Welcome, Moral Hazard!

Theory has it, if a principal and an agent engage in a deal, the contract should spell out everything in details. And all actions should be verifiable. Non-verifiable actions are subject to asymmetric information and therefore prone to moral hazard problem. Read the 100-day program of SBY announced yesterday (sorry, cannot find internet link, read it in-print). Most of them are non-verifiable. Take macroeconomic program for example. It says 1) To secure the 2004 Budget; and 2) To review the 2005 Budget. You can verify the first one. But how would you verify a review effort? This is like having a contract with your professor (you being a research assistant), and you have "I will work hard" in the contract. How can that be verified? In other words, what is the criteria to judge your "working hard"?

JK the racist?

Read why Steve Landsburg changes his mind from will-vote-for-Kerry to will-vote-for-Bush. It's because of the running mate: Kerry has chosen John Edwards the xenophob. Now, try to imagine that you were Steve and Kerry were SBY. Of course, Edwards were JK. Would you have voted for SBY? Considering that JK were truly a sinophob, ceteris paribus, I would have not. (The only thing that made me vote for SBY in reality was that Mega is way, way worse in all other aspects).

Ical and his vocabulary

Not a month yet, but Aburizal Bakrie (Coordinating Minister for Economic Affairs) has demonstrated how overestimated he is. When everybody should be really working real things out, he is busy doing word-game. "We are not going to be a subordinate of the IMF. So, we will change the name Post-Programme Monitoring into Post-Programme Dialogue". "We are not going to revise the Budget, we will just do some review-ing". What good in the world would these things do for the country? Mr. Bakrie, no time for trivia game.

What we did wrong back then

This piece by Stiglitz speaks for itself:

"Suppose the economy is operating below its potential -- say, because of a
lack of aggregate demand. In that case, an increase in aggregate demand can help
the economy. And deficits normally increase demand. That's because the
government is spending more money, or because low taxes encourage increased
consumer spending -- or both.


Keynes made this point clear a long time ago -- and he is still correct. No
wonder, then, that the IMF's imposition of fiscal stringency in East Asia and
Latin America -- when those countries already faced a downturn -- was a
disaster. The IMF policy had the predictable consequence of making the
economic downturns worse, turning downturns into recessions, and recessions
into depressions. The right prescription for the affected countries was not
balancing the budget, but running a temporary deficit to stimulate the economy --
as Keynes knew."

Intellectual honesty

I was once asked by a student: should we have ideological stand on economics and should we stick to it forever? I answered: yes and no. Yes, you should be unambiguous as to what perspective you are using in analyzing a problem. But it doesn't mean you are not allowed to refine your position. If you proclaim you are Keynesian and you think monetary policy is foolish even when it is needed, then you are dumb. I cited Keynes: "When the facts change, I change my mind -- what do you do, Sir?". It bothers me to see some people, without proper knowledge on history of economics thoughts, claim that they are Monetarists, or Keynesians, or Neoliberals -- you name it. But when you talk with them, they simply knew a three- or four-sentence definition from some textbook to describe their "ideology". I don't think it's honest.

In that light, this piece by Brad DeLong came to my attention. At least, this is what I refer to as "intellectual honesty". DeLong was an all-out Neoliberal -- as he confesses, believing that capital control is no-no-no. Read this and you'll see how DeLong admits that market can fail. There, we need government to help correct it. But be careful, government might as well fail.

Troy

Just saw Troy last Saturday. It was just OK. I like Eric Bana's acting (as Hector of Troy). The veteran Peter O'Toole (as Priam, King of Troy) could be better (reason why I decided to see this movie). Brad Pitt (as Achilles) surely had worked out his muscles a lot -- but not his acting talent. Diane Kruger (the seductive Helen -- the problem) acted worse.

