Why Social Security Is Not an Insurance

Social Security has been sold to the public as insurance.  The reality is that coercive redistributive welfare programs (Rothbard, Friedman) have been hijacked and repackaged as “insurance” by the progressive left to make these sound or appear politically palatable. 

Even legalistically, Social Security isn’t an insurance. American economist, author and professor Walter E. Williams explains at the Lew Rockwell.com (bold mine)

The Social Security pamphlet of 1936 read, “Beginning November 24, 1936, the United States Government will set up a Social Security account for you. … The checks will come to you as a right” (http://tinyurl.com/maskyul). Therefore, Americans have been led to believe that Social Security is like a retirement account and money placed in it is their property. The fact of the matter belies that belief.

A year after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis. The court held that Social Security is not an insurance program, saying, “The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” In a 1960 case, Flemming v. Nestor, the Supreme Court held, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.”

Decades after Americans had been duped into thinking that the money taken from them was theirs, the Social Security Administration belatedly — and very quietly — tried to clean up its history of deception. Its website explains, “Entitlement to Social Security benefits is not (a) contractual right.” It adds: “There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense.

… Congress clearly had no such limitation in mind when crafting the law” (http://tinyurl.com/49p8fl2). The Social Security Administration failed to mention that it was the SSA itself, along with Congress, that created the lie that “the checks will come to you as a right.”

Here’s my question to those who protest that their Social Security checks are not an entitlement or handouts: Seeing as Congress has not “set up a Social Security account for you” containing your Social Security and Medicare “contributions,” where does the money you receive come from? I promise you it’s neither Santa Claus nor the tooth fairy. The only way Congress can send checks to Social Security and Medicare recipients is to take the earnings of a person currently in the workforce. The way Congress conceals its Ponzi scheme is to dupe Social Security and Medicare recipients into thinking that it’s their money that is put away and invested. Therefore, Social Security recipients want their monthly check and are oblivious about who has to pay and the pending economic calamity that awaits future generations because of the federal government’s $100 trillion-plus unfunded liability, of which Social Security and Medicare are the major parts.

I previously made the same argument against the local pseudo health insurance (Philhealth) here

Quote of the Day: JGB market is dead

The JGB market is dead with only the BOJ driving bond prices...These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems. 

This is from Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions as quoted by a Bloomberg article. 

Japan's political class have come to the belief that central bank's 'free lunches' are elixirs that lasts forever.

US Stock Market Mania: The IPO Craze

In the US, IPOs have now become a craze.

This intro from a mainstream USA Today article captures the zeitgeist: (bold mine)

Investors are buying up just about anything with a ticker symbol, and that frenzy certainly includes stocks that are brand new to the market.

IPOs have metastasized into a centripetal force for wild and rampant punts… (bold mine)

The performance of IPOs is starting to hit the kind of feverish pitch not seen since the last market peak in 2007, and it even has hints of the IPO heyday of the 2000 dot-com boom. The signs:

First-day pops. Container Store's first-day return is certainly one to remember, rising 101% from its $18 a share IPO price to $36.20 a share. Container Store was the fifth IPO to double in its first day of trading this year, the biggest year for 100% one-day jumps since 78 did it in 2000. Seeing stocks double on their first day has become rare. During 2012, just one IPO, a company named Splunk, doubled on its first day, said Jay Ritter, professor of finance at the University of Florida. No IPOs doubled on their first day in 2009, 2008 or 2007, Ritter said. IPOs on average have gained 16% on their first day this year, Renaissance said, the highest in at least a decade…

Already this year, 182 companies have seen their shares start trading, up 50% from this point last year, said Renaissance. This coming week week of 11/4, 10 IPOs are expected to hit the market, including the much-anticipated online message service Twitter. At the current pace, there could be 220 IPOs in 2013, making it the busiest year for IPOs since 2000 by topping the 217 deals in 2004, Renaissance said.

Volume and number of IPOs in the US has now equaled or surpassed the 2005 highs according to the chart from PWC. The above represents 3rd quarter data which means given the current incredibly strong momentum, this would be so much higher.

I have previously pointed out “The scrapping for yields has impelled many to jump on the IPO bandwagon despite poor track record of newly listed companies”. The IPO mania only validates my view where market activities have increasingly been detached with ‘fundamentals’. Market participants see only one direction for stock prices; up up and away.

