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Keynes, Macroeconomics, and Traffic

Orlando Roncesvalles (oroncesval4@gmail.com)

Back in 1936, a smart aleck named Keynes (John Maynard, or just Maynard) cooked up something he called The General Theory of Employment, Interest, and Money. He thought of unemployment as something to be solved, possibly in the same way that Albert (surname Einstein) thought “relativity” was the mystery to get fixated on. The parallels stop pretty much there despite the historical fact that failed mathematicians sought to infuse physics into economics, a project that took a long time to be discredited (not until 2008 anyway, when the Great Financial Crisis finally put paid to the misconception that physics and economics can mix, the latter having the muddle-like consistency of dirty motor oil and the former the empirical clarity of replicable experiments).

The genius of Keynes was in his insistence that the short run mattered more than the long run (when we would of course all have died). In that short run, slack in an economy (or unemployment) could be dealt with by public works. This idea was nothing new — even the Roman emperors knew that public spectacles kept people employed (even entertained). Keynes came up with the idea that in the short run, aggregate supply (or output, later standardized into GDP or gross domestic product) would have to adjust to what he called aggregate demand, whose components included consumption, investment, and government expenditure. Textbooks would later call this equality between aggregate demand and supply as “goods equilibrium.”

But Keynes then married the idea of goods equilibrium with something we might today call “asset equilibrium”— a situation wherein people are content to hold the quantity or amount of money in their pockets.

Asset equilibrium meant that peoples’ “liquidity preference” was satisfied through the movements of the interest rate as the price of credit and the opportunity cost of holding money. Money demand was driven by GDP and the interest rate, while money supply was a policy variable in the hands of the central bank. The equality of money demand with supply would be at the market-determined interest rate. Recognizing such an equilibrium was a way of bringing in the workings of the money and banking system into a fuller explanation of the gyrations of the business cycle. After all, the money markets determined interest rates, and these rates in turn drove business investment, which of course is a component of aggregate demand in the goods market.

The essence of Keynesian thinking was and remains the workhorse of macroeconomics (that specialty within economics that concerns itself with the short run determination of GDP and interest rates).

After Maynard, everyone then had a field day. The business-cycle savants focused on the confidence-based elements of aggregate demand (consumption and investment); the politicians latched on because government spending was their domain and Keynesian economics provided cover for influence and corruption; and the bankers were very much in on the act of determining interest rates. Macroeconomics caught on as the thing to know before one can say anything about the national or global economy.

It turns out that the apparatus of macroeconomics can be tweaked to help us understand the relationship between GDP and traffic.

Recently, a noted legislator reiterated the idea that prosperity (a growing GDP) was behind our traffic woes. I interpret what the legislator said to mean that without the heaven of a business boom, we wouldn’t have the hell of traffic. We should sit back and no more challenge him and his ilk to take public transportation because of course he already knew the answer: We are prosperous, so that we should just grin and bear it!

A critical but opposite view has nonetheless come forward. It is the idea that traffic is a brake on prosperity. The more severe the traffic, the less the GDP.

So, which is it? Is it a positive correlation between GDP and traffic? Or a negative one?

Keynes would likely scoff at the seeming contradiction. The negative correlation is the working of goods equilibrium if we realize that the severity of traffic negatively impacts aggregate demand. Bad traffic keeps consumers from traveling to malls, and smart businesses would likewise invest less if traffic drags down sales projections. Bad traffic kills GDP.

The positive correlation is something else. As GDP grows, the more we want to acquire transportation assets, such as cars and motorcycles. But in the short run, there is only so much roadway for all, and traffic problems arise.

The two disparate relationships – goods equilibrium and “traffic equilibrium” – are synthesized in the macroeconomics apparatus. Smart students will see that the thought experiment is the same as that of the infamous IS-LM apparatus of macroeconomics, where IS represents goods equilibrium and LM represents assets equilibrium; we now simply replace assets equilibrium with traffic equilibrium. Traffic equilibrium, by itself, reflects the positive influence of GDP on the severity of traffic problems, though it also suggests that the less the traffic, the more that people will demand transportation assets (this is the analog to the idea that the lower the interest rate, the more we would prefer liquidity or hold money).

What does all this mean? Can we now have a “clean” sorting out of the two disparate influences – the one of GDP on traffic and the other of traffic on GDP?

