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Max Corden too biased on the debate of fiscal stimulus

Comments on Current Account Blog “Corden on fiscal stimulus”, the Australian, posted by David Uren, 27/05/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/corden_on_fiscal_stimulus/

Some economists are renowned for their ideological approaches to economic policies. Corden has just provided a perfect example recently.

Corden, I suspect, must be, or at least now sounds to be a Keynesian. He is too biased in his analysis of government stimulus to counter criticisms over reckless fiscal spending disguised or misdirected as fiscal stimulus.

He said there are two flaws in the notion that fiscal stimulus now will leave future generations worse off. He said for the fhe first one as follows:

“First, there is the total value of the bonds (and equities) acquired by the savers as the result of the rise in incomes brought about by the stimulus. These are assets, and it has been shown that their value is equal to the bonds issued by the government to finance the stimulus, which are the taxpayers liabilities.”
“Hence, there is a set of assets that exactly offsets the liabilities on which conservative critics of stimulus policies have focused.”
Is Corden correct in the context of countering criticisms? No, unfortunately. This can be easily understood through the following two examples. Example one: what answers one will get, if saying to a family going to face foreclosure of their home that, don’t worry, there are assets that is the total value of loans by the banks that equal to your liability, you should see the value those assets in the society’s balance sheet. The answers may piss off the questioner.

Example two: what answers one will get, if saying to the shop owner who has just been robbed that, don’t worry, there is no loss to the society as a whole, since there are gains to those robbers the same value equal to your loss. Surely the questioner will be pissed off by the answers.

These two example show how ridiculous Corden’s argument is. It is not just the total values that matters. The distribution of those values in the society, or between intergenerations in Corden’s case, that equally matters!

Corden’s second point is to allow the reasonable possibility that there will be positive legacy for the future generations if some of fiscal stimulus as investment turns out to be socially productive. Yes, there is no question that some fiscal investment will be socially productive. On that point Corden is correct. However, the argument is incorrect and wrong in the entirety or totality in the context. To see this point, one only needs to look at what has been happening in Australia’s fiscal stimulus packages over the past six months or so. First, there were the first cash handouts in November last year, proudly labelled by the government as fiscal stimulus. It was a waste, though not completely wasted to be precise, in stimulating the economy to say the least. To say the worst, it was a fiscal bribe. Or one may say it was a complete mess up by an inexperienced Keynesian government.

That was not the end of the matter. In March/April this year, the government has devised its second fiscal stimulus package that included another cash handouts, in the face of mounting evidence that the first one was ineffective in stimulating the economy because a large part of them were saved rather than being spent. To the government’s credit, however, the second cash handouts were a little fairer than the first one, because every taxpayer, except high income ones, would receive a cash handout depending on their taxable income in 2007-08. That was an improvement, a clear improvement. But the intergenerational consequences of inequality are there, the government used future generation’s tax liability to give cash to the current generation.

For Corden’s argument to be creditable, fiscal stimulus needs to be made in such a way, as Corden argued, that the social rate of return of this investment were equal to the rate of interest that applied to the tax liabilities, these two - the tax liabilities and the benefits of first-period public investment would be completely offsetting. Is that reasonably possible in reality? No! The answer is so clear if one looks at the Australian government’s recent proposal of a national broadband network at a proposed cost of $43 billion. There was no feasibility study, no business plan, no economic study, nothing at all. As the minister for finance said, that number was a guestimate, pulled out of the air, because the government feels it is in the national interest to have such a network, to do so. Can you trust anyone who approaches an investment of that magnitude in such a way so the result will be good?

Corden must be living in a very different world of idealistic Keynesian, where not only the government knows all the necessary information, it is also working completely and entirely in the interest of the country, it is so capable in deciding fiscal priorities, so business like approaching to investments. I am afraid that does not exist and Corden must be dreaming.

There is no question that there is a need for fiscal stimulus in the face of a great recession. The debate is not about that need or not. The debate is about what the fiscal stimulus should be and how that should be done, whether it is effective, whether it is done with the minimum costs to future generations. Ideology, whether they are political or economical, is unhelpful to the debate, and unhelpful to getting the stimulus right to lift the economy out of recession.


Leaders' lack of leadership and quality of bureaucrats' advices: the case of Australian government recent policies

Comments on George “Leaders out chasing phantoms”, 30/05/2009, http://blogs.theaustralian.news.com.au/meganomics/index.php/theaustralian/comments/leaders_out_chasing_phantoms/

George, I liked your article when reading it. And I still like it even after I had read some comments. To be frank, although I strongly share your frustrations about the PM and wish he could and would perform better as most Australians wished so, I tend to agree with some comments that Rudd may not be what people thought or think he is.

Yes, he has ego, as most people especially politicians do. He also has brains; I tend to agree with you, because otherwise he could not have risen to the Labor leadership and became the PM. But, his character of micro-manager and policy nerd is his own enemy and will prove to his eventual downfall.

Micro-manager, in fact, is a form of small mindedness, unless that character is supplemented with super energy and balanced with a big picture strategy/approach. So far Rudd has not shown the latter, except his opportunistic talent in combining with Gillard to defeat Beasley before the last election.

That act was a superb display of a smart strategy at a crucial time of history. It succeeded at a time when Labor was in despair and lacked talent. That act solved Labor’s despair and won the following election. But it has not changed its critical deficiency, that is, lack of talent. This particular point has exposed Rudd’s own weaknesses and reduced the Labor government to a group of clowns in a circus show.

Besides the Labor’s lack of talent, I have now begun to wonder the quality of the public service, especially a number of important agencies, such as Treasury, Finance and PM&C. The government’s responses to the financial and economic crisis after it had emerged have been so poor.

Some examples include the cash handouts as fiscal stimulus when expecting rising budget deficits and government debts, the national broadband tender processes and subsequent announcement of the new proposal of a new optical fibre of network to homes with an increase of the costs by several times of the original proposal the Labor took to the last election, the change to budgetary forward forecast process and the assumption of a lengthy period of above trend economic growth, the original disappointing and stubborn approach to the emissions trading scheme and the subsequent delay and changes to that.

Problems with the cash handouts should have been clear to economic advisors before they were proposed. If they were not clear to them earlier, they should have certainly been clear enough at the time the second stimulus package was made. But to everyone’s surprise and disappointment, they got the second cash handouts in the second package.

For the national broadband network, how could any responsible government, not to mention a federal government, announce a $43 billion infrastructure project without detailed economic and business study, or a feasibility study? They have bureaucrats such as the Communication Department, Infrastructure (Invest?) Australia, Treasury etc. Why was the government or the PM and his communication minister so eager to make that announcement? Why couldn’t they just say the government intend to investment in such an infrastructure project, pending the study of the business case?

For the ETS, the climate change minister and the PM went against the recommendations of their chosen advisor and adopted a conditional target of 15% reduction. Further, it insisted to introduce the scheme in 2010. What happened? They had to back down and raise the conditional target and delay the introduction by a year.

I doubt all the government’s policy problems just reflect the lack of talent in the government’s ministry. I wonder whether it also reflects the failures of our top public services.

That is unfortunate for the Labor government. But more importantly it is a tragedy for the nation.

Don't be stupid - even for Japan's sake

Comments on Tobias Harris “A nuclear Japan is not an option”, 29/05/2009, http://www.eastasiaforum.org/2009/05/29/a-nuclear-japan-is-not-an-option/

I cannot agree more with Tobias Harris that “There is no problem that will be solved by a Japanese nuclear arsenal”. Further, a nuclear armed Japan will destabilise the Northeast Asia, East Asia, Asia and the world, due to the particular history in East Asia in the first half of the last century.

Firstly China is unlikely to take that kindly and would probably do whatever it can to counter Japan’s nuclear arsenals. Secondly, other East Asian countries, including possibly South Korea, are likely to respond accordingly and a new arms race would start to counter balance Japan. Thirdly, Russia is also unlikely to take it kindly and would develop a new strategy to counter that. As a result, complete new, unpredictable and dangerous military and security games would emerge.

The proposal of using a nuclear armed Japan to force China to be more forceful with North Korea to solve the nuclear problems of the North is nonsense and nonsensical. The idea would lead to a chaotic East Asia, diverting its limited resources for economic development to a wasteful arms race. It is likely to turn many East Asian countries that suffered from Japan’s invasion or occupations before and during the Second World War against their former chief enemy. It is not in Japan’s interest either.

