rate to 75%. A conspiracy theorist would assume Hollande is deliberately trying to demolish what’s left of the French economy with these policies.

In Moscow, Vladimir Putin was again elected president of Russia. Despite police repression and the thuggery of the previous Putin regime, pro-Putin rallies were much more popular than anti-Putin rallies. “This is the time to build a bridge to Putin, before the most talented people move out of Russia,” said curator Marat Gelman.

As the United States elections draw near, the incumbent president is leading or tied in the polls. In his four years, he has not really deviated from his predecessor’s policies that were generally reviled by those in his party. He has presided over the largest expansion in public debt in world history, with the result being economic growth that is the weakest since the Great Depression. And this guy is likely to win. If he doesn’t, his opponent will govern just as he (and the ones before him) did.

Those of us paying attention are left to merely sigh and roll our eyes, reminded of H.L. Mencken’s line, “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”

Meanwhile, democracy continues on unquestioned. The politicians may be crooked, the taxes ruinous, the bureaucracy unwieldy, and the regulations outrageous, but the source of these outcomes is never questioned. The hope of democracy depends on the idea that all we need is the right people in power.

If democracy isn’t working, it’s not democracy’s fault. The problem is only that the right people have not been elected yet. This theory has been tested for hundreds of years and the results are the same, yet people still hope and believe. The worst rise to the top in politics, F.A. Hayek explained. To be elected, politicians must appeal to the least intelligent and most gullible. And because democracy makes politics and power available to everyone, it attracts those seeking status, fame, glory, recognition, attention, appreciation, dignity, and even dominance. The right people will never be attracted to politics, only the wrong people will.

This is from Mises Institute President Douglas French at the Laissez Faire Books on the popular delusion of the democratic utopia.

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.