DAP and the PH Economy

A Facebook friend shared an article from GMA News online explaining to us what DAP is. The article summarized DAP as a government "program to accelerate public spending and boost the economy." 

And then I asked a question: "How does public spending boost the economy?" "By pump-priming the economy, infusing money in the marketplace", my friend responds. And then he adds, "by building the needed infrastructure."

"I agree as a short-term solution." And the I asked another question: "How about as a long-term solution? What is the long-term impact of public spending on the economy?" He replied: "If the spending is focused on infrastructure, education and health, it will benefit the economy in the long-term."

This friendly exchanges reminds me of an article I wrote last January this year based on the The Freeman article, "Abundance Down There, and Back Up". 

And then I gave a longer response: 

"That's why I think understanding Henry Hazlitt's 'Economics in One Lesson' is very important. In that book, he talks about short-term/long-term and visible/invisible results of any economic policy or activity. I believe that the government has the authority to spend taxpayers money within its sphere of legitimate functions. However, concerning health and education, and add to it, energy, I don't think they are within the legitimate duties of the government. Of course, in case of health and education, we have been used to them and it's now difficult to break the customary ways of doing things. But for free market advocates, I think it is part of their idealism that somehow one day these sectors of the economy will be liberated from the political class. The Freeman article exactly touched this subject. For the writer, government interference in healthcare, education, and energy is exactly the reason why the products and services in these industries 'are getting worse. slower, and more expensive.'" 

And then I searched for another article and I found Jonathan M. Finegold Catalan's "Government Spending Is Bad Economics". In it, he identified several features and setbacks of government spending. They include the following: 

1. Government spending brings about the negative side effect of discouraging production. 

2. Government spending is inherently inferior to private spending.

3. Though the government is the biggest economic player, it does not play according to the rules of the market (my paraphrase version).

4. The reason why the state does not need to economize, because it can borrow, tax, and simply print more money.

5. Public spending distorts the entire notion of scarcity, because government can acquire any economic good at any cost. 

6. Government spending is not a method of improving the market's efficiency, nor is it a method of employing allegedly idle resources (This reminds me of the sources of DAP). 

7. The result of government spending is foregone opportunities; the cost is the gain in wealth that would have occurred had economization been allowed to take place.

8. Government, in fact, is a large disequilibrating force on the market. It forcibly redistributes economic goods, removing them from a process of economization and instead investing them toward the realization of less important, or less preferred, ends. 

9. We can safely conclude that government spending causes more harm than good; it redistributes the means of production toward the attainment of ends considered inferior by the individuals who make up the society that government is allegedly acting to improve.

Nothing to Fear

Companies and banks are also financially healthier...All signs so far - from manufacturing to consumer spending - are pointing to a firmer rebound, not just in the US but also in other recently stagnant developed economies like Europe and Japan...So while Asia may be in for a rocky ride as the US eases out of QE, most economies are in a good position to manage the adjustment without giving in to fears of a new crisis. - The Korea Herald 

Fiona Chan wrote the "Fears of Asian financial crisis may be overblown" at The Korea Herald dated August 29, 2013. Her article attracted my attention for it is about the economic situation of Asia and contains materials related to the Philippines. She thinks that Asia has nothing to fear for it has strong economic fundamentals and actually have experienced "boom for the last three years". Countries, which she identified as strong include Taiwan, Philippines and South Korea. In fact, she also thinks that the US, EU and Japan were already out of recession pit and on their way to recovery. 

My reading of Austrian analysis about Asian economy leads me to a different conclusion from Chan. If she thinks that those who see a repetition of the Asian financial crisis in the coming years are misguided, Austrians think that a far greater crisis is actually approaching. We just do not know when. It depends on several factors particularly in relation to the political and economic move of the US. But either way, we cannot escape a far serious economic bust. 

Even reading Chan's article, you will see a hint about the kind of monetary system that we have right now. She said that "if the authorities tighten monetary policy to stabilize currencies or reduce inflation, that risks sapping economic vitality." This is an admission that existing monetary system is unstable. Any attempt to stabilize it will make the situation worse. So the tune that we are playing now is to allow lose monetary policy and let inflation has its way.

You can detect another indication that we are not in a healthy condition when she quoted one economist saying " 'Asian economies have been on a steamroller boom for the last three years, and the fact is that many Asian economies are fundamentally on a much firmer economic footing this time around. '... they do not 'appear to be in danger of falling into an outright currency crisis.' " From Austrian point of view, this is exactly the one to fear - the boom she is referring to for it is caused not by sound business practices, but by credit expansion. After this, bust follows depending on the length of the impact of the easy money injected to the economy in the first place. So I assume that if we could interview an Austrian, he would say "It's actually the reverse: Asian economies are on a more serious and shaky economic footing right now." 

If Chan saw that the world economy has already escaped the 2008 crisis, for an Austrian, the crisis has never been solved. It was actually expanded...

The Key to Philippine Prosperity

Increasing the capital is the only key for developing nations (like the Philippines) to attain prosperity. This is Ludwig von Mises' central argument in his fifth lecture on economic policy, "Foreign Investment". I would like to share this under five headings - reason for lower income, three important events, numerous enemies of capital growth, situation in many countries, and the key to the prosperity of developing countries. 

