The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists

Europe’s embrace of austerity has sparked a debate among economists. This column argues that the debate has gone astray. Until the critical principle – ‘how’ is as important as ‘how much’ – is embraced, the austerity debate in Europe will continue to be completely out of line with the real economic trade-offs.

 

The European debate on fiscal austerity has gone astray – focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget tightening’s composition�(tax versus spending) and on the accompanying policies. Indeed, the title of this Vox debate – “Has austerity gone too far?” – reflects this inappropriate emphasis on size.

In our view, the essential question is not ‘how far’ governments go but of ‘how’ they go far enough.

Evidence on new taxes versus new spending cuts

Economists have engaged in some lively debates about how to measure and evaluate the effects of large fiscal adjustments episodes in OECD countries (Europe in particular). But a careful and fair reading of the evidence makes clear a few relatively uncontroversial points, despite the differences in approaches. The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear:

via The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists.

via The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists.

Government Intervention in the Economy

Statue of Liberty Gaeilge: Dealbh na Saoirse (Photo credit: Wikipedia)

Economy is akin to the freeway, though on the freeway there is a speed limit and traffic signals to regulate the traffic. And of course police to book the offenders. The economy, too, should have limits, regulators, and the law to book offenders.

If we base our analysis on methodological individualism, subjective rationality and inherent unpredictability of economic system to properly analyze the Government role in society we have to conclude that, beyond the point of maintaining the basic framework of law and order, government’s role in society is very limited. One single intervention is unlikely to produce a solution to deep-rooted economic and social problems and thus policy makers often try to build a variety of policy, policies that work on market demand and market supply.

Economists have referred innumerable times to the “free market,” the social array of voluntary exchanges of goods and services. But despite this abundance of treatment, their analysis has slighted the deeper implications of free exchange. One of the most lucid analyses of the distinction between State and market was set forth by

In his book The General Theory of Employment, Interest and Money (1936), John Maynard Keynes set forth a series of theories that have come to be known as “Keynesian economics,” whose major implication for the public and for governments was that recessions and depressions are not simply natural events that will eventually correct itself, but rather a problem that must be solved by direct government intervention in the economy, by deficit spending and other measures.. He pointed out that there are fundamentally two ways of satisfying a person’s wants: (1) by production and voluntary exchange with others on the market and (2) by violent expropriation of the wealth of others. The first method Oppenheimer termed “the economic means” for the satisfaction of wants; the second method, “the political means.” The State is trenchantly defined as the “organization of the political means.”

Economists usually make a common mistake, that extensive modeling, statistical and empirical coverage of events is enough for proper design of any system. Economics is a social science and the effects of intervention cannot be calibrated / forecast with great accuracy , people’s behaviour is subject to change as one can infer that from the ‘law of unintended consequences’. If we live in such undetermined and unpredictable world, with limited knowledge and limited ability for proper economic analysis, one cannot be sure about the policies that are being proposed.

Related articles

• Want a Job in the Free Market? (lewrockwell.com)
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• Economic Growth Hinges on ‘Frontier Economics’ of Entrepreneurial Upstarts and Reduced Government Intervention (kauffman.org)
• Greenspan’s Faith in Markets (economistsview.typepad.com)

On my To- Read Pile

• The Economist sees (and raises) (Michael Pettis)

• India’s economic monsoon (FT Alphaville)

• The mirage of free-market roads (Atlantic)

• The bathtub model of unemployment (Liberty Street)

• A conversation about economic inequality (Triple Crisis)

• The role of speculation in oil markets (Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva)

Internationalization of India: Of Trade and Connectivity

India Day Parade an event for PHD’s & Politicians? Open Letter to Editors of all Indian News Papers in USA (Photo credit: davemakkar)

India Gate (Photo credit: aroris)

