High Oil Price?

The recent strike against high oil prices was not only unsuccessful, it was also futile. Because the government’s response was limited to two choices: either to leave things as they are, or decide to subsidize oil prices. There was no chance that the government could, or would, force oil companies to lower their prices. And I think that subsidizing oil prices is an entirely wrong thing for the government to do.

High International Prices
The price of oil products is indeed high. Compared to previous months, the prices of oil products have risen quite significantly. However, this is simply because of high international oil prices. The local oil companies may have prices than are a bit higher than they should be, but this would be because of inefficiency and not greed.

Oil prices in the Philippines, despite appearances, are in line with international prices. Filipinos point out to spot prices of $88/barrel, and ask why the price at the pump is similar to when the price was $130/barrel in 2007. Well, there are two reasons why this is so. First, the price of oil that the Philippines buys is based on the Dubai crude price, not on the West Texas Index of the US. Dubai crude price is similar to Brent crude at $112/barrel, while West Texas crude is $88/barrel (price of West Texas crude is 27% higher than Dubai crude). The second reason is that the quoted West Texas or Dubai prices are spot prices, i.e. they are the price for single shipments for immediate (within a month) delivery. Companies importing oil pay prices agreed to in long-term contracts (contracts of a year or more) where the price is lower. In 2007, the spot price may have reached $130/barrel, but long term contract prices were probably only half that. But now, with spot prices lower, the long-term contract price is only a few dollars lower than the spot price. It may be that the long-term contract prices now are higher than those of 2007.

A better approach to looking at prices is to compare the retail price of gasoline between countries. Retail prices would already include all costs that go into gasoline e.g. transport, refining, distribution, taxes etc. A ( comparison of international oil prices ) show that US prices are about $3.79/gallon, while that of the Philippines is $5.00/gallon (On 9 Sept, average price of gasoline was P55.95/liter ).  If we consider than the price of West Texas crude is 27% more than Dubai crude, the Philippine price should be $4.81. And if we consider that WTI is the price of crude oil already in the US, while in our case, the crude has to travel from the Middle East all the way to the Philippines, or price of $5.00/barrel sounds fair enough. The countries near us (e.g. Malaysia, Indonesia) which have lower retail gasoline prices subsidize them.

Better Response
Bayan Muna, Piston and other leftists would of course reject the above reasoning. They would point out that the oil companies are ripping off everybody. And in a sense, they have a point. But if this is so, then a strike in Manila would surely not be enough to reverse a policy that even manages to ‘rip off’ US consumers and consumers all over the world. The local oil companies that we have are not doing the big rip off. In fact, as we have shown above, they are probably ripping us off a lot less than their US-based counterparts are.

The government could still take meaningful steps against the high prices of petroleum products.  First of all, it could promote gasoline efficiency, by providing tax incentives for people to buy hybrid cars. Or by having centers that check and improve the efficiency of engines, for a discounted price. The efficiency of many tricycle  and jeepney engines could be significantly improved by relatively small changes to the engine.

Then, the  government could also initiate the process of raising jeepney, bus and taxi fares. Not that an increase should be done now, but that there will already be a decision to raise fares when diesel price exceeds a certain amount. So that drivers and operators of public utility vehicles don’t need to do the whole process when the price does increase.

There may also be a need for the government to closely monitor the books of the oil companies, to make sure that any lowering of costs are passed on properly to the consumers, and that price increases are truly based on real increases in costs, and not merely in anticipation of them.

Americans Inflating Euro Crisis

Americans are aggravating the Euro crisis for their own ends. While there is indeed a problem with the Greek economy, America has made sure that it has developed into a full-fledged Euro crisis.

Euro Crisis?
If the news stories are to be believed, it seems as if the Euro is about to fall apart, and countries will have to revert to their own currencies. This is a myth. In the first place, Greece (and Ireland & Portugal) are small fish compared to the Euro area as a whole, and their problems could not bring the whole currency down. But the main reason why the Euro won’t fail is the strength of the German-France commitment to the Euro. This is something that no American can really understand.

Germany and France see the Euro as the embodiment of their European project, and this means they are committed to it fully. Germany felt the same way about German reunification, and it poured trillions of Euros (then DMs) to make East Germany catch up with West Germany. People were willing to even pay an extra tax just to finance this. The European project is seen by Germans as the thing that ensures the peace and stability of Europe, literally. If the Euro falls, the EU will break up, and a depression and even civil wars may ensue. Germany and France had fought 3 wars with each other, in rapid succession, before the European Community was formed. No sacrifice is too big to prevent this from happening yet another time. There is absolutely no way that the Germans and French will allow the Euro to fail.