Lower Income

The standard of living is lower in the Philippines simply because the average income is also lower compared to similar type of work in developed countries. And the reason for this is not inferiority of our workers or ignorance on the part of our entrepreneurs. Instead, it is dependent on economic situation and availability of capital in the country. I think the following paragraphs apply to us:

"The standard of living is lower in the so-called developing countries because the average earnings for the same type of labor is lower in those countries than it is in some countries of Western Europe, Canada, Japan, and especially in the United States. If we try to find the reasons for this difference, we must realize that it is not due to an inferiority of the workers or other employees. There prevails among some groups of North American workers a tendency to believe that they themselves are better than other people—that it is through their own merit that they are getting higher wages than other people. It would only be necessary for an American worker to visit another country—let us say, Italy, where many American workers came from—in order to discover that it is not his personal qualities but the conditions in the country that make it possible for him to earn higher wages...Nor can one explain this economic situation by assuming any inferiority on the part of the entrepreneurs outside the United States" (pp.76-77). 

"Once again: the difference is not personal inferiority or ignorance. The difference is the supply of capital, the quantity of capital goods available. In other words, the amount of capital invested per unit of the population is greater in the so-called advanced nations than in the developing nations" (p.77).

"The employers in all of these developing nations know very well that better tools would make their own enterprises more profitable. They would like to build more and better factories. The only thing that prevents them from doing it is the shortage of capital" (p.78). 

Three Important Events

Mises identified three important events in the economic history of the world. These are the introduction of foreign investment in the 19th century, the story of American subsidies in between and after two world wars, and the development of anti-capitalist mentality after World War 1. 

Without the aid of British capital in the 19th century, the development of US economic system is unintelligible. In addition to British capital, US economic policy during those times was friendly to foreign investment. This explains the unprecendeted growth of American economy. 

But after World War 1, economic climate changed with the development of anti-capitalist mentality. Countries were no longer friendly to foreign investment. The previous condition that encouraged foreign investment was removed. Expropriation of investments became the norm. Mises explains this in detail: 

"Starting with the First World War, there began a period of worldwide open warfare against foreign investments. Since there is no remedy to prevent a government from expropriating invested capital, there is practically no legal protection for foreign investments in the world today. The capitalists did not foresee this. If the capitalists of the capital exporting countries had realized it, all foreign investments would have come to an end forty or fifty years ago. But the capitalists did not believe that any country would be so unethical as to renege on a debt, to expropriate and confiscate foreign capital. With these acts, a new chapter began in the economic history of the world" (p.82).

"With the end of the great period in the nineteenth century when foreign capital helped to develop, in all parts of the world, modern methods of transportation, manufacturing, mining, and agriculture, there came a new era in which the governments and the political parties considered the foreign investor as an exploiter who should be expelled from the country" (ibid.).

Of course, countries will not openly declare such animosity against foreign investment. I think the typical strategy was described by Mises in the person of Jawaharlal Nehru of India. Nehru said, 

" 'Of course, we want to socialize. But we are not opposed to private enterprise. We want to encourage in every way private enterprise. We want to promise the entrepreneurs who invest in our country, that we will not expropriate them nor socialize them for ten years, perhaps even for a longer time' " (pp.83-84). 

Mises was not naive to believe that such a message was really an invitation to foreign investors. Capitalists want reliable rules that will stay not just "for ten years" or "even for a longer time".

Enemies of Capital Growth 

Aside from direct expropriation, "innovative" way of expropriating capital also exists. And this problem is rampant in developing countries (I do not know the details of this in the Philippines). Mises mentioned two ways of doing this - foreign exchange control and tax discrimination. And then referring to tax system, he described it as the existing policy in the US, as insane, and should not be followed by other countries (which I hope is not true to our country). He called it double taxation and progressive: 

"The problem—as you know—is domestic capital accumulation. In all countries today there are very heavy taxes on corporations. In fact, there is double taxation on corporations. First, the profits of corporations are taxed very heavily, and the dividends which corporations pay to their shareholders are taxed again. And this is done in a progressive way" (p.84).

"Progressive taxation of income and profits means that precisely those parts of the income which people would have saved and invested are taxed away" (ibid.). 

"This policy of the United States is worse than bad—it is insane" (ibid.).

Two additional forces that prevent capital growth are protectionism and labor unionism. Protectionism prevents "the importation of capital and industrialization into the country" (p.87). Labor unions on the other hand "use violence against entrepreneurs and against people they call strikebreakers" (ibid.). They "cannot industrialize the country, they cannot raise the standard of living of the workers", and they bring nothing but "permanent, lasting unemployment" (ibid.).

Situation in Many Countries and Proposed Solution 

Many countries are in serious trouble due to these anti-investment policies. The end result of this is harmful to national economy. It destroys confidence that cause the retreat of foreign investment. For Mises, his proposed solution was to establish an international law that remove foreign investments from national jurisdiction. Mises explains the seriousness of this problem:

"But in many other countries the problem is very critical. There is no—or not sufficient—domestic saving, and capital investment from abroad is seriously reduced by the fact that these countries are openly hostile to foreign investment. How can they talk about industrialization, about the necessity to develop new plants, to improve conditions, to raise the standard of living, to have higher wage rates, better means of transportation, if they are doing things that will have precisely the opposite effect? What their policies actually accomplish is to prevent or to slow down the accumulation of domestic capital and to put obstacles in the way of foreign capital" (p.85).

The Key to the Prosperity of Developing Countries

Mises kept on emphasizing that the only thing missing among developing countries for them to improve their standard of living is capital accumulation operating not under the control of the government, but under the discipline of the free market. And to achieve the desired result, capital requires a stable monetary unit. This would mean total absence of any kind of monetary inflation. 

At the end of the day, the key to the prosperity for developing countries is all about economic policy and for Mises this is the decisive point: 

"One must realize that all the policies of a country that wants to improve its standard of living must be directed toward an increase in the capital invested per capita" (pp.87-88).

"As I said before, there is only one way a nation can achieve prosperity: if you increase capital, you increase the marginal productivity of labor, and the effect will be that real wages will rise" (p.88).

