The rich and the famous in this part of the world have traditionally donated to the schools, churches, temples, hospitals, universities, social welfare organization in return for their name or chosen name to be honored or christened to a building, library, lab, faculty, a wing, an auditorim, a hall or even a gold/blonze statue.
It is common sight of seeing someone's wife or mother being honored in Hong Kong.
Whether it is sensational or otherwise, naming the donor is sometimes rather controversial.
There was a huge debate several years ago whether it is fine for HKU to name its medical faculty after LKS for his HKD 100 million donation.
Actually, all these are fine so long the common good is the objective and credit/honor ought to be given when it is due. I am inclined to believe that creating competition or a sort of market base incentive for charity serves the public good.
Big-ticket charity is often neither nameless nor faceless. We don't and shouldn't expect it to be altruistic. I recall even a small temple donation of just couples of ringgit get a mention in my little home town.
An issue confronted by most societies over here is that they are too often themselves not affluent to support "these civilizational causes".
It is costly to run a public library and etc. (recently, i read of Phily major is closing quite a number of them due to budget deficit. What about maintening a Cantonese opera or some marginal cultural or other social interest?
How much of these should and could be taken by the govt?
New York is different and certainly more lucky than perhaps all other places in the world with a tradition of generosity and charity. As a trading port and as a finance center of the world, the wealth generated (some argued they are virtual until it is spent) has allowed massive historically/artistically/civilizational-important collection for display and appreciation.
My Hong Kong has a much shorter history as an affluent society. She doesn't have a foundation-run library or a world class muzium or gallery with permanent collection of privately-owned but publiy displayed antiques and etc.
There are other equally civilizational traits that I am proud of.
Being one of the most affluence society in Asia, she is pretty spontaneous in responding to charitable cause whether it is a relief of earthquake or adoption of an African kids living in dire straits or rebuilding a Sizhuan/Tibetan school in an earthquake aftermath.
I also recall reading somewhere a survey that HKger, not just the rich, has the highest percentage of giving out of pocket donation (without tax rebate) in this part of the world.
They are the one who step out from the MTR station and reach into their pocket for several token of coins and placed them into a tiny bag in return for a small flag (sticker actually) attached to their chest or on their sleave.
They are the one who rang the toll free number to pledge a donation in response to a charitable concert/TV show.
These are my unsung hero who are generous and charitable whose name are most likely not recorded in the annal of history but whose deed are no less noble.
This gesture allows many NGO, social and religious cause to survive.
To understand how this social work and charity permeate this society, I notice that there is a large number of the full time social workers paid by various foundation in HK that in turn warrant a functional legislative seat allocated to this sector.
Let me drift to Taiwan. Many hospitals in Taiwan are named in similar style after the classic MSKCC. You find Wang Yung Ching naming hospitals he set up after his dad's name.
Actually, when you came to think about it, isn't our human civilization based on that little cooperation, charity and courtersy without which how could there be community in the first place even before we talk about civilization. Price is just one of the variable.
Wednesday, February 25, 2009
Thursday, February 19, 2009
Moments from My Metropolis - What Price? Civilization
Two recent experiences in my metropolis reminded me of both the gift - and the economic reality - of enjoying the abundant fruits of civilization.
Exhibit No.1. Two weekends ago, we decided to spend the afternoon with our daughters at the main branch of the New York Public Library (NYPL); the imposing Beaux-Art marble palace dedicated to books and learning on 42nd street at Fifth Avenue now being cleaned to be readied for its centenary. The NYPL system is one of the great joys of New York city living. According to its website, its 4 research libraries and 85 branches carries 50.4m publications for the benefit of 2.2m members. And it is totally free.
What that mean for us is that we would visit the Children's Room at the library, which carries a wonderful collection of children's books (in many languages), with a space to the side for children's activities and we would - literally - empty out whole stacks of books from the shelves and borrow them home. On that particular Saturday, we came out with about 30 books which we could keep for weeks - although the girls needed only a few days to run through them. For the past few years, we hardly bought any books because wherever we wanted we would find at the library. We can reserve them online and they would be delivered for collection at a nearby branch.
I imagine that is what a book loving multi-billionaire would feel, to collect and build up an endless collection of books (and CDs and DVDs) at his disposal. For us, we can enjoy the same thing as the billionaire - and its totally free.
