(HT: The Economist)
Thursday, December 18, 2008
Most promiscuous nation is...?
... Finland, so says a survey of 48 countries by researchers from the Bradley University.
(HT: The Economist)
(HT: The Economist)
Steve Levitt clarifies Giffen goods
Giffen goods are those products whose demand, contrary to normal goods, increases with price - an upward sloping demand curve. Steve Levitt has an excellent post clarifying the recent claims that rice in rural China (peasants buy more of rice as its price rises) and prostitutes (types of customers preferring more expensive prostitutes) are examples of Giffen goods, may be off the mark.
Levitt writes, "When we talk about the demand curve for a good, what we mean is how the quantity consumed for that exact same good changes with the price of that good while holding everything else constant (such as the consumer’s income, the price of other goods, etc) and vice-versa."
In case of prostitutes, cheaper and more expensive prostitutes are two types of "goods", serving two different categories of consumers. Therefore the customer who purchases the high-price prostitute would demand just as much or more of her services if she were willing to do all the same things but at half the price.
Rice is the staple diet in rural China, whereas meat is a luxury diet, and people prefer to substitute rice with more meat (substitution effect) as they become richer. However, as the prices of commodities rice (or inflation takes hold), peasants face reduced real incomes (income effect of a price change) which turns them away from consuming luxury food items like meat and towards consuming basic staple like rice. For staples like rice, the substitution effect and the income effect push in opposite directions, and when the income effect is bigger than the substitution effect (the relative rise in price of rice is smaller than that of meat or the difference between the prices of the two products are too high), higher rice prices lead the peasants to feel so poor that they end up consuming more rice.
Levitt writes, "When we talk about the demand curve for a good, what we mean is how the quantity consumed for that exact same good changes with the price of that good while holding everything else constant (such as the consumer’s income, the price of other goods, etc) and vice-versa."
In case of prostitutes, cheaper and more expensive prostitutes are two types of "goods", serving two different categories of consumers. Therefore the customer who purchases the high-price prostitute would demand just as much or more of her services if she were willing to do all the same things but at half the price.
Rice is the staple diet in rural China, whereas meat is a luxury diet, and people prefer to substitute rice with more meat (substitution effect) as they become richer. However, as the prices of commodities rice (or inflation takes hold), peasants face reduced real incomes (income effect of a price change) which turns them away from consuming luxury food items like meat and towards consuming basic staple like rice. For staples like rice, the substitution effect and the income effect push in opposite directions, and when the income effect is bigger than the substitution effect (the relative rise in price of rice is smaller than that of meat or the difference between the prices of the two products are too high), higher rice prices lead the peasants to feel so poor that they end up consuming more rice.
Wednesday, December 17, 2008
Moral hazard and unemployment benefits
For a long time conservative and free-market economists, especially in the US, have opposed unemployment insurance on the grounds that it promotes moral hazard and disincentivizes people from hunting for jobs and even shirk work. In the face of this spirtited opposition, successive governments in the US has cut back on unemployment benefits and its duration. But two studies - in the UK and US - come up with interesting findings to the contrary.
Chris Dillow draws attention to a study by Barbara Petrongolo, which uses data from the Jobseekers Allowance Program in the US and finds that though "tougher search requirements did succeed in getting people off unemployment benefits initially, it was not successful in getting people into new, lasting jobs". She found that the people subjected to the tougher rules worked fewer hours 12 months later, and those that were in work earned less than those who had been subject to the less stringent Unemployment Benefit rules. Stricter beenfit regimes tempted people to take the first job that came along, rather than wait for ones for which they were more suited. The upshot was that people went into low-earning work, or jobs that didn’t last. Also, many of those who left unemployment either went onto incapacity benefit or into the black economy.
Tim Harford points to a recent NBER working paper by Raj Chetty which claims that more generous unemployment insurance appears to lead to greater unemployment not due to moral hazard and people ducking work, but because the beenfits give a cushion to those looking for jobs from having to rush into an unsuitable job. His research suggests that those without their own cash reserves are using unemployment benefits to buy themselves time to find the right job. Therefore, while unemployment benefits do encourage unemployment in the short term, that may not be a bad thing!
