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Iran’s Subsidy Reductions: Upon Whom Will the Costs Fall?

Kevan Harris, MRzine
The long awaited liberalization of energy commodities in Iran has finally begun. President Ahmadinejad stated: “At this stage, we don’t want to free prices, rather we are going to regulate and reform them.” How regulated will this new system be?

Iranians with private cars get a monthly ration of about one full Iranian tank of gas (in the newer stylish Peugeot) at around $1.50/gallon; beyond that, the price goes up to $2.60/gallon. The price is not floating — it is still set. Additionally, what is not being covered in the Western media is that all sorts of bonuses and extensions of monthly ration limits are being granted for now — essentially this is a way of cushioning the shift to higher prices.

… let’s face the facts: Iranians who have long priced in cheap gasoline and other energy sources for their budgets are now confronted with a huge shift in costs. Some will cope, others will be hurt. The government is giving around $40 a month to every individual via personalized bank accounts, which can now be withdrawn by Iranians from the very handy ATMs that are available near most city streets. It is said that around 80% of the country are getting these payments — we will see how accurate that number is as time goes on.

… Will this lead to inflation? Most certainly — the question is how much and where it is concentrated. One worry I have is that the cash payments are not indexed to inflation currently, though the government could make changes to this in the future.

… According to witness accounts, people are going about their business. I would discount intermittent media reports of unrest, because (1) griping is an Iranian art form and (2) the outside media is operating in a particularly inane manner here.

… I am concerned that the subsidy reductions as currently demarcated will lead to increased inequality in an already polarized middle-income country. The bottom line is this: if the point of this plan is to get people to consume less of these goods, then the government will achieve its goal. Economist Saeed Laylaz is telling the Los Angeles Times that traffic will be less congested in Tehran — the silver lining for sure, and something that also occurred after the summer of 2007 when gas rationing and price tiering was first introduced. But if the point of the plan is to “get the prices right” and kindle economic growth, the government will be sorely disappointed. Furthermore, the fact that everyone in Iran is together experiencing this seemingly arbitrary act of the state could form a powerful collective grievance if anything goes wrong in its implementation.
Kevan Harris is a Ph.D. Candidate in the Department of Sociology at Johns Hopkins University. He travels to Iran frequently and recently returned from a year-long stay in the country. …
(27 December 2010)

Canada Discovers Trickle-Up Economics

Linda McQuaig, The Toronto Star
There was always skepticism about claims that, as the rich became richer, income would “trickle down” to others. What wasn’t perhaps foreseen was that the trickling would actually be in the other direction, and that it would be more of a torrent than a trickle.

But the evidence is now clear. Over the last three decades, the tables of the rich have overflowed, with barely any scraps falling off. On the contrary, there’s been a massive transfer of income and wealth from Canada’s middle and lower class to the rich.

The result is that Canada has become a highly unequal society.

This is bad news, since a growing body of empirical evidence shows that extreme inequality has a clearly negative effect on a wide range of health, social and economic problems, as well as undermining democracy.

While some degree of inequality is inevitable and even desirable (allowing bigger rewards for those making bigger contributions), the level of inequality that exists today in the Anglo-American countries — the United States, Britain and Canada — is extreme, and almost unique in the advanced world.

This is a dramatic departure from the far greater equality that prevailed in the U.S. and Canada in the early postwar years — from 1945 to about 1980 — when the benefits of economic growth were more widely shared.
(28 December 2010)

Policy Cures for China’s Post-Stimulus Hangover

Adam Wolfe, Rubini Global Economics
The chef on the Titanic is said to have survived the icy waters by thinning his blood with booze as the band played on. China’s approach to the global financial crisis followed a similar strategy.

In the fall of 2008—with Lehman Brothers’ collapse curtailing China’s access to trade finance, capital flowing out of the economy and final demand for Chinese goods in advanced economies plummeting—policy makers popped the cork. The People’s Bank of China (PBoC) got the party started by cutting interest rates by 216 bps from August 2008 through the end of the year. Quick to don its own party hat, the Politburo in November 2008 directed the government to launch a RMB4 trillion fiscal stimulus.

… With the output gap closed and monetary conditions hardly tighter, consumers are beginning to feel the post-party pain. In the second half of 2010, just as the PBoC was shouting last call, the Fed decided to buy at least one more round of liquidity for the U.S. economy—and in so doing opened the floodgates for hot money inflows to China.

With consumer prices rising rapidly, China’s policy makers have begun to seek remedies. In “The Hangover: China Considers Policy Pills,”available exclusively to clients, we survey China’s medicine cabinet for hangover cures, judge their effectiveness, consider potential side effects and sketch out our baseline forecast for China’s monetary policy in 2011. Hiking the required reserve ratio (RRR) for banks has been the easiest pill to swallow,

… We expect China to employ a mix of remedies in 2011, with limited effect at easing consumer prices. Three interest rate increases after the hike on December 25 will leave real deposit rates negative for most of 2011, which will require additional macroprudential measures to prevent a further increase in property prices. A modest slowdown in growth, as we forecast in our recently published 2011 Outlook, is a likely side effect. …

The Hangover: China Considers Policy Pills

Free online summary. The full report is pay-only.

In response to the global financial crisis, China flooded its economy with liquidity to boost domestic demand and arrest a slide toward recession. This was highly successful: China’s economy came in for a soft landing in 2010 and helped pull other emerging markets out of recession in the process. However, there were side effects from this liquidity binge. Money supply growth drastically exceeded that of nominal GDP, resulting in a liquidity overhang that first filtered into asset prices and now is driving consumer prices. Though China implemented tightening measures[…] (21 and 29 December 2010)
EB contributor Jan Lundberg writes:

I subscribe to the daily feed from Roubini. Despite group’s financial orientation, I admit he’s quite smart, and told it like it was regarding the greed binge and lack of oversight leading up to the Sept. 2008 banking crisis (he appeared in the intense documentary Inside Job). As for the interesting report on China above, I would trust it insofar as energy prices and supply do not take a serious turn, and as long as there’s no meltdown or collapse.

Ignoring those issues may be the main flaw of conventional economist thinking. On the whole it seems that Roubini believes the party can go on indefinitely regardless of key energy realities.

This is a case where clever writing makes conventional thinking sound refreshing.