The show could have been much better. One, it should have warned the watchers: "Warning: This is a VERY LOOSE interpretation of Homer's Iliad [and that's why we don't dare using that title]. We assume you already know that 1) Achilles has weak tendon [if you don't know, what the hell did you do when you were kid?]; 2) Trojan War is nothing but a place where men fight for a seductive woman [that's all you need to know, we'll guide you through some adult-only innuendo]". Such warning could make you less demanding. Don't ask why Aphrodite is not there or why Paris is so lame in contrast with his mighty brother, Hector. Also, don't ask why Odysseus seems so sidekicky next to Achilles (this is about -- I mean inspired by -- Iliad, not Odysseus!). Story aside, if you haven't seen Braveheart, you might think this movie is a thumbs-up. If you have, you don't need to see this one.

(I also watched Bulletproof Monk -- this one was a total waste of time, it is not worth a link).

Trial by anybody who wants

Talking about Adrian Waworuntu, the prime suspect of one of the biggest bank robberies in Indonesia. While I'm writing this post, he is being interviewed by a television. What really shocks me is that this interview is NOT an interview. It's a ... trial. Is legal institution in Indonesia so useless already that trial should be done by ... tv?

That's trial by tv. Now, another one: trial by so-called religious group. I can't understand, why each time the Ramadhan comes, this people calling themselves FPI (Islam Defenders Front) think they have the right to replace the police! They attack bars, night clubs, and the likes. These are the people who think they defend Islam while in fact they ruin it. Islam is no anarchy, but they make it seems like that. The sad thing is, the police seems so lame. So who's to blame?

IMF, MP, FP

A friend asked me again about this whole thing about pro- and anti-IMF. OK.

Let's look back to when the IMF was created. Bretton Woods meeting in 1944 was conducted as a response to the world wreckage due to the world war. The ideas was to help the countries recover. The meeting gave birth to the IMF, World Bank, and later, ITO (the latter became WTO). The idea was noble. Then people changed. Intitutions followed. Policies did, too. Now, IMF is perceived as neo-liberalist agency. (People forget that BW meeting was Keynes' idea -- the last person you would connect to neo-liberalism). To many people, IMF is identical to exploitation of people by capital. So everything related to it is rejected. That's what happens in Indonesia now, especially after the IMF recovery program failed. (It's very unfortunate to people like Sri Mulyani who happened to be the country's representative in the IMF. Her job was, among all, to negotiate with the IMF for Indonesia's interest. She suggested to end the IMF program in Indonesia. But people don't know and don't want to know that. To them, Mulyani is IMF. Cannot be more wrong. It's like you're having a war with a country and your government send you to negotiate. Before you know it, people think you're a traitor).

The friend asked me again. What's all this doing with monetary and fiscal policies? Alright.

Why do some economists tend to promote free market and others seem more prudent and consequently rely more on the State? I always believe, both have good rationale. Both are reasonable. People believes in market because they are afraid that relying on the government means putting money on it and asking it to manage the money for social welfare and development. Meaning, it gives room for corruption. To avoid this, you should minimize the role of the government. How? Don't trust it by putting your money in its hands. On the other hand, some people believe in State intervention because they are hopeless with their own people (read: market). They think market alone cannot solve the chronic problem of poverty and unemployment. Something needs to be done and somebody needs to do something. And invisible hands are just utopia. Therefore they want to use the government to help allocate the resources more efficiently (I like to say: we need the government to correct market failures, no more -- but nobody hears). In practice, the two camps might emerge. But ideological stand usually comes in the way. And lay people see it as a war between market and the State. Or, when it comes to policies, a war between monetary policy (in particular, inflation targeting) and fiscal policy (in particular tax collection). Unfortunately, the war -- for lack of better term -- has been misunderstood by press, too. News and even analysis seem to believe that this is a binary problem: either you use monetary policy or fiscal policy. You can't use both. This is a total mistake.

Bad press corp

Lately, I've growing exasperation toward these news presenters in local televisions. It seems to me tv companies have been hiring presenters based on their look only. Intelligence and press ethics don't really matter. Many times I have seen the way these tv chicks conduct their interviews with politicians, academicians, and other resource persons. It's terrible. They ask their target in a very unprofessional way. Well, they don't really ask. They nag. Same questions often repeated many times. It's obvious that none of them do (even a small) research before interviews. Consequently, they nag with silly questions. Back then, when TVRI was still alone, they were very professional. I recall world-class reporters such as Toety Adhitama and Usi Karundeng, to name a view. Now, when we need news, these many private tvs now bring Vivi Yahya, Rosiana Silalahi, or Ira Kusno to our glass. Why don't they learn from TVRI?