Would a nuclear armed Japan really force China to change its tactics towards North Korea? Yes and no. No first. If China perceives a nuclear armed Japan as a threat to its security as it is very likely, instead of a willingness to stop North Korea’s nuclear programs, China might tolerate them and take advantage of the likely nuclear rivalry between Japan and North Korea. Therefore the proponents of such stupid ideas, even assuming they are well wished, are unlikely to see that China is forced to take a harsher and hardline attitude towards North Korea. They are badly mistaken.

Now yes. As mentioned, China might change its attitude towards North Korea, but not to the like of those proponents’. If you have a potential nuclear threat from Japan, why don’t you use a nuclear North Korea as a friend to counter that?

As I said in my comment on Tobias Harris’ article of “The North Korean test: a study in powerlessness” the other day, North Korea’s violation of international laws does not give anyone the right to violate them. We need to find effective ways to enforce international laws and using legal means to bring North Korea to the road of denuclearisation.

Anyone who has a strong interest in seeing a peaceful, stable and prosperous Korea peninsular, Northeast Asia and East Asia as well as the world needs to be vigilant against those who wish to see a different world, and those who may be well wished but nevertheless so irrational in their thinking to make nonsensical proposals.


Regulate pricing behaviour better than regulate market structure

Comments on Stephen Bartholomeusz “Rethinking competition”, 29/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/Rethinking-competition-pd20090529-SH46V?OpenDocument&src=sph

Most anti-trust laws have been based on the paradigm of “structure-conduct-performance”. As a result, anti-trust laws or regulatory authorities have a major focus on regulating the market/industry structure, such as the number of firms, market shares, etc. This makes the jobs of the regulatory authorities easier by limiting market shares, or concentration of an industry, such as the number of firms.

That approach may be good for markets or products where there are limited economies of scale. However, it can have significant adverse effects on the efficiency of costs and supply in cases where economies of scale are prevalent. Although the purpose of anti-trust is to protect the interests of consumers, the end results may hurt them, if anti-trust measures present costs of production from falling associated with economies of scale. But such negative effects are generally unobservable, so consumers don’t know if they have been hurt.

That is a paradox of anti-trust based on market structure. A better framework in protecting consumers seems for authorities to focus on firm behaviour/conduct, as opposed to market structure. Competition authorities or competition laws should have the power to collect costs and pricing information, if the market share of any individual firms exceeds certain percentage. Bu studying costs and pricing, the authorities can rule whether a firm has behaved competitively or not and take competition measures accordingly.

Both the world economy and individual national economies have changed so much with technologies, trade and economic integration and globalisation. It is time to rethink competition and how to manage competition, not for just the fears of concentration and for observable of the poor outcomes due to uncompetitive firm behaviours, but also for the economies of scale and their effects on costs and prices and ultimately the interest of consumers.

Authorities need to be prepared to do hard jobs. The days of easy doings should be gone.

Macro managing asset markets without a framework - easily said than done

Comments on Alan Wood “Regulators should be neither bubble poppers nor blowers”, 29/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25552776-5013578,00.html

Now it is high time to have a debate on a macro approach to asset prices, in the context of the great recession following the financial crisis that had its direct root of the bursting in the bubbles of asset markets, including housing and equity markets.

The current recession has been characterised by some as balance sheet recession. Balance sheet, no matter it is for banks, firms, or households, is affected by asset market conditions and asset prices. Although the current recession is a highly synchronised one, there have been these types of so called balance sheet recessions before, such as Japan in the 1990s.

In macroeconomics, there are goods, money, labour markets, but no other markets explicitly, such as housing and equity markets. The three markets in the macroeconomic framework jointly determine interest rate, output/employment, aggregate price (inflation). That macroeconomic framework has been good enough for using the two main macroeconomic management tools, namely fiscal and monetary policies to manage the real economy and inflation in the conventional sense, although there has always been so much desired for the effectiveness of those two policies.

While asset markets do not explicitly exist in the macroeconomic framework, their effects are included in more sophisticated models of some markets, though as exogenous variables, such as assets in household consumption demand. This treatment of other asset markets has left the main macro policy tools incapable of dealing with or managing those markets, from macro point of view.

Without a workable macro framework which includes important asset markets, it will be extremely difficult to see what macro policies should be used and how they will work in dealing with any perceived or real problems in those markets.

The current debate should and will prompt economists to come up with some workable macroeconomic frameworks that can guide policy makers in managing the economy more effectively than they have been.The great recession has presented economists with a very practical and urgent task in their research. They need to meet the challenges of our time.


A lesson from North Korea nuke test - all countries should follow international laws

Comments on Tobias Harris “The North Korea test: a study of powerlessness”, 28/05/2009, http://www.eastasiaforum.org/2009/05/27/the-north-korean-test-a-study-in-powerlessness/

It is already very bad to see a nuclear proliferation by the North Korea regime. It would be much worse to see another one by Japan. It is unthinkable. It also indicates the urgency to bring the North Korea regime to the road of denuclearisation as quickly as possible. The six party members must act together resolutely and effectively.

Anyone, Japan included, should not use the recent test by the North Korea as an excuse to pursue nuclear proliferation. Someone’s violation of international laws does not make it right for any other one to violate them. Any violation is intolerable and should be dealt with accordingly and effectively.

The international community needs to enforce international laws in a meaningful, just and effective way. The international war crimes courts should be focused more on what is happening now, rather than being used as a tool of witch hunt for some past events in an unjust and unbalanced way. The court should establish its credibility and should become more effective deterrence for future offenders.

The UN Security Council should have the power to intervene to make the court accountable to the international community through the UN representation system.

Nuclear not the only issue of Korea peninsular

Comments on Greg Sheridan “Three lessons from Pyongyang's test”, 29/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25547827-5013460,00.html

Sheridan’s lesson number 2 is that “China is overestimated as a geo-strategic partner and as a central player in any solution to the problems North Korea presents.” It is both correct and incorrect.

It is correct because the six party talk processes so far has been a failure and is not up to the expectations of many. In that regard, the expectation that China could play a pivot role in solving the North nuclear problem has been shattered, and China has failed to deliver the realisation of that expectation. Further China was disappointing as a geo-strategic partner and a central player to have brought a resolution to the denuclearisation in the Korea peninsular.

Yet it is also incorrect and wrong. First, if Sheridan is correct in analysing the reality and China’s perceived interests in the regional peace, stability and security, then Sheridan should realise that a long term solution to the peace, stability and security of the Northeast Asia region should be to ensure that every country in the region feels peace and secure.

While the most important first steps are to prevent the North Korea to completely halt its nuclear programs and dismantle the related facilities, the next step is the disarmament of the Korea peninsular, including the eventual withdrawal of the US forces from the peninsular. That will remove the main excuse for the North Korea to develop its nuclear programs. It will also give China some regional security assurance.

If the long time disarmament is on the agenda, it is much more likely for both North Korea and China, and possibly Russia to see the end of North Korea’s nuclear facilities. China will be “a geo-strategic partner and a central player in any solution to the problems North Korea presents”.

So far, the focus of the six party talks have been on the nuclear issue and every party has been unable to face the broader strategic context and raise the question that is necessary following the end of the nuclear issue. That appears to have been the key issue that Sheridan number 2 lesson implies, but he failed to see and mention the broader issue.

How will China view the future unification of the two Koreas? Whether China likes it or not, it is a matter for the Koreas to sort out. But given China has its own unification of the mainland and Taiwan, it is unlikely to overly resist any moves of the Korean unification. It will be much easier for China to see a unified Korea if there is no presence of other external forces, because what is the purpose of their presence if there is no division of the Koreans?

So it appears that Sheridan only touched the surface of the peace and security of the Korea peninsular and the Northeast Asia when he was analysing the “lessons from Pyongyang's test”. If he thinks more strategically and has a real interest in seeing an effective resolution to Pyongyang's tests, it is not too difficult for him to see the bigger picture as a foreign affairs analyst.


Strategic thinking needs to be really strategic

Comments on Han Sung-joo “North Korea: strategic thinking, strategic response”, 27/05/2009, http://www.eastasiaforum.org/2009/05/27/north-korea-strategic-thinking-strategic-response/

While Han Sung-joo's article is very much focused on Republic of Korea (RoK) and its alliance with the US in response to the North on the Korea peninsular peace and stability issue, the issue is really very much beyond that context. Indeed it is much wider and broader.