He calls this one way as the slow method:

"To attain the end, as I see it, there is only one way! It is a slow method. Some people may say, it is too slow. But there are no short cuts to an earthly paradise. It takes time, and one has to work" (p.90).

In concluding his lecture, Mises cited Switzerland as a model of this proven way:

"In the center of Europe, there is a small country, Switzerland, which nature has endowed very poorly. It has no coal mines, no minerals, and no natural resources. But its people, over the centuries, have continually pursued a capitalistic policy. They have developed the highest standard of living in continental Europe, and their country ranks as one of the world's great centers of civilization" (pp.90-91). 

Personal Response

There are two questions that come to my mind while reading the first part of Mises' lecture. What is the economic situation in the country? And what prevents the availability of both domestic and foreign capital? I think it is the existing economic policy that determines the economic situation in the country. And this policy unless changed, we will never see the growth of domestic capital and flow of foreign investment. 

Dr. John V. C. Nye of George Mason University shares similar opinion as to the primary obstacle for the increase of investment in capital per capita. "Badly distorted micro-economic price situation", "poor and unreliable property rights and contracting", "legalistic bureaucracy" and "policies and institutional constraints that are anti-investment and anti-competitive" are great barriers both to domestic and foreign capital. 

We have been hearing the call particularly to OFWs to invest and start their own business. If this call is really true and sincere, the government must start paving the way first by removing restrictions that prevent the flow of capital into national economy.


Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.



Related Article:

Bono: Only Capitalism can end poverty

Monetary Policy and the Philippine Economy - Biblical Critique of Inflation

This is the 4th and last part of my series in "Monetary Policy and the Philippine Economy". The content will be taken from Gary North's "The Biblical Critique of Inflation". I want to present North's material in four parts: 

• Identifying currency debasement as a concrete call to repentance

• The law commands honest measurement and money

• Consequences of inflation, and

• Multiple indebtedness

Concrete Call to Repentance

North started his critique by citing that unlike today's church leaders, Old Testament prophets confronted both the nation as a whole and their civil governments with a concrete call to repentance. Isaiah 1:22 is an example of such call. In this verse, prophet Isaiah declared that Judah was guilty of economic dishonesty. Currency debasement and deceiving the public about the quality of the products in the market were considered normal and ordinary.

Precious metals such as silver and gold were used as money both nationally and internationally during biblical times. North mentioned that you can find "over 350 references" showing various contexts where silver and gold were used. Example passages include 2 Kings 5: 5 and 2 Kings 12:13.

Honest Measurement and Money 

Since gold and money were used as medium of exchange, honesty in economic transaction was vital. North argued that the law's provision concerning honest weights and measurement was also applicable to honest money. He quoted Daniel-Reps' study to show the importance of honesty in economic transaction: 

"Exactness of weight was important not only for dealings in corn and other goods, but also as a guarantee of the soundness of the currency...The practice of weighing money rather than counting it was still general in the Palestine of Jesus' day, as it was all round the Mediterranean. The scales also served to ensure that the coins were of the true metal and that they had neither been filed nor clipped.; indeed, this inspection was one of the banker's and money-changer's chief tasks" (Gary North, Introduction to Christian Economics, 1973, pp.5-6).

During Isaiah's time, silver and gold coins were not yet in existence. They were used as money in the form of "ingots" (p.6). Exactly, the debasement of ingots with cheaper metals was the offence committed by the people of Judah during the prophet's time. 

For North, that was an act of monetary counterfeiting. He considered it fraudulent, an act of theft, and immoral. He then equated it with the use of legal tender laws. And he contends that not even the government is above the law concerning the use of honest money. North explains why this is so:

"...legal tender laws are immoral; currency debasement is immoral; printed unbacked paper money is immoral. To mix cheap metals with silver or gold and call the result pure gold or pure silver is totally fraudulent. Yet this is what was being done in Isaiah's day" (ibid.).

Such act of monetary dishonesty was not new in Isaiah's time. It happened long time before his day. Proverbs 25:4 clearly identifes the command "to take away the dross from the silver".

Consequences of Inflation

"Currency debasement is the oldest form of monetary inflation" (p.7). North warns about the destructive impacts of monetary inflation on the economy. He quoted four paragraphs from Murray Rothbard's "What Has Government Done to Our Money?". I gleaned twelve destructive consequences of monetary inflation from those paragraphs :

• Gain for counterfeiters

• Losses for late receivers

• Redistribution of wealth in favor of first-comers

• Distortion of business calculation (consumers' demands and operation cost)

• Illusory profits

• Suspension of free market's penalty for inefficient firms and rewards for efficient firms

• Business cycle

• Decline in quality of goods, services, and work

• Popularity of get rich quick scheme

• Penalizing thrift, saving, and lending

• Encouraging debt and spending

• Reduction of standard of living in the name of creating "prosperity"

 See how North concluded Rothbard's analysis:

"Rothbard's analysis indicates why God so opposes monetary inflation, whether practiced directly by the State or simply private fraud which is tacitly sanctioned by the State. Currency debasement is theft. It involves the redistribution of wealth. Those on fixed incomes suffer. The quality of production tends to decilne. Monetary inflation (currency debasement) is a fraudulent, invisible tax, and the Bible prohibits it. The nation which permits monetary inflation to persist, as if it were not a terrible moral evil, will suffer the consequences described by Isaiah and Ezekiel (22:18-22)" (p. 8). 

Multiple Indebtedness

Since monetary inflation promotes debt instead of thrift and saving, a corollary economic and monetary phenomenon occurred. North described this as "multiple indebtedness". He got this idea from Exodus 22:25-27.