The answer is this. As an economy grows so of course does GDP. If the traffic infrastructure is left “as is,” traffic problems worsen, and governmental neglect is the culprit. This is because the traffic infrastructure (like monetary policy) is in the hands of the economic authorities. The infrastructure is in fact a public good. Still, the hapless citizens aren’t exactly helpless. They can move closer to where they work or work closer to where they live. They can drive less and consume less, and coincidentally lessen their carbon footprint. As a modern Marie Antoinette might say, let the travelers have their air-conditioned “me time.” Except that the peasants don’t eat cake or have their James (the proper name for chauffeurs of Rolls or Benz automobiles). Apparently there is no free lunch, and traffic is here to stay. Embrace it.

But if we were to solve the supply side of the transport asset equation, we reduce the severity of traffic, and the GDP boom continues or strengthens.

How to improve the traffic infrastructure is then the key. It is the magic but elusive password. Our legislators are perhaps simply not up to the challenge. Boot them, but don’t use the Denver boot. It won’t work because they’re too self-important. They’ve so far set things up so that they don’t suffer the inconvenience of public transport. Instead, they tell the ordinary citizen that it’s his fault because he enjoys a prosperous economy. Nuts.

In defense of trolls

The Ranking of Human Values

Let us rank what we value. In the end, we will conclude that we ought to be kind to trolls.

Thinking beats speaking because thoughtless speech is just noise.

Yet action speaks louder than words. This means acting is better than speaking.

Is acting better than thinking? Probably not because we also claim that the pen is stronger than the sword. He who lives by the sword dies by it. He who lives by the pen lives forever. Besides, when we’re thinking, we practice silence, and librarians will swear us all to that.

So there it is. Thinking is better than acting, which is then better than speaking.

What then is the point of protecting free speech if it is the lowest form of human interaction?

The answer lies in realizing that we also value compassion. We say that no man is an island, and that when the bell tolls, it tolls for all. We sense that the weakest have only speech. They can plead with the strong to spare them, but that’s about it. And the thinker, if he truly thinks, knows that there’s no point in thinking if he cannot protect the weak. The thinker understands the sense of justice that John Rawls imagined. He thinks that if he could choose his company or society, the thinker would choose to be born into a family of thinkers, and not warriors or orators.

When we see a troll earning his meager pay on canned ad hominem, we thank the Supreme Being that we weren’t born to be trolls. They’re there by an unfortunate act of God when He gave out talents. Trolls wish they could think or act, but all they have are meaningless words. And meager pay.

The pseudo-righteous proclaim that we shouldn’t feed the trolls. True enough. But the higher duty is to think and find ways to have a society where the undeserving rich wouldn’t be able to hire trolls.

In the end, we are all trolls. There are trolls, and there are trolls.

On Thought Leaders, Corporate Social Responsibility, and Sustainability

By Orlando Roncesvalles (January, 2020)

There’s an unfair amount of cheesy buzzwords out there.

It hit me one day when I came across something called “Thought Leaders.” My first reaction was to ask, “Are you kidding?” – addressed to no one in particular. When I think I’m thinking, I’m being me, moi. I’m doing the Cartesian thing (you know the drill: Cogito, ergo sum). Anyone without a working brain is just a rock, if not a pebble (but a glistening grain of sand can still capture the human imagination). This is a long-winded way of saying that if someone is “thought-leading” you or me, he’s not making sense. Never mind that Wikipedia defines “.. a thought leader [as] an individual or firm that is recognized as an authority in a specialized field .. whose expertise is sought and often rewarded.”

One commentator once cynically described a thought leader as “.. a discussion facilitator at think tank dinners where guests talk about what it’s like to live in poverty while the wait staff glides through the room thinking bitter thoughts” (David Brooks of The New York Times, way back in 2013). In short, a thought leader is an intellectually bankrupt idea wanting to be paid big bucks. How can you be thinking if your puny brain is being led by its nostrils? That wait staff in Brooks’s satire was the smart one, if poorly paid.

Pretty much the same can be said of something called Corporate Social Responsibility (CSR). A somewhat extreme view, usually attributed to Milton Friedman, the economist, is that CSR is, like thought leadership, somewhat of an oxymoron. It’s neither social nor responsible. It isn’t needed at all and wouldn’t even exist without a budget. That budget comes from excess profits. Economists understand that Friedman saw the problem as a lack of competition. The textbook says that with easy exit and entry, the long-run profit is just enough to compensate shareholders, even as corporations use the most efficient technology to minimize costs and sell products at reasonable (affordable) prices.

