BWorld 150, Rising state-inspired murders and budget 2018

* This is my article in BusinessWorld last August 25, 2017.

The second week of August 2017 would possibly be the bloodiest in the drugs war of the Duterte administration. More than 80 people were murdered mostly by the Philippine National Police (PNP) in various drugs-raid and victims were described as “nanlaban eh (they fought the police).”

Perhaps 99% of all countries and governments in the world have their own “drugs war,” like the Philippines. Punishment range from imprisonment to death penalty. Many of our neighbors in the ASEAN have death penalty for drug crimes like Indonesia, Malaysia, and Singapore.

The “war on drugs” therefore is not a unique program or policy of the Philippine government, the Duterte administration especially.

What makes the Duterte drugs war unique is the absence of due process for poor victims.

True, there is due process for very rich drug suspects like those implicated in the P6.4-billion drugs smuggled from China and passed through the Bureau of Customs. Not one of the personalities implicated including the President’s son, Davao City Vice-Mayor Paulo Duterte, were shot or murdered. They enjoyed due process of investigations, filing of affidavits, dismissal of allegations, if proof is weak.

It is the poor or several middle class or rich but not-politically connected people who get murdered on mere suspicions of being drug users or pushers. Of the roughly 9,000 estimated casualties in the Duterte drugs war, majority are labeled by the PNP as death under investigation (DUIs). However, for those who were killed outright by the PNP because they supposedly resisted arrest, no police investigation is expected.

These are state-inspired murders. The President himself is urging the police to have more deaths for drug suspects, warning the Commission on Human Rights (CHR) and other human rights advocates that he will order the police to shoot them.

The continuing murders from mid-2016 — when the Duterte administration was inaugurated — to the present has coincided with the big increase in the government budget, P667 billion in 2017 and P417 billion in 2018. I checked the PNP’s budget and I wondered why its allotment for this year fell by P17B despite the increase in personnel from 184,000 to 194,000 during the same period. What explains this discrepancy?

In interviews by various media (local and foreign) and human rights groups of self-confessed but anonymous murderers, the murderers claimed that they get cash from the PNP for each murdered victim, usually previous or current drug users or pushers but people who are generally poor. Remember also the testimonies at the Senate of several ex-Davao policemen (Lascañas, et al.) who claimed they got paid by then Davao City Mayor Duterte for the murders they made.

If this claim is true — and I hope it is not — where would the government get extra resources given the decline in the PNP budget?

I checked the other items of the proposed 2018 budget and there were five big items that stand out. They get P566B of the P667B total increase in 2017 budget, and P260B of the P417B increase in 2018 budget (see table).

If the claims of the anonymous hired murderers, of Lascañas et al. are true, then the extra resources may be sourced from “Miscellaneous personnel benefits fund” and from “Gratuity fund.” But since this is only surface data, this is hard to prove.

On another note, the Economic Freedom Network (EFN) Asia will hold its annual meeting and conference this coming Sept. 11-12 in Kuala Lumpur, Malaysia. While the focus is on economic freedom and trade, political freedom will also be tackled among network members because there are instances of decreasing political freedom and rising dictatorial trends in the region. These include the continued rule of military junta in Thailand and the rise of murders in the Duterte government.

Economic freedom cannot prosper well in an environment of threatened political freedom and decline in the rule of law. Rise in public health care spending to save the lives of sick and weak people becomes a farce when the same government is engaged in state-inspired murders by the thousands.

Bienvenido Oplas, Jr. is the head of Minimal Government Thinkers, a member of EFN Asia.
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See also:

BWorld 147, Sugar tax and health alarmism, August 15, 2017
BWorld 148, Energy Trilemma Index 2016, September 16, 2017 

BWorld 149, Free tuition and irresponsibility, September 17, 2017

BWorld 149, Free tuition and irresponsibility

* This is my article in BusinessWorld last August 17, 2017.

There are many reasons why the new law providing for free tuition for all students — rich and poor alike — in all state universities and colleges (SUCs) is wrong, but for this piece, we will limit them to only four arguments.

One, the government has no extra cash to cover extra spending on these already substantial expenditures. This means the deficit — which happens when revenues are lower than spending — that will require new borrowings will become bigger. The projected budget deficit rose from P353 billion in 2016 (during the Aquino government) and projected to rise to P482B this year to P524B in 2018, P576B in 2019 (see Table 1).

Note that the deficit is based on the cash budget, “the actual deposits and withdrawals of cash of national government agencies from the Bureau of Treasury (BTR) for payment of current and previous year’s obligations.”