By flagrantly pushing up prices for the sake of momentum and for adrenaline boosting short term punts, they have virtually ignored or dismissed all forms of risks

With 100% one day returns, the appropriate metaphor for the IPO mania is that everyone is a scalper or a day trader now.

IPOs are useful sentiment indicators as these give us hints on the whereabouts of the stages of the stock market cycle.

And the late stock market guru Sir John Templeton was right when he warned that the "time is different" represents the four most dangerous words on investing as they account for popular delusions. 

Yet while the mania may continue and even accelerate or intensify, what is unsustainable won't last.

Phisix: The Myth and Realities of a Yearend Rally

Once any attempt is made by the central bankers to slow down or stop the monetary expansion in the face of worsening price inflation, the entire house of cards begins to crumble. The boom turns into the bust, as investments undertaken and jobs created are discovered to be the misdirected outcome of money creation and the unsustainable patterns of demand and employments that could last only for as long as the inflationary spiral was kept going. Professor Richard M. Ebeling

Will a Yearend Rally Take Off?

November and December has largely been seen by the consensus as months favoring stock market investments. Some have classified them as Year-end rallies[1] or Christmas or even Santa Claus (late December) rallies[2]

Such rallies have been in anticipation of increased liquidity (from bonuses and gifts), also from a rebalancing of portfolios (partly from tax purposes) and or from mere optimism for the coming year—the January effect[3].

For the Phisix, since 1985, the November-December window reveals that the Phisix has risen 75% of the time during the past 28 years.

But digging through the numbers divulges some interesting insights.

One, the best returns have been during tops (1986*, 1988*, 1993 and 2006)

*1987 and 1989 I consider as quasi bear markets or countercyclical bear markets within a structural bull market. Both bear markets had been political incited (1987 and 1989 coup), posted significant losses of over 50%— 1987 (-53%) and 1989 (-63%)—and both lasted less than a year, specifically 5 months and 11 months respectively[4].

Two, the biggest returns can also be seen during sharp bear market rallies (1987, 1998**, 2000** and 2001**)

**1998, 2000 and 2001 signified as ephemeral countercyclical bull markets within a structural bear market.

Three, since the new millennium, the seasonality effects from the November-December window have greatly been subdued.

Has deepening connectivity via the cyberspace invoked a crowded trade effect (diminished arbitrage opportunities from most participants expecting everyone to do the same thing)?

Incredibly, the massive run by the Phisix from the nadir of the late 2008 of about 1,700 until the fresh historic highs in May of 2013 at 7,400 for a 335% return for 5 years+ period, has only generated November-December returns of +6.65% for 2009, -1.58% for 2010, +.88% 2011 and last year’s 7.16%.

This means that while stocks may rise over the said period, there is no guarantee, in contrast to popular expectations, that returns for the yearend season to be significant to offset underlying risk factors.

Of course qualitative dynamics of the past hardly resemble today’s conditions for us to rely on empirical data to accurately project future conditions. Said differently, this means that while stocks rose 75% of the time for the past 28 years, the largely downplayed negative returns of 25% over the same period, may also be an outcome.

The unfolding present conditions will determine the direction of price trends rather than from seasonal or historical variables.

The Nikkei-Phisix/SET Pattern

Yet the bullish consensus has been said to view the current consolidation phase as a replica of 2011 in expectations of a major leg to the upside.

Pattern seeking to justify one’s belief is easy.

The year to date chart of the Phisix (left upper window) and Thailand’s SET (right upper widow) looks as they have been behaving in proximate symmetry.

Both have earnestly been attempting to untangle themselves from the twin May-June and August bear market strikes.

Curiously both charts, the year-to-date Phisix and the SETI charts appear to closely approximate what seems as a bigger paradigm, Japan’s major equity bellwether the Nikkei 225 from 1985-1995 (red square).

Yet the succeeding events from the Nikkei’s incipient downfall had been an unpleasant one. In the wake of the 1990 crash where the Nikkei fell by 60% from the pinnacle of 38,916, after a long period of consolidation (1993-1997), the major Japanese equity bellwether plumbed to new depths. The Japan’s lost decade has been underscored by the Nikkei’s 80% loss over a 13 year period.

Since the all-time low of 7,831.42 in March 2003, the Nikkei has been rangebound from 8k to 18k. Even with Abenomics in place, the Nikkei at the 14,000+ levels has still been in a considerable distance from the June 2007 high of 18,138.36.