North Korea has so far successfully explored the weaknesses of the other members of the six party group. It appears that the North gained substantial concessions from the group and at the same time has kept and further developed its nuclear capacity and capability. In the end, it slapped at everyone’s face through the recent test of a second nuclear device and the defiant lunch of missiles. This has made the whole processes of the six party talks in the past years laughable.

North Korea’s escalation on its nuclear and missile development to defy the international community is serious and cannot be tolerated. The whole international community must act and act urgently.

If the Republic of Korea is to think and respond strategically, it needs to go beyond the conventional US alliance as a passive response to the North nuclear issue. It should consider more strategically about the security issue not only in the Korea peninsular, but also in the broader Northeast Asia, at the least.

I am not a security expert, but the North appears to have used the US presence in Korea as pretence for many things, including its development of nuclear and missile capability. Now the North has declared that it will no longer be bound by the armistice accord made to end the Korea war in the early 1950s, following Korea’s decision to join the Proliferation Security Initiative (PSI).

A long term solution to the peace and stability of the Korea peninsular will need to consider the impact of the alliance issue and create an environment that both Koreas will feel secure. In that context, a collective security guarantee for both Koreas by the six parties will be needed. Any alliances will need to be recast in that context.

Stone's attack on the Rio deal is very much Nationals' and outdated

Comments on news “Curbs on Chinalco worthless, says John Stone” by reporter Jennifer Hewett of the Australian, 27/05/2009, http://en.wikipedia.org/wiki/John_Stone_(Australian_politician.

Mr Stone is still very much in the Nationals shoes now.

The Australian reported that Mr John Stone had condemned the proposed Rio Tinto-Chinalco deal as against the national interest, warning that any government conditions imposed on the giant Chinese company would prove "utterly worthless".

It is reported that Mr Stone’s attack on the proposed deal undermines the claim that it is possible to protect the Australian national interest through the traditional sort of concessions aimed at maintaining Australian control. The Australian said that he was one of the most powerful Treasury Secretaries of recent decades, and his vehement criticism would add to the political pressure on the Rudd Government over the issue.

Is that the true? Let’s have a look at Mr Stone’ background to put his attacks in the appropriate context. I searched the web and found the following information from Wikipedia (http://en.wikipedia.org/wiki/John_Stone_(Australian_politician:

John Owen Stone (born 31 January 1929) is a former Australian politician. He served as Secretary to the Treasury between 1979 and 1984,[1] and as a Senator for Queensland representing the National Party in the Senate from 1987 to 1990.
After gaining
First Class Honours in Mathematical Physics for his Bachelor of Science degree and representing Western Australia (under 21) at hockey, Stone was selected as the Rhodes Scholar from Western Australia for 1951.
Oxford he was awarded First Class Honours in Politics, Philosophy and Economics (PPE) and won the James Webb Medley Prize for Economics before joining the Treasury in 1954.
Stone rose within the Public Service to become Secretary to the Treasury under
Prime Minister Malcolm Fraser. He penned a severe critique of Fraser's economic policies which was used against the Liberal party once the Australian Labor Party won the 1983 federal election. Stone resigned from the Treasury in 1984, after the election of the Hawke-Keating government, some of whose economic policies he supported.
Following the release of the
Coalition's One Australia immigration policy in 1988, John Stone, as Shadow Finance Minister said:
"Asian immigration has to be slowed. It's no use dancing around the bushes"
Despite his economic rationalist views, he initially opposed floating the currency and introducing a consumption tax; indeed he has repeatedly criticised the GST (and Treasurer Peter Costello) in print.
An informal advisor to
Joh Bjelke-Petersen, Stone was elected to the Senate from Queensland as a member of the National Party at the 1987 election, and resigned in 1990 to unsuccessfully contested the House of Representatives seat of Fairfax, his place being taken by Bill O'Chee.[3]
Since retiring from the Senate, Stone has been a critic of multiculturalism and a supporter of the Samuel Griffith Society, which he helped found. He formerly had a column, on economics and politics, in The Australian Financial Review. Most recently, Stone has been critical of the Howard Government for its efforts at eroding the power of the states within the Australian federal system, regarding this as a departure from long-standing Liberal/National coalition "states' rights" ideology.
In its March 2008 issue, Quadrant Magazine published an article in which Stone argued that
John Howard had been Australia's greatest Prime Minister.[4]

There is no doubt that Mr Stone was a distinguished Australian and was strong in economic policies as his two-decade long services in the Australian Treasury, including as the head of that department for a number of years, indicated. His voices should carry considerable weight in Australia. As an amateur economist, I respect his opinions on economic policies.
Does that mean his attack on the proposed Rio Tinto-Chinalco deal is correct? I have thought about it for a while and came to a negative conclusion. The following shows why.

Although Mr Stone served as the Secretary of Treasury, that experience had predated his role as a National Party Senator, for Queensland from 1987 to 1990. His economic views have much been influenced by his experience as a National Party Senator. This can be seen from his view about immigration, his opposition to floating the currency and the introduction of the GST, as well as a critic of multiculturalism in Australia.

Most economists agree that the floating of the Australian dollar was one of Hawke-Keating Labour government’s main structural reforms that, in conjunction with other reforms like reducing trade barriers and the introduction of enterprise bargaining, improved Australia’s productivity and brought enormous benefit to the nation’s wellbeing. Equally, the introduction of the GST enabled the abolition of a number of inefficient State taxes and the reduction of personal taxes and hence enhanced economic efficiency and productivity in Australia. Majority Australians now have now realised and enjoyed the benefits of those reforms.

What Mr Stone did to those important reforms at those times? He opposed them. Was he correct? No, he was wrong and has been proven wrong on all those occasions. Were his economic views proven correct? No they were not, they have been proven wrong. I am puzzled by the fact that a former Treasury Secretary could have had those incorrect economic views, but I am content that his views have reflected his experience of a National Senator in the 1980s when it might have been fashionable to have those protectionist views politically, particularly from the National point of view.

What about multiculturalism in Australia? Again, main stream Australians would disagree with Mr Stone on his critical views of multiculturalism. On this there is no need for me to say anything more at all. Everyone but Mr Stone, and possibly Pauline Hanson, understands that point. But all Australians understand what Pauline Hanson has been standing for - one white Australian nation! That idea has been burried by main stream Australians many many years ago.

From all these I can’t help form the view that Mr Stone, though well respected during the time as the head of the Treasury Department, has changed and now has had a very narrow, old fashioned, closed and nationalistic view of the economy and society. That view is very much outdated and does not sit well at all with main stream economics of free trade and investment, economic integration and globalisation.

He appears to have forgotten the benefit to Australia and Australians of our trade with Asia and the role of investment made by and capital inflow from Japan and other countries in or to Australia to complement the insufficient savings we Australians have compared to Australia’s investment needs. That is not strange since new memories can take the place of old ones.

After this research and analysis, I don’t feel that, as the Australian reporter claimed, Mr Stone's attack on the proposed Rio deal will undermine the fact that it is possible to protect the Australian national interest through the traditional sort of concessions aimed at maintaining Australian control as Swan did on other deals recently.

His views regarding the floating of $A, the GST and multiculturalism in the past, were completely ignored and thrown to the dust bin by both sides of Australia’s main political parties. I will be surprised at all that his opposition to the proposed deal will now have little weight either, even though Mr Barnaby Joyce a current National Senator from Queensland has been very vocal in opposing the deal too.

Does Mr Stone’s claim that “The resource assets under Rio's control are so potentially enormous the company has barely scratched the surface," hold any water? The answer is no. Mr Stone seems to suggest that he is much better than the market in determining the value of a company.

If he is to use that in his personal investment, good luck to him, but very few investors do not agree with him at the moment. He is dreaming gold beneath Rio’s mines! Yes, there is some in some mines, but for that investors don’t know any less than him, I would assume.

So, based on these facts, I could not disagree with Mr Stone more on his view of the proposed Rio deal! In fact, I wouldn’t risk in listening to his view regarding investment at all. I might have done that when he was the head of Treasury, but not when he had become a Nationals Senator. And definitely not now!

Enforcing international laws to deal with the North Korea regime

Comments on the question to me by Aurelia George Mulgan, 26/05/2009, http://www.eastasiaforum.org/2009/05/25/roos-to-japan/#comments

I can’t answer the question that Aurelia George Mulgan asked of me. That is a question for China.

