Friday, April 20, 2012

Impoverishing Corruptors, Why Not?

The idea of impoverishing corruptors is not a new one. In fact our Anti-Corruption Law allows the state to confiscate the assets of convicted corruptors and requires them to prove that their assets are not the product of corruption in order to get them back. But this idea has been generally accepted with mixed feelings. 

Some people believe that seizing the assets of corrupt individuals that were not actually acquired through corruption is a violation of human rights, especially when the state takes those assets for good. For them, the state should only take assets of corruption. I think this is a ridiculous idea, and I will tell you why. 

Sanctions are sanctions. Why do we have sanctions? Because we want to impose costs on the criminals, we want to let them fully understand the notion that crime does not pay. Because if crime pays, people will have more incentive to commit crimes.

To achieve that, we must ensure that whatever benefits criminals receive, the state will take it back, and impose additional costs on them, making clear that the costs of criminal activities will always outweigh the benefits.

Furthermore, the lower the probability of getting caught, the higher the sanctions should be. Why? This is to compensate for the fact that some people might not get caught and therefore will suffer no costs for their crimes. Of course, we need to take into account this probability and let people know that if they get caught they will receive a higher punishment. 

Having said that, I will argue that a prison sentence is not a cost-efficient type of sanction. The benefits of sending criminals to prison are highly questionable. The costs are very clear. First, taxpayer money is being used to pay for these criminal lives in the prisons. Second, there is no guarantee that prisons will change them into better people (at least in the current conditions in Indonesia). Third, there is always a possibility that richer inmates can bribe prison guards for their own benefit, simply because being a prison guard is not a well-paid job.

People should also understand that sending people to prison is actually a violation of human rights; you restrict the freedom of the criminals. Now if you can agree with prison sanctions, how could you say that taking the assets of criminals is against human rights? That does not make any sense.

I think this is the right time to think carefully about what type of sanctions we should develop in Indonesia and how we can utilize each type of sanction to deal with various types of crimes. Using prison and fines as the main sanctions is no longer enough. After all, all crimes have their own characteristics and underlying incentives.

The incentives that lead people to corruption might be entirely different from the incentives that lead people to, say, murder or rape. Understanding the incentives of these different crimes will help us in designing effective and efficient sanctions.

So let us return to the case of impoverishing corruptors. Money and other types of valuable assets are the bloodline of corruptions. Based on a simple economic analysis, we can say that people engage in corruption because they perceive that the benefits of doing so will be higher than the costs.

Suppose the value of your corruption assets is $20 million. Assuming that the costs of the sanctions multiplied by the probability of being caught is still lower than $20 million, economic analysis dictates that rational bad men will engage in corruption. This means that even getting back the whole $20 million would not be enough!

In addition, the people who argue against impoverishing corruptors say that the state should just recover the stolen assets. Again, this is clearly not enough. For each batch of stolen assets there are various opportunity costs for the government where the government could have invested those assets to generate more revenue. There are also costs for recovering those stolen assets. The law  enforcement system is not free.

Thus, it makes sense that the state should not only recover the stolen assets, but also the expected profits and interest that it would have received if those assets could have been used by the government in the first place, plus the whole cost of the criminal proceedings. Meaning that if a corruptor takes $20 million, he must be required to repay a lot more than that.

I do not see any good reason why we should not impoverish corruptors. Sending them to prison without taking their assets would only add a burden to the state budget, and is not efficient or maximizing welfare. It’s time to think like economists when dealing with pricey legal issues.

Read more...

Thursday, April 19, 2012

Why The Constitutional Court is Wrong on the Cigarette Case

The latest Constitutional Court decision on the Health Law is very surprising. It holds that public places must provide special places to smoke on the basis that people have the human right to smoke. I find this idea as simply preposterous and I am deeply confused on how come the Constitutional Court could make such decision. There are two main issues regarding the decision. First, whether smoking can be considered as a part of human right that is guaranteed by the constitution. Second, whether private parties can be forced by the state to provide facilities for smokers.