Exhibit No.2. The next day we were out for some exercise and fresh-aire in Central Park. The weather promised to be warm(er) and sunny. I had brought along the children's kick-scooters so that they could ride along the lake/reservoir. But what we did not anticipate was that a slight shower of rain broke the moment we got there - so we sought refuge at the Metropolitan Museum of Art, one of my favourite places in the world.
Housed in yet-another giant Beaux-Arts mansion, but one built of sandstone unlike the library which was built of marble, we dove into its 1.3m pieces of enclyclopaedic collection from civilizations around the world. We wondered around the Byzantine arts, to the medieval collection when Hue, our 5-year old daughter, wanted to see the mummies. So I went with her to learn about the mummies while Mewyee went with our 7-year old Ning (who is terrified of mummies) and we agreed to meet at the American Wing. Along the way, Hue and I saw and learnt about arms and armours, art and furnishing from the Middle Age Europe and finally mummies and other sacred art work from Ancient Egypt. Eventually, we had lunch at the museum cafeteria and by then the rain cleared and we resumed our original plan.
A few days later, Mewyee and I decided to visit the Met on an impulse. We ended up spending an hour on a gallery tour about the meanings behind costumes through-out the ages led by an expert curator. Such tours brings the collection to life by bringing out the meaning and significance behind the art. We have been on many such gallery tours and there are perhaps a dozen each and everyday (in multiple langauges and for different age groups) but this one stood out as the best we have ever heard for as long as we could recall.
And all the while, I was thinking how wealthy does one have to be to enjoy what we just did? A multi-billionaire would take years and billions to build and house a world-class collection like the Met - even if that is at all possible this day and age - and even more to engage world class brains and experts to create intellectual enjoyment for a lay-person like me. And for that, we paid $5. The suggested entry is $20 but payment is actually voluntary; once I stood behind a person who paid 10cents.
I was profoundly humbled by thoughs and experiences like these. What is the meaning of wealth and abundance? What is the meaning of a civilized society? And what price the "haves" of society should be willing to bear in exchange for a civilized society?
In many ways, New York is a great case study for that last question. Unlike the major capitals of the world - London, Paris, Washington DC - that host the national intellectual and cultural collections, New York do not enjoy state patronage. The great public institutions and collections in New York are privately endowed for the general public by the wealthy; many from the 19th century but contributions continue to pour in to this day from the great and the good of local society. One of the most attractive social tradition about New York City is that the wealthy tend to keep a low profile. For a city full of real estate moguls, the tradition is never to put one's name in bright lights on the building (one reason why New York is usually scornful of a certain Mr Trump, who is from New Jersey by the way). The only exception to this low profile is when it comes to giving: come charity balls and naming rights to a new concert hall, hospital wing or museum pavillion, one sees the New York high society in ferocious competition to see who is giving how much.
And the city as a whole is richer from all those giving. That is how even a homeless person can (if he wants to) read a different book a day for the whole of his life, or a small child get to learn to draw by sketching a Degas, or a delivery boy can listen to Placido Domingo at a public performance in the park, or new immigrant parents can get books for their children to learn English (and DVDs in their native language for themselves).
And I think about all manners of public services, the police for keeping the peace, the fire brigade for rescues in distress, the public buses that takes people about without need for a car, the utilities that brings us clean water, the public schools for giving everyone an education - with the glaring exception of a decent health system that keeps one healthy without costing personal financial ruin. On public schooling, it was said that despite the Great Depression in the 1930s and 1940s a whole generation got the best education in the world in the New York Public school system, which at the time was staffed by brilliant emigre scientists and intellectuals escaping from totalitarian regimes in Central and Eastern Europe.
Everywhere I looked and the more I learn the more I realise public services and amenities are not ill-afforded luxuries, or creeping socialism, or ill-deserved rewards for the poor amd unsuccessful. They are the very foundations of a civilized society; one where the rich, no-so-rich and the poor made a choice that their society shall stand and fall together; and who resolved that a civilization is sustainable only when it is not to be enjoyed in isolation but one to be shared.