Chris Dillow draws attention to a study by Barbara Petrongolo, which uses data from the Jobseekers Allowance Program in the US and finds that though "tougher search requirements did succeed in getting people off unemployment benefits initially, it was not successful in getting people into new, lasting jobs". She found that the people subjected to the tougher rules worked fewer hours 12 months later, and those that were in work earned less than those who had been subject to the less stringent Unemployment Benefit rules. Stricter beenfit regimes tempted people to take the first job that came along, rather than wait for ones for which they were more suited. The upshot was that people went into low-earning work, or jobs that didn’t last. Also, many of those who left unemployment either went onto incapacity benefit or into the black economy.
Tim Harford points to a recent NBER working paper by Raj Chetty which claims that more generous unemployment insurance appears to lead to greater unemployment not due to moral hazard and people ducking work, but because the beenfits give a cushion to those looking for jobs from having to rush into an unsuitable job. His research suggests that those without their own cash reserves are using unemployment benefits to buy themselves time to find the right job. Therefore, while unemployment benefits do encourage unemployment in the short term, that may not be a bad thing!
US Fed shoots the big cannon!
Ushering in a historic era of monetary policy loosening, the US Fed has decided to cut the overnight federal funds rate, which affects how much banks charge when they lend their reserves to each other, to a range of 0-0.25% from 1%. This dramatic decision by the Federal Open Market Committee (FOMC) follows nine rate cuts in the previous 14 months and $1.4 trillion in emergency lending, all of which have failed to rein in the decline.
The rate cuts are largely symbolic, in so far as the funds rate had already fallen to nearly zero in recent days because the credit markets had frozen so much that the banks have been so reluctant to do any lending business. While the target fed funds was until yesterday still 1%, in the last few weeks — following the massive increase in liquidity by the Fed — the actual Fed Funds was already trading at a level literally close to 0%. The possibility of a Japan style liquidity trap with its attendant consequences now look real.
Though this historic low interest rate leaves the Fed with little room for conventional monetary loosening, the FOMC of the Fed still expressed its commitment to buy 'large quantities' of debt and mortgage-backed securities and debt issued by government-sponsored companies like Fannie Mae; commercial debt for businesses and consumer lending, and longer-term Treasury securities. These less conventional measures have meant that since September the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as the central bank has created new money and lent it out through all its new programs.
This open commitment now to even print money to keep credit flowing and prevent a deflation is in keeping with the well stated stance of Fed Governor Ben Bernanke (remember the parody of "helicopter Ben"). Martin Wolf has this excellent article about the dangers of deflation - higher real rate of interest, rising real value of debt as prices fall (debt inflation), and postponed conusmption and investments - and the comparisons with the Japanese crisis of the nineties.
Yields on Treasury debt, which have plunged this year as investors sought a haven for their money, fell to new lows after the Fed indicated it would buy long-term Treasury debt and promised to keep interest rates at "exceptionally low levels" for the foreseeable future. The yields on Treasury’s benchmark 10-year bill fell to 2.26% from 2.51% and the rate for a 30-year fixed-rate mortgage fell to 5.38% from 5.74% the previous day.
In order to revive corporate and consumer lending, from later this month the Fed will start purchasing $600 billion worth of securities that are backed by Fannie Mae, Freddie Mac and other government-sponsored entities, besides joining with the Treasury to introduce a joint program to buy up securities backed by consumer debt like automobile loans. All of these will take the Fed's balance sheet to beyond $3 trillion. The consequences of this massive build up of monetary base, which banks and other investors are essentially hoarding now, will be catastrophic if they are not destroyed once normalcy returns and banks start lending again.