The passage speaks about the use of interest in lending money and the use of a pledge or collateral. It is this use of collateral where North got this idea of multiple indebtedness. For him, the cloak as pledge serves as a protection for both the creditor and the debtor. The debtor cannot use the same cloak as collateral in multiple loans or transactions. He is confined by his immediate assets. This economic principle prohibits multiple indebtedness. 

1. Fractional Reserve Banking

After laying down the basis for multiple indebtedness, North claimed, "The entire public sphere of civil government rests on the violation of the principle. The whole structure of modern credit is based upon the idea that men should not escape from perpetual debt" (p.11). Particularly, "fractional reserve banking and the limited liability corporation" (ibid.) have violated this economic law. This violation was later organized and designated as "the monetization of debt" (ibid.). Notice how North described this economic phenomenon:

"The central bank of every nation...prints up the money to finance the deficits of the central government, and in return for this fiat currency, the government gives an interest-bearing bond to the bank...From a biblical standpoint, this is utterly corrupt: 'The wicked borroweth and payeth not again' (Psalm 37:21a). The civil authorities do not intend to reduce this debt and repay the principal. They favor perpetual indebtedness. Laws that are transgressed in God's universe will be found to contain their own built-in punishment...Massive national indebtedness is highly dangerous" (ibid.).

Concerning fractional reserve banking, its mechanism is unbelievable. It all starts with a citizen making a deposit either checking or savings account. And from that deposit, fractional reserve can create loans nine times the size of the original deposit. North referenced Wilhelm Roepke saying the same thing about fractional reserve banking as resting "upon the systematic violation of the biblical prohibition on multiple indebtedness" (p. 12). For Roepke, without understanding the mechanism of fractional reserve banking, we cannot understand also "the perils and the problems which currently beset our economic system" (p. 13). 

Fractional reserve banking violates the principle of multiple indebtedness for it indebts itself beyond its immediate assets by loaning money to borrowers. Banks do this for they assume that their creditors will not ask for their money simultaneously. The faulty foundation of this mechanism is exposed when a bank run occurs. 

2. Limited Liability Corporation 

LLC has been in existence for more than a century. North describes this institution as a creature that came out of the economic environment that promotes multiple indebtedness. Or we can also say that with the existence of fractional reserve banking and government intervention, LLC is another form of violation of the principle of multiple indebtedness. North describes three things about this institution. 

First, LLC works as follows: 

"The corporation...is responsible only for the value of its assets. Creditors can collect, in case of coporate bankruptcy, up to the value of the corporation's property, but they cannot gain access to the funds of the legal owners, i.e., the shareholders...Thus, the LLC tends to become a huge, impersonal structure in which effective ownership is separated from management" (p.15).

North's second observation is about the shift in responsibility. Here North relies on Rushdoony's comments:

"...the liability thus shifts responsibility away from the responsible to society at large...with limited liability, a premium is placed on profit irrespective of responsibility. The shareholder is less concerned with buying responsible ownership and more concerned with buying a share in profits. And then, as the state further protects the shareholder against liabilities in his irresponsible pursuit of profits, the shareholder becomes less and less concerned with the responsible and moral management of his company" (pp. 15-16). 

Finally, North identified the influence of government intervention preparing the way for socialism. The limited liability laws are actually one form of government intervention. They destroy personal responsibility before God and before men, they produce subtle people who know how to use bankruptcy laws, and they erode the very foundation of Western civilization. Notice how North explains the connection of limited liability laws to socialism:

"Limited liability laws have produced the era of the huge, impersonal corporations that have produced unquestioned material prosperity, but at the same time these laws are now producing something very foreign to free enterprise...The drift into socialism continues, for it is socialism, above all other systems, which destroys personal responsibility and removes power from ownership..." (pp.17-18). 

Conclusion

At last, after 15 days, I finished my series on "Monetary Policy and the Philippine Economy". So part 1 talks about Dr. Nye's lecture where he identified the economic problems of the country and offered a corresponding solution. Part 2 contains six recent news articles related to monetary inflation written from different perspectives. Part 3 deals with Mises' lecture on inflation. And this last part is about biblical critique of inflation.

In blogging this series, I recognize the existence of gaps. It is just a draft, which needs to be finalized to come up with a lecture format. At its best, this series and other related articles in this blog serve as an introductory overview in the study of monetary inflation.


Part 1 - Dr. Nye's Lecture

Part 2 - Summaries of 6 Related Articles

Part 3- Mises' Lecture

Reference: North, Gary. (1973). An Introduction to Christian Economics. The Craig Press. 

Monetary Policy and Philippine Economy Part 3 - Mises' Lecture

This is my summary of Mises' lecture on inflation with some insertion of content from articles in this blog. I am using the word "inflation" here in its primary sense. You will recall that I already made a distinction in the early part of this series. This distinction is taken from Mises' lecture.

In this summary, I want to share 5 subsidiary topics under inflation: 

1. Two Ways to Solve the Financial Problems of the Government

After Mises clarified the distinction, he shared about two ways the government solves its financial problems. The legitimate way to do it is by taxing the citizens. But since taxing the people is considered not good for political career, another way of addressing the government's financial difficulties was made. This time it is by simply printing paper money.

In directly taxing the people, at least the people are aware about the deduction in their salary and they can adjust their expenses to a new financial situation brought about by new taxes. And another advantage of direct tax compared to simply printing paper money is that the price of goods and services is not affected. The only negative repercussion of such an act is the increase in buying power for the government and less on the part of private citizens. 

But this is not the case when government decides to print paper money to solve its financial trouble. It is also a tax, but people do not see it for it is done indirectly. And it also does not affect anyone's political career. 