Ignorance
America has been doing its best to inflate the Euro crisis. This is due to ignorance, self-interest, and in some cases even malice. Americans are ignorant in that they don’t understand how the EU works. The EU works slowly; but is capable of making huge changes if necessary. EU decision making is a very public affair, with many negotiating positions discussed in the various parliaments and the media. In the end, though, Europe is very pragmatic, and it is actually easier to decide among the 17 members of the Euro-zone, or the 27 EU countries, than it is in the US with its two feuding parties.

In  a sense, the Germans are using the ‘crisis’ for their own ends. The crisis is convenient to force the Greeks to give concessions. But this is part of the public way in which the EU decides on policies. The Germans, and everybody else in the EU, have been using tactics like this since the beginning.

Many Americans, who depend on their 401k funds for their pensions, do not understand the EU dynamics. And they are driven to panic by US  ‘analysts’ and even political leaders who have done their best to inflate the problems with the Euro.

Self Interest
The US government is consciously undermining the Euro in order to stabilize the US Dollar. Because, in the face of the dollar’s instability, to have a stable Euro that could function as a safe haven and even alternative reserve currency would cause a flight away from the dollar. Thus, US government officials are constantly reminding the public (mainly the panicky holders of 401k accounts) that the Euro is in crisis. Obama would say something like: “European countries are as able to repay their debts as America is” – which on face value may pass as some kind of support for the Euro, but which is calculated to remind Americans that investing in the Euro is risky.

Geithner’s supposedly unfortunate comments during the recent EuroFin meeting in Poland (16 & 17 September) is passed as a gaff, but it was perfectly consistent with their policy of overly emphasizing the Euro’s problems. The Euro crisis is just what Washington ordered – as far as they’re concerned, the Eurozone’s crisis should extend at least till after Obama is reelected.

Malice?
There are also those in America who are actively sabotaging the Euro for financial gain. Hedge-fund managers buy CDSs (Credit Default Swaps, financial instruments that ‘insures’ against sovereign default) on bonds from countries such as Spain, Italy or France or sell their bank stocks short. Then they spread rumors that that country’s banks are overexposed to Greek debt.  As a result, the price of the CDS skyrockets and bank stocks fall, and the hedge funds cash in.

Hedge funds have been rightly blamed by European governments for undermining the Euro. Some EU governments have prohibited short selling of bank stocks. The EU and specific countries are investigating the speculation in CDSs. But hedge funds are nimble, and are very difficult to pin down. Hedge funds love doing their dirty techniques against the Euro because they can get away with it. The American public is nervous enough that even small rumors are picked up and could have big effects. Another reason is that hedge funds fear EU investigators much less than US monetary authorities. If they attacked the dollar similarly, they would face far harsher punishment than if the EU catches them.

What Now?
There is now a real Euro crisis, thanks to the Americans. This crisis has depressed the value of the Euro and stock prices. Even though the Euro will not fall, EU governments now have to scramble to control the immediate problems.

While the France-German commitment to the Euro is absolute, this does not mean that they will bankroll Greece forever. They just might opt to have an ‘orderly default’ of Greece, or even kick Greece out of the Euro-zone. After all, Greece didn’t properly qualify to enter the Euro-zone; it had doctored its economic figures to qualify.

But Americans are now being bitten back for their anti-Euro efforts.  Their stock markets (and thus the pensions of millions of Americans) have declined dramatically. International investors and even Central Banks are buying gold at an alarming rate, pushing the gold price ever higher. And the relatively cheap Euro means that the US trade deficit with Europe will only continue to grow. American trashing of the Euro is proving to be only a temporary solution to the US Dollar’s problems. It has led to the US losing precious time that it could have used to decisively address its own problems.

Integrate the Informal Economy

Squatters have gained some kind of legitimacy as a result of the Philippines’ political process. In exchange for electoral support, many mayors protect squatters in their municipalities from demolition.  Economically, however, squatters and others who take part in the ‘informal economy’ are far from being integrated. This means that the country does not get the maximum possible benefit from their economic activities.

