Capping doctors' fees is not the answer

Allow private institutions to train more doctors in SA, but beware social inequity...

Here's a quote from a free-market article at Moneyweb by Jason Urbach:

It is laudable that the Minister is concerned about the nation's health and that he is taking the issue seriously, but the cure that he is proposing will be more harmful than the problem he is trying to address. There is an obvious way to decrease prices in the private sector. Increase competition. But this would require the Minister to put an end to the "old boys club" that dominates the medical fraternity by dissolving the government created monopoly responsible for training doctors in SA. The Health Professions Council of South Africa (HPCSA) determines the number of places available for trainee doctors and has limited them to approximately 1,400 positions each year. A number that has remained relatively unchanged since the 1970's despite the fact that the demand for these positions increases every year. In 2006, it was estimated that 15,794 prospective students applied for these coveted positions.

I'm not so convinced by Urbach's argument that: "Because of the time and expense involved in obtaining a Certificate of Need for medical personnel and facilities, and other long, complicated bureaucratic procedures that delay the introduction of new medical technologies and stifle competition, the cost of healthcare is driven up." Private provision of healthcare services is expensive in SA. A common free-market explanation is that government red tape increases the costs of provision, forcing providers to increase fees. There is certainly some truth to this argument, but in this case regulatory costs seem insufficient explanation for high tariffs and an argument for some kind of market failure is more compelling.

However, Urbach makes some excellent points, including a recommendation to allow private institutions to train doctors:

A long-term strategy to alleviate the chronic staff shortages requires the government to relax the controls on tertiary education facilities, make entrance to these facilities less restrictive, and allow the private sector to provide a large percentage of tertiary medical education for doctors. Private education facilities could operate on either a for-profit or non-profit basis and would relieve a significant part of the burden currently faced by the public sector.

Such an allowance would amount to ending the government-controlled monopoly on doctor training. Such a proposition is quite controversial because the costs of studying at an fully private tertiary medical school would be enormous, and such education would thus be to the exclusion of the majority of South Africans.

Cape Town Libertarians first meet

Yesterday a motley group of Cape Town libertarians met up to discuss their common political philosophy. This was the first such gathering, bringing together unaffiliated scholars, members of the Free Market Foundation, members of the Cape Party and authors of this blog. The occasion was a resounding success! If you'd like to get on our mailing list, please write to us.

Fear the boom and bust

This video is both funny and topical!

"John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the economic crisis. Before the conference begins, and at the insistence of Lord Keynes, they go out for a night on the town and sing about why there's a 'boom and bust' cycle in modern economies and good reason to fear it."

Knock-on effects of the Transnet strike

"BMW South Africa group communications and public affairs GM Guy Kilfoil said it had become clear that service and international competitiveness were not Transnet’s first priorities, spurred on by the fact that the parastatal could act as a monopoly."



"BMW South Africa currently exported its vehicles through the Durban port, which belonged to Transnet. However, the vehicle manufacturer had just completed a second test run through the Maputo harbour, in neighboring Mozambique. Kilfoil said there was no detailed business study on this available yet, but added that it was clear that port charges at Maputo were lower than those at Durban."

Ironically, how many jobs would be lost if BMW South Africa moved one of its production facilities to Maputo due to unreliable electricity and freight rail supply? This would be a clear example organised labour in South Africa contributing to unemployment.

Full article at Creamer Media.

Transnet strike costs farmers R1bn
Similar effects in the agricultural industry...

"A transport strike in South Africa, now in its third week, has resulted in farmers losing over $127 million, putting jobs in the agricultural sector under threat..."

"In the past year, the agriculture sector has shed more than 100,000 jobs and only 30,000 were created in the first quarter, Minister of Agriculture, Fisheries and Forestry Tina Joemat-Pettersson said, adding: 'These jobs are now under threat as the sectors themselves are facing production losses.' "

Full article at Creamer Media.

South Africa's very own Fannie and Freddie

by Galen Sher

Improving rates of land ownership has extensive socioeconomic benefits for a country. In South Africa, where many working citizens do not own their own property, finding ways of improving land ownership is critical for our development. A popular approach is the US model of Fannie and Freddie - government institutions that extended credit to low-income earners and guarantee loans to low-income earners issued by private banks.

They did so successfully and profitably for a number of years, greatly improving the proportion of Americans who owned their own homes. Unfortunately the incentive structure around them allowed them to fuel a bubble in the residential housing market and moreover to pose an enormous systemic risk to the US financial system.

