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".
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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 www.thelobbyist.biz.

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.
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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.
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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...
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http://www.cato-at-liberty.org/2008/11/10/obamas-tax-promises/
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.
Conclusions

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.
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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.
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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
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Those were nice points. Among my favorite US think tanks is the Cato Institute (www.cato.org). 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

http://edition.cnn.com/2008/POLITICS/10/06/walker.bailout/index.html

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....
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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!
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http://www.cato.org/pub_display.php?pub_id=9559

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."
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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.
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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.
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http://www.rasmussenreports.com/public_content/politics/election_20082/2008_presidential_election/59_agree_with_ronald_reagan_government_is_the_problem

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....
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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

Thursday, October 23, 2008

The State and the Individual

Recently I got a private mail from a good friend in one of the discussion yahoogroups that I moderate, Pilipinas Forum (PF). My friend wrote,

“PF has degenerated into a one-track advocacy platform rather than a free market of ideas. Anything that gets posted gets a single kind of response:

the culprit: BIG GOVERNMENT AND TAXES
the solution: MINIMAL GOVERNMENT”

I thanked my friend for voicing out that sentiment. It’s a healthy and friendly observation and I need to be aware of such observation or sentiment. So perhaps I need to clarify a few things.

First, PF is not an organization with a definite and specific advocacy or program of action. PF is just a forum, like millions of other online fora out there, from blogs to wordpress to other ygroups. So there is still diversity in opinions. Contrast that with a ygroups I created for Minimal Government (MG) supporters, that ygroups can be considered relatively “one-track advocacy” forum because of the specifically-defined advocacy.

Second, the core of my political and economic advocacies is not MG per se, but Personal Responsibility. If you visit the online magazine www.thelobbyist.biz, the title of my weekly column there is “Back to Personal Responsibility”. And if you visit MG’s website, www.minimalgovernment.net, it says there, “In a sense, MG is a philosophical movement attempting to change the dominant thinking in our people that many things in our lives – education, health care, housing, pension,… – should be government responsibility, not personal or parental or firm responsibility.”

So my philosophy can be summarized as follows:

the culprit: Big Government Responsibility and taxation
the solution: More Personal Responsibility

I find it really disgusting that so many bright people in this planet have bright ideas on how to make the world a better place, by forcing you and me, our family, friends, neighbors, everyone, to finance their bright ideas. And they make thousands of press releases, hold press conferences left and right, to announce their bright ideas!

Why can’t they say, “Hey, I got a bright idea how to reduce housing backlog and the squatters problem, but I won’t force you to finance my idea and projects even if you don’t believe in it. Only people who believe in my idea will!”

But they say, “There is lack of food, there is high malnutrition among certain groups of people, so we propose even bigger budget from big taxes and fees, for the Department of Agriculture, NFA, Quedancor, UNFAO, UN WFP, WB, ADB, etc; more food self-sufficiency and less food imports or exports, less international trade in food, etc.”

We can pick up any subject under the sun; what differentiate our perspectives in analyzing certain problems and the corresponding solutions to them will depend on how much faith, or lack of faith, we put in personal responsibility. The lesser that faith is, the more we will believe in more government, more forced collectivism.

That is why in analyzing the on-going global financial turmoil, my approach is more philosophical than financial. If you are an individual with small or no stable income, don’t buy an expensive house. If you are a bank, don’t lend someone big amount of house mortgage if you perfectly know that his/her capacity to pay in the future is suspect. If you are a government, don’t force banks or other private enterprises from lending to people whose capacity to pay such loans is suspect if not impossible. The “common denominator” remains the same: personal responsibility. Disregard it and we’ll have a society of irresponsible, authoritarian and corrupt people ruling our lives.

Tuesday, October 21, 2008

Agri Econ 4: Government Agricultural Interventions

Everybody in this planet is a food consumer. Hence, there is a big demand for food; the bigger the population, the bigger the demand. There will also be big incentives for farmers and other food producers to grow more food, both for their own household consumption and to produce a surplus for various consumers and make a profit.

If food producers and consumers are left on their own, they should be able to adjust among themselves. If food prices are high because there are too many consumers and few farmers, and there are minimal or no barriers to farming, some of the consumers will be encouraged to become food producers too, or at least become food traders -- and pretty soon, food prices can go down as food supply expands. If food prices go down so low to unprofitable levels, some farmers will shift to high-value food products where profitability remains high, while other farmers will stop producing and find other work. The resulting food supply reduction will result in upward adjustment in food prices, and the dynamics between food production and food consumption continue.