What I’d like to say is that why don’t the international community use the international court system to indict the leaders of the current NK regime, if they have violated international laws, as US president Obama has said? I think the Security Council should authorise the international prosecutors to do that and put pressures on the current NK leaderships.

I think this might be a good way to enforce international laws. In a case involving head of government or state, it should be authorised by the Security Council before any indictment being made.

That approach will make sure both that any significant breaches of international laws can be prosecuted and that the system of international court is not abused by any individual country. What are those laws for? They are there for countries and people to abide. If any one does not, then there should be a workable mechanism to enforce those international laws. That is the point I want to make.

There is an urgent need for a fair, just and effective framework to enforce international laws. I hope my proposal can provide some food for thought in making the UN system more effective. Every country has sovereignty, but if you are a member of UN and subscribe to its laws, you should abide them. If you don't, there will be consequences of not complying with them. Otherwise why do we need the UN and international laws?


Rudd APC idea unlikely feasible

Comments on Hugh White “The Asia Pacific Community concept: right task, wrong tool?” 26/04/2009, http://www.eastasiaforum.org/2009/04/26/the-asia-pacific-community-concept-right-task-wrong-tool/

Hugh White may be too kind to the Rudd APC concept.

I am not even sure the APC idea has any appeals to either China or the US. As the float of the G-2 idea, the bilateral relationship between the US and China, the world’s own superpower and a rapidly emerging and likely new superpower, is likely itself to take a course of its own. Unless they two can’t sort out issues they think important to both of them among themselves, there is not much left for others get involved in that important and far-reaching bilateral relationship for the next two decades or more. Leaderships in both countries and their advisors will be wise enough to realise that the only way forward to the benefit of both of them is close cooperation between them. Any other ways will be costly to both of them.

In that context, ideas from people to involve the US, China and Japan in another new regional forum do not appear to be realistic. For one thing, China is unlikely to accept that, because while the proponents may have good intentions, it is not too for China to see there is an element of using the US-Japan security relations to contain China. China is likely to be more suspicious especially when Australia is involved, given its emphasis on the tri-lateral security relations between the US, Australia and Japan and its role in the security in the Asia Pacific.

Yes APEC includes those three countries together. But it is mainly an economic forum and was created during earlier. The time now looks much different to then. Even from an economic perspective, the US economy is in great trouble, and is likely to experience a more rapid decline relative to those more dynamic developing economies, such as that of China’s and India’s. The US will have significant problems in terms of increasing savings and reduce government debts. While the US economy will remain a very important part to many economies including those dynamic developing economies, the coming decades following this great recession will see a world economy with less reliance on that of the US.

If Australia is to really look after its long term strategic interest, it has to recognise that it needs to stand as an independent member, not a deputy of the US. Any attempts to drag the US into a forum with China and to use the US as a protector is unlikely to have a market in China. To include Japan and the US will make the matter worse. One needs to have some perspective of how China perceives those ideas. Just as it is difficult for Australia to abandon its security alliance with the US, or for Japan and the US to give up theirs, it will be difficult for China not to feel threatened by their common presence in a new regional community involving security matters.

My guess is that China probably has every incentive not to see such a regional community such as the APC. If it can do without it, China is likely to do just that. That is why I have doubt to the feasibility of Rudd’s APC idea. Others may take it as a too much self-interest centred idea from Australia which is yet to demonstrate its maturity in its strategic approach to Asia.

Short selling should be banned all together

Comments on Alan Kohler “The phantom menace”, 26/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/The-phantom-menace-pd20090526-SDSSL?OpenDocument&src=sph

The phantom menace of short selling means it is destabilising and increasing the volatility of stock market. Its merits in increasing the liquidity of stocks is noted, but speculators should be using other market instruments to bet on any stocks falling.

For that purpose, there are options and warrants available for many stocks. By using those derivatives, the phantom menace can be avoided, while still providing the opportunities for speculators to speculate a fall in any firms' prices. It also prevents the so called free rider problem by the promoters of short selling.

Any excessive market volatility and unnecessarily destabilising forces should be avoided if possible. Speculations can be good if properly used, but they can be also destructive, causing unnecessary strife to firms. It can be a force to destroy social productive assets and values. The gains by speculators are not worth the pains to the society.

Decoupling of world economies

Comments on Adam Carr “SCOREBOARD: Decoupling revisited”, 26/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/SCOREBOARD-Decoupling-revisited-pd20090526-SDTAF?OpenDocument&src=sph

In my view, decoupling is happening and will be more pronounced in the coming years. There are a number of reasons for this decoupling. Firstly, the world economy may have come to the point that the capacity of the more advanced economies, especially the US, to continue to absorb the continuous and rapid expansion of the developing economies through imports may have reached a reflection point. The implication is that developing economies, especially the large and rapidly growing ones, will have to find other ways than relying on simply exporting their growing outputs.

Secondly, the current financial and economic crisis has made it clear that the US cannot continue to consume beyond its means, both privately and publicly. They must increase their savings from now on, or at least following the recovery. In so doing, its growth is expected to be slower, so its current account deficits will be reduced. This will add to the need for developing economies to rely more on themselves to maintain rapid growth.

Thirdly, some large developing economies have probably accumulated a critical mass to accelerate the so called South-South trade, that is, collectively act as a group to assist the growth of each other.

As Adam Carr, I don't have Nobel Prize either. But I would not be surprised at all that the more dynamic developing economies will recover much earlier than their more advanced counterparts from this world great recession. Further, I will not be surprised that they will maintain their rapid growth irrespective whether the US will or will not visit Japan’s 1990s experience following its bubble burst.

The rapid industrialisation of many developing economies simultaneously, especially the main large ones, is likely to see a change in the patterns of growth in the world economy. Decoupling will be a natural product out of that process.

The North Korea regime must change its behaviour to survive

Comments on Mark Jacobs and Shiro Armstrong’s comments on “Roos to Japan” by Tobias Harris, 25/05/2009, http://www.eastasiaforum.org/2009/05/25/roos-to-japan/

I think the members of the six parties may all have failed on the NK nuclear issue.

The world must be tired of being held as hostage by the current NK leadership. The carrot era is gone and now stick must be used. Many have been so frustrated by its missile tests, now the second and more powerful nuclear test, after it was supposed to have dismantled its facility.

China needs to realise that the NK cannot be accommodated in any other way except that all parties must act together and be prepared to use all measures, including the last resort, to denuclearise the Korea peninsular, and to prevent any further proliferation.

China needs also to prepare itself for the worst that it may have to open its borders with NK for receiving many millions of refuges, and other countries, especially the US, Japan and Russia must be prepared to help China and Korea if that ever happens.

The UN Security Council should decide three things now. The first is to authorise the six parties for any measures they decide are appropriate to achieve the denuclearisation of the Korea peninsular, so there is no need for any future delay. The second is a call for sanctions against NK, except basic humanitarian aid. The six party members should immediately enforce the sanctions.

Lastly, the UN and the six party members should be prepared for the worst that there might be a need for a regime change, if NK were to continue its reckless provocations.

Besides, the US, China, Russia and the two Koreas must establish a new arrangement for the peace and stability of the Korea peninsular. Some key components of such a new peace agreement need to include the collective guarantee of the security of the two Koreas, if that is what the two sides want and the consequential withdrawal of the US forces from the peninsular. The withdrawal of the US forces is premised on the security guarantee of the South side from the agreement.

Only this will create a long lasting peace and stability in the North East Asia region. How the two Koreas achieve their unification will be a matter for them to sort out.


A point on the virtues of bulls versus bears

Cooments on Cassandra Wilkinson’s “Gekko was right after all”, 25/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25531334-5017272,00.html

Cassandra Wilkinson has made a point. That is, bulls and bears in the stock markets.

Bubbles in stock markets have been driven by the bulls in the market participants. But when they burst, the bears in the market are in the centre stage and full control.

Although the stock markets world-wide may have recovered from their recent lows, many markets including housing markets as well as the economy in many countries are still definitely bearing. To break the grips from the bears, we need many bulls to come to the stage, or to turn many current bears into bulls.

Yes, it may seem ironic. It was the bulls that cased the bubbles in the first place, but unfortunately what we need most at the moment is bulls and more bulls. We need them to boost confidence! There are too many bears around now and we are bearing. We need strong bulling spirit to get us out this great recession!

A need for middle way in education between the Chinese and Australian system?

