Sunday, November 30, 2008

"Atlas Shrugged" popularization winners

Two bad news in Asia this week -- the terrorist attacks in Mumbai, India, that killed more than 170 people (really sad!), and the take-over by PAD demonstrators of Bangkok international airport, cancelling all international flights. In pursuit of political power, or in revenge of any political repression, people can be irrational and become violent. Big government in many countries around the world is really evil. Those who were previously oppressed would want to use the big and coercive instruments of government to perpetuate a new round of inefficiencies, if not violence.

But have 2 good news -- 2 institutes won the Atlas Economic Research Foundation and Ayn Rand Institute's "Atlas Shrugged" popularization project. I congratulate Barun Mitra and Mohit Satyanand of Liberty Institute, India, and Wan saiful Wan of Malaysia Think Tank (MTT), London. Their institutes will receive $10,000 each.

Details at

Saturday, November 22, 2008

Compulsory coercion

This week, the Implementing Rules of Regulations (IRR) of the “cheaper medicines law” or RA 9502, will take effect. Two of the prominent provisions of the law and its IRR are medicine price control and compulsory licensing (CL). The law and the IRR did not explicitly call it price control but “maximum retail price” which amounts to the same thing. Note the two words: “control” and “compulsory”, which means coercion. These are the 3 Cs of more government intervention and can be called “3CG”, in reference to an initiative that called for Cut the Cost, Cut the Pain or “3CP” by successfully lobbying for the said 3CG. Curiously, “Cut the taxes” on medicines was not part of its agenda.

Also this week, Thailand’s Health Ministry promised “more compulsory licensing” for essential drugs. For twp years now, the agency has issued CL on some medicines for HIV/AIDS, cancer and heart diseases, all manufactured by multinational pharmaceutical companies. (See the article here.) Last year, Brazil also issued a CL on drugs for HIV produced by a US pharmaceutical firm. India and Mexico are also toying with the idea, if they have not done it already.

What is CL and is its issuance for essential drugs – in Thailand, Brazil, and soon in the Philippines – really driven by concern for the poor, or plain envy?

CL, as defined in the IRR, means “a license issued by the Director General of the Intellectual Property Office to exploit a patented invention without the permission of the patent holder, either by manufacture or through parallel importation.” Most policy pronouncements by governments involved and supporting arguments by health activist groups say CL issuance is driven by concern for the poor. This writer argues otherwise. It is plain dark envy and hatred for multinationals, even hatred for globalization and capitalism, that drives those campaigns for CL, for 3CGs and various forms of government coercion, ultimately for health socialism.

Before, many people were dying of HIV/AIDS, cancer, heart and various communicable diseases. Then some medicines were invented by pharmaceutical companies to cure, or at least keep at bay, those diseases. Those earlier medicines were less effective, treatment period was long, and there could be some side effects. So newer, more effective, safe and more revolutionary medicines came on stream. Naturally, these new medicines also required new and more costly research and development, more revolutionary expenses to comply with more strict health regulations and more demanding expectations by patients.

High development cost means high retail price. And this is something that the health activists and government health bureaucrats cannot accept. The inventors of the new and effective medicines are now painted as evil, greedy capitalists who prey on the weakness and ignorance of the poor. Thus, the solution is to confiscate their patent -- that government-issued tool supposedly to allow those companies to recoup their huge investments and losses in non-successful researches and drugs. The tool for such patent confiscation is compulsory licensing.

There are many other medicines against HIV, cancer, heart and communicable diseases. They can cure, they are safe, and they are relatively cheaper, but they seem to be less effective and treatment period is longer. Patients, rich and poor alike, demand something that will cure them fast and quick, at cheap or no cost to them if possible. So governments and health activists target those more effective but more expensive medicines for CL (and government use and price control). And that’s how plain, dark envy came to surface.

The IRR of RA 9502 is 65 pages long. Minus the general provisions and definition of terms, and Annex TRIPS Protocol, it is 53 pages long. Out of this, 12 pages are devoted to CL and Special CL (Rules 12 to 13 of the IRR). If the provisions on “Use by government” (Rule 10) and “Parallel importation” (Rules 16 and 17) are to be included since they also call for patent confiscation, there are 15 to 16 pages out of 53 pages (or 30% of the total pages) on CL alone, a significant discussion and a signal how serious the Philippine government is intent on coercion and intervention in the medicine sub-sector.

