Oil - always in a pickle

Watching oil prices change is very entertaining. Oil prices over the last few months have declined sharply. It almost looks odd when we look at the data. I for one cannot help wonder why oil prices decline so sharply over such a short period of time.

Another interesting aspect is that there are large standard deviations and the mass of the distribution seems to be around $100 (this is only from 2007 and is not the growth in oil prices). 

James Hamilton at Econbrowser argues that a fall in the demand for oil is partly to blame for the lower oil prices. The US Energy information agency also shows that US oil production has increased quite sharply.

Despite various assertions I am still a bit sceptical that oil prices would plummet that quick because a few countries have economic problems. For one, the world economy has not recovered to pre financial crises levels and two we have not discovered a major oil resource in the last three months where production has increased. Sure demand for oil might be weakening due to slower world economic growth - but the major consumers of oil (mainly the Western and Northern hemispheres) are in their winter months. This means that the demand for gas will surely increase. On top of that, US economic growth has improved quite a bit - suggesting that the demand for oil should increase.

I tried to get an update on oil consumption and production, but the latest available (and free) data that I could found was until October. The interesting months were November and December. Another interesting observation is the increased volatility in the NYMEX oil open interest contracts. Now it seems that even traders are trying to profit from these swings (when haven't they?).

Finally, one might be tempted to see a correlation between oil prices and the debt problems in Venezuela and the sanctions against Russia - something for the conspiracy theorists. A Bloomberg and a FT story discuss the debt agreement between Venezuela and the Dominican Republic (has to do with oil). The intermediary is Goldman Sachs (the same guys that once upon a time announced that there was a real likelihood that oil prices will hit $200 per barrel). Basically with the fall in oil prices the debt swap is done at a massive discount (not good for Venezuela). Furthermore, oil is one of Russia's biggest export commodities - the fall in oil prices will surely hit their economy hard. But of course all of this might be simple coincidence...

Sources:

http://blogs.ft.com/beyond-brics/2014/12/03/venezuelas-new-best-friend-goldman-sachs/

http://www.bloomberg.com/news/2014-12-04/venezuela-said-to-discuss-swapping-dominican-oil-debt-for-cash.html

http://econbrowser.com/archives/2014/12/supply-demand-and-the-price-of-oil

https://www.quandl.com/

One the convergence between the Christian equality and the material equality

Kierkegaard in Work of Love (2009 - Harperperenial; p. 82-83) writes that "it [Christianity] allows all distinctions to stand, but it teaches the equality of the eternal. It teaches that everyone shall lift himself above earthly distinctions. Notice carefully how equably it speaks. It does not say that it is the poor who shall lift themselves above earthly distinctions, while the mighty should perhaps come down from their elevation - ah, no, such talk is not equable, and the likeness which is obtained by the mighty climbing down and the poor climbing up is not Christian equality; this is worldly likeness. No, if one stands at the top, even if one is the king, he shall lift himself above the distinction of his high position, and the beggar shall lift himself above the distinction of his poverty. Christianity lets all the distinctions of earthly existence stand, but in the command of love, in loving one's neighbour, this equality of lifting oneself above the distinctions of earthly existence is implicit."

There are many such treasure passages in Works of love. This passage, and a large majority of the book, emphasises love for one's neighbour. In loving one's neighbour you throw away any distinction of class and truly unconditionally care for everyone. One's object of love is not one's choosing (e.g. one's spouse or friends), but it is the obedience to God's command that one shall love one's neighbour. Kierkegaard is clear to point out that our neighbour is everyone.

What does this mean from an economics perspective? While politicians and policy makers might greatly care for people, I wonder whether this care is synonymous to loving one's neighbour. In economics we focus on elevating (at least trying to do so) one group of people (the marginalised, the poor and the needy) and lowering the status of another group (usually the wealthy). This is often the aim of progressive taxation and is definitely at the heart of heavy capitalism vs. communism discussions.

In an ideal world, where people truly loved one's neighbour, all types of economic class distinction would disappear. One can imagine that love would spur the other to do everything in his/her power to ease the suffering of a neighbour. Love, unconditional love, would expect nothing in return and would gladly sacrifice. The wealthy person who lifts himself above his "high" position would not care for that position - he is above that and hence would care little for his wealth.