As one casts one's eyes to the many societies and metropolis that are developing all around the world - across Southeast Asia China, India, Latin America and the old-Soviet Union - often we see enclaves for the wealthy esconced behind high walls, security guards, manicured lawns, satellite TVs, lavish shops, spas, private hospitals, private schools and darkened car windows. And beyond that are the rest of society; one of indifferent infrastructure, crime, corruption, pollution, poor schools and trash. And I am sure the conclusion must be that the value of civilization is indeed priceless.
Exhibit No.1. Two weekends ago, we decided to spend the afternoon with our daughters at the main branch of the New York Public Library (NYPL); the imposing Beaux-Art marble palace dedicated to books and learning on 42nd street at Fifth Avenue now being cleaned to be readied for its centenary. The NYPL system is one of the great joys of New York city living. According to its website, its 4 research libraries and 85 branches carries 50.4m publications for the benefit of 2.2m members. And it is totally free.
What that mean for us is that we would visit the Children's Room at the library, which carries a wonderful collection of children's books (in many languages), with a space to the side for children's activities and we would - literally - empty out whole stacks of books from the shelves and borrow them home. On that particular Saturday, we came out with about 30 books which we could keep for weeks - although the girls needed only a few days to run through them. For the past few years, we hardly bought any books because wherever we wanted we would find at the library. We can reserve them online and they would be delivered for collection at a nearby branch.
I imagine that is what a book loving multi-billionaire would feel, to collect and build up an endless collection of books (and CDs and DVDs) at his disposal. For us, we can enjoy the same thing as the billionaire - and its totally free.
Exhibit No.2. The next day we were out for some exercise and fresh-aire in Central Park. The weather promised to be warm(er) and sunny. I had brought along the children's kick-scooters so that they could ride along the lake/reservoir. But what we did not anticipate was that a slight shower of rain broke the moment we got there - so we sought refuge at the Metropolitan Museum of Art, one of my favourite places in the world.
Housed in yet-another giant Beaux-Arts mansion, but one built of sandstone unlike the library which was built of marble, we dove into its 1.3m pieces of enclyclopaedic collection from civilizations around the world. We wondered around the Byzantine arts, to the medieval collection when Hue, our 5-year old daughter, wanted to see the mummies. So I went with her to learn about the mummies while Mewyee went with our 7-year old Ning (who is terrified of mummies) and we agreed to meet at the American Wing. Along the way, Hue and I saw and learnt about arms and armours, art and furnishing from the Middle Age Europe and finally mummies and other sacred art work from Ancient Egypt. Eventually, we had lunch at the museum cafeteria and by then the rain cleared and we resumed our original plan.
A few days later, Mewyee and I decided to visit the Met on an impulse. We ended up spending an hour on a gallery tour about the meanings behind costumes through-out the ages led by an expert curator. Such tours brings the collection to life by bringing out the meaning and significance behind the art. We have been on many such gallery tours and there are perhaps a dozen each and everyday (in multiple langauges and for different age groups) but this one stood out as the best we have ever heard for as long as we could recall.
And all the while, I was thinking how wealthy does one have to be to enjoy what we just did? A multi-billionaire would take years and billions to build and house a world-class collection like the Met - even if that is at all possible this day and age - and even more to engage world class brains and experts to create intellectual enjoyment for a lay-person like me. And for that, we paid $5. The suggested entry is $20 but payment is actually voluntary; once I stood behind a person who paid 10cents.
I was profoundly humbled by thoughs and experiences like these. What is the meaning of wealth and abundance? What is the meaning of a civilized society? And what price the "haves" of society should be willing to bear in exchange for a civilized society?
In many ways, New York is a great case study for that last question. Unlike the major capitals of the world - London, Paris, Washington DC - that host the national intellectual and cultural collections, New York do not enjoy state patronage. The great public institutions and collections in New York are privately endowed for the general public by the wealthy; many from the 19th century but contributions continue to pour in to this day from the great and the good of local society. One of the most attractive social tradition about New York City is that the wealthy tend to keep a low profile. For a city full of real estate moguls, the tradition is never to put one's name in bright lights on the building (one reason why New York is usually scornful of a certain Mr Trump, who is from New Jersey by the way). The only exception to this low profile is when it comes to giving: come charity balls and naming rights to a new concert hall, hospital wing or museum pavillion, one sees the New York high society in ferocious competition to see who is giving how much.