The rate cuts follows a series of depressing news indicating that the recession is getting more severe than expected and has the potential to draw the economy into a depression. Unemployment figures for November have been dismal. In an increasing sign of deflation taking hold, consumer price index fell 1.7% in November, the steepest monthly drop since the government began tracking prices in 1947 as retailers have aggressively slashed prices in an effort to lure in Christmas shoppers. Home construction has skidded nearly 20% from October and 47% from the same time last year to its lowest levels in 50 years. Even the so-called core inflation rate, which excludes the volatile food and energy sectors, is essentially zero. Industrial production for November dropped 5.5% compared with November 2007 and 0.6% over the previous month, and manufacturing output declined 1.4% in November.
Meanwhile, despite a $ 5 bn cash infusion by Warren Buffet, with all its credibility spin-off (of immense value at such uncertain times), a corporate makeover into a universal bank, and a reputation for surviving many a crises, Goldman Sachs reported a quarterly loss of $2.12 bn, its first quarterly loss since it went public in 1999. The other big remaining investment bank turned universal bank, Morgan Stanley, too posted a $2.29 bn loss.
Update 1
Japanese Central Bank too follows suit and lowers rates to 0.1% from 0.3% and also announces its decision to buy up short term commercial paper to shore up the credit markets.
Update 2
Robert Lucas thinks that the Fed assuming the role of a lender of last resort at a time the markets are in a "flight to quality", has the potential to stumulate spending.
Update 3
The Economist reviews the Fed's unconventional monetary policy using quantitative easing.
Update 4
Janet Yellen of the Federal Reserve Bank of San Francisco summarizes the Fed's monetary policy response and compares the policies of the US Fed and Bank of Japan in the nineties. She makes the point that near the zero bound, short-term government securities and cash are almost perfect substitutes, and therefore simply expanding excess bank reserves by replacing G-Secs may have little effect on bank lending.
The rate cuts are largely symbolic, in so far as the funds rate had already fallen to nearly zero in recent days because the credit markets had frozen so much that the banks have been so reluctant to do any lending business. While the target fed funds was until yesterday still 1%, in the last few weeks — following the massive increase in liquidity by the Fed — the actual Fed Funds was already trading at a level literally close to 0%. The possibility of a Japan style liquidity trap with its attendant consequences now look real.
Though this historic low interest rate leaves the Fed with little room for conventional monetary loosening, the FOMC of the Fed still expressed its commitment to buy 'large quantities' of debt and mortgage-backed securities and debt issued by government-sponsored companies like Fannie Mae; commercial debt for businesses and consumer lending, and longer-term Treasury securities. These less conventional measures have meant that since September the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as the central bank has created new money and lent it out through all its new programs.
This open commitment now to even print money to keep credit flowing and prevent a deflation is in keeping with the well stated stance of Fed Governor Ben Bernanke (remember the parody of "helicopter Ben"). Martin Wolf has this excellent article about the dangers of deflation - higher real rate of interest, rising real value of debt as prices fall (debt inflation), and postponed conusmption and investments - and the comparisons with the Japanese crisis of the nineties.
Yields on Treasury debt, which have plunged this year as investors sought a haven for their money, fell to new lows after the Fed indicated it would buy long-term Treasury debt and promised to keep interest rates at "exceptionally low levels" for the foreseeable future. The yields on Treasury’s benchmark 10-year bill fell to 2.26% from 2.51% and the rate for a 30-year fixed-rate mortgage fell to 5.38% from 5.74% the previous day.
In order to revive corporate and consumer lending, from later this month the Fed will start purchasing $600 billion worth of securities that are backed by Fannie Mae, Freddie Mac and other government-sponsored entities, besides joining with the Treasury to introduce a joint program to buy up securities backed by consumer debt like automobile loans. All of these will take the Fed's balance sheet to beyond $3 trillion. The consequences of this massive build up of monetary base, which banks and other investors are essentially hoarding now, will be catastrophic if they are not destroyed once normalcy returns and banks start lending again.