Some bright men and women, however, think that farmers and consumers are too poor or too stupid to be left on their own -- that government, both national and local, plus multilateral institutions and NGOs, should guide how farmers and consumers should behave. This interventionist thinking has become widespread that agriculture bureaucracies and interventions in many countries have become huge. Naturally, the taxes and fees needed to sustain them, plus their endless conferences and activities will be big too. High taxes plus huge army of agriculture regulators, bureaucrats and statist activists would mean higher food prices too.

Last October 16, World Food Day was celebrated. National bureaucracies like the Department of Agriculture, multilateral institutions like the UN Food and Agriculture Organization (UN FAO), and big international NGOs like Oxfam, seized the occasion to preach for ever-bigger government intervention and politicization of agriculture. Among the advocacies they promoted were the following.

More tax money, xx billion pesos more on top of existing budgets and subsidies, for Philippine agriculture for the country to avoid the recent “rice crisis” and huge food price hikes. Two, do not rely on private entrepreneurship in agriculture because the market will prod farmers to produce more pineapples and bananas for exports, even biofuels and other cash crops, instead of more rice and corn. Three, agriculture trade liberalization is wrong and must be slapped with high tariffs and non-tariff barriers; instead, food “self-sufficiency” should be pursued.

These are myths that need to be corrected. Here are some reasons why they can be considered myths.

One, every year, there is no dearth of reports and stories of wastes and inefficiencies, if not corruption and robbery, in Philippine agriculture. Among the publicized ones involved the fertilizer scam, the government’s Quedan and Rural Credit Corporation (Quedancor) involving the swine scam, and politicians’ unaccounted political accounts in the same government corporation.

Subsidizing farmers look humane, rationale and advancing social equity. However, the practice may encourage some of them to continue farming not because they like doing it and they are earning from it, but because they are getting certain subsidies which makes farming “profitable”. Such redistribution of money from consumers and taxpayers to farmers is not simple, the procedures can be bureaucratic, which will require lots of paper work. Thus, farmers who want to get the various subsidies have to devote time and resources away from farming and into submitting documents and papers in their respective governments’ agriculture ministries and agencies.

In a rice farming village in Pangasinan province, north of Manila that this writer regularly visits, the following were gathered:

* The municipal government last year or two years ago, distributed hand tractors that can also work as water pumps, plus PVC hose for irrigation, to selected farmers who are members of a local cooperative.

* Farmer beneficiaries are supposed to pay nearly PhP 7,000 (around US$148 at P47/$) per year for 10 years.

* After a year, only about 15% of the farmer-borrowers have paid.

* No sanctions were imposed on the non-paying farmers, such as taking back the tractors and giving these to other farmers who did not qualify in the earlier selection process.

The “standard” belief and practice among farmers in many municipalities and provinces in the country is that they pay only on the first three years of the 10-year payment period. No one went to prison or had his tractor or any form of support taken back by the government for negligence in payment. The dominant thinking is that if it is a government program, farmers believe it is a dole-out and they are not supposed to strictly follow the terms in the contract, like regularly paying the loan or tractor or seeds/fertilizers extended to them.

Two, it escapes the mind of many anti-market activists that farmers themselves, big or small, are private entrepreneurs driven by the dual desire to produce food for their household consumption, and to produce a surplus for profit. The Philippine population is increasing by 1.8 million people every year, net of death and migration. The rice land area has remained static at 4 to 4.2 million hectares in the last two or three decades. There is not much land to devote for rice as there is large land conversions going on -- initially from forest to non-forest use like rice and corn land, then from agriculture to residential or commercial/industrial land. And many parts of the country are mountainous that only a few ingenuous Filipino farmers can secure regular irrigation sources from somewhere.

And yet for such steady increase in the number of rice consumers while rice land has remained static, there is only one important conclusion: rice productivity is increasing over time. If this is not true, food riots and mass starvation would have happened many years ago, but it never did. Credit goes to private entrepreneurs in agriculture – farmers and traders, millers and processors, etc. – not so much the NGO activists and often unproductive agriculture bureaucracies.

Three, food imports by the Philippines from its rice-exporting Asian neighbors have covered up for any food supply deficit due to various reasons (strong typhoons, drought, pest attack, earthquakes, and so on). Since the 90s until today, Philippine imports averaged 8% to 10% of annual consumption. Besides, the country’s rice-surplus neighbors really have the natural “comparative advantage” in growing rice than the Philippines. Take Thailand and Vietnam, the world’s top two rice exporting countries, for example.

