Possible cancelling effects in the Fed's MBS policy

A couple of years ago, there was some talk of the Fed unloading its MBS portfolio, which it had purchased with a substantial amount of cash. With QE3, the Fed decided to keep buying more MBSs, driving expected MBS yields down in its efforts to pump money into the housing market. However, as the Fed drives down MBS yields, there is a possibility that potential new entrants to the MBS market will chose other securities over MBSs. In other words, there is a self-defeating element in the Fed's MBS policy also. Whether this effect will prove to be stronger or weaker than the original impetus provided by the Fed through its MBS purchases remains to be decided, especially when the possibility exists of herd mentality playing a role in the housing market.

Other than this possible cancelling effect, efforts by the Fed to change the dynamics of the housing market will face difficulties due also to fundamental market considerations like demand, supply, prices, risk perceptions etc. The fact that the Fed's intervention has not led to any dramatic recovery in the housing market is a confirmation of this fact. Unless there is a large impact on the amount of housing loans, mortgage rates and house prices that can be traced easily to Fed action, as opposed to other factors or natural recovery in the housing market, one should be wary about ascribing any and every change in housing market parameters to Fed action. This is one aspect of the uncertainty that economics is prone to as a subject. And a lot of economic commentary is also prone to carelessness when it comes to ascribing economic dynamics to specific causes. The Fed needs to weigh the pros and cons of its MBS policy initiatives very carefully.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Ice-skating in fiscaldom - why the US fiscal scenario is likely to be anything but comfortable in the coming decade

Economics has not been able to achieve the kind of accuracy that characterizes disciplines like, say, engineering. This is regretable, given the kinds of crises that have befallen the US and the global economic systems in recent times. More than crises, persistent weakness and structural problems are likely to mark the US and the world economy in the coming years. Responsible intelligentsia should be honest about the limitations of economics as a subject and also about the seriousness of the problems that face us.

Comforting predictions or projections that try to rely too much on small variations in macroeconomic parameters and that rely on too fine a balancing of small variations in macroeconomic parameters should be viewed with suspicion. A mature economy should be marked by much higher levels of stability and should not be at the mercy of small movements in macroeconomic parameters. However, some attempts to paint optimistic scenarios do rely on calculations that tend to rely on a very delicate balancing of macroeconomic parameters that can not necessarily be guaranteed. Without naming names, one can assert that a lot of superficial analysis about the US and world economy is designed purely to give the impression that things are not really that bad and that the future is going to bring economic recovery and progress. They tend to ignore worst-case scenarios and can be very selective in the kinds of factors they consider. They tend to be analyses that do not take into account radically different economic realities. A lot of it is probably done at the behest of rich interest groups that need the appearance of research, but not actual research. Much of it is probably financed, explicitly or indirectly, by vested interests whose sole purpose is to perpetuate capitalist elitism. Academicians have often churned out dishonest analyses of this kind and have cheapened the public discourse. A lot of the problems faced by the US economy in recent times can be traced to the persistence of elitist policies that serve a particular interest, but pretends to serve the broader public interest. And US public finance is one area where this kind of ostensible expertise is rampant. They tend to perpetuate false and misleading beliefs in the virtues of lower taxes, even though the empirical data of the past several decades shows that the broader economy suffers several negative consequences due to persistence of low-tax policies and that lower taxes have no positive effect on economic output and investment.

The lack of decisive fiscal policy-making in the US and the prevalence of misleading notions and attitudes about the effects of taxes on the economy means that the US fiscal situation will most probably remain very precarious for the next decade. The political establishment in the US, that part of the intellectual establishment in the US that studies economic issues and the parts of the capitalist establishment that try to skew economic policy without regard for accuracy and the interests of US society are responsible for a significant part of this mess. The US public needs to be aware of the kind of apathy that their political establishment has displayed in this matter. It also needs to be aware of the limitations of a system where political opportunism often trumps principles and the public good. And it may well need to come up with new and unprecedented strategies to put pressure on a political establishment that has been this complacent about the fiscal health of the country.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Quality of intelligence and Western intervention in Middle Eastern countries

We all know what happened in Iraq with the whole weapons of mass destruction ( WMD ) misinformation thing and what the Western-led invasion of Iraq led to. Several years after US propaganda based on faulty intelligence led to the invasion of the country and in many ways a worsening of the security situation in the country, the world came to know that Iraq did not have WMDs. US military casualties in the thousands and numerous US injuries and enormous number of Iraqi deaths resulted from hasty action inspired by extremist neocon ideology.

Once again, we are confronted with a similar situation with the US administration issuing a warning to Syria not to use chemical weapons against internal opponents ( the Bashar Al-Assad government has stated that it does not intend to use chemical weapons against internal opponents ). What kind of intelligence underlies US statements on this issue ? How credible is the intelligence that the US administration is using, given the fact that US military personnel and NATO military personnel may have to risk their lives if the US alone or if NATO initiates military action against the Bashar Al-Assad regime ? US political discourse must hold its political establishment to higher standards of intelligence and due diligence than were followed in the case of Iraq. And the international community must be that much more alert against possible mistakes on this issue based on faulty intelligence.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Al-Qaeda in Syria, the Saudis and US dilemmas

With Al-Qaeda activity against the Bashar Al-Assad regime on the rise in Syria, with backing from some Saudi and Qatari quarters, US policy framers should be aware of strategic and moral dilemmas when it comes to backing rebel groups against Bashar Al-Assad. Assuming, of course, that morality is indeed a factor that matters in addition to realpolitik in the minds of those US policy framers who have the most say on this issue. While the US has limited its backing to non-al-Qaeda rebel groups in Syria, how sure is the US administration that money and arms provided by the US will not fall into the hands of Al-Qaeda groups ? The US will probably ignore this fine point at the moment because of how complex the situation is in Syria and because of the geostrategic aims of the US establishment.

