Decoding Najib’s brain to restores the honour of the nation

As others have noted, conservatives who’d like bash the president on the economy are having an awfully hard time right now, as the recovery proceeds apace. Too slowly apace, for sure, but no objective observer can miss that the trend is our friend and that even the job market, while still far too weak and with conspicuous downsides (intractable long-term unemployment), is improving.

So, they’re stuck with “yeah, things are getting better, but if we were in charge, they’d be even better!”

This year began with a series of reports providing tantalising evidence that economic recovery in the United States is strengthening. The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. But it is too early to celebrate.

Output growth in the US remains anaemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit and a long-run fiscal deficit, none of which is likely to be addressed in an election year.

Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labour and capacity were fully utilised. That gap – between actual and potential output – is estimated at more than 7 per cent of GDP (more than $1 trillion).

http://www.aljazeera.com/AJEPlayer/player-licensed-viral.swf

US companies increase the insourcing of jobs

The output gap reflects a deficit of more than 12 million jobs – the number of jobs needed to return to the economy’s peak 2007 employment level and absorb the 125,000 people who enter the labour force each month. Even if the economy grows at 2.5 per cent in 2012, as most forecasts anticipate, the jobs deficit will remain – and will not be closed until 2024.

The US’ jobs deficit is primarily the result of inadequate aggregate demand. Consumption, which accounts for about 70 per cent of total spending, is constrained by high unemployment, weak wage gains and a steep decline in home values and consumer wealth. The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit. Neither of these trends is healthy or sustainable.

Unemployment rate

This, of course, is the flip side of a rap with which I’m intimately familiar: “sure, things are bad — but without our actions, they’d be even worse!”

Neither are convincing to most people, because most people don’t engage in the economist’s counterfactual: the path the economy would have taken absent your interventions. It’s the “compared-to-what” in the above statements.

Thing is, I know and believe, within confidence intervals, my counterfactual. It comes from tried and true modeling based on the historical relationships of how advanced economies respond to stimulus.

Or, if you don’t like that sort of thing, you can derive a counterfactual from simply projecting the course the economy was on before you did your policy thing, and compare that to the actual path of growth and jobs (you can see that approach here — see discussion around Table 3). [Note: the fresh-water economists, who continue to willfully ignore critical lessons of our past, deeply disdain the Keynesian multiplier models — but I haven’t heard their objections to this other, much less theoretical approach, as in Table 3 in the above doc.]

What I don’t get is their counterfactual. Other than unconvincingly waving hands, muttering how things should be better, how the EPA and OSHA rules are killing businesses, yada, yada — let’s see some analysis.

Gov. Romney’s got real economists on his team. If he wants to make the case that things would be better if we followed his plan — which actually looks pretty Hoover’esque to me — explicitly anti-stimulus re: jobs and liquidate the housing market — let’s see the model. True, most people won’t believe it anyway, but those of us familiar with counterfactual analysis would like to see if there’s anything there, or is this just disgruntled smoke-blowing.

I’m not saying we (when I was with the admin) or the Federal Reserve got everything right by a long shot. But what I don’t see is anything approaching a coherent argument about how things would be better otherwise.

This year began with a series of reports providing tantalising evidence that economic recovery in the United States is strengthening. The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated. But it is too early to celebrate.

Output growth in the US remains anaemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit and a long-run fiscal deficit, none of which is likely to be addressed in an election year.

Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labour and capacity were fully utilised. That gap – between actual and potential output – is estimated at more than 7 per cent of GDP (more than $1 trillion).

US companies increase the insourcing of jobs

The output gap reflects a deficit of more than 12 million jobs – the number of jobs needed to return to the economy’s peak 2007 employment level and absorb the 125,000 people who enter the labour force each month. Even if the economy grows at 2.5 per cent in 2012, as most forecasts anticipate, the jobs deficit will remain – and will not be closed until 2024.