If the Nikkei’s pattern evolves similarly on the Philippines and on Thailand, then this would hardly be “bullish”.

Will a firming US Dollar be a Spoiler?

As I have been repeatedly saying, financial markets of emerging markets (which includes emerging Asia) will generally depend on the conditions of the bond vigilantes 

Rallying US Treasuries (declining yields) appear to have hit a wall. The US dollar has recently strengthened amidst the manic episode in the US equity markets.

In May, the sharply strengthening US dollar peaked along with the Phjsix (PSEC), Emerging Markets (EEM) and the FTSE ASEAN (ASEA) bellwethers. The rally in the US dollar coincided with an unexpected surge in yields of US treasuries.

It was also in May when the financial markets began to speculate on the impact of both Abenomics and more significantly Bernanke’s Taper talk. The financial markets came to believe that even a minor reduction of US liquidity would have an adverse impact on financial markets and the economy.

By June, global stock markets fell hard. Many emerging markets had been pushed to bear market levels. China suffered its first bout of liquidity squeeze[5]. While the US dollar rallied strongly against emerging markets, the US dollar fell against developed market contemporaries.

The sharp second spike in the US dollar (second green rectangle) in response to the continuing stress in the financial markets, corresponded with what seemed as an orchestrated communications campaign launched by central bank officials in pushing back the market’s concern over the Taper[6].

As equity markets of emerging markets partially recovered on assurances from central bankers, which has signalled a return of the quasi-Risk ON environment, the US dollar failed to sustain its advance and consequently declined dramatically.

However by August the rally in the equity markets of emerging markets hit a wall. Renewed concerns over the taper, uncertainty over Ben Bernanke’s replacement and the Syrian standoff emerging market sent stocks reeling[7]. Such uncertainties propelled the US dollar index higher for the third time.

But again this wouldn’t last as central bank officials come to the “rescue”.

The FED surprised the markets heavily expecting a tapering with an UN-Taper announcement[8]. Stocks in developed economies run amuck and went into a blowoff phase. Debt ceiling deal and Ms. Janet Yellen’s anointment as Bernanke’s replacement further fired up the melt-UP mode[9]. This US stock market bidding frenzy continues until today.

Some of this optimism has diffused into select emerging markets. The US dollar tumbled once again.

The wild volatility swings prompted by action-reaction feedback mechanism between, on one side, the central bankers and political authorities, and on the other, the financial markets continues.

Amidst a continuing meltup mode by US equities, the oversold US dollar staged a massive comeback this week. This has been accompanied by a renewed selloff in US treasuries as well as in commodities.

The question is will US treasury selloff and the US dollar rally be sustained? If so what could be the implications?

How the US dollar may affect the US-ASEAN equity correlation?

Changes in the direction of the US dollar index have demonstrated some correlation with the performance of US stocks relative to ASEAN contemporaries.

With a 2-3 months lag, the rise of the US dollar (February to June) eventually coincided with outperformance of the S&P 500 over the Phisix (SPX:PSEC; window below USD index), S&P 500 over Thailand’s SET (SPX: SETI) and S&P 500 over Indonesia’s IDDOW (SPX: IDDOW; lowest pane).

When the US dollar peaked in July and turned lower until last week, the SPX’s outclassing of the ASEAN stocks seems to have also culminated (blue line).

If such trend should continue, then we can expect the following

-ASEAN stocks can go higher vis-à-vis the US (but count me as doubtful)

-Even if ASEAN equities continue to consolidate or move sideways, ASEAN outperformance could mean a coming correction in US stocks.

-Since the above represents a ratio between two indices, even if both the S&P and ASEAN bellwethers posted declines, for as long as the degree of contraction by ASEAN equities is smaller than the S&P the ratio will favor ASEAN. The charts indicated (S&P: ASEAN) will reveal a downside motion.

But I lean towards a coming US stock market correction.

I have been pointing out how market participants have frenetically bid up US stocks by indulging in record high net margin debt, wallowing in debt financed share buybacks[10] and splurging on massive leveraging on indirect speculative activities

This comes amidst declining rate of growth in terms of net income and earnings, as well as, manipulations of earnings guidance[11] in order to justify such a mania.

