behavioral economics

P-Noy strokes nation’s ‘pleasure zones’

Here we go again. As the Philippines enters 2012, the stage is set for another round of reality TV/courtroom drama to unfold as the trials of former president and now congresswoman (FPANC?) Gloria Arroyo and her minions get underway.

Despite the political, economic and natural disturbances that visited the country last year, President Noynoy Aquino (P-Noy) ended last year cresting on a wave of popularity as evidenced by his public poll figures. Depending on which side of the debate you are on, 2011 proved to be either a very productive or very unproductive year for the country.

For those seeking to go after FPANC Arroyo and her proxies, 2011 yielded a very rich bag of goodies. The body count of former Arroyo allies piled up during the year to include: one former armed forces chief of staff (who fell on his sword), the ombudsman and a junior senator (who both resigned),  an anti-insurgent general (on the run and in hiding) and several police officials, and the former Comelec Chair, current Chief Justice, and the former first gentleman  himself (who are all awaiting trial). To the faithful, P-Noy promises many more scalps, including some associate justices of the Supreme Court appointed by Mrs Arroyo.

To those looking for a steady hand on the till to manage the economy, 2011 left much to be desired. I won’t go into all the details. One only needs to look at the slowing GDP growth figures. Employment generation may have been robust and inflation might have been under control, but this can be attributed mostly to the prudent handling of monetary policy by the Bangko Sentral, not the administration.

As one of the worst cyclones in living memory devastated northern Mindanao, the president too weathered some criticism over his response to the crisis. Such criticisms however were easily swept away with the torrent of foreign assistance and soft loans offered by the international community in the wake of the incident and the public outpouring of solidarity for the victims during the Christmas season.

Finally, to those seeking for “space” to allow our institutions to recover from the constitutional and legal brinkmanship that occupied the nation’s attention during the nine years of the Arroyo presidency, 2011 provided no respite from the political derby. The current lull in hostilities between the competing forces of the Aquino and Arroyo camps only offers them a chance to brace for the bumpy ride that is about to ensue.

The task of any rational observer of these events is not so much to determine who is right and who is wrong. As Daniel Kahneman, the father of behavioral economics wrote,

Our preferences are about framed problems, and our moral intuitions are about descriptions, not about substance.

Was the government’s treatment of Mrs Arroyo and Chief Justice Corona fair? The answer depends on how you frame the problem. If it is about making her ‘accountable’ for her actions, then the answer would be, ‘yes’. If it is about adhering to the principles of separation of powers and the rule of law, the answer according to many legal peak bodies is ‘no’.

Is the government doing a good job? Again, that depends on the mental frame. If it is about ‘restoring faith and trust’ then, we would have to answer in the affirmative. But if it is about delivering the fruits of development in an experiential manner, then we would have to answer in the negative as far as fiscal spending is concerned.

As for the continued confidence the public expresses through polls in the president, one would have to conclude either they agree with the way he has been running the country or that Filipinos are extremely overconfident and optimistic about his prospects despite a lack of tangible results.

A study by Kahneman and Richard Thaler (the co-author of Nudge, which is the how-to book of applying behavioral economics to public policy) into fairness in economic transactions offers us a clue as to why P-Noy’s number remain above the clouds. As Kahneman explains,

Remarkably, altruistic punishment is accompanied by increased activity in the “pleasure centers” of the brain. It appears that maintaining social order and the rules of fairness in this fashion is its own reward.

What this means is that bringing the Arroyos and their ilk to justice provides just as much utility to a majority of Filipinos as milk and honey. In other words, they are engaged and have decided to go along with P-Noy on the “joyride” down the high road of Daang Matuwid.

The problem is that sacrificing actual bread and butter issues for “mental stimulation” could prove destructive down the road, especially given the length of time that would be required to complete the journey. This is perhaps where the exuberance and overconfidence argument sets in.