Why should low-level of connectedness to the world should be a concern to Indian policymakers? Let’s start with ,traditional computable general equilibrium models (CGE) which peg the benefits of complete merchandise trade liberalization at about 0.5% of GDP, more advanced models with a consideration to all policy levers would shoot the number by a high margin. Also accounting for benefits from economies of scale , product and service differentiation, increased competition , normalizing risk, and generating and diffusing knowledge should push the potential gains well past 1% of global GDP, to 2-3%, or maybe more. Also, foreign direct investment offers an avenue for internationalizing even the provision of some “nontradables” ,  and there are substantial gains available from increasing the cross-border mobility of capital, information and people as well.Two decades of reform aimed at opening up the economy have roughly tripled India’s indicators of trade exposure, compared to our past, there has been a significant progress in this regard. That’s the good news. But the bad news is that India still ranks quite poorly in terms of many measures of the intensity of cross-border integration. In terms of measures of inward FDI stock as a percentage of GDP, India still figures in the bottom 10% of the countries. On Information Technology connectivity front India does a bit better, all thanks to Internet but India does substantially worse in terms of trade in publications and print material, intensity of short-run tourist flows and medium-run university students.

India figures in bottom decile of the fifty countries in terms of the extent to which it encourages FDI, according to OECD‘s FDI Restrictiveness Index. So although India has opened much more in past , a lot need to be done. The big problem here is not Manufacturing as one might say , where many barriers have been eliminated, sector where foreign investment is still very much restricted is business services. Take for example the classic case of FDI in multi-brand retail. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers . Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports. Similarly the foreign universities bill also turned out to be a car with square wheels. Indian tertiary education system needs  internationalisation of higher education and policy makers should put in place a policy framework to address the various concerns, if it wants to reap the benefits.

Policies explicitly aimed at boosting internationalization should be backed up with policies aimed at improving the domestic business environment. Another major challenge facing the investment flow is corruption, diverting long term commitments ( like FDI) to short term capital flows which makes it necessary for the government to tackle it. All of this should suggest that there is tremendous potential for further policy measures to increase the internationalization of the Indian economy and, more importantly, Indian welfare.

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• Govt notifies 100 pc FDI in single brand retail (ibnlive.in.com)
• ‘Proposal for FDI in domestic carriers sent to commerce ministry’ (revolutionizingawareness.com)

Some Interesting Public Policy Issues

Wikipedia (Photo credit: Octavio Rojas)

The old RBI Building in Mumbai (Photo credit: Wikipedia)

India Against Corruption HQ logo (Photo credit: Wikipedia)

The SOPA Act in The United Sates: The Stop Online Piracy Act (SOPA) is a United States bill introduced by U.S. Representative Lamar S. Smith (R-TX) to expand the ability of U.S. law enforcement to fight online trafficking in copyrighted intellectual property and counterfeit goods. The bill promises to protect intellectual property market and corresponding industry, jobs and revenue, and to bolster enforcement of copyright laws, especially against foreign websites.

Anti Corruption Body Formation in India (Lokpal Bill):Government failure to propose a strong Lokpal Bill

which is new anti corruption activism in India. It lacks teeth to bite the corrupt and is faulty in many ways.

Reserve Bank of India‘s monetary policy:
Keeping in mind the sustainability of Indian Economy and the growth prospects so that fiscal consolidation takes place , it becomes very difficult for RBI to curtail Inflation in India. Inflation in Asia’s third-largest economy hovered over 9% for 10 straight months to September. A depreciation in the rupee, which has fallen about 11% against the U.S. dollar since April, has made imports costlier, aggravating the inflation problem. While the RBI have persistently raise the rates 12 times in 18 months till September of 2011 as an anti-inflationary policy stance, while completely ignoring the supply side economics. What was need to focus on the supply side economics and not only demand side economics.

Lack of a National Integrated Logistics Policy in India: While roads have improved and express highways created, delays at check posts along the way due to heterogeneous state taxes and regulations have limited efficiency gains.