And the city as a whole is richer from all those giving. That is how even a homeless person can (if he wants to) read a different book a day for the whole of his life, or a small child get to learn to draw by sketching a Degas, or a delivery boy can listen to Placido Domingo at a public performance in the park, or new immigrant parents can get books for their children to learn English (and DVDs in their native language for themselves).
And I think about all manners of public services, the police for keeping the peace, the fire brigade for rescues in distress, the public buses that takes people about without need for a car, the utilities that brings us clean water, the public schools for giving everyone an education - with the glaring exception of a decent health system that keeps one healthy without costing personal financial ruin. On public schooling, it was said that despite the Great Depression in the 1930s and 1940s a whole generation got the best education in the world in the New York Public school system, which at the time was staffed by brilliant emigre scientists and intellectuals escaping from totalitarian regimes in Central and Eastern Europe.
Everywhere I looked and the more I learn the more I realise public services and amenities are not ill-afforded luxuries, or creeping socialism, or ill-deserved rewards for the poor amd unsuccessful. They are the very foundations of a civilized society; one where the rich, no-so-rich and the poor made a choice that their society shall stand and fall together; and who resolved that a civilization is sustainable only when it is not to be enjoyed in isolation but one to be shared.
As one casts one's eyes to the many societies and metropolis that are developing all around the world - across Southeast Asia China, India, Latin America and the old-Soviet Union - often we see enclaves for the wealthy esconced behind high walls, security guards, manicured lawns, satellite TVs, lavish shops, spas, private hospitals, private schools and darkened car windows. And beyond that are the rest of society; one of indifferent infrastructure, crime, corruption, pollution, poor schools and trash. And I am sure the conclusion must be that the value of civilization is indeed priceless.
Friday, February 13, 2009
Thinking in Trillions
The US economy is a multi-trillion dollar train-wreck. President Obama said it correctly last Monday during his news conference when he explained that it is not your usual recession. As a matter of fact, his Q&A - thanks to the precision and power of his thinking - makes an impressive education to the layman of what is going on and his logic for the stimulus package.
And I have been tempted for sometime to explain how that is so based on my understanding of economics. Here I shall try.
The total financial asset of the US economy is about US$55 trillion ("T"). That is the aggregate value of all homes, fixed assets, corporations, personal savings, stock, bonds, real estate etc. Think of that as total net worth.
The US economy produces US$14T of GDP a year. That is approximately 23% of the global GDP which makes the global GDP to be about US$60T. Think of that as income.
The US Federal Government makes up US$2.9T of the GDP, which is the amount it spends. To fund it, in 2008 it collected US$2.6T in taxes. The rest US$0.3T is the deficit funded through borrowings.
The total US Federal Government debt is nearly US$11T, which has risen US$5T within the last 8 years.
The stimulus package will add US$500bn of new spending (the remaining US$300bn will be tax cuts) in the next two years. Pro-rated to US$250bn of new spending a year means adding 8.3% to the federal budget annually. If the entire stimulus - both spending and tax cuts - were to be totally debt funded (which is likely), it will add 7.2% to the US Federal Government debt.
The stimulus spending of US$250bn per year is half the defense spending (38% if the running costs of wars in Iraq and Afghanistan are included); which is about the same as the amount for debt service (in 2008); which is about 40% of Federal expenditures on Medicare and Medicaid.
Now, lets consider the first of four crises, the mortgage crisis.
The total value of US home mortgages is about US$10T. Banks holds those mortgages as "assets" both through direct mortgage lending as well as an investor in mortgage derivatives.
And I have been tempted for sometime to explain how that is so based on my understanding of economics. Here I shall try.
The total financial asset of the US economy is about US$55 trillion ("T"). That is the aggregate value of all homes, fixed assets, corporations, personal savings, stock, bonds, real estate etc. Think of that as total net worth.
The US economy produces US$14T of GDP a year. That is approximately 23% of the global GDP which makes the global GDP to be about US$60T. Think of that as income.
The US Federal Government makes up US$2.9T of the GDP, which is the amount it spends. To fund it, in 2008 it collected US$2.6T in taxes. The rest US$0.3T is the deficit funded through borrowings.
The total US Federal Government debt is nearly US$11T, which has risen US$5T within the last 8 years.
