"Mechanism design" is not about making clocks

I was waiting for the Economist to put in its obligatory piece on the latest Nobel Memorial Prize in Economics. (The qualifier "Memorial" is there to pay tribute to the hardcore sciences of physiology, chemistry, and physics, which are the original Nobel Prizes.) At last I have something to free-ride on.

In my line of work "incentive compatibility" crops up frequently - it means that we should expect an agent to behave consistent with her incentives. Incentive compatibility is one of the keystones of mechanism design. It may sound trivial, but responses to incentives are naively ignored, say, in government policy. If for instance government is so distressed by rampant smuggling, perhaps in ought to wonder whether all those import restrictions actually spawned incentives for evasion (i.e. by creating a premium of the domestic price over the world price). Or that tax exemptions on dependents is not going to help curb the fertility rate. Examples can be multiplied. And don't get me started over the pardon of former President Estrada.

Trauma

Many in Manila consider Glorietta one of their favorite haunts. Years pass without incident, and soon, like our own home, such places acquire an aura of impenetrability. That is gone now. Horror has pierced clean through. You go down an escalator, ponder over the items you've seen on sale, match the colors and parties in your mind, blink, and the blast changes everything. On one end your life is taken - and so it was for nine people. On the other, you flee for your life at the crumbling debris. In between is a spectrum of injury. Some of you will need only stitches. Others will lose an arm, a leg, an eye, a face.

But whoever you are, you are a victim - unless you played a part in this, you lowlife piece of shit. For the rest of us there is only sadness, rage at evil men who did this, and fear. Fear that comes with the violation of sanctuaries, and with the swift deadliness of strangers.

The only cure is ordinary life. Malls that bustle, trains that run, crowds that mill; even an economy that continues to gallop with nary a pause, as I expect it would. Our routines are the most fitting rite of remembrance for this day of infamy.

In praise of the cheap peso

The peso is getting more and more expensive relative to the dollar. Since about this day in 2005 to the present, the peso's value in dollar terms has risen by about 27% (from P56 to P46.23 per $).

This is to a big extent due to the overall weakness of the dollar, causing it to become cheaper against all currencies. Aside from this though is specific high demand for Philippine pesos from dollar-denominated funds, basically from foreign remittances and portfolio investment. The timing though is beyond explanation - for all we know this is the result of forces set into motion months or even years back.

The era of the cheap peso arrived after the Asian crisis, as hot money blew cold on emerging markets, and the Central Bank shifted more credibly away from exchange rate targeting to inflation targeting. Filipinos have since gone global, working overseas in droves, seeking foreign customers (both inside and outside the country) to earn suddenly valuable foreign currency.

So is the dearer peso a market-driven correction? Partly. I don't believe in a return to a P56 per dollar regime. But the current trend is disturbing, to say the least. At least one prominent economist is taking up the cudgels for a cheap peso, and a major businesss daily (Business Mirror) is backing him up.

Bringing back the cheap peso makes eminent sense. (Coming from Professor Fabella, we can expect no less.) No, capital controls and exchange rate caps are nowhere near the table. The target is policy choices that may be artificially propping up the peso. Government should now shift towards dollar-denominated options (borrowing, investment, debt pre-payments), in line with the cheaper dollar. (But no bilateral deals in the dark, please.)

But if I may be too malice-minded, perhaps our policymakers are relucant to return to the cheap peso. Their rhetoric of a strong peso being the sign of good macrofundamentals is particularly off-putting. Let's hope they keep an open mind about the concerns of our dollar-earners.