In this sense there is no convergence between the Christian ideal of equality and the material ideal of equality. The former speaks of everyone lifting themselves above their station in life to equality, while the latter attempts to bring a balance by lowering the status of some and simultaneously raising the status of others. The economic equality needs a definition of distinction while the Christian equality makes no distinction. Furthermore, the economic equality requires a benevolent dictator (or a decent government) to do the job, while the Christian equality requires the individual raise himself. The ideal of economic equality requires constant intervention, while that of Christian equality is once-off. Economic equality requires a select group to achieve equality, while everyone is responsible for the other in Christianity.

The fact that so many people are still starving today, that inequality is growing, that individuals amass more than they need while brothers and sisters have nothing, point to our failure in keeping up with this command. Of course there are a handful of people that have sacrificed everything in keeping this command.

It brings some comfort in the midst of failing policies and selfish individuals that God does not distinguish between income, race and gender. That everyone is invited to participate in something that elevates them above the misery in this world - if they so choose it. It should be the ideal of all people to do away with distinctions. Once we are able to do that then individuals will take responsibility for the lives of others and stop waiting for governments, or those that already work hard in making a difference, to achieve said goals.

Solace in hierarchies...

I found a passage in the Žižek and Gunjević book, God in pain, quite interesting. (I am not putting forth any solutions - it is just a curious passage that I wanted to share).The passage looks at hierarchal structures in society and specifically how to eliminate the "pain" associated with falling in an inferior class structure. I almost paraphrase the entire section (taken from p.66) - most of this is quoted from Jean-Pierre Dupuy in Petite métaphysique des tsunamis.

There are four procedures of hierarchy, whose function is to make the relationship of superiority non-humiliating to subordinates:

1.          Hierarchy itself: Experiencing one's lower status as independent of one's inherent value.

2.       Demystification: The relationship between superiority and inferiority is not based on meritocracy, but are the result of ideological and social struggles. I.e. One's status depends on social processes and not on merits. This helps us to avoid painful conclusions that the other's superiority is a result of merit and achievement.

3.       Contingency: One's position on a social scale depends on a natural and social lottery. I.e. lucky are the ones who were born with better dispositions and into rich families.

4.  Complexity: Superiority or inferiority depends on complex social processes independent of individuals' intentions or merits. E.g. despite me being smarter and working harder, my neighbour's success outweighs mine.

The pillars do not threaten hierarchy, but is supposed to make it palatable. Dupuy  -"what triggers the turmoil of envy is the idea that the other deserves his good luck and not the opposite idea which is the only one that can be openly expressed".

Dupuy further states that it is a mistake to think that a society that thinks it is just and proclaims that it is just will be free of resentment. And in these societies it is the people who occupy inferior positions that will burst out in violent resentment.

Žižek quotes Rousseau's example of perverted self-love: One cares more for the destruction of one's enemies (they serve as an obstacle to one's happiness) as opposed to one's own happiness.

What does this have to do with South Africa?

South Africa proclaims that it is a democracy. It claims that it is just and free. Yet, there seems to be social turmoil every day. There are clear class distinctions and those that fall in the inferior classes are supremely unhappy about it. High income inequality, affirmative action (i.e. exclusive rights for some and isolation for others) and corruption are just a few examples of how unjust the country really is. The consequence is violent uprisings undermining every economic and social activity (strikes, destruction of property, crime are a few examples). South Africans, and many others in the world, then surely make a great mistake (in context of Dupuy) in thinking that South Africa is just and proclaiming it is just.

The ideal of demolishing hierarchy stands in opposition to the idea of making hierarchy palatable. Are we really able to demolish hierarchy? In effect this would imply some form of communism. History is definitely not kind to the examples of communism we have seen - numerous people have lost their lives for this ideal and almost always the ideals were perverted by the leaders who exploited the general population. Is the alternative better? Is it better to accept that things are simply unfair and unequal? That no matter what skills or abilities a person has, that person is subject to factors outside his control, or in the very least try to make something from nothing in what we call capitalist societies (there is no promise that hard work and ability will be rewarded). Unfortunately accepting ones circumstances does nothing to help starving people, and a system that proclaims equality cannot truly promise equality and food portions of the same size for everyone. 

These are deep philosophical questions that touch all of us.

