Moved to New Website

Hello All

Its been many years now that have thought to move  this blog to a new website and finally have moved economicsdoodle to a new website. It was so kind of all my readers who have always given your support and it is always required. I take this opportunity to thank all my regular readers of this blog. 

Now you can follow all happenings of economics, discussions and policy issues in the new website

https://economicsmate.com/

Kautilya - The True Founder Of Economics

On January 10, 2013 – I posted a write up on “KAUTILYA's Principles of Taxation and ADAM SMITH's Canon of Taxation”. The post was left open as usual for reader’s opinion. This post is different. Kindly read further to know how different it is. Thanks.

Today when I went to library and browsed some book, where I found an interesting book titled “Kautilya - The True Founder Of Economics” by Prof. Balbir Singh Sihag. 

In the book (page no. 10-11) he had given a partial list of concepts used by Chanakya alias Kautilya in his book Arthashastra (4^th Century BCE). The list is as follows:

Genesis  of the Concepts in Arthashastra  during 4th Century BCE	Re-emergence of these concepts
	Authour	Year
Opportunity Cost	Wieser	1889
Demand and Supply Framework	Marshall	1870
Law of Diminishing Returns	Turgot	1766
Liquidity	Keynes	1936
‘All other things being equal’	D Bernoulli	1738
Marginal Analysis	Turgot	1766
Constrained Optimization	Walras, Slutsky	1874-77, 1915
Distinction between Short Run and Long Run	Marshall	1870
Moral Hazard	Adam Smith	1776
Linear Income Tax	Mirrless	1971
Public Goods	Lindahl, Samuelson	1919, 1954
Producer Surplus	Marshall	1870
Importance of Capital Formation	Adam Smith	1776
Theory of Gains from Trade	Ricardo	1817
Crime and Punishment	Becker	1968
Efficiency Wages	Marx, Solow	1867, 1979
Risk-return Trade-off	Markowitz	1952
Asymmetric Information	Akerlof	1970
Time Inconsistency Problem.	Kyland-Presscott	1977
Non-cooperative game	Waldegrave, Nash	1713, 1951
Contigency Planning	H Stein	1996

The authour also stated that "It may be noted that the above illustratively enumerated twenty-one concepts, used in modern economic analysis, were already used and applied in Kautilya's formulations. Adam smith has the credit for only two..."

Note: The book cost Rs. 650 in Indian Market. (as mentioned in the book cover and this info is for the readers who wish to buy)

RBI's Third Quarter Review and Rational behind it

Recently RBI had announced its Third Quarter Review (for Full review of TQR Click here). Many analysts, economist and markets were surprised of its announcement because it has raised the Repo Rate by 25 basis points. RBI had said that from next announcement it will follow Dr. Urjit Patel Committee reports recommendation. But, when one reads the policy he will definitely see that even this quarter review announcement of RBI seems to be based on Committee report; because it talks more about CPI (whereas in its earlier policies it use to mention both CPI as well as WPI).

Let us have a look what is some rationale behind the hike of Repo rate. If one sees the graph above then one will see the main rationale behind the policy, as it says, is inflation control, is absolutely right and acceptable. But when one read the graph carefully then one will see when WPI had fallen (which was the lamp post for earlier policies) then Repo rate should have also reduced which never happened (RBI cities due to other reasons for it- which is not clear). In November 2013 there was little hike in Inflation where policy and inflation almost same and in December the inflation had fallen. The present hike is based on the December inflation, but not on the basis of WPI but CPI.

Those who are good at IS-LM Space of Monetary Policy will understand the above graph easily. For others here are the basic 3 conditions 

   1.   Price  Increases – Demand Increases - Interest Rate Increases

   2.   Price  Decreases – Demand Decreases -  Interest Rate Decreases

   3. Price Increases – Demand Decreases - Interest Rate
   (may be in) Status Quo (or) Increases!!

I leave this post wide open for readers perception.

Reagonomics – A Flashback

These days’ people are still thinking or hesitating to take some major economics steps like tapering, increasing interest rates etc… By seeing and analyzing the current scenario I remembered a strong head economist cum politician, former U.S. president, Mr. Ronald Reagan.

The economic policies which he used are popularly known as Reagonomics. He had a simple, but specific plan, of which he spoke often during the campaign: cut taxes, get control of government spending and get the government out of the way so that the entrepreneurial spirit of the American people could be unleashed. Some skeptics derisively called his plan “Reaganomics,” but President Reagan was undeterred.

Many economist and many leaders, across the globe, was amazed and surprised by the way he carried out the economic policies, administration and put U.S. economy on track in short span.

It was the most serious attempt in U.S. to change its economic policy of administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

His program (in 1981) of Economic recovery had four major policy, they are

1. reduce the growth of government spending,
2. reduce the marginal tax rates on income from both labor and capital,
3.  reduce regulation, and
4.  reduce inflation by controlling the growth of the money supply.

He believed that this in turn will increase savings and investment, increase in economic growth, balance the budget, restore healthy financial markets, reduce inflation and also interest rates..

In August 1981, President Reagan signed the Economic Recovery Tax Act of 1981, which brought reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses and incentives for savings. So began the Reagan Recovery. A few years later, the Tax Reform Act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country in the world.

The numbers tell the story. Over the eight years of the Reagan Administration:

• 20 million new jobs were created
• Inflation dropped from 13.5% in 1980 to 4.1% by 1988
• Unemployment fell from 7.6% to 5.5%
• Net worth of families earning between $20,000 and $50,000 annually grew by 27%
•  Real gross national product rose 26%
•   The prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988

During a G7 Economic Summit, the West German Chancellor asked him to “tell us about the American miracle” (Before two years, when he outlined his economic recovery plan these group of world leaders were unconvinced) As President Reagan observed with a wry smile, “I could tell our economic program was working when they stopped calling it Reaganomics”

Today many economist and politicians are more skeptics about taking some bold steps while economy is still quivering.  No doubt current scenario and situation may not be same; but taking decisions boldly can send a right signal to the economy to the take it to the next level.  This is where I admire Reaganomics.  Let us wait and watch how the policy makers do take decisions in coming days.