This column repeatedly advocates the importance of personal responsibility. Health is, first and foremost, a personal and parental responsibility, not government responsibility. People can drink, smoke and party everyday, or engage in frequent fights, or live in dirty environment, or live promiscuous lifestyle if they want to. But when their liver, intestine, lungs or other internal organs are punctured and weakened by alcohol, smoke, unsanitary environment and addictive drugs, they have no moral ascendancy to demand confiscation of property rights of private enterprises, price control of those enterprises’ products, and more taxes and health forced collectivism.

If governments are serious in bringing down medicine prices and making health care more affordable to the people, there are plenty of taxes on medicines to cut, if not abolish (import tax, import documentary stamp tax, value added tax, income documentary stamp tax, etc.). There are also plenty of regulations that prevent the entry of more medicine innovators into the country.

Manufacturers of generics and copy-cat drugs compete only in producing and selling old and existing medicines. They do not contribute anything in producing new, more powerful and more effective medicines that can significantly cut treatment period. Unfortunately, these are the medicines that patients are looking for. And governments, by issuing CL and other interventionist and confiscatory policies, are discouraging the development and expansion of more innovative pharmaceutical companies. And governments and their supporting health activist groups say they are “concerned with the sick”?

Thursday, November 20, 2008

Thailand politics and the anti-globalists

My friend from Thailand, an academic economist at Thammasat University, Dr. Pichit Likitkijsomboon, wrote a good article summarizing Thailand politics. It was published around mid-2007 on some websites outside Thailand. The article was partly drawn from ‘Thais pay the price for political turmoil’ in the Far Eastern Economic Review, Vol.169, No.6, July/Aug 2006.

Pichit wrote last year,

"Beneath the surface, the conflict is the struggle between the Thaksin government’s policy of pushing Thailand toward a globalized and competitive capitalist economy on the one hand, and Thai anti-globalization forces led and masterminded by the royalists on the other. Prime Minister Thaksin’s globalization policies include trade liberalization, the negotiations of free trade agreements with the country’s largest trading partners such as Australia, China, India, Japan and the United States, the corporatization of state enterprises, bureaucratic reform and economic restructuring. Although implementation of these policies has not been without flaw and has sometimes been subject to the accusation of the lack of transparency, the direction is clear: a social and economic restructuring of Thailand toward globalized, competitive capitalism...."

"...The crisis looks to last for years. The outcome will judge whether Thailand will move forward to be a modern democratic and liberalized country or an authoritarian state covered up with the skin of elected parliament and civilian government and an undemocratic constitution."

The anti-globalization groups in Thailand are misguided, and I assume they are just among the noisy and media-articulate minority. Despite the fact that many Thais don't speak or read English, that country is very globalized. One indicator is the 15 million foreign visitors (or more?) every year, the new and modern Bangkok international airport, world class beach resorts in Phuket, mountain resorts in Chiang Mai. Big exports, presence of many foreign auto manufacturers, etc.

Recently though, the anti-globalists, anti-multinationals, anti-capitalist forces seem to be gaining in some public policy debates. In health, they were successful in pressuring the Thai Health Ministry to retain compulsory licensing (CL) of a number of medicines produced by multinational pharma companies. And more CLs are coming. For the anti-globalists, innovators of revolutionary products like very effective medicines are evil if they cannot bring down the price of their costly health inventions.

Tuesday, November 18, 2008

Decentralization 3: Challenges to Local Government

I wrote this last November 1, more than two weeks ago, while I was still in Gummersbach, Germany, attending the 8-days seminar on "Local Government and Civil Society".

When an individual, his/her family and neighbors, their friends and associates, their village, civic, professional, cultural, or sports organizations, are challenged enough to do more social and economic activities for themselves and their communities -- and they are in fact allowed to do so, then we can say that there is greater individual and community responsibility to take care of society.

Consequently, we can say that there is greater individual and community freedom on what they want to do with their own lives, with their own neighborhoods, with their own talents and skills.

Obviously, there are a number of functions that the individuals and their voluntary organizations cannot do such as neutralizing armed robbers and criminals; or ensuring fast and unbiased justice system for people with legal and jurisdictional conflict with each other.

They are also unable to provide quality social and welfare services to people who have no or little capacity for productive work, like the mentally- or physically-handicapped. These functions that the individuals and their associations cannot perform more efficiently are then expected to be done by the government, whether local or national/federal.

This assignment of responsibilities -- of giving individuals and their voluntary associations more role in running their own lives and delegating bigger functions to government bodies when the former cannot do these more efficiently, is called the principle of subsidiarity.