Let us begin with the first issue. Smoking is bad for health. No doubt about that. Many countries have already banned the sale of cigarette or heavily taxed the sale, giving less incentives to people to smoke. Even further, many countries have also banned smoking in closed public areas. If you want to smoke, you do it outside, be it in a hot summer or a freezing winter. Even in the United States I can confirm that it is very rare to see people smoke, even in opened areas.

Having said that, it is puzzling that the Constitutional Court can say that smoking should be considered as an inherent part of human rights. Since when? I do see the right to live, but the right to kill yourself slowly? Well that's a new thing. Constitutional Court can of course interpret the constitution, but it does not mean that they can develop a new right out of nowhere. Every junior law students would understand that the basic texts of the laws should be respected as they are unless there is a very strong reason to deviate from using such texts.

The Constitutional Court further argues that because the law has not deemed smoking as an illegal activity, it means that smoking is a right. This is completely wrong and illogical. Saying that an act is not prohibited does not automatically mean that such act becomes an inherent right of human being. If the law says that a dangerous activity is temporarily permitted, it does not mean that the law say that people have the absolute right to do such activity all the time. Instead, it should be considered as a special case, an exemption.

People know that cigarette industry contributes a lot of incomes to the state. However it is not clear whether the benefits of having the industry outweigh the costs imposed to the citizens health and the opportunity costs in case the money used to buy cigarettes can be directed to other useful means. That will not be the focus of this article, but I can say that it can shed some lights on why smoking is still permitted in Indonesia. There are too many stakeholders involved.

Furthermore, if we can develop a right to hurt ourselves, I do not see why the law should prohibit people to use drugs or to perform euthanasia? As long as they agree to do so, why punish them. In case of euthanasia, why the criminal code punishes people who assist someone in their suicide attempt? Saying that the right does not exist because the laws deem these acts as illegal will not make any sense. If the Constitution says that the right to die or to hurt yourself exists, the Constitutional Court should declare that the above laws illegal for contravening the constitution. As simple as that. I wonder though whether the Constitutional Court will be brave enough to do that.

Now some people argue that actually smoking is not dangerous to our health, that it is a part of a bigger conspiracy, and therefore the argument that approving smoking is the same with approving the right to hurt yourself should be rejected. Again, I don't see any good reason why there should be a conspiracy for banning cigarettes. Basic economic analysis can show the flaws of this conspiracy theorist.

In a capitalistic world, profit is the most important thing. People can even produce hazardous materials for the sake of profits, as long as they compensate the victims for hurting them (due to the hazardous materials). In law and economic terms, we call this as the liability rule. If that's the case, why many developed states should bother with the cigarette industry? As long as they can compensate the victims, who cares. Furthermore, as long as they can pay a huge amount of money to the state in the form of excise tax, why restrict them from selling the cigarettes?

The answer is quite simple. From economic points of view, these states deem that the costs of having the cigarettes industry in their countries outweigh the benefits. Cigarette companies are not stupid, they have a very strong lobbying power, and yet, as an interest group, they fail to induce the developed countries to maintain their existence. This means that the costs of having them in such countries are so high that even the benefits that they provide cannot justify their existence. Each countries might have different views on this issue, but you can see the point.

Now, let us move to the second point. Can the state forces private parties to provide special places to smokers? I am a defender of people's freedom and I will clearly say this: the state should only be permitted to force private parties and its citizens to provide something for other people in special cases where the benefits are clear and outweigh the costs, and the provisions of such facilities are highly important for the sake of the people. None of these points are satisfied by the recent decision of the Constitutional Court.

And I find this fact as deeply problematic. How could we let the state force us to provide something without clear benefits? It's already perverse enough that we must acknowledge the right to smoke as a basic human right, and now the Constitutional Court says that we should also provide the facilities for the smokers? I mean, like really?

Some people say that since the majority of Indonesian people are smokers, it is fine if the state should provide facilities for them and that other non smokers should respect that. Well if you agree that the majority opinion should dictate anything in this country no matter what, you should not protest if we see cases where people using their status as a majority to oppress the minorities (like in the case of minor religious sects or LGBT groups). Hey, we're the majorities anyway, it's your task to respect us, and we should be free to do what we want since we are the majorities. You do realize that adhering to such principle would be a disaster.