The US’ jobs deficit is primarily the result of inadequate aggregate demand. Consumption, which accounts for about 70 per cent of total spending, is constrained by high unemployment, weak wage gains and a steep decline in home values and consumer wealth. The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit. Neither of these trends is healthy or sustainable.

Unemployment rate

With an unemployment rate of 8.5 per cent, a labour-force participation rate of only 64 per cent and stagnant real wages, labour income has fallen to an historic low of 44 per cent of national income. And labour income is the most important component of household earnings, the major driver of consumption spending.

Even before the Great Recession, American workers and households were in trouble. The rate of job growth between 2000 and 2007 slowed to only half its level in the three preceding decades. Productivity growth was strong, but far outpaced wage growth, and workers’ real hourly compensation declined, on average, even for those with a university education.

Indeed, the 2002-2007 period was the only recovery on record during which the median family’s real income declined. Moreover, job opportunities continued to polarise, with employment growing in high-wage professional, technical and managerial occupations, as well as in low-wage food-service, personal-care and protective-service occupations.

By contrast, employment in middle-skill, white-collar and blue-collar occupations fell, particularly in manufacturing. Hard-pressed American households slashed their savings rates, borrowed against their home equity and increased their debt to maintain consumption, contributing to the housing and credit bubbles that burst in 2008, requiring painful deleveraging ever since.

Three forces have driven the US labour market’s adverse structural changes:

1. Skill-biased technological change, which has automated routine work while boosting demand for highly educated workers with at least a college degree.

2. Global competition and the integration of labour markets through trade and outsourcing, which have eliminated jobs and depressed wages.

3. The US’ declining competitiveness as an attractive place to locate production and employment.

Technological change and globalisation have created similar labour-market, challenges in other developed countries. But US policy choices are responsible for the erosion of US’ competitiveness.

In particular, the US is underinvesting in three major areas that help countries to create and retain high-wage jobs: skills and training, infrastructure, and research and development. Spending in these areas accounts for less than 10 per cent of US government spending, and this share has been declining over time. The federal government can currently borrow at record-low interest rates, and there are many projects in education, infrastructure, and research that would earn a higher return, create jobs now and bolster US competitiveness in attracting high-wage jobs.

US jobless rate falls to three-year low

The US does indeed face a long-run fiscal deficit, largely the result of rising health-care costs and an ageing population. But the current fiscal deficit mainly reflects weak tax revenues, owing to slow growth and high unemployment and temporary stimulus measures that are fading away at a time when aggregate demand remains weak and additional fiscal stimulus is warranted.

At the very least, to keep the economy on course for 2.5 per cent growth this year, the payroll tax cut and unemployment benefits proposed by Obama should be extended through the end of the year. These measures would provide insurance to the fragile recovery and add nothing to the long-run fiscal gap.

So, how should the US economy’s jobs deficit, investment deficit and long-run fiscal deficit be addressed?

Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi-year plan to reduce the long-run fiscal deficit gradually. This long-run plan should increase spending on education, infrastructure and research, while curbing future growth in health-care spending through the cost-containment mechanisms contained in Obama’s health-reform legislation.

Approving a long-run deficit-reduction plan now, but deferring its starting date until the economy is near full employment would prevent premature fiscal contraction from tipping the economy back into recession. Indeed, enactment of such a package could bolster output and employment growth by easing investor concerns about future deficits and strengthening consumer and business confidence.

Painful choices about how to close the long-run fiscal gap should be decided now and implemented promptly once the economy has recovered. But, for the next few years, the priorities of fiscal policy should be jobs, investment and growth.

Prime Minister Najib Razak is off the mark when he was reported to have described an Opposition party (PAS) as promoting a welfare state (Negara Kebajikan). PAS in actual fact is emphasising on a benevolent state (Negara Berkebajikan) that gives priority to good governance and social justice – not the creation of a ‘welfare state’ as perceived by Najib.

