Higher tax rates in South Africa

Most countries have increased their sovereign debt levels since the 2008/09 financial crisis to stimulate slowing economies or bail out the greedy bankers who tried to make more money for greedy investors. It is a sad thing really. Now governments are facing probabilities of default (just type in sovereign debt crisis EU in google to understand just how bad things are). To minimise the probability of default governments have to increase tax rates, cut rebates or reduce spending. All these measures have negative consequences for economic growth. The point is that some governments simply don't have a choice as capital to finance expenditure dries up. The Obama administration is letting the Bush tax cuts expire (which effectively means that tax rates increase http://www.thefiscaltimes.com/Columns/2012/12/04/Why-the-GOP-Wont-Admit-Supply-Side-Econ-Has-Failed.aspx#page1). Unfortunately the question about which tools to use to appropriately consolidate the budget deficit is a rather complex one. In economics we learn that fiscal spending and taxes have multiplier effects (i.e. a dollar increase in spending increases economic activity by x dollars). If taxes have a lower multiplier than spending, then increasing taxes will harm the economy less than cutting spending. But calculating the multiplier is a very difficult task and one cannot simply rely on any old estimate. However, there seems to be empirical support that taxes have smaller multipliers than spending.

Let us assume that taxes damage the economy less than spending cuts, what taxes do we change and what rates do we set? This question is also very complex. One has to consider the redistributional preferences of government, the public's aversion towards income inequality, the possibility of tax evasion and tax avoidance and the possibility of immigration. Most undergraduate textbooks show that lump-sum taxes are Pareto efficient (the point where an increase in welfare of one individual cannot take place without decreasing the welfare of another). This tax strategy also assumes that government is efficient in distributing revenue collection efficiently. Unfortunately inequality exists and governments are far from efficient. This is why we have progressive taxes which addresses vertical (people with higher incomes should pay more taxes) and horizontal (people with the same income should pay the same amount of taxes) equity concerns. This unfortunately implies a Pareto-inefficient outcome as the tax liability lies with the minority of the population. This is very true for South Africa!

So, is it at all possible to increase the tax rates of the tax paying population further? Can these people afford a higher tax rate? Most probably yes. It is important to know that there is a difference between the effective tax rate an individual pays and the statutory rate. If person A earns R600 200 per annum he would fall in the top tax bracket. Assume that the cut-off point is R600 000 with a lump sum tax of R100 000 and 40% tax of anything in excess of R600 000. His total tax liability would then be (R100 000+(R600 200-R600 000)*40%) R100 080. Assume that the tax rate would increase to 50%, then his liability would be R100 100 which is only a R20 increase. His effective tax rate before the change is ((R100 000+R80)/R620 000) 16.141%. His effective tax rate after the change is 16.145%. That is why you always need to look at the change in rebates, tax rates and lump-sum taxes when the Budget is revised.

We know from theoretical and empirical (see Mirrlees (1971) and Saes (2012)) work that tax setting depends on:

1. The ability of labourers to shift their productive labour hours when taxes changes. Their preference for hard work diminishes as higher taxes are implemented (Frisch elasticities and labour-supply elasticities)

2. The distribution of tax payers (wealth is usually Pareto distributed)

3. Income and substitution effects. One's income is directly affected by taxes but substitution effects depend on labour-supply decisions. Elastic labour supply means that people can change their labour decisions (either choose more leisure or work harder to maintain a similar income as before the tax change). If the elasticity is larger than one, then increasing the tax rate could result in less revenue collection as more people decide to work less (either by reducing the amount of hours worked or by simply not being as productive while working the same amount of hours). When the elasticity is smaller than one then increasing the tax rate could result in higher revenue collection as people work at the same levels as before (same amount of hours and at the same productivity level).

In South Africa one would, a priori, expect labour supply to be very inelastic (smaller than 1) across income earners. Using StatsSA's Labour Force Surveys (LFS) suggests that the labour supply elasticity is close to zero (even while controlling for other costs such as transport or grants received). That means that one could increase tax rates and collect more revenue. But South Africa's top income earners also have access to other income types, which means that they can shift their labour income to capital which has a lower tax rate. I.e. some top income earners have a lower effective tax rate than middle and low income earners which violates the vertical equity principle. A business owner might not get his benefits in terms of a salary (which is subject to labour income tax), but gets his benefits in the form of higher dividends or company profits (which are subject to much lower rates than labour income tax). Thus raising taxes at the top end of the income distribution might only result in tax shifting. One possible policy remedy would be to increase tax rates on capital. Now this comes close to Lump-sum taxation (which implies Pareto-efficiency). Obviously there are different trade-offs involved in taxing capital such as a decrease in investment incentive.

Setting tax rates are notoriously difficult. Just looking at South African data would suggest that it is possible to increase the top tax bracket, or even introduce a new top income bracket. This would not necessarily result in a significant increase in tax burden as the effective rates are still low. This is definitely one way to close the budget deficit without incurring much harm on the economy overall. The only problem is that South African's do not necessarily get a return on their taxes as spending on education and health in the past has yielded little to be happy about (more on this later).

 

Jobs and technology

Unemployment problems will continue to exist for some time to come. A recent article in the NY Times (http://www.nytimes.com/2012/12/05/business/unionizing-at-the-low-end-of-the-pay-scale.html?partner=rss&emc=rss&_r=1&) discusses how people are now becoming part of unions to earn a higher salary. Technology is not solving the unemployment problem either; fewer workers are necessary to complete a specific task as computers and machines do the job more efficiently. Some economists argue that unemployment exists because some people are simply unemployable, or do not fill the needs of a company. The solution they propose is to improve the levels of education since one's wages should be equivalent to one's ability and skill. This still does not solve long-term unemployment. The rate at which machine and computer efficiency improves exceeds the rate at which education improves. My guess is that the future will have computers do the jobs of even skilled people. Demand for goods and services will not decline necessarily as the few rich people will demand more of these goods and services equivalent to the rise in their income...Capitalism will create market winners which absorb all competitors...in the end capitalism will become a weird perverted form of communism. Maybe Malthus was right...the world is perhaps over populated, or maybe we are focussing our time and energy on all the wrong labour market strategies. Low skilled labourers should work for companies that require a low skill level. Agriculture is one such industry. I find it odd that governments, especially South Africa, has not redesigned its agricultural programmes. More on this topic later.