I have noted that PE ratio of US stocks as embodied by the small cap Russell 2000 has reached shocking 80+ levels.

I have also alluded to substantial cash raising activities by foreign investors and by many celebrity and market gurus in anticipation of a major pullback.

Even the world’s largest sovereign wealth fund, Norway’s Norges Bank Investment Management has joined this bandwagon and recently warned of an impending reversal or “correction” of stock markets[12].

On the other hand, retail investors have been piling in as US stocks goes vertical.

It’s also important to realize that when major US equity benchmarks move farthest from each other, the outcome has been significant retrenchments or bear markets.

The S&P (red) pulled away from the Dow Industrials (green) and the Russell 2000 (blue line) in the dotcom bubble days, the corollary had been a dotcom bust.

In 2007, the small cap Russell 2000 meaningfully surpassed the Dow Industrials (green) and S&P (red) by a mile. The patent discrepancies eventually paved way for a bear market which has been triggered by a housing bubble bust.

The same can be seen in 2011, where huge divergences (but over a short period) led to a significant correction.

Today such incongruities have not only been colossal but have also been critically extended as earlier discussed[13].

But what if the US dollar index continues to climb?

The most likely answer is that in 2-3 months after, we can expect another round of outperformance by US equities relative to ASEAN.

Again this may not necessarily mean rising markets. The S&P 500 fell along with ASEAN markets in August, but again the decline was lesser in scale relative to the ASEAN bourses which endured the second strike from the bears. The August selloff resulted to the zenith of the SPX:ASEAN ratio

This means that if the US dollar should rise further, then this extrapolates to bigger fragility for emerging markets and for ASEAN.

Indonesia Remains Vulnerable

ASEAN’s vulnerability can be seen from developments in Indonesia

The recent seemingly tranquil pseudo-risk ON period has hardly pacified Indonesia’s mercurial financial markets.

It has failed to dampen the elevated conditions of Indonesia’s currency, the rupiah.

In addition, “dramatically increased the cost of living” has prompted labor unions and workers to hold a nationwide strike to demand a FIFTY 50% increase in minimum wages.

In Jakarta, this comes on top of earlier minimum wage hike of 42% in less than a year[14]

Yesterday, a first batch of a dozen Indonesian governors agreed to increase minimum wages by an average of 19%. Later in the day, another batch announced higher minimum wages from anywhere between 10-45%[15].

So rising minimum wages will compound on the drag effects on Indonesia’s real economic growth.

And to think just a year back Indonesia has been a darling of credit rating agencies[16].

While Indonesia’s inflation woes has been blamed on the partial lifting of oil subsidies (subsidies I earlier noted accounts for 3% of the GDP[17]), Indonesia’s main predicament has been due to unwieldy government spending, interventionist populist government (as shown by minimum wages) and massive credit expansion both to the private and government as measured by Indonesia’s external debt. 

These has prompted for trade deficits and a blowout in current account deficits[18]

In short, the Indonesian economy reveals of the priority to spend financed by debt rather than to produce and generate savings and increase productivity[19].

Indonesia’s foreign currency stockpile has been eroded by 23.2% to USD 95.675 million as of September 2013 from a high of USD 124.637 in August of 2011 mainly from defending the rupiah.

This compares to the USD 83.029 million for the Philippines as of September which also appears to be in a downshifting trend. From the record high in January 2013 Philippine foreign currency reserves has declined by 3.2% as of September.

The above only exhibits how the rupiah appears highly vulnerable to a crisis from a sustained surge in the US dollar and or extended selloffs in US treasuries.

This also shows how the damage from the bond vigilantes has percolated into the real economy.

And the recent rebound of Indonesia’s stock market appears to have ignored all these risks.

Curiously, Indonesia has a low government debt to GDP level (23.1% 2012) even lower than the Philippines at (40.1% 2012)

And it has not just been government debt but likewise overall debt standings which I previously shown where Indonesia’s debt exposure has been the lowest among ASEAN peers and China.

As a reminder, relative low debt levels by the Philippines or even by Indonesia didn’t spare these countries from a regional contagion when the Asian crisis hit in 1997[20].

The point of the above is that vulnerabilities to a debt crisis may emanate from different soft spots in the economy. This means relative debt levels hardly represents an accurate measure for measuring risks without understanding the interconnectedness and interdependencies of different sectors of an economy.