The stimulus package will add US$500bn of new spending (the remaining US$300bn will be tax cuts) in the next two years. Pro-rated to US$250bn of new spending a year means adding 8.3% to the federal budget annually. If the entire stimulus - both spending and tax cuts - were to be totally debt funded (which is likely), it will add 7.2% to the US Federal Government debt.
The stimulus spending of US$250bn per year is half the defense spending (38% if the running costs of wars in Iraq and Afghanistan are included); which is about the same as the amount for debt service (in 2008); which is about 40% of Federal expenditures on Medicare and Medicaid.
Now, lets consider the first of four crises, the mortgage crisis.
The total value of US home mortgages is about US$10T. Banks holds those mortgages as "assets" both through direct mortgage lending as well as an investor in mortgage derivatives.
The home mortgages are collateralized against the value of homes. The aggregate value of US homes peaked at US$13T in 2006 and has fallen to about US$8T - 8.5T, meaning US home mortgages as a whole is US$1.5-2T under-water. The "wealth" destroyed by this asset-deflation/bursting-of-the-bubble is bourne by both homeowners and banks.
Which brings us to the second crisis, the financial crisis.
The total capitalisation of US banks is about US$0.6T.
As the banks' asset value which were held as mortgages (or mortgage derivatives) decline, that will need to be written-off against the bank's capital base. Assuming that homeowners take the first hit (because banks tend not to lend 100%) the exposure of banks are still between US$0.5T - US$1.0T ... and growing by US$0.1T for every additional 1% fall in house prices. At this rate, US$0.6T in total capital base can disappear quite quickly and that's how banks become insolvent.
Hence the US has been under a financial crisis (at least since March 2008) because as banks are straddle with bad assets and fighting against insolvency, the ability of the US financial system to keep functioning comes under threat.
Which brings us to the third crisis, the credit crisis.
Banks are just one of many players in the financial sector. At any given time, financial transactions take place between any combination of counterparts: brokerages, insurance companies, pension funds, investment funds, credit card companies, trade credit, hire-purchase, car loans, student loans, commercial credit lines, consumer pre-payments, notes/bonds (issued by governments, local governments, municipalities, corporations, public bodies etc.). They all have one thing in common: credit i.e. people parting with their monies because they believe they have enough trust the counterpart to get the money back.
Since September 2008, many of these markets are in different degrees of dysfunction. However, due to aggressive intervention by the Fed in September and October, the worst did not come to pass. Nonetheless, there is still a significant contraction in the amount of credit available within the financial system (e.g. the commercial paper market shrank from US$2.2T in mid-2008 to US$1.6T in Feb-2009) and any that is available is a higher cost.
Which brings us to the inevitable - the economic crisis.
The economic crisis is not about the wealth of the US economy rather it is income (remember, the US$14T a year).
Imagine the US economy as a human body (as we will discuss later, it is not even a particular healthy one). It just encountered (1) a huge trauma - lets say it has a seizure from partying for 72 hours running [the mortgage crisis] - which reduced the blood flow to the heart causing (2) a heart attack [the financial crisis] which caused (3) a sudden (but thankfully temporary) fall in the blood flow to around the body [the credit crisis], which unsurprisingly caused (4) massive cell damage leading to organ failure [the economic crisis].
However, the US economy itself is the only thing that can fix all its other crises - and over time, there is no doubt it will because the US economy has structural advantages such as favourable demographics to push growth along. For as long as the US economy keep going, it will generate US$14T of economic output a year to slowly plug the hole from lost asset value from the mortgage crisis, to recapitalize the financial system, to generate cash flow to pay and reassure creditors ... and ultimately to make the economic wheel go around again i.e. maintain the productive capacity* of the economy to generate the next US$14T or more of economic output.
What has been fuelling the productive capacity of the US economy has been personal consumption - 72% of the GDP - partly debt fueled. Personal consumption in the US has been on uninterrupted growth since 1978. With the fall in house, equity value and pension funds, the total fall in US personal net wealth in 2008 was almost US$9T - coupled with the tightening of the credit market - personal consumption is falling drastically.
The current estimate is that the US economy at current rate will fall US$1T below its productive capacity annually for the next 2 years i.e. a -7% contraction in GDP. The stimulus package @US$0.4T annually will not make up the entire shortfall.
