Bar Stool Economics.

I reproduce a mail received from a friend and classmate without prejudice or comment.

“Tax System Explained – Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59..

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beer by $20.’ Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.

But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man, ‘but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I got.’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison, ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.”

Two Argumentative Indians.

I am blessed with the friendship of an amazing range of people and among them a special place goes to KD a great inspiration to me for courageous living under great adversity. He in turn has a wide range of friends and among them, I was fortunate to come across TD through copy of correspondence exchanged between them.

KD and TD, (even their names rhyme!) are not just friends but stimulate each other’s thought process. They usually take completely contrary view of any topic and freely exchange views, which I, as an interested observer, find very stimulating and thought provoking. So far, I have refrained from taking sides and have been content being exposed to their exchanges. KD lives in India and TD in Singapore. Both are Indians, the former by birth and residence and the latter by origin. They met at college and continue to be great friends. KD comes from an illustrious Roman Catholic family of soldiers and bureaucrats besides scientists, engineers etc. TD comes from a third generation citizens of Singapore of Indian origin from the Hindu textiles trading community.

I just want to share a particular series of exchanges with my readers. I have taken their permission to do so, but under the assurance that their identities will not be revealed. They are bashful!

The exchange starts with the publication of an article in the Financial Times by a highly respected commentator Martin Wolf. This is titled “What India must do if it is to be an affluent country.” I recommend that you read that article first to understand the exchange. The cartoon at the beginning of the article is heart breaking for me. It however reflects a reality.

Now for the exchange:

KD:Pad up because, here we go! (Pad up is a term used in playing cricket, when the batsman puts on leg pads to prevent injury from fast deliveries.)
I don’t think we should be in a race with China. It will be disastrous. Look our carbon emissions are just 1/6th of China, per capita and already our cities are ???????????????.
In any case let’s see what the hidden costs of the Chinese model are.
Let’s see if they can decouple from the US.
Let’s even, ref Urumqi and Tibet, see if the marvels of a consumer society are all that it takes to keep people happy. TD, I don’t revere poverty. But I am sure that wealth has costs and these costs are borne by the earth. I don’t believe money is inherent. All these trillions that they are talking of spending to stimulate growth, will ultimately be paid in environmental value.
And I don’t think the earth can pay it without harming itself grievously. And I believe that we are children of the earth, a part of it.

TD:”It will be disastrous” — well, what do you think of the sheer numbers of poor, malnourished and illiterate people” India has assured not to have promoted to above the poverty line, because it failed to grow economically as fast as its resources would have allowed if only the government did some basic things right? I certainly would not rate China too highly given its authoritarian one-party rule, so don’t get me wrong, but growing at a snail’s pace (except since 1991 broadly, given the much higher rates of growth after the Manmohan reforms) is nothing to boast about. Of course, since you are not one of those below the poverty line, it does not affect you very directly.

In any case, your sentiments about “nature” have more in common with the highly affluent (e.g. the typical Californian liberals) who are more concerned about the exaggerations by the likes of Rachel Carson (whose arguments were directly responsible for the resurgence of malaria in Sri Lanka and elsewhere in the 3rd world and thousands of deaths, where the governments discontinued the use of DDT on her advice). It is interesting to note that the US now has far more land under forest cover than in 1900, because the country developed rapidly and could afford to stop the wasteful exploitation of forests and timber; also note that up to a fifth of air pollution in India is caused by poor households burning firewood for cooking. That is, there is no necessary relationship between economic development and stressed environments; indeed, it is the reverse, where lack of economic growth (eg. most of Africa) or lack of good governance (USSR, China) has led to
poor environment records.

Urumqi and Tibet have absolutely nothing to do with economic growth, and everything to do with rabid Chinese Han nationalism (which has replaced Marxism-Leninism as the legitimating ideology for the one-party state).

Anyway, let not empirical facts get in the way, will you!

