Dilawan: Rise and Fall of the EDSA Regime - Another Aquino

“I have fought the good fight, I have finished the race, I have kept the faith.”

Those were the words of Pres. Noynoy Aquino at his valedictory State of the Nation Address to Congress in July of 2015 where he summed up his administration’s achievements and looked forward to “a new dawn of justice and opportunity” forged by “freedom from corruption” as he claimed, and I quote

My one and only interest is the well-being of my Bosses. I did all I could to forge a nation that is more just and more progressive—one that enjoys the fruits of meaningful change. I will let history decide.

And within 12 months of uttering those words, the era of the EDSA regime would draw to a close, with the rejection of Aquino’s hand-picked successor and the election of Rodrigo Duterte, whose approach to criminal justice was anathema to what the regime had stood for.

In this fourth part to the Rise and Fall of the EDSA Regime, we will look at the second Aquino presidency, its ambition, achievements and follies, and while five years is too short a time frame to have gained enough “distance” from those events, we will try to explain what led to the collapse in confidence in the yellow movement, which triggered their losses at the ballot in 2016 and since, and as to why it is unlikely that it will return any time soon. 

Dilawan: Rise and Fall of the EDSA Regime - Uno, Dos Tres

"I am the Market and thou shalt have no other models before me."

That is the first commandment of neoliberalism, an ideology that took root in the Philippines after the February 1986 people power revolt at EDSA.

In this series on the Rise and Fall of the EDSA Regime, we’ve been looking at the origins of the yellow movement and its impact on Philippine society. 

The Name of the Game

Holden Cruze assembly plant in Adelaide (Image from: CarAdvice.com.au)

The cat is out of the bag. An interview by Allan Kohler of the show Inside Business with General Motors Holden Managing Director Michael Devereux revealed the real purpose of government hand-outs to car manufacturers. It is not as is widely held to prop up failing industries, but to attract annual investments in R&D that have substantial multiplier effects throughout the economy.

Here is an excerpt from that interview:

ALAN KOHLER: So Australia should provide GM assistance in Australia not to help you to become profitable but because of a contest between us and other countries for the money?

We're engaged in a competition, is that correct?

MIKE DEVEREUX: Every country in the world is engaged I think in a competition to attract new, high-tech, highly capital-intensive investments - whether it's Brazil with tariffs, whether it's the UK with regional development funds, whether it's other countries with less obvious forms of either currency manipulation, or things like if you buy a car and you want to get it insured if it's an imported car it costs twice as much to insure as a domestic car [emphasis added].

So there's lots of different ways that countries play the game. The co-investment path is I think the most appropriate one for Australia and, yes, Australia does need to compete with other countries.

ALAN KOHLER: Right so but another way to look at that is the company that is playing the game is General Motors and the other manufacturers. You're actually playing off these countries against each other to improve your profitability by making them compete with assistance money?

MIKE DEVEREUX: Well, what happens around the world is GM is an about $150 billion company and we're looking to spend about 10 per cent of our total revenues on both engineering and capital [emphasis added].

And frankly, as that capital is deployed around the world, we try to deploy it in the way that returns the best return to our shareholders. And that is the purpose of business.

So every country on the planet competes for auto investment because of the multiplier effect that it has in the economy - from R and D jobs to actually capital equipment investments, to transportation and logistics.

It's got a huge multiplier effect. In terms of jobs, it's got about a five or six to one - so five to one multiplier effect.

So it's a large business enterprise. It has I think far reaching benefits into a lot of different sectors of the economy, so it's obviously why countries do that.

ALAN KOHLER: Can you can (sic) see why somebody would see that as fairly cynical - you know, the way that a company like yours would...

MIKE DEVEREUX: I can.

ALAN KOHLER: You know, just trying to get the best you can out of each country and you know, play them off?

MIKE DEVEREUX: I think a lot of people wish that the world was flat and that everybody played by the same rules but countries aggressively compete for what Australia has.
Australia is one of 13 places in the world - 13 - that can design, engineer and manufacture a car and a lot of countries want that same kind of capability [emphasis added].

Devereux then goes on to hint that GM Australia would be asking for about $300 million a year in co-investment funds from the Australian Federal government to invest in two facilities or car plants. The trade-off is that they would then have to guarantee that these projects would follow certain milestones in terms of the number and timing of jobs created.

This quite candid conversation reveals a couple of things. One, developing countries like Brazil and China (which was not named but alluded to) which have limited fiscal capacity to provide industry support in the form of co-investments can still compete through other policy instruments like tariffs and currency manipulation. Two, developed countries which preach free trade and open competition like the UK and Australia, actually engage in very interventionist policies to attract investments in high-tech and green manufacturing. 

In other words, the demise of industry policy has been greatly exaggerated in the West, since it has been resurrected in other forms under the banner of "innovation" and "climate change". In the past, opposition to taxpayer funded subsidies to the auto industry has been founded on the argument that this creates a "dead weight loss" by creating encouraging activities that an economy is not competitive in. 

Here we are seeing that it is actually creating public benefits through multiplier effects and a healthy return on public dollars invested that allow a nation to specialize in activities that it is well-suited for. A country such as Australia may not be able to export cars because of its strong currency resulting from the mining boom, but its mature domestic market can still support a profitable car industry within it. This strikes me as a good balance.

Economists Behaving Irrationally (or Economists Gone Wild!)

Brad de Long considers it "the greatest improvement in economics in my lifetime."

He is referring to the Journal of Economic Perspectives' recent decision to allow open access to its articles on the web. I tend to agree with him on this and hope that other serious academic journals follow suit.

Anyway, I took the opportunity to scan the contents of its archives to find articles that discuss a relatively new perspective in the economics profession, and that is how individuals or agents do not act rationally most of the time.

I came upon this one by Liran Einav and Leeat Yariv entitled What's in a surname? The effects of surname initials on academic success. It finds that among leading economics departments in the US, the supposed pre-eminent exemplars of rational decision-making,

Faculty with earlier surname initials are significantly more likely to receive tenure (...) are significantly more likely to become fellows of the Econometric Society, and, to a lesser extent, are more likely to receive the Clark Medal and the Nobel Prize. These statistically significant differences remain the same even after we control for country of origin, ethnicity, religion or departmental fixed effects.

There you have it, evidence that economists behave irrationally. The authors go on to state

We suspect the “alphabetical discrimination” reported in this paper is linked to the norm in the economics profession prescribing alphabetical ordering of credits on coauthored publications. As a test, we replicate our analysis for faculty in the top 35 U.S. psychology departments, for which coauthorships are not normatively ordered alphabetically. We find no relationship between alphabetical placement and tenure status in psychology.

Based on this research, not only do economists behave irrationally, their actions are based on others behaving the same way(!) as shown by their careful selection of co-authors and their increasing unwillingness to follow the alphabetical ordering norm. 

I suppose the core principle of economics about people responding to incentives still holds; whether such behaviour is based on rational or irrational norms is quite another thing altogether.

Shiller on Animal Spirits

Robert Shiller in his address to the RSA notes that the use of the term animal spirits or spiritus animales referring to animating feelings that drive our thoughts and actions has had a 2000 year history. Keynes used this term in the 1930s to portray the motives that lie behind the market and to explain the occurrence of depressions. He used this to argue for macro fiscal stabilisation policy to be used in conjunction with monetary policy in undermining fear that was gripping agents in the economy.

Thirty years later, the efficient markets revolution of the 1960s as espoused by scholars Modigliani and Miller converted many to the perfect markets hypothesis. This theory eventually gained ascendancy to thwart Keynesian macroeconomics and led to Thatcherism and Reaganism in the 1980s. Ultimately, faith in the assumption of perfect information that markets embody may have left markets exposed to extreme cycles of bubbles and busts, shocks which gradually have eroded confidence in the theory itself.

He speaks of his long association with George Akerlof the former president of the American Economics Association spanning over twenty years in developing behavioural macroeconomics and with Richard Thaler in developing behavioural finance. Over fifty years of research since Keynes has contributed to some extensions of animal spirits. The book uses the constructs so often ignored in the economic literature relating to:

• Empathy: a modern term that is distinguished from sympathy, relating to the way we are able to experience something that is happening to someone else, e.g. we feel left out, sad during an expansionary bubble if we are not invested in the market and are not profiting from it unlike those around us,
• Fairness: people are very alert to being slighted, i.e. sticky wage theory which is based on rigidities found in labour markets arises because people react negatively towards wage reductions,
• Corruption/bad faith: comes as a result of a lowering of standards (due to greed for example) i.e. the sub-prime mortgage meltdown has led to distrust towards the banks and legal contracts in general and leads to an unwillingness to transact,
• Money illusion: the way individuals react to inflation and deflation is based on the illusory effects of the value of money,
• Stories: social psychology tells us that the mind is organised around stories or narratives; people relate to stories rather than dry statistics.

Overall, these insights tell us that people are proximately rational. It is only under stressful conditions when undertaking decisions of significant emotional content that the animal spirits take over the rational mind. A memorable moment came when he quoted Larry Summers, chief economic advisor to Pres Obama who said that on the crucial policy issues of the day, none were being informed by economists.

In responding to the possible collapse of the banking system, governments in Britain and the US acted swiftly in order to cut off the oxygen from the narratives that were building to prevent stories that were proliferating of individuals affected by the possible bank collapses. Their accurate reading of the stiuation did not come from an understanding of behavioural economics but from their survival instincts.

When a member of the audience challenged his view that the crisis was driven not by these “panic” attacks but by the accumulation of reserves in China that supplied cheap money to US housing markets, Shiller pointed out that China’s massive savings rate developed over time. It came as a result firstly of the One Child Policy which was the Communist Politburo’s response to the narrative built up in the ‘70s by Club of Rome about the “limits to growth”; and secondly, by the story woven today of China’s resurgence in the global scene. The result of this has been the sense of nationalism and self-sacrifice that is justifying this need for savings. Fascinating stuff!