The rate cuts follows a series of depressing news indicating that the recession is getting more severe than expected and has the potential to draw the economy into a depression. Unemployment figures for November have been dismal. In an increasing sign of deflation taking hold, consumer price index fell 1.7% in November, the steepest monthly drop since the government began tracking prices in 1947 as retailers have aggressively slashed prices in an effort to lure in Christmas shoppers. Home construction has skidded nearly 20% from October and 47% from the same time last year to its lowest levels in 50 years. Even the so-called core inflation rate, which excludes the volatile food and energy sectors, is essentially zero. Industrial production for November dropped 5.5% compared with November 2007 and 0.6% over the previous month, and manufacturing output declined 1.4% in November.
Meanwhile, despite a $ 5 bn cash infusion by Warren Buffet, with all its credibility spin-off (of immense value at such uncertain times), a corporate makeover into a universal bank, and a reputation for surviving many a crises, Goldman Sachs reported a quarterly loss of $2.12 bn, its first quarterly loss since it went public in 1999. The other big remaining investment bank turned universal bank, Morgan Stanley, too posted a $2.29 bn loss.
Update 1
Japanese Central Bank too follows suit and lowers rates to 0.1% from 0.3% and also announces its decision to buy up short term commercial paper to shore up the credit markets.
Update 2
Robert Lucas thinks that the Fed assuming the role of a lender of last resort at a time the markets are in a "flight to quality", has the potential to stumulate spending.
Update 3
The Economist reviews the Fed's unconventional monetary policy using quantitative easing.
Update 4
Janet Yellen of the Federal Reserve Bank of San Francisco summarizes the Fed's monetary policy response and compares the policies of the US Fed and Bank of Japan in the nineties. She makes the point that near the zero bound, short-term government securities and cash are almost perfect substitutes, and therefore simply expanding excess bank reserves by replacing G-Secs may have little effect on bank lending.
Tuesday, December 16, 2008
Fiscal policy debates
The economic crisis has initated an intense debate (Conservatives Vs Liberals, Monetarists Vs Keynesians) about whether monetary or fiscal policy are of greater significance during times of such turmoil. It has also re-kindled the old debate about the relative importance of the various fiscal policy options, especially the respective economic multipliers of tax cuts and government spending.
Mark Thoma and Robert Skidelsky weigh in on the importance of government spending led fiscal policy over tax cuts and monetary expansion. Paul Krugman writes that we have reached a world in which monetary policy, both in US and soon in Europe, has little or no traction, and therefore fiscal policy is the only option left. James Galbraith too appears to agree.
Greg Mankiw, invoking studies by Christina and David Romer, Bob Hall and Susan Woodward, and Valerie A Ramey, argues that the tax cuts offer a higher multiplier than government spending. He claims that unlike the later which works through increases in disposable income and consumption demand, the former also incentivizes more investment demand from businesses. However, Martin Feldstein, a doyen among conservative economists, broke ranks and declared that the $168 bn tax cut dominated US fiscal stimulus of February 2008 failed because people actually ended up saving and paying off debts instead of spending it on consumption.
Mark Thoma sums up the debate about the relative utilities of the various fiscal policy options, mainly between tax cuts and government spending. Catherine Rampell in the Economix blog of NYT has the recommendations of an exhaustive list of distinguished economists.
Update 1
Marginal Revolution draws attention to a recent NBER paper by Andrew Mountford and Harald Uhlig which finds that of the three fiscal policy options - deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion - deficit financed tax cuts have the highest multiplier on the GDP. Free Exchange is not impressed and takes up issue here.
Update 2
The always insightful Mark Thoma has an excellent parable explaining how fiscal policy works during economic downturns and depressions. The commonest criticism against fiscal policy that it crowds out private investment may not apply to downturns and depressions, since at such times there are idle resources that are involuntarily unemployed and private investors are in any case unwilling to make any additional investments. So Paul Krugman is spot on in claiming that normal rules do not apply when the world is in depression.