Sources: 

1. http://www.econlib.org/library/Enc1/Reaganomics.html
2. http://www.reaganfoundation.org/economic-policy.aspx

A Small Note on Fiscal Balance

What is fiscal Balance?  

           

The balance of a government's tax revenues (plus any proceeds from asset sales) minus government spending is called fiscal balance. This is also called as Government Budget Balance, Public budget balance, or Public fiscal balance (for convenient purpose let us keep as fiscal balance). When the balance is positive then the government has a fiscal surplus, if negative then fiscal deficit.

The fiscal balance is further classified into Primary balance and Structural Balance (also known as cyclically-adjusted balance).

What is Primary Balance?

The primary balance is government budget balance before interest payments. In simple terms fiscal balance minus interest payments gives us primary balance.

What is Structural Balance?

Structural balances are an extension of cyclically adjusted balances, correcting for a broader range of factors such as asset and commodity prices and output composition effects.

The need for calculation of structural balance: 

In order to assess the fiscal sustainability the adjustment of fiscal balances for the output cycle is really crucial and needed. There is no single method is considered as the appropriate adjustment method for adjusting fiscal balance. The appropriate adjustment method depends on country specific factors, data availability, fiscal regime and the economic structure of the country.

Source: IMF Fiscal Monitor, 2013.

Note: Interest rate as a percentage is difference between primary balance (which is not given in the above table) from overall balance. The Bolded numbers are Percent of GDP for Advanced Economies as a whole and EME’s as a whole             

If one read the table carefully, then one can see that emerging markets are doing better compared to developed economy (all data are for the year 2012).          

                              

Note:  In many European countries, they have set an independent body to carry out the study of fiscal balance and they are called Fiscal councils. In India it is not easy to calculate the structural balance due to multiple factors mentioned above.

ANOTHER CURRENCY UNION or CHAOS?

       We all know that Europe have a common currency called Euro. It is still trembling to find stability. The euro crisis has put most people off currency unions. But, it seems that, Africa is not shaken up or put off due to this crisis. An African Monetary Union is proposed (like European Union) creation of economic and monetary union for the countries of the African Union. This union will be administered by the African Central Bank. By forming such union the Africa will go for the creation of new unified currency (same like EURO)

        An International Agreement was signed on June 3, 1991 in Abuja, Nigeria (called as The Abuja Treaty) and created the African Economic Community. They called for African Central Bank to follow by 2028 and the current plan is to establish an African Economic Community with a single currency by 2023. (Source: Wikipedia)

        An article in “The Economist” (in 7^th December, 2013 print edition) said that “In November the leaders of five countries of the East African Community (EAC) agreed to form a monetary union within ten years. A month before West African politicians agreed on a plan to introduce a new shared currency, the Eco, over the next few years. It should eventually subsume West Africa’s existing currency bloc—but not its central African cousin.”

        “Under the proposal an initial group of six countries will adopt the eco by 2015 (see map). Five years later the members of the West African Economic and Monetary Union (known as UEMOA, its French acronym), which currently share a currency called the West African CFA franc, are to adopt the Eco too, creating a currency union of over 300 million people.”(for full article click here)

        The Economist concluded that “If a region as rich as the euro zone has struggled to cope with such pressures, the likelihood that the poorer and less well-governed places hoping to adopt the Eco could is tiny.”

My Perception

        When the entire global economy is debating whether EURO as a currency will survive or not? This new currency union is really an eyebrow raiser. Despite of having many developed economies EURO is facing so many crises then how can Eco or Afro (hypothetically it may be name of African common currency) survive. Some may think that there is a scope that Eco or Afro may survive, because, there are many developing economies (even though tiny) in Africa. But, to have a common currency means to have common policy measures and common (more) effective administration. Can Africa do it?

John Maynard Keynes – A misunderstood economist!!

     John Maynard Keynes (J.M. Keynes) an economist who had given solution during the great depression. Later he was criticized for his theories and proved to be wrong. There is age old debates which are still going for and against J.M. Keynes. Recently, in economist an article titled “A Keynes for all seasons” – by C.R. | CAMBRIDGE, says why Keynes was one of the misunderstood economist.(for full post click here)    

   The author quotes that “Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time…Good economists are scarce because the gift for using "vigilant observation" to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one.” (for full post click here)

     John Wasik, a contributer in Forbes has once said “One of the most misunderstood economists haunting the global economy is John Maynard Keynes, a truly friendly ghost who many have transformed into a poltergeist.” (for full post click here)

     Another writer Andrew Murphy had stated in Harry’s Place that “Hayek in the 1970s, in an interview with a Chilean newspaper, gave a backhanded endorsement to the Pinochet regime, saying, “My personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism.”  

          It is safe to say, Keynes is a very misunderstood man. It is time for the centre-right to embrace their inner Keynes. He is a man of the middle.” (for full post click here)

  Keynes “The General Theory of Employment, Interest, and Money” came at a specific time during the 1930s, it was not a blueprint for good times or forever. Whenever he was criticized for his latest ideas he retorted by saying: “When the facts change, I change my mind. What do you do, sir?”

    Any economic theory evolves based on the particular condition or situation of that period of time. So, it is not appropriate to criticize any economist or his works without considering their timeline, situation of the economy at that particular period of time, etc… (views are personal)