KD: You missed my point. The Chinese believe that a higher standard of living is enough to keep the ethnic minorities happy. Apparently it’s not.
So I am indicating that the mindless pursuit of GDP as suggested by Wolf is not what’s good for us.
We have a large number of ethnic minorities who are not happy. Most prominently the Kashmiri Muslim who, like the Uighur has been fed massive doses of subsidy.
WE ARE EXAMINING WHETHER INDIA SHOULD COMPETE WITH CHINA.
India has 13% of the world’s people and 2% of the land.
If we chase China as it is, we are expecting the land to cough up thrice as much.
Chulhas (indigenous wood or charcoal burning stoves) in the dehaat (rural areas) are only a small problem. Our cities are toxic already. More mindless growth will make them even more so.
China wants US standards of living. Should we compete with the Chinese, by implication, we will seek US standards of living.
Not possible. The resources available to us or for that matter the earth are just not enough.
Already both countries are planning captive lines of supply from other countries. Sooner or later these lines will cross/clash.
Look at what China is up to in Africa. Isn’t it nascent colonialism?
Do you think we should do something similar? Lots of people do.
I don’t. I think it will lead to a very explosive situation. I also think that a very explosive situation is building up in the Indian Ocean where planned lines of supply cross.
I don’t say keep people poor and miserable. I think we should stop growing and distribute the available wealth in a better manner. Because, what do we have? A billion people fighting overabundance and a billion fighting poverty.
The Cuban model has much more to teach India than the Chinese one.

TD: The problem of Kashmir is largely the result of the LeT(Lashkar e Toiba) and other terrorist organizations, used by the ISI as a proto-foreign policy instrument, everyone knows that. Read your own country’s best intelligence reports!
It is not the outcome of some generalized “mindless pursuit of GDP growth”, whatever that is supposed to mean. I for one, and most of Singapore’s 4.8 million people, are extremely grateful for high GDP growth rates in Singapore, which meant for me the difference to my family not having to sleep all in one room, to be reasonably sure that our children do not get cholera, and the many common killer diseases that were common in my lifetime. It is precisely the lack of GDP growth in vast areas of Africa, Asia and L. America that lead to the strife, suffering and violence in these parts of the world. For heaven’s sake, just compare Gujarat to Bihar, in your own national backyard!

This is an ongoing debate in India not only between these two friends, but in every possible forum where concerned Indians are trying to come to grip with a juggernaut that seems to be rolling in a non inclusive direction. Martin Wolf’s suggestions are valid as are KD’s conerns which find a lot of resonance in India. TD’s defense has many takers in India too.

India’s favourite pastime is to argue. A Nobel Laureate wrote a book about it called “The Argumentative Indian” Please do use the link to understand why we argue.

My own take? We have been bungling along for 62 years. As Martin Wolf says, we have come to where we are, despite our political and bureaucratic management. Hindus call this land “Pavithra Bhoomi”, meaning Sacred Land. For thousands of years, people have been praying, conducting religious rites, performing pilgrimages etc and may be, God is protecting this land from total destruction by our managers. I think that we will continue to muddle along and survive.

I salute the friendship between these two stalwarts.

Out Of Box Thinking – Current Economic Dissolve

Prof. Natarajan is back with a guest post for us. His observations are for the Indian situation and worth a perusal for a different perspective.
Without much ado, let me lead you to his post which has already been published in sulekha.com

“The phrase “Out of the box thinking” to get solutions has become a cliché. Eduard De Bono demonstrated that to connect nine dots in a 3 by 3 matrix by a continuous number of straight lines without retracing your steps would require you to go out of the imaginary square box connecting the outer most points—so you had to literally think out of the box.

Let us look at this technique seriously in the current global economic disaster where every country is aping each other to give financial packages to the very people who caused the crisis. As only to be expected this bail out is just not working for 2 reasons. The first is that the governments are addressing the wrong constituency. The second is that the trackers of the problem, led by the media are measuring the response with a wrong instrument, the stock market indices and GDP growth

That reminds one of a fairly well known story. A lady was searching for something under the street light. A sympathetic passer by asked her what she had lost. “My diamond ring”, said the lady. Trying to help her out by joining the search, the man asked her if she could more accurately specify the area where it might have fallen. She said she had lost it in her house. Puzzled by her reply, the man asked, why she was looking for it in the street. “I don’t have electricity connection in the house” she replied. Hence she was searching where there was sufficient light!

In offering bail-out packages the various governments of the world are following the lady’s logic.

If we were to think out of the box then the solution would appear in this way:

First where was the economy lost?

Unlike the lady’s diamond ring, the economy has evaporated into the thin air. You can’t retrieve it. It is like your shaving foam that is out of its can. You can’t put it back, which is what every one is trying to do.

People are identifying the lost (failed) economic system like the proverbial six blind men who tried to define an elephant in his own way. Only there are more blind men here.