South Africa is poised to launch our own institution in a similar vein: a large fund that guarantees loans made to low-income (i.e. riskier) borrowers, with the aim of increasing the number of SA home owners.

Over at Moneyweb, Chris Blaine published this piece on 19 April. I have commented in italics.

JOHANNESBURG - Government has put together a billion rand fund to put a "floor" under banks' "gap" market loans. Is this the US subprime market reinvented for SA?

Minister of Human Settlements Tokyo Sexwale announced that he has briefed banking executives on government's plans. These will be announced in Sexwale's budget speech on April 21. This is so as to "not surprise them".

The discussions revolved mostly around the "gap" market, defined as those earning R3 500 to R9 000 per month. This is the group that finds it most difficult, if not impossible, to access bank credit explained Sexwale.

The broad idea is that the fund will insure banks against losses from loans made to the "gap" market. Sexwale says this will not only enable banks to lend, but will raise the cap of what banks will commit to the sector.

Government loan insurance (partial insurance, I hope!) allows banks to price their loans lower than they should be priced, given the cost of capital and the true riskiness of the people receiving the loans. This insurance makes loans cheaper and hence more affordable to low-income borrowers. The overall cost of providing a home loan to a risky borrower does not change, but the cost is shared between the bank and the taxpayer.

The fund is essentially to give banks confidence to make loans they wouldn't have before. A bank executive heading for the exit just after the meeting commented that if the banks could've made money from a market they would be in there already.

This insight was mirrored by Cas Coovadia of the Banking Association. Somehow though, Sexwale believes that this government "insurance fund" will allow banks to make responsible loans compliant with the National Credit Act.

A major difference between the (arguably failed) US system and the proposed SA system is that SA has the National Credit Act, which imposes stricter conditions on SA banks' lending than US banks faced. These stricter lending practices should mitigate, but will not eliminate, the risk of 'liar' loans and 'ninja' loans, etc that took place in the US.

Sexwale acknowledged that the US, and global, economy was brought to its knees as a result of banks making loans to people they knew could never repay them. He spoke of local bank Unifer as an example to bear in mind. It lost billions through dodgy loans leading up to the small-bank crisis.

Interestingly, when asked if the fund will insure loans for specific groups in the "gap" or everyone, Sexwale responded "everyone". It will be interesting to see if this really is a colour-blind scheme in implementation.

The scheme must be colour-blind for it to be constitutional in SA.

So what's the difference between this SA government initiative and the US subprime implosion?

Sexwale said we have proper regulations in place, banks that value their reputations... and "[we] trust the banks aren't run by crooks".

I'm afraid this explanation is simply not good enough. The crookedness or otherwise of SA bank managers has little to do with the sustainability of such a housing scheme. Minister Sexwale needs to have a clear policy in place for dealing with the house-price inflation that will accompany such a policy.

This intervention will divert taxpayer resources from productive economic activity towards a low-return housing investment. This tax-and-spend system creates capital inefficiency that is frowned upon by hardline libertarians. Personally, I see the potential social benefit of such inefficient capital investment. At the very least therefore I don't think this is a clear-cut debate to be argued purely on the basis of philosophical principle. Rather, I think this debate poses a cost-benefit problem that could be investigated through a thorough economic analysis.

Importantly Sexwale and the bank executives said they are working as a team to make this scheme workable. Hopefully this will result in a system that benefits those intended. Details were scarce as the scheme seems to be still in its early phase.

SA banks could benefit handsomely from such a policy, depending on the extent of the government guarantee. Can I hear anyone shout "Rent-seeking"?

The fund is envisaged to start at R1bn, but Sexwale said that as the economic cycle improves he could approach Treasury to provide more guarantees, further underpinning bank loan books. This sounds a bit like chasing the cycle though, something US banks did as the housing bubble grew.

The question lingers, if the banks could really make money in the "gap" market then surely they would be there already? Does this scheme not privatise profits and socialise the losses just like America did?

On the first question above: largely, yes, if there were money to be made here then SA banks would probably already be investing here. There are various reasons why SA banks may have avoided this market even if it were profitable, but let's ignore these for brevity. Let's assume that there is no money to be made in this market segment - but surely profitability is not a necessary condition for government investment? Just because this would be a loss-making exercise does not make this bad policy. Government projects are often unprofitable.

Another issue is that government has been criticised over its implementation of plans. In fact, a similar discussion such as Monday's one happened in 2005. From the sounds of Monday's briefing, nothing has happened in the five subsequent years.