Beijing and the reality of international competition”, 22/05/2009, http://www.eastasiaforum.org/2009/05/22/beijing-and-the-reality-of-international-competition/

Makeham’s article serves a useful reminder of some of the differences in the education systems between Australia and China. Obviously, it gas implications for Australians. Equally, however, it has implications for Chinese as well.

I talk only about two points. One is that the somewhat over-emphasis on education levels or the degree of education degrees in China, both individually and both employers. I have heard that there are large back-locks in unemployed graduates in China, some with post-graduate degrees. I begin to wonder whether that represents a waste of resources in China.

It seems to me that it is a paradox of pursuing “higher” education. It is obvious virtuous to learn more through “higher” education as much as possible for an individual, just like savings. However, if everyone in the whole country is doing exactly the same, you will have over supply of highly educated people. The point is it is good from an individual point of view, but aggregately it may cause a problem if every individual is doing the same thing. You might get a country of PhD, or in the Chinese case, post-doctorial, or more interestingly a few generations of post-doctorial for a person, as one’s education credentials to show.

There is no doubt there are benefits of that, everyone is more equally hooted to compete and to earn a living. But at the same time, you have many PhDs unemployed at least at a lowered natural unemployment rate. That, at least in a strict sense, represents a waste of more resources compared to some of the unemployed to have received lower levels of education.

Of course, if the world is perfectly mobile in human resources, then the matter may be different, that is, the paradox in a “closed” economy may disappear in an “open” economy. Those with better education (assuming that translates to better skills) are likely to find better opportunities elsewhere. That was the same point I made regarding Paul Krugman’s paradox of wage cuts in his article of “Falling wage syndrome” (see http://mrlincolns.blogspot.com/2009/05/krugmans-paradox-of-wage-cuts-is-untrue.html).

The second point relates to another potential externality of individual pursuits of better education and learning. If I borrow the production function concept in economics, one knows that you might have diminishing returns at some stage of the production function curve. If I further borrow a concept from economics, the optimal point of an individual’s inputs into education should be at such point where the expected gains from further inputs equal the costs of those inputs. If you further increase inputs into that education production processes, then the return will be lower than its costs. So it may be detrimental to an individual’s utility/wellbeing to pursue too much education.

Now let’s look at an alternative to the Chinese case, the Australian education. Here many people take a quite different attitude. For example, it is often said that one of the main things for primary schools is that children studying there should be made happy. That is obviously more humanitarian as for human beings as a whole. After all, what is the purpose of life? Happy, of course! But this may mean less learning, if we leave aside the possibility of diminishing returns and the so called optimal levels of study efforts/inputs.

So, what is my second point here? The point, if you put the two education systems together, is that we might have a need for a third way, the middle way, an alternative to both the Chinese and the Australian systems. In the middle way system, if one can get the production returns right and one utility (expected) calculation right, then one may not necessarily study as hard as the Chinese in their pursuits of education, but may study a little harder than many Australian students. Many Australians, students in particular, may have a different view regarding to the concept of nerds – a word my daughter often uses to describe me!

A just made a nice revenge, didn’t I? But I only used this forum, not in the debate with my daughter. By the way, she has finished her medicine study at Monash University at the end of last year, even though she says she is not a nerd. For that she will never say; the concept of nerds is too hard to swallow and acceptable for many vogue and young Australians - the future of our current grown-up generations. That was probably a main reason why the Rudd/Swan government has increased the age for aged pension from 65 to 67 in the 2009 budget!

Having finished the two points, I am wondering whether I have caused another paradox in the process! Remember my point? A paradox in one perspective may be solved in a different perspective?

Greene confusions regarding regulation

Comments on Bill Greene’s comments on “The state of economics”, by Doug McTaggart, Christopher Findlay and Michael Parkin, http://www.eastasiaforum.org/2009/05/21/the-state-of-economics/#comments

Bill, what is your point? Forgiving me being slow, but I really have difficulties in making sure what you were talking about. You started with a quoted sentence, did you support that or arguing against it?

You talked about "some of the "right" regulation was eliminated. Does it mean we got more or less regulation, albeit the "right" one?

You talked about "the harm done by central planning under big government programs"; I have also heard the US government outsourcing to reduce government size. I am not living in the US and don't have firsthand experience of the size of government programs and the "right" or wrong government regulation, or wether too much or too little regulation. Can you enlighten me on those, please?

I am eagerly waiting.

History needs to be told to benefit all

Comments on Richard Rigby “Can China embrace its history and Zhao Ziyang’s memoir?” 24/05/2009, http://www.eastasiaforum.org/2009/05/24/can-china-embrace-its-history-and-zhao-ziyangs-memoir/

Zhao Ziyang's book will be a valuable aid in assisting historians as well as for many others to fully understand what really happened back then in China and what lessons can be learnt from that particular event in China's long history, including its current modernistic reforming era, although it is very likely to remain a taboo in mainland China for some time to come. I suppose that it is paradoxical for many Chinese - they may be curious to want to know what the book has to say, yet they might also be resigned to the thinking that the time may yet opportune for the book to be allowed released in the mainland. I may be wrong, but I am eagerly waiting to see what will happen in the mainland in the wake of the book's release outside China and the potential availability from the web.

History needs to be told. But as many things, there may be a matter of the best timing. In China, stability and development have been the top priorities, it seems. People in the West talk about human rights. The Chinese also talk about human rights, with different emphasis. It is like different government in Australia or the US for that matter may talk about what is the best policy for the society, some may say we should tax the rich even more to make the society fairer, while others may say we should provide incentives for private entrepreneurs and indeed everyone to enhance efficiency and productivity. There may be differences in the value system. There are differences even in one nation. It is no wonder there are more international differences. But who can be the judge of who is right and who is wrong on such matter as to value system?

I am a Chinese Australian. While I have said I am interested in reading the book and in knowing what will happen in mainland China, I am more interested in Australian government budget deficits and ballooning government debts, the strategies the government spins out to turn the deficit into surplus in 2015-16. The respected Treasury appears to have got its forecast of economic growth for the next few years in Australia badly wrong with many economists and commentators saying they are too optimistic. My critique of the Treasury forecast has been that they just either conveniently ignored the Lucas critique, or most of the Treasury officials may be too young that they don’t know that critique, because it is more than 30 years old. The worst thing was that the Treasury changed its traditional forecast methodology for budget that is another reason people are suspicious of its forecast.

To just illustrate the relevance of the Aussie budget to Zhao’s book, the Aussie government in this budget introduced means testing to private health insurance rebate, contrary to or broke the Labor’s and Rudd’s election promise. Their excuse has been that the rich should contribute more in the current recession since they have the capacities to do so. Besides, they increased the age pension by $30.49 a week that translates to a rise of more than 10%, in the middle of the great recession and what Rudd/Swan have been saying a tough budget. Some background information to that is that Rudd may have promised age pensioners during the still good time before the recession set in a rise in pension. The two measures prove that it is the Labor in government now – a traditionally high spending and high deficit party. But don’t you worry, the Liberals will probably fix Labor’s deficit with a more flat tax structure sometime in the future. Different values in one society, that is!


History is not necessarily always rational but full of surprises

Comments on Jonas Parello-Plesner “The G-2: no good for China and for world governance”, 23/05/2009, http://www.eastasiaforum.org/2009/05/23/the-g-2-no-good-for-china-and-for-world-governance/

I personally don't like power politics much, as a personal preference for world governance, to start with. In this sense, I have some sympathy to Jonas Parello-Plesner's arguments in this article.

But one has to be reminded, even though counter to my personal preference, that during the cold war era that stretching a few decades in the not so long past, it was the two world superpowers that dominated so many world affairs. The whole world had lived in the shadow of the display of the two superpowers.

However, there were two good things that came out of that long agony. One was that there were two superpowers, not just one, so they sort or balanced each other out and did not lead the world into another world war. Another was that the collapse of the former USSR proved an important point to all nations and human beings that any system has to produce good both economically and politically, otherwise it will not last in the long term.

The two cold war world superpowers gave way to the sole superpower of the US. What we got from that? Certainly the world had collectively sighed a great relief that the constant threat of a global nuclear destruction had gone. But what else have we got? We got heightened terrorist attacks, culminating by the 9/11 attack on the US and the subsequent invasions of Afghanistan and Iraq by the US and some of its allies and friends. The invasion of the former was internationally justified that Al Qaeda was harboured there.