If the obligation budget, “the proposed amount of commitments that the government may incur or enter into for the delivery of goods and services in a fiscal year” is considered, the deficit will be much bigger: P923B in 2017, P927B in 2018 and P968B in 2019. The law calling for free tuition in SUCs — enacted in August 2017 while the proposed 2018 budget was submitted to Congress in July 2017 — would fall in the obligation budget.

Two, spending in public elementary and secondary education is still limited and it is unwise to further expand spending in public tertiary education.

Numbers below show that out of the 16 countries and economies (10 in the ASEAN, six in Northeast Asia), hiring of teachers in the Philippines was 2nd lowest in primary/elementary education, second only to Cambodia. In secondary education, Philippines was 3rd lowest, next to Cambodia and Myanmar (see Table 2).

Three, students who are absolutely destitute do not reach university level. They drop out after elementary or after high school and start working, especially now with the K+12 years of pre-college schooling. So those who reach universities are lower middle class to rich students.

If one sees the cars and SUVs in the University of the Philippines and many other SUCs, one will wonder why these students are getting subsidies. Budget Sec. Ben Diokno even oppose this new law and said that this welfarist program alone will cost P100B/year — on top of existing deficit and high spending.

Four, people’s values will be corrupted because personal and parental responsibility will be assumed by the state. As a result, children’s education from elementary to university level will no longer be the responsibility of their parents but of the state.

Health care is already largely a state responsibility. Soon more parents will be drinking or partying or gambling more often because their children’s education will no longer be their responsibility.

Before you know it, proponents and supporters of this lousy free tuition law will demand that each student in SUCs should be given free laptops and free Internet access. Or that the monthly water and electricity bills of the poor be paid for by the state as well.

The number of free riders, irresponsible people, and tax-hungry bureaucrats and consultants, welfare-dependents and people pretending-to-be-poor will increase.

For any problem, their “solution” is more government, more “tax-the-rich” schemes. Then people will complain of massive wastage, inefficiency, and plunder in government. As government expands, stupidity and irrationality expands.

There are several remedial measures about this new law. One is that it can be questioned and rendered void at the Supreme Court for being anti-taxpayers, anti-fiscal responsibility.

Second, it can be replaced with a new law that will void or drastically revise it, like no free tuition for rich students in SUCs while extending limited subsidies to poor students in private universities.

Three, taxpayers should remember the main authors in the House and Senate and penalize them in the next round of elections.

As someone said: “A government that’s big enough to give you everything you want is also big enough to take everything you’ve got.”

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See also:
BWorld 146, Mining and industrialization in Duterte SONA 2017, August 12, 2017 
BWorld 147, Sugar tax and health alarmism, August 15, 2017 
BWorld 148, Energy Trilemma Index 2016, September 16, 2017

Fiscal Irresponsibility 29, On the so-called DBM "Underspending" in 2014

A physician friend posted this report last week. Many of his friends (except me of course) blasted the "underspending". The report says, 

Abad attributed the sluggish spending mainly to the "structural weaknesses within national government agencies and government owned-or-controlled corporations (GOCCS), (42 percent); peculiar problems of small agencies (30 percent); savings generated from lower interest payments and net lending (14 percent); others reasons beyond the control of the agencies (12 percent); refocusing of efforts to Yolanda rehabilitation and recovery (1 percent); and, unutilized funds due to the Supreme Court decision on the Priority Development Assistance Fund and the Disbursement Acceleration program (DAP), (1 percent).

The budget for 2014 was P2.4 trillion.

Among the unreleased appropriations for agencies in 2014 were for major departments such as Department of Education (P2.2 billion); Department of Public Works and Highways (P26.3 billion); Department of Agriculture (P2.6 billion); Department of Agrarian Reform (P5.8 billion); and Department of Environment and Natural Resources (P1.9 billion).

The headline of course is wrong. No administration in the country since Marcos (then Cory, FV Ramos, Erap, Gloria, PNoy) knows how to "underspend", to have fiscal surplus during period of no crisis and pay previous debts incurred during crisis or financial turmoil years. Each year, government over-spends, expenditures > revenues, always, resulting in annual budget deficit and annual borrowings. Here is the annual budget deficit, 2000-2014. Average around P180 B a year.

source: http://www.treasury.gov.ph/.../2015/03/yr_cor_fiscal.pdf

With annual deficit, there is annual and endless borrowings. The PH public or government debt stock keeps rising by an average of P192 B a year from 2004-2014, with or without a crisis. Meaning the PH government, regardless of administrations, just keeps the spend-spend-spend, borrow-borrow-borrow policy. 