Have faith and conquer

Do we understand little of life when we cannot put into practice our teachings? Is this a psychological anomaly? Merely having knowledge about the way we ought to conduct ourselves does not necessarily imply that we are able to live life as such. How is it then that man possesses the knowledge of evil, yet fails to resist it? We experience inert urges that rebel against our trained minds. We often yield to these urges and afterwards our guilt condemns these acts. Either we don't truly understand the teachings, or we are simply rebellious. Under the one we are ignorant and under the other we rebel against what we know. Kierkegaard understood this well when he provided a detailed description of despair in The Sickness Unto Death. Although Kierkegaard goes to great lengths to describe why men despair and offers a cure, he does not deal with the origin of every man's sin nor with the continuation of sin. Kierkegaard defines sin as standing before God not wanting to be oneself or wanting to be oneself without the Power that constitutes us (God). In this sense we have all sinned, and still sin. We know, and some truly believe, that Christ has died for us so that we can be free from sin. This means that sin is erased from past, present and future for those who believe in God. Yet if sin is forgiven, no matter the time space, why do churches preach that man should continually repent from sin? Does this mean that man has no faith every time he sins?

Here we are faced with two tough questions? One, why do we continuously sin (or do we?) despite our deepest beliefs about life, and two, does sinning imply that we lose our faith?

We know from the book of Romans that the wages of sin are death. We also know that Christ's death paid those wages in full. Thus, when believers sin, they are not subject to death. Yet the church, and the Lord's prayer, teaches us that we should pray for the forgiveness of sins. This would imply that if we did not pray for the forgiveness of sins that we would not be forgiven, and this then would imply that sinning is equivalent to not believing. But this seems at odds with the meaning of Christ's death and its implication for the forgiveness of sin. Or did we perhaps misinterpret the scripture? An answer might be given in our definition of faith, since it is by faith that we are saved. Kierkegaard provides such a definition: It is in the hopeless state of man when he realises that it is impossible to save himself that he cries out to God for help for whom all things are possible. Thus, by asking God to forgive our sins we express our faith in its purest form. We recognise firstly that we are broken, and then subsequently cry out to God to save us from this misery since there is no way that we can escape it by our own means. The reason we sin then is because we are broken. We were broken since birth. And we inherited sin from Adam and Eve. Even new born babies sin (read Augustine's Confessions for examples). So does God then take away our sins? In one way yes, and in another no. Since we are forgiven for our sins through grace by expressing our faith, sin has no power. But, all of us still sin, by lying, gossiping, stealing, lusting, etc. Hopefully we become better the more we come to appreciate what this forgiveness of sin really means. God, knowing how imperfect we are and knowing what imperfect decisions we will make, still chooses to forgive us. There is absolutely nothing that you can do and hence no possibility for you to rectify the mistakes of the past. It is purely by God's grace that you are made clean. It is thus a sin to lament your actions. You are not being pious when you throw ash over yourself, or shave your head as a sign of mourning. Instead you are showing great signs of arrogance. If God forgives you, what gives you the right not to forgive yourself? Of course it is important to repent, since repentance is an expression of faith.

So we know that we continue to sin because we are broken and at times lack faith. But we also know that sin has no hold over us since we are forgiven by God. Now, does sin, in light of believing in God, imply that I do not have faith? This would seem to be the case. Because sinning means to stand before God and rebelling against Him, or not wanting to be yourself. And this means that you put possibility (possibility of earning one's salvation) into your own hands, by thinking that you can find just cause for ill-behaviour. What else does this mean when you lie, murder, cheat, steal, gossip and commit adultery? Yet we cannot simply judge all these acts in a generic manner. We have very little understanding of man's psychology let alone a man's soul. So we leave these things to be judged perfectly by God. So we sin quite a bit after conversion by displaying a lack of faith. That is why every time we sin (whether it be out of ignorance or rebellion) we ask for forgiveness so that we can express our faith and be forgiven. That is why Kierkegaard also says that every unrepented sin is a new sin - i.e. every moment is a new sin while we neglect to ask for forgiveness. While one could argue that all sins are the same (see previous entry), with the exception of the sin against the Holy Spirit, so too can we make a case that faith is different in varying degrees. We have numerous examples in the Bible of people whose faith increased (the impossibility of the self, but the possibility of God: "Father let me become more like You and less of myself"). It is through faith that Abraham could obey God in putting Isaac on the offering altar, it is through faith that David defeated Goliath, it is through faith that Jesus withstood the Devil's temptations and it is through faith that we daily fight evil in this world. This faith needs to be expressed in prayer and in praise.

To sum up: we all sin because we lack faith, but even a little faith is enough for us to be forgiven. We express this faith in prayer and in praise by seeking God's forgiveness.  When our faith increases sin dies. We can boldly express this faith because Jesus died and defeated sin by defeating death.

So do not be disheartened when you sin. We know that there are no more wages of sin. We know that we can ask God to forgive us. We do not need to hang our heads in shame when we sin. We need to acknowledge how fallible we are and how impossible it is to free ourselves from sin's bondage. We need to acknowledge that for God all things are possible. This possibility has freed us from sin's bondage. We can express daily our faith by coming in prayer to God and repenting. We understand that repentance is not just reciting words, but giving over to God every aspect of our lives because we know how hopeless we are.

