Today is 11-11-11

Wonderful date today, 6 one's. Many groups and individuals marked this day for the launching of some of their big programs and projects.

Me, I will attend the Philippine Economic Society (PES) annual meeting and conference, a whole day activity to be held at the Bangko Sentral ng Pilipinas (BSP). Will meet many friends there in the economics profession. I've been inactive of the PES lately. Well, I did not like the themes and topics of previous conferences before. This year, still another cheesy topic, but the good thing is that there are so many simultaneous panel discussions, something like 6 to 7 panels on-going at the same time, so I can just hop from one panel to another if one panel is boring. This is the main reason that attracted me to attend today's PES big event.

In the morning session, I plan to attend the discussion on "Understanding Institutional Change in the Philippines". I want to see if the speakers will mention topics like rule of law and property rights, two of the most important but often overlooked concepts in many economic and social literatures in the country. Or I can jump to the panel on International Trade.

In the afternoon, I plan to attend the panel on "Labor and Migration", or "Issues on Restraining Firm Market Power". Restrain market power? Why not restrain government power? There will also be cocktails after the conference, yeah, beer or wine, I prefer beer.

November 2011 is quite pivotal for some countries. The government in Greece sank, Berlusconi in Italy is sinking. Thailand manyprovinces are "sinking" literally due to heavy flooding. The floods are still rampaging for weeks now. Some folks will definitely argue that "warming causes cooling", yeah right.

State welfarism is very costly, many countries on both sides of the Atlantic are realizing it slowly. Paying someone for not working, or giving "free" healthcare for many if not all people, early retirement (like 50 years old in Greece?) and long pensions, are slam dunking their public finance with tons and tons of public debt. Public Debt/GDP ratio of 50 percent seems mild these days, as many countries are on the 60 to 100 percent or higher ratio already.

And talks of Israeli strike of Iran's nuke facilities has resurfaced. Here in the Philippines, talks of "all out war" against the communist CPP-NPA and the secessionist MILF rebels is also resurfacing, at least among a few sectors who want to end these 42-43 years old armed conflict. Me too, I'm tired of all these war, even if they are limited to far away municipalities and barrios. I don't want to see, support, finance through endless taxes and fees all those wars and bloated military bureaucracies for the next decades. It's an endless war it seems.
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The PES conference was great, lots of good papers presented, big audience too, should be 200+ participants. I actually came late, past 10am. The morning plenary session has already started, about Public Private Partnership (PPP) on various infrastructure projects. There were four speakers, one from the PPP Office, one from the Department of Finance, and two from the Asian Development Bank (ADB). I forgot the conference kit at home, I don't remember their names, but will write about it further. Peter Wallace was the moderator.

The two ADB guys talked a lot about public goods, like hard infrastructures (roads, energy, ports, etc.) and education. During the open forum, I was one of those who asked questions. I said something like this.

My question and comments are addressed to the two speakers from the ADB. You talked a lot about public goods, state responsibility, but I think one important public good now that government can provide is how to reduce the public debt, reduce the interest payment burden. The ongoing debt problems in Greece, Italy, the US and other developed countries clearly show that high public debt leading to economic turmoil is one clear proof of government failure, of government as creator or instigator of economic instability. So why not push for private sector investments even with no public sector participation? When government comes in, they bring lots of bureaucracies, as earlier mentioned by Mr. Vic Valdepenas where the PPP Office is duplicating the functions of the ICC (Investment Coordinating Council), the BOI (Board of Investments) and other agencies. Government also contract more debt, and get more taxes to finance those debts. So it is possible to have more private sector investments with no additional public debt.

Interest payment alone of the Philippine government is around P330 billion per year, average for 2010 to 2012, principal amortization not included yet, clearly a huge public finance burden. If private investors come in, government can only ask them, "Will you be involved in drug pushing, human trafficking, related activities?" If their answer is No, then government should tell them, "Ok, start your business tomorrow" and that's how we proceed with investment-led growth.

Perhaps it was somehow a shocker for the two ADB guys to be told that government -- and ADB-pushed new debts -- should step back. My gift for them on 11-11-11. In fairness to the two guys, they admitted that bigger private sector involvement is possible and desirable, that high public debt is a big issue for many economies.

More stories later in this blog.

Fiscal irresponsibility 17: Cut Spending and Borrowing

(This is my article this morning in thelobbyist. biz, with original title, Cut Spending, Borrowing and Irresponsib-ility. It seems to be my most popular article in the magazine as it is getting about a dozen hits per hour today :-))

When someone is irresponsible – a person, a corporation, an NGO, a government, etc. – there is tendency to live beyond one’s means. To splurge in over-spending, saying that such extra spending are “necessary and inevitable”, and resort to endless borrowing.