Yet it isn’t relative debt levels but rather confidence levels by creditors on the ability or willingness of a country to honor their liabilities.

External factors like a surge in the US dollar or rampaging bond vigilantes may expose such weakness.

Bottom line: ASEAN stocks and or the Phisix may rise mainly out of the desire to stretch for yields, but substantial risks remain. Potential tinderboxes as China (as explained last week), Japan, the US, Europe, India or even ASEAN would make global stock markets highly vulnerable to black swans especially amidst the unsettled bond vigilantes.

---

[1] The Free Dictionary Year-End Rally

[2] Investopedia.com Santa Claus Rally

[3] The Free Dictionary January Effect

[4] See Phisix: Don’t Ignore the Bear Market Warnings June 30, 2013

[5] See Emerging Market Rout: Prelude to a Global Crisis? June 17, 2013

[6] See Phisix: The Myth of the Consumer ‘Dream’ Economy July 22, 2013

[7] See Histrionics of US Politics: Markets in Buying Orgy on Hopes of Debt Ceiling Deal October 11, 2013

[8] See Asian Markets Jump on the FED’s 'Untapering' or QE extension September 19, 2013

[9] See Phisix: US Debt Ceiling Deal and UNTaper Spurs a Global Melt UP October 21, 2013

[10] see Phisix: Rising Systemic Debt Erodes the Margin of Safety October 14, 2013

[11] see Phisix: The Implication of the US Boom Bust Cycle October 28, 2013

[12] Bloomberg.com Norway’s Sovereign Wealth Fund Shuns Stocks on Reversal Bet October 26, 2013

[13] See More on Russell 2000s Outrageous Valuations October 29, 2013

[14] Wall Street Journal Indonesians Strike for Higher Wages October 31, 2013

[15] Wall Street Journal Indonesia Governors Boost Minimum Wage, November 1, 2013

[16] see Phisix: Moody’s Sees Bubbles as Structural Shift to Higher Growth October 7, 2013

[17] See Phisix: Will the Global Equity Meltup be Sustainable? September 16, 2013

[18] Tradingeconomics.com INDONESIA CURRENT ACCOUNT

[19] See Is Indonesia ASEAN’s Canary in the Coal Mine? August 2, 2013

[20] Marcus Noland, The Philippines in the Asian Financial Crisis: How the Sick Man Avoided Pneumonia, University of California Press 2000

Philippine Politics: As Predicted, Cigarette Sin Taxes Backfires, Tax Revenues Fall as Smuggling Explodes

As I have repeatedly been saying, people’s actions are guided by incentives. Raising taxes, such as the Sin Tax, reshape people’s incentives. And people respond to a change in the tax environment based on the elastic relationship between rates of taxes and the levels of revenues from such rates (Laffer Curve). Such variability in people's reactions usually goes in the opposite direction from the expectations of the government and their favorite ‘tax, economic and finance’ experts, as well as, the consensus who thinks in linear terms.

And because taxes don’t have “neutral” effects on people’s behavior, the result has been a policy boomerang.

I have noted incumbent domestic politicians have used the moral platform (supposedly to prevent or reduce vice) as pretentious cover to justify “Sin taxes” on what truly has been political greed—insatiable deficit spending.

Part of the linear thinking expert advisory group has been the IMF whom has endorsed such repressive taxes.

I have pointed to the US experience where 'Sin Taxes' caused widespread smuggling. Not only in the US, in the United Kingdom, alcohol sin taxes has prompted for increased health problems and a booming informal or shadow economy.

Yet like all prohibition laws, quasi prohibition decrees like the sin taxes fail to reduce alcohol or cigarette consumption. 

One might add as a way to get around such regulations, sin taxes promote corruption

Now the unintended effects of the Philippine version ‘sin tax’, from the Inquirer:

Blame it on the law of unintended consequences.

When the Aquino administration pushed Congress to raise the level of “sin taxes” on tobacco products last year, cigarette manufacturers argued that higher levies would create new problems for the government, like smuggling.

According to them, the resulting increase in cigarette prices would give more incentives to unscrupulous parties to smuggle in cheaper brands and meet the demand from less affluent buyers.

Today—almost one year into the effectivity of the Sin Tax Reform Law—their warnings have proved almost prescient.

Information provided by the country’s largest tobacco manufacturer showed that the government may have lost as much as P4.4 billion in tobacco excise taxes in the first semester of the 2013 alone.

