Delphi: Nothing in Excess

What will happen if the most of the big central banks in the world pouring the money into the money market? What will happen if the country that will face presidential election (for example US and Indonesia) will expand the money and the government budget? There is only one short answer: expecting global inflation in the one or two years ahead.

Inflation policy is a deliberate policy that is caused by the consideration of the evil of unemployment (Mises (2005), Economic Policy: Thought for today and tomorrow). Inflation policy is the cheating policy for the workers.

The problem of the rising of oil price is not just our nation’s problem but become the world problem [It seems that each sector of economy will suffer but the oil industry]; however, if we continue the discussion on the impact of oil price to the poverty level in Indonesia, then we are dealing with so many aspects, especially political aspects.

Actually I have some opinions about the impact of oil price to the poverty level but I just wanna share in this blog. The reason why I concern in this issue  caused by my discussions [or debat] with some of my friends last year on the policy of reducing fuel subsidy. Here the summary of my opinion: Reducing of fuel subsidy is a good thing [In the name of efficiency.The reduction of fuel subsidy  will have a good impact on government budget and it will help government to stabilize macroeconomic indicators], compared with reducing education subsidy. However, we should prepare the impact on poverty that could be worse than the government expected. So, the government should consider about the level of subsidy that should be reduced.

The CBS this week annaounced the poverty rate around 17.75% which is higher than before the reduction of oil subsidy, around 15.97%. There are two stand points for the reasons: first, from the one side argue that the higher of the poverty rate is caused by the higher of the food price, while the other side argue that the higher of the poverty rate is caused by the high of fuel prices [subsidy reduction].

According to my opinion, both of them are right, but incomplete. I will try to explain why the level of poverty increase than most of government economists expected. First, the impact of the high oil price will “transfer of the high price to the consumption bundle of poor people”. As we know that most of the poor people consumption is food, then the “fuel price tranfer” to the food price will affect the level of poverty line. This is so-called ”first round impact of fuel price to the poverty level”. This was already recognized and expected by the economist of government, but the second was missed: “second round effect”. Second, this second round effect could affect the poverty level from the income side of the poor and then will be reflected in the low consumption level. The explanation could be seen from this perspective: when the fuel price increase, the business that use the fuel as energy resource will suffer [especially transportation business]. As we know, many business have been collapsed during the first year after the policy, then the first victim of the downturn of business, is the poor people, or the cheap, unskilled labor: some of them will lose their jobs or have business to be collapsed. Then the low level of society have lost their jobs or having their income decreased, then it will affect their level of consumption.  The first round was happend around end of 2005 and the second round could be in the current situation or still continue.

The first round effect above could be managed by cash transfer [BLT], however the second one could be more complicated because it is talking about business problems.

I could see one way that government could do in the shortest way to fight our economic problem, including poverty: cutting tax [also rising government spending on massive job projects]. This was the recipe of the US economy in the 1970s, when the high oil prices attacked the US economy.

Further progress in global economic integration should not be taken for granted, however. Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future. And, as in the past, the social and political opposition to openness can be strong. Although this opposition has many sources, I have suggested that much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall. The natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared–for example, by helping displaced workers get the necessary training to take advantage of new opportunities–that a consensus for welfare-enhancing change can be obtained. Building such a consensus may be far from easy, at both the national and the global levels. However, the effort is well worth making, as the potential benefits of increased global economic integration are large indeed.

What the Bernanke’s concern about globalization should become our concern also if we want to ’save’ globalization. I wrote also a writing about globalization that reflect the possiblities of “de-globalization” in the future as the reversal of the current situation. Hopefully i still have the file that i could put in this blog.