Update 3
The most definitive proof that monetary policy can save the economy in times of economic slowdown comes from the present crisis. Unlike the Great Depression, nobody can accuse the Central Banks across the world, individually and collectively, of not doing enough and quickly at that. We have seen the Fed and others summon all the monetary policy levers - lower rates aggressively to the zero bound; capitalize banks and financial institutions with the most liberal terms; inject liquidity through their discount windows by relaxing all lending standards; act as a market maker of last resort by purchasing troubled assets and commercial papers; and provide blanket guarantees to deposits. The amounts involved have been mind boggling - more than $1.3 trillion in the US alone, and counting!
Apart from a few hours (in a few cases, a couple of days) of market rally, the financial markets and the economy appears to have hardly acknowledged these interventions. If anything, Central Banks, and not the Governments, have been the primary players in the drama so far.
However, despite the overwhelming proof, apologists of Monetarism, will surely claim that had the Central Banks not intervened so aggressively, the situation could have been much worse!
Update 4
Gary Becker takes a historical perspective, of the past fifty years, and restrains any knee-jerk aggressive government regulatory interventions that may have adverse long term consequences.
Update 5
Paul Krugman draws attention to the work of Adam Posen who finds evidence that the Japanese fiscal stimulus in 1995 did actually work and increase economic growth rate. However, Tyler Cowen debates the reliability of the Japanese example, given other factors involved.
Update 6
Paul Krugman gets to the basics of Eco 101 in favour of stimulus in the form of infrastructure spending and providing public goods, as opposed to stimulus in the form of tax cuts. A marginal dollar spent on public goods is worth more than a marginal dollar spent on private consumption, because in any case these are goods that a functioning society and market requires and will be under-supplied by the private sector.
Update 7
Bloomberg has this excellent article tracing the roots of the Monetarist take-over of economic policy making since the seventies. And Barry Ritholtz writes the obituary for Chicago School.
Update 8
Paul Krugman uses numbers to prove that the multiplier is much higher for public spending, by way of the increase in taxes ploughed back to the economy. The net stimulus is therefore smaller, or there is more bang for the buck.
Update 9
Daniel Gross sums up the debate between fiscal and monetary policy and favours using both in such extraordinary times.
Update 10
Here is the famous NBER working paper of 1994, at the center of debate now, by David and Christina Romer that claims that in post-war recessions, monetary policy has been more effective in the early stage of recoveries. They write, "We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries."
Update 11
Eugene Fama opposes fiscal stimulus on grounds that government debt only transfers burden from one generation to another.
Update 12
Brad Delong writes about the eclipse of the Chicago School.
Mark Thoma and Robert Skidelsky weigh in on the importance of government spending led fiscal policy over tax cuts and monetary expansion. Paul Krugman writes that we have reached a world in which monetary policy, both in US and soon in Europe, has little or no traction, and therefore fiscal policy is the only option left. James Galbraith too appears to agree.
Greg Mankiw, invoking studies by Christina and David Romer, Bob Hall and Susan Woodward, and Valerie A Ramey, argues that the tax cuts offer a higher multiplier than government spending. He claims that unlike the later which works through increases in disposable income and consumption demand, the former also incentivizes more investment demand from businesses. However, Martin Feldstein, a doyen among conservative economists, broke ranks and declared that the $168 bn tax cut dominated US fiscal stimulus of February 2008 failed because people actually ended up saving and paying off debts instead of spending it on consumption.
Mark Thoma sums up the debate about the relative utilities of the various fiscal policy options, mainly between tax cuts and government spending. Catherine Rampell in the Economix blog of NYT has the recommendations of an exhaustive list of distinguished economists.
Update 1
Marginal Revolution draws attention to a recent NBER paper by Andrew Mountford and Harald Uhlig which finds that of the three fiscal policy options - deficit-spending, deficit-financed tax cuts and a balanced budget spending expansion - deficit financed tax cuts have the highest multiplier on the GDP. Free Exchange is not impressed and takes up issue here.