No comment!

No reason to change 3.5% margin for Prime interest over the Repo rate

South Africa's 4 big banks conventionally set their Prime Interest Rate to be 3.5% higher than the SA Reserve Bank's Repo Rate. Over the past year questions have been posed as to whether this understanding between banks could be seen as collusion and whether this fixed 3.5% margin should be more competitive.

Source: Business Day

"THERE are no compelling reasons to change from the current fixed spread of 350 basis points between the repo and prime rates, a report compiled jointly by the Reserve Bank and the Banking Association of SA has concluded.

It follows, therefore, that there should be a single prime rate for all banks, they said after looking at the role of the prime rate and the prime repurchase rate spread in the banking system. They undertook the study after a meeting last year on the spread between the rates, which was attended by then Bank governor Tito Mboweni , executives of SA’s five large banks and the association.

The report also suggested that the “prime overdraft rate” should only be referred to as the “prime rate”, with a clear understanding that its role had changed from an actual “lowest” or “best” lending rate to that of a reference rate to which banks linked floating interest rates on loans and advances.

The report concluded that the size of the spread between the repo rate and prime was immaterial to the setting of lending rates, as prime was primarily used as a reference rate or benchmark for pricing loans.

Although it could cause short- term problems and disruption with existing agreements, any change in the spread, or a change in the benchmark rate, would not change the methodology for establishing actual bank lending rates, the report said,

“A uniform spread helps to create a competitive environment for banks, which enables customers to choose between products and negotiate interest rates based on their credit profile,” it stated.

Finally, it was suggested that because lending rates differed significantly from prime at times, the Bank should closely monitor trends in banks’ actual lending and deposit rates. This would ensure a better assessment of the market forces that drove the pricing of loans, and the extent to which these forces offset or reinforced the monetary policy stance of the Bank. I-Net Bridge"

Should the Western Cape secede from South Africa?

by Galen Sher

The impetus for this blog post is a conversation between Julian and I at the Cape Party's Facebook page. The Cape Party is a political party that contested the 2009 national elections and one of its goals is to "Return the Cape to a Free and Independent State".

Summary
There are two major arguments here for secession:

1. National government is not sufficiently accountable to the people of the Western Cape. Hence it is difficult for people of the Western Cape to drive policy changes or to hold national government to account for unfair practices.
2. Tax revenue raised in the Western Cape should be spent in the Western Cape, or should at least be spent as the people of the Western Cape would like it spent.

Conversation
Here is the conversation at 2 April 2010 as it relates to secession:

GALEN:
If the national government continually "sidelines the people of the Cape" then why not redouble efforts to hold national govt to account? It seems to me that arguing for separation is a real jump in logic. Somewhere down the line, when the Cape government neglects its constituents in Helderberg, should we vote for Helderberg to be emancipated from the Cape govt?

It seems that establishing a Cape Nation won't really make any difference.

JULIAN:
...even if the people of the Cape were vocal and did hold national government to account, what incentive does national government have to actually listen to them? I mean, the ANC & DA support bases lie elsewhere. Also, the ANC doesn't seem to be doing much for their own constituencies (cf. service delivery protests), because it's almost guaranteed their votes.

Cape secession represents a massive decentralization of power, which I think you'll agree is almost always a good thing. Added to that, the Cape Party is campaigning on a platform of even further decentralization & increased political / economic freedom. The CP could campaign for SA to change it's constitution in favour of greater political autonomy for each region, but I think that really would be tilting at windmills.

The most obvious benefit of decentralization is that each community has greater representation in the primary power structures that govern them. That's why the chance of Helderberg being neglected would be lower. Finally, I think if Helderberg really wanted to, they should have every right to secede.

GALEN:
On accountability: we must discuss this within the context of SA's three tiers of government - national, provincial and local. Yes, accountability requires more than vocality - it requires citizens to change their vote. Given that local govt can change hands independently of the other tiers and given that spending is directed at a provincial level, why is further autonomy necessary?

If further regional autonomy is necessary then CP needs to demonstrate why this could only be achieved through seccession.

To respond to ur first question: the national government has an incentive to listen to the people of the WC to the extent that the WC represents 11.4% of SA's registered voters and is the 4th largest province by this measure.

Last sentence and the "right to secede": In any secession group there will be a (usually minority) subgroup which is opposed, and the rights of both groups must be observed. The opposition group would have to be sufficiently small to justify violation of their right not to secede.

