The Chronicles of a Capitalist Lawyer

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.

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.

A couple of days ago, I came upon very troubling news about the current draft of our new criminal code that is supposed to replace the one made during the Dutch colonial era. Apparently, the drafters of the new code inserted a provision saying something like this: the Criminal Code will not limit the possibility of applying the laws that stipulate that someone must be penalized even though the penal actions are not regulated in Indonesian regulations.

Even worse, it seems that the senior law professors involved in the process are not strongly opposed to this provision, with some evening showing their support, saying that customary law should be respected in Indonesia. This is preposterous. Under classical legal doctrine, a person can only be penalized if his or her action violates the written provisions of a validly promulgated law, the so called legality principle.

I assume that most of the time, defenders of the use of customary law in the Indonesian legal system believe that customary law represents the indigenous wisdom of the relevant society. The fact that the customary law has existed for a long time means that the practice is good for everyone. This is completely misleading.

There are many explanations given for why certain customs prevail for such a long time. First, the customs are efficient for everyone within the society. Second, the customs are efficient only for the majority of the society. The second type of customs will be our main focus because it is possible that such customs are effective for the majority without putting any burden on the minority, but it is also possible that the customs only benefit the majority at the expense of the minority.

We have a lot of examples for these kinds of customs, especially customs that support discrimination based on race, gender, and religion. It can also be in the form of non-welfare maximizing customs where people cannot avoid such customs because costs of avoidance would be too expensive (imagine the custom of Indonesian people to hold a marriage party). In other words, the persistent existence of such custom does not necessarily indicate that the custom is good for the welfare of the society.

Having said that, putting a provision that people can be penalized for actions that are not legislated in state laws would be a ridiculous idea. First, the standards are not clear (and the diversity of tribes in Indonesia will complicate the standards even more). Second, there is no guarantee that policing transgressions of customary law is justified other than to satisfy the interests of certain groups in the society.

Why do we have criminal law? From a Law and Economics perspective, criminal law exists to deter actions that will cost society. Certain acts must be prevented and we should give incentives to people to avoid such actions because we believe that the existence of those actions will result in a net public loss.

Furthermore, criminal law will only be effective if there is a strong enforcement basis. That would be another cost for society. After all, legal enforcement is not free of charge. That is why some legal scholars argue that the optimum rate of crime might not be zero, because the costs for achieving such a rate might actually outweigh the benefits.

Thus, in order to reach a balance, we should be careful in formulating criminal law provisions. We should only criminalize actions that are clearly harmful to society and where the costs of the enforcement would justify having such criminal provisions. This means that the legal provisions must be clear, people should know what the prohibited actions are and why the actions should be prohibited.

You can’t achieve this goal if you can criminalize other people by using provisions that might be unknown to the public or don’t have legitimate reasons for existing in the first place. If these lawmakers really understand the efficiency principle, their way of thinking should be reversed. Customary law should only be used to exempt a person from being penalized under the provisions of the criminal code provided if the end results will produce net benefits to society.

By this I mean that if the customary law can solve the criminal issues using cheaper measures without having to use the standard state legal enforcement process (which is costly), we should go with the customary law (a good example would be the concept of restorative justice).

I can only hope that the final version of our new criminal code will no longer include the above provision.

I've just read the latest draft of Law on Higher Education, especially the parts related to financing activities and I think the provisions are just fine. Contrary to the majority opinion, I do not believe that the costs of higher education should be cheap. High quality education is actually very expensive, you have to spend a considerable amount of money to maintain the best talents (those who teach younger generations should be the best of the best not the worst of the worst) and to run the organization in compliance with the highest standard of quality. Asking the government to ensure that the cost of higher education will always be cheap would be a naive attempt if not totally ridiculous.

We should realize that government's budget is limited and it would be almost impossible to finance all higher education institutions in Indonesia in a country where we are still fighting for maintaining fuel subsidy. How could you expect the government to pay for the costs of education if you can't really sure on whether the fuel subsidy can be reduced or not?

And we've seen the result of this forcibly cheap education. I assume that the chance of getting admitted into the University of Indonesia might be significantly smaller than the chance of getting admitted into top universities in the United States, yet the outcomes produced by our University of Indonesia are still inferior compared to its counterparts in the United States. How could that happen? If we believe that the entry test has selected the best of the best of Indonesian high school students, how could the output is inferior in so many levels? The answer is simple, how could you expect the institutions to give their best if their budget is too constrained?

Let us talk about talent first. Most of the time, I see that the majority's logic on being an University lecturer is all about dedication to the society. Such logic is totally wrong. Dedication is good, but you need to ensure that the lecturer can also have a good and sustainable life so that they can focus on teaching and researching. The fact is, most of them receive such a small amount of salary that it is actually an insult to their dedication and hard work. Since they don't have enough salary, economic logic dictates that they will try to find additional income, meaning less focus on their primary job. Of course this is bad not only for the lecturer but also the students who should receive their full attention.

Even worse, since the payment cannot attract many candidates, the lecturers will also be overworked. Even if they don't have any additional job, they won't have enough resources to give their best for their own primary job. What a disaster! How could we maintain the logic of cheap education at the expense of the quality of our higher education institutions? The lecturers deserve a better treatment than this. The same analysis is also applicable for the quality of Universities facilities. If you don't have enough money, you can't build state of the art facilities for improving the level of education quality. You pay with peanuts, you get monkeys. As simple as that.