Three points on SBY

So, finally we have this new president, SBY. Bye, Megawati, it's time for you to stop pretending. I have bigger hope for SBY-JK -- much bigger than to Mega. But I won't spend time comparing them here (but as a note, I believe, high expected utility always comes with higher risk -- JK is a risk factor). Just three quick points on interesting issues lately.

First, this whole objection toward "pro-IMF cabinet" is really off the mark. Not many times I am against PKS' (Justice Party) stand. But I guess, this is one. I have written elsewhere about my take on globalization and eventually the IMF. To me, the Indonesian bad experience with IMF's programs in the past was partly OUR fault (worsened later on by people like Rizal Ramli). On the other hand, the IMF's share to that problem was due to a malpractice by its staff. So, banishing the Fund for having incompetent staff in managing Indonesia is like banishing a whole hospital that happens to have some careless nurse. Do you think all nurses in such hospital are careless?

Second but might as well be related. Some analysts have brought the issue up to the tension between growth and unemployment. Corollary: macroeconomic stability versus fiscal stimulus. This, too, is a misnomer. I don't understand why some economists really hate fiscal stimulus -- even when it is needed. Many anti-Keynes economists don't know that JMK clearly argued for BOTH fiscal- and monetary policy depending on the situation. The supply-siders (read: Friedmanites), in contrast, think there should be NO fiscal policy AT ALL (it's funny: many times they even forget that "tax cut" -- one of their mantras -- is in fact fiscal policy!). These people should really start to realize that demand management matters, too. Lots of empircal evidence out there. Reaganomics-Thatcherism has its time. But not all the time: Bush has proven it. Think about this: supply-siders' backbone is Say's Law ("supply creates its own demand"), fine. But, they also say they believe Walras Law (that "ALL markets clear). It doesn't take too much time to see the flaw: Imposing both laws together is theoretically impossible. Say's Law only concerns with goods and labor markets. Walras Law adds the third one, namely money market. Saying that "supply creates its own demand" basically imposes that goods- and labor markets clear (because Investment = Savings should be paired with Labor Demand = Labor Supply). But if that's the case, while you ALSO hold Walras Law, then money market should also clear (Money Supply = Money Demand) -- Now, look around: do you think all markets clear? I don't. I don't buy Say's Law, because it implies that the cause of unemployment is EXCESS aggregate demand for goods (and, this is funny too: they call that "voluntary unemployment". To me, it sounds like an oxymoron). I don't think so. I think the cause of unemployment is more of INSUFFICCIENT aggregate demand. This is where fiscal stimuli is needed. Remember: you can also use monetary policy in OTHER situation. I am not against monetary policy.

Third. SBY waited too long before announcing his cabinet last night despite his promise. The doubter has come back?

Not happy with the Nobel this year

"Damn, it's Kydland and Prescott. Not good for Keynes", I wrote an SMS to Rizal last night. I learned macroeconomics from Stephen Parente, a former student of Ed Prescott, and his co-author for "Barriers to Riches". Steve is really proud of him -- and of Finn Kydland (also a former student of Prescott). He took three consecutive meetings to talk about Kydland-Prescott's time inconsistency model. (I had a chance to meet Prescott when he was giving a lecture on the causes of difference in productivity between American and European workers. It was boring).

Back to what gives Kydland and Prescott the Nobel. It's that time (in)consistency model. It's about credibility of policy. It is THE real business cycle. The more Steve taught me about Real Business Cycle, the more I appreciated that elegant model (Steve likes the example of credibility in monetary policy: once you deviate, you're screwed). But... the more I read the paper the more I was and am questioning the plausibility of its key assumption. I am always skeptical when people start saying "... in infinite horizon..". Infinite? Gimme a break. This is what Keynes really hated. Hiding behind infinite horizon. Loooooooooonnnnnggggg run. And mind you, in that infinite horizon, there is only one representative consumer. How come? Isn't that too heroic an assumption?