When you look at it closely, this principle would sound “revolutionary” or “subversive” to current and dominant thinking in public administration around the world where most functions are expected to be done by the government – from garbage collection to buses, education, housing, unemployment and social security insurance, health care, etc.

This principle of subsidiarity is among the important concepts that participants in the seminar, “Local Government and Civil Society” at the International Academy for Leadership (IAF) by the Friedrich Naumann Foundation for Liberty, are leaning towards. I am lucky enough to be one of the 23 participants from different countries – South Africa, Egypt, Palestine, Turkey, Ukraine, Lithuania, Argentina, Paraguay, Brazil, Pakistan, China, Malaysia, Indonesia, and of course the Philippines.

About two-thirds of the participants are city or municipal councilors, or party leaders in local governments while one-third comes from civil society organizations.

The seminar is held here at Theodor Heuss Akademie, Gummersbach, Germany. The small city is 56 kilometers from Cologne, and the akademie is situated on top of a small hill with a good view of the surrounding residential areas below and wide forest plantation around. The seminar started last October 26 and will end on November 1.

Related to subsidiarity are the concepts and practice of decentralization, privatization and competition. I have written a short paper on “Subsidiarity, Decentralization and Privatization” a few months back. These inter-related concepts are intertwined in a bigger concept called New Public Management (NPM). This concept is called “new” because of its advocacy for lean state, lean local government, and more personal and community responsibility.

On another note, I am happy to see a good friend way back from our undergrad days at the University of the Philippines School of Economics (UPSE), Gladys Cruz-Sta. Rita, starting a regular column “Running a Bureaucracy”, also in the

Gladys gave me a thick book that she wrote bearing the same title, and that book is one of my reference materials here in our seminar in Gummersbach because of the wealth of information and practical experiences that Gladys shares with her readers. It is definitely a good reading material for local government administrators.

Nonetheless, government administrators need to ponder on the principle of subsidiarity and its related concepts for them to understand and appreciate the idea of respecting more individual and community responsibilities in running their own lives. And consequently, for government administrators to withraw and remove plenty of taxes, fees and regulations that tend to stifle individual initiatives, innovation and entrepreneurship.

Today, I will share with you my

Experience in Barangay Justice System

Last week, construction workers in a project about 10 meters away from our window woke us up because they worked until 1 am! That was not the first time the same construction work disturbed our sleep. Before I would call up the barangay tanod and security, within minutes the barangay security officers would come to the project site, and the noise will decline if not stop.

This time, I would not stop at a telephone call at the barangay security. So last Wednesday, Nov. 13, I went to the barangay hall of Brgy. San Antonio, Makati City. A lady at the "Lupon Tagapamayapa" (Peace Council) heard my complaint, gave me a paper, I wrote there my official complaint, in a complaint form, paid P100 complaint fee, she attached the receipt to my form, and instructed me to wait for the summon to be served by the barangay captain to me, the complainant, and the respondent, the project engineer of Ironcon Builders and Development Corp. with official address at Intramuros, Manila but the project is in Yakal St., Makati, just across our street.

I received the Summon yesterday morning, November 17, telling us to report to the Barangay hall on November 18, 1pm. Within an hour, I got a phone call from the respondent, he asked me what do we want, I said we only want to sleep soundly at night. I could sense he wanted an informal arrangement with me, I told him that if I talk to him, there will be no witnesses. I want the barangay officials to hear my complaint, he can defend his company, and we will both listen to the judgement and ruling of the barangay peace council. So he put down the phone.

Today November 18, my wife joined me, we also brought our 2 years old daughter as we have no yaya at the moment. 1pm we were at the barangay hall. The lady said the other Lupon official will be late as he has a prior meeting somewhere and he was not consulted of the 1pm meeting. The respondent came about 1:40pm. The lady said we wait for the barangay chairman to possibly hear us but he was busy with many other guests who keep coming.

The 1pm became 2:15pm, but at last, the meeting started. The other Lupon Tagapamayapa official, Joey Angeles, is a respectable-looking man in his 60s perhaps. Upon learning about my complaint, he did not ask me to detail everything as he is very familiar with similar complaints, and he immediately talked to the respondent, the young project engineer.

Joey was very calm yet clear and emphatic in his points. Construction work of whatever nature should start no earlier than 7am, and should end no later than 7pm. Should there be an extension due to delayed deliveries of materials, the barangay should be informed as well as the affected neighbors, and such extension should be no later than 10pm. No exception.