The first series of the two part article puts the blame of the tax loss burden to a single company. And as usual, the mainstream excuse has been one of regulatory lapse (and scheming entrepreneurs) rather treating such as a political economic phenomenon. 

As a side note, the mainstream's solutions to social problems can be simplified in 4 ways: throw money at the problem, replace the perceived delinquent authority/ies, and for the politically incorrect entities, apply or increase regulations or impose prohibitions and lastly implement taxes for the other groups. There hardly has been the perspective where these solutions can be or have earlier been the source of the problem.

Yet another article suggests that there has been an explosion of cigarette smuggling. Recently, Php 18 billion pesos worth of Marlboro cigarettes has reportedly been seized by officials. In addition, according to the same report sales of tobacco companies plummeted by 40% during the 1st quarter of 2013 resulting to a decline in tax collections

And all the above symptoms—shadow economy, smuggling, lower revenues, failure to stem vice/s, greater health hazard (from counterfeit or low quality products)—of sin taxes captured by this opinion column from the Inquirer

The high tax regime has been in force since January. Has it forced smokers to quit? No. Has it pushed street prices of cigarettes high enough to make smokers quit? No. Has the government been able to collect more taxes? Still no.

Worse, what Filipinos are smoking now is much more harmful to their health than what they used to smoke. What happened?

Smuggling. When the “sin tax” was being crafted, this column warned that cigarette smuggling would flourish, as had happened here before and in other cities when taxes were raised drastically. It is happening now.

Smuggled cigarettes sell for P1 per stick, less if you buy by the pack. They are sold out in the streets, in sari-sari and convenience stores everywhere with posters that scream “low prices!” at every passing man, woman, and child.

Unfortunately, smokers who can buy cheap cigarettes tend to smoke more and are not financially motivated to quit. Already, 25 percent of Filipino smokers of higher-priced premium and subpremium brands have shifted to the smuggled P1 brands.

In the Philippines’ 100-billion-stick market, that translates to 25 billion sticks or 1.25 billion packs that should have been taxed at a higher rate of P25 per pack, instead of just P12. The government is losing about P16.3 billion in taxes per year.

Statistics show that contrary to expectations, the smoking rate among Filipinos has not subsided since Republic Act No. 10351 was implemented.

It has gone up instead. The average daily consumption has grown from 13.5 sticks per smoker in the first quarter of the year to 14.1 sticks per smoker in the second quarter.

The increment may be slight but it is certainly puzzling. The reason is the raging popularity of cheap smuggled cigarettes.

Philosopher George Santayana once warned about people who don’t learn from past as doomed to repeat the same errors.

Obviously politicians and their apologists can hardly ever grasp that populist feel-good noble-sounding repressive policies such as the sin taxes (which really have been engineered to generate votes or approval ratings) have been bound for failure from its inception.

This reminds of me of the fatal conceit by politicians who believe that they can subvert the basic laws of economics. 

Even in the 18th century Scottish philosopher Adam Smith recognized this which he branded as the "man of the system" (Theory of Moral Sentiments, Part VI Of the Character of Virtues)

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

At the end of the day, it is society who carries the load or who pays for the costs of failed experiments by political authorities. This is why the same errors have been recycled through time.

Quote of the Day: Gandhi was no (liberartian) saint

Politicians and bureaucrats are corrupt, driven by baser instincts. They make money for themselves and for their families. Gandhi’s ambition was limited to becoming a saint, often at the cost of his family. Being corrupt is bad enough, but what kind of warped thinking does it require to be corrupt and still not use it materially for the self and the family, while providing a cover for others to rape and plunder? Gandhi’s character should inspire an utter cringe.

Gandhi was a loony. He could never evolve beyond sex and vegetarianism. His understanding of religion was more of a dogma than an appreciation for deeper things in life. He attempted to do some basic experiments though not of the kind too different from what a five year old child does when playing with round stones or water. He drank his own urine, which had no rational medicinal basis even in those days

So difficult it was for Gandhi to understand his sexuality that even at his old age, he shared his bed with different young women, his disciples, calling this “nature cure”. He did this to practice his control on “brahmacharya” (celibacy). In Gandhi’s view experiment of sleeping naked with women helped him in contemplating upon social problems. He involved his 19-year old niece in his experiments. Another was the 16-year old wife of Gandhi’s great-nephew. There were many others, at least some of them married. Most likely, he did not have sex with these women. In what Gandhi did, the women ended up being guinea pigs of his human experiments and faced humiliation in a deeply conservative society.