Source: Bureau of Treasury.

Governments must learn to underspend, to have fiscal surplus during non-crisis years and pay back some old debts. 

Another physician friend commented that the DOF and DBM "do not want to invest in more health human resource in the face of a growing population. The primary care coaltion is lobbying for more Health human resource, with decent and attractive compensation, and the government answers with a small govt paradigm, cutbacks and contractualization disguised as "rationalization ".imagine what we could have done with P303 billion in advancing universal health care."

Hmmm, "a small govt paradigm, cutbacks and contractualization", he could be referring to Hong Kong. The PH is definitely among the big government models. Combine the cost of national govt + local govt + government corporations (GOCCs, like SSS, GSIS, PhilHealth, PagIBIG) + cost of compliance of various regulations, the cost is big.

Besides, P192 billion a year net increase in public debt stock with or without a crisis is not enough? How much do they want, P300 B year, P500 B a year, increases in public debt?

The "underspending" of P303 billion in 2014 was not directly used to pay our public debt, but rather, it represented money that should have been borrowed and the borrowing by that amount did not materialize. 

It is understandable that the health sector will lobby to use that "underspent" P303 billion for more  health spending, like hiring more health human resource as "we don't even have 1 midwife or nurse per barangay."

One problem is that DepEd cries "we need more money", DA and DAR cry, "we need more money", DILG and PNP cry, "we need more money", DPWH and DOTC cry "we need more money", etc.

Another comment suggested that "Underspending is not a sign of good governance. It's a sign of bad budgeting and neglect of duty."

This is one clear proof that it is not only the government officials and legislators who love fiscal irresponsibility, but many in the public too, including many professionals. For them, government annual over-spending, living beyond its means, endless borrowings, is a virtue so long as the money goes to their favorite sector/s.

Consider this: A person who earns P100k a month but spends P110k a month, with or without health emergencies and borrows P10K a month on average will be called "mayabang", "maluho", "magarbo", "hindi marunong magtipid", "palautang", other unkind adjectives.

But when a government does the same, it is ok, it is fine, it is good governance. There is double standard and double talk here. In this example, that irresponsible individual can finance his endless borrowings by selling some of his assets and properties, or resort to stealing from other people, then pay his debts. An irresponsible government can finance its endless borrowings also through large-scale privatization of its assets and corporations, or resort also to stealing -- from the pockets of future taxpayers. Whether they steal from current or future people, it is a criminal act.

Finally, about this "more public spending in healthcare means better health outcome" hypothesis or theory. I am really curious about the case of Manila city. It has a total of 10 government hospitals -- 6 city hospitals, 3 DOH hospitals, and 1 UP PGH. Per sq. km. of land, it has the most number of government hospitals and hence, has the most number of government doctors, nurses and other health professionals in the country.

In addition, it has barangay health centers + clinic within city hall + private hospitals giving subsidized treatment to indigent residents of the city.

Is there an existing study/ies showing that the residents of Manila City are the healthiest people in the PH? I doubt it, but in case there is one, I want to see that paper.

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See also: 

Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011 

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2011 

Fiscal Irresponsibility 27: PH's P2.6 Trillion 2015 Budget, June 10, 2014 

Fiscal Irresponsibility 28: Greece's Public Debt and Populism, February 09, 2015

Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012

Fat Free Econ 39: P57,000 Public Debt Per Filipino, February 25, 2013 

Pork Barrel 10: Bloated Budget, Wasteful Government, June 02, 2014

Fiscal Irresponsibility 27: PH's P2.6 Trillion 2015 Budget

The Department of Budget and Management (DBM) has announced that the projected budget of the Philippine government next year will be around P2.6 trillion ($59.63 billion at P43.60/US$) or more than P300 billion than this year's P2.26 trillion budget. That means P2.6 trillion of taxes, fees and borrowings.

A P3 trillion budget for 2016, and P3 trillion taxes, fees and borrowings, is just around the corner. Government, national and local, keeps expanding. On years of no crisis or emergencies, a responsible government should have fiscal surplus, pay many loans and reduce the public debt, currently rising by around P400 B a year. In post-emergencies year, running a budget deficit and resume borrowings is understandable. But the government just keeps expanding and borrowing, with or without a crisis or emergencies.

While politicians and legislators, and those in the Executive branch are directly to blame for endless expansion of government, the public also share the guilt. For any problem they see, they think that more government is the solution. They seek endless government subsidies, endless government new regulations.