What's detrimental in this form of indirect tax is that since people do not see any reduction in their income, they think that they can still buy the same amount of goods that they previously buy when the quantity of money is not yed increased. They do not realize that the purchasing power of their money has been reduced since the certain consequence of printing more money is price increase. And since prices of goods and services have already increased as a result of additional money, those who receive the same amount of salary when the new money was not yet introduced will suffer. And since most people do not know how their money lost its value, they simply consider it as something natural.

2. The Most Affected Sector in Inflation

The fact is, price increase and the lost of purchasing power are not natural. It is an inescapable outcome of government's act of printing money to address its financial problems. So the financial burden is transferred from the government to the citizens without them knowing it. 

Mises was questioning not how the money is spent but how the money is obtained by the government. Due to the preference of the government to use printed money rather than direct tax, some people will have greater advantage than others. Those who receive the new money earlier are in a better position than those who receive it late. Ron Paul identified the early beneficiaries as the “speculators, bureaucrats, and the special interests favored by the government” (Pillars of Prosperity, 2008, p.110). The sufferers are the laborers and savers. Among them are the teachers and ministers. Mises clearly identified teachers and ministers as the people who would suffer the greatest disadvantages from the increase in money supply. He explained why this is so: 

"As you know, a minister is a very modest person who serves God and must not talk too much about money. Teachers, likewise, are dedicated persons who are supposed to think more about educating the young than about their salaries. Consequently, the teachers and ministers were among those who were most penalized by inflation, for the various schools and churches were the last to realize that they must raise salaries. When the church elders and the school corporations finally discovered that, after all, one should also raise the salaries of those dedicated people, the earlier losses they had suffered still remained" (Economic Policy, 1979, p.61).

Since there are groups who benefit from new printed money, for them, this kind of monetary policy is good. I think this explains why there are people who insist that there's nothing harmful about increasing the money supply. On the other hand, those who are harmed by this policy do not know the connection of the government's action to their financial situation. And besides, the technicalities surrounding this matter is so complicated, as if, it was really made intentional in the first place to hide it from average citizens. 

3. How long shall inflation last? 

The basic flaw of this kind of monetary policy is that it cannot last. The Roman Empire, Han Dynasty, and Germany are used as typical examples to demonstrate the catasthropic end of continually increasing the supply of money. Mises described the situation of Germany in 1923. He stated, "On August 1, 1914, the value of the dollar was four marks...Nine years and three months later, in November 1923, the dollar was pegged at 4.2 trillion marks" (ibid., p.63). In short, German currency collapsed. 

The question is, until when will the government continue this monetary policy? Mises answered: "Probably as long as people are convinced that the government, sooner or later,...will stop printing money..." (ibid. pp.63-64). When people do not believe this anymore, then they will realize that prices will continue to increase. As a response, they will start "buying at any price, causing prices to go up to such heights that the monetary system breaks down" (ibid. p. 64). 

Under inflationary monetary system, becoming a debtor is considered wise. Anyone who understands the system could take advantage of it and could utilize it to attain easy wealth. Another feature of inflationary policy is the perception about the government's power. It is looked upon by the people as all-powerful. People ask the government to take care of them for with an unlimited supply of money, the government can do anything. This kind of government perception is a clear break-away from the past for then it was considered the citizens' duty to support the government, not the other way around. US President Grover Cleveland said, "While it is the duty of the citizens to support the government, it is not the duty of the government to support the citizens" (p.66).

In order to correct the wasteful spending of the government, Mises believed that only a return to the gold standard can do it. He argued that the gold standard is a form of protection from extravagant government. One great advantage of it is that "the quantity of money under the gold standard is independent of the policies of governments and political parties" (p.65). 

4. Labor Unions

After explaining the advantage of gold standard, Mises turned to the labor unions. He considered it as the second power next to the government who influence wage rates. The problem with the wage rate demanded by unions is that it is above the level of wage in free market. As a result laborers are only employed by industries prepared to suffer loss. When businesses can no longer afford losses, they shut down resulting to more unemployment.

Currency devaluation has been the usual response of governments to unemployment. But as both workers and unions realized through time that currency devaluation had reduced the purchasing power of their demanded wages, they made additional demand: wages must go up with price increase. This is known as "indexing"(p.69) and so the unions became index conscious that made currency debasement as solution to unemployment inapplicable.

5. Full Employment

John Maynard Keynes was a strong advocate of currency debasement. In his 1936 book, "General Theory of Employment, Interest and Money", he argued that unemployment is bad and that the only way to solve it is by inflating the currency. Mises described Keynes' strategy as "cheating the workers" (p.70) and this is considered necessary in order to attain full employment. 

For Mises, there is no need to resort to inflating the money supply to achieve full employment. The market should be allowed to operate freely without the interference coming from both the governments and the labor unions. This is the only way to achieve full employment. Mises explained this further:

"...wage rates for every type of labor tend to reach a point at which everybody who wants a job can get one and every employer can hire as many workers as he needs. If there is an increase in the demand for labor, the wage rate will tend to be greater, and if fewer workers are needed, the wage rate will tend to fall" (pp.70-71). 

So the choice should not be between inflating the money supply or unemployment. Full employment can be achieved without increasing the money supply. 

Conclusion: 

Mises concluded his lecture by emphasizing that inflation is a monetary policy and it can be changed. And the only way to change it is for the intellectuals to do their role in shaping public opinion. Once the public are informed about the disastrous results of inflation, Mises was confident that politicians will abandon this monetary policy.


Part 1 - Dr. Nye's Lecture

Part 2 - Summaries of 6 Related Articles

Part 4 - Biblical Critique of Inflation


Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.