JULIAN:
...the problem is that all the taxes are controlled by national government - provinces have no taxation power and local governments can only increase property rates if they want additional revenue.

Spending is not directed/allocated only at provincial level, a substantial part of the budget is given to the national administration to spend as they choose. Added to that, some of the money that is allocated to provinces falls under "conditional grants", which basically means the national government tells the province how to spend it. Added to THAT, the money allocated to the Western Cape is 60% of what it should be. Check the "Division of Revenue Act" discussion, or get in contact with Adrian Kay, he has more info.

Don't forget that money isn't the only issue. Our police, courts, prisons, schools, hospitals, laws etc. are all, at the least, heavily influenced by the national legislature and administration.

Apart from secession, how else could greater autonomy be achieved? What kind of lobbying would convince the ANC that it's a good idea to reduce their power?

Re. the incentive for the ANC to listen to WC population, I'm afraid you'll need to explain to me how having 11% of the vote counts as an incentive. If you were a cutthroat politician, wouldn't you exploit the 11% (who are unlikely to vote for you anyway) in order to win the votes of the other 89%?

Re. your last point: on a practical level, the system the Cape Party is proposing could theoretically allow for a community to keep the policies and laws of SA, or perhaps even become an enclave within the Cape Nation. But on a philosophical level, I don't actually believe in natural rights. I'm a nihilist, so for me right & wrong don't exist, might makes right and all that. But I do like individualist principles, and I think they generally make life better. So for me, "right to secede" translates into the individual right to choose one's government, which (for me) is good. So even if only 51% in an area (which could be very small) want to secede I think they should be allowed to, the practical details can be dealt with according to each case. The "right not to secede" will often translate into "forcing those other guys to live the way I think they should live". Of course, this discussion goes to the very heart of libertarianism...

Opposition to Eskom's World Bank Loan is hot air

Environmentalists vent frustration but ignore bigger picture
by Galen Sher

If you haven't heard already, Eskom has applied to the World Bank for a $3.75bn loan to cover some of its enormous financing gap. The majority of the loan ($3bn) will go towards the 4,800 MW Medupi coal-fired power station in Limpopo. Understandably, environmentalists in South Africa and abroad are concerned that the World Bank should not finance power generation based on fossil fuels. While it is good that people around the world are concerned about the environmental consequences of World Bank investments, much of the opposition is principle-based and lacks a broader perspective.

1. Medupi will be constructed regardless of the outcome of the World Bank loan

Construction of Medupi began in 2007 and has slowed since financing became more expensive. However, the project is going ahead with a coal-supply agreement recently confirmed. Opposition to the World Bank loan often ignores the fact that construction of Medupi will continue regardless of the outcome of the loan application.

2. There will be severe regional consequences if Medupi does not go ahead

South Africa supplies "60 percent of all electricity produced in sub-Saharan Africa and our neighbors Botswana, Lesotho, Namibia, Swaziland and Zimbabwe all rely on Eskom for their electricity."

Eskom would have to redirect funding from other projects (including renewable energy projects) to finance Medupi. Failing this redirection, Eskom will have to apply for further electricity price increases to finance Medupi.

Medupi will also generate job opportunities for workers in Limpopo.

3. The World Bank loan will also fund renewable energy projects

The balance of the loan, some "$745 million, will be invested in wind and concentrated solar power projects, each generating 100 MW, and in various efficiency improvements". Pravin Gordhan

4. The construction of Medupi must be seen in the context of South Africa's national climate change policy

South Africa is pursuing reductions in carbon emmissions of "34% by 2020 and 43% by 2025" (Pravin Gordhan). As long as the construction of Medupi and other coal-fired power plants in South Africa are compatible with these reduction targets, it is debatable whether construction of these power plants should be opposed at all.

Eskom has also undertaken efficiency improvements at Medupi to reduce coal and water consumption at the power station. The construction has also passed its environmental impact assessment through the Department of Trade and Energy. These are at least a small comfort.

Now, instead of getting frustrated with the environmental implications of such coal-fired power stations, the public should be more concerned with the potential corruption in the award of the contract to Hitachi to construct Medupi and Kusile - contracts valued at some R39bn!

The benefits of aluminium smelters and Eskom's risky contracts

By Galen Sher

The context
At Creamer Media's Engineering News, Matthew Hill has discussed a 2008 Econometrix report, which says the South Africa enjoys "enormous" benefits from its controversial aluminium smelters.