But there is a possibility that weakening Bashar Al-Assad will strengthen Al-Qaeda in Syria. If this happens, and if Al-Qaeda groups happen to gain control over territory inside Syria, we will be in the ridiculous situation where the US would have enabled Al-Qaeda control inside a country through its own geostrategic designs, if not blunders. This should be a major worry for a US establishment that seems eager to bypass or ignore UN mechanisms. And it should be a matter of concern for European countries too. The lack of clarity in US approach to the Syria question does not inspire confidence in its ability to prevent, counter or contain groups that it considers inimical to itself. US foreign policy does not have a clear vision for the kind of dispensation it wants in Syria. There is a high chance that the kind of approach the US is taking on the Syrian issue will make things worse than they already are.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Law and order problems in Iraq and sectarian divisions

Iraq continues to experience violent attacks, similar to what it experienced when US forces were present in the country. It is difficult to tell whether the reason behind these attacks is ideological Islamic militancy, sectarian differences between Shias and Sunnis or a combination of the two. In other words, do they constitute a law and order problem or are they due to some kind of full-blown sectarian strife ? The answer to this question is crucial for any kind of policy-making that aims to end these conflicts. Despite its global vision, the exact shape and form that ideological Islam takes differs from country to country since the specific local political and socio-economic conditions can vary a lot.

If one considers Sunni militancy in Iraq, those Al-Qaeda groups who are active in Iraq will have to decide what exactly their goal is in Iraq after US troop withdrawal. If it is Al-Qaeda activity inspired by a desire to impose a specific brand of ultra-conservative Islam on Iraqi society, it will have to come face to face with several crucial questions. One is the level of popular support that these Al-Qaeda groups command, or expect to command, inside Iraq. Another question that they have to contend with is - since Al-Qaeda is based on Sunni ideology, is there not a possibility that their militant activities in Iraq can contribute to a broader Shia-Sunni split ?

A lot will depend on the intentions of the Nouri Al-Maliki government, on the kind of vision Mr. Nouri Al-Maliki has for Iraq and how well the political process is able to counter sectarian divisions and to respond to the needs of different groups in the country. No one should be under the illusion that the conflicts within Iraq will be easy to put an end to. The need of the hour in Iraq is mature leadership that can build on its economic strengths and that can prevent the existing violence from spiraling out of control.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

NATO stance on conflicts within nations - Cold War and post-Cold War modes in European foreign policy

Europe's recent foreign policy stances on internal conflicts within nation states is marked by a strange combination of Cold War modes and post-Cold War modes. If one follows Europe's policy stances, actions and attitudes on this question from 2000 onwards, one can discern a kind of schizophrenia. Not always very comfortable with US efforts to " police " global political morality, it has nevertheless extended military support for the US " policing " agenda. While neoconservative elements have been exceedingly vocal inside the US, at least until very recently, it is not clear how far the US neoconservatives have been able to plant their ideas and their worldviews on European policy framers and European opinion makers.

It is the US that has been the most enthusiastic proponent and executor of the neocon agenda and several European countries have extended support, sometimes half-hearted, possibly due to compulsions having to do with overall security perceptions. Both the Afghanistan war and the Iraq war started by George W. Bush were primarily wars of the US establishment and in many ways, wars for the US establishment. Europe did not experience anything approaching the Sept 11, 2001 events in scale and European countries did take this fact into consideration while deciding the extent to which they would support the US-led initiatives in Iraq and Afghanistan. The European participation in the Iraq and Afghanistan wars stemmed from a combination of security concerns and idealism, although the idealism may have been misinformed and was most probably based on misleading and highly faulty intelligence.

The enthusiasm with which some European governments ( the French administration of Sarkozy, in particular ) decided to adopt military means, along with the US, to intervene in the internal conflicts in Libya during the Arab Spring revolts meant that like the US, some influential parts of the European establishment had begun thinking and acting like the US in that they were militarily intervening in foreign countries not based on security concerns, but based on an imprecise and possibly naive notion of idealism, an idealism of the kind that misses the complexity that constitutes the real world and tends to oversimplify matters to fit certain theoretical frameworks. With the recent conflicts in Syria, this imprecise and naive notion of idealism ( that can easily lead to ridiculously non-ideal consequences unless used with caution and unless based on a very careful assessments of the facts ) has once again surfaced, for example, through the statements of Mr. Anders Fogh Rasmussen, the NATO Secretary General. The problem with Syria, as with other cases in the Middle East ( although it is not acknowledged in a whole lot of the conformist discourse that permeates Western and US media and intelligent opinion ), is that the justification for intervening in a civil war is not very apparent. Even when the fear of possible use of chemical weapons is used by the likes of Mr. Rasmussen to talk about non-UN-sanctioned intervention in Syria, it is not clear what exact moral argument is being used, or if there is any moral argument. Since both sides in the Syrian Civil War have resorted to violence to achieve their aims, what is the exact moral argument being used when the bogey of chemical weapons is being used as a justification ? Surely, if the US establishment and significant parts of the European establishment are publicly subscribing to the view that chemical weapons use can be a triggering point for non-UN sanctioned-NATO-intervention in Syria, there must be other triggering points too, if one starts using the destructive power of arsenals as the criterion for intervention. Since national security is not a justification for intervening in Syria ( Syria does not pose a national security threat to the US or to European nations ) and since the validity of arguments based on things like chemical weapons is questionable, one is led to wonder if there are parts of the establishment in the US and in Europe who are trying to push the US and European militaries as well as the US and European political systems into new international paradigms. Recent history is replete with instances where those who shout loudest about freedom have often done significant damage to the cause of freedom. All too often, superficial public discourse has been the basis of the deployment of military forces inside countries. It is time for the international community to take note of the tenuous nature of the arguments underlying the public statements of the establishment in US and in Europe and to come up with solutions to the Syrian crisis that have a truly international flavor and that do justice to the causes of freedom, international rules and international harmony and that take the existing complexities of disputes into consideration.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

