Sunday, November 19, 2017

Moody’s and Modi

US based bond credit rating agency Moody’s upgraded Indian government’s bond rating from Baa3 to Baa2. This is one level up from their lowest rating grade. They have changed their outlook of the Indian economy from positive to stable with this upgrade. Modi government ministers and its supporters are terming this upgrade as an endorsement of their policies of demonetization and GST for which they are under intense backlash and criticism of late.

One thing that I vividly remember about Moody’s is that this is the same credit rating agency which failed miserably in seeing the sub-prime credit crisis coming in 2007. Just before the sub-prime bubble busted in 2007, this agency was rating the toxic mortgage backed securities (MBS) with their highest rating level of AAA! After the crisis this rating came down to their lowest level of junk!

Does this upgrade matter so much?
The fundamental theory behind this bond rating upgrade is the flawed Keynesian idea of ‘borrowing and spending’ to boost economic growth. As we have discussed many times in past, economy doesn’t grow when the government or people spend (out of their income or via borrowing) and consume, but when people save, invest and accumulate capital. Government borrowing only siphons off private saving and investment funds which actually slows down economic growth in future. It lowers our standard of living. Most of the government spending is pure consumption in the form of various welfare schemes. This is sheer waste of society’s saved resources. And whatever little so-called investment like building roads, bridges, dams etc., the government carries out fails to pass the market test of profit and loss. All government projects are highly inefficient and very costly. They continue to make losses year after year, but unlike any private firm they never go out of business because they earn their so-called revenue not by satisfying consumers’ most urgent needs by providing them best quality products at the lowest possible price but by coercing and robbing the tax payers. This again is sheer waste.

And, if at all this upgrade will reduce the cost of borrowing for private companies of India that also will not help the Indian economy very much because this borrowed money will be used by the fascist business tycoons to shore up their empires, as has mostly happened in past, instead of serving the poor Indian consumers. Borrowed money will go in the stock or real estate markets where it will be used for speculation instead of any productive purpose.

Conclusion
All in all, borrow and spend policy will fail in the end because it can’t produce real economic growth. The big Indian government with its all out interventions in the economy is the real problem. This upgrade is a bad news for people because it will allow this big government to borrow and spend more and become even bigger!

Thursday, November 16, 2017

Pollution and Property Rights

The capital of India New Delhi is once again engulfed in toxic smog. The usual blame games by politicians have begun about the cause of this pollution. The Delhi chief minister Arvind Kejriwal is blaming the burning of crops in the adjacent states of Haryana and Punjab for this pollution. Other major causes cited by authorities and activists are vehicle exhaust and dust and industrial emissions. Delhi government has tried every measure like spraying water or the famous odd-even scheme for vehicles etc., that it had in its policy portfolio to combat this pollution but failed. Now the authorities are hoping for rains to come and naturally clean this pollution!

Most people discussing this issue are of opinion that only government can tackle this problem of (air) pollution. But is it so? The usual problem with such opinions is that they ignore the alternatives available. For example, in the field of environmental sciences there is a school of thought known as free market environmentalism. No one is looking at the ideas of this school of thought for solving this issue of (air) pollution in New Delhi and elsewhere in India.

What Is Free Market Environmentalism?
The Property and Environment Research Center defines free market environmentalism as an approach to environmental problems that focuses on improving environmental quality using property rights and markets. It emphasizes three important points: 
  • Markets, property rights, and the rule of law are fundamental to economic growth, and economic growth is fundamental to improving environmental quality. There is a strong correlation between treatment of the environment and standards of living.
  • Property rights make the environment an asset rather than a liability by giving owners an incentive for stewardship.
  • Markets and the process of exchange give people who have different ideas and values regarding natural resources a way to cooperate rather than fight. When cooperation supplants conflict, gains from trade emerge.
The causes cited by authorities and activists are only proximate causes of (air) pollution. They are not root causes. The root cause of the problem of pollution is the absence of private property rights and its corollaries free markets and the rule of law in India.
If the absence of private property rights is the root cause of pollution in India then the only solution is to establish the institution of private property rights and enforce it strictly via private judiciary system. There is no other better solution of this problem. Hacking at the proximate causes like the burning of crops or vehicle exhaust and dust will never permanently solve the pollution problem.