The report was commissioned in 2008 by BHP Billiton. Southern Africa has three aluminium smelters, two in Richards Bay and one in Maputo, all drawing their power from Eskom. They are part of Eskom's controversial undisclosed deals, obtaining power at much-reduced rates. The smelters have been criticised because:

1. They use large amounts of electricity - as much as 5% of South Africa's total electricity consumption.


2. They obtain their electricity at low cost, which is seen as inequitable.


3. They are a capital (machinery)-intensive use of resources, rather than a labour-intensive use of resources, and hence they do not meet South Africa's employment generation objectives.

Risky contracts
None of this is new. However, the article makes a striking observation:

Under the terms of its contract with Eskom, BHP Billiton pays less for power when the aluminium price falls and more when it climbs. For Eskom, the economic crisis of 2007 and 2008, which led to precipitous declines in commodity prices, including the price of aluminium, blew in the perfect storm, with large chunks of power reportedly supplied to the smelters at below cost. [emphasis added]

Any actuary would immediately spot these contract terms as being extremely risky for Eskom. The cost to Eskom of providing electricity has virtually no relationship to the aluminium price. Therefore, these contract terms effectively place Eskom in a position where it has taken an outright bet on the aluminium price. Specifically, when the contracts were signed Eskom effectively took a wager that the aluminium price would continue to rise at least as fast as inflation.

The aluminium price graph below (Source: London Metals Exchange) shows the aluminium price hovering between $2500/t and $3000/t until late 2008 when the financial crisis broke in earnest, after which the price drops to some $1300/t in March 2009. Today the price has recovered only to some $2200/t. Therefore, from March 2009 to today Eskom has been forced to provide the smelters with low-cost electricity at a time when the utility could least afford it. This situation has arisen through Eskom's own folly in entering into such risky contracts and failing to provide adequately for the risk.



The benefits of smelters
Notwithstanding the costs incurred through providing them with cheap electricity, Southern Africa's smelters have given the region substantial economic benefits, according to the unreleased Econometrix report:

1. The smelters employed more than 3 200 employees and 2 800 contractors when the report was written


2. contributing R1,3-billion in corporate tax to the South African and Mozambique governments


3. it was estimated that about 100 000 South African citizens depended on the Bayside and Hillside smelters for their livelihoods


4. Foreign currency earned from exports... [were] more than R21-billion. [Net of imports, the smelters earned the region R12 billion in foreign exchange.]


5. The facilities comprised around 1% of gross regional product.

The report goes on to argue that South African investment in aluminium smelters should be increased, not reduced, at the time of writing. If only Engineering News, BHP Billiton or Parliament would release the full report to the public.

Patel Pursues Pensions 2

by Galen Sher

In our first blog post on this issue, Julian provides a great introduction, his view and the full bibliography. I chose to create a second blog post, rather than comment directly, because my response is too long for a comment. I strongly encourage the reader to view this short post and some of its bibliography before reading my instalment.

I am close to pensions and this issue is therefore compelling to me. I hope to provide a middle ground between the various commentators here and an actuarial perspective.

Patel is mooting that 5% of pension funds' assets be invested in government debt, potentially a special kind of 'developmental' government debt, with the intention that this policy would provide government with additional capital to finance public infrastructure.

The Pension Funds Act of 1956 and the FSB's Regulation 28 already encourage retirement savings vehicles to invest in government bonds. Government bonds also provide a good match for level pensions liabilities and provide diversification. For these three reasons, pension funds already invest, sometimes extensively, in government bonds.

If the 5% is viewed as a minimum allocation to government bonds, its impact would be negligible as the vast majority of funds already achieve this. Funds could also use structured products to circumvent this requirement.

If the 5% is viewed as an additional allocation to Dion George's "parallel system of government debt", then this policy could be viewed as Dawie Roodt's "nothing more than an additional tax" strictly when pension funds would otherwise not have invested in such debt. It would amount to an additional tax when markets are performing well, and a subsidy otherwise.

Mike Schussler points out that the real (pun intended) risk is that long-term inflation erodes the fixed returns earned on government bonds. Contrary to Dawie Roodt's skepticism, this problem could be overcome by issuing more inflation-linked government bonds, the demand for which is large in SA.

It is impossible to be decisive on this issue without more information. The proposal is both "workable" (Mike Schussler) and "flaky" (Dion George).