The question of chemical weapons in Syria - the cases of internal conflicts and external aggression

Syrian government officials have stated that they do not intend to use chemical weapons inside the country. However, one statement hinted that Syria reserves the right to use chemical weapons against external aggression. When the George Herbert Walker Bush ( or Bush Sr. ) administration led the attack against Iraq in the early 1990s, it was in response to the Iraqi invasion of Kuwait. The alleged use of chemical weapons by Saddam Hussain against Kurds in the late 1980s did not lead to any military action against Iraq. When the George W. Bush ( son of George Herbert Walker Bush ) administration attacked Iraq for allegedly possessing weapons of mass destruction ( later proved to be false ) and for allegedly having contacts with al-Qaeda , the use of chemical weapons in the late 1980s against the Kurds was used as an additional justification by some commentators and analysts. But the fact is that in the 1980s, when Saddam Hussein was in the good books of the Reagan administration, the alleged use of chemical weapons by Saddam Hussein against Kurds in Iraq did not lead to any military response against Iraq by the Reagan administration. Of course, more than twenty years have passed since then. New Democratic foreign policy and neo-conservative foreign policy have tried to sell the idea of " nation-building " to the world, with questionable results. While the current White House is trying to continue the New Democrat-neocon flavor of foreign policy when it comes to internal conflicts in other countries, the US administration would do well to clarify its exact intended policy on chemical weapons use by Syria, internal or external. Will an internal use of chemical weapons in Syria ( the Syrian administration seems to have vehemently denied intending to use chemical weapons for internal conflicts ) lead to unilalteral non-UN-sanctioned US military action or non-UN-sanctioned NATO military action against Syria ? As for Syria's not ruling out the use of chemical weapons against external aggressors, the legality and the morality become very murky. Syria is not a signatory to the Chemical Weapons Convention. While the US has ratified the Chemical Weapons Convention, there is confusion about whether US foreign policy has been made consistent with this ratification, at least based on the information that this writer has been able to gather. It seems that technically, Syria is right when it reserves the right to chemical weapons use against external aggression.

The morality of chemical weapons use is complicated. The use of chemical weapons by the US in Vietnam, the continuation of the use of other deadly forms of weapons etc mean that chemical weapon use becomes a difficult moral subject. It would be nice to rid the world of chemical weapons, but then it would be nice to rid the world of other deadly weapons as well. And of tyrannical governments and insensitive governments and of dangerous warmongers and war criminals. Using UN frameworks seems to be the safest option for such cases. The lack of evidence of weapons of mass destruction in Iraq and allegations of criminality against some western leaders are examples of how hasty military action in such cases leads to a tangle of moral and legal complications. The " policing " actions of the US become that much more difficult to justify given the lack of due diligence and a tendency to disregard UN mechanisms.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Cash and the Public Distribution System in India - Questions of priority and implementability

The Indian government has decided to go full steam ahead with its plans to disburse public distribution system aid in the form of cash rather than food. The government plans to have the cash deposited in the bank accounts of intended recipients and the system is supposed to make use of electronic Aadhar cards. A comprehensive food security framework that ensures adequate nutrition to all deprived and vulnerable sections of Indian society has not been implemented yet. But the government is busy publicizing the detailed manner in which it intends to disburse PDS aid. As far as the poor are concerned, the actual allocation of aid matters way more than the exact manner in which the food reaches them. This obvious fact seems to be lost on the Indian government.

A large proportion of the Indian population is still illiterate. Any PDS system that the government runs should be made intuitively easy for all Indians to understand, even those with no or limited literacy. Experts in human-machine interactions and experts in governance can try to determine if direct food disbursement or non-electronic cash disbursement or electronic cash disbursement will work better in the current Indian context. May be the Indian government should hire such experts and form a committee comprising some of them to recommend the best way to disburse aid. For cash disbursement, careful thought should be devoted to determine if traditional non-electronic banking or electronic banking is better suited in the current Indian context, where massive development challenges still remain and where literacy rates are still not at rich country standards. As for corruption, a lot depends on the people running the system and electronic systems cannot be expected to be immune to corruption. The fanfare with which the government is going about its attempts to introduce the electronic scheme while crucial questions about the storage and distribution of foodgrains remain and while lack of literacy hobbles large segments of the population is an example of the superficiality that has crept into government policies in recent times.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

US funding of groups opposed to the Bashar Al-Assad regime in war-torn Syria - legal and strategic questions

The Syrian government describes the rebel groups fighting aginst the Bashar Al-Assad regime as terrorists. The White House prefers to see the efforts of these groups as a fight for democracy. As in many such cases, the reality is complicated, no matter how much the White House tries to couch its interference in Syria in a make-believe language of moral clarity. The question of the legality of US interference in Syria in the form of aiding rebel groups becomes significant in the light of past history and because of the possibility of similar situations arising in other parts of the world. The historical precedents do not provide clear guidance in this matter. While the International Court of Justice ruled aspects of US involvement in the funding of Contra groups in Nicaragua to be illegal, instances like Afghanistan and external support for groups in Cold War conflicts in some other countries have not been subjected to any kind of consistent international judicial review. Funding of insurgent groups by individual countries and the bypassing of UN mechanisms while doing so are vestiges of the power structures of the past centuries and the Cold War. The extent to which these power structures will be dismantled in the coming years will determine how strongly UN mechanisms will be able to react to instances like these and how well the aggressive ( often over-aggressive ) actions of powerful nation states in such cases can be curbed.