Every aspiring law students realize that absolute power tends to corrupt absolutely. That is why we need a check and balance mechanism. People are not angels, and if we always let the majority to decide anything without proper counter measures, that would be a perfect recipe for oppression. In short, the latest Constitutional Court decision is regrettable. Making a wrong policy is one thing, after all not all judges are equipped with such skills. But making a wrong legal interpretation that every first year law student should know? That is absolutely unacceptable. Well, the fight is still going on. Let us see how the central and regional governments will deal with such issues.

Read more...

Friday, April 13, 2012

The Law and Economics of Family Management

I wonder how many people are aware of this, but our Legislative Board (DPR) is currently in the process of drafting a law on gender equality. I take this news as a positive, development and I hope that the law can be soon promulgated.

What concerns me are the various critiques made against such laws based on the notion that women’s and men’s rights and obligations are not the same, especially in the family. Thus, these critics urge that the state should instead maintain a division of tasks between men and women in a family, which of course has been stipulated under the marriage law.

This is indeed a pity since there are two major misconceptions relating to the above notion. First, people may believe what they want to believe, but it’s outrageous to ask the state to regulate how people should manage their family matters.

While Islam provides certain guidelines on how husbands and wives should interact and how they should manage their family, from a legal perspective, Islamic law does not provide any penal sanctions to a couple who chooses to use a different method of family management.

This is in line with my thesis that Islamic law is efficient (research that I currently pursue). That is, while Islamic law provides moral guidance, it will only provide penal sanctions when there are clear net social losses caused by an act.

A good example is this: There is a penal sanction for being drunk, but there is no sanction for eating pork, even though both are prohibited under Islamic law. Being drunk can produce a net loss to the society — even the United States acknowledges their drinking problem.

But eating pork? While some might argue that the prohibition is related to health problems, in general, it’s a personal choice to either eat it or not. In short, it is your own responsibility to assess the costs and benefits of eating pork, including its effect on your own health. But that’s it,  there are no clear social losses caused by eating pork.

I think the same view is also adapted by the current marriage law. While the law still tries to make a division of labor in the family, there is no sanction for those who do not comply with such a rule, meaning that people are generally free to choose what they want to do with their family management.

This brings us to the second argument. From an economics perspective, it would be more efficient for a couple to decide by themselves on how they will manage family matters, simply because they know best about their own affairs. You can’t expect the state to be an all-knowing entity that can determine what is best for a person.

I am not against women being housewives, but I am also not against women having a career outside the house. What really matters to me is that whatever the choice is, it should be made consensually between the husband and the wife. And to achieve such purpose, of course, they should have equal position.

Imagine this, suppose you think that you want to become an engineer, and you are currently pursuing an engineering education. Suddenly, the government tells you that after further deliberation, they’ve determined that you are not suited to become an engineer, and that you should be a singer instead. Even worse, the government forces you to be a singer. Would you agree to be treated like that?

I will say this: If the government has the capacity of God, is able to know everything up to the sub-atomic level and can predict the future with 100 percent certainty, I will support the idea that the government should determine what we should become — it should select only the best of the best, and those untalented people should just work as blue-collar laborers.

Fortunately, the government does not have such capacity, and even we know that God does not force a person to follow certain paths simply because God respects human individuality. Various Islamic sources confirm this, such as the case of Noah’s son who refused to hear his father’s plea, and died during the great flood.

Even a prophet cannot bring his own son to follow him. How come? Because each man is responsible for his own deeds, and God lets people decide how they will assess the costs and benefits of their own actions. That’s further evidence of the notions of efficiency in Islamic law. So let the family decide by themselves. Remember, you can preach, but you can’t force. It’s as simple as that.

Read more...

Thursday, April 12, 2012

The Age of Information Overload?

A recent article in Gizmodo attracted my attention. The author told us that he lost his faith in humanity upon finding the fact that some kids actually thought that Titanic is only a fictional story. While I understand that the author was exaggerating his point. It still raises a fundamental question. Is this the age of information overload? Is this a good thing or a bad thing?