People should be careful what they wish for or request from the government, especially new legislations. Almost ALL government subsidy programs created by legislation are forever, they never go away as all laws here have no sunset (timetable) provisions. All new regulations create new or expand existing bureaucracies that exist forever. And the BIR will keep inventing new harassments, new requirements, to doctors, entrepreneurs, even those in informal sector, so that it can raise more tax revenues. We already saw it in the BIR-doctors love-hate affair. Expect the worst to come in the coming years.

Another disappointment for the lefties too. Big money means big temptation to steal, or at least to waste. Big expectations often mean big disappointments. 2.6 trillion of disappointment.

I am curious how much will be the interest payment alone for 2015. Public debt stock is rising by around P300 B a year, with or without a crisis or emergencies.

source: Bureau of Treasury, http://www.treasury.gov.ph/ 

Palpak din ang campaign ng Freedom from Debt Coalition (FDC). You will never have "freedom from debt" if there is no "freedom from (endless) borrowings" mentality and policy. If new welfare programs (and bureaucracies)are invented without phasing out or abolishing old and ineffective welfare programs (and bureaucracies), endless borrowings is the result. 100 percent.

Government should learn to live within its means. If projected revenues next year are P2.3 trillion, then the budget should be at that level only, not P2.6 trillion then borrow P300 billion. Government should stop borrowing even for one year. If new welfare programs have to be invented, then some old welfare programs that do not seem to work should be shrank, if not discontinued. The national government should focus on improving the institutions for rule of law implementation. The poor appreciate fast and credible delivery of justice as much as the rich. 

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A physician friend engaged me in a private discussion. His ideas are useful, I am posting our short discussion here.

Him: Sir Nonoy, we cannot continue living beyond our means. Either cut the budget, impose new taxes, cut losses due to inefficiencies and corruption or a combination of the three.

Me: Yes, that was my point. The Executive, as tolerated by the Legislative branch courtesy of pork barrel, keeps living beyond its means. Too much fiscal irresponsibility. This makes tax cut proposals become more difficult. Too many spending.

Him: well sir, there are those arguing that if government spending contracts without the private sector coming in, our economic growth will be compromised. i would prefer living within our means, whether as individuals, families, communities, or as a nation. We are lucky interest rates are down. but what if it shoots up? just the interest payments will kill us hehe.

Me: PH government interest payment alone is P330 B a year. And it should rise to P350 B yearly soon. That is killing certain sectors of the PH economy already.

If government reduces spending, it reduces heavy taxation and borrowings too, more money in the pockets of people and firms, they can expand and hire more people. If people have stable jobs, what is the need for rising government spending, except to fatten the salaries and perks of those in government.

Him: although sir there will be expenditures for certain social needs which the  private sector cannot or will not spend for (i.e. national defence). but i agree that we must spend within our means

Me: Actually defense spending here is verrryyy bloated. The big threat to the people is internal -- criminals, thieves, rapists, murderers, etc. Police function, not military function. That is why private security agencies are everywhere. Peace and order has been privatized, what a horrible government failure.

Him: regarding defense spending, Im no expert but our AFP does need upgrading. hehe. also our PNP.

Me: AFP modernization can be funded by privatizing Camp Aguinaldo, all of the proceeds should go to AFP fund, so there will be no need for new taxes, new borrowings. AFP can move to Cavite or Bataan. Their function or mandate is external defense, not internal.

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See also: 
Fiscal irresponsibility 12: More on US debt default, July 28, 2011

Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011 

Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2011 

Business 360 3: Fiscal Cliff and Government Irresponsibility, January 23, 2013
Pork Barrel 9: Are PH Government Institutions Ready for Cleansing?, April 09, 2014
Pork Barrel 10: Bloated Budget, Wasteful Government, June 02, 2014

Fat-Free Econ 24: Government Fat and Public Expectations

* This is my article yesterday in TV5's news portal,
http://www.interaksyon.com/business/43681/fat-free-economics-trimming-govt-fat-requires-changing-publics-expectations
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One of the major perks in government is that one can always live beyond one’s means, to spend larger than projected revenues or income, then just borrow like crazy as lenders are more than willing to lend because government has one huge pool of collateral who are sure to pay a stockpiling debt today and in the future: the taxpayers.

This moral hazard– a person, an institution, etc. can become complacent and irresponsible because someone else is going to pay for whatever mistake in decision, action or inaction made – is perhaps the single biggest explanation why so many governments around the world, rich and poor alike, are heavily indebted. The incumbent politicians shower various forms of subsidies and welfare programs to certain blocks of voters in order to be elected or reelected, and let the future administrations worry where to get the money for the over-spending and over-borrowing made in the past and the present.