The total capitalisation of US banks is about US$0.6T.
As the banks' asset value which were held as mortgages (or mortgage derivatives) decline, that will need to be written-off against the bank's capital base. Assuming that homeowners take the first hit (because banks tend not to lend 100%) the exposure of banks are still between US$0.5T - US$1.0T ... and growing by US$0.1T for every additional 1% fall in house prices. At this rate, US$0.6T in total capital base can disappear quite quickly and that's how banks become insolvent.
Hence the US has been under a financial crisis (at least since March 2008) because as banks are straddle with bad assets and fighting against insolvency, the ability of the US financial system to keep functioning comes under threat.
Which brings us to the third crisis, the credit crisis.
Banks are just one of many players in the financial sector. At any given time, financial transactions take place between any combination of counterparts: brokerages, insurance companies, pension funds, investment funds, credit card companies, trade credit, hire-purchase, car loans, student loans, commercial credit lines, consumer pre-payments, notes/bonds (issued by governments, local governments, municipalities, corporations, public bodies etc.). They all have one thing in common: credit i.e. people parting with their monies because they believe they have enough trust the counterpart to get the money back.
Since September 2008, many of these markets are in different degrees of dysfunction. However, due to aggressive intervention by the Fed in September and October, the worst did not come to pass. Nonetheless, there is still a significant contraction in the amount of credit available within the financial system (e.g. the commercial paper market shrank from US$2.2T in mid-2008 to US$1.6T in Feb-2009) and any that is available is a higher cost.
Which brings us to the inevitable - the economic crisis.
The economic crisis is not about the wealth of the US economy rather it is income (remember, the US$14T a year).
Imagine the US economy as a human body (as we will discuss later, it is not even a particular healthy one). It just encountered (1) a huge trauma - lets say it has a seizure from partying for 72 hours running [the mortgage crisis] - which reduced the blood flow to the heart causing (2) a heart attack [the financial crisis] which caused (3) a sudden (but thankfully temporary) fall in the blood flow to around the body [the credit crisis], which unsurprisingly caused (4) massive cell damage leading to organ failure [the economic crisis].
However, the US economy itself is the only thing that can fix all its other crises - and over time, there is no doubt it will because the US economy has structural advantages such as favourable demographics to push growth along. For as long as the US economy keep going, it will generate US$14T of economic output a year to slowly plug the hole from lost asset value from the mortgage crisis, to recapitalize the financial system, to generate cash flow to pay and reassure creditors ... and ultimately to make the economic wheel go around again i.e. maintain the productive capacity* of the economy to generate the next US$14T or more of economic output.
What has been fuelling the productive capacity of the US economy has been personal consumption - 72% of the GDP - partly debt fueled. Personal consumption in the US has been on uninterrupted growth since 1978. With the fall in house, equity value and pension funds, the total fall in US personal net wealth in 2008 was almost US$9T - coupled with the tightening of the credit market - personal consumption is falling drastically.
The current estimate is that the US economy at current rate will fall US$1T below its productive capacity annually for the next 2 years i.e. a -7% contraction in GDP. The stimulus package @US$0.4T annually will not make up the entire shortfall.
And critically, consumption - unlike investment - does not by itself grow the productive capacity of the economy. If we think of the productive capacity of the economy as cells in the body. During injury or illness, cells tend to die, even-though the body needs to have them in order to recover. Anytime a worker is laid off, investment is reduced, production is cut, technology/R&D is cut, the productive capacity of the economy is reduced. For the US economy, the body has been keeping itself alive (or even look outwardly robust) mostly through junk food that merely kept the body going but did nothing to keep it healthy or growing. What this also means is that the productive capacity of the US economy has not been growing at a self-sustaining manner through a positive return-on-investment. Instead, it has been growing in a zero-sum-game through consumption which do not have a return.
Any visitor to the US expecting to see 21st century infrastructure or technology would in most case be disappointed. Airports, highways, telecommunication systems, public transport are often 25 years or older. In fact, many date back to the Works Progress Administration projects by FDR as his stimulus program to bring the US out of the Great Depression.
