Thursday, October 23, 2008

Fiscal Deficit

Fiscal deficit
Another word that seems to scare American politicians appears to be fiscal deficit. Why are they afraid? Because fiscal deficit is bad! Why is fiscal deficit bad? No idea!!!

Some theory behind the story of Fiscal deficit; It is a common practice in economics to just state the theory, assumptions are also presented but many a times they take the back seat. So the story of the fiscal deficits begins with some such assumptions.
The theory says that when ever there is fiscal deficit, there will be inflation. (Therefore fiscal deficit is bad! What about the assumptions?) One of the most important assumptions behind this theory is that of full employment. Fiscal deficit leads to inflation if and only if the economy is in full employment. That is to say, all the resources, labour, capital, natural resources are already employed and there is no scope for further increase in production, will a fiscal deficit (where in the government spends a lot more than it earns) leads to a situation where too much money is chasing too few goods and there will be inflation in the economy. So what is so scary about it that Mr McCain wants to go for a balanced budget?
I don’t know.

Under the conditions of the assumption, there will definitely be inflation, true. But what if the assumption is violated? In the presence of spare capacity in the economy, there is always a chance that fiscal deficit which is used to print money (monetised fiscal deficit) will lead to better utilisation of the existing capacity/resource to improve production and therefore be beneficial to the economy.

What are the current economic conditions here in United States? Does the situation warrant a balanced budget?

Well currently unemployment is very high. There are a lot of people wanting to work, but are finding no work. There are producers who have excellent prospects but are slowing down due to lack of credit. The propensity to consume is weak, consumer driven American economy is slipping into a recession. We might already be in the midst of a recession!! It does not take very long to get from recession to depression, a balanced budget or a budgetary surplus is just the shortest way to get there!

So why is Balance budget good? And Ms Palin was so proud of her fiscal achievements in Alaska? Well it is alright to cut down expenditure on extra cars, fancy dinners, business class air tickets, but what about schools, what about infrastructure and what about productive expenditure? No answers I guess…

The candidates will keep harping about balanced budgets! Please vote for us, we will give you a balanced budget and as a complimentary offer, we will give you a small piece of hell….

Socialism and American Public

I have been following the election campaign here in the United States. One thing that stands out is the American public’s fear for words like ‘welfare’ and ‘socialism’! these words seems to have derogatory connotations! It is so surprising, that one presidential candidate should criticize another because his plans amount to ‘welfare’ and sounds ‘socialistic’. I don’t believe that this could even happen. Personal ideological longings apart, what is the harm in taxing those who can afford to pay and spend the money thus raised so that the less privileged could have a better life. After all the richest in this country are indeed the richest in the entire world, if they cannot part with their accumulation for the betterment of their own fellow citizens, what is the hope for the rest of the world which is evidently so much less privileged than all these people?

The first question that arises is why do people fear ‘welfare’?
The first thing to strike me is that this country made enormous gains in the past few decades from free enterprise, much more from open global trade and from low tax regime that now they are scared of higher tax rates? No not convincing enough. Liberalising health care sector, meant hardship to a lot of people but Insurance, Medical care providers, Pharmaceuticals and hospitals made a lot of money. Similarly, in financial sector, investment banks, hedge funds and those rich enough to invest a lot of money made much more money than they had ever done. Now what is the result? Who is bearing the brunt? The ordinary tax payers, small investors who lost money at the stock markets, bonds (issued by companies like Lehman) people who are being laid off left right and centre and those who brought homes at the peak...Why does ‘welfare’ scare even this subset of the population? Does not ‘welfare’ mean cheaper healthcare and cheaper education and better infrastructure for all these people? Is it not the duty of the state to ensure that its citizens can afford these basic facilities?

Before coming to this country I strongly felt that the Indian government is not doing enough to provide healthcare and education to its population, but now I feel it is doing a much better job. Being one of the richest countries in the world and for the small population they have, this country is not taking care of those who cannot afford the expensive healthcare, or the expensive college; whereas in India, there still is something to fall back upon. However poor you are there are charitable hospitals, government run hospitals that provide somewhat inferior quality care, but do offer something which is better than nothing- total exclusion! And education in India! I studied in a government run free school, a government aided college and a government university. The cost of my entire 20 + years of education cannot be more than the fee charged for a single course in the cheapest possible university here in United States! Indeed with all the scholarships that I got, I must have made a lot more money than I paid up in fees. I am glad we do have the option to do that in India. Of course with the increasing richness, there are so many more choices than before, but competition is good for all of us. I strongly feel we have this option in India because our resource constrained Indian governments feels obligated to have ‘welfare’ in mind! The State still feels responsible for the welfare of its citizens, just that they should not be producing cars and incense sticks, but concentrate on schools and hospital.