The above story reminds me of a scene in Slumdog Millionaire where Jamal, the main character, was interrogated by the police officer on how he could answer the various difficult questions in Who Wants to be Millionaire Quiz when he does not even have a clue on who Gandhi was. And Jamal's answer was sensational, "I might not know who Gandhi was, but do you know the bicycle thief on the road in front of this police office?". In short, Jamal explains to us precisely that each person simply has his or her own niche in terms of general knowledge.

And I guess in this age, having such niche is very important. You can't judge the knowledge of a common person only by the level of his general knowledge on certain events. Yes, it seems foolish that the kids do not know about Titanic. But consider this. Suppose you, a city dweller, go to a village where the farmers know how to produce milk and crops. You watch them do their work and then you are amazed when you finally understand for the first time how your milk and rice are produced.

Now these farmers would probably think that you are an idiot based on their standards of knowledge. From the farmers' perspective they will say something like this: "come on, how come a man does not know how to take milk from a cow? It's common knowledge anyway". Though I doubt that they will lose their faith on humanity simply because you don't know how to get milk from the cows.

An Economist, Thomas Sowell, once said that the best sign of modern development is the fact that modern people need less knowledge in order to maintain a good quality of life. In the past, in order to survive the world, a man must have different set of skills, he must understand the nature, how animals behave, how to produce crops, how to cook meat, how to build houses, etc. How about now? I bet that most of us don't know a damn thing about how to survive in the wilderness or how to produce our own foods and clothes from scratch.

We simply depend on other people with better comparative advantages to produce those things for us and we do what we think are best for us in accordance with our own skills. And this is in line with economics rationality. Why bother spending our resources on something that can be better done by other people? Unless the benefits of doing so exceed the costs, we would most probably choose to do something else.

And the law also works under the same logic. When we are trying to impose certain liabilities to certain people for negligence, judges are required to adopt a standard that is common to such people under their respective categorization. You can't impose a professional's standard to an ordinary guy in doing their job. Everyone should be judged based on his reasonable skills. Only then we can produce an efficient result.

Even when we are talking about the standards of knowledge for professionals, we cannot expect them to know everything. As an example, I am quite confident with my knowledge on securities laws, corporate laws, and Islamic laws, but I am not an expert on say, intellectual property and real estate laws. And it would be foolish if I push my luck on those fields by giving formal advice to my clients without proper preparation. In fact, based on comparative advantages, it would be better if I just assign those intellectual property cases to other lawyers who are more knowledgeable than me (which is also encouraged under lawyers code of ethics).

If we want to be concerned with our generation, I say it's not about the amount of knowledge that a normal person should have, rather we should put more effort on understanding and improving how people think. This is an age where knowing a lot of things is good, but knowing how to effectively find the sources of knowledge is better. What is really important is how people will utilize such knowledge in order to maximize the welfare of the society and produce efficient results.

Thus, teaching people how to think should be the priority. How to analyze things, how to have a healthy skepticism on various issues and beliefs, how to induce people to think creatively and to focus on solution-oriented thoughts. These are the things that will redefine our society for many years to come. It would be useless if we have a lot of people who know a lot of things but don't even have a single clue on how to utilize such knowledge.

So, forget about the Titanic issue. Whether it is based on true story or not might not be highly relevant anymore in the future. Instead, we should teach those kids to understand that people should do their best in reducing the level of human error in the transportation business in order to avoid a case like Titanic and how we can formulate a good policy to reduce such type of accident. One thing for sure, I still have a lot of faith in humanity.

Read more...

Thursday, April 05, 2012

Is Legally Prohibiting People From Buying Subsidized Fuel a Good Idea?

Although the House of Representatives on Friday rejected a plan to raise the price of premium subsidized fuel, the government can still raise the price in the near future. This may delay another debate on whether we should cut the fuel subsidy. Unfortunately, the current global price has continuously risen, and the price of non-subsidized fuel has significantly increased.

Considering the price discrepancy between the two types of fuel, and assuming that the difference in their quality cannot be easily distinguished, it does not take an economist to conclude that people will likely (if not certainly) purchase the cheaper option. Surely, no rational person would believe that asking people to be ethical by not purchasing the subsidized fuel would work without any legal sanctions.