How Private Property Rights will work?
What precise solution private property free market system will find for the problem of pollution is impossible to know in advance, but we can elaborate few things using theory and history. One thing is for sure that entrepreneurs guided by the price and profit & loss system of the free market capitalist system will find more efficient and ethical solutions compared to the present statist inefficient and unethical solutions. In the case of New Delhi, authorities and activists are citing three major proximate causes of air pollution: 1) burning of crops in the adjacent state villages 2) vehicle exhaust and dust and 3) industrial emissions. Private property right regime means an individual is the owner of his bodily property and all other physical property that he/she has appropriated legitimately using that body. No one, not even the state (aka government), is allowed to aggress upon these properties and violate them. Any violation of these properties is a crime and punishable appropriately. Right now, because private property rights regime is absent, the villagers are burning their crop in the open and harming others via air pollution. In the regime of private property such harmful actions will strictly be banned and that ban will be properly enforced by private institutions like private police and courts. Same is true for industrial emissions too. Industries will not be allowed to violate others’ property rights. They will have to take private city owners’ permission first to locate nearby or amidst them and pollute environment, and such permission will simply be not coming. In such situation they will have to locate their factories in some remote area where their activities do not affect the lives of private property owners. What is happening today is the exact opposite of this. In the name of “development” government itself is giving licenses to these industries to operate within or nearby cities and pollute environment! Also, in the absence of government taxes entrepreneurs will have extra funds available to invest in R&D activities and invent better anti-pollution clean technologies. In the present statist system, even if entrepreneurs want, government’s restrictive policies prevent them from investing and inventing such clean technologies.

And, one big cause of vehicle emission is the cheap money policy followed by the Indian central bank, RBI. In the absence of low interest cheap loan availability, there would be fewer cars running on Indian roads, which will reduce air pollution drastically. Most of the people who buy cars buy by using bank provided artificial cheap credit. Governments, via RBI, by providing cheap money to Indian buyers artificially increases demand for cars in India, which results into more vehicles on Indian roads and more air pollution. This also leads to problems of traffic congestion and high frequency of road accidents. A truly free market in banking sector will have no central bank and the credit will be regulated naturally by the consumption and saving habits of people. Also, private road companies will simply not allow high pollution cars on their roads, which will cut vehicle exhausts drastically. And as in the case of industries discussed above, private car companies too will have every incentive to invent new low or zero pollution technologies.

Conclusion
The real cause of air pollution in Delhi (or India or elsewhere) is not crop burning or vehicle or industrial emissions. It is the absence of private property rights regime in India. As long as this regime is not established, New Delhi or Ahmadabad or any other city of India will continue to get engulfed in toxic smog. Any measure like odd-even scheme or spraying water will simply not work.

Wednesday, November 1, 2017

(BOOK REVIEW) GDP: A Brief but Affectionate History

GDP: A Brief but Affectionate History by Diane Coyle (Revised and Updated Edition 2014, Princeton University Press, pp. 167 )

Diane Coyle’s little book GDP: A Brief but Affectionate History tells a very mainstream history of the statistics of GDP (Gross Domestic Product) in brief 145 pages. The book is divided into six chapters not including the introduction. The introduction discusses what GDP actually means. Coyle throws light on this often confused statistic:
GDP is the way we measure and compare how well or badly countries are doing. But this is not a question of measuring a natural phenomenon like land mass or average temperature to varying degrees of accuracy. GDP is a made-up entity. The concept dates back only to the 1940s.
As Coyle clearly states, when looking at GDP numbers published by the newspapers, journal articles or uttered by the politicians from their bully pulpit in election rallies, we must keep this fact in mind that GDP is purely a made-up entity. It has nothing inherently natural in it. It is a device of some economists, bureaucrats and politicians designed for some specific purpose in past. What that specific purpose was we come to know in the first chapter.