First, these two countries have wide, contiguous rice land areas of between seven to 10 million hectares, compared to the Philippines’ four million hectares scattered in various provinces and islands around the archipelago. Second, these two countries have huge rivers as main irrigation source like Mekong River, courtesy of their being a contiguous land mass. Third, these two countries have no or very little typhoons, only about 10 per year perhaps, versus the Philippines’ 20 typhoons per year on average.

Interventions like the provision of farm equipment, seeds and fertilizers, credit and marketing network, entrepreneurial spirit, are not included yet. The natural geography of those two countries alone gives them enough comparative and competitive advantage to grow rice. The Philippines’ comparative advantage is more on tourism, not agriculture.

Thus, instead of continuing agricultural trade protectionism, the various tariff and non-tariff barriers in agricultural imports, especially rice, should be slowly removed. Poor households who cannot afford to buy some local grains, vegetables, animal and fishery products in large amount for their families’ daily consumption, should be given respite by giving them access to otherwise cheaper food imports from the country’s Asian neighbors.

The market, the interaction between producers and consumers, not between bureaucrats and statist activists, can provide reliable information and signals for both producers and consumers to adjust with each other. Hence, statist interventions for more tax money for more subsidies, more tax money for dishonest and corrupt politicians and bureaucrats, and more agricultural trade restrictions and protectionism, should be slowly reduced, ultimately abolished. There is nothing wrong with a social system that allows the lazy and irresponsible to go hungry and poor, while allowing the hardworking, the entrepreneurial and responsible people to flourish and become rich.
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Related papers I wrote recently:

(1) More Food Producers, Less Food Bureaucrats

September 08, 2008

Agriculture is often an emotional subject when it should not be. Mention farming and farmers and images of poverty and economic difficulty would more often than not, come up in the minds of the public. Hence, various forms of subsidies, crop insurance, trade protectionism and other “incentives” were cooked up and implemented by many governments and generally supported by the public.

That should not be the case because everybody in this planet is a food consumer. Hence, there is a big demand for food, and there is big incentive for farmers and other food producers to grow more food, both for their own household consumption and to produce a surplus for various consumers and make a profit.

If food producers and consumers are left on their own, they should be able to adjust among themselves. If food prices are high because there are too many consumers and there are few farmers, and there are little or no barriers to farming, some of the consumers will be encouraged to become food producers too, or at least become food traders, and pretty soon, food prices can go down as food supply expands. If food prices go down so low to unprofitable levels, some farmers will shift to high-value food products where profitability remains high, while other farmers will stop producing and find other work. The resulting food supply reduction will result in upward adjustment in food prices, and the dynamics between food production and food consumption continue.

Some bright men and women, however, think that farmers and many consumers are too poor or too stupid to be left on their own, that government, both national and local, should guide them how they should behave, so that everybody will have access to good food at a good price. This interventionist thinking has become widespread so that bureaucracies in agriculture ministries or departments and related or supporting agencies have become huge and wide in many countries. Naturally, the taxes and fees needed to sustain them all, including their conferences, meetings, travel and other activities will be big too.

Bureaucracies in agriculture-related foreign aid institutions also expand as these institutions become more efficient in convincing the taxpayers in richer countries that they should continue paying high taxes because part of it is being used to subsidize farmers in poorer countries. Of course they do not mention or tone down the fact that a big portion of the foreign aid money goes to the politicians, agriculture and infrastructure bureaucracies of recipient countries first, before reaching the poor farmers, if any is left.

So with more intervention and subsidies, agriculture departments or ministries and their attached agencies naturally have huge budgets, directly or indirectly. With lots of money to administer, tinker, if not play around, the agriculture bureaucracies would normally attract robbers and opportunists among men and women. Cases of inefficiencies and wastes of tax money are widely reported in many rich countries like the EU’s Common Agriculture Policy (CAP) and the US.

Here in the Philippines, there is no lack of large-scale robbery scandals. Among the most prominent were the fertilizer scam in 2005, then the swine scam this year involving the government’s Quedan and Rural Credit Corporation (Quedancor) and politicians’ unaccounted political accounts in the same government corporation.

Subsidizing farmers look humane, rationale and advancing social equity. However, the practice may encourage some of them to continue farming not because they like doing it and they are earning from it, but because they are getting endless subsidies which makes farming “profitable”. Such redistribution of money from consumers and taxpayers to farmers is not simple, the procedures can be bureaucratic that will require lots of paper work. Thus, farmers who want to get the various subsidies have to devote time and resources away from farming and into submitting documents and papers in their respective governments’ agriculture ministries and agencies.

