Have we learned 101 Economics?

William Easterly says “I think we economists love to speculate about heterodox theories when times are good and we feel free to discuss experimental alternatives to economic orthodoxy (and nobody is paying us much attention during good times anyway). But when the global economy is in free fall and everyone else seems ready to throw each and every Econ 101 principle out the window, we get desperate to save the core principles that lead to prosperity and development.

This is what the Principles textbooks teach us. These ideas made their way into Principles textbooks by some process of natural selection--they were the ideas that stood the test of time in economics, because they were associated with the steady climb toward prosperity of the rich countries and, in the last half century, of the global economy.

There are variations around these core ideas of course, but the variations are always grounded in a home of sensible economics 101. In the midst of the scariest crises of our lifetimes, economists are coming home”.

Every individual life is a message to someone –Gandhi, Hayek and Osho!

There is a wider belief among the first generation of independent India that the Mohandas Karamchand Gandhi “life was his message” it may true for his some of simple ideas, like “simple living, high thinking”, fighting for freedom by non violence, disobedience, etc. 

What was happened or still happening is that some his ideas become dangerous to present society including the “self sufficient”, the “disobedience”, the “self rule”, etc. 

It may be worth to ask our self that is there any country in the world which is “self sufficient” of all goods and services? Clearly the answer is no. And what people misunderstood is not only the Mohandas Karamchand Gandhi ideas but the whole process of freedom fighting. 

People now wolf cry that the present generation have terribly “misunderstood” and the “great injustice has been done to Gandhi, by Gandhians, who deified him and made him into some kind of a cult figure; by his opponents who simply dismissed him as obscurantist, outdated and irrelevant; and by those who have used him as a stamp to justify and legitimised their own agenda. Gandhi needs to be rescued from all three. That would do justice to him”. 

What is more terrible is the saying of “he never tried to impose it on the Congress organisation. In fact the famous Congress resolution passed at Karachi in 1931, advocating centralised planning and large-scale industrialisation, was predictably drafted by Jawaharlal Nehru. But it was Gandhi who moved that resolution, primarily in order to create consensus around it. Gandhi never insisted on his economic ideas to be at the centre of Congress programme”. 

What is the meaning of stressing to “create consensus” when his life is message to the people of this country or the world where he think that the “centralised planning” will kill the people instead of saving from it. 

Let’s not forget that the true Mohandas Karamchand Gandhi ideas will be perished by time alone, including the everyone else’s who think that they wanted to replace his ideas. 

Who does not understand whose language? It is the another barely a year old (or close) newspaper Mint which says “Much before the first five-year Plan was launched, economist Freidrich Hayek had highlighted the pitfalls of centralized planning. More than Hayek, it was Gandhi’s influence that curbed the worst excesses of that process. Nehru did not make mistakes of the kind that caused Soviet-type political disasters. He did not shake the foundations of private property in India that might have led to serious political problems”. 

It is important to say at least two points. First it has been now understood that “it was Gandhi who moved that resolution” of “centralised planning” and the Mint no, no “more than Hayek, it was Gandhi’s influence that curbed the worst excesses of that process”. It does not give when and where he “curbed” it that process? 

Another naturalist Osho says “I wrote Gandhi another letter: "On the one hand you say you are non-violent, and on the other hand you worship the Gita, which teaches simply violence and nothing else." The whole book is a teaching for violence. Krishna, to his disciple Arjuna, is teaching, "You go to the war, fight, because that's what is the will of God, because without his will nothing happens. So if this big war is happening, it cannot happen without his will." Krishna tries in every way to persuade Arjuna. Arjuna argues but he is not a great logician, otherwise it was so simple.” 

No doubt it is now questionable as I posted here yesterday. 

And there is no doubt that we all like or don’t like we respect the man who fought for us but if his ideas become impracticable or more harmful let’s reject it honestly. 

Don't forget to read full article by Osho here

In the name of "stimulus"

George F. Will says a “convenient truths” underneath of stimulus package. “There never is a moment when an open society that wants to remain such does not need the wisdom of Friedrich Hayek, the Nobel Prize-winning economist who said: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." So the deference accorded this president should be proportional to his willingness to acknowledge that neither he nor anyone else can know whether the stimulus will work.”

The messy stamped money

One way to panelize (not do give liberty or freedom) the individual who don’t spend saved money or dumped one during the depression.    

The Economist reports that “IN 1933, in the depths of the Depression, Irving Fisher, America’s most prominent economist, wrote a pamphlet on “Stamp Scrip”. This was a type of alternative currency popular in America and elsewhere at the time that was periodically taxed with a stamp so that it would be spent, not hoarded.

Based on the theories of Silvio Gesell, a German “quasi-economist”, one such currency, the wära, was used to revitalise Schwanenkirchen, a Bavarian coalmining village, in 1931. “No one who received wära wished to hold [them], the workers, store-keepers, wholesalers and manufacturers all strove to get rid of them as quickly as possible, for any person who held [them] was obliged to pay the tax. So wära kept on circulating, a large part of [them] returning to the coal mine, where [they] provided work, profits and better conditions for the entire community,” Fisher wrote approvingly.”

This may be dangerous scrip.

Good, bad, the worst newspapers in India

This January ends with two important changes in Indian print media. 

Vir Sanghvi says “the best was Business Standard where the irresponsibility of junior reporters was over-ruled by experienced senior journalists who double-checked every story and carried only the facts……….. the worst was Mint ---- ironic because I am a columnist ---- which managed to get basic details wrong, running biased and inaccurate reports and then following them up with a series of wildly speculative (always attributed to "a source close to the situation") stories which (long after I had left and other NewsX issues were being featured) nearly always demonstrated a total misunderstanding of the situation.” 

And Ashok V Desai says “different newspapers have been trying out different formulae for survival. Amongst financial newspapers, Economic Times tries to combine entertainment with news. Business Line compensates for its inadequate news coverage by having weightier editorial pages. Business Standard tries to cover company news, backed by systematic coverage of the stock market. Financial Express has not yet found its core strength. None of them has the comprehensive coverage or quality of Wall Street Journal or Financial Times”. 

If any one is reading with keen observation will find the above conclusion. 

The dog’s breakfast of a stimulus package

Liberal economist narrates about the stimulus packages announced by new President of US. He says that the “If the purpose of the stimulus package is to raise aggregate demand by roughly the amount it has fallen because of the financial crisis, Valerie Ramey finds that from historical US data, the multiplier for public spending is not large: $1 in public spending raises GDP by $1.4 (“Identifying Government Spending Shocks: It’s all in the timing”, UC, San Diego, June 2008). Whilst Christina and David Romer’s study of the effect of tax changes on aggregate demand found that a $1 tax cut raises GDP by $3 (“The Macroeconomic Effects of Tax Changes”, UC, Berkeley, November 2008). Though it should be added that since being nominated as Obama’s Chair of the CEA, Christina Romer seems to have changed her tune and fallen into line (see C Romer and J Bernstein: “The Job Impact of the American Recovery and Reinvestment Plan”, January 10, 2009), with the claim that the proposed package will lead to the creation of over three million jobs by the end of 2010. But as many observers have noted, “The total package is so diffuse, it costs $223,000 to create a single job” (D Brooks: “The First Test”, NYT, January 23).”

Legality has been burned and the Value of liberty too…………….

It may be ironic that today’s legal experts including Mr Markandey Katju don’t understand what the modern development hold including the technology revolution. And he says childishly “poverty and unemployment, which are the main causes of crime and terrorism” and “crime and terrorism cannot be eliminated by draconian laws. They can be eliminated only by the abolition of poverty and unemployment, which are the main sources of crime. Only rapid industrialisation can abolish poverty and unemployment, which will largely eliminate crime and terrorism.” 

Clearly I don’t know but if his argument is true is that the Osama bin Laden, Pakistani attackers are under the below world poverty line? 

Or our own policy and other legal agencies are deprived of basic necessity and they live under the Indian poverty line?

To be captured here………..

Markandey Katju argued in a serious of two articles in the Hindu on 8^th and 9^th January 2009. He argued the caste system is shading in structure through the mirror of modern development and technology and social change in behaviour mainly in purchasing power and the end result is its domination is no longer exist. 

However, S. Gurumurthy says in the same news paper but in the opposite side not only in the print page but also in the entire argument. 

See he says “contemporary writers and modern minds like Gurcharan Das and Swaminathan Ankilesaria Aiyar in India did not miss that out what Fukuyama had. They perceive caste as a potential engine of growth and development. Swaminathan Aiyar saw it as the social capital of India. That Justice Katju seems to be unaware of the empirical evidence of caste as a development vehicle in economics is evident from his remark that “a scientific study’ on caste ’is yet to be done.” 

Further he adds that “Caste is a very strong bond. While individuals are related by families, castes link the families. Castes transcended the local limits and networked the people across. This has prevented the disturbance that industrialism caused to neighbourhood societies in the West, resulting in unbridled individualism and acute atomisation. In independent India, a contradiction has developed between the individualism-centric Constitution and caste collectives. Caste-based politics has actually helped to harmonise this contradiction between the formal Constitution and the non-formal social architecture. In a sense, caste-based politics mediates between traditional society and the modern state in India. Yet it can still be argued that the caste element in politics is not desirable. But caste in economics is a positive drive of development…”

Someday pass

It may true that “the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control – and that a nation cannot prosper long when it favors only the prosperous.”

But the fact is this that every union, the government and politicians in the world need to think numerous times before taking any action “know that your people will judge you on what you can build, not what you destroy”.

Conduct ourselves

NR Narayana Murthy said in 2002 that “In India, we consider our marriage vows as sacred. We are willing to sacrifice in order to respect our marriage vows. However, we do not extend this to the public domain. For instance, India had an unfavourable contract with Enron. Instead of punishing the people responsible for negotiating this, we reneged on the contract - this was much before we came to know about the illegal activities at Enron”.

See also what economist Ajay Shah said here

Stimulus injects no aggregate demand till private investment flows

Bruce Bartlett has an excellent article in the Forbes which needs greater attention but the folly is many of the professors of economics don’t understand it is certainly true in India as well.

 “…view among economists was that government had nothing to do with business cycles--it neither caused them nor was there anything it could do about them. They were like the weather; you just coped the best you could.

Government isn't always responsible--bubbles can occur on their own, as they have over the centuries--but systemic errors usually result from government policy. 

The Federal Reserve, our nation's central bank, is the institution mainly responsible for altering the terms of trade. That is because it has the power to change the value of the currency, which is the intermediary in every single economic transaction, and also to alter the terms of every intertemporal transaction--those between the present and future, such as saving today to consume tomorrow--by raising or lowering the interest rate.

No one today believes that the Great Depression just happened or dragged on as long as it did because the private sector kept making mistake after mistake after mistake. It only made them and continued to do so because government interfered with the normal operations of the market and prevented readjustment from taking place.

The Great Depression resulted from a confluence of governmental errors. 

Unfortunately, Franklin D. Roosevelt misunderstood the nature of the economy's problem and tried to fix prices to keep them from falling--thus preventing the very readjustment that would have brought about recovery. 

As economist Hal Varian of the University of California at Berkeley recently put it, "Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?"

Every invention is folly for some time

Sadanand Menon writes in the Business Standard highlighting the gun of representation in new literature and art. And he says that “.creative pieces like White Tiger and Slumdog, in fact, purchase ratings and approval and awards abroad by swivelling the spotlight on the seamier side of the Indian reality; that this gore-and-grime realism is not the ‘real’ India and merely represents an opportunist re-orientation of poverty as pornography.” 

I hunch that he is not at all aware of what the meaning of political representations. Did the politician fulfill the voter’s desirers? Did the bureaucrats represent the tax payer’s desirers as they live by public taxes? 

It is these people who” represents” “merely an opportunist re-orientation of poverty as pornography.” 

Provoked Ideas of Meghnad

Meghnad Desai writes few observations on Satyam and politics in India. The following are from his article:

“Like a murderer, who has escaped undetected but can’t keep away from the scene of his crime, he provoked detection. The market, which our intellectuals tell us does not work (hence we need regulators!), smelt a rat and dumped on him. 

The biggest danger right now is that this will be seen as solely a Satyam problem, and be dealt with technically, that is assuming that in Indian context anyone ever comes to judgment. After all, the murderers of 3,000 Sikhs are still swanning around Delhi 24 years later. The roots of the fraud lie —I guess , since we don’t know—in the real estate and infrastructure Matyas firms. Real estate everywhere in India is embedded into corrupt politics. In Mumbai as in Hyderabad, local politicians take their bribes in real estate and in return give fat contracts. This is why Sreedharan, the Delhi Metro boss, smelt a rat about the Hyderabad Metro contract. He called the contract awarded to Matyas ‘a land scam’. 

No inquiry will report before the election of 2009 or even the one after that! Think Lieberhan. Sebi had already been found asleep when someone used its stationery to do an insider trading job. Who could now trust anything Sebi does, if it leaks like a sieve? No one took responsibility, and no one resigned. One cannot have effective regulation in a country with dysfunctional politics, which appoints people to sensitive jobs only after making sure they are not likely to embarrass their masters. What the scandal needs is a wide ranging inquiry, perhaps a judicial one chaired by a reliably independent person, preferably a foreigner, to delve into this murky pool. 

I predict that no such inquiry will be initiated. Raju will be free for decades. Matyas companies will escape undetected. 

That is par for the course and should not shock anyone. But I feel sorry for India Inc. For a while it looked like the Indian private sector would overcome the handicaps placed on it by the politicians it has to genuflect to. I even hoped that the business leaders would reform politics. It seems politics can corrupt any business faster than you can think. Even as recently as August 2008, India was touted as a success story, the next super power with a dynamic economy and vibrant democracy”.

Meghnad Sutra

Meghnad Desai says yes again typical thoughts on Obama Plan of spending.

“India has already been disturbed by his views on Kashmir and he does not speak without forethought. Any idea that he will be a Third World President or Africa’s best friend should be suspended. Obama did not just pretend to be middle of the road to get elected; he is like that politically.

So if Obama is to face the long term challenges, he needs to make Americans tighten their belts; if not now, pretty soon. He has to wean them off cheap gasoline and sub-prime mortgages. He will need to restructure the American economy towards more public transport and public housing, providing greener economy. He will need to dismantle uncompetitive industries like Detroit and launch new industries. He will need to do what Margaret Thatcher did as well as what Al Gore wants. The world is on the cusp of a change in the power balance. Asia will gain and the West—the US and EU—will lose. The first test will be in reshaping the Bretton Woods institutions. Those who set them up and wrote the rules are now debtors and the downtrodden of then are creditors now. The baton has to be passed on and it would require the best brains of the Obama team to manage this transition".

