Q & A

Q: How many classical economists you need to change a light-bulb?
A: None, the invisible hand does it

Q: How many neo-libral/austrian economists?
A: None, the market takes care of it.

Q: How many keynesian ones?
A: All of them. Because this way you create employement, increasing
demand and does multiplying employement and so on.

Q: How many marxist ones?
A: None, the lighbulb contains the seeds of its own revolution.

Q:How many economists does it take to change a lightbulb?
A:Eight. One to change it and seven to hold everything else constant.

Are Consumers Rational?

Are Consumers Rational?

When we start studying Microeconomics the first thing we study is that we have limited resources and we have unlimited wants. Second thing which we studies is that “Consumer is Rational” and our teachers used to explain us that the consumer will not buy a rotten tomatoes and rotten vegetables; which is true when we talk only about buying tomatoes or mangoes etc. However, if we think in a broader sense, beyond grocery items then consumer may or may not remain rational, e.g., taking stocks in stock market, doing investment, buying foreign exchange, movements of interest rate, buying a lottery ticket etc.

We’ll take this one by one:

1. People, especially the retired ones” always thing that decreasing interest rate is a bad thing and what they are getting in hand is meaningful. These people do not have an idea about real interest rate but I don’t blame them because if prices go up 3fold and interest rate initially goes up to 13 percent and they are getting good amount of money. But after inflation has declined and interest rate declines too they are getting profit or interest money on the same fixed amount and money they are getting at, say 6.5 percent, is half of what they are getting previously. In this case they do not want interest rate to decline. J According to their own view they are rational ones but if the rationality is to lower inflation and lower interest rate then they are not rational.
2. Continuing with the interest rate, if there is a recession, with high inflation and high unemployment --- increase in interest rate leads to more unemployment and inflation otherwise. Policymakers would want to reduce more at the same time but due to trade-off they cannot. Simply stating, unemployed wants to re-employ again and already employed people want inflation to be at the lowest. Who is rational then, unemployed or already employed or both are rational.
3. In the long run we are all dead, said by a biggie and people use it out of context J  most of the public (I am using here for general consumers)  has a myopic view and cannot or do not want to see what’ll happen after ten years. They want their rewards the next day. Some people do not believe my statement and they say that no we do not want our rewards the next day, “yes” they can wait for a year. But they always argue that what has happened in the last 20 years or so is not favorable for us and these are those people who do not have confidence in the government. Thus who are rational, those who do not believe in the government or those who believe in the government. Because when u don’t believe in the government then government cannot make the policies correctly because they had in mind that consumers are rational (irrational) and they believe don’t believe) us J.
4. Continuing point three from where I started, i.e., Long Run. Does general public know what is long run or this word is used just to fool general public? Or if you do not know about long run then you are not rationalJ. Medium plans are made, long term 2010, 2020, and 2030 plans were made. But is it again the question whether people have confidence in government or not. Some people want quick money and some people think that 30 year is a long period and no idea whether they’ll live till then or not. Are these people Rational?
5. There will be different points where we can ask whether consumer is rational? Trading in FOREX market when exchange rate is increasing. Buying stocks when it’s increasing. Most of the big investors do not think that it’s a good idea to buy when stocks are increasing. Thus are these people rational?

Continued…. With your comments

Hazrat Ali’s (RTA) letter written to his Governor in Egypt

All the best to the Government: budget 2011-12

Annual budget 2011-12 of Rs.2.767 Trillion was announced few days ago. It is 14.2 percent higher than last year budget. It is adjust to inflation rate (14.1 percent) is an immature statement right now. But there is nothing wrong if they have done it accordingly. If we divide the current budget estimates by the inflation rate to make those values comparable to previous year, it is interesting to note that increase in total expenditures by 0.5 percent only.

By looking at the last three years, tax revenues were always more in the budget estimates and expenditures are always less in budget estimates. At least government is consistent in these estimates J LOL. In 2008-09 ratio of budget estimates to revised estimates of tax expenditures was 0.94 and same was the last year. However, it was 0.99 in 2009-10, which was good. If we go into further bifurcation, direct taxes are always short of target and in 2009-10 indirect taxes increased its target mainly due to revenues from sales tax.

Current expenditures always increase it’s budget estimates and on the contrary development expenditures always less than the budget estimates. However, total expenditure always increase the budget estimates.

There is another interesting point noticed from the last three years that ratio of direct tax to total tax has decreased and indirect tax has increased even though the FBR has special emphasis on increasing direct taxes.

Few challenges which are addressed in the budget are

·        Containing of Fiscal Deficit.

·        Reducing Inflation.

·        Overcoming energy shortage.

·        Increasing investments.

·        Creating employment.

·        Reducing Public Debt.

We’ll take these challenges one-by-one. As far as containing fiscal deficit is concerned, two things are important, reducing expenditures and increasing revenues. However, there is no major policy announced which shows that Government is interested in lowering expenditures and raising revenues. Increase in tax revenues is ambiguous after announcement of decrease in Sales tax rate by one percent and increase the lower limit of income tax. Moreover increase in PSDP program to $300 Billions which is 53% more than the revised estimates 2010-11 and 15 percent raise in the salaries does not tell us decline in expenditures. Furthermore every year we collect less revenues that we expected and spend more what we thought. Thus, it is extremely impossible to achieve the target of 4 percent fiscal deficit. All the best to the Government.

Reducing Inflation and Creating Employment has a trade-off. We are having double digit inflation and to decrease current inflation we need to increase interest rate, which means contracting money supply be lowering credit creation and thus reduction in investment and lesser employment opportunities. But of course there are different ways to do this other than standard textbook materials. Again All the best to the Government.

Overcoming energy shortage is one of the major issues inside Pakistan. Rs.115 billion which include Rs.32.5 billion through budget is allocated for power generation by WAPDA. These will be hydel projects. Rs. 22 billion are also allocated to Pakistan Atomic Energy Commission to produce energy from nuclear source. However, how much energy they can produce and when it is available to people is a serious concern. All the Best to the Government.

Reducing public debt is a difficult task in the presence of fiscal deficit. If we consider fiscal deficit to be 4 percent of GDP, Government may need to borrow which increases public debt again unless we repay more than what we are borrowing and we pay debt servicing as well. All the best to the Government.

In short we are surrounded by several problems such as terrorism, high inflation, high unemployment, low investment, low growth, low education, low health facilities, bad governance etc. We need to fix these one by one. If we want to fix them jointly even then we need to do it gradually (Apart from terrorism; eradication of terrorism in the most important among others). It’s time that we realize that we need to take singles and doubles instead of hitting fours and big sixes. Instead of starting huge projects and borrow money from World Bank and other financial institutions, we can start small projects with our own money. If we can we should depend less on the foreign aid.

Monetary Review of Pakistan by Money and Banking division at PIDE