The Philippine government suffers from this habit of living beyond one’s means, with or without an economic turmoil, with or without natural calamities, with or without an election. And thus, borrowing has become the rule instead of an exception.

High public debt means high interest payment for those liabilities. From 2010 to 2012, interest payment was almost P300 billion a year on average and comprised nearly one-fifth of the total national budget on average. Next year, some P334 billion will go to interest payment alone, especially for domestic debt.

We often hear that the country’s fiscal condition has stabilized, resulting in some credit ratings upgrade. The Philippine government, or companies which are based in the country, can borrow domestically or internationally and enjoy lower interest rates compared to a few years ago.
While there is truth to this statement, the fact remains that the government cannot avoid drastically cutting the need to borrow to finance a budget deficit, or stop borrowing even for one year. And while new foreign debt securities carry lower interest rates compared to those made a few years ago, the overall interest payment remains huge, if not rising. 

In the table below, only those debt securities that charge $50 million a year or higher are included,  and these items were all contracted for budgetary support or financing the deficit. Multilateral and bilateral loans like from entities like the ADB, WB and JICA, are mainly project loans.

While the fiscal condition of the Philippine government is not as severe as those in some European economies like Greece, Portugal and Spain, this is not an excuse for not doing certain reforms like drastically cutting borrowing and spending to what projected revenues can finance and sustain.

There are two important revenue measures that can be realized in the short term, meaning within one or two years, and can be used to cut borrowing and the public debt and hence, annual interest payments. These are (a) revenues from the hike in excise tax of “sin products” like tobacco and alcohol, and (b) privatization of the Philippine Amusement and Gaming Corporation.

Cutting the public debt by say P200 billion, at say 8 percent interest rate, would mean an annual savings of P16 billion. This savings can be used to finance certain programs that would require new borrowings. Unfortunately, the projected revenues from the proposed sin tax hike has already been earmarked or pre-allocated to finance universal health care of PhilHealth and the Department of Health. In the meantime, Pagcor’s privatization is not moving fast enough.

If these measures with huge potential revenues are not passed into law, then another alternative is simply to cut spending, especially in departments and agencies that have no clear contribution to improving the country’s productivity like the Department of National Defense. Or a cut in the budget of public tertiary education, the state universities and colleges and the corruption-prone Department of Public Works and Highways.

Governments will keep expanding along with its coercive powers if people do not assume more personal and parental/guardian responsibility, more civil society roles, in running their own lives, their households and communities.  Public spending and indebtedness will keep rising if it is deemed government’s “responsibility” to purchase small items like condoms and pills, and medicines and healthcare for adults who abuse their own body with over-drinking, over-smoking or over-eating.

Cutting the fat and pork in government spending can start by cutting the unnecessary expectations of the public on the roles and functions of government. 
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See also:
Fat-Free Econ 17: SONA, the Budget and Debt, July 22, 2012
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012

Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012
Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes, June 06, 2012
Fiscal Irresponsibility 26: On the $1 B Philippine Loan to the IMF, June 27, 2012

Fiscal irresponsibility 11: US debt default talks

(This is my article yesterday in thelobbyist.biz with original title, Fiscal irresponsibility and debt default)

The term “debt default” suddenly has become a common term in public discourse in the US. The biggest economy in the world, the strongest military power in the world, and among the beacons of the “rule of law” in the world, is entertaining the idea of violating the rule of law, by defaulting on its huge public debt payment. What happened?

It is actually common sense and will not take a degree in astrophysics or financial economics to understand that living beyond one’s means will bring someone to big trouble someday. By spending larger than one’s income or revenue, regularly and consistently, then one’s debt will simply pile up year after year. And that is what has happened to the US and so many other countries in the world now, rich and poor alike.

I will limit my words and show these charts and a table below to speak for themselves. These will help readers make their own conclusions too.

source: The Economist, Buy now, pay later, April 13th 2011 issue.

The US’ budget deficit (expenditures larger than revenues) from 2010 to 2012 is projected to average around 9 percent of GDP. This is a very high figure. The ballpark “sustainable” level is 3 percent of GDP or lower. I discussed this chart earlier in ATR and the soul of limited government.

Fiscal irresponsibility, of public spending larger than taxes and other revenues, has been around since the 70s or earlier. There was a short period of fiscal surplus in the last decade (mainly during Pres. Bill Clinton’s term) but were erased immediately. Source of this chart and below is The Economist, I just forgot to note the issue date.

