Every once and a while I like to talk about interesting articles in my favorite magazine. Here is the Economist summing up the mood of Indian voters before the recent election:
The mood of Kamalpur’s residents is revealing. As they are mostly Muslims, Congress hopes for their votes. Yet the party’s main message interests nobody. No one speaks in favour of public welfare, subsidised rice and wheat or efforts to provide make-work jobs, policies supposed to give Congress the support of the rural poor. “A programme is good if it reaches here, but it doesn’t come,” says one man, sparking a lively chat about crooked politicians. A good road to the city helps more.
By contrast, the BJP is fired up. Middle-caste Hindus whose lives are fast improving dominate nearby villages. Those who have grumbled eternally about bad rains can now moan instead about traffic jams into Delhi. Signs of their new wealth are abundant. Walk down narrow alleys and men crowd around to film you using their tablets and phones. “It is very fine here,” says one. “We are connected.”
These voters back the BJP and predict rapid economic gains after the election. They are impatient for a better life, having tasted the optimism that faster expansion brought in the 2000s. Frustrated since then by slower growth (stuck at 5%) and high prices, they want Congress crushed.
A watershed in three parts
This election is likely to be seminal. A campaign strategist for a big party talks of “citizen consumers” who are intolerant of substandard politicians and readier than ever to dump them. These more demanding voters are emerging thanks to three intertwined trends: a youth bulge, urbanisation and rising incomes. In time, they should help to improve the political system.
The rise of the young is dramatic. Around half of India’s 1.2 billion people are under 26, with no memories from before the first liberalising reforms of 1991 but aware that development still lags. These “born frees” are the vanguard of a huge number who will come of age in the next two decades.
Consider Congress crushed. Morgan Warstler must be smiling somewhere. Just to be clear, I don’t know enough about Indian politics to comment on who “should have won”, although I’m certainly aware of the controversy surrounding Mr. Modi. (As an analogy, my views on Abenomics are unrelated to my views on Mr. Abe. And doesn’t the Indian election look an awful lot like the 2012 Japanese election? A controversial nationalist wins an overwhelming victory promising market reforms in a country where growth is slow and elections usually produce weak coalition governments.)
I’m more interested in the mood of the voters. India has more people that the US, Canada, Japan, Australia and Europe combined. Poverty is the big problem. And if we can believe The Economist, they just voted for growth over redistribution. That fact (not the election of BJP) makes me more optimistic.
You hear lots of conservatives say that they are more worried about poverty than “inequality,” partly in response to the recent focus on the huge gains that have gone to the top .01%. (Here’s an example from Martin Feldstein.) I do think that inequality is a valid issue, and support some redistribution on utilitarian grounds, but I share the conservative dismay over the recent obsessive focus on billionaires. It seems disproportionate in a world where the most serious problems are poverty and too little capital, not too many wealthy people. Once again the Economist, this time discussing North Korea:
“Dear Leader”, which includes three personal poems, is a testament to Mr Jang’s literary flair. He chooses poetry to express painful episodes, whether the hunger of a young girl or the public execution of a farmer in his home town. He paints a bleak portrait of his village, to which he briefly returns to discover a swarm of wasted bodies “waiting for death”, a childhood friend eating rice by the grain and tap water for sale. Desolation creeps even into better-off Pyongyang: a mother, close to death, and her daughter stand in a marketplace; a sign hangs from the girl’s neck: “I sell my daughter for 100 won ($0.11)”.
I’ve been reading the Economist for 40 years, and it’s greatly influenced my worldview. It’s made me see the entire world as “us.” It’s convinced me that progress is 90% growth and 10% redistribution. Of course 10% is still quite important in absolute terms. But even that issue is quite complex. Suppose Bill Gates’ entire fortune was transferred to the US Treasury. How would that impact US equality? How about global equality? Those two questions might have very different answers. Again, focus on consumption, not wealth.
Here the Economist explains how Germany is starting to undo the very reforms that made its labor market so successful:
During her previous grand coalition Mrs Merkel made one big domestic reform. In Europe’s fastest-ageing country, she raised the retirement age from 65 to 67. Sadly, there is less method in the seeming madness of the present coalition’s opening salvo of policies””what Germans are calling Reförmchen, or “reformlets”. One of these again affects pensions, but in the opposite direction, lowering the retirement age for certain workers to 63, and perhaps even to 61 if years in unemployment are counted. Economists and employers are screaming foul. So are 50 of the 311 parliamentarians from Mrs Merkel’s own centre-right camp, who fear the economy will suffer.
Another Reförmchen is to introduce a national minimum wage for the first time, of €8.50 ($11.72). This will affect about 14% of workers nationwide and 20% in the less productive former East Germany, according to a study by three economists at universities in Magdeburg, Berlin and Dresden. When Britain introduced a minimum wage in 1999, it affected only 5% of workers. Germany’s wage floor would barely increase incomes of poor workers, because they would lose welfare top-ups, the study says. But it could mean that as many as 900,000 lose their jobs. And it could stop young people (over 18 but under 21) getting good training and permanent jobs at all.