In a rice farming village in Pangasinan province that I regularly visit, I learned of the following. The municipal government last year distributed hand tractors that can also work as water pumps, plus PVC hose for irrigation, to selected farmers who are members of a local cooperative. Farmer beneficiaries are supposed to pay nearly PhP 7,000 (around US$152 at P46/$) per year for 10 years. After a year, only about 15 percent of the farmer-borrowers have paid. There are no sanctions done to non-paying farmers like taking back the tractors and give to other farmers who did not qualify in the earlier selection process.

The “standard” belief and practice among farmers is that they pay only on the first 3 years of the 10-years payment period. No one went to prison or his tractor or any form of support taken back by the government for negligence in payment. And the thinking persists that if it is government program, it is a dole-out and people are not supposed to strictly follow the terms in the contract, like regularly paying the loan or tractor or seeds/fertilizers extended to them.

The issue of non-productive use of agricultural extension workers employed by the provincial and city/municipal governments is another case of wastes. The extension workers are supposed to be the “bridge” between new results in agricultural R&D and modern farming practices, and the farmers on the field, especially the subsistence farmers. But the right incentive for the extension workers to do their job well is not there. Whether they perform their work or not, they are already assured of their monthly salary and allowances. They are accountable to the Mayor, or other local politicians who recommended them and/or approved their employment in the local government. So when the provincial Governor or city/municipal Mayor assigns them in any work except agricultural extension work, they do it.

Efforts by multilateral bodies and bureaucracies to expand foreign aid in agriculture in poorer countries purportedly to stabilize food prices in the future are likely to create more wastes and inefficiencies than good results. The better options are: One, leave the farmers and consumers alone to adjust and adapt to changes in food supply and demand as reflected in food prices. Two, abolish, or at least consolidate, certain agricultural programs and agencies which have been clearly burdensome to taxpayers for a long time now with no clear and consistent positive results. And three, abolish or at least consolidate, certain regulations that make life more difficult, more complicated, for people engaged in food production and distribution. Let us have less agricultural and economic bureaucrats and more agri-businessmen and women.


(2) State Intervention in Agriculture Production and Distribution

July 07, 2008

A number of observers and policy makers blame "market manipulation" and "market failure" as reasons for the current food price spikes around the world. Hence, existing government regulations, taxation, and intervention should be retained, if not expanded, in agricultural production and distribution.

Below are a some of these interventions and regulations being practiced by governments in many countries around the world. I have identified no less than 10 various government interventions in the sector, but due to space constraints, will discuss only seven of them here. A longer paper covering and discussing all those interventions that I have identified will be posted in our website, http://www.minimalgovernment.net/.

After enumerating these interventions and their purported rationale, my comments and critic of these measures follow. The "farmers" being referred in the foregoing discussions refer to both small and big/commercial farmers.

One, subsidize farmers to produce more food for "self sufficiency" . The goal here is self-explanatory.

Two, subsidize farmers to produce less food in times of bumper harvest. The goal is to stop prices from going too low that will make farming unprofitable, which might prompt some farmers to stop farming and move elsewhere.

Three, impose high agricultural tariffs to discourage importation of food that are cheaper than those locally-produced. The goal here is to protect local farmers from foreign competition, never mind the consumers who demand cheaper food.

Four, subsidize farmers to produce more crops for biofuels and away from food. The goal is to help "fight global warming".

Five, have an agricultural insurance where farmers will get subsidy when the price of their produce declines in the future. The goal is to prod farmers to continue producing certain crops even when it may look unprofitable to do so.

Six, impose "community preference" of high health and sanitation standards, animal welfare and labor standards, for imported food products; otherwise, the tariff will be very high.

And seven, impose rice "export ban" at the height of high world rice prices. The goal is to protect local prices from rising further when some of local output will be diverted for the world market.

For me, these are misguided public policies that do not result in more food for more consumers at more or differentiated price levels. Their negative consequences are as follows.

First, maintaining food "self-sufficiency" policy invites agricultural protectionism in order to shield local farmers from foreign competition, which may turn them off from continued farming, which can result to "food insufficiency" someday. Some countries produce particular agricultural commodities more efficiently than others by virtue of their geography (wide flat lands, few mountains, lots of lakes and rivers, away from usual typhoon path, and so on), soil condition, conservation practices and entrepreneurial spirit of farmers, etc. Hence, it will give justice to both local consumers to avail of such natural and social advantages in other country that allow them to produce cheaper food than what local producers can provide. A good example of what food autarky can do is North Korea.