The irresponsible can partially correct its bloated ego and not be stuck in forever indebtedness if it will (a) cut its spending relative to its income or revenues and slowly pay the debt, and/or (b) sell some of its assets and properties, pay the debts, and slowly mend its ways to live within its means.

The incorrigible irresponsible though, would never do the above two measures. In the case of governments, what they do is (i) create new tax measures, or raise existing taxes and fees, or (ii) simply declare a default and ask for debt write off for some, or restructuring and postpone payment to even longer period. Let the future administrations worry about the wastes and excess of the past and current administrations.

There is a good chart from  The Economist last September 15, 2011, “Splurge or Slash?”

Citizens of highly indebted countries like Portugal, Spain, US, France and Germany, simply want their governments to cut spending, not increase spending via Keynesian stimulus hallucination. Ordinary citizens, especially those in the private sector, are net taxpayers. The politicians and those in various government bureaucracies – local, national, and multilateral or foreign aid government bodies – plus the welfare dependents, are net tax receivers. Thus, there is a big gap in perception on how to solve the perennial public debt problem. The net tax payers do not want additional taxes to pay for those increasing debts. The net tax receivers want ever bigger governments to be financed by ever-higher taxes from the rich, the industrious and responsible people. 

Here in the Philippines, the ever-rising public debt is also financed by endless borrowings – from foreign aid (WB, ADB, JICA, etc.) and from private lenders (individuals, banks, corporations). Below is a table of how scandalous the interest payment that we taxpayers in this country have to pay in order to bail out the continued wastes and irresponsibility of our political and bureaucratic leaders. These debts have high interest rates and other charges, from 4 to 10.6 percent p.a. or several times larger than the London Inter Bank Offered Rate (LIBOR) of around 1 percent. Table is lifted from Alas, Oplas CPAs blog, Interest payment on foreign debt securities, Philippines.

source: DBM, BESF 2012, Table B.22

* Notes:

1.    These foreign debts were meant purely for budgetary support, ie, to finance the budget deficit.
2.    Only loans with more than $50 M in interest payment in 2010 (1stblock) and in 2012 (2nd block) are included here.
3.    The Loan Account name indicates (a) amount loan, (b) interest rate and other charges, and (c) year of loan maturity.

Check that one RP loan until 2030 at 9.5% p.a. (vs LIBOR around 1% pa) and we pay $142 M per year on interest payment alone. Another loan until 2031 at 7.75% pa and we pay $116 M/year. More foreign loans just to finance the annual budget deficit.

If a debtor has some sense of responsibility and sanity, it will take the high interest rate as a signal  and say, "Hoops, they are charging me high cost of borrowings, I might as well reduce, if not stop borrowing even temporarily."

An economist friend suggested, “BSP's foreign currency reserves (not counting gold and other forms of reserve assets) are already $59B. These are earning, what, 2% p.a. or less? In principle, forex reserves are assets owned by the Philippine Government. The latter can take half of the stockpile of forex reserves (or even less), and pay down the entire amount of USD denominated debt on your spreadsheet above.”

I am not aware of the technical or legal issues why such measure cannot be done by the government through the central bank (BSP). But if those issues are not too serious, the government should pursue such measure. The important thing is that the high public debt, especially those from high interest rate foreign debt securities, should be retired as soon as possible.

Greece is falling closer and closer to a debt default, which is option (ii) that we discussed above. Governments do not collapse even if they default on their debt obligations. Maybe the administration in power can collapse but government as an institution does not. The guys and entities who lent to the irresponsible government are also the other group who might collapse.

Government is force and coercion. That is why it often attracts the most horrible and irresponsible people in the planet masquerading as saviors of the poor and masses.

That is why we need less government. Less force, less coercion, less corruption and less irresponsibility.
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See also:
Part 14: Debt crisis and government failure, August 08, 2011
Part 15, Philippine government budget 2012, August 08, 2011, and
Part 16: On government bail-outs, September 11, 2011

Weekend fun 21: Humor in global financial turmoil

(This is my article yesterday in thelobbyist.biz with original title, Economic and humor contagion)

The economic and financial uncertainties primarily caused by public debt burden (ie, high fiscal irresponsibility) in the US and Europe is continuing. Heavy turmoil last week, extended up to this week, and most likely until the next few weeks and months.