The first chapter covers the history of GDP beginning from the eighteenth century to the 1930s. This chapter is important because this is where we get to know the main reason why economists, bureaucrats and politicians devised the statistics of GDP. Before discussing the concept of GDP Coyle takes us on the brief tour of the history of national income account statistics, which were the predecessors of the concept of GDP, starting from William Petty in the 17th century. This history is covered to reveal the fact that the early definition of the concept of national income was not precise and fixed. Here is Coyle:
The quick dip into the early history of national income accounts and the forerunners of GDP shows that the definition of “national income” was not precise or fixed. How it was interpreted depended on the intellectual climate and on the political or military needs of the moment, and so the definition changed over time.   
In the following discussion of how the concept of GDP came into being in the 20th century the emphasized words of Coyle above should be kept in mind as the same political and military needs played fundamental part in the birth of the concept of GDP.

Now Coyle discusses the main reason behind the birth of GDP. And here is Coyle again:
The definitions we use now date back to two seismic events in modern history, the Great Depression of the 1930s and World War II (1939-1945).

During the depression years the Roosevelt government was interested in knowing how the economy was doing overall so they can plan their anti-depression policies properly. This work of providing the overall picture of the US economy was carried out by the National Bureau of Economic Research and their economist Simon Kuznets who later won the Nobel Prize in economic science for the same work. The crucial fact to keep in mind in this history is that the US government was only interested in knowing the total amount of output in the economy while Simon Kuznet was mainly interested in working out how to measure national economic welfare rather than just output. Before this modern exercise of measuring national income of the economy in the 20th century, the old pre-depression pre-war methods of measuring national income will show government war expenditure as negative in the national income accounts and consequently it will reduce the private output available for consumption in the economy. In short, government expenditure on war will reduce the national income. This was unacceptable to the Roosevelt government, who wanted to increase their warfare and welfare expenditure to boost the economy, and they devised the new concept of GDP to overcome this hurdle. Simon Kuznet was ignored and the bureaucrats and politicians got what they wanted in the new concept of GDP. And why the Roosevelt government thought that they can boost the economy by increasing government spending on warfare and welfare? Because they were following the advice of the British economist John Maynard Keyes whose just published book The General Theory of Employment, Interest and Money swept the profession of economics and became a new policy dogma. As Coyle puts it, at the heart of this classic economic text lies a theory about the relationship between different economic variables, including, in addition to national income, personal consumption, investment and employment, interest rates, and the level of government spending. The theory set out links between the tools the government had available and the size of the economy. It became the basis for a more interventionist approach to government economic policy from the 1940s onward, using both fiscal policy (the level of tax and spending) and monetary policy (the level of interest rates and availability of credit) to target a higher and less volatile rate of growth for the economy.

This means, the concept of GDP was solely devised by government friendly economists, bureaucrats and politicians to justify their macro and micromanagement of economy via central planning as ordered by Mr. John Maynard Keynes. In this way the whole history of GDP is also the history of the so-called science of macroeconomics. GDP is the main concept used by central planners in their macroeconomic centrally planned management of the economy even today. And as the theory and history is evident, this central planning is the main cause of our economic, social and political miseries.