Sin's equality

My friend and I had a very interesting conversation this morning regarding sin. It started off with the controversial story of late UK disc jockey Jimmy Savile. Jimmy was knighted by UK monarchy and received a special mention by the Catholic church for his many philanthropic deeds. Then came a damning documentary alluding that Jimmy was an alleged paedophile who committed many vile acts. Now the question we posed was whether Jimmy was naturally inclined to commit such an act, whether soberness of mind or lack thereof had anything to do with it and what the consequences of such an act are.

In order to understand these questions we must provide a framework for these actions.  This framework can be neatly summarised as sin. And here sin is meant in both a religious sense when man turns his back on God and in a secular sense where man harms himself and those around him (you could make the case that both have the same practical implications).

I think that it is fair to say that every human has sinned in his life. We often judge the severity of sin in the sense that it exhibits harm on fellow man and this leads to judgement of the sinner. Should the sinner and the sin be judged equally? What about the mental state of any two men - Let us assume that we have two murderers. The one commits murder because he thinks that he does society a service by eliminating a type of person while the other murders a person out of hatred. The first person, one could argue, is mentally ill while the other had perfect ability to know that there was nothing wrong with the person he murdered but yet still did it. My logic dictates that the heart of the second murderer was more ill than the heart of the first murdered. How then are we to judge the sinner? The sin makes them equally guilty for the outcome was the same, but the sinners were completely different in that their motives differed with varying degrees of "wrongness". C.S. Lewis gives us a perfect example of the difference between the heart of man and the psychology of man. Assume that two soldiers are inhibited from entering the battle field due to a crippling effect of fear. Assume that psychology is able to remove fear from both men. The one man freed from the burden of fear exclaims his joy and now wishes to defend his country at any given cost while the other man makes the choice to run out of a sense of self-preservation rather than fear. The heart of the first man was sincere and good, while the heart of the second man was ill and evil. How are we then able to judge the sinner? That is why God tells us to leave any kind of judgement to Him. We are all imperfect judges!

We are now able to discern that sin and the sinner cannot be judged the same. Now, can we truly distinguish between different kinds of sin being worse than others? We usually assign some hierarchy to sin. We might assume that a lie is not so bad as stealing, that stealing is not bad as murder or that murder is not so bad as rape. But it can it not be argued that we should view sin as all the same? There is a saying in Christianity that tells us that every man would carry a cross and that God will not tempt a person more than what that person is capable of handling. A certain individual finds it easy not to lie but struggles not to commit murder. Another person continuously lies but the thought of murder does not cross her mind. Both these people have an affliction to a type of sin. In each their desire to commit the sin is equivalent. If they both give in to their desires they both sinned and the sin has the consequence of making them both guilty for not resisting. You see, we only look at what happens after the sin or the outcome of sin, which is either a lie or a death, but we don't see that their affliction (the desire to lie or to murder) was the same. Is this not perhaps what Christ meant when He defended the prostitute from stoning by saying the man with a clear conscience should be the first to cast a stone. Christ also said that you commit adultery by just looking at another women in a sensual manner. Once again, this makes us imperfect judges of sin.  

I am in no way defending Jimmy. And of course I agree that we should have a secular court ruling on the consequences of sin. Mad men who inflict harm upon society should be locked away. Sane men who inflict harm upon society should be locked away. But let us not be mistaken. We have all sinned in some way or another. We have all given into the desires of our hearts. We are all equally as guilty and we are all sinners. Thus, before we judge another we should remember that I have done exactly the same thing, that is sin. What only separates us the consequence of sin. Other than that we are equally guilty of sinning.

Is there redemption? Some believe that you can do many good deeds that would outweigh bad deeds. But this does not cancel out sin. The sin has already left a stain. Others believe that living out ones sentence is fair pay for sin. But now we are punishing the consequence of sin and not the sin itself. The Bible tells us that any sin is punishable by eternal death. God gives us a way out: Christ. Christ had to endure the same temptations as man and yet did not yield to sin. Yet He took up the cross and bore the burden of man and was nailed to the cross so that man would stand guilt free before God. Our inheritance should have been death, yet what we got was eternal salvation. This is love at its maximum.

The art of giving

Is there any difference between man? His appearance is distinct, DNA construct differs in magnitudes and his choices are taken from a probability distribution that has infinite selections. Yet, man is the same. Whether our creation is a result of a uniquely made-up context or the result of natural evolution originating from the same "swamp", we share something so uniquely common. Is it perhaps not by chance that you have what you have and are who you are in this moment? What predestined you to be so fortunate to own things or what predestined you to experience such misery as pain and hunger. Once we think about our life's situation we make the object of life what we have and who we are. We then differentiate ourselves. We are then unequal in our unit of measurement.

This is an illusion. We are not the things we own but are defined by our understanding of who we are. Once we understand that we entered the world nakedly and will leave the world with nothing, then we start to understand that what we have, whether it be a lot or nothing, does not determine who we are. Thus, whatever you have is a gift. For it was given to you, whether it be intelligence or strength or anything else. But the gift itself means nothing if it is not put to good use. It means nothing if the gift itself becomes the object of our struggles in life. The gift has no meaning other than satisfying our own selfish and proud desires to be worshipped by people. Once you understand, as Kierkegaard puts it, that you are lowlier than the gift, you then come to appreciate and give thanks to the giver. Then you will also be able to give everything away without it becoming a burden.

We should then head the pleas of the needy. They are in need of a gift. Do not refrain from giving, but give joyfully without any expectations. If you expect something in return, be it respect or admiration, then you have exalted yourself above the gift that comes from God. And if it troubles you to give what has been given to you, then give it all away since it only burdens your soul to keep things. There is no use in giving when you are being glorified. Give so that God receives the glory for we are in the business of saving souls and not in the business of becoming gods.

Money is only a subset of what constitutes as a gift. Your advice, your sympathy and your care form part of giving to others. Remember that you are not above these gifts. Lower yourself when giving. The purpose of giving and receiving is so that we understand what equality is before God. The gift in itself cannot differentiate us in God's sight. We are all equal.