Commodities that often experience huge price spikes are those that are least-traded. Rice that is traded internationally is only about six percent of global food production. So when certain countries experience supply shortfall for whatever reasons, the leeway for emergency supply from imports is small, resulting in huge price spikes and hence, economic difficulty for poorer consumers of those countries.

Second, encouraging farmers to produce less food when they are capable of producing more prevents local food prices from falling, which should have benefited consumers. This perverse use of taxpayers money then making the same taxpayers pay more for food that could have been made available at a lower price is insensitive public policy.

Third, as discussed above, food protectionism penalizes consumers, including many farmers themselves who experience crop damage or small harvest (due to strong typhoons, pest or insect attack, prolonged drought, civil conflict, etc.). A better option is to cut, if not abolish, those tariffs on food products, have full free trade in food and other commodities and services. Producers of food-surplus countries will benefit through higher income, while consumers of food-deficient countries will benefit through lower price.

Fourth, encouraging production of more biofuels through tax money has contributed to the recent food price spikes, even if at a minor level. If farming for biofuels production is indeed profitable, then there is no need for subsidies.

Fifth, encouraging farmers to continue producing particular commodities even if their prices have gone down (due to big local harvest due to improved productivity, due to big harvests abroad and imported cheaply, etc.) to non-profitable levels is not good. Taxpayers should be spared from shelling out more money for price differential subsidy. With current high prices of many food products, farming is becoming more profitable. But when governments maintain, if not increase, various farm insurance and price subsidy, this means those governments have no intention of allowing cheaper farm production in the future.

Sixth, those strict health, sanitation, environmental, animal welfare, and labor standards were imposed by farm lobbies and bureaucracies of rich governments, not so much by consumers. If some rich consumers want these strict regulations, they can do so by demanding labeling and purchasing only those products (local or imported). Poorer consumers who may not be too strict with those standards and just want cheaper and safe food, need not be forced to pay ore. If food products are indeed unfit for human consumption, they should be banned, not over-taxed to make it very expensive for consumers.

And seventh, export bans by some governments have worsened the difficulty of net rice importing countries through even higher rice prices. Global supply is disrupted and some farmers in rice-surplus countries are discouraged from higher production since the opportunity to earn higher at exporting rice was killed. Allow freer trade, have few or zero restrictions, in mobility and trading of commodities that experience high price increases so that producers will have more incentives to produce more.

There is no substitute to allowing the individuals – food producers, traders, processors, and consumers – determine what is good for them. More government intervention in agricultural production and distribution is creating more problems than solutions.
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See also:

Agri Econ 1: Food Prices and Government, April 13, 2008
Agri Econ 2: Rice Laissez Faire vs. Subsidies, May 06, 2008
Agri Econ 3: Dr. Samran Sombatpanit and WASWC, July 03, 2008

Monday, October 13, 2008

US Debt 3: Crisis of Irresponsibility

The ongoing economic turmoil in the US and the rest of the world has been termed a “credit crisis,” a “financial meltdown,” a “market free fall,” and even worse, a “crisis of capitalism.” The use of the latter phrase is implying that the current economic woes could be the beginning of the “end of capitalism,” and the rise of what? Rise of socialism, or Hugo Chavezm, or other forms of statism?

For lack of a more apt term to describe the ongoing financial troubles in major economies around the world, this writer would rather use the term “crisis of irresponsibility.” Here are some reasons why.

One, borrower irresponsibility. There is general acceptance, if not consensus, that the immediate cause of the current global financial trouble was the widespread default of sub-prime borrowers in the US for the houses they bought. People who have small or no stable income were allowed to buy houses whose price are much higher than what those borrowers could really afford to pay if some explicit or implicit subsidies were absent. The immediate symptom showed up in July 2007 after Wall Street investors started pulling out their money after learning those huge sub-prime homeowners’ loan default.

Two, lender irresponsibility. Anticipating continued “housing price bubble,” the lenders – developers, commercial banks, mortgage houses, investment banks, insurance companies – lent even to sub-prime borrowers, people who have questionable capacity to pay those high-priced houses, and charged them higher interest rates.

Three, housing policy irresponsibility. When a government policy forces banks to give out bad loans, then more bad loans will be given away. Eamonn Buttler in his article, “Blame bad rules, not capitalism”, wrote “(On) 12 October 1977, US President Jimmy Carter signed the ‘anti-redlining’ law. Before then, lenders generally denied loans to people in poor neighborhoods. But the politicians – with good intent – wanted to make home ownership available to all Americans. So lenders were forced into giving out risky mortgages: what we now call ‘sub-prime’ loans.”