Monetary Policy and the Philippine Economy Part 2 - Summaries of 6 Related Articles

As a result of my Google search last July 2, I came up with top 10 links, but after visiting them all, I selected seven. The first link directed me to Dr. Nye's lecture. At this point, I want to share my summaries of the content of the remaining 6 articles.

Among six articles, three are safe; two are more realistic, and; the remaining one is in between. That lone article reminds me of Dr. Nye's lecture except that part where he mentioned that Philippine economy was protected from trouble due to non-engagement.

1. Safe Articles

Vulnerable but the economic fundamentals are sound

The recent shift in macroeconomics due to the announcement made by the Chairman of the Federal Reserve exposed the vulnerability of emerging markets. Gerardo P. Sicat claimed that though the Philippines' vulnerability was exposed as result of massive withdrawal of "hot money" from the PSE, our economic fundamentals remain intact. I think he was happy to see peso depreciation for this would benefit the export industry. However, the reduction of stock price index is bad news for domestic investors.

I just wonder why Sicat was calling for reform if the nation's fundamentals are really sound? What did he mean by reform? We read such need of reform from Dr. Nye's lecture. Do they mean the same thing or is Sicat's idea of reform one of protectionism? If he was referring to protectionism, I cannot understand how come he also advocates economic liberalization, which in fact is something commendable.

Time is so fast

Lilian Karunungan's article from Bloomberg reminds me of PSE's jubilant celebration in 2012. The peso appreciated and also there were videos that circulated around that time claiming that the Philippine economy was positioned for growth for decades. But the celebration was short-lived. After nine months, we witnessed that the so-called growth was nothing but an outcome of temporary parking of "hot money" escaping the impact of American QEs.

Bubbles - Fear and Denial

This time, its the impact of Japan's QE on Asia's economy. Policy makers in Asia were afraid, but the Governor of Bank of Japan considered their action as insignificant. The Governor of the Philippine Central Bank confirmed this. And besides, Kuroda promised to monitor the impact of their monetary policy. The writers mentioned also that other central banks have been doing the same thing such as the Federal Reserve, the Bank of England, and the European Central Bank, as if, by mentioning them, the fear of policy makers in emerging countries is baseless after all.

2. More realistic articles

Danger Zone

After defining QE, Cassandra Ty mentioned that US, UK, and Japan have all adopted this monetary policy. The goal of QE is to stimulate the economy. However, since the economy of the world is interconnected, the consequences of this action cannot be confined within the boundary of the initiating nation. Ty clearly identified that it "would have a spillover effect on the rest of the world" and that in fact a huge quantity of this new created money went into the Philippine stock market. Aside from possible currency war in the future, she saw other dangers of QEs include trade imbalance, inflation, and asset bubble.

Till death do us part

I consider this article from Business Mirror most realistic among the six. The writer mentioned about the IMF-WB annual meeting attended by the members of the Philippine Department of Finance. And then he confidently claimed that the Philippine government is "absolutely clueless" about the nature of global crisis and predicted a dark legacy for the existing administration as one of "economic disaster" unless policy makers would start to understand the situation and make necessary changes.

The writer is highly critical of QE. After mentioning the differences in the responses of Thailand, EU, South Korea, and US to a difficult economic situation, he raised the question about the source of $5 trillion, which the US needs to have a good start. He seemed to imply that through QE, the US could get such amount from the emerging countries.

And then the writer quoted history as his basis that monetary systems using fiat currency all collapsed. He cited the experiences of Roman Empire and China's Han dynasty as his examples. In the end, he issued a warning that unless the Philippine peso will be allowed to appreciate, our economy will crash together with the continuous devaluation of the US dollar.

3. In between article - From unreliable PSE into real economy

"The biggest percentage loss since the Great Recession of 2008 and the biggest points dip in the institution's history", that's how Heydarian described the recent drop in PSE prices. He added that emerging markets "have been under siege" as a result of anticipated QE retreat. So the trend is changing in favor of central economies like US and Japan and against emerging economies such as the Philippines. So the call now is for the reform of economic policy and shift the attention from PSE into the real economy. The writer ended his article by giving credit to previous administration.

Part 1 - Dr. Nye's lecture


Part 3 - Mises' lecture


Part 4 - Biblical Critique of Inflation

Monetary Policy and the Philippine Economy - Dr. John V. C. Nye's Lecture

I am done reading Mises' 4th lecture, inflation, from the book "Economic Policy: Thoughts for Today and Tomorrow". Now, I want to write my own piece combining:

• Dr. Nye's lecture on quantitative easing, 
• Summaries of 6 related articles, 
• Mises' lecture, and 
• Biblical critique of inflation

But before I do that, I want to share first my understanding of three important terms.

Three Important Terms

I accept the technical difference between inflation and quantitative easing. However, I see them as basically similar for they are both monetary policies and their essence is the increase of money supply.

Inflation has two meanings, the primary and secondary. Its primary meaning is historical. The secondary meaning is popular. Its historical meaning is either an increase in money supply or it includes the act of creating new money, which results into the reduction of the purchasing power of the monetary unit and price increase. The popular meaning is simply confined in price increase.

Considering the primary meaning of inflation, quantitative easing is basically referring to one and the same monetary policy. Mises Wiki helps me clarify the confusion in my mind when it defines quantitative easing as "a euphemism for an inflationary strategy of monetary policy pursued by central banks." So the term is actually a vague substitution for something that is considered harsh, and in this case, the act that is considered harsh is the increase in money supply.

Concerning monetary policy, I restated the definition given by Mises Wiki as the manipulation of money supply advocated by both monetarists and Keynesians through central banks to maintain economic growth and limit unemployment. Only the Austrian school criticizes monetary policy for its destructive results such as the redistribution of wealth, business cycle, and other disastrous economic distortions.