I have purposely ignored the moral issue of whether this level of government intervention is acceptable, or the philosophical-legal issue of whether it infringes on individuals' property rights, but these certainly merit discussion for another blog post.

The management of retirement savings is a sensitive subject because retirement savings constitute a substantial portion of an individual's wealth at retirement.

Gross Greek Government

Not even 2000-year-old ruins are safe from bad government:

Greek heritage crumbles - Mail & Guardian

Perhaps this shows that national monuments shouldn't necessarily be owned by national government.

Patel Pursues Pensions

So the state wants to "encourage" the trustees of private citizen's retirement savings to "invest" in "development projects". So much for private property rights.

Incidentally, this is why I oppose pension funds: they significantly reduce people's power over their (implicit) retirement savings. It's almost a Law of Nature that the less power you have over your money, the less of it you will have in the end.

Here are some relevant links:

Patel to tap pension funds - Times LIVE

Patel eyes pensions trillions for state fund - Free Market Foundation
"The unintended consequences of this action are entirely predictable - individuals will stop investing in retirement vehicles, thereby reducing the level of savings in the economy, resulting in less money for genuine investments that drive economic growth."

Patel's pension plan dangerous - DA - Politicsweb
"Under Apartheid, pension funds were utilised to fund the Apartheid regime through the implementation of prescribed assets."

Uasa opposes Patel's retirement fund plan - Times LIVE
"If the state were a business, we at Uasa certainly would not have invested our hard-earned retirement savings with them."

NUMSA backs Patel's pension funds proposals - Politicsweb

Patel's pension plan 'workable' - Fin24.com
Economist Dawie Roodt: "Politicians are not good at identifying winners and here we have the idea that pension funds be forced to invest 5% of their savings into a politically determined project."


Well, at least we're not Argentina:

Argentina Makes Grab for Pensions Amid Crisis - WSJ

Just a jump to the left (again)

Yesterday's feature article at Politicsweb by Dr Pierre Rabie (DA MP) provides an excellent response to Minister of Economic Development Ebrahim Patel's anticipated policies of import tariffs and company bail-outs (albeit with strict conditions).

Central to the argument is that:

• Protectionism (like company bail-outs and import tariffs) protect jobs for certain interest groups only
• But they force South African consumers to pay higher prices for the goods so produced.

This represents a direct wealth transfer from South African consumers to the workers who would otherwise lose their jobs. It's all well and good to say we should protect workers from losing their jobs, but at what cost? Should all South Africans have to pay higher prices because organised lobbying interest groups like Cosatu demand import tariffs?

In the South African context of extreme poverty, my opinion is no. Workers, however vulnerable, are nevertheless less vulnerable than the unemployed and poorest South Africans. Such workers should not be entitled to protect their interests at the expense of the poor and unemployed.

I thought this piece of the article was balanced:

"...the broader costs to society far outweigh the short term sliver of benefits to a narrow interest group. The ANC government needs to accept that the figureheads of its so-called developmental state, the parastatals, requires urgent attention by way of privatisation, and that labour market rigidities needs to be solved in order to make it easier to employ job-seekers. Until this is done, efforts to step up protectionism are at best attempts at distraction, and at worst interventions that would achieve the direct opposite of the sustainable, job-creating economic growth we need."

China Must Ignore Calls for Stronger Yuan

In an article last week in BusinessWeek, Shaun Rein argues that China should ignore (for now) the international community's calls to allow its currency to strengthen. China's government has maintained an artificially low yuan for several years as part of a strategy to promote economic growth by making its exports cheap.

Americans have been calling for the Chinese government to allow the yuan to strengthen because thousands, if not millions, of American jobs have been lost to Chinese factories.

Rein gives the following reasons for his argument:

• Centres of production would not necessarily shift back to the USA. If they shifted away from China they would move to other low-cost countries like India or Vietnam.


• Workers in China are poor and would lose millions of jobs by allowing the yuan to appreciate to its normal levels.

This entire discussion has failed to recognise the impact on countries other than the USA and China of allowing the Chinese government to maintain an undervalued yuan. The Chinese government's aggressive interventionist policy to boost competitiveness of sectors like textiles has caused South Africa, for example, to suffer immense job losses.

China's continued currency market manipulations amount to a violation of workers' rights in South Africa and around the world. In African countries where unemployment is systemic and causes massive social problems, this rights violation is particularly severe. We should all join the call for China to allow its currency to appreciate as a step towards the progressive realisation of human rights around the world.