The other (also somewhat extreme) view is that CSR is a worthwhile cause, like climate change. We need to restrain corporate “greed” through signaling devices (“My product is green or organic, not produced by slave or child labor, and I’m an NGO-certified good guy”), or by outright regulation. In this public relations ecosystem, CSR validates monopolistic pricing and ultra-high CEO compensation, or it runs on the fiction that regulators cannot be bought. Is there a middle ground? I admit to not knowing, though I believe that Friedman is right if corporations dealt only with private goods (those without negative externalities like pollution). In a world where corporations produce public goods or bads, governmental regulation must be brought in, although this leads to a problem of how to prevent something called regulatory capture. Perhaps that’s just too difficult a problem, especially in countries run like pineapple republics where cozy relations between corporations and their regulators are an open secret.

Finally, I come to that bane of all banes. The word is “sustainability.” If something is not sustainable, it must be sinister and will, sooner than later, destroy our souls. Think of single-use plastic clogging the planet’s oceans if not our stomachs. Ponder the futility of islanders heading to an upland that will anyway be washed away by climate change. We are doomed beyond recognition, never mind repair. Unless we see the light of sustainable. Yeah, right.

These words pretty much suffer in translation. Thought leader is tagasugod ng pag-iisip. CSR wimps out as katungkulan ng korporasyon para sa madla. Sustainability comes through as pananatili ng kinabukasan. Although I kind of like the last even if it suggests a Luddite itch for all things old.

To Thought Leaders, I say, “Talk is cheap. Let others speak too. You lose credibility otherwise.” To corporations practicing CSR, “We’re on to your tricks.” To those waving the banner of Sustainability, “You look like a kissing cousin of CSR.” Perhaps the antidote is to impose an excise tax on those selling CSR products, or to confront the sustainability activist with a question. “What exactly would you suggest we do?” If the answer won’t pass the Cartesian existential smell test, then we know it was just hot air, if not a sigh. The climate change folks will sorely disapprove.

Dangling drugs

ALTERNATE UNIVERSES

 

Here’s an imaginary conversation between an “underground” economist (UE) and a wannabe journalist-blogger (WJ) recently on the drug problem and the economy.

 

WJ: Why do people do drugs, knowing it’s a crime?

 

UE: A crime is also subject to the laws of economics.

 

W: I don’t understand. Is there an economics of crime?

 

U: Economists are crazy people. They think that their thinking applies to anything. There’s even an economics of religion that explains how religious leaders can stop typhoons or earthquakes, and how the good book can predict the end of the world. But that’s another story.

 

W: I still don’t get it. Crime is a bad, not a good. My economics book says the economy produces goods and services, not bads.

 

U: No bads? Your teacher didn’t teach you right, or you learned wrong.

 

W: (Sobbing). How can you be so mean? I went to the (… mentions a top school of economics in the country).

 

U: There, there.. It’s not the end of the world. A good becomes a bad when you don’t want any more of it, and demand becomes supply.

 

W: You mean that the good is just the opposite of the bad?

 

U: (to himself) I give up. Maybe this explains why bloggers are wannabe journalists.

 

U: (continuing) Well, not exactly. You can sell a good you don’t want but you have to find someone who will want your bad (he thinks it’s a good).

 

W: Now I’m even more confused. Sellers sell bads and buyers buy goods?

 

U: Haha. Now you get it. Illegal drugs are sold by those who don’t want it. Now, if only I could sell our corrupt politicians, I’d be rich, but who would buy?

 

W: Yes, who will buy corrupt politicians?

 

U: You’d be surprised. They buy each other. Ask your pseudo-friendly PR practitioner; she’ll tell you who’s buying whom. They’re addicted to each other no end. They even party with each other, all the time looking old and decrepit, even when they’re young. It’s all very strange.

 

W: But we’ve strayed. So, again, why do drugs exist?

 

U: OK, back to square zero. Drugs aren’t inherently bad. Poison in small amounts is medicine. The problem is when you take in too much. How to prevent the “taking too much” is an economic problem.

 

W: (brightens up) Ok, now I get it. The trick is to educate ourselves to limit drugs and politicians! But nowadays, we pretend to kill drugs but glorify the politicians who like the idea of drugs to keep themselves in office. We need politicians who, like doctors, prescribe drugs as medicine so they won’t have any more jobs. I remember an economist who had a theory of “creative destruction.”