And four, plain BIG government irresponsibility. Making a bad public policy even bigger and worse. For instance, after the “anti-redlining law,” semi-governmental companies Freddie and Fannie made investors believe that the bad mortgages they made were guaranteed by government, creating a “moral hazards” problem wherein complacency can be rewarded with bailout, not penalized with bankruptcy.

Now, the public in the US and around the world is bombarded with “more government financial regulations please” mantra. Really? But the US government cannot even properly discipline itself, generating hundreds of billions of dollars of budget deficit every year (at least $480 billion by end-2008, for instance). And worse, the Federal government is facing an estimated $56 trillion debt.

In a commentary, “America's $53 trillion debt problem,” David Walker wrote: “The nation's real tab amounted to $53 trillion as of the end of the last fiscal year (September 30, 2007). 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… 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) in a year is about $14 trillion. The cumulative debt of the federal government alone will be about 4x of GDP! GDP is the combined production of goods and services by the federal, local and state governments, private corporations and households.

So, can an institution that can irresponsibly accumulate various debts amounting to 4x of GDP, be the "bright guys" to provide “leadership” in regulating further all corporations, earning or misbehaving, private corporations? This does not look good.

From one big government intervention (encouraging or forcing sub-prime and risky loans and fiscal irresponsibility) to another xx billion dollars for Fannie and Freddie, $85B for AIG, and the enacted $700 billion bailout or “rescue package,” and higher future taxes to pay past and current bailouts and borrowings), there seems to be no logical conclusion or timetable for the never ending big government intervention and taxation.

US capitalism needs the current "electric shock" to deliver real hard lesson for both the American capitalists and the American government. Private enterprises should be allowed to grow big or go bankrupt – without government intervention. The job of the government is to ensure the rule of law, that parties honor their obligations and contracts with other parties, and that robbers, killers and other criminals along the way are neutralized.

The US stockmarket and the rest of the economy have so far shed several trillion dollars of losses and failures because their debt culture (federal debt + local and state governments debt + corporations and household debt) has bloated the economy by trillions of dollars. The bubble should pop, the excesses should be removed, and irresponsibility (personal, corporate and government) should be checked and controlled.

Failing big business should not marry big government. But it is happening now, nonetheless. The Treasury Department, the Fed, the White House and Capitol Hill think that to "solve" previous and current government failures, even bigger government intervention, regulation, borrowings and taxation should be introduced

Plenty of news stories these days say that many American households are cutting back on their consumptions except the necessities – food, health care, education, etc. – which means Americans feel they are poorer now, or they anticipate they will be poorer in the coming days. How can they be made to feel "richer"?

One option is a large-scale income tax cut. Allow them to keep more of their monthly or annual income, let them spend the "de facto" wage increase. Someone's spending is somebody else's income. But all the above US government agencies can think of are retain, if not increase in the future, current high income taxes – to finance more government spending, more bailouts, and possibly, more printing of money. The few tax cut measures in the multi-billion bailout was more of a “sweetener” so that more Republican legislators will support the huge bailout bill.

The author of the book, “In Defense of Global Capitalism”, Mr. Johan Norberg, has some good arguments on why the “more government financial regulations please” mantra is wrong. In his paper, “Regulators cannot avert next crisis”, he wrote: “Every crisis has led to thousands of new pages of regulation. Why is it that regulation doesn't stop crises from happening again? Look no further than the US federal institutions in Washington, DC, and we find 12,113 individuals working full time to regulate the financial markets. What did they do with the powers they had?.. So we get new rules that target the mistakes that everybody already knows they must avoid. The next possible crisis and its causes are so far unknown, and our regulations may have no effect or even make them worse...”

To sum up, is the current “crisis of irresponsibility” leading to continuation or death of irresponsibility?

Based on the above discussions and ongoing global development, the answer seems to point to a continuation, if not expansion, of irresponsibility. But as mentioned earlier, a crisis is short-lived and will not drag for a long time. There is a $56 trillion debt somewhere, and that’s for the US federal government debt alone. Not included there are several trillion dollars debt by US local and state governments, plus trillion dollars more by other central governments of other rich countries (Europe and Japan).