Why I am not an Austrian Economist

Murray Rothbard

A friend whose opinions I respect greatly, and who I hope will one day write some of them down as posts here or elsewhere, forwarded me a great critique of Austrian Economics. The article is written by Bryan Caplan at George Mason University, which university is just outside Washington DC and is known for freer market thinkers. I present a brief summary of the article, which is really more of a critique of Mises/Rothbard Economics than of Austrian Economics, below. Unfortunately I must leave a lot of discussion out to save space - the reader is encouraged to consider the whole article for a fuller picture.

Ludwig von Mises

Foundations of Microeconomics
Mises/Rothbard dismiss the use of utility functions because they reject the idea of cardinal utility. However, this rejection is spurious because utility functions are merely a useful tool to summarise ordinal preferences and they do not constitute a belief in cardinal utility.

Mises/Rothbard reject the concept of indifference curves because they believe that human preferences can only be revealed by human action and such preferences cannot be known if they are not revealed. In other words, if a person is truly indifferent between two options, that person can make no decision between the options; no action is taken and the indifference is unobservable. Caplan argues that preferences can and do exist even if they are not revealed by action and therefore that indifference between two options is knowable even if it is not revealed, thus the use of indifference curves is justified.

Mises/Rothbard reject the assumption that human preferences, as described through supply and demand curves, are continuous. Hence Mises/Rothbard reject the use of calculus in economics. Logically then, Mises/Rothbard's supply and demand functions should be discontinuous - unjoined points on an XY plane - which would almost never intersect. A market price could almost never be established where quantity supplied and quantity demanded are equal.

Results and applications of Austrian Economics
Mises/Rothbard consider the economic calculation problem to be the decisive argument against the economic feasibility of socialism, even though empirical evidence does not exist to support such a claim in the face of other cogent arguments against the economic feasibility of socialism:

1. Work effort
2. Innovation
3. Underground economy

Rothbard does not accept the existence of positive externalities, but he does accept the existence of negative externalities as an odd consequence of his above discredited utility theory. Caplan argues that this distinction is nonsensical because "negative externalities often don't violate property rights, and positive externalities can".

Mises/Rothbard correctly argue that unemployment is caused by excessive real wages and that inflation is not a long term solution to the unemployment problem. However, Rothbard says that "wage rates can only be kept above full-employment rates through coercion by governments, unions, or both." Caplan argues that this is a typical generalisation and ignores the "market-based impediments" to downward wage adjustment:

1. Damage to employee morale,
2. Formal contracts specify wages, and
3. Wage renegotiation can be expensive - it takes time to bargain and renegotiation risks the loss of mutual goodwill between employer and employees.

Caplan also takes issue with the following conclusions of Austrian Economics:

Monetary expansion distorts the structure of production unsustainably
The Austrian Business Cycle Thoery explains the "sudden cluster of business errors"
The Austrian Business Cycle Theory provides the best explanation for why downturns hit the capital goods sectors especially hard
Only the Austrian Theory can explain the existence of inflationary depressions (stagflation)

Quantitative methods in economics
Mises/Rothbard say that economic history can only illustrate economic theory, that economic theory is the only 'true' form of knowledge and it is impossible to use economic history to 'test' properly economic theory. Caplan argues that economic history can be used to test economic theory, but is separately important for the measurement of effect sizes.

Mathematics and statistics have emerged over the last 50 years as the main drivers of economic research, even though their track record in delivering results has been poor relative to qualitative economic theory. Caplan argues that Austrians beleive that the failure of mathematics in economics should lead to the removal of mathematics from the discipline altogether.

Conclusion
In sum, Milton Friedman spoke wisely when he declared that "there is no Austrian economics - only good economics and bad economics," to which I would append: "Austrians do some good economics, but most good economics is not Austrian. Bryan Caplan

Zapiro = Genius

Read our previous posts regarding the issues in this cartoon - here & here.

Source: http://www.mg.co.za/zapiro/all

Pornography and liberty

In an article today in the Mail and Guardian, MultiChoice's general manager Jackie Rakitla is quoted as saying: "At this stage we're doing research to determine the extent of interest in porn, and we're looking at the feasibility of implementing such a service."

Understandably this controversial announcement caused great controversy in society between conservatives and liberals others in between.

Permit pornography or forbid pornography
One's position on this issue depends on the perceived effects pornography has on society (positive) and personal value-judgements about what such effects are desirable or undesirable in society (normative). Reading on these issues can be found on Wikipedia.