Why are Americans scared of ‘welfare’? The question still remains to be answered!
Does it have something to do with the cold war era mindset? When it was believed that ‘right’ is ‘right’ because it is opposite of ‘left’? Is it because it is so very easy to obfuscate communism, socialism into sounding similar? That reminds me of the presidential debate in JNU-2004, when a candidate from one of the smaller parties took on the task of differentiating himself from the left-backed major party candidates and did a wonderful job. May be American public needs to hear one good lecture on the topic. Though the aim of this post is not actually to differential between the two ideologies, I will try and do it in may be a few lines!

Socialism could also be a part of a democratic ‘welfare’ state. No doubt the communism had its roots in socialism but socialism is not just communism. In a democracy, there are enough checks and balances to avoid the trap of communism. And what is wrong in providing free health care (education)? The Scandinavian governments do, the French and the British do it. They do not have to shell out $ 700-800 on their health insurance each month. They do pay higher taxes and their economic growth has been slower. But what is the use of having faster economic growth rate that just benefits the rich and leaves the underprivileged worse off? Every research that studied inequalities in the recent decades concludes that inequality has risen; so why do we need growth if it cannot benefit a majority of the population? Life in Scandinavia and Europe is much better than that of United States, is it not? Here it would not take long for a hardworking salaried taxpayer to become homeless and not afford heath care; the possibility is so much more muted in Europe.

Communism on the other hand is a setup which seeks to establish a classless society. Everyone owns everything and everything belongs to the communes. So there is no scope for private ownership, no private enterprise, no private profits, everything is for everyone and people simply disappear never to come back. True this experiment has failed; the proof is Russia and other eastern European states. It kills enterprise, incentive to work hard and breeds a discontent and violence. True, communism and its lack of liberty scared me like hell! I even have nightmares about it. I was never as disturbed as I was when I went through George Orwell. It is scary, but it has nothing to do with welfare.

A ‘welfare’ state can exist very well without even coming kilometres close to communism. They are successful welfare states which encourage private enterprise and private ownership of assets, have vibrant democracies and their citizens are better off that way. Why should social welfare be scrutinised under the leans of communism?
What ever it is the spin doctors are doing a good job of scaring the hell out of American public. The bottom line is, in our enthusiasm for certain jargons and prescription; we forget the aim of ‘society’, ‘government’ and ‘democracy’ themselves. The primary aim is wellbeing of all citizens, if all is impossible; the aim is the wellbeing of a majority of the citizens (Bentham still rules!!!) and it should always be remembered. What ever promotes the wellbeing of the majority should be promoted, cheered and accepted. What reduces wellbeing of the majority should be feared, discouraged and snubbed. It is not easy get lost in the jungle of jargons?

Friday, October 3, 2008

Sarah Palin

My take on the performance of Palin in the VP debate; This is the first United States presidential election that I have been following so closely for obvious reasons- I love elections and right now I live here in United States! The election has been pretty interesting, watching out for Hillary in the beginning and now Palin. After all despites more than 200 years of independence they still have not had a woman at the helm of affairs! Where as we developing nations in south Asia, India, Pakistan, Sri Lanka and Bangladesh we have all had great women politicians.
Hillary Clinton was fabulous. She had the right credentials, she spoke right, she had the charisma, she had her policies right, but she failed to gracefully accept the challenge posed by a rookie!! By the time the primaries were finished, she looked desperate for power which I feel was her undoing. But she is a politician any party and country should be proud of, a person who can represent the country abroad. After all, being in the white house means interacting with leader from every corner of the world. And United States could have felt safe in the hands of a person like Hillary. Well now that Hillary is not running in 2008, we will have to keep watching her.
On the contrary is Sarah Palin. I had not watched her interviews before, but having read about her ‘Russia close to Alaska’ statement, I was rather amused. Yes, she is spontaneous; she is the mom next door; she is cute but is she a VP material? I was very disappointed. Is this the best female candidate this entire country has to offer? Most of the times, she intelligently beat around the bush failing to answer. She was adamant that she will speak what ever she knew regardless of the question. It reminds me of a fellow in school, who used to cram two-three chapters on the previous day of the exam and end up writing only about the two chapters what ever the questions were. But she is smart enough to sound very confident, for she is a good politician-material. She knows how to strike the populist note and tried to sound the person next door. But is that enough? One person with questionable IQ and dubious judgement at top position here in this country has created enough mess that the entire world needs at least a few years to recuperate. The world is more dangerous than it was 8 years ago, economically it is more fragile than it was 8 years ago, poverty has increased, and income inequality has increased. Everyone is worried about their jobs, about their mortgages from America to Europe to India.
How well does Sarah Palin mean in a circumstance like this? She does not seem to understand security issues. She feels Iraq is at the heart of terror!!! So where did Bin Laden go? Did he suddenly disappear from the most-wanted terrorist list? So that means she does not even remember ‘weapons of mass destruction’ that Mr Bush was so scared of and managed to scare the entire American public with it to secure another term. Thank goodness he cannot run again. Who knows he could have said India has ‘weapons of mass destruction’ so smoke out India next. Now the faint public memory cannot even understand that the person whom they could be voting for is so unaware of the events not long ago! Again she wants to build an embassy in Jerusalem. If only American and Israelis had kept away from Palestine and parts of Jerusalem, the world would have been a far peaceful place. In the first place I really don’t understand the Israeli concept of the land being promised by God to Jews. No one has seen god promising the lands, but Israel continues to occupy disputed lands. The ultra right wingers continue to build settlements in disputed areas. What I do appreciate is their guts to settle down in a hostile region and make sure their borders are safe. Just know where to keep your enemies, neither far that they escape your sight, nor close that they can hurt. I wish India could pursue such an aggressive policy like Israel does with its neighbours. Coming back to American embassy at Jerusalem, does Ms Palin even know how dangerous a place Jerusalem could be for an American embassy? As outsiders, as foreigners who just read news papers we are so much more aware of the problems in other parts of the world which Ms Palin does not seem to know. Does that mean she does not even read news papers?