The question then is this: Would sanctioning those who buy subsidized fuel and can afford the non-subsidized option be a good idea? I believe it would not be wise at all.

First, the consumers of subsidized fuel come primarily from the middle-class. These are people who will have difficulty adjusting their lifestyle with the rising fuel price. Those in the upper class don’t have any problem paying for fuel, and might not consume the subsidized product in the first place.

But penalizing people for buying subsidized fuel might be dangerous — there would be too many targets to cite, and the costs of legal enforcement would be excessive. If people are cheating the rule and buying subsidized fuel, how many legal enforcers should be created, deployed and paid to combat them?

Furthermore, a penalization system might increase social unrest, especially if the government ends up punishing people for something they feel they naturally need. That could potentially be another huge cost to society.

Also, if we impose penalties on those who buy subsidized fuel, why bother maintaining the low price? Imagine the inefficiency of such a system. We spend money maintaining the subsidy, and then we spend more money enforcing the law in order to ensure that only needy people buy cheap fuel. It doesn’t make any sense at all. These are double expenses with unknown benefits.

Another way to induce people to buy non-subsidized fuel is to require insurance companies to cancel or reduce protection for cars that use subsidized fuel. But the problem with this solution is that we need to make sure insurance companies will cooperate, therefore spending additional money to supervise the insurance companies — again spending more money trying to save money.

In addition, if the price discrepancies keep increasing, the above measure will be less effective since people will likely treat the costs of losing insurance as a future probabilistic matter, while the high fuel price is the current problem they face. In short, they will have more incentives to choose facing future risks rather than facing the problem now.

Let us make this difficult situation as easy as possible. The main problem with having different prices of fuel at the same location is that it is almost impossible for us to ensure that only the right targets will benefit from the subsidy. You can not fight human nature to pay as little as possible for goods. And I’m quite certain that politicians, who by their very nature must pander public opinion, would never agree to penalize consumers (who are also voters) from buying subsidized fuel. Increasing the price is one thing, but criminalizing people would be an unacceptable threat to future votes.

This problem would never occur if the government did not create an excessive market distortion in fuel supply. After all, it would be easier for the people to adjust to the change when those changes are gradual. Shock therapy rarely produces a good result, and often comes with huge sacrifices.

I think this is the right time to be realistic. Unless the government can find a quick way to make a lot of money, maintaining the subsidy is a bad idea ­— but criminalizing use would be a recipe for disaster.

Read more...

Sunday, April 01, 2012

The Baptists, The Bootleggers, and the Fuel Subsidy

There is a very interesting case study in Public Choice literature. Once in the United States there was a law called Sunday Blue Laws which basically prohibited the sale of alcohol in Sunday. One of the supporting groups for this law, we call them as Baptists, was a group consisting of people who wanted to prohibit such sale of alcohol based on moral and religious values. The other group, we call them as Bootleggers, was the seller of illegal alcohols. They also supported such law but not based on altruistic or moral values, rather it was because such restriction increased their profits. The stricter the restriction is, the less the supply for the alcohol, the bigger the price that they can charge for their illegal products.

It goes without saying that these two groups are ideological opponents, but with respect to political matters, they were in the same side and their cooperation as interest groups allow them to provide the necessary voting power in the legislative to support the promulgation of the Sunday Blue Laws, effectively prohibited the sale of alcohol even though both groups have completely different reasons to support such laws. Public Choice theorists also use the same analytical structure when they review a very famous case in the United States, i.e. the Lochner case which dealt with whether New York may legislate the maximum working hours for workers in bakery shops.

New York argued that the law was passed to protect the health of the workers since during the beginning of the 20th century, the working condition of many bakery shops was so poor and many workers work for a very long hour in order to compete with each other. Some politicians support this law on the basis that they need to protect the interest of their citizens, giving protections to relatively weak workers from the capitalists. But the researchers also found out that the other supporters of this New York law are groups of major bakeries that already comply with such law and want to cut the competition by imposing a law that will destroy the business of many small bakeries that depend on immigrant workers.