Each person's liberty and freedom are affected by society's decisions on the extent to which, and the manners in which, pornography is permitted or forbidden. In my uninformed view, South African citizens should afford Multichoice the right to screen any shows its customers are willing to pay for, subject to the protection of all South Africans' constitutional rights.

Perhaps a debate on this issue is relevant to a blog about liberty. Relevant questions are:

What are the effects on society of permitting pornography in its various forms? What are the effects of forbidding such pornography?

Which of these effects are desirable and / or undesirable to society and therefore to what extent should pornography be permitted / forbidden?

What are South Africans' constitutional rights on this issue?

Trust me, I'm an economist

Deathbed of Keynesian Economics Will Be in U.K. by Matthew Lynn

Moral of the story: the macroeconomics you learned at university is probably wrong.

Alternatives to hiking electricity prices?

"...as if there has never been any alternative, and as if South Africans should 'shut up and deal with it'..." Manie van Dyk, DA MP

Despite what NERSA and the SA Government may have you believe, there were actually alternatives to hiking electricity prices. Broadly speaking, there are three sources from which revenue could be raised to finance Eskom's expansion needs. These are:

1. Consumers of electricity, through price-hikes
2. Government, through tax revenue or guarantees on Eskom's debt
3. International capital markets, by selling a majority stake in Eskom to private investors

I am in favour of the last option. I don't see any value to society in maintaining ownership of Eskom that could not be achieved through mere regulation and tax of a privately-owned electricity producer (or producers, preferably). This view echoes the statement of Chairperson of Business Leadership South Africa (BLSA) Bobby Godsell on the nationalisation of the mining industry:

"Why would you want to take massive State resources to own something that you already regulate very comprehensively? ... I would be asking what public good is achieved by taking away ownership."

I would go further by saying that it is in society's best interests, but perhaps not Government's, to privatise Eskom entirely. Such privatisation would amount to splitting Eskom into its various business units and selling the government's share.

Not only does the SA Government need the revenue to pay off its rising debt levels (and future revenue that will inevitably be pumped into Eskom's future failures), but it has a moral obligation to reverse the wealth accumulation of the state under the previous regime (for a reference, see Julian's first comment to this article).

This privitisation process amounts to the liquidation that any private firm would undergo, had it performed as poorly as Eskom over the last decade. In addition, the process would provide an opportunity to restructure Eskom into several smaller producers, reducing the extent of the unfair monopoly Eskom has over both electricity production and distribution in SA.

The DA's Manie van Dyk expresses a similar opinion in today's feature article:

The problem with this is that there was an alternative. Introducing Independent Power Producers (IPPs) would bring with it the efficiencies, technological advances and, most crucially, hugely needed capital funds, that our electricity production sector is currently crying out for. Now we are in a situation where, although the Minister of Public Enterprises and President have both recently acknowledged the potential of IPPs, the state is trying to go it alone on funding when faced with a capacity crisis of epic proportions. The ANC's hands remain tied by their obsession with a state-centred "developmental" approach, which in large part precludes the raising of capital for infrastructure via markets. The ANC government is now trying to raise nearly R400-billion for infrastructure development, in the space of just a few years, via a series of ad hoc tariffs, instead of by means of long-term loans or by securing capital via the markets. That, we believe, is simply an untenable approach.

Simon Spicer, CEO of BLSA, rightly points out that the health of the SA economy is to a significant degree dependant on the health of key state-owned enterprises. The price hikes are really worrying because even the SA Reserve Bank (which is still independent, thankfully) cannot predict the effect they will have on inflation. According to today's article by Dion George, DA MP:

What we do not know, and herein lies significant risk, is what the second-round effects will be. The Reserve Bank confirmed that even its own sophisticated models have difficulty in predicting the magnitude, especially of a continual shock over the next three years. At the NERSA hearings, the case was simply put that our economy cannot withstand an increase at the rate of 35%. 24.8% does not make the pill any easier to swallow. It will go down, but at the opportunity cost of slower growth and unquantified second round effects. The Reserve Bank forecast GDP growth at 2% for 2010/11 and National Treasury forecast 2.3%, presumably having factored in the tariff increase - but we cannot be sure.

Inflation, and how the SARB will respond to inflation, are now the most important factors affecting future economic growth in SA. Remember when the SARB hiked the repo rate up and up and up in 2008, in response to inflation? That piece of monetary policy arguably sent SA into recession long before the financial crisis turned into an economic crisis.

The SA repo rate since 1999: