Tag Archives: government

Chicken and egg problems

I first heard about this as a question around which came first and the challenge of studying causality in somewhat circular systems. But then it was also characterised as a problem when we want to develop a new system to displace the prevailing one. It is some kind of situation where you need something to start another and you need the other to get the something you need.

Classically, if you want a thriving business, you need customer, stakeholder support but in order to do that, you need to have the business first. Or that you need capital to build a business but then quite likely the route to getting money for capital is to have a business. When success builds upon success, based on what you can observe, then you have a chicken-and-egg problem on hand when you want to create the success to begin.

Essentially anything that involves some kind of circularity exhibits this kind of problem when it needs to be first put in place. Several strategies have been looked into for this problem. There’s bootstrapping – which generally entails squeezing out some resources from existing pockets/spaces to be able to get the first bit of results which will drive more. And then let it snowball.

There’s the ‘fake-it-till-you-make-it‘ approach, which involves essentially lying to at least a small group of stakeholders to get them onboard in order to bring in the others. I do not recommend this. Finally, you could also take immense amount of risks, exhausting resources, adopting the ‘build-it-and-they-will-come’ approach.

Governments in particular do all three a lot. And it can be wise to learn from them when it comes to business. Sometimes they can be good entrepreneurs.

Half baked solution

Who eat half-baked cookies? Probably someone who have never tasted a cookie; or maybe someone who prefers cookie dough, or don’t know what you were trying to bake. Yes when you don’t know what you’re trying to bake, then something half-baked works just as well as one that is properly baked.

Likewise, there are plenty of half-baked solutions lying around and even implemented by those who have no clue what is the problem they are trying to solve.

We often overlook the importance of specifying a problem well before getting our hands dirty to solve it. Being biased to action isn’t always good when one does not have strong thinking. Of course, if there’s a system of trial and error that continuously test different solutions to find one that works, that’s okay. The challenge is in not knowing what problem one is trying to solve; or attempting to design a solution that tries to solve multiple problems.

Then there’s no proper test for the solution at all, no success indicators that allows the solution to past the usefulness test.

So if a government comes up with a scheme and it is not used; or an incentive programme which no one in the market qualifies, what just happened? Did the problem that it was designed to solve not actually exist? Or is the solution half-baked?

Changing the story

Insurance seemed like betting against your death or misfortune and some people don’t want to bet on your personal downfall so they don’t want to buy insurance. For years, the industry have been trying to change the story and they settled on the idea of protection, financial protection against those misfortune.

In principle, that works theoretically but the issue is that a lot of what you pay for is sales and distribution. The structure of the industry is such because insurance works well only when the risks are being pooled. That means having lots of people paying the premiums in order to support payouts during adverse events. As a business though, it means that the firm is ultimately a sales and marketing organisation. Costs will have to weigh disproportionately on the distribution side of the business.

This is a shame because the society needs insurance. Yet it is a market failure; the market system allocates resources poorly in this market. It can be better designed through a mix of regulation and making it mandatory to have certain amount of cover. The government should not think the market will help reduce cost of insurance through competition because the basis of competition in this market isn’t so much pricing. It is more sales, marketing and tactics.

But isn’t it just like many other products? For luxury products, yes. Basically for things people don’t actually need, you can allow the whims and fancies to be shaped by the market. But when it comes to insurance, you want the market to deliver an outcome so you need to design the boundaries and structure to make it work.

The story of insurance should be that of mandates, regulation, and basic necessity and right of people. We come together to live in highly urbanised environment and it should be a no brainer for us to risk-pool and mutually insure. There’s no excuse for this market to be hijacked to support high-flying salespeople.

Monetary Policy

As I mentioned about the difficulties of governing Economies and Greenspan’s disclosure on his workings on a paper in defence of his policies, The Economist recently wrote in their column about Greenspan’s recent defence of himself. Those interested might want to access his paper here.

In general, The Economist adopts a rather sarcastic tone when discussing Alan Greenspan’s role in the build up to the Subprime Mortgage Crisis in 2007. They are arguing that central bankers are around to ensure macroeconomic stability and therefore are expected to ‘play safe’ and manage the economy. That is, if reducing short-term interests rates could rein in the housing boom, that should have been applied. Even if Greenspan couldn’t have identified the bubble, and that the house prices are not related to the interest rates that central bankers could influence, the leverage growth in securitised markets might be worth managing:

By looking only at the effect of monetary policy on house prices, Messrs Bernanke and Greenspan also take too narrow a view of the potential effect of low policy rates. Several economists have argued convincingly, for instance, that low policy rates fuelled broader leverage growth in securitised markets.

Of course, having just read Dot.con and Lord of Finance, I do realise that central bankers’ attempts at interfering with specific market booms have often been ineffective or with rather disastrous results and thus choose to focus only on economic fundamentals like price inflation. Greenspan does have a point when he suggests that the central bankers are unable to deal with a global force that are changing the conditions of the economy. Very often, these efforts may create further imbalances that merely postpones a crisis.

Like I say, no one claims monetary policy is easy to conduct – it’s too often more of an art than a science.

Governing Economics

Many have attributed the housing bubble that eventually resulted in the Subprime Mortgage Crisis to the previous, one of the longest serving Federal Reserve Chairman, Alan Greenspan. We are pretty familiar with Greenspan, who have written Age of Turbulence. In his book, he highlighted his general argument against anyone who would finger-point him as allowing a bubble to inflate. He pronounce that it is impossible for anyone, whether the regulatory body or not, to accurately identify a bubble.

As for the Subprime Mortgage Crisis, politicians in the United States still blames it somewhat on Alan Greenspan and now that everything is cooling down, Greenspan offers his own defence. Although Greenspan was nicknamed ‘the Maestro’, he subtly attributes the period of great prosperity and low inflation to the globalization forces and technological advancement more than his skills at handling the monetary policy of US. In any case, he outlines his job at the Federal Reserve as an observer trying his best to keep to fundamentals of the economy and the crisis therefore comes as a surprise both because of how the economic agents have basically defied market assumptions namely on the issue of counter-party surveillance. Essentially the government cannot possibly provide the ‘self-interest’ that is supposed to drive the free market.

No one says that managing the economy is an easy job. Sound economics decisions by governments often turns out to be political disasters anyways so sometimes politicians stop heeding economists altogether. The recent issues that confront Tim Geithner is essentially similar; the economy is picking up thanks to his plans but people are unhappy with him. Figures on employment are not helping him anyways since the recovery is ‘jobless’ so to speak. Management of the economy is a huge balancing act for the government.

The idea of government has gone really far since the days of Locke’s conception of the social contract. The philosophy of governance in the modern world is just getting more complicated.