Again, we can see how the cooperation between Baptists and Bootleggers worked very well in this case. The US Supreme Court finally deemed the law unconstitutional although after the passing of the New Deal by Franklin Roosevelt, more paternalistic laws were issued and the Supreme Court was pressed by the President to support those laws. But that will be another topic of discussion. For now, let us focus with the case of fuel subsidy in Indonesia.

We can quickly see two groups rejecting the reduction of fuel subsidy. The first group argue that reducing fuel subsidy will harm a lot of poor people. The fact that most of the time the subsidy is enjoyed by those who actually do not deserve it does not matter since once the subsidy is reduced, it will affect the overall price of goods in Indonesia and the poor people will suffer. There is a grain of truth here. You do not need to be a genius economist to understand that when you increase the fuel price, since it affects the price components of many other products, producers will most likely also increase their prices as a response. Consumers will be the victim here.

The second group reflects the people who enjoy the existence of fuel subsidy, those who buy the cheap fuel and those who illegally export the cheap fuel to other countries for considerable profits. For those who buy the cheap fuel, it is simply a rational choice, at least for the short term. Whether there will be huge inflation and whether it damages the environment are things that will happen in the future and discounting the probability of having such catastrophe in the near future, they might conclude that in the long run, all of us (this generation) would already be dead when the Earth is being struck by such catastrophe. So, why the heck should we care anyway? It's the problem of future generations, not us.

Combined these two groups, and you will find that they consist of the majority of Indonesian people. They might have different agendas, but they have the same goal, preventing the fuel price from going up. As such, I do not see why I should be surprised with the recent political maneuvers in our legislative board. Politicians, considering their rational incentives for maximizing their own interests, would always consider the present condition in making their decision. And the future for them would always be about the next election, meaning that they are very short sighted. Whatever beyond the election period is another issue to be solved when they reach another election.

Of course in the context of Indonesia, it also means that the idea of reducing the fuel subsidy will never be a popular one. You can't argue about the needs to conserve the energy or to pursue alternative energy sources in a country where most of the people have bleak futures. They don't care about such issues. If they are pessimistic with their futures, how could they appreciate the fact that our environment is in danger? For them, whether the environment will be destroyed or not in the future will not alter the fact that their life sucks now and most probably also sucks in the future.

The question is, how could we avoid this vicious cycle? One thing that might happen is to wait until the fuel price has reached a point of no return where it would be impossible for the government to maintain the subsidy. I note that this might be the political compromise made a couple of days ago. At least when you need to take an unpopular policy, you take it after you are in a desperate condition. Might actually work, but I can't predict whether the end result would be beneficial for all of us, since it might also be too late.

You see, the problem of this kind of policy is that in the end it is made to support certain groups at the expense of other groups. Right now, the Government supports both of the Baptists and Bootleggers groups at the expense of tax payers money, though I will argue that the Bootleggers are the ones who enjoy most of the policy. From Game Theory perspective, it is also a prisoner's dilemma game. I personally for sure will buy the cheap fuel. It is paid by my tax without my consent, and I will enjoy it to the fullest. I bet that many other people will also think the same. It will turn out into the tragedy of the commons and everybody will eventually suffer.

The Baptists group may produce a nice argument on the need to support the poor. It is a valid argument, but it fails to see the overall human incentives. Rational choices of many people may produce a bad result, that is the essence of the tragedy of the common. Everyone will be better off had they conserve the energy, but in a situation where every people can benefit themselves at other people expenses and there is a lack of supervision, the rational choice will be to spend the resources as soon as possible before other people take the resources for themselves. Why bother conserve the energy if we can't be sure on whether everybody will do the same? See the irony?

Is this a premonition for a bleak future for us? Who knows? We can hope that suddenly a miracle will occur, maybe someone will be able to produce energy from water and humanity will eventually survive. But until that day comes, you better cross your fingers and hope for the bests. After all, we are all together in this situation.

PS: I only provide a positive analysis of our current condition. There are many other people who have provided excellent normative analysis on the policies that should be taken on fuel subsidy and I don't think that my thoughts on the normative aspects will give an additional value so I decide not to dwell on it.

Read more...

My Recommended Blogs

  © Blogger templates The Professional Template by Ourblogtemplates.com 2008

Back to TOP