Infrastructure Finance in India: While delays in implementing infra projects due to land acquisition , environment and other issues are well recognised in India, one area where a solution could have been forthcoming much earlier relates to accessing long-term funds needed for investment. India needs to develop long term debt markets and deepen corporate bond markets. This in-turn calls for strong insurance and pension sub-sectors.

Attracting Foreign Investment and Foreign Investors in India: India needs Modern Retail. There could be an argument about FDI in retail , but there is really no debate about the need of Modern Retail Technology . Cold-Storage and faster movement of perishable commodities along with better ways of Supply Chain Management will help farmers and Consumers. All this could be done without FDI , but the entry of Carrefour, Walmart and Tescos of the modern world will accelerate the process.

Energy and Power Sector: No country have higher growth without adequate power. India is especially facing enormous power problems. Bank lending to the sector is at all-time high, but some projects that have borrowed money are stalled because of land, raw material and infrastructure issues. Some states are not in a position to buy power from private generators because they have not raised the power tariffs for a decade are now unable to raise it because of political pressures and vote bank politics.

Dismal Scene and Negligence for India’s Agriculture Sector: There have been hardly any reforms in agriculture. Marketing laws are outdated. Distribution and logistics from the farm to food-bowl are full of inefficiencies and corruption. The cost a consumer pays is too high and cost the farmer gets is too less. This exaggerates the problem of food inflation. The APMC (Agriculture Produce Market Committees) monopoly run by state governments does not allow retailers to buy directly from the farmers.

Labour Reforms: Labour laws must be reformed so as to restore the employer’s right to lay off workers upon adequate compensation to them. In context of India, firms with 100 or more workers have no legal way to exit since they cannot lay off the workers. This works as a major barrier to entry of new firms on a large scale , as they hesitate to enter into a world that no exit doors.

Opaque Political Funding giving rise to more of Politico-Corporate Corruption: Corporate contributions to political parties are shrouded in secrecy, which give chance to more corruption. Electoral compulsions for funds in countries like US and India become the foundation of the whole superstructure of corruption. Transparency in the ways that companies engage in , manage and oversee the political funding, especially in case of India is a first step to cleaning up the corruption problem. Both companies and political parties need to take a lead in this.

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• India’s Misguided China Anxiety (businessweek.com)
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WTO and Regional Trade Agreements

“In the last years, we have seen the WTO being stuck, while regional & bilateral trade agreements gained ground, so how would you assess the role of the WTO in the upcoming decade and do you think that the WTO will need to adjust to this new environment, if so, how?”

Global trade liberalization occurs through a variety of channels and not all of them appear to be in harmony with one another. Though every major nation is now a member of the World Trade Organization (WTO) and a participant in its complex process of multilateral trade liberalization; an average WTO member also belongs to six Preferential Trade Agreements (PTAs) (World Bank, 2005). WTO is now facing growing ‘irrelevance’ in bringing multilateral trade agreements palatable to all the members on the table, amidst the growing popularity of Regional Trade Agreements (RTAs) and PTAs.

RTAs on one hand can further the process of globalization through expanding the scope of trade cooperation, whereas, on the other hand, their trade diverting effects may contribute negatively to the process of international economic integration. Their proliferation could create competing blocs, eroding the viability of Multilateral Trading System (MTS). Regional groupings like ASEAN are nothing but a reflection of spaghetti -bowl effect. With the growing number of RTAs and PTAs the WTO needs to change gears and come up as a stronger organization to prevent the harmful effects of regionalism on International Trade and MTS.

The challenge is to ensure greater coherence among PTAs and between PTAs and MTS. The prolonged Doha negotiations suggest that the interest in multilateral agreements have been seriously weakened. Such a situation offers more room for bilateral deals. DDA should be concluded sooner than later, as implementing free trade within RTA is becoming increasingly difficult. From the perspective of normative economics, countries and WTO should work towards removing domestic distortion in Agriculture Sector. An effective competition policy, with an idea to remove market imperfection is needed. There is also a need for conducting joint exercises by the relevant ministries among the partner countries to understand whether the reasons for restricting market access are genuine or not. Predatory pricing is difficult to practise; therefore, anti-dumping measures on presumptions for stopping that have to be verified. RTAs pose a potential risk to the multilateral system, which gives rise to the need for an internationally financed Advisory Centre on Regional Trading Arrangements to provide training, negotiating advice and accreditation to private providers based on an agreed analytical framework.