He also pointed out that he does not want to see us again filing the same complaint. Should there be any complaint of similar nature, the barangay will automatically go after them. The worst that can happen to the contractor is the barangay will move to stop the project. Joey cited the case of a medium-high construction project in the barangay. When digging was made, no structural support was made on the neighboring lot. When the soil began to soften in the neighboring lot, the owner complained to the barangay up to the city hall. The verdict: the construction project was stopped, the contractor and project proponent were left hanging with all their plans and investments.

I was very satisfied with the result of the hearing by the Lupon Tagapamayapa. The respondent clearly understood the constraints on their part. They have to abide by the ruling, or risk facing a bigger problem with the barangay, not just with individual respondents from the affected neighbors.

Being an advocate of small and limited government, the role of maintaining peace and order is one function that I believe should be strengthened in government, both national and local government units. Most other functions can be given back to private enterprises and voluntary associations by individuals.

I have personally experienced how barangay justice system is handled and rendered, and I am impressed.

On another note, I also like the responsiveness of the barangay security personnel whenever complaints via phone calls are made, whether it's during regular office hours or unholy hours at midnight and early morning. The security personnel would normally come within 4-5 minutes or less.

See also:

Thursday, November 13, 2008

US Debt 5: Obama's Taxes, Bail Outs, $56 Trillion Debt Bomb

Below is a good analysis from Cato blog...
Obama's Tax Promises
Chris Edwards

... Note that many of Obama's proposed tax breaks are "refundable," meaning that much of the effect is to increase federal spending, not to cut taxes. Refundable tax breaks involve cash hand-outs to many people who do not pay any federal income taxes.
With that in mind, here are Obama's main proposals to change the tax system from its 2008 structure:

Tax Increases

Raise the top two personal income tax rates from 33 and 35% to 36 and 39.6%, respectively.
Restore the income phase-outs for personal exemptions and itemized deductions, further increasing effective tax rates at the top end.
Raise the top capital gains tax rate from 15 to 20%.
Raise the top dividends tax rate from 15 to 20%.
Increase taxes on oil and gas companies.
Increase taxes on U.S. multinational companies.

Combined Spending Increases / Tax Cuts

Making Work Pay. A refundable tax credit of up to $500 for low-income workers.
Mortgage Credit. A refundable tax credit of up to $800 for nonitemizers who own homes.
Saver's Credit. A refundable tax credit of up to $500 per family for retirement saving.
American Opportunity Credit. A refundable tax credit of up to $4,000 for education expenses.
EITC Expansion. Expand the refundable earned income tax credit.
Child Care Credit. Turn the current child care credit into a refundable credit.

The Urban/Brookings analysis (pages 22 and 25) found that more than half of the dollar impact of these six tax code changes will be to increase federal spending, not to cut taxes. That's $648 billion more in federal spending over the next ten years. In addition, Obama is proposing a new refundable tax credit for buying health insurance.

Tax Cuts

Exempt people age 65 and over from federal income tax if they earn less than $50,000.
Minor business incentives. These promises were so small and undefined that the Urban/Brookings study didn't even score them.

For the economy, for tax code complexity, and for the America ideal of equal treatment under law, Obama's tax proposals would be a disaster. With Obama's tax and spending proposals, government as Santa Claus has reached new heights.

Related papers I wrote recently:

(1) US Budget Deficit

October 23, 2008

Before the $700B bail-out was even proposed, projected US Federal government budget deficit for 2008 alone was $480B. Not included there are budget deficit by various states, cities, counties in the US, also budget deficit of certain government enterprises. So the consolidated public sector deficit (federal + state + other local govts + govt corporations and banks) could be in the $1 trillion + or - several billion $.

That is why I consistently question the logic, the institutions that cannot even discipline themselves in terms of appetite to live beyond their means, are supposed to be the "saviours" of corporate failures?

Is government failure the solution to market failure?
If there are market solutions to market failure, then there should be govt solutions to govt failure. Govts, US govt in particular, should start in their own backyard by stopping the bleeding in their fiscal balance sheet.

But with the current bail-outs and take-over or part-nationalizatio n of a number of private banks, government failure and irresponsibility is being injected with more irresponsibility.

A friend here in Manila, Lardy, shared this funny caricature about the fiscal condition at the end of the following US Presidents:

Ronald Reagan, Fiscal conservative ...... $200 billion deficit
George Bush, Fiscal conservative ......... $300 billion deficit
Bill Clinton, Tax and spend liberal ......... $200 billion surplus
George W Bush, Fiscal conservative ..... $482 billion deficit

Those were nice points. Among my favorite US think tanks is the Cato Institute ( It assembles in one roof many of the world's intellectual giants who believe in more personal responsibility, limited government, and more personal responsibility. Many of them have never been a fan of either the Democrats or the Republicans. Rewarding personal irresponsibility with various subsidies is like choosing which way to socialism, by train or by plane.

Why can't the guys from both parties move to sell and liquidate Freddie and Fannie, get the billions of $ and use it for the bail-out now that it is a law?

From some of my readings, those 2 state enterprises are the depository of nepotism and rent-seeking politicians and bureaucrats, mostly from the Democrats, but some Republican politicians were also showered with some lobby money.

(2) The US' $56 Trillion Debt Timebomb

October 08, 2008

I stumbled on this commentary today in CNN, below…

Commentary: America's $53 trillion debt problem
by David Walker

The Emergency Economic Stabilization Act contains plenty to make lawmakers on the left and right shudder. On the right, it's the apparent abandonment of free-market principles. On the left, it's the absence of punishment for high-flying Wall Street CEO's....

The nation's real tab, on the other hand, amounted to $53 trillion as of the end of the last fiscal year. That was the sum of our public debt; accrued civilian and military retirement benefits; unfunded, promised Social Security and Medicare benefits; and other financial obligations -- all according to the government's most recent financial statement of September 30, 2007.

The rescue package and other bailout efforts for Fannie Mae, Freddie Mac, AIG and the auto industry, escalating operating deficits, compounding interest and other factors are likely to boost the tab to $56 trillion or more by the end of this calendar year....

The US' gross domestic output (GDP, the combined production of goods and services by the federal + local & state governments + private corporations + households) in a year is about $14 trillion. The cumulative debt of the federal government alone will be about 4x of GDP!

If federal debt + state and local govt. debt + corporate debt is combined, how large can it be, $100 trillion? $200 trillion? More? I don't know. But maybe Batman and Spiderman know the answer.

Now, if we listen to many legislators, media commentators and just many other people out there, they say that the US government should do more regulation of all private corporations, whether sinking or floating high up there. Really? They mean, an institution that can irresponsibly accumulate an estimated $56 trillion debt that's 4x of GDP is expected to be the "bright guys" to provide “leadership” in regulating further all private corporations, responsible or irresponsible, earning or misbehaving, private corporations?

Sorry, I really can't see the logic. But then again, maybe Batman and Spiderman can provide the mathematical and philosophical logic.

Meanwhile, got a Filipino friend here in Manila, Sam, who, when we were forming "Minimal Government" way back in 2004 for registration with SEC, commented, "The name sucks! Eeewwww! Why not 'atomize' or 'vaporize' government?"

He has migrated to the US about 2 years ago, but thanks to that capitalist invention called “yahoogroups” or other online networking and web-based mails for free, communication anywhere around the world is very easy. Sam recently wrote, “I agree that change is constant. I am no fan of big government and still have to experience this animal called minimal or no government but smart government? The term smart government is in my opinion oxymoronic. It is and remains a pipe dream.”

Keep on kicking, Sam!

(3) America's Finance Socialists

July 27, 2008

The bailout of Fannie and Freddie (F&F) in the US seems to be over. I read a good article criticizing it as clear socialist attempt at using taxpayers' money to bailout irresponsible fund managers. The author, Gerald O'Driscoll, noted that capitalism without bankruptcy is like religion without sins. So true. Corporate and individual bankruptcy is part of a free society. If people cannot go bankrupt, if they cannot become poor, then they will become irresponsible, complacent and lazy. And there will be equality in society, everyone is equally poor and miserable.

I find the author's writing style frank and funny (f&f, hehe).
Read on!

Treasury's Thieves

by Gerald P. O'Driscoll Jr.

Gerald P. O'Driscoll Jr. is a senior fellow at the Cato Institute. He was formerly vice president and economic adviser at the Federal Reserve Bank of Dallas.

This article appeared in the New York Post on July 23, 2008.

Treasury Secretary Henry Paulson's bailout plan for mortgage giants Fannie Mae and Freddie Mac should be titled "The Bondholder Relief Act of 2008": The taxpayers will be providing the relief to holders of Fannie/Freddie debt, many of whom are foreigners.

Paulson has asked Congress for a blank check from the taxpayer to pay off investors for losses already incurred and likely to be incurred in the next few years. He told Congress that, if it promises unlimited funds to backstop the lenders, Fannie and Freddie are unlikely to draw on the credit line. But the nonpartisan Congressional Budget Office estimates the most likely outcome to be a cost of $25 billion over the next two years - and more if housing deteriorates further.

He also wants authorization for Treasury to buy senior preferred shares in Fannie and Freddie. That prompted Sen. Jim Bunning (R-Ky.) to remark that he thought he'd woken up in France. Yes, socialism is alive and well in America - thanks to a Republican Treasury secretary.

Absent from Paulson's plan is any protection for taxpayers. They'll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it "casino capitalism" - taxpayers bankrolling management high rollers.

The plan doesn't ask stockholders or management to suffer for their financial indiscretions. The players who put their companies in jeopardy get to stay in charge - Paulson says he isn't looking for "scapegoats." Someone should remind him that capitalism without failure is like religion without sin.

There are now three possible outcomes:

* Congress passes the Treasury plan in its current form. That gives us the status quo on steroids - Fannie and Freddie continue to make risky bets and rack up more losses, with the taxpayer guarantee fueling the financial fiasco. This would be the worst outcome, but it's where we're headed.

* We could truly privatize the two companies: Remove the federal guarantee and force them to retrench and reform. Fannie and Freddie would have to raise private capital and downsize their bloated portfolios. They'd become just two ordinary-sized financial firms, whose balance sheets would be measured in billions, not trillions, of dollars. A long shot now, this would be the best outcome.

* Nationalize both companies and end all pretense that they're private. (Fannie was a government agency until 1968; Freddie was only chartered in 1970.) They could return to being federal guarantors and packagers of mortgages, and would hold no sizeable assets themselves. This last approach is called "honest socialism."

See also 
US Debt 1: How Bloated is the US Govt? May 08, 2006
US Debt 2: Private Sector Bailout of Government, September 26, 2008
US Debt 3: Crisis of Irresponsibility, October 13, 2008
US Debt 4: Obama and US Entitlement, November 11, 2008

Tuesday, November 11, 2008

US Debt 4: Obama and US Entitlement

Dear President-Elect Barack Obama supporters,

Belated but big congratulations!

I'm no fan of either OBama or McCain, because I’m no fan of state welfarism and “entitlement” mentality and social policy. But I believe that Obama deserved to win mainly because McCain can’t. Obama should also win because of his impressive talent in mobilizing so many donors and volunteers, across all states, social classes, race and colors. Even across nations and continents.

So I want to see him push more welfarist policies – like more socialized health care, more socialized housing, pension, etc. – by next year as it's being expected of him, and I want to see immediate and medium-term results later on.

Obama and his supporters are right. The US needs change, and they will get it. But the change they want, to my mind, is not towards the classic Jeffersonian-Reagan type of limited government and more personal responsibility, but towards French, Sweden, similar types of highly welfarist but also highly interventionist state and high taxation type of “social democracy” or related social model. A welfare state that decapacitates plenty of personal, parental and corporate responsibilities and assign more responsibility to the State is very expensive to maintain.

The Republicans under 8 years of Bush Jr., I guess, was a disaster in pursuing limited government, more personal responsibility philosophy. The slogan and some rhetoric was there but the actions were not. The $400+ billion budget deficit annual average by the Federal government alone in recent years is one proof of such lurch backwards. The current and on-going bail-outs amounting to several hundred billion dollars more will further stretch out America’s fiscal discipline, or mal-discipline.

Since the US has never been to France-Sweden type of high welfarism society, perhaps it deserves to try this path. Economic, business and political historians of the future will have a grand but hard time assessing the results 2 or 3 decades down the road later.

For the meantime, hats off to Obama and his supporters.
Yes they can!

No, no, no, this is not an endorsement of socialism and welfarism in the US. But that's where the US is headed to, I guess. The signs are there.

Expensive socialized health care promises by Obama and many American voters clapped vigorously. More money for Freddie and Fannie have been poured even after their recent financial debacle, towards continuing socialized housing, and this is not being questioned by the incoming administration. Socializing many things means socializing people's pockets and savings.

Many US voters I guess are salivating to "experience" the French and Swedish, other north-western European welfare system. It's a high expectation that will pressure Mr. Obama to heed rather than digress from.

