Friday, August 29, 2008 0 comments ++[ CLICK TO COMMENT ]++

Politicians Trying to be Bad Economists

Economics is called the dismal science so no one really knows much of the "truth" or what is really happening out there. However, there are some government policies that are just reckless and don't accomplish anything meaningful. I guess it's that time of the season :(

First, we have the Japanese government trying to combat the rising energy and commodity prices by spending money on several things including an attempt to lower tolls on roads. This is going to totally backfire. It will actually increase, or at least maintain, oil demand.

Japan unveiled a 2-trillion yen, or $18-billion (U.S.), stimulus package Friday, including assistance to small businesses and other pump-priming measures to shore up its flagging economy hit by soaring energy and material prices.

The new measures include discounts on expressway tolls, assistance to farms and help for part-time workers to find better jobs, according to the Cabinet Office. Funds were also earmarked for better medical care, ecological technology, housing loans and education.

Japan has been dropping money from helicopters on practically every single economic problem in the last 20 years. There's a reason that Japan's debt to GDP is 195%!!! If Japan doesn't start cutting its debt, it will end up as one of the poorest countries in the world in 50 to 100 years. Its population is shrinking so the debt burden will get bigger and bigger by the year.

Coming on the heels of the Pakistani stock exchange outlawing price declines below a limit, it looks like some politicians in Russia are thinking of getting the government to buy shares in the slumping Russian market.

The government is considering investing in the Russian stock market to break a weeks-long fall of local shares, a senior Russian lawmaker said yesterday.

"I think the time has come for the state to step in discreetly and invest," said Pavel Medvedev, a member of the State Duma's financial markets committee. "The idea is being discussed - in the Duma and, more importantly, in the government." He would not specify the proposed amount of investment...

Market-watchers say they have heard rumours about a government plan to buy stocks worth $1-billion (U.S.) to $20-billion.

I don't think these politicians know what they are doing or what the market represents. The Russian market has been declining primarily due to slumping commodity prices. There were some reports that investors are fleeing Russia but that seems to be based on a misleading report that seems to have mixed up currency reserves with investment flows (central bank actions impact currency reserves and it's not the same thing as private investment flow.) Buying up shares is not going to do anything in the long run. All it will do is to transfer government wealth to a select few. The wide range that is quoted makes me think this is wishful thinking on some people's part (recall that there have been several rumours over the last 3 or 4 months that the Chinese government would buy shares in their local market as well.)

Free market proponents won't agree with it but governments do intervene in the stock markets when they see it fit. In fact, there is some rumour (totally unfounded) that the US government may buy shares in Fannie Mae and Freddie Mac (this is in contrast to the general consensus that the government will only invest in preferreds or higher). Government intervention can work but it is very costly and unpredictable. Perhaps the most successful outcome was when the Hong Kong government started buying shares en masse in 1998. The HK government pursued the policy in order to thwart what it considered as speculative attacks on its currency and share prices. Amazingly, it actually worked in the end and the government actually made money for the citizens (after selling the shares it owned at higher prices.) But none of the situations I have come across (or mention here) are similar to the Hong Kong situation.

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