Tuesday, 17 June 2008

Petrol Price and the Soulful Science

Wrote this comment on Nat's blog. Thought that it might be relevant to the previous post, so I am reproducing it here:

But Nat, economics IS humane. As humane as any discipline could get. Some argue it is a soulful science. One even wrote a book with that title. What it could do is to have better public intellectuals to do some good PR job for some of the explanations and reasonings.

In the context of your post, I think a true economist (ie, not the talking heads on Bloomberg, or your local financial analysts) would be deeply misguided if 'efficiency' is regarded as an ultimate goal. In all reasonable considerations, efficiency is at most a proximate goal, with the ultimate goal being the wellbeing everyone. No one should really argue for efficiency just for efficiency sake. For eg, if you truly embrace and understand the purpose of central banks, the ultimate goal of all central bankers is to maintain and improve a sustainable level of living standard - inflation stability and economic growth are proximate objectives.

So when a clear headed economist argue that the fuel price increase is good, it is not because she is making a case of efficiency is more important than the rakyat. On the contrary, it is because the fuel increase is good for the rakyat ultimately. The problem is that the reason why this is good is so against intuition and conventional wisdom, that most economists making a non-apologetic case for it sound like bitches.

And now moving on to be even more specific, I disagree with phased increase in fuel price. If we agree that removal of fuel subsidy is inevitable, and that the main problem with removal of subsidy is hardship for the people due to inflation, then phased increase in price will ultimately hurt the people more, not less. And no, it is not hoarding and the sorts, but through the main determinant of inflation - inflation expectation. A one time increase limits the expectation of future inflation, but a staggered increase embeds the expectation. A phased increase in fuel price will most probably lead to much higher overall inflation than a one time increase. And when that happens, the hardship of the rakyat will be greater, not less. One can take a corollary of this argument in central banks raising interest rates, either one time or in a staggered manner. If the central bank is worried about inflation expectation (as compared to being worried about a financial market meltdown), you would expect it to raise rates over a period of time, multiple times in a staggered manner. This embeds expectation. In the reverse, if you do not want to embed expectation as in the case of raising fuel price, you should want to do it in one go. I am doing a bad job in explaning this, but Paul Krugman wrote briefly on this matter not so long ago - google "Krugman + embedded inflation".

This doesn't mean we should ignore those who are badly hit by this one time increase. It is just that there would be more badly hit people if it is phased. One way to alleviate the hardship of the poor is to have direct transfer to them, and the road-tax rebate does this. It is imperfect yes; no tool is perfect, but it is important that it reaches the intended target most of the time (for eg, a blanket fuel subsidy for everyone is NOT a good tool to help the poor). Yes, you can argue that it is unfair that some Beemer and Merc owners get the rebate too, but how many of these cases are there anyway, compared to the rest of the population? 5% to 95%?

But of course, more could be done. Income-based, mean tested transfer perhaps. If the Government is wise, this should be in the planning process for the next Budget.

Man, I post the longest comments on your blog, haha.

Noticed the alliterating title?



Shawn Tan said...

Lo! Efficiency is the ultimate goal, in engineering. d: It's all about output/input.

Elanor said...

Lol! Noted :)

Anonymous said...


I agree on most of your points. But you must remember that the inflation increase will reduce our purchasing power since our salary are not increase. Do you know that Malaysians purchasing power were much higher in the 60s than today? Most country will have inflation. It is the matter of preventing the purchasing power of the people to drop. Like in Australia, the gov. had set a salary guide for each profession. The employers cannot underpaid the employees.This is something to protect the purchasing power of the working class which form the largest portion of the population.

Anonymous said...

New Cabinet:

Prime Minister - Anwar

Deputy Prime Minister - Lim Kit Siang

Agriculture Minister -

Community Minister -

Culture Minister - Farish Noor

Defence Minister - Azmin Ali

Education Minister - Nga Kor Ming

Environment Minister - Teresa Kok

Finance Minister - Tony Pua

Foreign Minister - Ramasamy

Health Minister - Tan Seng Giaw

Home Minister -

Information Minister - Jeff Ooi

Law Minister - Teng Chang Khim

Manpower Minister -

Sports Minister -

Technology Minister -

Trade Minister - Khalid

Transport Minister - Liew Chin Tong

Tourism Minister -

Anonymous said...

Finance Minister- Elanor Tan Hiaw Hiaw.

Bry@nt ThE tHiNkEr said...

Interesting to read your blog.Just happen to stumble upon it when I was surfing.
Good to see that you're still intake with Malaysia although being abroad

Avatar said...


I find it hard to agree that traditional economics is humane.

When efficiency and production of goods is given primacy over the well being of workers...how can it be humane?

Although I am no economist, I find the current capitalist system to be deeply flawed. Already, the systems is showing signs of strain.


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