The big challenge is for the Republicans -- how soon they can go back to the Jeffersonian-Reagan legacy because the current breed of party leaders and politicians seem to be far out from going back to this tradition. Only when the party can realize this that they can put up a more distinct alternative to the new philosophical direction of American voters and political development.

A month ago, October 06, I wrote this:

Majority of Americans Believe in Less Government

The US bail-out was granted, long live the politicians and bureaucrats. So, where will the US government get money to pay for the bail-out? From borrowings, where else.

And what will the legislators, SEC, other government bureaucracies do now that they bailed-out many companies? Regulate those companies more, what else.

For many people in Washington DC, perhaps they think many US corporations became big because of their "support and facilitation". So when some of these big corporations fail, they should not go bankrupt through their new "support and facilitation" powers.

Unfortunately, majority of the ordinary American public believe that less government is better, see the Rasmussen Report below. Their problem though, is that Ronald Reagan is dead, and no one else among the succeeding Republican leaders bothered to follow his wisdom.

May I quote here a friend, Mr. Joe Lehman, new President of Mackinac Center.
In 2004, in an Atlas-FNF conference in HK, he said,

"While the Democrats want to bring us (Americans) to socialism on a train, the Republicans want to bring us there on a bus."

Two weeks ago, I asked him if he still thinks the same, he replied,

"While the Democrats want to bring us to socialism on a plane,the Republicans want to bring us there on a train."

So back to the question, why the current Republican leadership can't see Reagan's wisdom? My guess is the usual politicians' hunger for power -- the power to give away welfare, give away bail-out, to reward personal and corporate irresponsibility.In return, the power to reduce, cut, or retain current high US taxes; the power to retain, reduce or increase government regulations and bureaucracies in business.

59% Agree With Ronald Reagan—Government Is The Problem
Friday, October 03, 2008
In his first inaugural address, President Ronald Reagan delivered a line succinctly capturing the sentiment that elected him: “Government is not the solution to our problem; government is the problem.”
A generation later, that attitude still resonates with a solid majority of Americans. A new Rasmussen Reports national telephone survey finds that 59% of voters agree with Reagan, and just 28% disagree.
Support is found across a wide range of political and demographic groups. Sixty-seven percent (67%) of men agree with Reagan, as do 52% of women. A majority of voters in all age and income groups agree.
The only demographic group to disagree with Reagan’s statement are those who identify themselves as politically liberal. Just 35% of liberals agree that government is the problem, but 46% disagree. Moderates embrace the Reagan view by a 61% to 25% margin, and conservatives are even more enthusiastic.
Republicans overwhelming embrace Reagan’s view, and 55% of unaffiliated voters agree as well. Democrats are a bit less enthusiastic, but 49% agree with Reagan while 34% disagree....

See also 
US Debt 1: How Bloated is the US Govt? May 08, 2006
US Debt 2: Private Sector Bailout of Government, September 26, 2008
US Debt 3: Crisis of Irresponsibility, October 13, 2008

Saturday, November 01, 2008

Spontaneous Market 7: Price Control is Price Dictatorship

The price of a commodity is an indicator of both its value or usefulness to society (demand side) and its availability or scarcity (supply side). Thus, when a product or service is deemed useless by the consumers, say telegram or personal pager, then its price based on the willingness to pay of the consumers, will be zero or near-zero. At that price, no service provider will supply the service. The result will be clear: telegram or paging companies will cease to exist.

On the other hand, when a commodity or service is deemed very useful to society but it is freely available, or the supply is unlimited, like air, then the price for its consumption will be zero. Luckily, the supplier of that service – nature – does not demand any monetary compensation. But there are certain places and instances where air is very thin if not absent and hence, people will have to buy a “bottle or tank” of air for them to survive, like those in scuba diving or those climbing Mt. Everest or other very tall mountains.

Price, therefore, is a beautiful mechanism that tells people and producers what products and services are most or least demanded by certain groups of consumers in a particular place in a particular time. It is necessary therefore, that pricing of commodities and services be left as freely and spontaneously as possible to allow both producers and consumers, both sellers and buyers, to adjust to each other. If the price is too high, consumers can walk away and the sellers will not sell anything and go bankrupt, even temporarily. If the price is too low, producers will not supply and consumers will buy nothing that they need and they will be the end-losers.