Mr. Lakhdar Brahimi's diplomatic efforts have yielded limited results as both sides seem intent on escalating the conflict to the fullest extent possible. The incongruity of UN peace efforts proceeding in parallel with possibly illegal interference directed against the Syrian government by a major world power and a UN Security Council member just goes to show how complex the issue is. While the White House funds only non-Al-Qaeda groups opposed to Bashar Al-Assad, it may well be contributing to creating a situation where Al-Qaeda may control some regions or where Al-Qaeda may increase its influence in Syria. What kind of political equations will emerge out of these conflicts ? Will they lead to stable governments and the cessation of conflicts ? UN-led dialog, rather than US-funded insurgency, most probably stands a better chance of leading to stable political solutions, an end to recurring violence and justice for all groups involved.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Credit rating agencies and India's public finances

Like many other countries, India has received several warnings from international credit rating agencies about its public finances. The global economic crisis that began with the financial crisis of 2008-09 has pushed several governments into precarious situations regarding the sustainability of their public finances. The last downgrade of India's sovereign debt did not have any significant impact on India's government bond yields. This goes to show that the grades assigned by credit rating agencies are not the only things that the bond market takes into account while determining the yields on government bonds and the ability of the government to borrow money. However, like in the case of Europe, credit ratings can serve as useful warnings about possible vulnerabilities in the public finances of a country.

Since credit rating agencies do not specify recommended yield ranges for government bonds, individual and institutional investors should conduct their own independent analysis about government bonds. This has been the case for several countries in recent months. The yield on Indian government bonds of different maturity lengths has been around 8% recently. While India does need to take measures regarding taxation, spending ( for example, the right mix of subsidies, the right timeframe of subsidies etc ), growth and development, the recent threat by Standard and Poors to downgrade India's sovereign debt to junk status seems wide off the mark as regards the reality of the Indian economic scene. The recent Kelkar Committee Report and the Indian government's willingness to act based on it are signs that the Indian government is serious about addressing the fiscal sustainability issue ( the details about how fiscal sustainability is brought about and the right mix of policies needed to balance the goals of fiscal sustainability and human welfare do need to be determined carefully by the right kinds of debates inside India ).

Credit rating agencies should be careful when analyzing countries like India where massive human development challenges still remain. Also, their stress on the term " reforms " when it comes to rating India's government debt may well be a sign of superficiality in their analysis of the Indian economy and the short-term and long-term fiscal sustainability of the Indian government. A lot of the " reform " measures announced by the Indian government like relaxing FDI requirements in retail and in insurance may be less crucial for fiscal sustainability than things like human capital development, equitable growth and the health of the infrastructure sector. One cannot expect changes in FDI rules alone to bring about sustainable growth when the country has massive challenges in the areas of aggregate demand, human welfare, human capital etc. These factors are not necessarily significant to the same extent for European economies. Therefore, the impact of laissez-faire economic policies on growth and fiscal sustainability can be expected to be different for India and the European countries. Excessive stress on these " reform " measures and negligence in the human resources area and the aggregate demand area can even lead to weakness in public finances.

India's tax revenue to GDP ratio is less than 15% due to several structural factors. India's slow pace of development in the rural sectors of the economy is a contributing factor in India's inability to raise more tax revenue. While many will agree that economic growth, understood broadly, will be a crucial factor for improving the government's ability to increase tax revenues, there is a lack of agreement about what kind of growth ( the sectoral distribution of growth, the rural and urban components of growth etc ) over what kind of timeframe will best lead India to a stage where the government can reach tax revenue to GDP ratios that will help it sustain crucial development efforts and welfare systems. The elitist bias of the recent decades in Indian economic policy is not conducive to the creation of broad-based growth. Continuation of the same bias can lead to a stagnation of tax revenue to GDP ratios. It is time for intelligent opinion in the country to realize the inconsistency between the need to run a well-funded modern government in a modern state and the large inequalities in economic growth between different sectors. It is also time to base economic policy on good projections of several important macroeconomic parameters and not base policy predominantly on overall GDP growth rates. Also, it is time for economic policy to be based on a better discernment of the differences between short-term and long-term economic dynamics. The same also holds for credit rating agencies trying to grade sovereign debt and other aspects of the economy.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

The real problems, Mr. Hatch, for US public finances, are multifarious and multifaceted and go beyond anything as simplistic as just entitlements

Senator Hatch has stated something along the lines of - entitlement spending is the real problem confronting US public finances at the moment. The real problems, Mr. Hatch, for US public finances, are multifarious and multifaceted and go beyond entitlements. Just ask somebody like Mr. Paul Krugman. Or other Republican senators.

Dangerous simplifications can lead to dangerously misleading and wrong solutions. Why not defense cuts, Mr. Hatch ? And why not do a dispassionate study of different taxes and the potential impacts of different tax rates on investment, growth, fiscal health etc, both in the short run and in the long run ? Identifying the real problems confronting the US economy requires going beyond mere soundbites. It is time for the US political system to rise up to the challenge.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Compromising the Baucus-Conrad way and implications for the future of the US economy

Senators Baucus and Conrad have expressed their preference for compromising with the Republicans on entitlement spending for Medicare and Medicaid in return for tax increase concessions. The Senatorial voting arithmetic based on ideological predilections and other factors on the tax-spending questions isn't clear. For example, Senator Chambliss, a Republican, has expressed his willingness to be flexible on the tax increase question. Whether or not significant compromises need to be made about spending in order to reach agreements with Republicans about taxes, the question of why Senators Baucus and Conrad decided to focus on entitlement cuts rather than other cuts like defense cuts still remains.