The world trading system is far from perfect; and many reforms and changes in rules should be under discussion. But to further the cause of trade liberalization, much remains to be done including a defence of what has already been accomplished.

Related articles

• Global Preferential Trade Agreement Database (GPTAD) (mpoverello.com)
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• Baldwin on the Rise of Regionalism (worldtradelaw.typepad.com)
• Fair Trade, not Free Trade. (shaketheshock.wordpress.com)
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Sodexo Coupons – Invalid. A Business Model explained | Kiran Dhanwada

As of January 1st, 2012, all retail store chains in Bangalore (and across India) have stopped accepting Sodexo coupons in lieu of items purchased. Every firm hands out these Sodexo vouchers to its Employees (included in compensation package). Employees are now worried that these Sodexo coupons would be useless as they are not being accepted. My view is that this might just be a temporary phenomenon since there are a lot of stakeholders who will lose out if these vouchers prove invalid. The post explains the how and why of it.

If it were a school debate, the subject of the topic would be ‘Sodexo coupons – A boon or a curse. Discuss’.

via Sodexo Coupons – Invalid. A Business Model explained | Kiran Dhanwada.

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Some nice finance papers to look at

• Can rising confidence in low macro-risk explain the boom in asset prices? (Tobias Broer and Afroditi Kero)

Look at the analysis this paper does on recessions in different economies. Analysis and comparisons based on different parameters of current recession and earlier recessions is also very interesting. Also see Appendix A for data by episode.

• On international risk sharing and financial globalization (Eleonora Pierucci and Luigi Ventura)

Look at financial account components to GDP ratio for different countries. Some useful analysis on savings and factor income.

Lecture by Professor TN Srinivasan: Recent bouts of Inflation in India

I recently attended a lecture at Madras School of Economics by Professor T.N. Srinivasan (Samuel C. Park, Jr. Professor of Economics, Yale University, Connecticut, United States). It was Third R.Venkataraman Endowment Lecture , in the fond memory of late President of India. President Venkataraman was a renowned economist and a lawyer and was fondly known as ‘RV’. Professor Srinivasan (hereafter TNS) talked about RV’s contributions towards development of India and his achievements in first few minutes of his interaction. the Occasion was also marked by the presence of Professor A. Vaidyanathan
(a member of the Central Board of Directors of the Reserve Bank of India).

The lecture focused on , “RECENT BOUTS OF INFLATION IN INDIA: POLICY PARALYSIS?”. I took notes from his lecture and would make an attempt to jot down main crux of his lecture.

He mentioned that the problem of stagnation of the share of financial savings , is threatened by black economy and high rates of inflation. He then pointed out key issues with the measurement of inflation in India, which are summarised as below.

Measurement Issues

1. RBI‘s ultimate objective is sustained growth with financial stability. He says that from consumer’s welfare perspective relevant price index is Consumer Price Index (CPI). Also, Producer Price Index is used in many countries along with aggregate CPI. Neither an aggregate CPI(until recently) nor PPI is published in compiled in India.
2. We measure Inflation as Wholesale Price Index (WPI), the year-on-year of this is also known as Headline Inflation. Also Wholesale prices of food articles is termed as Food Inflation which is misleading.
3. D Subbarao recognizes this problem yet RBI goes for WPI, primarily because CPI data was not available (and only made available in Feb, 2010).
4. Also, Indian WPI is not actually what WPI stands for, because it uses retail prices for some and wholesale prices for some commodities. It does not include services. So TNS hopes that when new data for CPI accumulates, RBI switch to its use.
5. He also proposes that in addition to CPI a new better PPI and cost of living index should be complied. Also In India, we do not have process to include new goods and quality improvements in old goods in price indices, we need it urgently because we see a huge wave of new products and quality enhancements in older ones due to trade liberalization and greater competition.

