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Wednesday, 28 October 2009

Post Budget Blues

Over the long run, what rational expectations theory says, the wisdom of the majority, is basically the correct one. You can't fool all the people all the time. We eat, sleep, fornicate, interact with our fellow beings, and do whatever we must to sustain ourselves materially and spiritually. As long as the basic requirements of social life are made available- food, housing, education, protection, we just pretty much don't care with whatever the government announces. In the minds of government policy makers, this is the 'model' which they construct- a society that is satisfied enough, by the supply of basic means of sustenance, the rest are just bonuses which if obtained, are good. If unavailable, no matter. So in the budget that was just announced, just as in the previous budgets, people are looking at things that affect the basic necessities. Beyond that, the government can make as much noise at it wants without altering the conventional life that has so far been established.

What an endogenous agent outside the group says, such as what a finance minister says for example, represent just random shocks the will not move the opinion and therefore the behaviour of the public. Hence, he can say disposable income is increased so and so much by way of reducing taxes. By the way, just what is disposable income? My own definition is, it's just money you can dispose of. With this definition of disposable income, I can for example, buy another Lamborghini, Ferarri Tetarosa or a state of the art Hummer. Then I can gallivant and cruise along Nob hill of Bukit Bintang or Bangsar. The RM50 per head from a total of 11 million credit card users for example- that's money the government can dispose freely. The fee they collected per AP, that's money they can dispose too.

Will that alter the spending behaviour of the people radically? Not likely. Because, experience teaches the people, that this kind of thing is ephemeral and is likely to be temporary. Next year, disposable income may be lessened on account of a contracting economy. So, people, as  economic agents spend around income which they think is more or less permanent. For example, if they spend RM1000 per month, an increase of this year's income by another RM200, will unlikely lead them to spend beyond RM 1000. Because, what RM 1000 has thus far gotten them had made them accept it as normal life. RM200 can't buy them what RM1000 has given them. An additional RM 200 is just a random shock that is incapable of transforming their lives into really high income earners.

The future behaviour of crowd is more or less stable. This makes the expectations of the crowd as a whole, predictable. What does predictability create? It creates opportunities for manipulation and managing. If I can reasonably predict what the public thinks and expect in the long run, I can dish out audacious propositions, knowing full well, because they are audacious, the public will disbelieve them any way. This means, the public are set in their ways and so whatever I claim, however preposterous won't affect their general thinking. They will carry on with their lives, taking care of themselves and whatever I say, won't affect them.

Because of this, I can move away from point by point analyses on the recent budget. Anyway, such analyses have been ably done by other bloggers such as the economist's economist (in blogosphere), e policy and the man with the finance background, Outsyed the box.

Because how the crowd and public at large will behave in a more or less predictable manner or predictable bias, I can manage their biases. I will have trouble only, when crowd expectations are unpredictable and unpredictability endangers my position. The finance minister can just about say anything, because he knows the crowd as a whole doesn't believe in his audacious propositions. It is just sufficient and necessary, for the finance minister to get the major components of the budget correct. Doing that corresponds to the predicable crowd expectations.

Just to give an analogy. I would rate PKR and PAS to be unpredictable and unbiased. To me, they are politically dangerous because we don't know how they react. But DAP has a systematic bias- we know and can predict their behaviour and that makes them more manageable. We need just to tackle their predictable expectations.

The crowd or public at large are set in their ways. They will model their future behaviour based on their experience in the past and once they decide on a particular mode of behaviour they are unlikely to change. The government knows the public at large will not embark on some drastic or sea change behaviour. Knowledge of this kind of behaviour allows the government the luxury of making tricks on the public. However preposterous and audacious the announced initiative and policies, the government knows, the public at large will take care of themselves.

If I were to describe the typical response of the public at large at the recent budget, its one that's represented by nonchalance. Sadly, there is general lack of concern and that allows the government the opportunity to get away with most things.

But I am troubled by one thing. If I allude to a construction of such a economic model by civil servants, then I am attributing an above average capability on their part. Knowing the standard of civil servants in general, I am being excessively charitable to them.

2 comments:

Nik 28 October 2009 at 19:58  

Dato'

We have yet to see which category of consumer will get hit by the Removal of Fuel Subsidies according to the Restructuring of Pump prices "Based on Merit"...

Malaysians Mudah Lupa.

Ever noticed the agony on the faces of drivers earlier this year when they saw how much higher they had to pay for their fuel during the shortlived experiment of gradual fuel subsidy lifting?

Whilst the government talks about subsidies, the public should also be aware that the price of oil products paid by the final consumer is only slightly connected with the price of crude petroleum, as well as with its transportation and refining costs...

Taxes of various kinds adds substantially to the price of the finished product and often greatly exceed the cost of the original petroleum (eg. All over western europe gasoline taxes are so high as to make up around 70% of the final price paid by the consumer!)...

Because the main fiscal component of the gasoline price is made up of excises - fixed taxes on each liter produced - when the price of crude oil grows, its share of the final price of gasoline grows as well...

In Japan taxes on oil products represent nearly 50% of the price at the pump...

The Irony is that, on the one hand the public is encouraged to support the National Car Project whilst at the same time they are being penalised through the removal of fuel subsidies...

Anonymous,  28 October 2009 at 20:35  

Its not nonchalance - it is an inability to do anything that will make a difference....do you have any suggestions?

jo

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