That is both a challange as well as opportunity for the Stimulus Package. Because so little investment has been taking place the return on investment should be pretty robust - every $ invested may yield a large multiplier of economic effect - which in turn will expand the economy's productive capacity. That is important because there is no point to an economic recovery by merely going back to where it was before. To recoup the costs of the Stimulus Package - plus the much larger costs of recapitalizing the financial system and restore the wealth lost to the mortgage bubble - the US economy need to grow to have more productive capacity than what it had earlier. That is the key: because every 0.1% in additional growth in the GDP will over 25 years painlessly recoup the costs of the Stimulus Package ... and doing so in the right way by growing the productive capacity.
So I believe it is right that Obama included billions in what he called "down-payments" for his goals to invest in other areas for economic reforms: alternative energy, energy efficiency, health care reform, education, scholarships and infrastructure. If anything, I hope he will use this as a springboard to reform and reinvest in those critical areas of the economy even more in the months to come.
Investing in structural reforms of the economy stands to repay the short-term spending many fold in the years to come. It is true they are not the purist view of stimulus for stimulus-sake because they take longer to implement and so the effects are slower but the return-on-investment - from structural changes to the economy - is potentially huge. They are the catalysts to shape the "creative destruction" of the current economic model as it evolve into one hope to be a larger, stronger and more sustainable one. For example, US$2T of annual US economic output comes from the most wasteful healthcare system in the world. If reforms means the US spends as much per capita as Canada (who does not seem to be doing too badly) that is US$1T a year of additional lift to the US economy - and lesser drag on the competitiveness of US corporations for whom employees' healthcare is part of payroll costs. Likewise for energy and transportation infrastructure.
It is a dillemma that policy choices during a downturn is often counter-intuitive and contradictory to the longer term choices. Whatever the virtue of cutting personal consumption, if it keeps falling too drastically that is a lot of productive capacity to be lost making recovery even harder. So personal consumption has to be brought to a soft-landing, particularly stimulus spending can double as a social safety net targeted at maintaining the health, shelter and food needs of the unemployed and for his family. In the US, if you lose a job, you lose healthcare for the whole family and without the income you may lose your home, and the downward spiral beckons. Whatever the arguments for and against a welfare state, there is a social and economic cost to ignoring anyone to lose his health or his home or not being able to feed himself. What is broken often takes longer to fix and by ignoring his plight society makes it harder for him to be productive again. So this component of the Stimulus Package cannot be ignored.
Lastly, it should not be forgotten that in the US, most public services are provided by the States through their own budgets raised from local taxes. Because of their heavy reliance on property tax and sales tax, state budgets are decimated by the economic crisis. What is making it much worse is that most states have a balance-budget-requirement in their constitutions; i.e. when tax revenue falls they are legally obliged to cut their expenditure accordingly. So what gives? State and local level taxation maintains the school system, public hospitals, funds public transport, funds the police, paramedics, fire service and local services like parks and libraries ... which is just about all the most important services that underpins a civilized society. The Stimulus Package allows the States to get an infusion of Federal money for the State's portion of Medicare and Medicaid obligations (which often consumes the largest share of the budget - and in a recession this can only go up as more people fall into poverty), thus cushioning the amount of cuts that will be required on other areas.
One often forgets the difference between a civilized society and the uglier faces of capitalism (think of how many cities where the rich live behind walls keeping crime and squalor outside) comes down to public services that maintain a minimal quality of life for everyone. The impact of cutting one public bus line, or closing the local park, or letting crime go up, or cutting funding for schools means a lot to society. I read in St Louis that as the city considers which bus route to cut, hundreds worry about having having no means to get to work, seniors cannot get to the hospital etc. For others, these are jobs: bus drivers, policeman, librarians etc.
Going back to our patient, its been said in cardiology that "time is muscle". The faster you treat a heart attack, the less the muscle damage and the better the chance for recovery. What has been done so far only stablizes the patient: the Fed provided emergency blood transfusion (The Fed and FDIC flooding the market with US$trillions in funds and guarantees) and the Stimulus Package provides shot of drugs to keep the heart pumping and stimulate tissue-repair. Unless policy makers act quickly to save the destruction of the heart muscle (i.e. the productive capacity of the economy undermined through job-loss, good companies going bust, investments pulled), it would be very difficult to fix the heart attack [financial crisis] and to allow the body to recover from the trauma [mortgage crisis].