Satyam Computers

Ajay Shah Says “I am extremely uncomfortable with the fact that the government has appointed a board of directors. Let’s think deeply about this. The company is owned by shareholders, the government is an interloper, the government has no business in getting involved in the governance of the company.

 

What the government should have done is to collect the institutional shareholders ‑ 50% shares are held by institutional shareholders ‑ which can be easily put together in a meeting with a five days notice period. So, the government should have put institutional shareholders of the company into a room and told them you pick. The institutional shareholders should have put together a board of directors and that board should go around recruiting a management team. I think we are doing damage to the fundamental concepts of private property and the corporation by putting government into companies in this fashion”.

As amicus curiae

Fali S Nariman  says, "Judges of the highest court who have powers to life and death over us citizens, judges who can (and do) send people to jail for contempt of its order must - I repeat must - show that they too are amenable to good practice."  

"That is how they earn the respect of us commoners. We in India learn by example - never by precept. For judges of the highest court to litigate as to whether or not they should disclose their assets is as bad as judges going to the court on whether it was lawful for income tax to be deducted from the salaries they get! We have good judges, but we need more judicial wisdom." 

Real tragedy of modern economics is too much false assumptions

Courtesy-The Business Line

T. C. A. Srinivasa-Raghavan writes in the Business Line but quite interesting in questioning the basics of economics which is often said as 'dismal science' nothing more on it in a rational way at least in the modern times. Note the following thought which has gone through years at least in his mind.

“As mentioned last week the purpose of this column is to suggest that economists no longer quite know what they are doing as a result of which economics has lost its way. This is proposed to be done with the help of examples from the research in economics.

Assumptions are central to any discipline of structured thought. Newspapers, for example, assume that readers are only interested in reading news but not reading per se. Psychologists assume that everyone is nuts unless proven otherwise. Historians assume that the historical material they use is true. And so on.

Economics differs in one very important respect. It makes more assumptions than any other discipline. One of these is (or used to be) that people and societies act rationally, where rationality consists mostly of consistency.

But after more than a century of using this assumption as a bedrock of their theories economists have now begun to abandon it in order to justify the discipline’s inability to come up with explanations that stand the test of time.

They are not saying that people don’t behave rationally but only that there can be no standard yardstick by which to judge an action as rational.

Thus, even though suicide bombing is regarded as completely irrational behaviour, to the bomber himself it appears to be the most rational thing to do.

I might add that whether or not that is the case, suicide bombers certainly take care of one of the most used definitions of rationality in economics, attributed to John Muth of Chicago University, an economist of great standing.

His definition was simple: people don’t make the same mistake twice. With suicide bombers, of course, we never get the chance to find out if this is true.

The question that needs asking but which no one is asking is: by diluting the rationality requirement, has the subject gained or lost? Having thought about it a lot during the last two decades, I would say that one way or another, it has not made any difference.

Therein lies the real tragedy of modern economics”.

“Can do” good or evil

When everybody celebrate Obama to the White House yesterday, K.P. Nayar says “Unfortunately for Obama, his choice as the next treasury secretary, Timothy Geithner, who spent part of his childhood in New Friends Colony and went to school in New Delhi, has turned out to be a tax cheat. Obama would have been better off disowning him and withdrawing him from consideration for his cabinet.” 

Where is the State here?

T K Arun writes in the ET “The Sapiens in Homo Sapiens stands for wisdom, the ability to reason. Ideation is a defining feature of the human being. 

From stone implements, mastering fire, mastering animals and crop husbandry, smelting ore to produce metal, using the metal to create more refined tools and weapons, conquest and subjugation, migration to all corners of the planet, music and art, language and literature, war and worship, mathematics and astronomy, rebellion and revolution, missiles and missions to the moon — all milestones in man’s march from a primitive biped in a corner of Africa to the supreme species whose ambition now soars beyond the sun embody the power of thought fusing with action”. 

You too do thankless job

 The Mint also does the thankless job to unclear bomber prize of US stimulus plan it says that Mr “Krugman is right when he says that spending may be the only way out of the worst contraction the US economy has seen since the Great Depression”.

 

 

Only State education department can fool every child no matter whether they enter school building or not

Nonika Singh says students “..in schools, ...., where the fear of failing hangs over student’s minds like a morbid cloud which can engulf their precious childhood in a vice like grip”. 

So well to do students have no incentive to do more...till class eight. What is horrible is the “Harpreet Malwai, a teacher of computer education at Carmel Convent School, Chandigarh, sees no reason why failure should be a driving factor. She says, “Actually, children should not be failed till Class X, for by holding back children in school classes we ensure that they are held back in life too.” She further adds that since each child is special, creative and uniquely capable, he or she can choose his or her muse after Class X, a period in which students are forced to study all subjects.”

Administrated Politics

Gobind Thukral says:

• Chandigarh... “the city, no doubt, elects one member for the Lok Sabha and has a nearly elected Municipal Corporation. The current member of Parliament, Mr Pawan Bansal, is a minister of state for finance and hence funds should be no problem. It is another privilege indeed.
  