Rent
It may seem strange to collect rent from squatters. Local Government Units (LGUs) don’t collect rent from those squatting on government land because they fear that by doing so, squatters acquire some sort of right to stay.  They also feel that this is an added burden on the poor people.  Reality does not support the latter argument. Gangs regularly collect ‘rent’ from squatters, and the people readily pay them. They have the money to pay rent.

Collecting rent does not bestow renters a right to stay indefinitely. People who rent rooms or apartments can be told to leave, and so should people who rent land. The municipal government could make it clear that the land could still be used for another purpose, and that it will give something like a 3-month notice if it decides to do so. Collecting rent, however, changes the status of people from ‘squatters’ to renters; and this makes it easier to deliver other services to the area.  Part of the rent collected could also be shared with the local barangay (perhaps 1/5 of the rent). They could help ensure that nobody else collects rent from the people. The share of the rent could partly be used to pay for part-time barangay tanods to help police the neighborhood (who, among other things, would make sure that the gangs don’t collect ‘rental’ money anymore).

Vendors
Street vendors of all types should be licensed. And the license fee should be rather high; after all, it would not be possible to collect VAT or business taxes from them. With the license, the vendors will no longer be harassed by the police. Corrupt police regularly milk vendors, and if they don’t pay they are arrested. The license fee will be welcomed by vendors, just to avoid paying the informal tax to the police. Licensing vendors also clears the way for the government to enforce health standards for food sales and some other regulations.

Public Parking
Many people suffer from the hassle of street kinds forcing their ‘Watch Your Car’ services on them. If you don’t pay the kids, something bad may happen to your car. In Cebu City, the government issues parking ticket booklets, which are sold through street kids. The kid who sold you the parking ticket also watches over your car; because the moment your car leaves, another car would need to be sold a parking ticket. The city gains money from this arrangement, and so do the street kids. And the car owners at least have a structured way of making sure that someone is watching over their car. I think that this is an example that other cities could emulate.

Water and Electricity
Extending water and electricity services to slums helps to improve the quality of life in slums, and greatly reduces illegal taps on water and electricity lines. But measures need to be made to make this work well. The barangay, or a barangay-level organization, should ‘buy’ electricity and water from the wholesale providers and distribute these within a given slum area, and collect the payments. The cost of illegal taps or leaks will effectively be distributed among neighbors, providing people with an incentive to report illegal taps, and to demand action against these.

Why Progressive Taxation and Cash Transfers make sense

If Tea Party activists are to be believed, the US government is busy taking away money from hardworking citizens, and spending it on bureaucratic government or on the parasitic poor.  In response, they call for lower taxes, smaller government and less social spending. While there may be some things valid in the criticism of how the government works and its social spending priorities are, there is a case to be made to keep such things in place, in principle.

If we were truly to minimize government, keep taxes as low as possible and have no social spending, we will get something like Somalia – a failed state in chaos, with terrorists and criminals running loose, and not much of an economy. There is a need for the state and its bureaucracy, in order to keep an economy running well.

But Somalia is not the US – it was undeveloped even while it had a functioning state. True. But when it had a functioning state, it at least had a working economy, and not as much crime, terrorism etc. as it has today.

For an example of a much more developed country with low taxes , minimum state and low social spending, lets take the case of Russia during the years immediately after the fall of the Soviet Union. The lack of effective government controls on the economy resulted in a handful of people getting control of huge chunks of the country’s wealth. They didn’t pay much taxes, corruption was rampant, crime syndicates ran amok and there were shortages of coal and other resources.

A developed economy needs to have a developed system of government. And this means that people need to pay the necessary taxes to pay for that government. As an economy is more developed, it needs more government officials, not less, in order to run things correctly.

Progressive Taxation
Progressive taxation makes sense from both an economic and a moral point of view. If a country needs to raise a certain amount of money, it makes economic sense to get a bigger proportion of this from the rich, rather than from the poor. The rich have more money than the poor; and their capacity  to spend is less affected by taxes than that of the poor. Also, since the poor tend to spend most of their income (while the rich save part of it), the multiplier effect of having poor people retain their money means that the market demand for goods is higher.

Now for the moral point. It is a myth that rich people had worked harder to become rich. A lot of rich people started off as rich children – being born of rich parents. And every successful businessman became so partly because of contacts, privileged information, or just plain luck; combined, of course with some measure of hard work.  Hard work is responsible for only a part (the smaller part, actually) of the wealth of rich people. Following this logic, rich people ought to give back more to society, because they have benefited more from society than others.