The invasion of the latter was not necessarily so, and in fact many have argued that was the act of the sole remaining world superpower and that there was little international justification for its so called pre-empty actions. The matter of fact is that the main excuse for the war in Iraq, that it had weapons of mass destruction, has been irrefutably proven to be false. But that war has had huge costs, in terms of both human and economically. Even the US has paid dearly for that adventure with rising military tolls and military and other spending related to that war. Yet, no one has been responsible for those huge costs!

That was a legacy of an unconstrained or unrestricted sole world superpower. It can do what it wants and sometimes what it does can be very bad to others and to itself in the long run.

Even now the UN Security Council is still governed by the vested veto power to each of the five largest victors of World War II. That is an uncomfortable reality. Although there have been calls for reforms to the UN governing structure, there have been also difficulties to change that outdated structure, one has to admit.

Why and how the two superpowers did came into existence? It was probably not anyone’s wishful thinking or doing. It was the natural evolution in the aftermath of World War Two. The US, a traditional power, emerged as the leader of the west, while the USSR, a new and emerging power with a different system became the leader of a number of aspirant but relatively poor nations that were struggling to seek to change their countries’ destiny.

The two different systems competed and fighted with each other. They hated each with. They each wanted to destroy the other. So they built up their camps militarily with each having nuclear arsenals to destroy the whole world a few times over. On that point, the leaders of each camp had some sanity with them over that period, so they resorted to the principle of mutual deterrence that worked and saved the world from destruction. But eventually, one collapsed and disintegrated suddenly perhaps to the surprises of many including the very sophisticated intelligence of the other opposing camp. That was not the outcome of anyone’s well thought design. History has been full of surprises in that regard.

What about the G-2 concept? I don’t have an opinion at this stage, meaning I personally don’t have any idea. It may or may not work. Again history may present its surprises to us, irrespective whether we like it or not.

Nevertheless, I hope that any development along that line will not follow the competing and opposing two superpowers of the cold war ear, even though they do represent two different systems and also one traditional power and the other emerging power. I hope if they do emerge as G-2, they will work cooperatively rather than competitively with each other, for humanity's sake. We have come a long way, havn't we?

The experience of the superpower politics in the cold war era, as well as the recent history including the wars and the current great recession, should serve as a useful reminder to any superpowers in the years/decades/centuries to come, perhaps for all sides, both positively and negatively. Any superpowers should not assume they will be superpowers forever. They have their historical roles to play, but each of them will also have their sunset time. That is for sure, so don’t over play your role as a superpower.

An Asian Union - a true community for Asians

Comments on Ryo Sahashi “A three-tier approach to Asian regional architecture”, 20/05/2009, http://www.eastasiaforum.org/2009/05/20/a-three-tier-approach-to-asian-regional-architecture/

This is my third comment on this article - likely to be the last one.

There is the European Union; there is the African Union; there is the Summit of the Americas. Asia is world largest continent with about half of the world population. Yet there has been no such a thing as the Asian Union, or the Summit of Asians. Neither culturally, economically, or militarily, is Asia world most advanced, nor is it the least developed. So in the modern time of integration or globalisation, why has this been the case for so long? One has to ask. The answer is not necessarily an easy one.

I don’t attempt to provide an answer to that question here because I am not qualified to do it that I know that for sure. What I would like to venture, however, is to try to contribute constructively to the future. This is because I was born in Asia (in its true meaning) and had lived there for more than half of my current life long. I must, as a matter of disclosure of information, say that I am now a Chinese Australian, not far from Asia in its true meaning. Further one can recall that Mr Gareth Evans, former Australian foreign minister, had tried very hard to put Australia into the map of Asia during his time as the minister, that is, to join Asia.

I think Asians should establish an Asian Union as a community for Asians to look after the affairs including the security of Asia and advance the wellbeing of Asians. The membership of such a union should be open to any countries in Asia. In that, it should include countries which have part of their land in Asia, such as Russia, if that is what they want to do. It could potentially include Australia and Oceania, but that should be a matter for the Asian Union to decide, taking into account the efforts by Australians wanting to be a part of Asia.

What governing structure should such an Asian Union have? It should have permanent annual summit of heads of government/country to decide the priority agenda for the next year. This is an assembly of Asians. The Union should have a permanent secretariat organisation, similar to that of the UN Security Council. Such a secretariat may have a number of permanent members and a group of rotating members to be effective. Its president / secretary general should be rotated among the members or representatives of groups of members with much smaller populations of each.

The permanent members of the secretariat should ideally be a small odd number, such as 5 or 7. They may come from a combination of the most populous countries and the largest economies in Asia. Instead of each of the permanent members having a veto right, the majority of the permanent members can veto on any matters of draft resolutions. This will make the secretariat more representative and effective than UN’s current governing structure.

I think such an Asian Union will be the next step in Asia development in its long history. It is badly needed now, given the development of the other continents. Those large Asian countries should put aside their historical issues aside and take the leadership of Asia. The simply matter of fact is this: if you don’t want to be strong and look after your own affairs, you will not be strong and your interests have to be looked after by others who may or may not put your interests first in their agenda, and why should they?

More realistically, I think the existing platform of ASEAN plus three could form the impetus of an organisation of the Asian Union. Alternatively, it would be better if India could be included in such a formation process, given its share of the Asian population.

There should be plenty of important and urgent Asian regional issues to be addressed by the Asian Union, not only the economic development, trade and investment, but issues such as the North Korea nuclear issue, the conflict in Afghanistan, the instability in Pakistan and some other regions in Asia. If the Asian Union is created and operates effectively, issues such as the increase in regional military expenditures, regional territorial dispute can all be on the agenda. It could also contribute to the resolution of the Middle East conflicts.

A true and more transparent Asian Union that is not in the shadow of any other world powers will be in the long term interests of all Asians. I look forward to its creation in the not so distant future.


Treasury as top economic policy agent and Rudd/Swan political spins

Comments on Paul Kelly “Spun out”, 23/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25523687-12250,00.html

Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.

The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.

Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.

If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.

In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.

To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.

Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?

The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.

The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.


A rapidly changing economic landscape of the world

Second comment on Ryo Sahashi “A three-tier approach to Asian regional architecture”, 20/05/2009, http://www.eastasiaforum.org/2009/05/20/a-three-tier-approach-to-asian-regional-architecture/

This is my second comment on this article. In this I will focus on a point regarding economic matters, as evident from the following excerpt from this article:

[Economically, the U.S., Japan, and other advanced economies - including EU countries - will maintain their global dominance, and their relatively strong position vis-à-vis newly emerging economies like China and India will continue for the foreseeable future.
It is unlikely that China and India (and possibly Russia) will form their own international institutions to provide an alternative for the established ones. It is important to keep a coalition of advanced economies in rule-based international institutions.]

While it is true that the US, Japan and the EU are now still world largest economies both individually and as a whole, the rise of some large developing economies is causing rapid changes to the world economic landscapes, with shifting in geoeconomic powers. The current financial and economic crisis is accelerating those changes. If anyone has any doubt about this, the G20 meeting in London in April can be a case study for people to derive some useful insights and helpful conclusions. It is not too difficult to see that the argument of “their global dominance, and their relatively strong position” of the US, Japan and EU is no longer necessarily correct.

Further, the trends of the relative shift of economic powers seen in the past decade or so will accelerate to an unprecedented degree over the coming decade, as the inevitable readjustments of large international imbalances between the US and some other countries in the wake of this world wide economic crisis. There are profound economic implications from these adjustments. The US is likely to see a lengthy period of slower growth with possibly higher inflation.

While this could, on the other hand, be a potential threat to some of the rapidly rising developing economies, some of them have advanced to such a degree that they can adjust their economic structure to accommodate their higher saving rates through channelling savings to more rapid capital accumulation. This may not be very easy and should take some time, but the result will be more rapid growth and faster shrinking of the gaps between the now advanced and developing economies.

Besides, an important consequence of the current crisis is that the authorities in many countries have to increase government deficits and debts to try to get the economies up and going again. The burdens of increased government debts are likely to be heavier in the US, Japan and the EU, relative to some of the rapidly rising developing economies. Efforts to reduce government deficits and debts will dampen the economy, further constraining its growth in the medium term. This headache is likely to persist in some advanced economies for some time to come.