While the South African government has done a great deal to improve the lives of the poor since 1994, it never, or hardly, acknowledges its shortcomings (the opposition parties and newspapers do a reasonable job at highlighting inefficiencies). (We also don't know whether future governments will do any better). Perhaps this is what Dupuy wants - societies should acknowledge its mistakes and maybe people will find solace in that - it is sometimes the government and its policies that constrains me and not my merit or ability and on the other spectrum that this same government that constrains me helps another who might be more in need (not always Pareto optimal, and not always welfare enhancing) It does not make it fair, but it surely helps ease the psychological pain of being unfairly treated.

Is there anything new about South Africa's latest crime stats?

In September 2014 the South African Police Service released its latest crime statistics. In this post we will see whether crime rates have dropped and what provinces remain high crime zones.

I believe that crime breaks communities and unity if left unopposed. The recent South African crime statistics do not deliver any good news. Before looking at some of the numbers, we might try and understand what factors lead to crime. It is also important to distinguish between the types of crimes committed. South Africa seems to be plagued by violent crimes.

Here is what the literature says about the determinants of crime (some might seem intuitive):

·         Poverty causes crime, but also, crime can cause poverty (Anderson, xxx). For South Africa the impact of poverty is not that large, but still statistically significant. Anderson (xxx) finds that a R1000 increase in monthly expenditure increases the probability of a robbery by about 7%,

·         Robberies are higher in wealthier areas. For South Africa this can be up to 25% higher in wealthy areas compared to their not so wealthy neighbours (Demombynes and Ozler, 2005).

·         Crimes in South Africa could be a lot higher than reported (Newham, 2002). I don't think it is too much of a stretch to assume that a large number of crimes go unreported. Police corruption, misplacement of documents or the fear of a victim might explain some of this under-reporting.

·         In some cases it is believed that unemployment causes crime.

·         Cultural deviance or cultural conflict can also explain crime (Eide, 1999).

·         The probability of being caught and the type of punishment are also determinants of crime. Criminals weigh the costs and benefits of committing a crime and then act on those calculations. This assumes that many criminals behave rationally and that crime is not always sporadic but often well planned. Other factors that criminals might take account of in committing a crime include tastes (perhaps the criminals are bloodthirsty, perhaps they have an affinity for stealing only small items such as jewels), ability (this includes intellectual and physical) and punishment (the severity of punishment if caught) (see Eide, 1994).

·         The Law commission in 1997 and 1998 tracked over 15,000 and found that only 6% of serious violent crime tracked followed a conviction over this period.

·         Age is an important variable. In a country like South Africa where a large proportion of the youth are unemployed and uneducated one ought to expect high crime rates.

·         Blackmore (2003) show that a higher income per capita, drug related use, urbanisation and the unemployment rate are all important factors that determine crime in South Africa. I am not necessarily a fan of using per capita income as this could be correlated simply with inequality increases.

Some stats

To make the comparison easy across provinces I indexed the various crimes so that crime per 100000 people in 2005 equals 100. This allows us to compare crime rates in 2014 relative to 2005. Obviously we would want all related crime to be below 100 - i.e. this represents a drop in crime.

As an example the map plot illustrates sexual offences in three periods. In 2005 all the provinces have the same colour (remember that we indexed 2005=100). We can then compare 2009 and 2014 (these are fiscal years, i.e. 2014=2013/14). If a province has a darker colour then it implies that it has less crime compared to the other provinces. It is also important to read the colours from the scale provided. For sexual offences the Western Cape had the lowest crime rate while the Eastern Cape and Limpopo had the highest in 2014

When we look at murder rates we see that Gauteng, Mpumalanga and KZN improved the most. 

The Northern Cape improved the most in terms of reducing aggravated robbery in 2014.

Finally I wonder whether overall crime has dropped significantly. The figures show marginal improvements for some provinces, but also a worsening of crime in other provinces. The national figure hardly shows any improvement.

It would be interesting to do a counter-factual analysis of what crime would have been without the security precautions that some households have (armed response, dogs, electric fencing, etc.) vs. a counter-factual of what crime would have been like when holding police service employment constant at 2005 levels. This would also help us make more informed decisions whether employing more police officials and raising their salaries would make a dent in crime.

Finally, do you feel safer? This mental conflict causes psychological problems and an irrational fear. This is one of the sad side-effects of a country with high crime rates. 

UPDATE 24 October 2014:
I recently saw that StatsSA publishes a survey on crime perceptions. This survey shows that there is indeed under-reporting. People also do not feel safe (no surprises there). Thought this was interesting though. 

References

Anderson, M.D. (). The effect of poverty on crime in South Africa: A GMM and IV approach.