A benevolent state is not a welfare state but a state that promotes the ‘growth of welfare’  and this will in turn bring about social justice to the people.  Bribing the people before elections on the pretext of giving aid cannot qualify a government to be benevolent. This is the one-off kind of charity work for short-term gain by political incumbents that will not impress voters. A benevolent state subscribes to the affordability of the citizens to lead a decent and affordable life.

Even Sri Lanka has not gone bankrupt

For instance, when citizens have to pay heavily for education and health care in government-owned institutions the state cannot claim itself to be a benevolent state. Many benevolent states  in the world – in Europe and Asia – offer free or affordable education from primary to tertiary level for all their citizens. There are many countries tin the world that also offer free or affordable health care by the government for the people. These are well-managed countries that take care of their citizens’ welfare.  These states  promote social justice and does not commercialise education or healthcare to generate money. Even  a poor country like Sri Lanka can offer free education for all its citizens. Yet it has not gone bankrupt.

Thousands of Malaysian students are stuck with the PPTPN loans. Many have not paid the loans and owe the government billions of ringgit. The government is dumb and until today cannot come up with a viable mechanism how to resolve this problem. Students do not have to scramble for loans to pay for their education and get into debt right from the day they step their feet into the university if education is made affordable to most parents. Parents are aware that even with the high costs for education in the country they see no quality in it. Out of no choice they have to send their children to local to these institutions as most cannot afford overseas education.

UMNO-BN government has put our students in a very difficult position when they are forced to pay for university education. All this attribute to poor governance. Today billions of ringgit given out as loans to students cannot be paid back by them. A bulk of this money comes from loans taken by the government from EPF. EPF contributors are not happy with this move.

Why not make education free or affordable for all Malaysians studying in government-owned universities? And also ensure that all races are given the rights to pursue their education in these universities. If government-owned universities are more meant for a single race than there is no social justice in a benevolent state. All races and people of all religions have to be given equal opportunities to have access to government-owned educational institutions.

Stop the gimmicks

The creation of a benevolent state emphasising on social justice is the core element in Islam also shared by those professing other religions.  The welfare work such as handing RM500 to the poor or giving RM200 vouchers to students are just political gimmicks for the next general election. Beyond this, there is no soul to this practice. Such aid does not need direct UMNO involvement. Itcan be efficiently done by the welfare department created by the government in each state. This does not qualify the government to claim itself as practicing good governance or social justice. Giving RM500 to the poor and those in power misusing RM500 million of taxpayers’ money only show that there is no social justice in the country and thus it does not qualify itself to be called a benevolent state.

Najib is again off the mark here when he brands the Opposition as wanting to promote a ‘welfare state’ and claims that UMNO is already practicing a ‘welfare state’. To prove this point, UMNO went on to give a one-off payment of RM500 to the poor before an election. UMNO does not justify that it is promoting its version of ‘welfare state’. This to many  is ‘bribery’ of sort.

Moreover, RM500 each to the poor is too little when there are ministers and their spouses living in luxury, spending millions on shopping sprees and having properties overseas. Giving a few ringgit handouts to please people before an election does not make UMNO a party that champions the poor. The people does not need a government to do this. They will accept the money but it is not a guarantee that they will vote for UMNO or BN.

Corruption and spending sprees

Najib tends to believe that creating a benevolent state will make the country go bankrupt but how about  endemic corruption that has afflicted the country? The amount of money and wealth plundered and pillaged by those in power and those closely connected to those in power is enough to make the 70 percent poor Malaysians uplift their standard of living. Trillions of taxpayers’ money and money from national resources are washed into the drains and a bulk of it taken out of the country for the past 54 years of UMNO-BN poor governance.  Why not pro-UMNO media impart this news to the rural people?