Be wary not to think that giving is beneath you. Be cautious not to elevate yourself thinking others are not worthy of receiving. Don't deceive yourself by thinking that what you give will be used for ill conceived purposes. What you have is not yours! Life is about honouring God. It will be a great benefit to all of us to remember scripture. Jesus healed the blind man by saying he should go wash himself in the river. Jesus gave him this gift without expecting anything in return. God gave us the gift of salvation even though we don't deserve it and "squander" it. We should follow this example!

The cost of strikes

In a previous post I hinted at the destructive capabilities of union power. I also noted that it is odd that SA's yield curve remained unstable despite all the recent media attention regarding industrial strike action. Well, yield curves have finally started to move and the exchange rate plummeted. Markets are finally valuing the impact of bad governance.

Unions are important for societies in as much as their power is constrained within well defined limits. However, once unions grow in numbers their influence on our daily lives increase. Mancur Olsen theorised that unions form over time and form lobby groups to influence policies. These policies do not always have the best interest of the economy at heart and are characterised by him as protectionist and anti-technology which hurt economic growth. This makes perfect sense from the union's perspective as technology is often associated with improvements in the means of production and this is usually done by machines which replace labour. The union is interested in growing in numbers and thus reflect policies that would suit individuals rather than the economy as a whole. Most individuals want to be paid more. It thus makes sense for an individual to join a group that could exert pressure on companies and governments to pay higher wages. The irony is that on a macroeconomic scale higher wages translate into fewer jobs. This is a paradox where the gains of the individual are the loss to society (similar to the paradox of thrift). Furthermore, nation-wide strikes have enormous costs to society. It tears down the social fibre of a country, makes investors risk averse, leads to decreases in economic activity which could result in increases in structural unemployment, erodes potential tax collections which are vital for servicing the budget deficit and sovereign debt, it leads to capital outflows which balances the current account deficit and ultimately reduces economic growth.

Wage demands are often justified when employers exploit employees. However, wage demands in South Africa are simply absurd. The department of labour annually compiles reports on the industrial action plans (strikes). In these reports the number of work days lost and number of employees involved in strikes are summarised by sector. The sectors responsible for most workdays lost are the manufacturing, mining and transport sectors. These are also the sectors with the most frequent number of strikes. An interesting study shows that strikes in South Africa have a very long history and is usually associated with violence. Perhaps here history is a good predictor of the future...

There are a number of ways to calculate the effects of strikes on the economy. One way is to analyse revenue lost per sector due to the strikes and simply subtract that from gross domestic product. Of course one has to take account of the indirect effects such as a loss in tax revenue and the loss in potential investments. These losses are simply incredible. Another quick and dirty calculation would be to use use a production function (in this case a Cobb-Douglas (CB) production function) and subtract the number of people involved in strikes from the employment variable. Simply put, the CB function has capital and labour as inputs for production. Employment numbers are obtained from both the South African Reserve Bank and Statistics SA's websites. This employment number needs to be reduced by an effective employment number that subtracts the number of people absent from work for a certain period. This new measure of employment gives us an alternative input measure. Use the share of labour then to calculate the loss in GDP. Of course this measure is fraught with problems, but it serves as a rough guide on the impact of strikes historically. Unfortunately the Department of Labour does not have recent data on strikes. This restricts the analysis to previous years.

The figure below summarises this "quick" calculation. The blue line is a counterfactual of what GDP would have been had there been no strikes. The black line is the actual GDP. The grey bars (values reflected on the right axis) show the loss in GDP. It is notable that strikes at times costs the economy as much as 2 percentage points of GDP (roughly R60 bn). My guess is that this is still a conservative measure. The results would more striking once the 2011 and 2012 data becomes available!

More worrying is the slow response of government intervention. Already the transport sector is holding the government ransom. Local government employees also warned that they are set to join in their own strike.Something is seriously wrong!

Unions should be able to make demands. But these demands need to be accompanied by some sort of agreement. It is unreasonable to suggest real wage increases in excess of 2% annually. A solution to the problem would be to have wage increases follow some measure that takes the productivity of a sector into account. Such a measure would serve as an incentive for employees to work harder since their wages would be linked to the performance of the sector. Having wages linked to inflation creates a massive problem. If a person's wage increases he will most likely spend it which will increase inflation. Once inflation increases his wages will need to keep track. This is a vicious cycle. Your wages should be a measure of your performance/productivity and not the amount of goods you consume! Eating too much makes one lazy! These targets and measures should be made transparent so that both employees and employers are held accountable.

South Africa needs to intervene quickly. The outlook is bleak. Yet, it is not impossible to turn things around.

South Africa's sickness and diagnoses for a cure

Despite various strikes and downgrades by rating agencies, the South African stock exchange continues gaining upward momentum. Resources continue to climb and capital inflows rise. This seems at odds when you look at the the way investment firms value risks. Movements in the Resources Index might make slightly sense as South Africa is a price setter for platinum and arguably for gold. Cut supply and prices are surely set to rise. What puzzles me is that the entire JSE ALSI rose during this period. Perhaps the returns still outweigh that of other countries and that the risks in SA are perhaps more muted than European markets who struggle on in trying to find solutions for their ailing economies. My only guess is that fundamentals prevail despite all the rhetoric about political instability. Thus, the noise in this equation is perceived as small in investors' decision making process. This is clearly demonstrated as bond yields remain stable.

Sounds like SA is managing its domestic and foreign problems optimally, right? Not really: Have investors looked at the fiscal plans for the next couple of years? Have investors analysed whether people are buying up any new mines or factories? Have investors noticed that government does not deliver books to children in Limpopo even though the education budget is enormous? So, what are the potential returns for the investments government and private business are undertaking?

If you want to get an idea of whether to invest in a country or not just analyse its leaders. Intrinsic valuations focus on a holistic approach to investment. I worry that the current leading party is managing a great country poorly. Government wage growth is ridiculously high compared to government productivity. The Auditer-General's audits on local government reflect incompetence. Political leaders point fingers to Apartheid for its failures. It comes then as no suprise that we witness violent strikes, the violent opposition of unions and the crime levels in South Africa.

