Wednesday, February 20, 2008

Inflation and CBs 2: Panama has no Central Bank

One of the hallmarks of HK's free market economy is that its monetary authority (or central bank or federal reserve) does not print the national currency. The HK dollar is printed not by its monetary authority, but by private banks -- HSBC, Citibank i think, and one more bank. The monetary authority just function as it is -- to set monetary policy (levels of interest rate, money supply, exchange rate and international reserves, etc.).

But there's one economy that looks more free marketer than HK in monetary policy -- Panama. It has no central bank or monetary authority. No national currency, they're using the US$. And in some big infrastructure projects, like expanding the capacity of Panama Canal, the government will raise not a single tax rate, but rather use revenues from the canal to do the job.

To see more about this, see Andrew Work's article, "Panama -- the HK of Latin America?"

In earlier short articles, I have argued that central banks are shrinkable if not abolishable, if their main concern is "inflation targetting". High inflation rate, and high prices of commodities and services in an economy, is mainly a result of trade protectionism and less mobility of commodities around the world. When the price of some goods are high in country A when such goods are wide available elsewhere, that country's protectionism is the culprit. Conversely, when the price of other goods in that same country A are dirt cheap when these goods are expensive elsewhere, again that country's or other countries' protectionism is the culprit.

The level of money supply in the economy is not much a factor, though loose money supply can push prices up (ie, too much money chasing too few goods and services). But it's those central-planning thinking central bank bureaucrats that manipulate money supply and interest rate levels. And their manipulation can distort the price signal in an economy if market players are better left on their own to respond to changes in consumer demand and producer supply.

When central bank officials or bureaucrats say thay want to "cool off" an "over-heating" economy, they mean they want to control "over-spending" and high borrowings by the people because this can lead to high inflation. So what they usually do, is they raise interest rates -- to encourage savings and discourage high spending and borrowings. Then they say that they have controlled high inflation.

I am not in favor of this kind of intervention. When people have lots of money to spend, let them do so; someone's consumption is somebody else's production and services.

* See also: Inflation and CBs 1: Central Banks Can Be Anti-Globalists, June 29, 2006

Tuesday, February 12, 2008

CSOs and State 3: Poverty and Public Education

In the 70s to the 80s, there was a famous British rock band called “Supertramp” and one of their cool and hit songs was “The Logical Song”. A part of it goes like this:

Now watch what you say or they’ll be calling you a radical,
Liberal, fanatical, criminal.
Won’t you sign up your name, we’d like to feel you’re
Acceptable, respectable, presentable, a vegetable!

The Philippines is in a continuing grip of political instability as more cases of corruption charges are being investigated involving a number of top government officials who contracted big amount of taxpayers’ money for projects to “fight poverty” and “improve governance”. These are two seemingly “holy” goals that can justify high and multiple taxes and fees. After all, who doesn’t want to see an “end to poverty”?

But there are many shades of poverty and reasons for poverty. Among the quick ones that I can think of are:

1. Acts of nature – whole villages and farmlands wiped out by strong typhoon and landslides, or strong earthquakes and tsunami, or volcanic eruption and lava/lahar flows, etc. These are understandable causes of poverty and the victims really need some government support, assuming that they will seek it.

2. Acts of men – high and multiple taxation and corruption, thick bureaucracies that slow down if not kill entrepreneurship and job creation, robbery, killings, wars. These are often government-created inefficiencies that can lead to mass poverty..

3. Acts of personal irresponsibility – people who don't want to work; or work little and consume plenty or expensively; or work hard but also drink/gamble/spend hard; or those that get involved in frequent troubles; etc. Some of government’s welfare programs help encourage a culture of complacency and irresponsibility.

Any or all of these striking you will ensure that you will become a “logical poor” or you “logically become poor”. But if poverty is caused by personal irresponsibility, then we
should not “fight poverty” and instead, allow misery. Because it is not fair when governments, including foreign aid bureaucrats, will confiscate (or justify the confiscation of) a big portion of our income and savings to subsidize people who don't even bother look for a job or do not know how to save for the rainy days.

A friend once asked me why I could be so “cold and heartless” in saying these things. Well, it’s borne out of some personal observations. For instance, in a rice farming village that I frequently visit, I have heard and seen some farmers who died poor and miserable. These are industrious guys who work 6-7 days a week, but they also drink 6-7 nights a week. When their intestine or kidney or lung or other internal organ gave way, they have little or no savings to tide them over. If projected medical expenses are big, any support by relatives and friends will not be enough.

And I don’t know if the “poverty fighters” in governments and foreign aid institutions take into account poverty due to personal irresponsibility. If they cannot realize the tax burden of the bureaucracies that they work with and the economic distortions created by their intervention, then I doubt that said poverty fighters will really be successful in their avowed mission.

A related note I wrote late last year,

Why Education Should be Parental Responsibility, Not Government Responsibility

November 19, 2007

When my wife was still pregnant, she and her 2 friends who were also pregnant (they all gave birth on different days of October 2006) were already discussing the kind of early training or schooling they will give their kids when their child is 2 years old, 3 years old, and so on. And in these 3 mothers’ minds, they sometimes have different preferences or plans for their respective children at a young age, much more when the kids reach college level.