Now if we understand that the state budget is constrained and that further funding is necessary, what should be done? First of all, we need to increase the tuition fee. That's the least thing to do, but it does not mean that it would be the end of our poor friends. What I have in mind is cross subsidy mechanism, meaning that the rich ones should pay more and therefore they can subsidize the poor. This means that the government should permit universities to freely charge the price of their education service, and let the law of supply and demand governs the rest. What is more important to achieve is that the universities must ensure that even the poor ones can still study based on the cross subsidy mechanics.

In the United States, as far as I can see, poor students can still pursue their education at top universities as there are many ways to finance their studies, including scholarship from various institutions and education loan provided by the Government and the universities. We need to be more creative! We understand that education is very important for the development of our nation and we want to ensure that everyone should have access to better education. The solution is not by forcing the costs of education to be cheap, the solution is to find alternative ways of financing for the universities and the students.

I salute University of Indonesia's idea to bring in some expensive restaurants and cafes. If this businesses can target students from middle and high class families to spend their money there, hopefully it will also generate more income to the University. The main question is whether the additional funds are used for improving the University or not. If yes, why not?

Another idea would be to establish chairs of professorship in our universities. I've seen this trick practiced in top universities in the US and I am quite sure some of our most prestigious universities should also be able to do the same. These chairs will provide a good marketing for major businesses and industries while providing additional endowment funds to the university. Again, more money for the universities should be good provided that the universities spend them wisely.

I guess this is the right time to stop asking for false hope. Unless the government can produce money from the sky without causing crazy inflation, the idea of requiring the government to finance the entire higher education would be unpractical and unreasonable. Instead, we should try to find more money from the people. There are a lot of rich people in Indonesia, why not utilizing them by giving them the correct incentives to contribute more? Why not let the universities to be more flexible in finding ways to gather funds for financing their business?

In my view, the government should mainly act as a supervisor in ensuring that universities will not discriminate students based on their financial condition and that they will manage the money for the best interest of lecturers and students. I believe that would be far cheaper than paying for the entire education system. I really care about Indonesian education system and I believe that the best way to improve it is to find a better way of financing. There are a lot of things that we need to catch up. We can't waste our time debating on ideas that are not in line with the reality. Accept the truth and move on!

Just when we are still absorbing the decision of President Susilo Bambang Yudhoyono to create an anti-pornography task force, Cass Sunstein, the head of the United States Office of Information and Regulatory Affairs and former professor at the University of Chicago Law School, is reporting his success in fostering a more efficient regulatory environment in the United States, at least from the perspective of government agencies. This news just made my day.

No words can perfectly express my deep envy of the above news. For a lawyer who pursues the art of law and economics, having an Indonesian governmental task force whose main purposes are to evaluate the costs and benefits of all existing regulations and to provide recommendations — or even having power to revise or cancel regulations that are not justified — might be a faraway dream. Yet, the dream is still there and we have many good reasons to pursue it.

Too often we see Indonesian regulations that are not justified, not only based on the costs but also their basic reasoning. What is the purpose of having regulations? Regulations exist to maximize the welfare of the society (which include maintaining order and promoting justice).

The fact that regulations are applicable to and will affect the lives of many people means that no regulations should be promulgated unless we clearly understand the intended and unintended consequences of such regulations to society.

In an age where people demand more accountability from the government with respect to the use of their tax money, doing a cost and benefit analysis prior to issuing a regulation and evaluating the issued regulations periodically should be the norm that must be satisfied at all times. It is a continuous process because no law will ever be perfect for all times and places. Yet, I find that many people cannot understand (or maybe refuse to understand) this very simple principle.

If the president really loves to create task forces, this is the ultimate task force that he should make in the first place. The rest can be disbanded immediately simply because we don’t see any justification for their existence other than for wasting our money.

What would be the task and scope of authority for this task force? The task is simply to evaluate all existing regulations in Indonesia, assessing the costs and benefits of having those regulations, especially the actual benefits and costs of enforcement. The task force should also be authorized to revise any regulations issued by governmental agencies, making it a super body standing at the top of the hierarchy of governmental agencies, ensuring that all policies of the government will be synchronized.

For laws issued by the legislature, the task force should only have the power to make recommendations. After all, the legislative body represents the basic idea of our democracy. While I support an efficient and effective government, it does not mean that I support tyranny. Thus, the authority to change regulations should stay within the scope of governmental agencies.

I don’t think that the task force should be granted the power to issue regulations by itself. That part should still be the main job of various governmental agencies and departments, assuming that they have a comparative advantage in starting the process.

By focusing on evaluating and revising the regulations, we can save the costs from doing a redundant job. In short, one body to make the regulations, another to evaluate the regulations. In addition, we cannot expect the drafters of regulations to review their own products. Hence, naturally, the authorities must be separated.

What ideas should be promoted by the task force in evaluating regulations? First, flexibility within the rules. We should always favor flexible rules except in special circumstances. The fact that the world can change drastically in a short time means that there should be less room for rigidity in the law. More freedom should be given to society while the government ensures stability via security maintenance and institutional support.

Second, efficiency. The regulations should aim at maximizing benefits while reducing the costs. This means less administrative procedures from the government side. Don’t make things more difficult when you can make them easier. It’s as simple as that.

It also means that government should only regulate important things when the costs of enforcement are justified. As an example, government should not waste its time to regulate and enforce the laws on private conduct that might be better enforced by family members such as in the case of pornography. Instead, it should focus enforcement on reducing crimes that are disastrous to the society, such as corruption and money laundering. We have limited resources, so please focus only on the pressing matters.