• Yet we find the seasoned politician mostly in tears. He has been sending missives to the city administrator who is also the Governor of Punjab, complaining of being ignored.
  
• Every week his complaints mount and he feels crestfallen. May it be the cause of farmers, whose lands have been virtually usurped by the administration all in the name of development or the plight of the poor, the underprivileged slum dwellers and small shopkeepers.
  
• One reason for which the citizens agree in a big way is that the Administrator, who is also the Governor of Punjab and whose accessibility to the citizens is limited because of the constitutional position he holds, should be replaced by a Chief Commissioner”.
  

Economics in Garlic

Vir Sanghvi writes in the HT about the heaven of garlic which I once use to eat like food because of taste or smell. “There’s a restaurant in London’s Soho called Garlic And Shots which is frequented by strangely dressed people in chains and leather trousers. The food itself is rubbish but the restaurant gets by because it goes on and on about how it puts garlic in everything. There are garlic cocktails, garlic fish, garlic meat, garlic sauce etc etc. I doubt very much if anyone actually likes the food but the idea of eating so much garlic seems to give white people a decidedly sexual thrill”.

Vicious cycle of politics or poverty but if it is tourism, politicians start residing as slumdog……of life

Sudheendra Kulkarni says in Indian Express few but permanent questions about poverty in India “but what can one say about his political maturity, as displayed by his decision to invite a foreign dignitary to undertake poverty tourism in his constituency? Would a British MP take Pranab Mukherjee on a tour of the poorer quarters of London and show what developmental works he has initiated? Would an Italian MP invite Rahul to take a look at poverty in his country and make it an international media event? Have we ever seen Hu Jintao and Wen Jiabao (or Xi Jinping and Li Keqiang, who are tipped to become China’s next President and Prime Minister) escorting a foreign visitor on a tour of the backward areas of their country? Let’s not forget that there is a lot of hidden poverty in Europe. There is stark poverty in China too, in spite of the fact that China was last week adjudged the third largest economy in the world. 

Who has given Britain, one wonders, the right to advise us either on Kashmir or on development and poverty alleviation? After all, our erstwhile colonial master was one of the culprits who created the Kashmir problem in the first place. As our colonial history incontrovertibly shows, Britain was also responsible for the pillage and pauperisation of India—one of the important factors that pushed the families of Karma Devis and Shiv Kumaris into poverty. Of course, we cannot blame Britain for our own failures in poverty eradication in the post-Independence era. But who is responsible for these failures, if not those who have ruled India for the longest period since 1947?”

It’s now Change vs Hope no audacity in between

What is next, so for the developing countries? Hey guys be ready to export whatever you can or could not in the past because our pundits says that the new government in US is ready to pull everybody legs and hopefully the “stimulus package will work since global economic recovery hinges a great deal on US recovery. Three, he will have the vision to work on the long-overdue reform of the global financial architecture”.

New Social Science

Sauvik has excellent piece in today’s Mint

Hayeks call for complete abolition of Central Bank

F A Hayek said at the Gold and Monetary Conference, New Orleans, La., November 10, 1977 “I discovered that I had opened a possibility which in two thousand years no single economist had ever studied. There were quite a number of people who have since taken it up and we have devoted a great deal of study and analysis to this possibility. As a result I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else. Now, fully to understand this, we must free ourselves from what is a widespread but basically wrong belief. Under the Gold Standard, or any other metallic standard, thevalue of money is not really derived from gold”.

 Thanks to Lew Rockwel  

The idea of government is the idea of crisis

Kaushik Das writes in the Mint “History has shown time and again that all the previous business cycles or “general cluster of business errors” were the outcome of either the manipulation of interest rates, price levels, exchange rate, fiscal balances or a combination of all of these by government institutions.”

In fact Sauvik is right in a way to deeper sense of free enterprises system.

The blunder stimulus

DR AJIT RANADE Chief Economist & President, Aditya Birla Group says “cheap dumped imports are fickle, and imports don’t create jobs, but exports do.” 

This is indigestible in economics.

Light Glass lover

Reshmi R Dasgupta writes some of wine economics but old socialist and dogmatic wine:

 “glass of red wine and once in a blue moon some really light beer, which my father routinely dismissed as 'horse piss'! But coming back to that prescient minister of yesteryear, after clearly enjoying every sip of champagne, the same gentleman also revealed that he had tried to convince Nehru to plant wine grapes in suitable places around India but "Jawahar simply refused". Imagine, had the minister prevailed, we would have had a more-than-50 year old wine industry in India and could have probably rivalled Australia and South Africa in the 'New World' genre!” 

Omkar prescription for painoeconomy

Economist Omkar Goswami writes: 

• “On the last Friday of 2007, the BSE Sensex closed at 20207. That evening, at a swish Mumbai restaurant called Indigo, a young investor banker triumphantly told me, “20,000 is just a half-way house to 40,000, which will happen sooner than you think.” On 26 December 2008, also the last Friday of the year, the Sensex closed at 9,329 — almost 54 per cent below the level a year earlier. Instead of doubling to 40,000, it had more than halved; and quicker than the young banker could have thought. 
  