The country seems to be heading down an inevitable path directed by leaders who are self-serving. My prayer is that things will change immediately before anger and frustration leads to something far worse. The proletariat will rise against this incompetence, but unfortunately their anger will be misdirected towards those not responsible for their poverty.

People are not oblivious to this crisis. Holding on to a historical occurance seems to disable them from changing. Patterns are hard to break and the biggest obstacle is trusting previous oppressors. People need to find the courage to vote with their heads and not their hearts. Inherent biases lead to sub-optimal voting strategies. The majority of black people refuse to vote for a white leader party. These potential voters either continue to vote the ANC into power, or simply stay away from voting. Things could be different...

SA has spent the last 18 years identifying structural problems. Some are being addressed and others are available but leaders lack the will to implement them. I will list some of the constraints (mainly regarding labour) and talk about the solutions that exist:

1.) High levels of unemployment: This is due to regressive employment conditions such as Broad Based Black Economic Empowerment (BBBEE) that hinders the fair employment of good managers. Just have a look at the recent Commission of Employment Equity (CEE) report. The appointment of black managers in the private sector has been rising. The story in the government sector is that black management completely dominates. I am very careful not to hint at anything particular here, but BBBEE has replaced many white skilled managers. Some of the provinces need a bail out from national government (which is against the law btw.) because they managed their finances poorly. Conditional grants (which are mainly for investment purposes) are not being spent (only about 70%). No wonder that some of these provinces look absolutely horrible when driving through them. Insanely enough, local government "efficiently" spends its bonuses (which does not really seem to be linked to any productivity) and its wages. SORT OUT THE BAD MANAGEMENT OF GOVERNMENT!

Private companies are becoming increasingly more capital intensive. The share of capital to output has been increasing while the share of labour to output has been decreasing. This implies a couple of things that are pretty standard in economics: (i)The wage rate is too high and thus the labour supply curve moves down (less employment), (ii) Labour laws are too stringent (recent talks about disbanding labour brokers are not helping), and the World Bank's cost of doing business survey indicates a worsening in the ability of businesses to perform their tasks. (iii) The marginal product of labour is negative - employing an additional person in your firm does not create more output, but is instead an addition fixed cost, (iv) The skills are insufficient to service the needs of a specific company. Unions hinder the implementation of a youth wage subsidy that will provide the young unskilled population an opportunity to get employment experience, and hence, become more employable in theory.

These four points summarise the major constraints of employing people. Simple solutions exist for each of them. Academics and some business men wrote scores of papers that propose simple and implementable solutions: (i) make sure that wage growth follows productivity growth and not linked to arbitrary measures such as inflation. If inflation is too high, much more than productivity growth, then people are consuming more than they should and possibly on all the wrong things. If wages keep track with productivity then companies can afford to employ people to be more productive. (ii) Unions have a very important function, but in SA they have confused their altruistic purpose with complete anarchy. If they really had the interest of the worker at heart, then they should know basic labour theories about wages and the negative impacts of strikes. This is what you get when you have unions making up political lines. The role of unions need to be minimised and their power should be taken away. They have become corrupt and are not helping the country. I understand the difficulty of balancing the employer's and employee's needs. Fortunately there are many country examples to draw from in getting this balancing act right (a future post on this will come). (iii) Because of all the problems faced by companies and all the labour costs incurred, companies have to think outside the box. We live in a day and age where machines can do the job of ten men. Farmers and manufacturers continue to diversify the means of production. There is very little need for many hands to get a job done when one machine can do the job more effectively and timely. To absorb abundant labour, wages need to be cut or least set to a specified level. Furthermore, foster a hard working culture of learning by doing. Take away the entitlement disease. Everyone is replaceable! (iv) In SA the emphasis is on pass rates rather than quality of education. Universities have a bridging programme to fill the gap left by high schools. Many African country peers (who are all poorer than South Africa) have higher education standards. They have smaller budgets and are yet able to produce better trained scholars. The biggest failure of the state is the education system. Since 1994 little progress has been made to make students better qualified. Every year it is easier to pass matric. Universities also suffer this fate as they are dependent on funding by the state. The state gives universities money in exchange for the number of students who get degrees. Degrees are now dished out. This is a perverted system. Bring back old school standards. Reward teachers based on their results (good quality education) and make sure that there are people who can appropriately evaluate teacher skills. If need be import teachers and replace all the useless and lazy ones. There are many good committed teachers in SA who want to make a difference. Don't treat all teachers the same. What is the incentive then to teach better?

2.) Crime: South Africa has a history of violent crime. Official statistics would have you believe that crime rates are decreasing. What they don't show you are absolute numbers of a crime. If the level of crime is high then any low rate of increase leads to a massive  increase in the absolute level of crime. Simply put, the crime statistics are simply misleading. You will be disturbed when you observe the police. What you will notice is that they drive fancy cars sponsered by companies who care. Look at the men and women working for the police. They are all fat (apologies to those who make an effort to stay fit). There is nothing wrong about being over-weight, but the police should be fit people who command a presence of respect. Go to a police station. You'll see them eating all the time. Sure it is a bit of a depressing job that makes you want to nibble away, but you are paid to do a job. They pitch up too late at the crime scene, they don't bother to pursue thieves and just hand you a form to complete so that you can go to insurance companies and claim back money (they charge way above any natural rate). Illegal immigrants flow to SA. Uncontrolled inflow of foreigners will surely be accompanied by crooks who flee their countries. The biggest problem is that the punishment for crime is not severe enough. Rapists, thieves and murderers don't go to jail for long. Simply increase the jail sentence. Cut off the hands of thieves (depending on the severity of the crime) and forever lock away rapists and murderers. The solution is easy: Toughen up the police service. Give them bonus pay for excellent work (cases solved and acts of bravery). Make the punishment fit the crime so that criminals will fear the law.