Blackmore, F.L.E. (2003). A panel data analysis of crime in South Africa. South African Journal of Economic Management Science, 6(2003): 439-458.

Demombynes, G and Ozler, B. (2005). Crime and local inequality in South Africa. Journal of development economics, 76: 265-92.

Eide, E. (1994). Economics of crime. Stavanger, Rogaland Mediesenter, 158 p.

Eide, E. (1999). Economics of criminal behaviour.

Newham, G. (2002). Tackling police corruption in South Africa. Centre for the study of violence and reconciliation.

South African Law Commission, Conviction rates and other outcomes of crimes reported in eight South African police areas. Research Paper 18, Project 82 (sentencing)

Just how bad is a country's debt for growth

Yes I know that I have a previous entry on the effects of public debt on economic growth. That, however, only focused on South Africa.

Once again public finances bother me. I can't quite wrap my head around why some countries are able to sustain such large amounts of debt and not be in any danger (according to rating agencies) of default while other countries with comparably smaller debt are at risk of defaulting. The common marcro reasons cited for this are long-term growth rates, low interest on bonds, little debt denominated in foreign currency, the maturity of debt and stable and low inflation. Political factors are also important. These include weeding out corruption, have proper expenditure plans in place and don't have domestic strife (investors seem to hate this).

I wish I had time to do a counter-factual and determine how better or worse a country would have been without increasing its sovereign debt. For now we will have to settle with a (hopefully) interesting figure just to get us interested. The scatterplot illustrates the relationship between debt and economic growth for advanced and emerging economies (five year averages from the IMF). A striking feature of the figure is that there is a negative relationship between economic growth and low debt. There is a positive relationship between debt and economic growth for advanced economies between 25%-50% of debt to GDP. Higher values of debt/GDP >50% seems to have a negative effect on economic growth. For EM countries the positive relationship between debt and GDP occur between 35%-100% of debt/GDP. This is indeed a very big range.

What this figure tells us is that aggregating numbers like this tells us very little about the real effects of debt. To really understand the consequences of accumulating debt one has to look at a lot of micro factors (the reasons for accumulating debt, the maturity of debt, etc.). This would be difficult to accomplish since many countries hardly report these variables necessary to do any useful analysis. There is also no reason to believe that debt thresholds are static. The evolution of fiscal policy and the macroeconomic landscape change frequently. We should expect that these thresholds would also change.

Should South Africa tax the rich more?

It is an interesting question. One that is no doubt supported by many people. In my view there is some scope in raising taxes for top income earners, but I think the same also holds for middle to lower income earners. If the objective is raise taxes to finance the deficit gap then raising the top income tax rate might not do much. Let us look at some of the data to understand why.

For the analysis I use SARS revenue collection data obtained from the National Treasury website. They break taxable income and assessed taxes by 24 income categories. The data is slightly dated - the most updated is in 2012. Some basic summary statistics of the data show that:

• Tax as a percent of taxable income is about 20.2% - implying that this is the average tax rate
• There were 14 million (m) taxpayers
• Only 5.8m were liable to pay income tax
• There are about 52m South Africans (See StatsSA 2011 census)
• Of the 52m, roughly 34m are of working age (although it is from ages 15-65)
• This means that about 17% of the working age population contribute to income tax

Given the high unemployment rate it is no surprise that only a small percentage of people contribute to income tax. We can calculate the effective tax rate of the income groups (this is plotted below). It is clear that there are two tax slopes: R60,000 - R150,000 and one from R150,001-R5 million and above.  This does not correspond to the hump-shaped statutory tax rate schedule. This is interesting for two reasons: i.) that some people earn additional income other than salaries and wages such as dividends and interest that cements these linear slopes, or ii.) it could mean that there is the possibility to introduce additional tax thresholds (this often over-complicates the tax system).

We want to compare these rates to the proportion of total revenue collected by income group and analyse how this stacks up to the proportion of tax payers. We see that the majority of income is collected from people who earn R150,000 and above. This corresponds to the number of tax payers in that income category (the number of tax payers above R1.2 million decreases significantly). About 86% of total revenue collected comes from the wealthy 30% of people - meaning that 70% of people only contribute about 14% of income tax revenue collected.