• Only traitors questioned the sustainability of our dazzling growth trajectory. “What’s 9 per cent?” you were told with barely hidden contempt. “Why shouldn’t we get 10 per cent? Or 11? Or even 12?” Today, these self-same alpha males speak of cutting investments, slashing costs, conserving cash and ‘right-sizing’ — the euphemism for firing people. 
  
• There is nothing to indicate that Japan has learnt the lessons of 10 years of inaction. 
  
• There are solutions. The immediate ones are monetary. Why can’t the cash reserve ratio be brought down from 5.5 per cent to 2 per cent? Or even zero? Why should banks earn 5.5 per cent by parking their money at the RBI? Why shouldn’t this reverse repo rate be slashed to 2 per cent? And the repo to 4 per cent? These measures will create more liquidity and force the banks to lend. To put a lid on monetary expansion because of inflationary fears is absurd in a situation where commodity prices have crashed everywhere. 
  
• Plan to ride out 2009 by gritting your teeth and working harder than before. Things should turn for the better by January-March 2010”.
  

The odds corporate

K.V. KAMATH writes in BW “The Indian corporate sector has demonstrated its ability to compete in a global environment, and today is far stronger than it was in the late 1990s, in terms of quality and operating efficiency”.

Gold mania and terrorists

In his latest column of Ashok V Desai in BW writes some interesting story about gold imports.

The Latest Gold Racket by ASHOK V. DESAI

”Taxing gold and jewellery brings little revenue; it only makes smugglers rich and nurtures terrorists” 

”Chand Mehra is a strange character: He is a jeweler who knows English. He went and did an MBA in the Peter Drucker School of Management of Claremont Graduate University in California, and came back with the ambition of making India a world power in gold jewellery. Of the world gold production of 3,000 tons, India consumes about a quarter. It is the world’s largest market for gold, and hence naturally prized. 

When World War II started in 1939, the British government had to devote all available resources to fighting the war. The Germans started sinking British ships, there was a shortage of shipping space, and it had to be rationed. 

Gold was quite inessential for fighting the war, so its imports were banned. After the War came independence and the ascent of socialists in India; they were even more contemptuous of Indians wanting to wear gold. So the ban stayed. 

The market invariably finds a way around bans. When Arab countries suddenly quadrupled the price of oil in 1973, they became unimaginably rich overnight. They no longer had to work; they hired Egyptians and Indians to do the work for them. Hundreds of thousands of Keralans flew to work in Dubai and Abu Dhabi, and earned wages beyond their dreams. They wanted to send money to their wives in Kerala. A helpful man came and offered to do it for them. They could give Dinars to his men in Dubai, and he would ensure that equivalent Rupees would be delivered to their wives in the villages of Kerala in three days. His door-to-door service was more convenient than that of our nationalised banks, who were loath even to open branches in rural Kerala.

How did that man get Rupees? He bought gold with the Dinars, put them in fast boats, and delivered them on the coast of Gujarat and Mahrashtra. From there, his couriers delivered it to jewelers all over India. Once he had put his business in place, Indians hardly noticed that there was a ban on import of gold; they could get all the gold they wanted — at a price. 

That man’s name was Dawood. Chand’s brainwave was that he would import gold, make really light, fancy chains with Italian machines, and sell them to fashionable Indians. But to do so he had to import the machines, and to import them he had to accept an export obligation. The finance ministry had imposed a condition of minimum 10 per cent value addition on jewellery exports; the margins on exports were so slim that he could not export.

If he could not export, Chand could not produce chains. If he could not produce chains, he could not service the bank loans he had taken. So he got simultaneously in trouble with the commerce ministry and with banks, and failed. That is when I came across him, and wrote about the irrationalities of government policy. I do not know whether P. Chiambaram read me or not, but when he became finance minister in 1998, he lifted the ban on gold imports and allowed its import through banks. Since then, most of the gold has entered the country legally.

That was ten years ago. Now Chand has managed to pay off the bank, and is back in business. But now he faces another hurdle. Dawood no longer brings gold in fast boats. He gets hold of Keralans who have been in UAE for more than six months. He gives them free tickets home. All they have to do is to carry 10 kilos of gold jewellery, which the Indian government freely allows. This jewellery is sold in India, and gives sufficient profits to Dawood to fund all his profitable and patriotic — read terrorist — activities. 

Now Chand is campaigning for a ban on imports through these couriers. I disagree with him. But I see how the government has created a lucrative courier business for Dawood and his peers. The business no longer depends on a gold import ban; it depends on the fact that the import duty on gold is Rs 10.30 a gram, or 1 per cent, while the duty on jewellery is 10 per cent. By using a courier, Dawood saves this 10 per cent, plus value added tax of 1 per cent. This is a pretty fat profit margin — enough to finance a hundred terrorist attacks like the one in Bombay.