. . .
The government has also intervened messily in the property market, where rents are rising fast in some cities. It will cap increases in rent when re-letting flats to at most 10% of the rental average in the relevant district. The rules are still vague. But that hasn’t stopped landlords from panicking and raising rents as high as they can in anticipation. Investors who were planning to build new housing are thinking again.
That’s what happens when you give the conservative party a big victory. And it reminds us not to expect too much from Mr. Modi.
The Economist is also one of the few magazines that understands the important role that deposit insurance plays in creating moral hazard and excess risk-taking:
EVER since Lehman Brothers went bankrupt in 2008 a common assumption has been that the crisis happened because the state surrendered control of finance to the market. The answer, it follows, must be more rules. The latest target is American housing, the source of the dodgy loans that brought down Lehman. Plans are afoot to set up a permanent public backstop to mortgage markets (see article), with the government insuring 90% of losses in a crisis. Which might be comforting, except for two things. First, it is hard to see how entrenching state support will prevent excessive risk-taking. And, second, whatever was wrong with the American housing market, it was not lack of government: far from a free market, it was one of the most regulated industries in the world, funded by taxpayer subsidies and with lending decisions taken by the state.
. . .
The numbers would amaze Bagehot. In America a citizen can now deposit up to $250,000 in any bank blindly, because that sum is insured by a government scheme: what incentive is there to check that the bank is any good? Most countries still encourage firms and individuals to borrow by allowing them to deduct interest payments against tax. The mortgage-interest subsidy in America is worth over $100 billion.
Even Bagehot’s own financial long-stop has been perverted into a subsidy. Since investors know governments will usually bail out big financial firms, they let them borrow at lower rates than other businesses. America’s mortgage giants, Fannie Mae and Freddie Mac, used a $120 billion funding subsidy to line shareholders’ pockets for decades. The overall subsidy for banks is worth up to $110 billion in Britain and Japan, and $300 billion in the euro area, according to the IMF. At a total of $630 billion in the rich world, the distortion is bigger than Sweden’s GDP””and more than the net profits of the 1,000 biggest banks.
. . .
How can the zombie-like shuffle of the state into finance be stopped? Deposit insurance should be gradually trimmed until it protects no more than a year’s pay, around $50,000 in America. That is plenty to keep the payments system intact. Bank bosses might start advertising their capital ratios, as happened before deposit insurance was introduced. Giving firms tax relief on financing costs is sensible, but loading it all onto debt rather than equity is not. And still more can be done to punish investors, not taxpayers, for failure.
The Economist has a long history, and willingness to learn from its mistakes. Here it corrects a mistake made in 1857:
As well as being global, the crash of 1857 marked another first: the recognition that financial safety nets can create excessive risk-taking. The discount houses had acted in a risky way, holding few liquid assets and small capital buffers in part because they knew they could always borrow from the Bank of England. Unhappy with this, the Bank changed its policies in 1858. Discount houses could no longer borrow on a whim. They would have to self-insure, keeping their own cash reserves, rather than relying on the central bank as a backstop. That step made the 1857 crisis an all-too-rare example of the state attempting to dial back its support. It also shows how unpopular cutting subsidies can be.
The Bank of England was seen to be “obsessed” by the way discount houses relied on it, and to have rushed into its reforms. The Economist thought its tougher lending policy unprincipled: we argued that decisions should be made on a case-by-case basis, rather than applying blanket bans. Others thought the central bank lacked credibility, as it would never allow a big discount house to fail. They were wrong. In 1866 Overend & Gurney, by then a huge lender, needed emergency cash. The Bank of England refused to rescue it, wiping out its shareholders. Britain then enjoyed 50 years of financial calm, a fact that some historians reckon was due to the prudence of a banking sector stripped of moral hazard.
And here is one reason I am a market monetarist:
Argentines themselves must also change. The Kirchners’ redistributive policies have helped the poor, but goodies such as energy subsidies have been doled out to people who do not really need them. Persuading the population to embrace the concept of necessary pain will be difficult. That is partly because the experience of the 1990s discredited liberal reforms in the eyes of many Argentines. But it is also because reform requires them to confront their own unprecedented decline. No other country came so close to joining the rich world, only to slip back. Understanding why is the first step to a better future.
The neoliberal reforms worked fine until 1998, when monetary policy became much tighter. No wonder it’s so hard for Argentine voters to develop an “understanding” of what went wrong. The group that delivered the free market reforms is the same group that delivered the hard money policies that drove Argentina into deflation and depression.
The entire article on Argentina’s long, sad decline is worth reading. The accompanying photo reminded me of The Purple Land, a novel you don’t hear much about anymore.