While the US war in Afghanistan, Iraq and elsewhere, then the huge corporate bail-outs in 2009-2010 have contributed a large part for the big jump in public spending in recent years, it will be the expensive welfare and entitlement programs plus high interest payment that will tear down the American taxpayers’ and government’s pockets in the coming years and decades.

Recently, it was Ireland and Greece that experienced deep fiscal crisis. Soon, Portugal, Spain, Italy, UK and other European countries, and the US, will follow suit. Note the 14 countries above which have gross debt of 77 percent of GDP or higher in 2010.

The US, or any other highly indebted economies around the world, should NOT default on their debt payment. The current high debt payment is penalty for past wastes and excesses. It should be a painful reminder that fiscal irresponsibility is wrong.

What the US and other highly indebted countries should DO, is to cut spending, from the size of their bureaucracy to military spending to expensive entitlements to foreign aid. If revenues are not sufficient to cover whatever bleeding heart programs, then that’s it. Governments should learn to live within their means.
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Five years ago, I wrote this:

How Bloated is the US Government?

MAY 08, 2006

The US has the largest economy in the world.
But it also is the most indebted country in the world.
And it has the biggest government spending, the biggest bureaucracy, in the world.
Just how big are the spending, and the taxes and borrowings to keep those huge expenditures?

Lucky that I checked the Mackinac website, and I saw Mr. Mark Brandly's article, "How big is Bush' big government?". For brevity purposes, I removed certain paragraphs; if interested to see the whole paper, please see http://www.mackinac.org/article.aspx?ID=7689

Below are the relevant numbers from Mr. Brandly's paper:

* Federal spending alone in fiscal year 2006 is expected to be over $2.7 trillion, which means the federal government spends $7.4 billion a day or $5.1 million in every minute of the year. This is 815 times the level of federal spending in 1930.

* This $2.7 trillion in federal spending breaks down to $9,000 per capita or more than $36,000 for the average family of four. If we add in all state and local spending, then total government depredations (a term Murray Rothbard used to describe the greater of government spending and government receipts) are currently over $4.4 trillion or about $14,700 per person annually.
* A significant portion of this spending is being financed with government borrowing. In 1930, the per capita debt load was $140 per person. The current federal total debt level is $8.4 trillion, which works out to around $28,000 per person. In short, the per capita debt load is 200 times larger than it was in 1930. Adjusting for inflation, the real debt per capita is still over 16 times more than it was in 1930.

* Federal government debt increased $553 billion in fiscal year 2005 alone. That's more than $1.5 billion of additional debt per day and over $1 million of borrowing per minute for every minute of the year. The interest on the debt in 2005 was $352 billion or more than $1,100 for every man, woman and child in the country. These interest payments are roughly equal to 37 percent of federal income tax revenues.

* Much of this debt is owed to the Federal Reserve. U.S. taxpayers are on the hook for $758 billion of government securities that are held by the Fed. So, on average, every person in the country owes the Fed about $2,500.

* One way to see the harm of government intervention is to realize its effects on our standard of living. The depredations of the state reduce the incentives to be productive, destroy our capital base and have a negative effect on economic growth. From 1959 to 2005, adjusting the numbers using the implicit price deflator, real Gross Domestic Product increased an average of 3.37 percent annually.

* Consider the possibility that government interventions reduced real economic growth 1 percent annually during this time. If there had been an additional 1 percent per year economic growth since 1959, then real GDP would currently be 55 percent higher than it is. The 2005 GDP of $12.5 billion would have been $19.3 billion. The median family income is estimated to be $44,389. A proportionate increase in this statistic results in a median income of $68,800.

* In this scenario, a worker with a salary of $44,389 who is losing 35 percent of his salary to taxes has a tax liability of $15,536. After paying the various types of taxes he gets to keep only $28,853 of his salary. With the extra 1 percent growth per year since 1959, if that worker represented the average, his gross salary would be $68,800 and he would get to keep all of it.

* It is conceivable that the $4.4 trillion of annual depredations could have caused more than 1 percent annual damage to our economic growth since 1959. What are the implications of a 2 percent negative impact on GDP? If the absence of interventions had added an additional 2 percent annual growth, this would have resulted in 141 percent more output today. The 2005 GDP would have been over $30 trillion and the median family income would now be $107,000. The worker described above with the $44,389 gross salary and the $28,850 of after tax pay, would have an income of $107,000. The depredations have reduced his net income by 73 percent.