Americans and Democrats deserve to hear specific numbers from Democratic senators like Baucus and Conrad. When it comes to Medicare cuts, what does " rich " mean ? If these " rich " are availing of Medicare at the moment, where will they come up with the resources for equivalent medical care if their Medicare entitlements are cut ? Senators Baucus and Conrad are effectively stating that the US can no longer guarantee the same level of medical care without jeopardizing the future fiscal health of the US. However, the question arises - how do you know if this is indeed the case ? In other words, why should parts of Medicare expenses be the ones to go in order to restore the US to good fiscal health and good fiscal prospects ? Why not try to find specific defense cuts to achieve the same objectives ? Also, what amount of cuts are Senators Baucus and Conrad recommending ? What are the numbers as far as the mix of tax increases and Medicare spending cuts they are suggesting goes ? Without specific numbers from these Senators regarding tax increases and spending cuts, it is difficult to reach an intelligent assessment about their suggestions.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Mere gimmicks won't help the Indian economy

The UPA government has expressed confidence that it will win the FDI ( foreign direct investment ) vote in parliament. India is one of the most complex countries in the world, especially when it comes to the functioning of its political system. Parliamentary arithmetic may well save the UPA government. However, Prime Minister Singh, Finance Minister Chidambaram and the Indian National Congress Party have betrayed a sense of desperation by allowing majority foreign stakes in multi-brand retail. Since retail isn't manufacturing and the entry of foreign retailers in a big way can cause irreversible harm to domestic retailers, the costs to the Indian economy may well outweigh the benefits. After trying to draw comparisons between the current situation in India and the early 1990s, why did Prime Minister Singh resort to something like FDI in retail, whose benefits are questionable and whose potential to cause harm are non-negligible, as one of his and the Congress Party's major advertising items ? It seems there is a lack of quantitative thinking in the way crisis situations in the Indian economy are being tackled.

The UPA government may survive the FDI vote, but the country will still be left without convincing answers to its economic travails. There is a lack of stress on the country's internal economic strengths. Instead, there is an over-reliance on possible foreign capital, and there too, the approach is not very clear or comprehensive. And it smacks of elitism. Given how India's GDP growth has failed to bring the desired levels of improvement in living standards for the broad masses, this approach, that is elitist both in reality and in appearance, can prove to be politically costly for the Congress Party.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Two incompatible aims for the Afghan president

Hamid Karzai has reportedly acquiesced to US efforts to keep 10000 American troops in Afghanistan beyond 2014. The Afghan president has also reportedly initiated moves to start some kind of peace dialog with the Taliban. Any realist should view these two aims of the Afghan president as incompatible for the most part. Only the most naive would expect US military operations to remain confined to strictly defined aims, pre or post 2014. How Hamid Karzai proceeds on these two fronts remains to be seen. It certainly does not give the impression of strong leadership in Afghanistan. Weak-kneed is a more appropriate description. The fact that Afghanistan still does not have trained troops and trained police stretches one's credulity. Better and stronger leadership will hopefully emerge from democratic and negotiation processes in Afghanistan in the coming months and years. Better and stronger leadership that can bring to Afghanistan indigenous frameworks for dealing with terrorism and other security issues.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

How the political establishment in Washington DC is leading the US down the drain

Probably never in US history has its political establishment been so lacking in its response to the kind of dangers that the country is facing. These are not very visible dangers, like external aggression. But the implications for human welfare and for the sustainability of the economy are enormous. Politics as usual in Washington DC leaves one wondering as to how the US public has grown so apathetic about its own future and so lax in the kind of performance it demands from this establishment. Any astute observer of the US political scene of recent times should be able to gather that the puniness of the Washington DC politicians and the gargantuan scale of the short-term and long-term problems facing the nation will soon begin to tell on the nation's health in ways that have the potential to create intense strife, instability and hardships.

If one goes back in history, the Great Depression is one instance where the country was faced with dark, gloomy and uncertain economic prospects of an unprecedented nature. Even though the Great Recession wasn't as severe as the Great Depression, we still don't know whether or not we will slide towards a double-dip recession in the US. Also, there are many more people in the US than during the Great Depression. Never underestimate the importance of a large population when economic stability and sustainability are issues. How and in what manner this can enter into the economic well-being of the country is difficult to tell, but only the most naive can assume that it is an irrelevant factor.

The defense budget of the US is a big albatross around its neck. It is buying the US little in terms of security or image. However, it contributes to the creation of a macro-economic time-bomb in the form of a possible debt crisis. The miltary-industrial-political establishment may have become bigger since the Great Depression, but it has not necessarily improved in quality. In fact, quite the opposite is probably the case. How this nexus interacts with the democratic process will determine how well the US will be able to defend itself against existential threats of an economic nature.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

The heights of complacency in US economic policy-making

The lawmakers in Washington DC can be expected to resort to old rigmarole in the coming weeks and waste the nation's valuable time while faced with unprecedented economic challenges. Holding timetaking discussions about whether or not to extend Bush tax cuts and whether or not to increase the debt ceiling have become periodic rituals for a political establishment that is mired in old and increasingly irrelevant divisions. On several occasions in the recent past, the Democratic Party has either capitulated to affluent vested interests or it has displayed amazing incompetence when it comes to fighting for its traditional support groups. It is not too much of a stretch to say that the Democratic Party has betrayed its traditional agenda. As far as old divisions go, what better friends can the Republicans have than the current Democrats in the Congress and in the White House ? In the last few years, the Democrats ( at least significant segments of the Democratic Party ) have either acceded to Republican demands about economic policy or they have engaged in subterfuge with their own stated principles.