On issues of economy, she kept on saying that tax cuts will improve the number of jobs and all the problems of the economy will be solved miraculously. Wow! Is it so simple? If it were so simple we professional economists would be out of jobs !!! One simple question is why is that after eight years of tax cuts has led the American economy into today’s quagmire? How did the jobs evaporate if tax cuts were a cure? And she kept highlighting fiscal austerity. But has it not been proved that what matters is the quality of spending than fiscal austerity and a zero based budget? Of course spending on a wasteful war is no more a good option. As I see it, there was a time when America had to spend on wars to pump prime their economy. But Iraq war proved rather different stretching too long and far more expensive to pump prime but large enough to suck crucial resources out of the economy. It is time to stop the bleeding wounds from further haemorrhage. So both measures are problematic. She fails there as well.

Then if there is a question she could not comprehend or she did not know the answer, she just got back to something she knew a bit. Energy policy. Wow. How intelligent. I was reminded of Rabri Devi in her initial days.
The saddest part of Ms Palin is that despite her inadequacy, is that she subscribes to a brand of policies that has just been proved to be wrong. Free markets will never work, tax cuts will not increase jobs, market fails without the interference of government (regulatory or participatory) and there are no simple solutions to complex issues. All these have so long been proved in the academic circles but so poorly received in the policy circles. She is just in the wrong boat at the wrong time. Her lack of knowledge is only aggravated by her leaning towards free market philosophy. That’s a heady combination.

There are a few more issues that I find rather too old-fashioned for my tastes, one is her anti-gay stance. Hey come on, gays are normal people, they need to have their own choice whether to get married or to live with each other or to get hospital visitation rights. What applies to a relationship between a man and a woman should also apply to a relationship between two men or two women. Another such issue is that of abortion rights. It is all about choice. There are people who want to have babies and there are those who would not want to. The choice should obviously be left to individuals. Spending money to promote unwanted babies will just lead to unloved and uncared for children. What life can such children look forward to? Strange when she knew her conscience will not allow her to go for an abortion; she should have at her age known better to use other preventive methods. Now what did that end up with? An infant affected by down’s syndrome, who needs to travel and keep awake at odd hours because ‘mama has to pose for a photograph’!
She is always pitching in for the mom-next door image, contrasting and characterising her fresh-ignorance with that of the seasoned long time Washington-ers. Unfortunately her parenting skills are not great either. Her teenage daughter is pregnant, the way she brings her infant son for all photo-ops is sad. So where does Sarah Palin fit in?

I just imagine Sarah Palin facing gutsy politicians like Mayawathi, Jayalalitha or for that matter Mamatha Banerjee. (Sonia Gandhi again is rather too coached!!! just like Palin) Agreed that politics is a different ball game in India, but these ladies are no-no-brainers. They know what it is to be where they are; they are astute, well informed and are great spin doctors. No wonder they survived in the male bastioned Indian political fiefdom. Will Sarah Plain hold upto them? The Answer is pretty clear. Sarah Palin fails to fit into the jigsaw puzzle .