Were Gandhi not looking for sainthood, he would have been more kind with his family. He would not have fought the English. He would have spread the message of freedom he learnt in England. He would have used the English to liberate the Indian society from its very deep-rooted dogmas. He would have listened to Tagore. Alas, “freedom” for him and for the top people in India’s “freedom movement” was more of a socialist construct heavily influenced by personal political motivations. Very likely, Gandhi did not even understand what Tagore meant.

Gandhi was no saint. In fact, I feel ashamed writing about someone who was a common human from the masses, with simplistic beliefs and conduct. His mistakes and sins were nothing unusual in the ever-contradictory and hypocritical cesspool that Indian society exists in. He was not to be one, but it was the accidents of the history that gave him a position of a saint. He was not responsible for killing anyone. If he did, he did not consciously mean to. His work might have and indeed did cause a lot of pain, but that was not really his mistake, for he did not have the foresight to look much further in life, not too unlike someone who does a 9-to-5 job and cannot think beyond his evening beer to understand the consequences of his actions. He deserves no place in history and certainly not in the libertarian philosophy, either as a hero or as a villain.

This interesting quote is from Jayant Bhandari writing at the Ludwig von Mises Institute Canada.

Video: Milton Friedman on Why Inflation is a disease for a society

In the following video from Liberty Pen, the illustrious Nobel Prize economist Milton Friedman explains why inflation is a disease for a society..

(hat tip Cafe Hayek)

Inflation is a tax which is imposed without representation and which nobody has to vote for. And of course, it is a marvelous tax from the point of view of a congressman trying to meet the demands of his constituent for more spending

Philippine Politics: Barangay Elections and the Pork Barrel System

The recently concluded Barangay elections reported accounts of massive and widespread vote buying (as much as 1,000 pesos per head) and a surge in the death toll from election violence (higher than national elections in 2010).

The 64 billion peso question: why all these?  What drives candidates to desperately seek political office at the cost of their lives and huge amounts of expenses?

The answer of course is no stranger to most: it has been both about perks and power.

Let us examine the perks or benefits from the officials of Barangay level.

The basic perquisites are as follows: 

Graph from the Rappler.

Aside from these, other benefits include Christmas bonus and cash gift, insurance coverage, as well as, benefits for accident, total or permanent incapacity, disability, death and burial.

There’s more. Barangay officials also get many subsidies in the form of “free hospitalization in government facilities, and free tuition in state schools for themselves and two of their legitimate dependent children (“legitimate” is specified in the law) during their incumbency. Based on their number of years in the service, barangay officials can get civil service eligibility”.

What are they not entitled to (for now)? 13th month pay, hazard pay, representation and transportation allowances, productivity incentive bonus, clothing and personnel and economic relief allowances.

[As a side note, the above also introduces the power aspect

National level officials have been pushing for more Barangay benefits from more funding to fare discounts. Why? 

It’s all about political power

This noteworthy excerpt captures its essence

“In theory, the law says [barangay elections] should be nonpartisan,” Casiple said, referring to a provision in the Omnibus Election Code barring candidates to represent or receive aid from any political party.

“But in reality, they’re important to mayors. That’s where the fight is. If you hold the barangay, it’s a ready-made machinery for ward leadership. It has become a fight by ordinary politicos,” Casiple said.

Casiple said this partisanship has translated the “perks” otherwise not stated by law, granted by higher government units. Off the top of his head, Casiple cited, as example: “Here in Quezon City, all barangay captains are given a car. “

Ergo, controlling the Barangay means ensuring votes from the grassroots level. So leaders from the local to the national level compete to gain their favor. This leads us to the key of Philippine patronage politics: whoever controls the local governments, controls the machinery for the national level]

Now even if we total cash and non-cash benefits these would amount to about at best Php 500k per year. For a three year term that would accrue to P 1.5 million. At P 1.5 million, 1K peso per vote expenditures, whether direct (vote buying) or indirect costs (ads or marketing campaign, organization, network and etc..), would translate to only 1,500 voters. There are about 3,518 voters per Barangay in the National Capital Region (registered voters: 6m, no. of Barangays 1,705 NSCB)

How will candidates recoup their election expenditures “investments”?