The country is faced not just with short-term " fiscal cliffs ", but also long-term fiscal precipices that can create enormous problems for the economy. The small and medium scale business sectors are displaying weakness and the fiscal and monetary medicines that have been tried have failed to create the conditions for the desired levels of short-term growth and for optimism for the long-term. Let the political establishment in Washington DC not forget that the housing crisis and the financial crisis did happen in a capitalist economy where the economic decisions of many private sector players proved to be too reckless in hindsight. A further curbing of extreme laissez faire tendencies in the economy may well be needed to prevent future catastrophe. A very predictable burgeoning of the public debt to GDP ratio cannot be left to be solved by continuing the fiscal policy mistakes of the past. Compromises between traditional Republican stances on the issue and the recent feebleness of the Democrats on the issue will most likely lead to a lot of false assurances and will create the conditions for a public debt-default precipice in about a decade. Unless care is taken, the economy may well come face to face with that precipice even before that. Moreover the long-term problem of job loss and job destruction in the United States can get exacerbated if left to the mercy of market forces alone. It is time for the political establishment in Washington DC to switch gears on questions like public debt, job losses to foreign countries and weak net job growth.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Is the Affordable Care Act constitutional ?

The majority opinion in the Supreme Court of the United States which held the Affordable Care Act to be constitutional seems to have muddled certain concepts. The US government may have a right to tax individuals, but how is making it mandatory for individuals to buy health insurance consistent with American notions of freedom, especially when certain individuals will be forced to use their own money to cover part of the insurance ?

The US government imposes payroll taxes and it hands out Social Security benefits to certain recipients. However, individuals are not coerced to spend their money on a program, the way the Affordable Care Act intends to do. The constitutionality of the Affordable Care Act will probably be revisited in the future, and may form the subject of ideological and constitutional and intellectual battles in the years ahead. Even those who have left-leaning views about the economy should be wary about the constitutional implications of this Act.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Seniors under the Affordable Care Act

The supporters of the Affordable Care Act have tried to create a celebratory atmosphere around its passage and its validation by the Supreme Court. Whatever one's opinions may be about the constitutionality of the Affordable Care Act, all left-leaning individuals must be wary about what the Act intends to do about funding for Medicare. It appears strange that Medicare spending will be cut under the Affordable Care Act while a lot of the money for the Act will be obtained from Medicare tax increases. While the wealth transfer part of the provisions of the Affordable Care Act may be theoretically consistent with left-leaning views in the US, the part about cutting funding for certain seniors does not jell well with the broad thrust and the symbolism of traditional leftist legislative activism in the US. Something just isn't right when Democrats allow this kind of dilution of Medicare because of tight fiscal conditions.

It is almost as if the Democratic Party has lost coherence in the kind of legislative agendas it is pursuing and in the way it bargains with ideological opponents in the Congress. It is not yet time for the Democratic Party to pat itself on its back about the Affordable Care Act. When srcutinized carefully, it looks more like a capitulation than like an achievement.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Colonization activities in Palestine and the right to self-defense of Israel

Israel's recent efforts to invoke the right to self-defense as its justification for air strikes on the Gaza Strip should be viewed in the wider context of the Israeli-Palestinian imbroglio and must necessarily be colored by the reality of Israeli colonization activities inside Palestinian territories in the eyes of any impartial observer of the recent developments in the region. Struggles for self-determination cannot always take the form of clear-cut wars with clear-cut rules like the Geneva Convention or similar rules. Self-determination struggles often rely on tactics that do not conform to standard rules of military engagement. They often have to rely on sporadic attacks and can involve an avoidance of direct confrontation with strong occupying forces. This has been the case not just in Palestine, but in other such conflicts around the world as well.

A country that invokes the right to self-defense should not be, at the same time, carrying out activities of an imperialist nature in territories that have never belonged to it under international law. Most of the international community has accepted this reality in the past. The United States has been the one partner of Israel that has supported its actions in Palestine, illegal or not, even when they have violated standard norms of international behavior or of human rights. Recent efforts at a ceasefire in Gaza can, at the very best, buy temporary peace. The only way for lasting peace to be achieved is for a comprehensive security deal in the Middle East where Palestine's right to self-determination is recognized and followed and where Israel negotiates some kind of mutual arrangement with those powers that are intensely hostile to it. It seems Israel's ability to force military solutions in the region, whether in Palestine or elsewhere, is limited. While several sections of the international community can be sympathetic towards Israel because of the recent rocket attacks, they will also have to consider human rights in Palestine and occupation activities in Palestine while deciding their views and their strategies. All the recent round of fighting does is exacerbate existing hostilities. It does not provide a way towards security for Israel. Or the Palestinians.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Greece needs contingency planning for a variety of economic scenarios

As wrangling and head-scratching continues in Europe about the best course of action on Greece, there seems to be a paucity of contingency planning for the different scenarios that can ensue. In fact, it is not even clear what the European community intends to do about Greece if it does not accept the two-year extension for further fiscal austerity. Does it intend to stop all talks of a third round of aid money and ask Greece to implement further fiscal tightening ? If those opposed to the two-year extension get their way, what does the Greek government intend to do in such a situation ? Clearly, the fact that the government negotiated a two-year extension means that it thinks that immediate fiscal tightening needs to be avoided. However, what if such an immediate fiscal tightening becomes necessary if next week's decision about Greece is one opposed to the two-year extension ?