Just to see how unequal the tax distribution is we calculate the Gini coefficient. A measure of 1 means absolute inequality and a measure of 0 implies absolute equality. We compare taxable income with tax assessed (see Figure below). There is a more unequal distribution of collecting taxes compared to taxable income with a Gini of 0.652 vs. 0.558. A heavier weight from on the 50th to 70th percentile vs. what they actually earn. This does not imply that these people pay more than what they should (how much each should pay is a philosophical and economic question left for a later blog entry). It means that there is a decent sized middle-class that pays taxes.

But just how much additional tax can the government collect from simply raising tax rates? It is very difficult to get a decent estimate. If there are no adverse behavioural responses to an increase in tax rates then the calculation is simply mechanical, i.e. take the lump sum amount add the amount of revenue above the threshold times the rate. Unfortunately there are many behavioural effects of taxes. People may not work as hard as they used to (despite the same working hours), lower income households might stop working altogether if they are able to receive better benefits from being unemployed. 

In the next post we will look at some of these effects and try to arrive at preliminary conclusions.

For now it suffices to know that the tax burden is disproportionately higher than on a small number of individuals. We know that tax inequality is slightly higher than income inequality (the middle class pay a slightly higher share of taxes compared to their incomes relative to the rest of the income distribution from the SARS sample data). 

What is that - we are giving more money to Eskom?

The South African government's policy on Eskom is interesting. Definitely not in a good way.

Eskom has received about R60bn in loans from government not too long ago. Now government is giving Eskom another rescue package. And, what has Eskom achieved? It seems like very little but empty promises. The delivery of power stations have been delayed. New project costs are well above estimates. Makes me wonder what project finance plans these guys have in place and why no one is being held accountable for crippling the South African economy. It is definitely not fine that more people are out of jobs because of bad economic planning. It is a crime, and it seems like a perfect one since no one is held responsible.

There are two very funny parts about the Eskom saga: People pay taxes to bail out Eskom. They don't get free electricity for this. On top of that, they have to pay Eskom's tariffs. And then on top of that, they have to pay municipal taxes that add a markup on Eskom's tariffs. These markups differ from municipality to municipality. It seemed like the Treasury was swayed by a possible downgrade. The ironic part about a bailout is that it will put more pressure on the government's finances and could lead to a possible sovereign downgrade.

What does all of this mean? While I don't think that South Africa's debt is such a big problem in comparison with many other countries, it seems like rating agencies disagree (they have been wrong in the past...hint: financial crisis and mortgage backed bonds). It means that there will be an increase in government's effort to consolidate its deficit and reduce its debt. If not, brace yourselves for a downgrade. These are the consolidation options government has:

1. Decreasing government spending. What will they decrease? It will be stupid to cut back on infrastructure spending since this is the only component of SA's government spending that is productive (i.e. there is some future benefit that can be discounted). They will struggle to decrease the wage bill - employment is largely supported by government. They will struggle to cut real wages since they will face formidable opposition from unions. Health? No. Education? No. So it seems like government will not really cut back on spending.
2. Raising taxes. I do not think it is the right environment to raise corporate income tax. The economy is still too weak, and businesses will not stomach this (and yet we have corporate profits doing just fine...?). There are also some papers that argue that an increase in corporate income tax only temporarily decreases growth. But we can't really afford a reduction in GDP at the moment. Perhaps there is room to raise taxes for the upper income households. Of course they won't like this since they already contribute the majority of SA's PIT collection. And the additional revenue collection from raising the upper threshold tax rate will be too little. Perhaps government will finance the Eskom bill and the wonderful wage bill by increasing VAT? To be honest, I think this is the most real response to their problem. It is, however, political suicide. But that should not dissuade the ANC too much now - they have recently won the general election.
3. A miraculous increase in economic activity that does not rely on electricity. Electricity constraints has played it share in a slumpy growth environment. So where will this miraculous growth come from? 
4. Inflation. Nope...SA will not be able to inflate away its debt problems. The inflation increases will definitely be outweighed by interest rate increases. South Africa is an inflation targeting country after all.

Unfortunately, it seems that the government is left with no choice but to bail out Eskom. But this time at least fire people who are not doing their jobs. Make sure Eskom employees do not get crazy salaries. And dammit, make sure that pay raises are linked to productivity growth and not some stinking measure! Make sure there are proper loan conditions. And open the debate for competition. The days are gone when South African electricity is cheap. A single supplier of electricity has market power - and market power in the hands of evil men mean high prices. And yes they can charge super high prices since most of us need electricity (the price elasticity of demand is very inelastic).