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Thursday, May 31, 2012

The `G' in the C+I+G=Y formula

When Kenyesians dan Hayekians debate each other, they don’t debate on the science of economics as a science. As a science which studies the allocation of scarce resources among competing wants and needs, that part is settled. They debate on the bigger issue of how to manage the economy. Keynesians want to steer the economy while Hayekians want to set the economy free.  One side thinks they can plan for others. The other side wants the planning to be done by many as individuals adapting themselves to the free market.

They debate on the efficacy of polices- whether managing aggregate spending or freeing the market is better in order to increase income. Controlling aggregate spending suggest some control over the aggregates- whether consumption, investment or government spending. Who controls them? The answer: The government. Control suggests the omnipotence of government and of course governments all over the world, like to control things.

Hayekians support the free market relying instead on the actions of individual economic actors with motivations and self-interests (what interests the individual) to make the economy work. Free market does not mean free from government involvement absolutely. Rather, government’s scope is limited over a few matters such as keeping peace from within and without. Government’s role is that of an umpire and the umpire must be neutral.

Our government of course supports the Keynesian approach without a doubt. They are adherents to the dictum, we are Keynesians now. But here is where the similarities end. While in western economies, the focus is on actually seeing the economy succeed, the emphasis in our country is different. The focus here is to concentrate steering power into our hands as much as possible, so that in the name of guiding the economy, the state plays the role of allocating resources to who they think can advance the economy.  The state assumes omnipotence stature. And  because of this status, they get to choose who succeed and who fail.

We are digressing too far I am afraid. We can already anticipate the headlines. “We must avoid what happens to Greece. In order to do that, we must spend more. To hell to those who complain of increasing public debt to GDP share. If we cut spending, the economy will contract. The opposition is stupid. They are just following the IMF’s prescriptions”.

What we fear most from the Tragedy of Greece is that, it will be used as justification for more deficit spending. The dependents to government contracts and thetenderpreneurs, the rent seekers will support the government. Greece , Ireland will be used as examples NOT to be stingy but to spend more. It will give a carte blanche for the powers that be to pick and choose winners based on whether the chosen are liked or disliked. The business elite will be celebrating the fall of Greece in anticipation of windfalls from our Santa Clausian government.  

The real issue of restructuring is kept on the backburner.

The basic idea behind Keynes Theory is to spend more to get out from economic slowdown. Mahathir before and Najib now, like spending. They like the G in the C+I+G = Y formula. Najib likes announcing spending plans- when the private sector created a shopping paradise for high end products in JB, Najib was there hailing Premium Outlets as an example of government initiatives. Did that initiative increase productive capacity of the economy? Consumption spending does not create productive capacity of the economy.

When Guocoland announced that it will spend billions to create an Eco city in Sungai Pelik, Sepang, we all feelpelik too, he was there behaving like the midwife delivering a new economic initiative.  Clever, by strategically officiating such private sector initiatives, Najib can be seen as the originator of the business plans. Didn’t I say before- the ETP was just a collection of private businesses business plans adopted by the government as its own National Economic Transformation Plan?

It’s going to be spend baby spend after this. Before FGVH lists, Najib got money to pay settlers RM 15,000 per Felda household. Where did the money come from? Advances by underwriting banks? Loan from EPF? Internal Felda funds? Then it’s the settlers’ own money they are getting and they are jumping up and down in euphoric hysteria.

The missus is now demanding that, the next RM 5,000 installment must be paid directly into her account lest her husband in Felda Chini goes south to Segamat and patronizes one of the massage parlors there. The son will demand the subsequent RM 5000 be banked direct into his BSN account so that he can finally get that Kris Motorcycle he planned to get to rempit on the nice Felda roads.

What happened to Greece will be used gleefully by the pro-deficit people who hate the idea of austerity. Because to them, cutting back on government spending means painful cuts that is hurting growth. Their growth that is. No more negotiated tenders. No more free passages.

That, they say is silly economics. The PM says the economic plans by the opposition don’t make sense. The people must choose between austerity and growth. Let us clarify some of the issues here. The issue here is to curtail public (government spending) but free the people to do the real economic work. Allow them to be taxed lower and give easier credit and capital.

Posted by sakmongkol AK47

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