So there should be more crisis ahead in the coming years. But one really big crisis out there will definitely be resolved in favor of death of irresponsibility, especially of big government irresponsibility that encourages, directly or indirectly, personal and corporate irresponsibility. When people around the world assume more personal and parental responsibilities in running their own lives, their own households and communities, and expect less “government responsibility”, then societies will be headed to a new world order and ultimately, world peace.
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Greed and Responsibility

Can greed be good, both for the individual and society?

I think Yes, if it is coupled by personal responsibility and not causing harm to other people in the process of being greedy.

Example. A person salivates at the prospect that the price of the 2nd house that he is about to buy will double, if not triple, within one or two years. So he moved to buy that house by recalling his investments elsewhere, took a loan of only 30 percent or nothing, to buy that house cash. He never robbed or kidnapped for ransom anyone to get additional money. From plain pure savings and borrowings with earnest desire to pay the loan.

This still falls under "greed", right? Greed with personal responsibility.

Another variation is greed with personal irresponsibility.

A person who has no money even for a downpayment, or has enough income for his current consumptions and amortization payment, but took another mortgage with zero or very little personal equity for a high-priced 2nd house with the same salivating desire to make big money after a year or two. This is a very risky practice with some harm to other people happening if that person will default on his loan.

The current financial woes in the US and elsewhere is a result not too much of greed per se, but of greed + debt culture. Living beyond one's means, living on borrowed money, living on an illusion of big money in the future that may or may not materialize. There is lot of personal irresponsibility involved.

With this view, the current situation therefore, is good. It is a self-correcting mechanism by the market. Those with bloated assets suddenly experience their assets shrink, if not become bankrupt. As my favorite finance whiz kid Gina would say, "the market will correct itself with or without government intervention."

People with bleeding hearts for corporate failures simply don't get it.
Capitalism without failure is like religion without sin.
Or like Christianity without hell.

The sins of the past will haunt the sinner today, or in the future.
Once the sin has been atoned or "paid" and corrected, life will go on.

Incidentally, there's a good article from the IHT today, "Debt is whittling away US economic power",
http://www.iht.com/articles/2008/10/12/business/leonhardt.php?page=1

The debt culture will catch up on America. It has caught up now, but not entirely. There's more debt and bubbles down the carpet and bed of the US government, both federal and state/local government, than currently admitted.

With the current bail-outs and planned ownership stakes in a number of private banks, the US government's debt is changing from bad to worse. Applaud more borrowings and more regulations!

* 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

Monday, October 06, 2008

Patent exhaustion and the rule of law

The philosophy of "rule of law" is very explicit that a law should apply to all and everything, and no one or nothing is exempted. That not even the legislators and administrators of the State should be exempted or have the power to make exemptions. That is why classical political philosophers (like Friedrich Hayek) argued that not all output by the legislature, national or local government councils, can be considered as "general laws" because many rules created by modern legislatures often make certain exemptions. And those "exemptees" and "above the law" are usually the economically protected and politically connected ones.

Take the case of patents or other forms of intellectual property rights (IPR). A patent is granted by a national government to a product or invention by a certain manufacturer. This is the State's way of saying "Thank you for producing an innovative product for the use of the people". But before the State grants such compliment, it first requires lots of papers and permits, authorizations and accreditations, taxes and fees. Once the manufacturer and inventor of such product has complied with all those regulatory requirements, the State, through its agencies that handle and grant IPR, finally gives the patent.

So, securing a patent, complying with the State's various regulatory requirements for an IPR protection, are neither short nor cheap. It takes long and expensive procedures -- from the actual invention itself, discovering the basic and applied sciences that govern the molecules and physical energy of one's invention, checking and counter-checking that there will be no harmful risks to the consumers, to complying with the bureaucracy, discovering the rules and regulations, both printed and hidden, that govern the molecular behavior of government regulators.

This sends mixed signals to entrepreneurs and traders out there. Let us tackle two prominent and opposing signals or options, and the corresponding behavior to each respective option.

One, by requiring stringent and expensive patent approval system, the State will be accountable to protect an IPR, come high or low water.
Corresponding behavior: Go through the entire process, endure the bureaucracy, taxes and fees. This is the route taken by law-abiding individuals, inventors, scientific institutions, and corporations.

Two, by requiring stringent and expensive patent approval system, there should be some loopholes or "exemptions" somewhere.
Corresponding behavior: Don't go through the entire process, don't endure the bureaucracy, taxes and fees. Find those loopholes and exemptions, or introduce and lobby the introduction of such exemptions, and still make money in the end. This is the route taken by less innovative, or bleeding heart collectivist, and often shrewd, individuals, inventors, and corporations.