Update 2
The always insightful Mark Thoma has an excellent parable explaining how fiscal policy works during economic downturns and depressions. The commonest criticism against fiscal policy that it crowds out private investment may not apply to downturns and depressions, since at such times there are idle resources that are involuntarily unemployed and private investors are in any case unwilling to make any additional investments. So Paul Krugman is spot on in claiming that normal rules do not apply when the world is in depression.
Update 3
The most definitive proof that monetary policy can save the economy in times of economic slowdown comes from the present crisis. Unlike the Great Depression, nobody can accuse the Central Banks across the world, individually and collectively, of not doing enough and quickly at that. We have seen the Fed and others summon all the monetary policy levers - lower rates aggressively to the zero bound; capitalize banks and financial institutions with the most liberal terms; inject liquidity through their discount windows by relaxing all lending standards; act as a market maker of last resort by purchasing troubled assets and commercial papers; and provide blanket guarantees to deposits. The amounts involved have been mind boggling - more than $1.3 trillion in the US alone, and counting!
Apart from a few hours (in a few cases, a couple of days) of market rally, the financial markets and the economy appears to have hardly acknowledged these interventions. If anything, Central Banks, and not the Governments, have been the primary players in the drama so far.
However, despite the overwhelming proof, apologists of Monetarism, will surely claim that had the Central Banks not intervened so aggressively, the situation could have been much worse!
Update 4
Gary Becker takes a historical perspective, of the past fifty years, and restrains any knee-jerk aggressive government regulatory interventions that may have adverse long term consequences.
Update 5
Paul Krugman draws attention to the work of Adam Posen who finds evidence that the Japanese fiscal stimulus in 1995 did actually work and increase economic growth rate. However, Tyler Cowen debates the reliability of the Japanese example, given other factors involved.
Update 6
Paul Krugman gets to the basics of Eco 101 in favour of stimulus in the form of infrastructure spending and providing public goods, as opposed to stimulus in the form of tax cuts. A marginal dollar spent on public goods is worth more than a marginal dollar spent on private consumption, because in any case these are goods that a functioning society and market requires and will be under-supplied by the private sector.
Update 7
Bloomberg has this excellent article tracing the roots of the Monetarist take-over of economic policy making since the seventies. And Barry Ritholtz writes the obituary for Chicago School.
Update 8
Paul Krugman uses numbers to prove that the multiplier is much higher for public spending, by way of the increase in taxes ploughed back to the economy. The net stimulus is therefore smaller, or there is more bang for the buck.
Update 9
Daniel Gross sums up the debate between fiscal and monetary policy and favours using both in such extraordinary times.
Update 10
Here is the famous NBER working paper of 1994, at the center of debate now, by David and Christina Romer that claims that in post-war recessions, monetary policy has been more effective in the early stage of recoveries. They write, "We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries."
Update 11
Eugene Fama opposes fiscal stimulus on grounds that government debt only transfers burden from one generation to another.
Update 12
Brad Delong writes about the eclipse of the Chicago School.
Monday, December 15, 2008
Mint op-ed on fiscal stimulus
My op-ed piece on "Tailoring our fiscal stimulus" appears on Mint today.
Elections as a fiscal stimulus!
Any fiscal stimulus to be effective has to be timely, well targeted and temporary. If we go by this test, one of the most effective fiscal stimulus options is elections, especially in an Indian context!
Even with the most conservative estimates, election spending by both the political parties and the government runs into several thousands of crores of rupees. Unlike the conventional government fiscal stimulus, most of this spending will be in the unorganized sector and informal black economy, and will thereby impact the lives of millions of people in the most direct manner. Here is a list of the major election-related expenditure streams.
1. It is an open secret that a candidate spends anywhere between Rs 5 to 10 Cr for fighting a Parlaiment seat. This includes the payout to get the party nomination from the constituency to the actual election campaigning expenditure. For the 543 Parliament seats, assuming just two parties, and the lower bound of Rs 5 Cr, the total spending on Parliamentary elections alone works out to Rs 5430 Cr.