The idea of controlling the price of anything is born out of various motives, from humanitarian and pure public service, to political rent-seeking and pure envy. Price regulation and control is a clear proof and explicit signal that an economy is not free, that pricing of the regulated commodity is highly politicized. Price control is also a naked and blunt proof that there is price dictatorship: the price dictators decide at what price the producer and/or seller of a final product or service can sell, even though the same price dictators do not decide nor dictate the price of all inputs and intermediate products and services needed to produce that final product or service.

Thus, while the rationale or alibi given to institute price regulation and control is to “give justice to the consuming public”, there is great injustice to the same consumers when producers and/or sellers of commodities whose price has been politicized and regulated will be discouraged from producing further. When prices are controlled, producers who can possibly make some “miracle” products at sky-high and “miraculous” costs will be discouraged from innovating and producing those products. Ultimately, it is the public, the consumers, who will be the losers because they will be deprived of enjoying such revolutionary products.

Can people expect the “same” quality of a commodity after government has distorted and coerced a lower price? This does not look possible.

Producers will be discouraged from producing better quality commodities or products that require higher cost of raw materials and intermediate inputs, higher wages for higher labor and technological skills, higher office and plant rentals for cleaner production environment, higher cost of storage and packaging, etc. When the price of the above-mentioned production and marketing costs are uncontrolled, plus there are uncontrolled taxes and fees slapped on them, then the price of the finished product will be controlled later, then it is a perfect formula to discourage production of good quality commodities. Only low quality and mediocre products will be produced and sold in a politicized pricing system.

This partly explains why under normal, non-coerced, non-politicized pricing system, there are different prices for different quality products of the same generic category. For instance, there are different prices for different designs and brands of running shoes. And people love this price segmentation or price differentiation for differentiated designs, quality and packaging of products.

Here in the Philippines, price control is seldom practiced, thanks to some sanity in the minds of government regulators and bureaucrats. Unfortunately, that populist and interventionist policy is never erased in the minds of many people in government. That is why in the recently-enacted “Cheaper medicines law” or RA 9502, price control of some drugs and medicines “when national emergencies exist” was included.

This already sends a negative signal to producers of good quality and innovative medicines while sending positive signal to producers and traders of low quality, non-innovative, even counterfeit medicines. Because a “maximum price” to be set by the government through the Department of Health (DoH) and ordered by the President of the country will now be used by the second group of medicine producers and traders as a “target” price. Even low quality and non-innovative drugs can be priced near or at the level set as “maximum price” by the State.

The potential damage of the price control provision in the law, however, can be mitigated if the implementing rules and regulations (IRR) that will be issued will make it difficult and nonarbitrary to declare a “national emergency” to justify medicine price control. Thus, certain safeguards that are strict enough should be included in the IRR.

The current draft IRR prepared by the DoH somehow lists some good and strict criteria before a maximum retail price (MRP) can be declared. Among such criteria are the dozen-plus factors and inputs that contribute to the final price of medicines, like cost of research and marketing, taxes and fees, exchange rate, and so on.

But the composition of the Price Control Advisory Body or Consultative Council was not defined. This writer suggested some proposals on who should be in that body or council, mainly players from the private sector plus consumers. Since the composition of the body or council is not defined in the DoH draft IRR, it is possible that such body may be packed with lots of government officials, like people from the DoH, DTI, BFAD, DoST, DSWD, NEDA, DILG, and so on.

A definition of what constitutes “national emergency” was also not made in the section on Definition of Terms. Again, there is danger that such phrase can be abused by an abusive and corrupt DoH Secretary and President of the country someday. They could threaten the manufacturers and distributors of safe, effective, but “expensive” medicines with: “Hey, we will issue price control (or compulsory license) on your most popular and blockbuster medicines, unless you pay us…”
This is not to say that the current DoH Secretary and President are corrupt and extortionists. This law will stay with the citizens and residents of this country for the next 20 or 50 years or even longer, unless amended by another law where the price control provision is removed and abolished. The appearance of corrupt and extortionist DoH Secretaries and Presidents of the country in the next 20 or 50 years or even longer, is a big probability considering the bad governance culture and history in the country.

Hence, mechanisms should be instituted to make it difficult for future corrupt and extortionist DoH Secretaries and Presidents to impose medicine price regulation and control arbitrarily. More innovators and inventors of effective, revolutionary and safe medicines should be encouraged to come in, and not discouraged with politicized pricing and patent confiscation. With more competition among such type of medicine producers, the public will be protected with quality and affordable medicines.

* See also:
Spontaneous Market 5: Limits to Free Market? November 16, 2007
Spontaneous Market 6: Removing Pork Barrel, December 16, 2007