3.) People don't get what they pay for: How much of your salry goes towards paying taxes? Might be the right number. You see, the state has dual objectives in terms of taxation: Maximise revenue and take care of the welfare of the people. Currently the state is doing everything it can to collect more revenue. Capital gains taxes have increased to broaden the tax base of the rich who were clever enough to transfer funds to these taxes (i.e. the rich pay a lower effective tax rate if they can transfer funds to either a cc or somehow use Capital Gains Taxes). Secondary taxes on companies, now Dividends tax, have increased and there are always talks of a super tax. Now it is ok to pay taxes, but you need to get something in return. Remember that the government is appointed by the people, and it is not the government that should dictate terms. Now let's check what you are paying for: Education, health, wages to government officials and various capital projects and services. Most skilled people pay the largest portions of taxes. It is most likely that skilled people will find higher paying jobs. Labour taxes are progressive (i.e. if you earn more you pay more). But skilled people hardly use public hospitals or public schools. Simply because the standards are too low. They benefit from working condition roads (they might have to pay for that too depending on whether National Treasury wins the court case on e-tolls). You are paying people who are telling you that you should pay more while they simply do not work efficiently. But rich people also pay taxes because they feel guilty that they have a lot more than most. By paying taxes you put your trust in government to distribute some of that wealth. Unfortunately government is not doing a very good job at that. Social welfare spending is super high and some studies show that people abuse this system and disables them from working. I.e. a poor person will take a child grant rather than working. This is perverted! I know, what other choice do you have? Vote differently!

To sum up; people want jobs, they want to feel safe and they want what they pay for. The solutions exist, but South African leaders have a stinking attitude problem. Stop driving your fancy cars and start doing what the people pay you to do. It is frustrating knowing what the potential of this country is and just standing by while things go from bad to worse.

Stop sobbing and realise what is happening. Let it really sink in. Fear will set action into motion. And this action needs to be mobilised to heal a country from its sickness. A sickness that is self imposed by elected leaders who know very little and worse, care very little. If things will inevitably go bust in South Africa, is it not better to fight the system as best you can rather than watching the country burn? The solutions are simple enough and they will work if only you stand up for what you believe.

Reconciling predestination with free will

How do you bring the downward spiral of age to a halt? It is as though every man's life follows an inevitable path. Choice, it seems, must be an illusion. Movie fanatics of Donnie Darko understand this puzzle. Religious scholars are roused when they hear the word predestination. String theorists develop theories of what they think is reality is merely a projection from a different dimension. Philosophers argue whether we even exist and some go as far as to say that we are mere dreams of God. One thing is for sure, we have all questioned whether our actions are truly ours.

By now, you my reader, know that I often write from a Christian perspective. This makes perfect sense since I am a Christian. For those who do not follow my faith, stick around and see whether this post will not make you curious.

The question of this post is; do we have free will and how? There are many theological texts that deal with it. A nice summary on predestination in Christianity can be found here: http://www.whatchristianswanttoknow.com/what-does-the-bible-teach-about-free-will-and-predestination/. For now let us put aside our preconceived notions of predestination and just focus on what the Bible tells us. For one, the Bible is full of passages that support the predestination hypothesis and the complete free-will hypothesis. This information alone does not, at first sight, seem to be able to lend more insight into this question. What else do we know? We know that God says that man has free will, but at the same time we know that God is omniscient. This in itself seems even more confusing as seemingly two opposing views now stand next to each other.

Now that we have set out the problem; God's omniscience vs. man's free will, we can start to decompose it and see whether we can't find an answer. I propose a simple theory, I am sure other people have thought of this too, that attempts to consolidate the apparent contradiction.

  1.) People are subject to time, at least what we naturally observe, that seems to move in a linear direction. God is unconstrained by time and views the history, the present and the past in the present (for a lack of better word). Figure 1 attempts to illustrate this view: We begin our lives at t0 (birth) and we die at time t+T. We make forecasts of the future. The further into the future our forecasts the worse they become. I.e. anything in the far future is possible. Thus, the way we experience this life seems completely random. What we do experience is a sense of free will. I.e. it is I who make the decisions. This does not subtract the possibility that certain things in life happen for a reason. The choice that you make, irrespective of whether a rock was purposefully placed on your path, seems to be completely yours. Since God is outside the boundaries of time, He observes everything. The point of birth and the time of death. This does not mean that God interferes with your decisions. He might direct your path, but your decision still is only yours. But now you shout at me from behind your glasses and ask what about Pharaoh? Didn't God say He will harden Pharaoh's heart? Yes He did. But Pharaoh was not used as a puppet. He still made his own decision, God only knew what that decision will be.

Figure 1: Simplistic schematic of our perception of time and possibly God's perception of time

But what about Judas and Christ and the end of time? God now, it seems, directs and makes man's decision for him. What about the countless number of people who will never come to God? Did God ordain that? What does that tell us about God?

Perhaps the starting point to answer such questions would be to look at the world just before it got created: From nothing God made something. He knew what His creation would do, He defined the rules of nature, the spins of planets and everything else. But since He knew what His creation would do, He knew that His creation would turn their back on Him. Despite this knowledge God still created us. He knew that man will exit His divine and holy presence. He knew evil will come forth because of man's decision (here evil means disobeying God). Yet, He still created us. And knowing that man is lost without God, God in His goodness made a plan for us so that we can find redemption and be reconciled with Him as it was the original idea of creation.  Yet in all of this He does not take away our freedom of choice. Your life might be shortened due to His intervention, but every present moment you are in control of your decisions. Thus, God did not create evil and God certainly does not tempt man. What He does, miraculously, is direct our footsteps so that hopefully we can make right decisions. Thus, God surely knew how things would play out before He even created this universe. My every decision today was in God's mind before anything took form or shape. His plans to rectify my faulty decisions was ordained before anything started. What we see here is something completely amazing: God is the centre of everything and nothing can come to being without God knowing it. Once we understand that God is at the centre, our understanding of our purpose begins to be realigned with God's will. Everything is full circle for God and completely deterministic while we experience life as merely random.