The country went through hundreds of failed businesses because of UMNO-BN’s poor governance. The people have heard enough of the PKFZ RM12billion scandal, the submarine commission amounting to RM500million, Sime Darby debacle of RM964million, PosMalaysia RM230million loss, Eurocopter waste deal amounting to RM1billion. Billions more were lost in Terengganu Stadium when it collapsed, MRR2 repair costs, Torurism kickback, Matrade repairs, London’s Sports Complex, lost in selling Augusta, buying of submarines, Paya Indah Westland, overpayment by Maybank, paintings for MAS, plane used by prime minister that runs into millions in expenses, compensation for botched crooked bridge, APs to cronies, PSC Naval dockyard, Perwaja Steal loss, losses by Bank Islam, APCO …. and the list goes on. In fact money lost in hundreds of business deals under UMNO-BN government has tarnished the image of UMNO. Cronyism, corruption and the expensive lifestyle of leaders and their spouses have bled the nation profusely.

All the money wasted could have uplifted schools and universities where education can be made affordable to all Malaysians. Make it affordable for all citizens to seek medical care in government hospitals.  Ensure that the poor are housed. Giving a small token of reward each to the poor will not make the country turn into a benevolent state. These are pittance when leaders are enjoying life living in luxury houses and driving luxury cars, overseas holidays, staying in posh hotels and going on shopping sprees.

Peanuts for the poor and mega-deals for the rich

A benevolent state does not mean that it is a welfare institution to dish out people’s money before elections but a government that ensures the poor and the needy irrespective of race or religion are given the opportunity to live a decent life.

All benevolent states in the world with good governance have not faced any serious economic problems. Greece is collapsing not because of being a benevolent state but it is because of too much borrowing and too little productivity. This reminds of Malaysia which is about to face the same fate as Greece. Almost all states in the world with leaders who are corrupt and their spouses who live a lavish lifestyle have experienced economic problems.

Every responsible government would strive to provide a social safety net to ensure that wealth is fairly distributed and this only occurs in states where the welfare of the people are their most concern but this is not the case with Malaysia. The rich are becoming richer and the poor poorer. UMNO-BN, however, needs the poor for elections. Giving out pittance to the poor and enriching those in power is not good governance. Commitment to an Islamic state is insisting that the government adheres to fair principles in governance. No abuse of power, wastage, corruption and injustice should be tolerated.

Plundering continues

UMNO and Najib have failed to understand what a benevolent state is under an Islamic state. When PAS proposes a benevolent state it gives emphasis on good governance and social justice – which is part of Islam and rejoiced by all other religions. Abuse of power, financial leakages, corruption and lack of integrity are not the essence of a benevolent state. And this is cherished not only in Islam but also those leaders who are sincere in managing the country.

Najib pointed out initiatives such as the RM1.4 billion handed out to the less fortunate under the 1 Malaysia Social Welfare Programme (KAR1SMA) and RM500 for each household earning less than RM3,000 a month under the Bantuan Rakyat 1 Malaysia (BR1M) as examples of Putrajaya’s social safety net.

The people are asking why only RM500 for each household. This to many poor families is not enough to even sustain their living expenses for two weeks. Is it more a political gimmick than aid?

Enriching the already rich and those well-connected to those in power is the reason for a nation to go bankrupt. The unabated plundering of the nations’ wealth would ruin the nation’s coffer not when money is used to help the needy in a benevolent way.

Safety net giving priority to welfare

It was reported that UMNO practises a social safety net and gives priority to welfare. Then they could create a fair and just society that is balanced in sharing wealth. But how come some ministers are super rich. They can afford to live in multi-million ringgit bungalows, their families be given projects worth millions of ringgit, spend a fortune on shopping sprees, stay in posh hotels ?

And the people find it impossible to make ends meet. What can  a one-off payment  of RM500 do to help the poor? The poor rural people are not aware of all this abuse as the pro-UMNO media will spin to their master’s favour.

Corruption and cronyism are the main causes that lead to economic ruins in any country and not a benevolent state that emphasises good governance and social justice.

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