* Those of us making the case for liberty have logic, history and morality on our side. Government intervention is immoral and should be stopped for that reason alone. However, the economic costs of the intervention are also important. Part of the appeal of freedom is that it leads to tremendously higher standards of living and these numbers show that government interventions that cause seemingly small amounts of harm, over time, impoverish a society.
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See also:
Part 10, Rich countries' public debt, April 27, 2011
Part 9, ATR and the soul of limited government, April 26, 2011

China Watch 13: More on the Spratlys/SCS Conflict

These days, there are lots of media and political noise in the country about the Spratlys and "China bullying" issue. Two of my friends in facebook posted the Inquirer report today, China to neighbors: Keep out of Spratlys; Stop search for oil, sans permission, says envoy in their wall. I made this quick comment in their respective walls:

China is now the world's biggest lender country, the US now the world's most indebted country. China reserves of US treasury notes (ie, public debt) alone is at least $1 trillion. Who wants war in this country, because of those far away islands and islets? HK and Singapore are laughing at the Philippines, possibly at other claimant countries aside from China. Singapore land area is almost 1/2 that of Basilan island, and Singapore GDP size is larger than the Philippines, and possibly 100x that of Basilan provincial GDP. And here is a poor country Pinas who cannot even develop Basilan, much less other islands and provinces in its own undisputed territory, singing some war dance (aka more taxes for the military), wanting to extend its "power" over far away, very small islands, in disputed territories. Who are the spin doctors behind this idiocy?

A friend made a quick reaction to my post above: "US wants to get in. China wants US out. PH wants US in."

I think that China will laugh at the US when it comes in. The US cannot even engage for long a small enemy with oil, Gadhafi of Libya. The US cannot even exit gracefully in Iraq now; it cannot even defeat the Talibans in the caves and mountains of Afghanistan after it entered that country in 2001. And it cannot even find a way to cut its $1 trillion a year budget deficit (Federal government deficit alone). And we expect that it will want to adventure for long in the South China Sea? What for, oil? They already invaded Iraq for oil. What else, for tuna and blue marlin?

There were three comments in a friend's wall that I like.

1. This administration I understand, is tinkering with the idea of buying second hand goods to beef up the military. Laughable. The way the AFP is performing, it is better to abolish them altogether. Better to act helpless than pretend we have strength which nobody will believe. Better to channel he scarce resources in improving public education. -- Luwi

2. Bright idea Luwi. Gunless AFP is better. You win the psy thing. China will go nuts. -- Butch

3. We should forge a military alliance with China. With most of Filipinos having Chinese lineage even with the most mestizo looking once, China can be our protector, and we can develop. -- Ceferino

(China Ambassador to the Philippines, Liu Jian Chao, and Philippine Presidential Spokesman Edwin Lacierda, photo from the Inquirer) 

I tried these very rough conspiracy theories:

1. Is there any brewing scandal at the Office of the President or other big agencies in the Philippine government, and people's attention are diverted now to the Spratlys issue?

2. Are the few but powerful thieves in the government, so hungry with more tax money, they ramp up the Spratlys and China issue? Note that the 2012 budget will be submitted to Congress in late July or early August this year.

3. Is China so angry at the planned debt default of the US government, even temporarily, where China is the biggest lender government to the US? 

I am wondering if the spin doctors from all sides can give us ordinary mortals, some hints of what's going on.

As I noted above, the island-province of Basilan, clearly within the Philippine territory, zero dispute about it, we cannot even develop. It used to be the scene of kidnapping for ransom by the Abu Sayyaf, and fighting between bandits and some Muslim rebels with the AFP. Basilan land area is 2x that of Singapore. The AFP, the police, the national and local governments, cannot even ensure peace and order and attract more businesses and job creation in that island province. So why spend billions of pesos more for the Spratlys adventure? From Manila, those islands are even farther than Batanes in the north and Basilan in the south. By ramping up the Spratlys "war dance", it is clear that there are certain sectors and vested interests who intend to steal big time from us taxpayers.

Every year, the country's budget deficit is about P300 billion. Is this not enough? They want more military spending, more borrowings, and more taxes to pay those borrowings. Personally, I even plan the trips for my kids well as there are lots of taxes in gasoline and diesel products. Out of the P53/liter gasoline prices, at least P13 of it are government taxes alone (import tax + excise tax + VAT). What do they want now, more taxes in gasoline and other products to finance their planned robbery in the Spratlys spending? This is silly, if not crude robbery.