Whether there is a need for the large and more rapidly growing developing economies to form their own international institutions to provide an alternative for the established ones is an open question. However, the existing main international economic institutions such as the IMF and the World Bank are likely to experience significant changes in their governance and approaches. Like it or not, the representations of developing economies in those institutions will strengthen at the expenses of the existing heavily represented advanced countries. This is not a rivalry between the advanced and developing countries, but simply a reflection of the new reality. The existing structure of governance simply cannot work effectively any more.

To conclude, the economic dominance of the three major advanced regions internationally will disappear at a frightening speed, if that has not happened already. The coalition of advanced economies is no more than a wishful thinking. Countries, advanced and developing alike, will seek every opportunity to advance their own economies. In that process, the more dynamic developing economies are more attractive than semi-stagnant ones. That is the beauty of evolution and human beings will continue to seek beauty and love beauty, among the laments and the noises of wingy from some minds who may feel the world is changing too fast for them to cope.

Trade by comparative advantages not by regulations

Comments on Joel Rathus’s comments on Haruhiko Kuroda’s “theories”, 21/05/2009, http://www.eastasiaforum.org/2009/05/19/asian-development-bank-and-the-invention-of-a-new-asian-growth-paradigm/

Joel, your comments caused me to reflect on the term "interest groups". It may appear to be a remote link, but I can't help seeing a shadow there. Intraregional or extra-regional trade, it should all be based on comparative advantages and changes in those advantages overtime. They should not be regulated or forced by some authorities according to their will, such as the ADB with little real accountability.

The blunders that the IMF made to some Asian countries during the Asian financial crisis in the second half of the 1990s have been well known. Few people from IMF back then have been held accountable for the huge costs their mistakes caused to some Asian countries. One would hope that the ADB would learn from the IMF experience and avoid making similar mistakes.

Economists need to act with urgency

Comments on Christopher Joye “Twisting in the mind”, 22/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/Twisting-in-the-wind-pd20090522-SA4FQ?OpenDocument&src=sph

My view is that economists as a profession that have a responsibility must do their best to contribute to this debate. And they need to do that with an ultimate urgency.

No matter which schools of thought is or will be eventually proven to correct, there is a clear need for a serious and open debate on the issue. It is so important and affects almost everyone’s life. It is an inevitable debate. If it had not been clear in the past, it should surely abundantly clear by now given that the recent financial crisis almost brought down the world financial system and has resulted in the current great recession not seen since the great depression in the early 1930s.

A debate on this issue will need new and more rigorous theoretical supports. Unfortunately, we have got such luxury of well founded economic theories to support the debate. The economist profession needs to stand up to the challenges and shouldn’t still dwell in their comfort zone of research to study the real, urgent and important economic issues, crisis if you like.

Keynes created the main thrust of Keynesian theories in response to or in the aftermath of the great depression. It shouldn’t be too much to expect economists to come up with similar work in the wake of this great recession. After all, there are many times of economists now than the case during the heyday of Keynes time, so they should produce something useful to the society. Otherwise, they will have difficulties in justifying their pays taken from the society.

PS: I myself am also trained as an economist, but my economic skill is very rusty due to nature of work. So I can only call myself an amateur economist. Inspect of that, I should be among all the economists to share this responsibility.

Australia needs an independent body of national economic affairs

Comments on Michael Costa “Budget honesty now for the future”, 22/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25518784-5015664,00.html

Irrespective whether it is Malcolm Turnbull’s parliamentary budget office, or it is Michael Costa’s intergenerational budget office, what is needed is a national economic body that is independent from the government of the day and be accountable to all Australians, possibly through federal parliaments. It should be funded with the same degree of security as federal politicians’ wages and salaries. Its key staffing should be appointed either independently, or half by each of the main political parties.

There are several key issues that such a body is needed to look after. Firstly, intergenerational equity should be a consideration of this independent body. This is a long term issue but a very important one, given that population aging is a pressing issue. However, any research needs to take into account that Australia has been an open country with significant immigration that differs from many other industrialised countries as well as some developing countries. This growth pattern and characteristic of the Australian population cannot and will not follow the same assumptions used in other countries in terms of population aging and structure. More realistic assumptions need to be made.

Secondly, such an independent economic body can stand above both Treasury and RBA to bring together fiscal and monetary policies together into consideration, and provide independent advice or at least opinions as to what macroeconomic policies mix is the most appropriate at the time. This issue has been hidden for too long in many countries, although not in economics theories. The theories point out to use both policies to such an extent to produce the most desirable outcomes in terms of interest rate, government spending, taxation, outputs, employment and prices. So this area should be an important task for such an independent overarching national economic body.

Thirdly, the body can provide independent economic forecast periodically and also prior to government budget time. Its forecast can be compared to Treasury’s forecast that is generally used by the government of the day to underpin its key budget assumptions. Either this body’s forecast or Treasury forecast will be necessarily always good, but they provide people with alternative and authoritative benchmarks for analysing key economic assumptions used in the budget.

Fourthly, because the nature and characteristics of Australian intergovernmental financial relations, such a body can and should provide independent advices on government finance, taxation, expenditures and services holistically. Yes, it is incomplete to only focus on the budgetary affairs at the federal level, if it can change its position by either reducing or increasing funding to the state governments, or changing government service obligations between different layers of government.

Of course there can be other key economic and economic governing issues such as government regulations that the independent body can examine and provide its own opinions at the arm’s length from the government of the day, such as the regulations governing the communication sector in Australia. This can provide some sort soft constraints to government behaviors, so they need to consider very carefully before they change/introduce/reduce regulations.

To conclude, there is badly a need for an independent and overarching economic body in Australia to improve government policy making, to look after a number of important economic affairs for the Australian public. The government of the day, irrespective which political persuasion, in conjunction and consultation with all the other main political parties, should take urgent actions to create such a body. The earlier such a body is created and operated, the better the Australians welfares will be.


The state of economics and the challenges for economics

Comments on Doug McTaggart, Christopher Findlay and Michael Parkin “The state of economics”, 21/05/2009, http://www.eastasiaforum.org/2009/05/21/the-state-of-economics/#more-4471

As an amateur economist, I sort of agree with the author’s points’, but only to a certain degree. The second dot point at the beginning was like the story of a bottle half empty versus a bottle half full, depending how you look at it. While it sounds obvious right, one can’t help have a sense of tautology in the argument. Nevertheless, it may inject some fine-tuning to the hot debate on strengthening financial regulations with some cold reasoning.

The third dot point appears to be too much of a defence of the indefensible probably to save some face for the economist profession. The authors provided some examples to show their point. To quote from them:

[Evidence of a problem had started to accumulate from early 2007 and economists were already working on scenarios associated with sub-prime problems in the US. In early 2008, the body of academic economists in the US had sessions in their annual conference on exactly that topic. Nouriel Roubini and Paul Krugman were then making their warnings.
The focus at that time was on the sub-prime assets associated with housing loans and it was expected that any shock there would be a relatively small and manageable. That expectation was not met, because of the interconnectedness of the financial markets in different countries, the extent to which banks in other countries were exposed to these assets and the extent of leveraging that had taken place.]

It seems that the very examples they used actually disproved their point at the same time when they tried to argue it and shot their own feet. The root of the current crisis had its origine much earlier than 2007. As the authors said, in as early as 2002 the Fed began its overly loose monetary policy and persisted with that unwise monetary stimulus policy until 2006. The sub-prime would have started also well before early 2007 when the author said economist were working on that. As the author said, only until early 2008 “economists Nouriel Roubini and Paul Krugman were then making their warnings”.

Was that strong enough to say that economists didn’t fail to anticipate and avoid the crisis? As an amateur economist, I don’t feel that way, to be frank. To say otherwise is too defensive, if not being interpreted as offensive.

The fourth dot point is obvious correct, but is incomplete in the sense that it does not say there have been significant failures in economics, both at the microeconomics and the macroeconomics levels. From microeconomics point of view, there are the issues of correct valuation of securities, derivatives and etc, as well as the associated information failure. Economics needs to contribute to the resolution of those issues.

At the macroeconomics, the conventional macroeconomic tools or policies provided few ready policy prescriptions for the authorities to use to combat the financial and economic crisis, so that the Fed have recently had to resort to the so-called non-conventional methods in its attempt to find a way out. Conventional monetary policy has long become ineffective when interest rates are very low, as have been the cases in a number of countries.