Here is another refresher how the current global financial turmoil started – on the big debate what to do with the federal debt limit.

Source: Mercatus Center, 30 Years of Bipartisan Debt Ceiling Raises, August 16, 2011

The rise in debt ceiling has become more frequent and each rise is becoming more steep. The recent rise in debt limit for instance was $2.3 trillion, from $14.3 to $16.6 trillion. And such high debt limit is expected to be reached in less than two years. That is how fiscal irresponsibility can trigger government failure with bitter global consequences.

Some sectors have analyzed the recent and on-going financial turmoil not via graphs, jargons and equations. Instead, they turn to exaggeration with humor to depict the current and future condition of the US and global economy. Below are some of those witty comments, gathered from different sources. I have also contributed or invented 3 of them here 

How bad is the situation in the United States? It's sooo bad, that…

- My neighbor got a pre-declined credit card in the mail.
- CEOs are now playing miniature golf.
- Exxon-Mobil laid off 25 congressmen.
- I saw a Mormon with only one wife.
- If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
- McDonald's is selling the 1/4 ouncer.
- Angelina Jolie adopted a child from America.
- Parents in Beverly Hills fired their nannies and learned their children's names.
- A man had an exorcism but couldn't afford to pay for it, and they re-possessed him.
- A truckload of Americans was caught sneaking into Mexico.
- A picture is now only worth 200 words.
- The Treasure Island casino in Las Vegas is now managed by Somali pirates.
- GM and Ford are now manufacturing jeepneys and tricycles.
- Starbucks is now selling 3-in-1 coffee in sachets.
- Delta airlines now flying cheap standing only tickets.
- S&P forecast chapter for the US economy: Chapter 11.
- President Obama's economic policies will create millions of new jobs, but they are all for Iraqi and Afghani soldiers.
- The Debt Ceiling debate is a mess because Al Qaeda is trying to take credit for it.
- It’s good that gas prices have fallen because people can now afford to drive the cars they're living in.

My favorite is a quip from a friend who said that the US may need technical assistance from the Philippines on how to handle their public debt problem. I added that USAID and WB will jointly fund that project of Philippine technical assistance to the US how to (a) move from AA to BB rating, and (b) handle the debt problem while getting more new loans to save the planet, save the poor, save the economy, save the bureaucracy.

Market failure often opens up opportunities for market solutions. But government failure opens up opportunities for more government intervention, taxation and regulation. And that explains why the economic turmoil can easily jump from one big economy to another down to the smaller economies. Huge public debt and fiscal irresponsibility by the governments of those economies are the main facilitators of such contagion.
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See also Fiscal irresponsibility 12: More on US debt default, July 28, 2011

Fiscal irresponsibility 14: Debt crisis and government failure

(This is my article yesterday in the lobbyist.biz with original title, Debt Crisis and Government Failure)

A debt crisis is a situation where a debtor – a person, corporation, government, or other entities – is in a situation where it may not be able to pay its obligations to its creditor/s despite earlier promises or contract of paying on time, or on a renegotiated payment period.

Government failure is inability of government to provide or supply what it has vowed to the citizens. The more functions or welfare that government promises to the people, the bigger the danger of government failure. Among the most important functions of government is the promulgation of the rule of law.

When government borrows like crazy with a promise to its creditors that it will pay on time, then says that it may not be able to fulfill such obligation, that it may default some of its debt payment, then government is saying that it may throw out the rule of law on its debt contract.

The debt crisis of the US federal government was solved temporarily last August 2 when the US Congress enacted another law raising for the nth time the government’s debt limit. Thus, the debt uncertainty was “solved” temprarily by having more debt. Thus, the debt crisis of 2011 was only postponed into the future, maybe until next year, or next 2-3 years.

Now the US government got a big slap with a credit downgrade. For the first time, its AAA rating by S&P was downgraded to AA+ with a negative outlook, meaning another downgrade in the coming months and years is highly possible.

Low credit rating means lower possibility of that debtor that it can fulfill its debt contract on time and at the stipulated terms. Thus, higher risk for its creditors. So creditors will demand higher interest rate to reflect the possible danger in the future of the debt contract to be reneged or renegotiated.

I doubt that the US government, and many European governments for that matter, will realize their self-inflicted government failure, then blame market failure somehow for the mess. But the lesson is actually very clear and simple: If you live beyond your means, if you spend much higher than your income or revenue, then resort to endless borrowing to finance the funding gap, the natural resort is 100% predictable: ever higher debt.