Emily or Lakisha? I bet it's Emily!

In a recent AER issue (Sept 2004, subscription required), a paper by Marianne Bertrand (Chicago) and Sendhil Mullainathan (MIT) is worth discussing. They investigate job market dicrimination in the US. It's not the content that is really interesting. It's the method. In particular, it's the way they conduct their experiment. Bertrand and Mullainathan sent thousands of fictitious (!) resumes to help-wanted ads in Boston and Chicago newspapers. They use African-American- and White-sounding names to manipulate perceived race. After controlling for education, military experience, and other skills, they find that discrimination is significant. In addition, the study finds that the White-sounding names (Allison, Anne, Carrie, Brad, Brendan, Greg, etc) receive 50 percent more callbacks for interviews than the African-American names (Aisha, Ebony, Keisha, Darnell, Hakim, Jamal, etc). Interesting experiment. Would ethicists disagree? Ugh, I wonder: would the result have changed if they had targeted "athelete-wanted" ads?

Good public servants

So I bought three books from Amazon.com. I paid $332.96 including about $40 for S&H. To my surprise, in the notification form sent to me by the Indonesian Postal Service, I had to pay an extra Rp432,852 -- that's almost $50. I complained.

 

First, I visited the Indonesian Postal Service. A staff explained to me that the 50 bucks were charged by the Indonesian Directorate General of Customs and Excise. The Postal Service only shared part of the S&H with the US Postal Service.

 

So I went to the Customs and Excise Office. The gentleman there nicely explained to me that for any personal purchase from abroad with value of $50 or more, the State would charge either 1) Import tax, and/or 2) Excise, and/or 3) Value-added tax, and/or 4) Sales tax, 5) Luxurious good tax, and/or 6) Income tax. My books were subject to numbers 4 and 6. That is, 10% for sales tax, and 7.5% for income tax. The base was my books' CIF value minus $50, or $274.37. 

 

OK, I paid a lot for the books. But I am fine: the people in the Post Office and in the Customs&Excise Office were very nice and helpful. They showed me all the regulations related to my questions. And I understand. If it's transparrent and lawful, I pay. No harm done.

 

(SBY, I vote and I pay tax. Watch your back!)  

Tax cut

I am no big fan of coalition. But I applaud people who express their standpoint explicitly, reasonably, and with clear argument. These Nobel economists are the examples more of the latter than the former. Akerlof, Arrow, Kahneman, Klein, McFadden, North, Samuelson, Sharpe, Solow, and Stiglitz say it all: Bush's tax cuts plan is a flaw. So vote for Kerry.

A week ago or so, we were watching the first episode of Commanding Heights, The Battle of Ideas at office. I have an impression that it does not do enough justice to Keynes. CH series are about market superiority against government "intervention". And Hayek is the man. Keynes is the loser. Market means Hayek, vice versa. Intervention means Keynes, vice versa. This is a total misunderstanding. Unfortunately, some economists think it is not. It's like saying that: tax cut is always good. Ah, Friedmanite.

Aside: Should really have another in "I live this office" series. Three days in a row for dead internet. Ah, Jurassic Park.

Ex post feasibility study, eh?

What a weekend. Was giving a training on valuation techniques to Bank Indonesia officers. Yesterday was terrible. Had to teach ("You don't have to teach us. We want a discussion. Let's work together". Ah, well) more than 6 hours. And it's not the worst of it. What bothered was the whole idea: they wanted to conduct a cost-benefit analysis -- and this means feasibility study -- of a big investment in a machine AFTER purchasing it. Say what? Never I wanted to end a training so desperately.

It feels good to finally be home again (even though mail-server is down again -- why am I not surprised?).

Aside: Health test results are good. No problem of chollesterol (sp?) as Mom suspected.