It seems Greece needs a set of strategies designed to match different scenarios regarding GDP growth ( short-term, medium-term and long-term ), tax revenue fluctuations, willingness of the rest of Europe to lend money under specific scenarios, willingness of the IMF to lend money under specific scenarios etc. The worst-case short-term scenario for Greece is one where no further aid money flows in due to disagreements about the economic merit of such aid, due to the unwillingness of different parliaments to approve aid money etc. It should be possible to avoid this worst-case scenario, where Greece is left completely to itself, if those who have a stake in Greece's future take all possible consequences into account while deciding their actions. For example, European countries need to take into account the fact that leaving Greece to its own fiscal and economic resources in the short-term can trigger a bout of instability that the European economy and the world economy should try to avoid at all costs. Although no one is talking about stopping aid to Greece altogether, Greece needs to create contingency plans for such a situation which can lead to exit from the Eurozone, hyper-inflation, failures of banks in Greece etc.

The ripple effects on banks in the rest of Europe, on the trade volumes of Greece's trading partners etc can be devastating for Europe and eventually for the global economy. Given the possible devastating short-term and medium-term impacts of leaving Greece entirely to its own on Europe and on the global economy, it makes sense to provide the requisite amount of aid to Greece till it reaches the right combination of internal fiscal and economic stability. Short of this worst-case scenario, details like the timeframe of budget adjustments, the combination of taxes and spending levels etc need to be considered. What countries like Germany and France need to realize is that questions like timeframes for fiscal adjustments and for reaching specific debt-GDP ratios are economic questions first and political questions next. At this historic juncture for the European and for the world economy, it will be the height of stupidity for European countries to put politics ahead of economics. German taxpayers and taxpayers in other countries need to be educated by their economists and by their politicians that extending financial aid to Greece from their own money can make perfect economic sense given the integrated nature of the European and the global economy. It is imperative that short-term political considerations are not allowed to cloud sound economic reasoning given the delicate state that the European economy and the global economy find themselves in.

As for the right combination of taxes and spending, this is again an economic question that needs careful analysis based on the country's revenue structure, spending programs etc. Those who may want to put more emphasis on spending cuts and less on tax increases for achieving lower deficits in Greece would do well to realize that the rich, the high income earners and the large-profit-makers should be expected to make some sacrifices for Greece's austerity programs. Greek policy-makers should be able to come up with frameworks where taxes are imposed on employers making good profits and adequate provisions are made for employers struggling to make profits. Letting the burden of austerity fall on the spending side alone can create unwanted economic consequences and socio-economic instability. By not letting tax increases absorb some of the shock of austerity, conditions may get created where large sections of the population are left without basic welfare provisions and where the aggregate demand may change in a way that has adverse effects on the economy. Clearly, the details can be complicated and can vary from country to country. But mere ideological opposition to letting some tax hikes be a part of austerity programs, as opposed to dispassionate economic analysis, can lead to severe problems in the short run and in the long run. Greece needs serious economic analysis in this area. Fiscal projections, GDP projections, sectoral GDP projections etc under different tax-spending combinations and under different external aid combinations need to be arrived at. Given the fast-changing nature of economic developments in Greece and in Europe, no one should expect this to be an easy task. However, it should be possible to make projections that are reasonably accurate and robust. The extent to which Greece is able to come up with good projections about these aspects of the economy may well decide the short-term and long-term economic well-being not only of Greece, but also of the rest of Europe and possibly of the world as well.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

What US inflation hawks should know about the term " unprecedented situations " and what QE proponents should be careful about

One should expect unprecedented economic situations to lead to unprecedented economic policies. For the most part, the US Federal Reserve didn't create the Great Recession ( the Greenspan Fed may have contributed to the real estate bubble in some measure, but one should keep in mind that it is difficult for Fed policy alone to create asset bubbles like real estate bubbles if most economic agents are acting " rationally " most of the time. Also, the Greenspan Fed may have had other valid justifications for its interest rate policies ). It responded to it. The Great Recession has similarities with the Great Depression, but it isn't the same as the Great Depression. There is nothing in economic science to provide exact guidance for Fed policies during these difficult economic times.

Those who swear by rigid anti-inflationary principles ( http://www.bloomberg.com/news/2012-10-31/bernanke-depression-guru-seeks-roosevelt-well-being.html ) would do well to realize that these are indeed unprecedented times. This article is not trying to defend specific asset purchases of the Fed. For example, excessive purchases of mortgage-backed securities during QEs, as opposed to buying more Treasuries worth the same value, is indeed a risky game. And it should be scrutinized carefully. What this article is trying to say is that inflexible anti-inflationary stances are ill-suited during deep recessions and during long bouts of high unemployment.

As for the exact mix of securities that the Fed bought for its QE operations, that is something that experts need to think seriously about. Were all the QEs necessary ? Possibly. Were all the purchases of mortgage-backed securities for these QEs necessary ? That is a difficult question to answer. Can the US economy embark on a high-GDP-growth and an inflationary trajectory while the housing market is still down ? Or is the recovery of the housing market a sine-qua-non for inflationary pressures to build up in the US economy ? Once again, this is a difficult exercise in economic prognostication that requires serious research. Let it be said though, that if inflationary pressures build up without a corresponding recovery in the housing market, the MBSs held by the Fed will most likely not command much market value. To that extent, the Fed's ability to rein in inflation will be compromised in such a situation. This possibility of the inability of the Fed to have sufficient amount of effective assets to sell in case of inflationary pressures is something that monetary policy needs to contend with. Let it also be said that the European Central Bank's long-term-refinancing-operations may also leave it in a situation of weak control over prices if inflationary pressures build up. Both the US and the European monetary systems are dealing with new economic realities. The policy makers in charge of these monetary systems are learning many crucial things along the way. In the US, GDP growth is beginning to falter although it recovered to some extent after the GDP contraction during the Great Recession. The small business sector has shown persistent weakness. Even big corporations have been having difficulties. Why haven't the QEs led to more investment spending and more consumption spending than what we have seen ? What effect have the QEs had on activities in the credit market ( as regards rates and amounts of lending and borrowing and the quality of new credit in the economy ) and what effects are they likely to have in the credit market in the future ? These questions about the links between QEs and possible economic recovery need to be answered if we are to reach a better understanding, not just of the recent economic crises, but also of appropriate responses to possible future crises with similar causal factors and similar mechanisms.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

India's public finances strained even for food security - what are the implications for human welfare and prioritization of public expenditure items ?