Currently, the plan is to impeach not just the chief justice but a majority of his associates on the bench appointed by Mrs Arroyo. With the Supreme Court set to weigh in on whether the articles of impeachment were signed by the congressmen under duress, it seems unlikely whether the trial of the chief justice could be wrapped up in the three to six months originally projected by one senator-juror.

Despite calls for the CJ to go “softly into the night” and rumors of two associates willing to retire early of their own accord, it seems unlikely that they will. Even if the CJ were convicted and the two rumored justices resigned in the coming year, the Arroyo appointees would still hold a majority. Three more justices would have to be impeached to gain a comfortable margin for P-Noy in the high court.

Assuming an average of six months each (an optimistic assumption) to impeach and try the CJ and three other justices along with the heroic assumption that two would go voluntarily in the interim, it would take another 24 months to finish the task. Insert a six month period in between as 2013 is an election year, and that means middle of 2014 would be the soonest possible date for P-Noy to “clear the decks”. That leaves him one year to push his “reforms” as the last twelve months of his presidency from July 2015 to June 2016 is a lame duck period.

According to P-Noy, the Arroyo influenced Supreme Court is standing in its way preventing major “reforms”. Talk of “original sin” has alluded to this. If that is truly the case, then the nation will have to wait until late into the Aquino II presidency before anything gets accomplished. The fact that they have succumbed to a kind of “confidence bias” in predicting when this will be has led them to view P-Noy’s presidency with favor (a case of irrational exuberance?).

Another warning to those entertaining such stroking of the nation’s erogenous zones again comes from Kahneman who tells us that

Other classic studies showed that electrical stimulation of specific areas in the rat brain (and of corresponding areas in the human brain) produce a sensation of intense pleasure, so intense in some cases that rats who can stimulate their brain by pressing a lever will die of starvation without taking a break to feed themselves.

Indeed, taking the need to fulfill some sense of fairness or altruistic justice to the extreme could cause the nation to be mesmerized, intoxicated with the chemicals that stimulate those “pleasure zones” in the brain. At some point, however, either the powerful effect of this stimulant could wear off or millions of our countrymen could follow the trajectory of these lab rats, withering away, unable to wean themselves off the steady drip of anti-Arroyo mania.

Playing it safe (or the Deal or No Deal Scenario)

This Monday’s release of priority bills from Malacañang before the convening of the Legislative Executive Development Advisory Council (LEDAC) will be less controversial for what it contains, and more for what was left out of it. Today’s morning papers report that about 23 bills are to be certified as urgent by the Palace to Congressional leaders.

For the purpose of presentation, I have classified these bills into five categories, namely: programmatic, fiscal and budgetary, regulatory, judicial and legal, and finally security and national defense related. The full set of measures are shown in the table below:

First Set of Priority Bills by the Aquino-II Administration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conspicuous for their absence are two measures: the Reproductive Health (RH) and the Freedom of Information (FOI) bills which were scuttled during the last Congress. A lot of discussion has occurred in this space over the two measures.  I will not be focusing here on the merits of these bills but rather on the reasons for their non-inclusion. I think it will shed some light on the current disposition of the president.

What follows is an analysis of the legislative agenda proposed by P-Noy. I will place special emphasis on what I think are driving and resisting his policy agenda. It is my belief that certain factors are at this time creating an atmosphere of risk aversion on the part of the administration. I will try and explain the reasons for this and the reasons for why it has to change.

Drivers: Events, programs and lobbies

Although the Cabinet through Executive Secretary Paquito Ochoa will try to put a rational, dispassionate face on the deliberations that took place prior to the compilation of this list, it is clear that recent events have had a direct hand in driving the agenda put forth by the Palace.

The first of these events was typhoon “Ondoy which entered the Philippines and wreaked havoc on Metro Manila prior to the start of the election season in 2009. With the trauma of this tragic event etched in the minds of many residents, the long-overdue process of creating a land use and development plan has finally been put on the table along with the creation of a housing department.