The effectiveness of conventional fiscal policy has also been in doubt. This is because the levels of government debts in quite a number of advanced economies were high and further rises in government debts run into political difficulties and also undermine confidences. More to the point, if the private sector stops, it is probably too much to expect that the government can fill the entire void left. There are also the longer run consequences of too much government spending and debts. The long run efficiency of the economy is at risk if government plays too much the role of the private sector. More importantly, fiscal policy does not appear to be the right approach to solve the current financial and economic crisis, a balance sheet recession as some economists calls it, as opposed to insufficient aggregate demand, similar to the Japanese case following the bubble burst in the early 1990s that gave rise to the lost decade for Japan.

Economists’ two main arms of macroeconomic tools or policies have been ineffective. Like it or not, that has been the fact and economists should have the courage to admit it. Only by truthfully realising the failures of economics, can economists create new theories to remedy those failures, to provide new and more effective prescriptions for authorities to deal with similar future challenges.

The Keynesian theory was born following the great depression. Although having been criticised and ridiculed by many, it including both the conventional fiscal and monetary tools, has contributed in preventing another great depression until this great recession.

New theories will arise from the experience of this great recession. They will further enrich the body of economics and provide theoretic guidance to policy makers when they face another one. But hopefully, if advances in microeconomic theories can effectively address the correct valuation of securities and risks, we may not experience another great recession.

While it is too early or premature to say what is needed of macroeconomics, it appears that it might need to keep the stability and correctness of “asset market values”. They can’t be allowed to grow too fast to balloon to bubbles. Nor can they be allowed to fall too much when bubbles burst to such a degree that severely affects both the supply (firms don’t produce) and demand (consumers don’t consume) as a result of battered balance sheet due to falling assets values.

What the authorities in many countries have done so far have an effect to lift the values of both the housing markets and the equity markets or at least to prevent them to fall further, intentionally or not. But the efforts so far have appeared to lack of potence. But they are trying without the guidance from economists, or maybe ignoring theirs.

It is in this sense of advancing both microeconomics and macroeconomics that I totally agree with the authors’ fourth dot point, that is more economic research is the best hope. It is high time for economists, especially those who are in academics with considerable freedom to choose their research topics to meet the challenges as both the important and the emergent as the current ones.

Mr Lincoln's budget reply - better than Swan and Turnbull

It is nearly one week now after the opposition leader Mr Malcolm Turnbull’ reply to the Budget and nearly nine days after the Treasurer Mr Wayne Swan delivered his Budget 09, both at the house chamber of the federal parliament house. Let me now mock up another budget reply, Mr Lincoln’s reply to Swan Budget 09, the third way. It is shorter and more to the point than that of Turnbull’s and read as the following.

Mr Speaker, we have all heard the Treasurer’s 09 budget speech as well as the opposition leader’s reply to it. Both had high pitches and were delivered with a lot of fanfares. To their great credit, they were not completely worthless, I should say, but they were really only of little value, I’m afraid to say, Mr Speaker.

Some of the members in this chamber, Mr Speaker, got quite excited either by the Treasurer or by the opposition leader in the short distance of two days, those two days of last week, an unforgettable week they might say to themselves in private and in whispering.

However, Mr Speaker, however, if you look at the response from the public, the public Mr Speaker, or hear from them, you will certainly, I stress the word certainly, know that they were far less than impressed by the performance of both of our members, Mr Speaker, both of them.

They have been a little disorderly and may be rude to our members, Mr Speak. So much so that I wasn’t sure until a minute ago, only a minute ago, Mr Speaker that I should report this to you and the chamber. I finally thought that for the benefit of information to you and to the members of the chamber, Mr Speaker that I decided to say so as it happened, Mr Speaker. Because, as you know Mr Speaker, as you know that they or maybe the members of this chamber may resort to the nasty FOI, FOI, I have to say Mr Speaker. I really felt that it was in a place between hard and rock, very uncomfortable, Mr Speaker, that very few would be happy to be there.

The Honourable Treasurer, they say, and the honourable PM, and his government have failed them, failed them, Mr Speaker. That is what they say, Mr Speaker. They say that they have spent but wasted a week, a whole damn week, to find the centre piece of the budget that the honourable Treasurer said time and time again during his budget speech. They say they simply couldn’t fine it, no centre, and no piece either. That is what they say, Mr Speaker. They say they could find the nation building centre piece, the damn centre piece. Instead, what they have found is that hundreds and hundreds of billions debts, government debts that is. But I feel a little glad that they have been shocked by that finding and are still in a shocking state, a shocking state, Mr Speaker. That seems a revenge on our behalf, on our behalf. That is a relief for us, I must say, Mr Speaker that is a relief for us. I don’t think they will recover any time soon, any time soon to be rude to us again, not in a short while, Mr Speaker. So we can all stay easy for that while, for that while.

They are not only rude to our government, our great government, Mr Speaker, they are also showing disrespect to our leader of the opposition, the leader of the opposition, and his little team of mates, Mr Speaker. They say our opposition has been incompetent to tear apart the Treasurer’s budget. Very disrespect, Mr Speaker, very and very disrespect to our opposition team mates. But that is what they say, I am afraid again to report, Mr Speaker. They say they waited the whole damn two days to listen to the leader of the opposition, listen to his speech, his reply that is Mr Speaker. What they say? They say the bloody leader of the opposition, the bloody opposition leader had an issue with health and asked the government to swap something with cigarettes, with cigarettes, Mr Speaker, at a magnitude of $1.9 billion. That is the amount to cure a health issue, a health issue, Mr Speaker that is what they say. They say that is too bloody expensive, Mr Speaker, too expensive.

Mr Speaker, their disrespect doesn’t, that is, doesn’t stop there, I am afraid. During a secret trip to gather some information on them, I overheard that they say they can make a better budget, a better budget than our Treasurer’s. As you can see, Mr Speaker, they are so boasting, so boasting and disrespect.

Mr Speaker, now let me say what their nasty alternative budget looks like. It is smaller, definitely smaller than our Honourable Treasurer’s, in terms of budget deficit hole. You see, Mr Speaker, theirs is a poor one, an inferior one than ours, that is for sure. How can it be better, how can it be better if they will have a smaller budget deficit hole? But they say they feel more comfortable to stay in a smaller hole, Mr Speaker. What a bunch of idiots they are, Mr Speaker.

I spent some time before I came to this chamber, Mr Speaker, to this great chamber of ours, to identify how they makes a smaller hole to the budget, a smaller hole, that is. It became clear to me finally, finally Mr Speaker, that they say they don’t need our tax reduction, the tax reduction for them. They say that is some billions smaller a hole that the Treasurer’s. Then they say those pensioners would be happy even with half of the rise we have given them. That is what those idiots say Mr Speaker. They say that is further billions of dollars smaller that they will be happy to stay in. Have I got right, billions of dollars smaller. I t looks like I also got the same problem, the same problem as our Honourable PM and the Honourable Treasurer, as them in speaking out in terms of billions, Mr Speaker. I don’t know why, don’t know why, I can’t simply say that, that bloody little billions of dollars, Mr Speaker. That is little mystery, a mystery indeed

As you can see, Mr Speak, as you can see, they don’t know how to make themselves happier with a large hole to stay. They instead prefer a smaller one, a quite smaller one. That is why and that is why we, the members of this great chamber, the greatest chamber in the world, have to do our best to make the budget deficit hole larger, much larger for them to stay and live in with, just for their comfort, for their own sake, Mr Speaker. WE all have a great responsibility, a great responsibility to achieve that. Only that, only that, Mr Speaker, can show how capable we are to manage their affairs for them, and how great we are, and much greater than them, Mr Speaker. That is the whole point of my report to you, Mr Speaker, the whole point. I didn’t waste any time, I just didn’t. But if I did, who cares, we are paid to do that, just to do that, Mr Speaker. That is our job, our job.

But please wait, please Mr Speaker, they say their two bloody little measures can show they can make hard, tough decisions and leave less debts to future generations. You see, Mr Speaker, they are clearly confused themselves, they are confused. How can that be good to leave a smaller debt to future generations can be good, or better than ours, that is, both of our offers. Mr Speaker, they are confused, deeply confused. In their confused state, they want to reduce or diminish our greater legacy, that is our greater debt legacy. What an evil idea that is!

Now I can rest my case. Now I can do that, Mr Speaker, can’t I? Am I paid enough to do this, Mr Speaker? That is my concern, part of my great job, you may say.