Which brings us to the fact that when given the choice and resources, parents will have varying plans for their children. For instance, aside from the basic skills of reading-writing-math, some parents would want their elementary-level kids focus more on arts, music and dancing; others would want their kids to be good in European or Asian (Mandarin or Japanese or Korean) language; others would want their kids to be good in science and math; others would want their kids to be good in Catholic (or born-again, or Islamic or Protestant or Buddhist) virtues and religion; others would want their kids to be good in household care like cooking and home care; others would want their kids to be good in soccer or basketball, ballet or swimming, and so on.

Can government-sponsored public education respond to dozen-plus different needs by parents, say on a single municipality alone? I really doubt it.Government only gives uniform and general education. And when things are made uniform, what usually follows is mediocrity. Because uniformity discourages excellence, explicitly or implicitly; it just make things and people go "uniform, equalized and generalized".

The only way to cater to these varying needs and priorities by parents is to have very diverse educational system, and only private schools that cater to the needs and whims of parents can respond to this. Those schools that fail to respond to parental needs will close shop, while those schools who do will become big.

Privatization of education (ie, abolition of public education system at all levels) is a long-term vision. And this “devolution” of responsibility from the state to the parents, the individuals, should be complemented with the abolition of certain taxes and government fees, those forced confiscation of income and savings of parents, so that the latter will have more disposable income to spend for their children’s education and other household needs.

For the meantime, we can start with the privatization of all state universities and colleges including the University of the Philippines (UP), and allow the state to run public elementary and secondary education.

What about the poor? Parents who are responsible will never run out of opportunities to improve their lives and the future of their children. Parents who are irresponsible and would rather spend their time drinking and gambling, and discussing how much subsidies they expect from government, will go poor, even starve. They deserve this because they chose this. But what about their children?

Humanity is filled with endless examples of charity. Pure, voluntary charity that requires zero taxation and zero political grandstanding. Their support to fellowmen, especially poor children and the aged, the physically and mentally handicapped, the victims of natural disasters, is endless. There are hundreds of civic and service organizations, church organizations, private enterprises and foundations, even sports associations, who are more than willing to provide charitable work to their fellowmen who have the dignity of showing ambition and aspiration to improve their lives in the future.


See also:

Thursday, February 07, 2008

Taxes and Hypertension: How to reduce medicine prices

Sir Isaac Newton’s 3rd law of motion states that for every action, there is an equal and opposite reaction. When government intervenes to reduce the price of something, it imposes taxes or fees/ charges to finance whatever price subsidy and the salaries and perks of personnel who will do the price and income redistribution. Those taxes and fees raise the price of those things and services that government says it wants the price to go down. Sort of unintended consequence. And this affirms Newston’s 3rd law of motion.

In the on-going discussions and debates about “quality affordable medicines” or “cheaper medicines” bill, to the point of developing or aiding hypertension to some actors or players or would-be interventionists, various factors suspected of contributing to the high price of medicines have been identified and diagnosed with more government intervention: amendment of the law on patent system, price regulation and control, parallel importation and disrespect patent rights, “generics only” prescription by doctors. It is notable that government intervention itself – those high and multiple taxes and fees on medicines and medical products, bureaucratic regulations, attempts at price control – has never been identified as among the suspects. Why?

Blaming the multinational corporations, especially those in the petroleum, pharmaceutical and transportation sectors is always a convenient excuse for policy makers and implementers and their allied pressure groups. Thus, legislators and politicians can always impose various taxes (import tax, value added tax, documentary stamp tax, patent tax, other regulatory steps and fees) on those commodities and services, then blame the producers themselves, especially if they are multinationals.

People aspiring cheaper price of anything – cellphones, house, car, medicine, hospital stay, shoes, and so on – is a perfectly rational behavior. The assumption is that people should get good quality and safe products. After all, all fake, imitation and dangerous products are sold cheap compared to their original counterparts so that they can easily be sold. Producers and sellers are happy, buyers are happy, except when some of them will develop adverse effects if not die later, in the case of those taking counterfeit medicines.

One time-proven mechanism to reduce the price of something is to have as many producers and innovators of good quality products and let them compete with each other. And don’t impose high and too many taxes on the players so that they can compete more fairly. Some players will expand while others will fail. That’s the sad but necessary result when informed consumers make their decisions whom to patronize and whom to evade. Unfortunately, what the two versions of “affordable/cheaper medicines” bills, is to discourage entry of innovator companies and have more generics companies that do not engage in very expensive and time-consuming R&D and clinical trials. In addition, importers and distributors of locally-patented drugs other than the patentees are encouraged, under the “parallel importation” scheme.

One question that can be asked under this scheme is this: Supposing a patient develops bad allergies, if not died, after taking the imported medicines (maybe it’s a fake or mislabeled or mis-stored or mishandled that reduced or negated their effectiveness) from abroad by non-patentees, who will be accountable? (a) The physician who gave the prescription, or (b) the importer who brought the medicines, or (c) the drug manufacturer abroad, or (d) the local patentee who sells the same drugs domestically, or (e) the local drug store that stored and sold the medicine, or (f) the government which allowed and encouraged the entire scheme?

Unfortunately, the answer of who could be accountable could not be determined from both the Senate and House versions. What the two bills intend to achieve is to have cheap/affordable medicines at all cost. And at no cost to the government – ie, government tax collections should never be reduced because there are billions of pesos of pork barrel projects to finance every year.

So why can’t we start with drastically reducing if not abolishing the taxes and other regulatory fees imposed on medicines? Then encourage the entry of more innovator companies into the country, or the importation of those medicines at zero import tax and zero trade barriers by their local patentees who should be the sole accountable entity to the patients should they experience any adverse reactions later.