To understand this assume we are parts of a model. We have an inherent data generating process and are subject to shocks that are completely random (independently and identically distributed). Thus some days our behaviour seems completely predictable while on other days our behaviour is completely random. But for someone who knows what shocks will occur in the future, that person might have perfect foresight and be able to predict, very accurately, how events will unfold. God observes all these shocks since He has that information. God, in other words, has perfect foresight. We are just unable to predict these shocks with any degree of accuracy, because our information span is limited to time and space.

Once again, the crucial question of our existence boils down to whether we believe in God or not. Since we know that God can direct our paths, does God direct every one's path to Him? If we are not directed to Him, and have never had any knowledge of God, how can we then believe in Him? It is the same as living in the absence of light and never knowing what light is, how can one ever know that such a thing as light exists? Logically it might be difficult. The Bible is pretty clear about this. For God loved the world so much that He sent His only begotten Son. His love for the world is so great that Christ's final commandment to the disciples were to minister to all the people of the world and to make disciples of them. The point is that God wants everyone to believe in Him. How He directs You is His choice, you still decide whether to believe in Him or not. For some God will reveal Himself in such a way that you cannot deny His existence, for other the approach is more subtle.

The question

Life on earth is subject to morally questionable trials. We often liken ourselves to mere animals and in the end ground human development on theories in the evolutionary process of the animal kingdom. Perhaps the saddest development in human philosophy is that the mind is subject to natural selection. This creates an automatic bias in so much that we then fight to be the top opponent in the food chain. Instead of fighting you should take a laid back approach. Life is not about getting on top, earning the biggest salary or even having the most say. There will always be fighting for the top position. In the process people get replaced. No one is irreplaceable! Don't waste your strength on futile arguments, on gossip and simply playing games. Doing this will eventually wear down the best parts of you. In the end you become just like the competitors. Before you know it, you have lost all sense of individuality. It is very wise to isolate you from the hustle and bustle of power and wealth. Get into a space that is void of any noise and think hard about issues that truly matter. Most likely you will discover that most things in life should be enjoyed, but that they are temporary and immaterial. In other words, all the effort you put in to attain things that are material will be a waste of time and energy. Thus, stop wasting your time by trying to convince people of your views, they are subjective in any case! Stop trying to impress others with knowledge that any man can pick up from reading Google related searches. Most of all, stop punishing yourself by always being dissatisfied with what you currently have.

You will soon discover that there exists only one choices in life. That is, belief in God and disbelief. All the other things in life are an outflow of these choices. If you believe in God you should live a life completely devoted to Him. The other choice has more grim consequences -  if you do not believe in God why exist at all? In the end, what does it then matter that existence precedes essence?

Genocide meets a probability

When should a country be concerned about the possibility of genocide happening? Certain political figures polarise countries causing militant  factions to form. Should a country fear the chanting of rebel minority groups? Is it not possible for that minority group to grow over time and exert an incredible amount of influence on the rest of the country?

The organisation Genocide Watch (genocidewatch.com ) monitors countries that are at risk of possible genocide. They list certain charachteristics leading up to genocide.

Given the criteria by Genocide Watch, which is by no means exhaustive, is it possible to calculate a probability of genocide. I will use South Africa as a case study. The country over the last few years has been tremendously polarised by political fractions. Within the ruling party alone certain events can be described as worrisome: The previous president, Thabo Mbeki, has been ousted by Jacob Zuma who later became president. He enjoyed strong support from the ANC Youth League who have a militant history. The previous ANCYL leader chanted songs that incited many black people against white Afrikaners. The title of the song "Shoot the boer" is self explanatory. More recently, the aggressive strikes at Lomnin's Marikana mine, which culminated in over 34 deaths, were echoed as a consequence of former British colonial rule and the state being unable to be held accountable for its actions http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=325233&sn=Marketingweb+detail . Poor service delivery, such as the long overdue provision of textbooks to Limpopo schools, was blamed on previous Apartheid president Hendrik Verwoerd (who has been dead for 46 years) http://www.sowetanlive.co.za/columnists/2012/08/01/how-to-find-textbook-culprits. But these cases might just be outliers on a general trend. But these outliers might just quicken the inevitable path towards genocide. Once we analyse the general trend we might be able to get a clearer picture of whether South Africa is heading towards genocide.

South Africa has large levels of inequality. Most of its capital is owned by the white minority. The ANC has made various promises that have not yet been fulfilled. This includes proper housing for all, employment for all and a better life in general. Unions mobilise labour when their demands are not met and as a consequence hold the country to ransom. South African farm murder rates are amongst the highest in the world (according to http://majorityrights.com/weblog/comments//the_boer_genocide) and overall crime rates are disproportionately high compared to emerging market peers. The judicial system is constantly under threat while we have also witnessed the sacking of two police chiefs. Corruption is rife while ignorance continues to bind the country. Service delivery protests are increasing as the municipality buildings are burned to the ground and government employees' lives are threatened. The escape clause the ANC uses is to blame the Apartheid era government, which was abolished eighteen years ago, for everything. The country is in a crisis and its people are very angry. This anger is a brewing pot waiting to be directed, and currently that finger is pointing to white people.

So what are the chances that genocide will occur in South Africa? Below I table the eight criteria mentioned in Genocide Watch. In Table 2 I make subjective ticks to those that apply. The right hand column mentions preventive measures, such as the judicial system, is able to punish hate crime and stop possible polarisations. I weight this with the historical record of genocide where occurrences of genocide were sourced from http://en.wikipedia.org/wiki/Genocides_in_history.    