After providing the definitions of the above terms, allow me to proceed to Dr. John V. C. Nye's lecture.

Dr. Nye's Lecture

Dr. Nye gave this lecture in January 14, 2011 and it was attended by "BSP officials and representatives from both the public and private sector, e.g., the Senate, the Bureau of Treasury, the Presidential Management Staff, Bankers Association of the Philippines, Chamber of Thrift Banks, Philippine Economic Society, Ayala Life, Citigroup, USAID, IMF, and members of the Press." The title of his lecture is "Why Quantitative Easing was good and should be better...and how the Philippines should benefit from it."

The academic credentials of Dr. Nye is very impressive. He earned his Ph. D. in Economics from Northwestern University. At present, he is "a Professor of Economics at George Mason University and holds the Frederic Bastiat Chair in Political Economy at the Mercatus Center." He is also "a specialist in economic history..." Interestingly, the problem of economic development in the Philippines is included among his existing numerous projects. 

In presenting Dr. Nye's lecture, I would like to reverse the order by enumerating first the problems and solution he identified in Philippine economy before presenting his positive assessment of quantitative easing.

1. The Problems in Philippine Economy

At the outset, he described the Philippines as "bystanders in the global drama of economic maneuvers" (p.8) and this explains why we are not much affected by global economic crisis. In short, we are not really in the game; we are just watching as the global players battle on the ground. So it is not really true that the fundamentals of Philippine economy is sound that's why we do not suffer as other countries do. Dr. Nye described further the Philippine situation as "non-engagement" (p.9) and lacking in integration with regional and world trade. So the outcome of such position will be protection from trouble and at the same time, from wealth. 

Dr. Nye painted the ugliness of the nation's economic situation. He described the country as the exact opposite of China, which has become "more economically liberal and more business friendly..." (ibid.). The other way of saying it, is that the country is hostile to business initiatives and you can see it through interventionist policies.

Dr. Nye identified numerous problems in the economy, which are "mostly self-imposed" (p.8). In his view, even though the Philippines share some of these problems with neighboring countries, our situation is far more serious. And that's why he thinks that the country has "one of the most distressing climates for investment in the region" (p.10). 

Though there are other problematic areas in the economy like unprepared infrastructure for regional expansion and excesive concentration of industry in the NCR, most descriptions of the nation's economic problems are related to policies and regulations. Below are the descriptions of economic problems that Dr. Nye identified: 

• "...bad policy and excessive regulation is a breeding ground for corruption and inefficiency that further damages the economy, producing cynicism and complacency" (p.10). 

• "The PH has a fragmented and poorly integrated economy marked by a dysfunctional state institutions coupled with excessive intervention and regulation" (ibid.). 

• "Current rules also slow down the development of more advanced urban regions to accept workers who would like to move out of the countryside" (ibid.). 

• "...while industry is somewhat productive, it is inefficient and hampered in its further development by excessive regulation and high transaction costs" (ibid.). 

• "Nationalistic rules on ownership and investment limit competition and entrench special interests" (ibid.). 

• "...among these are the constitutional restrictions on foreign ownership and investment in the Philippines coupled to the mix of bureaucratic red tape, complicated taxes, and petty corruption..." (p.11). 

• "A crazy patchwork of subsidies, price controls, and regulations give the illusion of helping the poor, while effectively stiffling the economic progress and enriching the corrupt and the politically well connected" (ibid.). 

• "So many policies in the Philippines seem to be motivated by a nationalism that says it is better to be protectionist and nationalistic even if the end result is greater emigration and lower growth" (ibid.). 

• "Various reciprocity and tax rules have had the effect of driving foreign air carriers away from the PH thus weakening competition and taxing PH travelers, PH business, and incoming tourists. Taxing foreign businesses with outside options does not harm the foreigners but ourselves" (ibid.).

Dr. Nye summarized our nation's problems in one sentence: 

"PH major problems have less to do with macroeconomic or fiscal stability but with a badly distorted micro-economic price situation, poor and unreliable property rights and contracting, a stiflingly legalistic bureaucracy, a slew of policies and institutional constraints that are anti-investment and anti-competitive, and a political economy that favors the worst mix of populism, elite rent-seeking, and high-minded but unproductive nationalism" (p.13).

2. Solution to Philippine Situation 

Philippine situation is not at all hopeless. It is not yet too late for the country to benefit from what is happening right now in global economy. After reading the entire lecture, I discern that Dr. Nye's proposal though taking into consideration his idea that the country can take advantage of quantitative easing, he believed that the real issue lies in reforming "micro-economic policies to make investment more competitive." (p.8). In order to maximize the benefit of what's going on, the Philippines must act faster than its neighboring countries in reforming its regulations if it does not want to be ignored by foreign investors due to the existence of better options. Moreover, investors must be given the assurance that the changes in policies will stay and remain consistent in the future. If these conditions are not met, our country will once again "look back in a few decades at another set of missed opportunities as the gap with our Asian cousin further widens" (p.13).

3. Positive Assessment of Quantitative Easing

I observe that even Dr. Nye is against interventionism, his monetary ideas are far from the Austrian school and reflect the perspective of Milton Friedman. We can see this in his assessment of the causes of the 2008 crisis, Quantitative Easing, the Federal Reserve, the Great Depression in the 1930s, US economic recovery, and inflation.