In the patent and IPR system of many developing countries like the Philippines, the policy of "national exhaustion", meaning a patent on an invention in a particular country will stay until the end of its patent life, is followed. But with growing socialization of health care campaigns in the world, a new concept called "international exhaustion" – for drugs and medicines only – was introduced and negates "national exhaustion". It was introduced first in the WTO under the Trade-Related Aspects of IPRs (TRIPS), and second in the country through the "Cheaper medicines law" (Republic Act 9502). This unfortunately, is a violation of the "rule of law" principle because it grants exemption to the general rule of protecting private property rights, regardless of reason or alibi, social, cultural or whatever.

The scheme violates "national exhaustion" rule but the said violation is legalized and implemented by the State under the "international exhaustion" rule is called "parallel importation". Drug manufacturer X went through option one discussed above (i.e., endured all the bureaucracies and paid all the taxes and fees to get a patent, say in the Philippines). Now the government agency that granted the patent to company X can now say, "The patent that I gave to drug manufacturer X is now 'exhausted' and useless because the same patented drug it sells here has been introduced and sold in other countries. So other firms can now parallel import said drug and sell it here; no need to go through the long process of securing a patent."

This sudden about-face can be done instantly and the national patent system for the affected drug becomes a farce and a hypocrisy. The plentier the practice and declaration of "international exhaustion", the bigger the hypocrisy.

But that's on the level of political and legal philosophy alone. Let us tackle the implication of "parallel importation" scheme on public health, which is the main reason why said violation of the rule of law on patent has been justified in the first place.

Drug trader Company Y buys "cheaper medicines" from the sister firm of Company X from abroad, then transported, stored, and distributed said drug to various drugstores, pharmacies and other drug retail outlets in the home country – all without permission or approval by Company X being the national patent holder of said drug. One or more patients develop bad allergies, or develop negative side effects, after taking the "cheaper medicine" imported and distributed by Company Y. It turns out that any or all of the following possibilities happened:

The imported "cheaper medicine" was mishandled, mis-stored (say a few degrees Celsius hotter than the minimum temperature required for effective storage), opened from original containers and repacked, and consequently contained wrong labels and wrong expiration date, etc.
The imported "cheaper medicine" was counterfeit, produced by a fake and unlicensed drug manufacturer abroad, and the medicine contained very little or no active ingredients that can cure a particular disease.
The original manufacturer (sister firm abroad of Company X) found some health risks in the medicine and was recalling it, but Company Y is just a trader and has spent money already for the importation, transportation, storage and distribution to many retail outlets here, and would not care recalling said drug since it will not be affected anyway because it does not carry the corporate brand of the drug manufacturer.
Who will the adversely affected patient complain and possibly sue? Company X at home country, or its sister firm abroad, or drug trader Company Y, or the physician who prescribed the medicine, or the drug store?

Recently the Philippines and other importing countries were gripped by the scare of melamine-tainted milk from China. The chemical melamine is said to cause kidney problems on babies and children who consumed the milk. A number of raids were conducted, by the police, the Health department, and other government agencies, to remove from the shelves and storage areas of supermarkets, drug stores and warehouses, milk products that are proven or even suspected of containing melamine. The panic was wide but pinpointing who is responsible for manufacturing and distributing said melamine-tainted milk was not clear.

A similar scare in the distribution of counterfeit medicines, or original but mis-handled and mis-stored medicines, or medicines recalled by drug manufacturers but not recalled by drug traders, can happen someday in this country or other countries that implemented the "parallel importation" and "junk the national patent" scheme.

But policy damage has been done, because laws have been enacted in a number of countries that legalized the violation of the rule of law on national patent and IPR protection. And pretty soon, an implementing rules and regulations (IRR) will be promulgated in the Philippines to give more meat and mechanism on how to operationalize the violation of the rule of law.

Some "remedies" or remedial measures can be introduced though, in order to reduce the potential risks and damage by this scheme. This author has proposed some safeguard measures to be incorporated in the planned IRR. Seems that not one of them has been considered by the government agency that has the power to give patent and the power to render said patent "exhausted" and meaningless later on under the "international exhaustion" rule as legalized by the new law.

Another remedy perhaps, is for the all government agencies involved that required the submission of various regulatory requirements and agencies that collected various taxes and fees, to reimburse the full costs of compliance by the patent holder. The latter's right to private property protection of an invention has been disregarded by the same government agencies that promised to protect such private property right. Hence, the patent holder should be fully reimbursed at least, as a way of the State saying, "Sorry for disregarding your private property right and for my violation of the rule of law on IPR protection."