Some people insist that higher defense budget, "strong external defense is an obligation of the state, supported by a strong economy." At the current fiscal condition of the Philippine government, it is impossible to have a "strong economy" if 20% of the entire tax collections of the government every year is spent on interest payment alone, because of the huge public debt. From the remaining 80 percent of total tax collection, all sectors will fight it out for a shrank pie -- education, healthcare, housing, agriculture, environment, police, military, local governments, social work, public works, CCT, etc. That is why more borrowings have become the rule rather than the exception.

It is therefore impossible to increase defense or military spending without increasing public borrowings. Unless we privatize Camp Aguinaldo, the AFP and the Department of National Defense (DND) can use tens of billions of pesos of privatization proceeds for AFP modernization, and the the AFP, DND and their golf course will move somewhere else for their headquarters.

There is indeed a big challenge to "put the house in order." Government should learn to live within its means. Do not over-spend, do not over-borrow, do not over-tax, do not over-adventure militarily. Corruption, wastes and robbery in government can immediately be minimized by applying this simple philosophy. Just to have a zero budget deficit even for one year has become an "impossible dream" now. How come?
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A good friend, Sam A, aka "Abu Samy", made this reaction about the proposed "Spratlys adventure" by certain sectors in the Philippines. He used to be a plane pilot, so he knows a number of things about jet planes and fighter planes.

Ahhhh, national sovereignty and pride, what have you wrought? Challenging China? Seriously? With what? A couple of rickety PT-like boats, some tora-tora vintage planes, and a howitzer or two perhaps? Ok, ok, so that's why they're asking for more moolah to supplant our paleolithic fleet of combat material. Do they have a wishlist, i.e., offensive or defensive type of equipment, quantity, supply and maintenance, training, simulators, etc.?

To effectively defend the disparate and lilliputian Spratlys against a full-scale invasion (aircraft and destroyers) by the Chinese, we'd need at least two squadrons (~28 aircraft) of at the very least, Harrier V/STOL fighters to fend them off. The Harriers were roughly $40 million each WITHOUT ammo, armamaents (missiles & bombs), spare parts and fuel in the year 2000. That's roughly P2 billion each. You'd also need an air tanker or two of KC-135 Stratotankers ($40 million each w/o spare parts, etc.) to sustain the Harriers in flight.

And yes, the missiles (air-to-air and air-to-ground). We'd need a lot of Sidewinders (air-to-air) and Mavericks (air-to-ground) to fend them off. The Sidewinders are $100k a pop. The more sophisticated beyond visual range (BVR-AAM) air-to-air missiles cost $300K each. Maverick missiles are about $150K each.

Total bill? Roughly P350 billion for a 3-day war. And that mind you is IF the Chinese just send their MIG-21's to dogfight with the Harriers. If they send their new stealth fighter the J-20, well the AFP might want to purchase some F-22 Raptors ($339 Million each) and/or F-18 Hornets ($60 Million each) to mix it up well and win.

So much for wishful thinking...

I thanked Abu Samy for giving me permission to post his ideas here. We fondly call him "Abu Samy" because several years ago, while vacationing with his wife and 3 kids in a beautiful island-resort in Palawan, the Abu Sayyaf bandits struck and kidnapped more than 20 guests from that resort. Luckily, Sam and his entire family stayed in a far away cottage that the bandits did not bother to get as they prioritized the guests staying in cottages on the shore. In memory of their near brush with such traumatic kidnapping (the negotiations to end the kidnapping by the bandits lasted for many months), he and his friends adopted the "Aby Samy" monicker :-)

I told Abu Samy that perhaps the potential (or resident) big time thieves in the government are not that ambitious to "beat" the Chinese military as suggested by him. I have not heard or read from the "war dance" singers and lobbyists any amount closer to "P350 billion" for a 3-days, or even a 3 months war.

Me also thinks that the potential thieves would be contented with P10 B a year for 4 years as additional funding on top of regularly appropriated for "AFP modernization", as suggested or ordered by President Noynoy Aquino. Why? Because having a really "strong" air force and navy to match the Chinese firepower is not their goal. Their main goal is to get or steal X percent from P10 B per year.
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See Also:
China Watch 6: China-India Blog, Eco-Protectionism, August 30, 2009
China Watch 7: Rising Yuan, Economic Bubbles, April 07, 2010
China Watch 8: World's Largest Economies in 2010, August 16, 2010
China Watch 9: Liu Xiaobo, Human Rights and the NPA, December 10, 2010
China Watch 10: Is China Still a Communist Country?, December 21, 2010
China Watch 11: Big Brother and Inflationary Pressure, March 07, 2011
China Watch 12: The Spratlys and SCS Conflict, June 08, 2011