 

U: And you thought creative destruction explained only the business cycle and the stock markets. By the way, you’re on to something there when you got to thinking that drugs and corrupt politicians are similar. If there were only a few bad politicians, we could just string them up. But if they’re all over, we’re dead.

 

W: (already dead) ..

 

U: (also dead) ..

 

Narrator out of nowhere: The moral is simple. Economists, as bad as they are, say that you can’t just outlaw bads. Good night.

 

 

 

A Winter’s Day

In a bleak and dreary November found me in the ‘burbs of Washington, DC. To the cognoscenti, that’s that famous place that is of course the center of the universe. I do not exaggerate.

Some days ago, the DC baseball team, the Nationals, won the World Series. That’s evidence number one. Two, it has been unseasonably cold, almost freezing, almost unheard of before Thanksgiving. That’s a portent of momentous events as well as palpable evidence of climate change. No self-respecting center of the universe would be left out of the climate change debate, and even if Greta Thunberg preferred to land by sailboat in Frank S’s New York, she sandwiched a protest visit to Washington, making the latter a competitor to the title of the Definite Place To Visit. Three, and most importantly, the Washington Post still shows up on my driveway, once a week at least, although slimmed down measurably with the advent of competing news and advertising sources online. It doesn’t matter, this competition thing, so long as we embrace the philosophy of no more driving to the shopping because of course Amazon.com not only reads your needs but also delivers in One Day Prime. Finally, for nostalgia more than anything else, there’s still The Old Ebbitt Grill; go there for the oysters and crab cakes.

There are certain perennials about the American capital. The Redskins have only the remembrances of things past (to evoke Marcel Proust, Doug Williams, and Joe Gibbs). The Washingtonian Magazine is still around, especially where you go for a haircut. Reagan National is still the airport of choice for Movers and Shakers. The traffic, yes the traffic, still competes with La-la land. The visitors still visit the White House and the great museums, of which the Smithsonian is still the best. The Kennedy Center still has free performances (at 6pm, Monday to Friday).

But there must be things that are new. As a creature of habit, I can report not much. This is due more to my inaction than anything else. But I checked around and came up with certain nuggets, if only to help guide out-of-town visitors. For the museum-hungry there’s a $1 bus called The Circulator. The Washington Monument has re-opened after closing for a renovation in 2016 (get your tickets in advance). The lure of Atlantic City has dimmed, replaced by nearby casinos in Baltimore and at the National Harbor, for the visitor who likes slots and tables. For Filipinos the restaurant scene has grown like mushrooms in a rain forest. In my neighborhood there’s a Kuya Ja’s Lechon Belly (4.5 on 473 reviews at Yelp).

What do the French say? Plus ca change, plus c’est la meme. Mao jud. I visit but not in the extremes of winter and summer; for then, there’s Dumaguete.

Politics, economics, rice

The paradox of advantage

The production, consumption, and importation of food (rice or grains) have posed contentious as well as analytically difficult issues even when economics was still in its infancy. In the early 1800s, David Ricardo came up with the idea of comparative advantage to explain why countries trade. On its face, it presented a paradox because comparative advantage suggested that a poor country (one endowed with limited technology) should export a good such as rice even if it didn’t have an absolute advantage in its production (it just needed to have a comparative advantage). Ricardo was also not one to advocate self-sufficiency as he was pretty much a proponent of free international trade. Today’s debate on the merits of rice tariffication presents conundrums and even unanswered questions, though the latter have perhaps more to do with politics than economics.

Bread and circuses

But even earlier, when economics was not yet a social science, kings and despots already knew that to survive insurrections, they made sure that the price of bread or grain (or any food staple) was affordable to the masses. The Roman poet (Juvenal) considered on or around 100 AD that political stability required whoever was in power to provide bread, as well as circuses! Forget the Romans. The Bible has its share of stories where kings had the burden of protecting their subjects from suffering in times of famine. Closer to home here in the Philippines, when the price of rice spiked in 2018 and became part of an inflation scare, there was a fair amount of wrangling on what to do.

Tariffs in international economics

The conventional wisdom today in economics, particularly in the textbooks on international economics, hasn’t changed much in the last two hundred years. Free trade, because it is voluntary and anchored on the concept of comparative advantage, was (and still is) a good thing. And yet, here we are in today’s age of wondrous innovations dubbed as the “fourth” industrial revolution, fulminating at the specter of rice prices remaining high for the consumer but falling to penury-inducing levels for rice farmers. What has gone wrong?