We can only make a guess. 

One, from their 20% share of the national internal revenue allotment (IRA). In 2013, the IRA budget for the 42,026 Barangays nationwide has been at P59,165,520,37.This will jump by 15% to 68.3 billion pesos in 2014.

Two, from their share of the other revenues from the allocations for local government units (ALGU) as part of the national government’s budget law, the General Appropriations Act. 

In 2014, the AGLU budget has been set  at 360.5 billion pesos.

Notes the Philippine Senate:

Other items in the ALGU are the shares of local governments from tobacco excise tax collections and taxes from mining and other extractive industries, and the budget of the Metropolitan Manila Development Authority, among others.

Third there are other sources of funding from the Barangay level, include (as per the Department of Budget and Management

-Service fees or charges for the use of barangay property or facilities;
-Barangay clearance fees; 
- Fees or charges for the commercial breeding of fighting cocks and on cockpits and cockfights;
- Fees or charges on places of recreation with admission fees;
- Fees or charges for billboards, sign boards, neon signs and other outdoor advertisements; 
- Toll fees or charges for the use of any public road, pier or wharf, waterway, bridge, ferry, or telecommunications system funded and constructed by the barangay; 
- Revenues from the operation of public utilities and barangay enterprises (markets, slaughterhouses, etc.); 
- Fines (not exceeding P1,000) for the violation of barangay ordinances; and, 
- Proceeds from the sale or lease of barangay property or from loans and grants secured by the barangay government

In short, fees and taxes from the Barangay level

The above is the flow chart of how the Barangay establishes and supervises its budget via the DBM

So there you have it. Pork in its varied forms applied to the Barangay: from the national level: AGLU via IRA and AGLU via other shares of taxes, and from the Barangay level fees and taxes.

In essence, from top to bottom, Philippine politics operates under the Pork Barrel system

Every election, said the great libertarian H. L. Mencken, is a sort of advanced auction on stolen goods. The Barangay elections seem to validate this.

As I wrote in 2010

So essentially, the Pork Barrel culture reinforces the patron-client relations from which the Patron (politicos) delivers doleouts and subsidies, which is squeezed from the Pork Barrel projects, to the clients who deliver the votes and keeps the former in power. Hence, the Pork Barrel system is essentially a legitimized source of corruption and abuse of power seen from almost every level of the nation’s political structure, an oxymoron from its original “moralistic” intent (unintended consequences). As the saying goes “the road to hell is paved with good intentions”.

As we previously noted, ``Plainly said, when we demand for more social spending or welfare based programs to resolve our problems then we increase the funds allocated to politicians for their dispensation. Essentially, Pork Barrels signify our excessive dependence on government where the correlation of government spending and the price of getting elected are direct.”

Politicization of every aspect of social life from top to bottom leads to corruption, political and wealth inequalities and economic-financial repression which means a lower standard of living. The worst effect is the violence which politics incites, and of the degradation of society’s moral fiber

While the call for the abolition of the Pork Barrel is ideal and necessary it is not sufficient. 

For as long as the public thinks the Pork is a problem of personal virtuosity or what I call as personality based politics (and not of systemic defect), politicians will be able to camouflage pork into many different masks as shown by latest the speech by the Philippine president. 

In other words, to abolish the Pork requires a radical change of opinion by the public. As Scottish philosopher historian and economist David Hume wrote in Part I, Essay IV OF THE FIRST PRINCIPLES OF GOVERNMENT in Essays, Moral, Political, and Literary (bold mine)

NOTHING appears more surprizing to those, who consider human affairs with a philosophical eye, than the easiness with which the many are governed by the few; and the implicit submission, with which men resign their own sentiments and passions to those of their rulers. When we enquire by what means this wonder is effected, we shall find, that, as FORCE is always on the side of the governed, the governors have nothing to support them but opinion. It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular.

And the best way to attain such change is for the public to demand a third party audit of all forms of Pork from the top to the local level (past and current), with emphasis on the top. 

Only by opening the Pork's Pandora's Box will there be a bigger chance for an epiphany by the public that Pork is inherent in the nature or structure of the Philippine patronage based political system. Such that dismantling of the Pork Barrel has to occur from top to bottom. 

Yes this also means demolishing Pork at the Barangay levels.

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