Table 1: Eight stages of genocide and their preventative measures

Stages of genocide	Characteristics	Preventative measures
1.) Classification	People are divided into "us and them".	"The main preventive measure at this early stage is to develop universalistic institutions that transcend... divisions."
2.) Symbolisation	"When combined with hatred, symbols may be forced upon unwilling members of pariah groups..."	"To combat symbolization, hate symbols can be legally forbidden as can hate speech".
3.) Dehumanisation	"One group denies the humanity of the other group. Members of it are equated with animals, vermin, insects, or diseases."	"Local and international leaders should condemn the use of hate speech and make it culturally unacceptable. Leaders who incite genocide should be banned from international travel and have their foreign finances frozen."
4.) Organisation	"Genocide is always organized... Special army units or militias are often trained and armed..."	"The U.N. should impose arms embargoes on governments and citizens of countries involved in genocidal massacres, and create commissions to investigate violations"
5.) Polarisation	"Hate groups broadcast polarizing propaganda..."	"Prevention may mean security protection for moderate leaders or assistance to human rights groups...Coups d’état by extremists should be opposed by international sanctions."
6.) Preparation	"Victims are identified and separated out because of their ethnic or religious identity..."	"At this stage, a Genocide Emergency must be declared. ..."
7.) Extermination	"It is 'extermination' to the killers because they do not believe their victims to be fully human".	"At this stage, only rapid and overwhelming armed intervention can stop genocide. Real safe areas or refugee escape corridors should be established with heavily armed international protection."
8.) Denial	"The perpetrators... deny that they committed any crimes..."	"The response to denial is punishment by an international tribunal or national courts"

Source: http://en.wikipedia.org/wiki/Genocide

Below I also briefly describe the reasons why there are no or little preventative measures. Table 2: Eight stages and preventative measures in South Africa

Stages: Yes=1; No=0	Preventative measures: Yes=0; No=1
1.) 1	1: BEE, land reform, Manyi and Malema
2.) 1	1: Even though hate speech is against the constitution the ANC seems to make excuses for songs like "Shoot the boer"
3.) 0	0
4.) 0	0
5.) 1	1: Malema and other racist cronies still walk free
6.) 0	0
7.) 0	0
8.) 0	0

In calculating the probability of genocide in South Africa I will leave out characteristics 7 and 8 since they already include the murder of people. I sum up the first column and the first six rows. This gives  a 6/12 probability of genocide occurring in South Africa. However, this is not necessarily supported by the data. This probability will be my prior subjective probability which will be weighed by the data. As mentioned before, I take the number of countries which had a genocide incident since 1951. I add China, Turkey and Ukraine to that list. In total, 26 countries had an incident where genocide occurred. The data then says that since 1951 the probability of genocide is 0.133.

The probability of genocide given a lack of preventative measures= P(Genocide/Lack of preventions)=P(lack of preventions/genocide)*P(genocide)/P(lack of intervention).

·         P(lack of preventions/genocide)=0.5 ; assuming that when genocide took place intervention failed

·         P(genocide)=0.133; % of countries who had an incidence of genocide since 1951

·         P(lack of intervention)=P(Lack of intervention/No Genocide)*P(no genocide)+ P(lack of preventions/genocide)* P(genocide)=0.5*(1-0.133)+0.5*0.133

The P(Lack of intervention/No Genocide) was assumed to be 0.5 taken from Table 2.

Using Bayes rule, this gives a probability of 0.098 or a 9.8% chance of genocide occurring in South Africa.

A few points to consider when analysing this probability: It is subject to my own opinion which is informed by limited resources. If I were to take all the countries listed on the wiki site I would have 50/196=0.255 of countries in the world with an incidence of genocide.If  I assumed further that there were no preventative measures when genocide eventually occurred (prob=1) and that P(Lack of intervention/No Genocide)=0.2, the probability of genocide in South Africa would be 0.63 or 63%.

It is also important to note that we live in a dynamic world where constitutional laws get amended and society pressures dissipate or increase given new feeds of information. Thus, to exactly pin down any probability would lead to  fallacy. The probability in itself could also change the path of the future. As an example the government would see this probability and act positively to stop such an event. Thus, this probability would decrease. For a true probability measure you would have to have access to a full set of information from the past but also the future and you should strip out the effects of government intervention with knowledge of the probability.

In fact, such a crude calculation of a probability should serve one purpose only (you should remember the theme of this blog now) to change people's attitudes for the better. Hatred does not solve the problems we face today. The problems we face today might be as a result of the past, but this result loses value the further we go back into time to explain the present. We need to come up with innovative solutions that fit the issues we face today. For South Africa it might mean a change of leadership (either presidential candidates or ruling parties), it might mean a change in social dialogue (nothing is really achieved by changing street and provincial names to names that very few people know of), if might mean scrapping regressive policies such as BEE which is fraught with fraud and corruption. It is time that elected leaders be held accountable for their deeds or rather their misdeeds.

Time is a truck

Time is like a truck. The truck moves from point A to point B in a straight line and you are being pushed by the truck to point B. There is no direction in which you can change the force or even the direction of the truck. The truck will in the end bring you to a complete standstill at point B. Time is the truck that pushes you from your birth to your death. There is no way to change the force of time. You are inevitably pushed to your death. The only difference between time and the truck is that with the truck you know where point B is, but with time you don't know when you will meet your end. Thinking about time in this way makes me more conscious about how I can never regain something of my past and how I will inevitably face my future. As each second passes my skin ages and with it my mind and with it my understanding of life. I do not have the future yet and have already lost the past. All I have is a bleating moment of the present before it flaps away. I am only real in as much as I live in that small space of real time. Every moment of everyday I have to make a forecast and hope that things work out as planned. I am reasonably good at making forecasts for the immediate future, but everything after that is subject to random events. God is completely outside time's realm and I am completely subject to a tiny present. I am almost not real, and God is absolutely real since there is no history or future, no memory nor change but only now. And since there is only now then God can only see how we make decisions. Thus, God does not make our decisions for us; we have complete free will over every action, God just sees how these events unfold.