Keeping all this in mind, we can say that Inflation in India are overstating the true values.

Trends in Inflation

He underscores that time pattern in changes in the price of food articles and not the same as all commodities. In a period of 79 months from April 2005, nominal food prices rose faster in 55 months that other goods nominal prices.

• 53 out of 55 in two long spells.
• 26 out of 29 months from July 2005 to November 2007, and
• 27 out of 29 months from October 2008 to February, 2011

Repo Rates and Inflation

A simple correlation between inflation in all commodities and repo rate yields a coefficient of 0.39, and coefficient of ‐0.47 between inflation in food articles and the repo rate. This is somehow two opposite things happening out here.

Analysis of Inflation

1. He points out that Inflation is about changes in nominal prices over time, thus is a dynamic stochastic process which requires a framework incorporating the stochastic shocks to the economy for its analysis.
2. Any analysis of Inflation , necessarily has to take into account the monetary policy and financial sector behaviour as well. (He quotes Minton Friedman’s statement here.)
3. Effects on real sector integrated with monetary sector should also be considered (consumer welfare, aggregate and sectoral outputs and growth, real investment, employment)
4. He also talks about expectations of future prices, and quotes Keynes arguments of expectations of decision makers of the futures prices.
5. He says, that recent crisis was not foreseen by anyone not even academic economists, and it highlighted issues with macroeconomic and financial models, which gave way to ever-growing literature on ‘ What is wrong with Macroeconomics’. According to him, India specific models on Dynamic Stochastic General Equilibrium (DSGE) are very few.

Indian Inflation

1. Country’s economic managers have not been able to fully grasp the process underlying the persistent high inflation.
2. Criticizes Kaushik Basu’s papers published in EPW for being less insightful . Goes to an extent of saying that he would have not expected this from the brilliance of Basu.
3. One can refer Basu’s paper: I searched for the paper titles , and found them to be the ones below,     a)”Understanding Inflation and Controlling it”; b)”India’s Foodgrain Policy, An Economic Theory Perspective.”
4. You can download papers here : Paper 1,  Paper 2
5. He talks of Mihir Rakshit’s paper that questions the macroeconomic framework of monetary and fiscal policy.

Policy Implications

Good News: Recent Decline in Food Inflation

Bad News: GDP growth rate going down

Montek Singh points out to investment slowdown, but no data bear him out.

Unnecessary stimilus during March 2009.

Forward Looking manner needed.

Lack of consolidation – organised data

TNS expects RBI to come with a report on Impact of European Debt Crisis.

Policy should be proactive rather than reactive.

Lack of coherence in Policy Making

Vaidyanathan’s Inputs

Problems RBI faces: Skewness of Income increased, Enormous increase in Asset Pricing, Informal Financial Sector.

4 Keys to Buying a Used Car Online

1.     Privacy Policy, read it. Pay attention to the kind of information that the seller is collecting from you and how that information is used.

2.     Payment Process, should be clear and straightforward. Most likely you will be paying online you want to be sure that your private information and details are protected. A trusted and reliable seller is one who accepts acceptable and renowned payment options such as PayPal and alert pay.

3.     Reputation, read the seller’s reviews. This will give you an idea of how it is to deal with the seller that you are considering doing shopping with. Stick to the official company websites and renowned websites for all your shopping needs.

4.     Shipping and handling policies, read the refund and return policies and all other legal terms before finally clicking on purchase. In case you cannot find these terms, it is within your right as a buyer to request the seller via telephone or email to guide you on where on their website you can find legal terms of business.

While shopping online is very easy and convenient, it presents risks and only by being an informed buyer can you be guaranteed of a great purchase.

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