2. Add in assembly elections in a few states, say 1000 assembly seats. At Rs 3 Cr, and two candidates, this spending will work out to about Rs 6000 Cr.
3. It is estimated that the Election Commission will employ more than 4 million people to conduct the elections. Polling personnel at the rate of about 200 polling stations per Parliamentary constituency, 4 persons per polling station will have to be employed to conduct the poll. The payments to them and other officials, including the massive police and paramilitary personnel, involved in election process will be in the range of Rs 3000 - 5000 Cr. These payouts can be considered the equivalent of tax credit checks paid out to stimulate the economy.
4. The additional spending by way of procurement and logistics for election related activitities will be atleast Rs 2000 Cr.
The total spending on all these counts, at its most conservative estimate, will be a handsome Rs 15000 - 20000 Cr. A more realistic figure could be almost double this, a significant enough amount. Most of the campaign and election related spending will be on items which are produced and consumed locally. The multiplier effect on such spending is likely to be substantial and the benefits of the spending will accrue mainly to those most in need of the same. Further, the handouts will go to the hands of those who are more likely to spend rather than save it.
Finally, elections are a one-off event, and hence there is an inherent sunset provision to election spending. In the circumstances, the immediate need of the hour is - early elections!
Update 1 (28/101/2010)
The US Congressional elections in 2010 appears to have all the trappings of a fiscal stimulus. A new class of super-wealthy, self-funding candidates appears eager to spend their heirs' fortunes in the (often fruitless) search for thankless public office. The spending prowess of candidates like Meg Whitman in California and Mike Bloomberg in New York, have contributed substantially to stimulating the economy.
Even with the most conservative estimates, election spending by both the political parties and the government runs into several thousands of crores of rupees. Unlike the conventional government fiscal stimulus, most of this spending will be in the unorganized sector and informal black economy, and will thereby impact the lives of millions of people in the most direct manner. Here is a list of the major election-related expenditure streams.
1. It is an open secret that a candidate spends anywhere between Rs 5 to 10 Cr for fighting a Parlaiment seat. This includes the payout to get the party nomination from the constituency to the actual election campaigning expenditure. For the 543 Parliament seats, assuming just two parties, and the lower bound of Rs 5 Cr, the total spending on Parliamentary elections alone works out to Rs 5430 Cr.
2. Add in assembly elections in a few states, say 1000 assembly seats. At Rs 3 Cr, and two candidates, this spending will work out to about Rs 6000 Cr.
3. It is estimated that the Election Commission will employ more than 4 million people to conduct the elections. Polling personnel at the rate of about 200 polling stations per Parliamentary constituency, 4 persons per polling station will have to be employed to conduct the poll. The payments to them and other officials, including the massive police and paramilitary personnel, involved in election process will be in the range of Rs 3000 - 5000 Cr. These payouts can be considered the equivalent of tax credit checks paid out to stimulate the economy.
4. The additional spending by way of procurement and logistics for election related activitities will be atleast Rs 2000 Cr.
The total spending on all these counts, at its most conservative estimate, will be a handsome Rs 15000 - 20000 Cr. A more realistic figure could be almost double this, a significant enough amount. Most of the campaign and election related spending will be on items which are produced and consumed locally. The multiplier effect on such spending is likely to be substantial and the benefits of the spending will accrue mainly to those most in need of the same. Further, the handouts will go to the hands of those who are more likely to spend rather than save it.
Finally, elections are a one-off event, and hence there is an inherent sunset provision to election spending. In the circumstances, the immediate need of the hour is - early elections!
Update 1 (28/101/2010)
The US Congressional elections in 2010 appears to have all the trappings of a fiscal stimulus. A new class of super-wealthy, self-funding candidates appears eager to spend their heirs' fortunes in the (often fruitless) search for thankless public office. The spending prowess of candidates like Meg Whitman in California and Mike Bloomberg in New York, have contributed substantially to stimulating the economy.
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