Dr. Nye recognized three separate causes of the 2008 global crisis. He did not see the prior increase in the money supply as the primary cause of the crisis. In fact, for him, the greatest mistake of the chairman of Federal Reserve was the hesitation to provide bigger dosage of quantitative easing. He believed that inadequacy of "monetary expansion can make a bad economy much, much worse" (p.1) and "...real crises can be created or worsened by inadequate monetary policy" (p.2). He was actually proposing "...more easing and something that would surpass what had already been tried" (p.3). He is convinced that "...all the evidence is that QE2 was helpful not harmful but that it was inadequate and will require still more intervention" (p.6). Furthermore, he thinks "...that the Fed still has many effective instruments at its disposal..." (ibid.).

The monetary view of Dr. Nye is consistent to Friedmanian analysis of the Great Depression in the 1930's. The major problem then was insufficient liquidity. And also in his view, "...the only policy in the 1930s that helped the recovery was Roosevelt's abandonment of the Gold Standard in 1934" (p.4).

Moreover, for Dr. Nye, US economy has already experienced "notable recovery". He based his idea of recovery on the improved performance of the stock market, rising price levels, and higher GDP.

And finally, his assessment of inflation is also contrary to Austrian analysis. He does not like high inflation, but considers low inflation as an "evidence that we need more not less monetary expansion" (p.6).

4. Personal Comment

Dr. Ron Paul, schooled in Austrian school, diasgrees with Dr. Nye's monetary view. Dr. Nye's interpretation as to the three separate causes of 2008 crisis ignores the critical role of the Fed. For him, the real estate bubble, banking crisis, and macroeconomic collapse had no connection with each other and he failed to see their connection to the action of the Federal Reserve.

In Dr. Paul's congressional report, “The U. S. Dollar and the World Economy” dated September 6, 2001, he argued that the Fed has the primary responsibility for the 2008 crisis and real estate bubble in particular. According to him, it all started with Federal Reserve credit expansion to the tune of $3.2 trillion (Pillars of Prosperity, 2008, p.219). Here is my summary of that connection:

"It all started with Federal Reserve credit expansion. Huge size of the credit went into real estate, stirred up by the '$3.2 trillion of debt maintained by the GSEs' (p. 219). The GSEs by the way, was composed of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The GSEs received a special treatment through low interest rates and the Federal Reserve monetizing them 'just as if they were U. S. Treasury bills' (p. 220). This action of the Federal Reserve sent an attractive message to foreign central banks causing these banks to purchase great quantity of GSEs."

Ron Paul also contradicted Dr. Nye's idea about quantitative easing. In September 14, 2012, Dr. Paul asserts, “Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious.”

These are just two examples where Ron Paul as representative of the Austrian school differed from Dr. Nye's monetary perspective.

However, regardless of Dr. Nye's positive assessment of quantitative easing, which Austrian economists consider erroneous, still he did not believe that quantitative easing as far as the Philippine economy is concerned would greatly benefit the country without consistent adjustment in micro-economic regulations. QE does not create growth and has little effect on local economy. For him, even increase in tax revenues is incapable to improve the economy without regulatory reforms. He saw the primary function of monetary policy as "a means to smooth out short term fluctuations and provide the proper background conditions to support development" (p.8). He added, "The purpose of monetary policy should be to allow the real economy to perform better" (ibid.).

Part 2 - Summaries of 6 Related Articles

Part 3 - Mises' Lecture

Part 4 - Biblical Critique of Inflation

The Government is Doing a Lot

Reading "Poverty level in Phl unchanged since ’06" does not make sense to me. One could easily dismiss my difficulty to the fact that I am not an economist. But I ask, who is the audience by the way of such a report? Is it the economists or the Filipinos as a whole? If it is the economists, it makes sense why the report is technical. But if the intended audience is the Filipinos, why not make the report comprehensible?

There are parts in the article that I understand. At least, I got the idea that since 2006, poverty level in the Philippines remains the same. In terms of percentage, Ted Torres identifies that almost 28% of Filipinos remain poor. On the other hand, the parts that are incomprehensible to me are those related to the meaning of poverty line, the meaning of family income, the meaning of the different percentages of poverty incidence in different provinces and the meaning of government programs. So I have a problem in understanding the details of the report. 

I want to know how NSCB (National Statistical Coordination Board) determines the poverty line. Is it fixed or subject to change? What causes the change in poverty line? 

The difference in family income that determines a poor family also puzzles me. Does it mean that if a family of five is earning P7,821 per month, such family is no longer below the poverty line? How can a family of five with such an income pay their house rental, electricity and water bill? How about the allowance of children going to school and the transportation fee of the person who works? It is really unthinkable that with such an income the family can already buy other goods aside from food. To my mind, only a magician can expand such income to meet the enumerated needs. 

To my non-economic mind, to complete NSCB's income distribution, I find that the poorest 20% earns 6% of total national income; the middle 60% earns 44% of total national income, and; the upper 20% earns 50 % of total national income. What's the significance of this report? 

The reporter also wrote that "an annual tracking of poverty incidence will now be done to allow the government to make the necessary tactical or short-term changes in its Philippine Development Plan 2011-2016." I wonder when was the government war against poverty started? Is this annual tracking of poverty incidence only done this time?

I still have many questions in mind concerning government program against poverty. What is the meaning of the following phrases and statements: 

• "...with the timely measures we are now implementing", 

• "...the government’s massive investment in human development and poverty reduction", 

• "...the problem of poverty requires a comprehensive, 'multi-pronged and multi-sectoral solution' involving many stakeholders", 

• “We are making use of the current effort..."

• “We need value-added activities for our farmers."

• "We also need to spur their access to markets,” 

I just finished reading the introduction of Mises' economic policy. Reading this report, I think Mises is right that interventionism is very much alive in the country. Of course, the term is not used to describe the existing economic policy, but the reality is there. It is captured in this statement: "the government is doing a lot."