After the deluge that crippled the city, the twin but related crises involving water and energy gripped the headlines early in this administration’s life. Thus the creation of a water regulatory body and an amendment to the EPIRA law have been proposed to deal with it.

The oil spillage by an Indonesian vessel off our eastern coastline has also flagged the importance of defining the rights of foreign vessels who enter our territory as well as to define more clearly our maritime zone.

The global financial crisis has also had a lingering impact via the fiscal deficit. The Arroyo administration was on track to balance the budget or bring it back to surplus when the financial crisis hit. The government had to counteract its effects on the economy through stimulus spending. This along with some revenue erosion measures passed by Congress have forced several measures to be considered including the ones on fiscal responsibility and rationalization, and government procurement.

The recent Congressional hearings concerning the plea bargain agreement of former AFP comptroller Garcia have also affected the policy agenda. The modernization of the AFP was always on the cards prior to that, but recent events make them even more urgent along with measures to protect whistle blowers and state witnesses.

The Maguindanao massacre and the trial of the Ampatuans have also put the strengthening of the witness protection program on the table as well as influence the scheduling of the elections of the Autonomous Region in Muslim Mindanao.

Apart from events driving the policy agenda, some very rational processes have also been responsible for placing a few proposals forward. Some of these were a direct result of policy statements and promises issued during the campaign and following the election of P-Noy. These include the additional two years for basic education or K+12, health insurance coverage for the poor, housing, public-private partnerships/Build-Operate-Transfer law changes, anti-trust or pro-competition policy, and land administration.

One of the immediate impressions P-Noy had upon assuming office which he mentioned during his first State of the Nation Address (SONA) was the amount of waste that he saw particularly in the National Food Authority (NFA) and state owned firms. It is not surprising to see a proposal for the re-organization of the NFA (to basically strip it of its rights to import grains and allow it to become a regulatory body instead) along with a measure that seeks to standardize executive compensation at state owned and controlled companies.

Finally, the influence of the business sector is also evident with the proposed amending of the labor code to deregulate the working hours of women. This is to help the business process outsourcing industry comply with labor standards and to legitimize their hiring and work-scheduling practices.

Resistors: Conflicting agendas

There were supposedly 180 measures that the Cabinet looked at. This was apparently whittled down to the list above after much deliberation. Among the measures dropped were the RH and FOI bills. These two measures have been pending since the last Congress. They represent key planks according to their proponents in the fight against poverty and corruption. I will not dwell on the merits of these proposals, only on the possible reasons for their omission from the final cut.

The Catholic hierarchy and their adherents remain the single biggest hurdle in the way of the passage of the RH Bill. What is curious is that during the election campaign, rumors floated around that they were campaigning against P-Noy and had endorsed other candidates who toed their line on this issue. It is unclear as to whether supporting reproductive health was part of the formal party line of the Liberal Party or whether it was just a personal position of then candidate Aquino. What is certain was that up to late last year, P-Noy had expressed support for it.

Which makes his back flip on the issue quite absurd. On the one hand, he was not cautious in upsetting the Catholic bishops as a candidate when he needed their endorsement the most. On the other hand, the fact that his popularity ratings nearly a year in office remain sky high should have emboldened him to pursue this long-awaited measure despite veiled threats issued by the clergy.

This type of behavior is reminiscent of contestants faced with the prospect of losing or winning in the game “Deal or No Deal”. The theory that explains it was first posited by Daniel Kahneman and Amos Tversky, founders of behavioral economics, and is called prospect theory. Basically, it states that individuals exhibit different risk preferences under different situations. A study of game contestants on the popular show confirms this. I have blogged about this phenomenon in the context of Australian politics and budget policy here.