A modest person or government would recognize the folly of such unsustainable lifestyle, and would solve such debt by cutting spending and/or raising income, not by more borrowing. A lower credit rating in fact should be a good opportunity, a good rationale, for the heavily indebted person or government, to cut its less important spending as there is higher penalty for more borrowing.

The US government has trillions of $ of assets and properties to sell if they really wish to solve that endless debt problem. Privatization of some of those assets is a good solution as the government can continue many of its projects and welfare programs, pay many of its debts and soon reduce the interest payment burden, without resorting to more taxation of the citizens.

But for many governments, rich and poor alike, more borrowing, even more taxation, is the usual solution. Today’s politicians who get today’s borrowings will not be around when those debts will fall due in the future. This is one moral hazards problem in government that largely explains why the debt problem tends to worsen rather than mitigate.

In short, hypocrisy is much larger than sincerity.
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See also:
Part 11, US debt default talks, July 18, 2011
Part 12, More on US debt default, July 28, 2011

Foreign Aid 1: MDG Goals = More Debt Addiction

July this year, leaders of G8 countries promised debt forgiveness or debt write off for some of the world’s highly-indebted countries, mostly in Africa, during the G8 summit in Scotland. September this year, many world leaders gathered in New York for the UN World Summit, and one of the talking points was debt reduction for other indebted poor countries. Some proposals that received considerable support by other leaders of developing countries were “debt for equity” and “debt for Millenium Development Goals (MDG)”. The Philippine’s Speaker of the House of Representatives was among the key campaigners of such proposals.

Such new schemes are similar to debt write-off for highly-indebted poor countries. Other indebted poor countries will also not pay a big portion of their foreign debt to both multilateral/bilateral foreign aid institutions, and private bondholders. Instead, the money to be allocated for some foreign debt service (principal amortization plus interest payment) will be used for lender countries’ institutions, corporations and banks’ investment in some earning assets in poor countries ("debt for equity" scheme). Or use the money to expand the budget for social services to help meet the UN’s MDGs of cutting world poverty in 2015 by half compared to their 1990 levels.

While the goal of such new schemes -- poverty alleviation around the world – is laudable, the means are not. Debt forgiveness and reduction can inspire dictators and corrupt leaders to further rape their countries’ economy since the poorer a country is, the bigger is its chance for debt write off, or debt reduction at least. Hence, a “race to the bottom” can happen and it will condemn poor people of those countries into perpetual poverty and dependence on government for dole-outs.

Past loans for public education, public health care, infrastructure, environmental protection, and other social and economic services in poorer countries should have improved the skills, productivity and health of the people of recipient governments. In turn, these people should have become more productive and entrepreneurial, and they pay various taxes and fees to their governments, and the latter can pay back those loans contracted in the past.

Since many poor countries keep on borrowing purportedly for the same social and economic services, this means that the money from past loans were wasted and/or stolen. If this is so, then the solution to high public debt is not large-scale debt forgiveness or more foreign borrowings to be administered by the same sets of institutions and bureaucracies. Instead, poor countries should engage in large-scale privatization of state enterprises and remove some agencies and bureaucracies to save on annual expenditures. Proceeds from privatization and savings from agency consolidation should be used to retire a big portion of the public debt, and to finance continuing social and economic services to the public.

The Philippines and many other poorer economies have plenty of government corporations, banks and financial institutions, including their respective subsidiaries, that more often than not, distort the business environment since they operate as government monopolies, or siphon off public resources for their capitalization or for their bail out as they keep on losing money. Many if not all of these state enterprises can be privatized, not once but piecemeal. While it is true that privatization proceeds are one-time and non-recurring, savings from interest payment of the retired debt or from further contracting new debts, are recurring.

There are no “market failures” being addressed by these state enterprises as many private enterprises can and do provide the services which the former provide. For instance, in the Philippines, there is no justification why government is into real estate, like Clark Economic Zone, Subic Bay, and National Development Company’s subsidiaries (Batangas Land Co., First Cavite Industrial Estate, Kamayan Realty Corp., and so on). Or why government is into trucking and shipping, like NDC subsidiaries National Trucking and Forwarding Corp., Tacoma Bay Shipping Corp.

Non-payment of debts is a bad practice that encourages "moral hazards" problem of being irresponsible borrowers and being addicted to more debts. If poor country politicians, top bureaucrats and consultants can waste or steal their own people's tax money, how much more with rich Japanese or European or American taxpayers’ money. Non-payment of past loans for whatever social goals will only prolong the malady of debt addiction and the economic distortions of government enterprises that need to be disposed to help correct past mistakes and fund mismanagement.