What should be done then? Gold and jewellery are too valuable per gram to tax reliably and efficiently; they can be easily smuggled, transported, manufactured and sold. So the best solution is to free them entirely of tax — of import duty, education cess, VAT and whatever else the governments care to call their taxes. Is it not unfair not to tax a useless acquisition of the rich like jewellery? No; tax the rich, not their jewellery”. 

The author is Consultant Editor of Businessworld. (Businessworld Issue 06-12 Jan 2009)

Trade Doom of Hillary Clinton

In FT Professor Jagdish Bhagwati says “Mr Obama needs a stellar crew that will understand the protectionist nature of “fair trade” demands and dispel the unions’ baseless fear that trade with poor countries harms American workers’ wages.

Alas, his cabinet appointments include Mrs Clinton, whose trade scepticism is badly muddled at best, as secretary of state, and Hilda Solis, who reflects the anti-trade sentiments of the union federation, AFL-CIO, as labour secretary”.

 

Dilemma of Japan Economy

MC Shalom P. Hamou has commented on my post which I wholeheartedly subscribed from Christopher Lingle’s article published in Mint.   

First I agree with you in economics we should be a “straightforward to make the case that” will be relevant, rationale and unconventional in logic. 

It may not be true that the Japan economy is “constrained… by the inherent conservatism of a society that places so much value on consensus”. In fact I would say the post modern society monetary policy which has been emulated from the stymied political community of central bankers around the world. Indeed this community failed to sense what the giant F A Hayek wrote in "Choice of Currency”. 

It is absurdity to Say “the problems of the Japanese banking system, for example, can be interpreted as arising in part from the collision of a traditional, relationship-based financial system with the forces of globalization, deregulation, and technological innovation (Hoshi and Kashyap, forthcoming.” I wonder if the developed world says the same thing that developing world (although wrongly) breach in their home. Where the unconventional developments of post modern monetary society march? 

There is nothing to lose “traditional strengths” if the nation marches toward better living condition with core rule of law value.   

Politicians around the try to play “a major role in… macroeconomis” which is a fiction in practical life. 

Perhaps it is true that the political “the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years…”has broken the “the banking system”. 

A nation’s price of commodities and services is not an end product to “stabilizing aggregate demand and inflation” which is often deemed to be so. 

The biggest myth of twenty-first century will be the “responses,.. confused or inconsistent,  relied on various technical or legal” pundits in world.  

Back to Hayek read his choice of currency and his greatest theses of contribution to spontaneous economics. The problem of economics is not resources but information according to Hayek’s original contribution to economics. 

Finally it may be true that “A Credit Free (read choice of currency), Free Market economy is a solution that will correct all of those dysfunctions.”

Politics of Quadrilateral project

“One of the key reasons why infrastructure gets neglected, in the first place, is that there is very little political pay-off to filling potholes and repairing bridges, compared to spending that same money creating community centers, bike paths and other things” says economist Sowell. The BS editorial reports “the World Bank now has a report which speaks of huge delays, over-engineering of contracts, and a poor safety record during construction. The Bank now threatens to pull out hundreds of millions of dollars of commitments to NHDP projects.”

Seminal Economics

T.C.A. Srinivasa-Raghavan just started column titled ‘Empty Sum’  The Business Line   Newspaper. He writes in his first piece: 

• “Economists will protest, more than somewhat shrilly, that I am making far too many sweeping statements. That is to be expected. But, after spending a lifetime with them, I know that in their heart of hearts they agree that this is exactly true of most of post-war economics.
  
• Techniques in econometrics have, of course, improved. But useful economic theory has made virtually no progress. Much of microeconomics stays where it was in, say, 1945, except in the matter of its dress. And as we are seeing now, macroeconomics hasn’t gone beyond Keynes, who published his seminal work in 1936.
  
• My view is that the post-war period can be divided into two clear segments. The first comes roughly up to the mid-1970s when economic theory grew increasingly distant from real life and more-or-less merged into advanced mathematics. The second phase was a sort of reaction, and comprises the empiricist phase where, gradually, the mere presence of a data set has meant that anyone who knows a little regression can become an economist. Thought and thinking have both exited.
  
• The trouble with empiricists, as opposed to empiricism whose importance can’t be denied, is that they can’t tell the difference between correlation and causality. I once wrote an article showing how every change of party of government in the US after 1945 has been accompanied by a recession.
  
• The correlation was easy to establish but causation, in either direction, is another kettle of fish altogether. Even after having been advised early not to fall prey to it, they make the classic post hoc, ergo propter hoc (after this, therefore because of this) mistake.
  
• The triumph of mindless empiricism has seen the advent of a menace called the policy economist. This tribe is to economics what ‘non-state actors’ are to security: guided missiles but with commercial intent. These economists flourish in think tanks which, if you ask me, are like those camps in Kandahar, Muridke, PoK, etc. But more about them in the months to come.
  