During the campaign when P-Noy was faced with falling poll numbers, he needed to take some bold steps to help invigorate his sagging position. His vacillation over Hacienda Luisita was affecting his credentials as a reform candidate. It was a reminder that Aquino was after all part of the establishment comprised of landed elites who would protect his economic interests once elected.

To shore up his reformist credentials, support for the RH bill was one of those positions he could brandish to voters hungry for change. Standing behind a bill that a majority of Filipinos were actually supportive of despite the displeasure of a powerful bloc, the Catholic bishops, would cast him as a conviction politician. This was of course a risky proposition given how the bishops choose to wade into politics from time to time. Just like a contestant faced with lower prospects of earnings, Aquino went “all-in” in favor of reproductive rights.

Now that he is president and enjoys heretofore unseen popularity ratings, he can afford to be more circumspect in his policy stance. After failing to reconcile his version of the RH bill with that of the bishops, P-Noy decided to yank it out of today’s announced priority bills following a brief conversation with a retired archbishop. It appears that the religious lobby has won.

Just like a contestant faced with increasing gains, P-Noy has chosen to be more conservative or risk-averse in his decisions. Normally, economists steeped in the neoclassical tradition would say that we are dealing with one person here who ought to have only one set of risk preferences. The president who considers himself an economist proves that that is not the case. He has exhibited different risk preferences in different situations based on his recent gains or losses.

The same type of behavior change is noticeable with respect to the FOI bill. Before he assumed office, candidate Aquino was all for measures that would improve transparency and accountability in government. Now as commander-in-chief he is becoming reticent regarding too much openess. Not even the revelations of corruption during the Garcia plea bargain hearings were enough to convince him that this is what is needed.

Temperament versus culture

An alternative explanation for this sudden change in temperament is the notion that the work environment of the public sector supports a risk averse culture anyway. This behavioral norm is often attributed to bureaucrats more than their political masters though. It is often cited as the reason for making the bureaucracy answerable to elected officials. While the latter tend to be more entrepreneurial and risk-seeking, the former tend to favor incrementalism.

It may just be that having come from a wealthy family might have made P-Noy’s personal temperament more tentative and risk averse. Individuals who have amassed great wealth tend to exhibit this attitude. Having abundance makes acquiring more material wealth less of a priority. In the same manner, politicians with so much political capital may be hesitant to spend it for fear of losing it in the process.

The irony is that sometimes the surest way to lose that political capital is by not spending it. This was the case with former PM Kevin Rudd of Australia. Prior to 2010 he seemed to be coasting to re-election enjoying extremely high poll figures in his first two years as prime minister. Having ratified the Kyoto Protocol and issued an apology to the stolen generation of indigenous Australians, he was seen as a reformer. When the global financial crisis hit, Australia was heralded as one of the shining lights in the G20 summit for its fiscal management and prudential regulation of its banks.

Then in the early part of 2010, faced with increasing pressure from an opposition that had once supported his policies on climate change, he along with three other members of his “kitchen cabinet” decided to back down from enacting a law that would introduce a  price on pollution via an emissions trading scheme. This was despite his previously stating that climate change was the biggest single “moral, economic and social challenge of our time.”

The duplicity of this back flip was not lost on the Australian voter. It caused a reversal of Mr Rudd’s once unassailable lead in the polls as preferred prime minister. Eventually, his colleagues within the parliamentary Labor party decided to switch horses mid-stream and decided to elect a new prime minister to lead them into the 2010 elections. They survived in office after the polls only by forging an alliance with the Greens and some independents.

This is a lesson that many incumbents should learn from. Shying away from promised reforms when the going gets tough and filing them under the “too hard” basket is the surest way to see their popularity tumble. It does not matter how high one’s polling figures are. Complacency will prove the biggest risk. A government that is hesitant or tentative at reform because it is faced with stiff opposition or pain in the near term will not be rewarded by a public looking for authenticity in its leaders.

The underlying message here is that if it thinks it can “play it safe” by skirting the important policy decisions, the administration needs to think again.

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