Lawmakers as villains

The twitter-verse has focused on a conspiracy theory based on an impending demise of domestic rice production. The story is that we have a heartless and gutless set of legislators who pushed what is known as Rice Tariffication, which has by now had the effect of making rice farming unprofitable (requiring all kinds of governmental intervention to support the poor rice farmers), thus also forcing the price of rice land to the levels of a song for real estate developers who know how to convert such idle lands into houses and lots. This state of events runs afoul of the Emersonian and romantic view of the idyll of (rice) farming in the hinterlands (so, planting is not a joke but it is both honorable and upright, especially if food self-sufficiency is a nationalistic priority). It is of course easy to blame the “rich capitalists” who dominate the real estate industry for the plight of the poor farmers.

The lessons of history

There is nonetheless more to the story. The historical record traces the timeline of rice farming as a battle towards high productivity and self-sufficiency that didn’t get anywhere. One study states that the Philippines imported rice from 1885. Although we had a brief heyday of self-sufficiency in the late 1960s and 1970s, the Philippines has since become the world’s second largest rice importer (next to China). The official line has been that we aimed for the three goals of self-sufficiency, high incomes for rice farmers, and affordable prices for consumers. What has been unsaid is that these goals are basically incompatible. Without a gigantic leap in domestic productivity, only the last of these goals could be attained, and only if the rice-exporting countries (such as Vietnam and Thailand) were to sell rice on the cheap.

And more. We had a commitment to the international community to abide by free trade rules (apparently, the nameless bureaucrats at the World Trade Organization believed that what was good for the world was good for us), but like a stubborn-headed child we dug in and said, no, we want to “protect” our domestic rice farmers. We opted also to engage in this protectionism by applying quantitative restrictions on rice imports (also known as quotas). The persistent WTO gave us this leeway while suggesting that an equivalent restriction through tariffs might be a better idea. So, with the apparent fiasco today, should we blame the WTO?

The Catch-22

Back to the drawing board of international economics. If outright free trade is best, what could be the second-best? Is it quotas? Or tariffs? Here, our economic managers have been caught in a Catch-22 bind. A Catch-22 is a unique situation. Applied to the tariff-quota controversy, it goes roughly as follows. Both tariffs and quotas can result in the same domestic price – higher than the world price; and the same level of domestic production (but higher than if we had free trade) and imports (at the same level as if we had simply applied quotas). But there are differences. A tariff generates government revenues, which can be collected and then misused. A quota results in “windfall” profits for those given import licenses, and is said to be a major source of corruption. In short, either way, tariffs or quotas, we face the same inevitable temptations for the abuse of public office for private gain.

But there’s a mystery that accompanies the Catch-22. Theoretically, the situation of the rice farmer is the same under either tariffs or quotas – he produces at a level higher than under free trade, and benefits from a domestic price that exceeds the world price (by the size of the tariff, which today is set at 35%). What has happened, and this has been documented by both the proponents and opponents of Rice Tariffication is that rice farmers earn less under tariffs. The unanswered questions are: Why? Is the 35% tariff too low to make its effect equivalent to that of the quota system? Is it because there is a local cartel that can dictate a lower farm-gate price under tariffs than under the old quota system? If there is such a cartel, is it engaged in a form of retaliation because they lost some lucrative opportunities under the quota system? Can such a cartel continue to operate? What if there were a political will to dismantle such a cartel?

No way out?

What seems not in dispute is that Rice Tariffication was aimed at achieving “parity” between farmers’ incomes under the quota system and under the tariff. We can perhaps argue that good intentions are not good enough. The hard question is what should be done?

My personal view is that tariffication (or quotas) was never the answer. (Neither was self-sufficiency.) It is, after all, a second-best form of protectionism that allows inefficient domestic producers to continue as they have done for almost fifty years, or even longer. We should now consider whether “creative destruction” (an idea from the economist Joseph Schumpeter) should be allowed. Let the rice farmers find other higher-value crops. Let the government support them in any way it can, especially in the provision of public goods in the form of extension services, better farm-to-market infrastructure, and a “clean” bureaucracy. But why create a P15 billion kitty (from the rice tariff) that would tempt politicians the way that pork makes them giddy with cholesterol?

As to the doomsday story that rice lands will end up becoming subdivisions, that is one for those thinking about land use policies and legislation. That is altogether another story.