After discussing the birth of GDP, Coyle goes on to discuss the various ways in which macroeconomists measure GDP today. I will not go into these technical details here. Rather I want to focus on her important discussion of various conceptual problems of GDP, which almost render the whole statistics useless. The first thing Coyle warns us about is not to mistake GDP as a measurement of welfare. She clearly says that, GDP is not a measure of welfare; it does not measure well-being. It only measures economy’s output that also in highly dissatisfactory and misleading ways. The major conceptual problems with GDP are:
  • Calculating real GDP: GDP is a total of variety of goods lumped together and expressed at their market prices. This means, higher price inflation can increase GDP without increasing the actual output. To counter this problem economists convert nominal GDP to read GDP by adjusting it for price inflation using various methods. These methods are highly flawed. As discussed by Coyle, so, although we definitely want to make this adjustment for inflation to measure real economic growth, the choice of technique can lead to strikingly different “real” conclusions.
  • Hedonic price adjustments: GDP also doesn’t measure the quality improvements taking place in the goods. To tackle this issue economists have devised a technique of hedonic price adjustments, but this technique is highly problematic and involves lot of guess work and arbitrary decisions by the statisticians.
  • Seasonal adjustments: Most of the data massaging in the calculation of GDP is done while adjusting it for seasonal fluctuations.
  • Adjusting GDP for exchange rate: Comparing GDP across countries is also highly problematic looking at the various techniques of adjusting GDP for price levels in different countries via exchange rates. Any altering of techniques by one country will make big impacts on comparisons.
  • Changing base years: GDP will also change drastically if some country changes the base year used to calculate GDP.
  • Production boundaries: production boundaries mean what counts as economic output? As Coyle puts it, much of GDP is private sector output or expenditure measured at the prices charged in the market…but large portions of output are not marketed – everything done by the government for one thing. This has to be valued in a variety of other ways, such as the wages paid to government employees. This is surely highly flawed method. Wages paid to government employees in no way passes the market test of how much consumers are actually valuing these employee produced goods and services e.g., I know many teachers in my government run university whose contribution in students’ learning is not only zero but negative and still they get seven figure salaries! Counting this as positive contribution in GDP is surely nonsensical.
  • Household production: GDP also doesn’t take into account all those valuable activities that are taking place outside the market e.g., all unpaid household work. As Coyle puts it, a widower who marries his housekeeper and stops paying her a wage reduces GDP!
  • Innovation exclusion: GDP also ignores the impact of innovation on output and prices.
  • Inclusion of financial industry in GDP: After the 2007 financial crisis and the role played by the finance industry in making that crisis many people, including Coyle, has started questioning inclusion of financial industry contribution in GDP calculation. If financial sector is damaging the economy by carrying out risky and morally bankrupt activities then its inclusion in GDP is surely questionable.
All these flaws in GDP has forced economists to look for alternative measures of welfare like the Human Development Index (HDI), Happiness Index, Net National Product, OECD’s Better Life Index, Economic Well Being or “dashboard” of indicators etc., instead of just looking at economy’s output.

In the beginning I called this book a very mainstream history of GDP. The reason why I am calling it a mainstream history of GDP is because it fails to take account of other schools of economic thought like the Austrian School when analyzing this history. If Coyle used the theories expounded by the Austrian economists then the whole history would have looked very different from what she has presented in her book. For example, in recanting the 20th century history of growth, stagflation and boom-bust business cycles she completely ignores the role played by central banks in generating those business cycles and stagflation. This is a huge omission. Instead of taking a critical look at the role of central banks, she looks at them very favorably and thinks that central banks played a role in stabilizing markets. In doing so she completely ignores the very important work of Prof. Ludwig von Mises and his student and Nobel Prize winning Austrian economist F A. Hayek.
In the end, despite discussing at length so many flaws of GDP, she still favors using it and ends her book by saying, GDP, after all its flaws, is still a bright light shining through the mist. This is very contradictory.

The real question Coyle never asks and answers is what is the need of gathering all these statistics like GDP in the first place? As we saw GDP’s history, the only reason for gathering GDP and other statistics is because they are needed and used by the politicians and bureaucrats to centrally plan their economies. Not looking at this side of history reveals Coyle’s ideological biases towards Socialist central planning; she takes this mainstream point of view of centrally planning our economies for granted. As theory and history has shown us, this very same statist socialist central planning and macro and micromanaging of economy is the root cause of our economic, social and political miseries. Statistics like GDP or GNP or HDI etc., enables governments’ dangerous socialist central planning. Without it governments cannot do their central planning, which means our economic, social and political problems will be solved if governments are deprived of these statistics. As Murray Rothbard brilliantly put years ago, statistics is the Achilles’ heels of governments:
Surely, the absence of statistics would absolutely and immediately wreck any attempt at socialistic planning. It is difficult to see what, for example, the central planners at the Kremlin could do to plan the lives of Soviet citizens if the planners were deprived of all information, of all statistical data, about these citizens. The government would not even know to whom to give orders, much less how to try to plan an intricate economy.