One says it is a financial crisis.
Another says that it is a crisis of confidence
A third says, it is all due to sub prime loans.
Many say banks are not willing to allow credit to flow.
Banks are reporting terminal sickness
The pundits are saying it is due to excessive leveraging.
More knowledgeable persons are saying it is due to the unquestioned but unjustifiable justification of accepting US dollar as a reference currency.
Many attribute it to the expensive life style of Americans (Both State and Non State Actors!) on borrowed money.
Greed is also widely accepted as the cause.
The communists are convinced that it is failure of capitalism.
Indian mandarins are now boasting of our perfect regulatory system in contrast to the flawed western system, which is what they had tried to follow till yesterday.
The real problem is like the massive elephant, bigger, stronger and capable of more damage than the combined perception of all the blind men. It is already rendering millions of people jobless.

The previous system was being abused extensively.

Trading in money had become an all important profession for gambling financial specialists, without adding even one cent of real wealth to any country.
Stock markets have become active gambling dens. They have defeated the very purpose of joint stock companies, with managements cheating minority share holders and the latter behaving like persons in the oldest profession, opting for the highest bidder on a daily basis and indulging in an activity called day trading, instead of the more appropriate ‘night soliciting trade’).
The solution:

The problem should not be viewed as a crisis or threat, but taken as an opportunity to change the present order.

There is no “one size fits all” solution.

Western societies have introduced massive automation to replace manual effort due to:

The paucity of working population
A genuine desire to improve working conditions and
A very laudable desire to achieve higher productivity
But this logic has failed in India, with its vast numbers of the work force regularly being replaced by giant machines, even in activities like road building, dam projects and other civil engineering projects like pipe laying, house building etc. The mechanization approach is further aided by antiquated labour laws.

The vast outlay on infrastructure projects is only lining the packets of large Indian and multinational companies without creating substantial employment or purchasing power at Professor Prahlad’s bottom of the pyramid.

We have special problems to be addressed.

We have a huge poverty and unemployment.
We don’t have an export- based economy.
We are not net earners of foreign exchange.
Our major import bill is on account of petroleum products.
We have a huge unsustainable Government debt, although Indians are great savers individually. The irresponsible pay hikes after the 6th pay commission has further dented Government’s resource management.
We cannot afford to squander away the precious revenues in the form of doles and give- aways, reducing the country to a nation of beggars.

For the Indian economy to survive and grow, the intrinsic purchasing power of the masses has to increase dramatically.

1. More and more Indians have to be gainfully employed in some real work that will create real wealth.

2. Government should create infrastructure such as roads, rail road construction, small reservoirs and check dams, drinking water projects, canals linking rivers, aforestation Projects, rural schools, rural medical centres etc. through the efforts of the large number of unemployed workers and students all over the country. It should not resort to international contracts for such works. That will only line the pockets of multinational sharks and make the country poorer, all dressed up and nowhere to go.

3. The government must further liberally fund generation of power through solar and wind energy solutions.

4. Production of fruits and fruit processing is another great opportunity.

5. Boost to generic drugs production and waiver of patents in expensive drugs can also be justified, giving the reason of unaffordability.

6. Mass employment will necessarily involve a large work force that will be engaged in physical activity.

We need to peg compensation of each employee to a realistic limit. The maximum salary of the highest paid CEO should be not more than 5 times that of the lowest paid worker.
At the international level, India should plead for a new more equitable Reference currency to remove the threat of artificial and arbitrary devaluation at the behest of IMF and World Bank. US Dollar standard that evolved in 1971 after failure of Bretton Woods agreement of 1944 has lost its legitimacy. http://www.youtube.com/watch?v=5uKnPB43Dog
WTO is becoming irrelevant in the current scenario of protectionism, where even an enlightened President like Obama is imposing restriction on H1 B Visas. India should play a leading role in achieving a more equitable system to permit free movement of skilled human resources.
A very tall order, you may say. But in trying times like the present one, there are no easy options. If you have the slightest doubt about the explosive environment we are in, I recommend you to read the article captioned “Governments across Europe tremble as angry people take to the streets” by Ian Trayner, Europe Editor of Guardian that was published on 1st Feb, 2009. http://news.infoshop.org/trackback.php?id=20090202223104518″

Declare Emergency In India

This is a guest post by Professor N. Natarajan form Chennai, India. He is a much respected accademician, who comes to us with deep work experience with the Government, Public Sector and Private Sector Banking and Consultancy. I value his views and wish to share his suggestions with the readers of this blog. India is no exception to the turmoil that is going on in the world and we too need to address a number of issues and I hope that this will generate some discussions.