• Overall, the swings between the two extremes — of economics posturing as physics so that it can use advanced mathematics, and data-based vacuity which has no roots in politics, custom, institutions, law, etc — have led the discipline into a state of meaningless tarkam and vitarkamwhere scoring petty points is mistaken for scholarship and where debate becomes an end in itself”.
  

The fiction of a liquidity trap

Christopher Lingle has excellent article in Mint particularly it is important to note the following: 

• “In the current climate of global economic uncertainty, central bankers are creating vast amounts of paper money from thin air to pump into the global economy. 
  
• central bankers are perpetrating and perpetuating the problems they claim to be seeking to avoid. 
  
• In the current setting, interest rates in the US and Japan should be much higher than their present low levels at near zero. 
  
• In other words, investment depends more upon spending rather than upon increased savings. 
  
• As a modern proponent of the liquidity trap, Paul Krugman is as confused and confusing as Keynes. Krugman suggests that an economy caught in a liquidity trap will slide into deflation. But he then states that deflation can push an economy into a liquidity trap. Like Keynes, he seems to like to have it both ways”.

Whereas T.N. Srinivasan who is Samuel C. Park Jr. Professor of Economics at Yale University says “Unless the private sector sees the current slowdown as an essentially temporary phenomenon and believes that the economy will be bouncing back to 8.5 per cent or more [growth rates], simply reducing the interest rates will not help,” he said.

Directly pour money in the hands of people!

Kishore Biyani says: 

• “The Chinese had drawn up a massive bill, largely funded by tax payers’, to be spent by the government itself in boosting the economic activity. Taiwan, on the other hand, decided to give back some money to its citizens to spend by themselves, thereby creating demand for products in local markets, which in turn could boost economic activity and job creation. 
  
• Under a new policy announced in December 2008, the island’s 23 million people regardless of age or wealth were given 3,600 Taiwan dollars or around $165 as shopping vouchers. “The programme is aimed at boosting the economy and is expected to contribute to a 0.64% increase in 2009 GDP,” explained Premier Liu Chao-shiuan. 
  
• The core belief behind this programme was government spending is not effective due to leakages and delay in execution, whereas private spending is far more efficient in boosting economic activity, creating demand for goods and services and raising employment levels. The idea of the voucher and stimulating growth through private consumption has been powerful enough for even the governments of Japan and Germany to consider such a move”.   
  

One of my Hero of economists ever lived in the world and in India was Professor B R Shenoy

Ashok V Desai who is no less senior living economist in India. He wrote a article in the Business Standard in 12 August, 1997 which I consider to be a biggest rubbish except or some of the following lines which I think worthwhile to remember a man of his age, great free market economist Professor B R Shenoy who lived not just an great human being but questioned the intellectuals of his counterpart mostly socialist babus. Anyway thanks to Desai for making me aware of his follies… 

• “Returning to a legal definition of an Indian, the first patriot must be B R Shenoy. In my youth, Shenoy was a strident critic of policies; mainstream Indian economists treated him as an untouchable, and I must say that I myself took no serious interest in him then. But anyone who reads him today must see how right he was, for instance about inflation, controls, corruption, gold smuggling, planning or unemployment; everyone is experiencing it and saying it today. To be right is an achievement in itself, but to be right against the combined weight of establishment opinion, and to keep hammering at the truth regardless of consequences was foolhardiness of the highest order: that was patriotism”. 
  
• “Jagdish Bhagwati is as affable as Bellicoth R J Shenoy was belligerent; but he is the next one on my list”.
  

Join the global baboos for making more mess

Chacha Manmohan Singh listed a group of people to “represents a vast untapped resource that can be harnessed as an input into national development processes in India”. 

See the below list: 

1)     Prof. Jagdish Bhagwati

2)     Sh. Karan F. Bilmoria

3)     Sh. Swadesh Chatterjee

4)     Ms. Ela Gandhi

5)     Sh. Rajat Gupta

6)     Dr. Renu Khator

7)     Lord Khalid Hameed

8)     Sh. Kishore Mahbubani 

9)     Sh. L.N.Mittal

10) Sh. PNC Menon

11) Ms. Indra K. Nooyi

12) Shri Bhikhu Chotalal Parekh 

13) Prof. C.K. Prahlad

14) Tan Sri Dato' Ajit Singh

15) Dr. Amartya Kr. Sen

16) Sh. Vikram Pandit

17) Sh. Sam Pitroda

18) Sh. Shashi Tharoor

19) Prof. Srinivasa SR Varadhan

20) Sh. Yusuf Ali, M.A.

 As it says that “the Council will serve as institutionalized dialogue mechanism between the diaspora community and the highest levels of Government”.

Manufacturing policy advisers

Yoginder K. Alagh says “Krishnamurthy is sadly an outlier, for his focus is all the time on doables, with examples from current policies of successfully industrialising countries. Sorry, my friend, the Maruti 800 was three decades ago. I still drive one, leaving the new fancy car to the lady of the house. But maybe you will have your day and we pray somebody out there is listening”.