Thus, in all the host of measures that have been proposed over the years to check and limit government or to repeal its interventions, the simple and unspectacular abolition of government statistics would probably be the most thorough and most effective. Statistics, so vital to statism, its namesake, is also the State’s Achilles’ heel.
Notwithstanding the support of Coyle for GDP, instead of collecting the data of GDP and other statistics what we need to do is what the unsung hero of Hong Kong’s growth story, its financial secretary John James Cowperthwaite, did. When Marian Tupy asked Mr. Cowperthwaite to name the one reform that he was most proud of, “I abolished the collection of statistics,” he replied. Sir John believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy.

Overall, Coyle’s book is a good read for students and laymen who want to understand the intricacies of GDP and know its brief history. But its mainstream treatment doesn’t make it very useful beyond that purpose.

Saturday, October 14, 2017

Is Sex with an underage wife Rape?

The Supreme Court of India on Wednesday ruled that a man is committing rape if he engages in sexual intercourse with his wife who is aged between 15 and 18. How logically sound this Supreme Court ruling is? To know the answer of this question we must first understand what ‘rape’ is. An online dictionary of law defines rape as the crime of sexual intercourse (with actual penetration of a woman’s vagina with the man’s penis) without consent and accomplished through force, threat of violence or intimidation (such as a threat to harm a woman’s child, husband or boyfriend). This means, a rape basically is a violation of others’ bodily property right. It is an initiation of aggression against others’ private (bodily) property. Any case of such initiation of aggression re sexual intercourse is a rape no matter what the age of the person whose bodily property is violated is. The age factor is irrelevant here.

The ruling of Supreme Court is purely arbitrary and illogical having no basis in any sound legal principle. Why only wife between 15 and 18 years old? What if the wife is 18 years and 1 day old? What if she is 19 years or 20 years old? In any case of rape the only thing the court has to decide is whether any kind of sexual aggression has took place or not without looking at the age of the victim or aggressor. A rape is a rape. A sexual aggression against an 80 year old wife is also a rape and 16 year wife is also a rape. The Supreme Court is unduly complicating the matter and the law. By doing this, they are inviting all kinds of troubles for people who will get falsely accused of rapes in future.
The fact of the matter is, in India the judiciary system lacks any basis of sound legal principle. Whatever principles they are using are all arbitrary subjective values of the judicial body members.

The state judiciary system functions like this only everywhere. Their goal is not of producing ‘Justice’ for the victims, but to endlessly complicate matters so that the institution of state and its organs like the justice system can be perpetuated indefinitely. As long as the state is in charge of the judiciary system, there is no hope for the victims of getting ‘Justice’.

Monday, October 2, 2017

Coalition Governments and Economic Growth in India

Former RBI governor Y V Reddy said that Coalition governments in India have produced better economic growth rates in the last three decades than a strong majority government… Interestingly, the highest growth in India from 1990 to 2014 was really during coalition governments… So, in a way it’s consensus based… in Indian situation, a coalition probably produces better economic results than a strong government.

Mr. Reddy is committing a logical fallacy of Cum Hoc, Ergo Propter Hoc. Just because two things are occurring simultaneously and are closely connected with each other doesn’t mean one is causing the other. Better economic growth has nothing directly to do with what kind of governments, either coalition or majority, India has. What matters for growth is what kind of economic policies these governments are going to follow. If the government is small and less meddling in the free market enterprise system then it will produce stronger economic growth like what happened after 1990 economic crisis and following Rao-Manmohan liberalization reforms. And if the government is totalitarian and imposes its controls on the free market enterprise system then it will strangle the growth like what is happening under present Modi government.

The only reason Mr. Reddy sees this correlation is because India is a typical Wittfogel style oriental despotic country where demagogue despots are lurking in the background to seize the power and impose their will on people whenever opportunity allows them. The coalition government restrains such demagogues so they have to listen to others’ wishes and stay away from totalitarian controls. Coalition government works under restrains because it is working constantly under threat of losing power if they ignore others’ wishes. Such government also results into more political log-jam in parliament so they can’t pass draconian controlling bills easily. But majority government doesn’t face such restraints. Whenever one party is successful in getting full power via full majority, like what Narendra Modi got in 2014, they impose their totalitarian controls on everyone resulting into dismal economic performance.