Conditional Cash Transfers
Cash transfers for poor families is a way of ensuring a minimum standard of health and education for citizens. On the short term, it may look like charity or dole-outs, but it is really a smart investment into the future. An educated and healthy labor force is worth a lot more than what the Cash Transfer Program eventually costs, in the longer term. Conditional Cash Transfers (CCTs) do not make people lazy; on the contrary, people will work harder if a better future and standard of living is achievable, than when their situation is hopeless.

It would be even better if the government is able to provide Universal Health Care and quality Free Education for all. But, when this is not yet possible, a Conditional Cash Transfer program that improves the health and education prospects for the poorest families is a good thing to do. An added, though secondary, advantage of a Conditional Cash Transfer program is that it stimulates the local economy in the poorest communities. The CCT effectively raises the level of demand, leading to more business for merchants, more goods get transported, and there is more demand for services (e.g. laundry, transportation, retailing). And all this indirectly raises the welfare of all the poor families in the area (e.g. through cheaper goods, more job opportunities).

On Bio-industry

The business of raising chickens and pigs has grown into a full-grown bio-industry. ‘Mega-stalls’ for these animals are sprouting in the Dutch countryside.  It seems that raising the animals themselves is much more profitable than importing meat.  This is profitable when these animals are raised in ‘optimum’ growing conditions.

Mega-stalls have advantages of scale: personnel cost per animal is lower; less space per animal in terms of buildings (which at a later stage could be maximized further by building multilevel stalls), lower cost of buying feeds, bulk advantage in selling. At the same time, because of the scale of these stalls, they require a different ownership structure than the traditional family farm. Mega-stalls are generally corporate; and this means that it has to operate like corporations do, and not like family farms. They require attention to ROI (Return on Investment) because of the big bank loans needed to finance them. And with ROI comes corporate efficiencies, which may lead to ‘externalities’ (negative side effects) in the quest to maximize profits. One issue is that of their environmental impact – which boils down mainly to the disposal of waste. And then there is the issue of animal welfare – chicken/pig movements are restricted as much as possible, to optimize conversion of feed to meat. And then comes the issue of health – since large collections of animals are susceptible to all kinds of diseases, mega-stall owners tend to use a lot of antibiotics to lessen this risk. But this leads to antibiotic resistance being developed by bacteria in the meat, which means that bacteria that infect humans are more likely to be resistant.

All the issues related to mega-stalls could, in theory, be resolved by government regulations. However, since resolving these is in conflict with the whole rationale of having mega-stalls in the first place (which are built to maximize profit), it will be extremely difficult to regulate their operations by simply specifying environmental, animal welfare and health requirements.

Labeling
One kind of regulation that may prove effective in controlling these ‘externalities’ of mega-stalls is by requiring that the meat coming from them be labeled. The government should require that all meat be packaged, and that these be labeled (note: not only the meat from mega-stalls need to be labeled). At the same time, imported  meat should also all be similarly packaged and labeled.  On the labels, it should be indicated how much fat, salt etc. that it has, and if no antibiotics were used in raising these animals. There would also be strict minimum requirements on environment, health and animal welfare.

The individual countries of the European Union could not do this by themselves. There needs to be a EU directive to implement a centralized labeling system. This way, it would not be possible for growers in one EU country to produce sub-standard meat, and export them to other EU countries.

When companies are forced to label their products (and an independent body should be in charge of inspecting for compliance) people could directly compare the quality of various kinds of meat. Hopefully, they would reject, or at least discount, lower quality meat – paying much less for it. It would then not pay, for example, to feed salt to chickens before slaughter – salt is sometimes added to increase slaughter weight of poultry or hogs, since a high salt content will make that meat cheaper. And animals who don’t move much will have a large proportion of fat, this will merit a lower retail price.

Here to Stay
Despite mega-stalls being eyesores and running counter to the cultural-determined accepted mode of agriculture, I think that further scaling up of the bio-industry is here to stay. All we can do is to minimize (or correctly price) their externalities. The growth of meat production in EU countries will eventually be balanced by meat production elsewhere – in grain producing countries like Ukraine, or nearer markets. And by that time, mega-stalls will only be enough to supply the meat requirements of a given country.