In the current global financial crisis our government has to think originally and act accordingly. The British Government decided to buy into its banks instead of doling out cash. Its action has inspired the US government to follow suit, although its first knee jerk reaction was to bail out the creditors whose money was at risk due to the crisis of confidence.

The Government of India needs to respond meaningfully. With a pliable new Governor in the RBI, the government is announcing reduction of Cash Reserve Ratio (CRR) of banks to put more cash into circulation. The magic wand of release of non-existant funds will do more harm than good and hasten our bankruptcy as a country!

India’s problems are:

1. Very high inflation, due to poor agricultural productivity.
2. A very large population living on the fringe of hunger. India ranks lower than Sri Lanka!
3. A highly weakened currency that is hitting a new low everyday due to the large import of Petroleum; excessive imports of consumer goods under the WTO regime causing extinction of small and medium scale industries in the last 3 years; and the very poor performance on the export front despite all subsidies and incentives.
4. Large-scale unemployment.
5. Wasteful non- plan expenditure of the Government.
6. A small, successful IT sector that has distorted the wage structure across the board and led to mindless squandering of money by the pampered executives on luxury-imported goods.
7. Very low awareness of our precarious economic condition even among well educated youth.
8. Our PM’s explanation that our problems are caused by external factors alone and the assertion of the FM that everything is hunky dory with our system are both wide of the mark. The problems listed above are very serious and pretty much our own making.

Instead of boldly informing the people of the problems, the Government is working overtime to prop up the stock market with the FM dying a hundred deaths with each collapse of the Sensex that has become a daily affair. The Government is aping the western countries and copying the solution of injecting cash into the market, with no tangible effect.

What should the government and the country be doing to tide over the crisis?

1. It should ignore the volatility of the stock market and end the obsession with its ups and downs. Its losses affect a small section of the population.
2. It should conduct a large-scale information blitz to tell the naked truth to the people. Long ago we had a PM who advised the entire country to go without dinner for one evening every week to overcome our shortage of food and dependence on doles from the US. He succeeded because of his sincerity to lead from the front by practising what he preached.
3. Government should immediately reduce the import of petroleum drastically, by restricting its use mainly for production of power and mass transport. Everyone should be made to follow the rule without exception.
Ø The use of petrol and diesel for private cars should be made prohibitive, so that people are encouraged to pool their vehicles.
Ø Measures such as vehicles with odd or even registration numbers should alternatively be off the road for 2 days in the week will enforce car-pooling automatically.
Ø Schools must insist on bussing kids as has been done in Bangalore and reduce the number of cars coming to drop and pick just one kid up.
Ø All gas-guzzlers with engines of more than 1600 CC should be garaged.
Ø Promote use of products grown, produced and manufactured from within a 250 kms radius from your place of residence.
Ø Escorts of 20 odd cars for ministers and other “worthies”—both central and state should be done away with.
Ø
4. Give a high priority and incentive for production of wind and solar power. Both have invaluable potential for reduction of pollution.
5. Launch an urgent program for using advanced technology for gasification of coal for use as fuel for producing power.
6. Forget the honeymoon of 123 Agreement with US and shelve setting up of nuclear power plants with a heavy outgo of foreign exchange and subsequent fear of sabotage by terrorists and cut off of fuel supply.
7. Make a blitzkrieg publicity appeal to every citizen and educate him why he should Buy Indian and use only locally manufactured consumer products.
8. Drastically reduce the import of finished goods and levy a heavy expenditure tax on people opting for imported goods.
9. Remove the Service tax, which has been a major cause of inflation
10. Drastically curtail Government’s administrative expenditure.
11. Pass an emergency law that industries facing economic problems should first reduce the wage levels across the board by a percentage before rushing to lay off staff. This was done voluntarily by Intel, the chip-maker.
12. In view of the financial emergency Government should take the lead and reduce the salaries of all its staff (commencing from President, PM, and MPs, right down to the level of peons). The Dearness allowance must be frozen at the current levels for all staff whose salary exceeds Rs.20,000 per month.

Shocking measures, tall orders, impossible to implement you may say. But then we are facing an extraordinary situation that demands emergency measures like these, not unlike wartime when a population automatically pitches in with self-discipline and control.
Difficult times call for tough actions and great sacrifices. If the PM and our leaders set an example, the whole country will fall in line. That is where the biggest problem is!