So I see the Stimulus Package as the necessary first-shot in a multiple-course treatment. Collectively as a society, asking to borrow and spend 3% of the annual income or 0.7% of the total wealth to keep the economy and society from crashing, it is small money especially when compared to the scale of the challenges and compared to the potential for pay-back. It is a small start to a long and expensive treatment that will continue with finding the US$1 - US$1.5T to recapitalise the financial system ... and eventually to structural reforms that will require US$20T to fund the health care and retirement of the US baby boom generation ... and move to a alternative energy economy .... to educate the largest number of school age children in US history.
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This article is partly inspired by a marvellous must-read article in the NYT. The Big Fix - The Real Economic Challenge for Barack Obama
Tuesday, February 10, 2009
2 Days Before Valentine
This coming February 12, 2009 is a very special day.
On this day 2 centuries ago, February 12, 1809, it was an exceptional day of human history. 2 great men were born on each side of the Atlantic.
The first man contributed the theory of Natural Selection. He is Charles Darwin, a British scientist and explorer.
His theory becomes known as the theory of evolution providing an unifying logical explanation for the diversity of life in the biological world.
This new understanding of lifes upstaged the prevalent theocratic if not mystical explanation of life that dominated the largest of our human history. The proposition that every life forms are attributed to a certain divine creation, though is no longer mainstream, is still common in certain societies where tolerance and moderation are not the general rule.
The second man is Abraham Lincoln, arguably the most well regarded American President in history.
Among his many firsts, Lincoln was the first President from the Republican Party and the State of Illinois. None really matters.
What count was his deeds and words. Lincoln is a very rare President whose deed is praised and celebrated everywhere and whose speech is memorized and recited again and again by successive leaders of all stripes. He is an unifying figure across the political divides.
Lincoln succeeded in ending the civil war and reunited the country. His term was brief but what he accomplished was really belonging to the ages.
He inspired a nation with renewed purpose and introduced moral vigor into the American constitution.
Don't forget to propose a toast to Darwin and a toast to Lincoln on February 12, 2009 on their bicentenary.
A personal note:
My convertion into atheism at the age of 13 was in large part supported and sustained by Darwinism. It was a rare excitement for a young boy to challenge and contradict the religious orthodoxy. To atheism and by extension Darwinism, I owe my emancipation from religion.
Abraham Lincoln recalibrated my views on public duty and political ideal. This is in large part thank to BHO who tried to mimic AL. No surprise, I came to know Abraham Lincoln much better only late last year after reading the Team of Rivals.
On this day 2 centuries ago, February 12, 1809, it was an exceptional day of human history. 2 great men were born on each side of the Atlantic.
The first man contributed the theory of Natural Selection. He is Charles Darwin, a British scientist and explorer.
His theory becomes known as the theory of evolution providing an unifying logical explanation for the diversity of life in the biological world.
This new understanding of lifes upstaged the prevalent theocratic if not mystical explanation of life that dominated the largest of our human history. The proposition that every life forms are attributed to a certain divine creation, though is no longer mainstream, is still common in certain societies where tolerance and moderation are not the general rule.
The second man is Abraham Lincoln, arguably the most well regarded American President in history.
Among his many firsts, Lincoln was the first President from the Republican Party and the State of Illinois. None really matters.
What count was his deeds and words. Lincoln is a very rare President whose deed is praised and celebrated everywhere and whose speech is memorized and recited again and again by successive leaders of all stripes. He is an unifying figure across the political divides.
Lincoln succeeded in ending the civil war and reunited the country. His term was brief but what he accomplished was really belonging to the ages.
He inspired a nation with renewed purpose and introduced moral vigor into the American constitution.
Don't forget to propose a toast to Darwin and a toast to Lincoln on February 12, 2009 on their bicentenary.
A personal note:
My convertion into atheism at the age of 13 was in large part supported and sustained by Darwinism. It was a rare excitement for a young boy to challenge and contradict the religious orthodoxy. To atheism and by extension Darwinism, I owe my emancipation from religion.
Abraham Lincoln recalibrated my views on public duty and political ideal. This is in large part thank to BHO who tried to mimic AL. No surprise, I came to know Abraham Lincoln much better only late last year after reading the Team of Rivals.
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