Comprehensive food security in India is a topic that has to fight for attention with a host of other matters in Indian public and political discourses. It is a sign of the elitist turn that Indian economic policy making has taken over the last twenty years or so, if not more. It should be a matter of grave concern that the recent Kelkar Committee report has stated that food subsidies and the requirements of the Food Security Bill will create burdens on the public debt that may necessitate passing some share of the burden to APL ( above poverty line ) consumers in the future. The problem with this is that India's poverty problem is way more serious and complex than what these simplistic approaches seem capable of tackling. For a while, there was no clear consensus on whether the poverty line should be defined as 26 rupees a day for rural areas and 32 rupees a day for urban areas. Even now, it is not clear if these definitions of rural and urban poverty lines will be accepted in the final versions of the bill. 32 rupees a day is less than a dollar a day, which is a common criterion for poverty used around the world. Even when a dollar a day is used as a criterion for deciding who is poor and who is not, it is usually understood that the people earning between, say, a dollar a day and two dollars a day also encounter significant economic difficulties in their daily lives. Suggesting that some of the burden of food subsidies in India can be passed to APL consumers in the future may be missing some significant human welfare implications for those whose earnings are just above the poverty line.

The fact that India finds itself in a situation where providing food security to its citizens creates severe strains on public finances is a sign that some crucial aspects of the welfare of Indian citizens have been neglected for far too long. Why did comprehensive food security start attracting attention in India only after the public debt problem and the public finance problem became so vulnerable ? What kind of prioritization was being followed by Indian policy makers ?

As for the future, should the exact Kelkar Committee recommendations about food subsidies be followed or is there need for serious debate about which items of public expenditure need to be modified by how much in the future and over what timeframe and where food subsidies figure in all this ? Mr. Chidambaram has stated that the government is committed to implementing the Kelkar Committee recommendations. Does Mr. Chidambaram think that the recommendations about food subsidies should be followed exactly as stated in the report or should there be additional debate about the prioritization of expenditure items ? What definition of poverty line should be followed if one tries to follow the Kelkar Committee suggestions about food subsidies and APL families ? Without a clear consensus on the definition of poverty line and without a clear understanding about the income distribution just above the poverty line and the number of Indian families who are marginally above the poverty line ( which usually turns out to be quite large by most of the commonly followed definitions ), how can the government do justice to the human welfare aspects when it comes to prioritizing subsidy expenditures ?

Clearly, human welfare in India cannot be left to the mercy merely of these higher level reports and recommendations. Clearly, there is a need for more detailed analysis and debate about the complexity surrounding the poverty problem and the income distribution issue in India while deciding food subsidy policies. While growth and tax revenue increases can potentially relieve some of the pressure on this front, the prognostications on this front are not all optimistic. GDP growth in India has encountered some serious problems and it has not proved easy to increase tax revenues as a percentage of GDP. Given its implications for human welfare, a well-financed food security system should be a priority till growth and income increases lead to lower food subsidy needs. However, till such GDP increases and such income increases materialize, all efforts should be made to make the food security framework secure. Let us put food security at the top or near the top of the priority list of government expenditures and let us not make the food security framework vulnerable to expenditure cuts while poverty remains such a big problem for the country's economy.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Weakness in the small business sector and implications for economic recovery in the US

Given the fact that small businesses employ about 50% of all US workers, the health of the small business sector is crucial to the sustainability of economic recovery in the US. Consider, for example, an index like small business average change in employment per firm. This index has dipped discernably about three or four times since the onset of the Great Recession. Further, it has been negative for most of the time since the beginning of the Great Recession.

Small businesses rely to a great extent on domestic spending. Whether that makes it more vulnerable than big businesses to housing sector collapses and financial sector collapses is an interesting question. This article is not intended to discuss the effect of sectoral collapses on the demand levels of firms. One probable reason for the persistent weakness in the small business sector is the difficulty of restarting closed small businesses ( considered in the aggregate ) or starting new kinds of small businesses in a high risk economic climate and in a situation of weakness in the demand side of the economy.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

The labor market and the lack of a solid recovery from the Great Recession in the US

There is a lot of confusing data and a lot of inaccurate claims about the US labor market and US unemployment in the public discourse. A lot of the discussion tries to paint a more optimistic picture about US unemployment and US economic recovery than what the data warrants. The US labor force participation rate has decreased by about 2% since before the onset of the Great Recession. This means the unemployment number would be higher by 2% compared to the current numbers if the labor force participation had remained at the pre-Great Recession levels. Moreover, the underemployment rate is at a high level of around 15% and can be expected to have an effect on the sustainability of the recovery from the Great Recession.

Those who want to stress spending cuts as the best way to reduce the US budget deficit should keep in mind that a private sector whose recovery from the Great Recession is not very solid will find it very difficult to absorb any job losses in the public sector due to government spending cuts. This should be considered along with other factors like the welfare aspects of government programs and the availability of good private sector alternatives to them.

The fact that GDP growth rate recovery from the Great Recession became delinked from job creation to a significant extent in the early stages of the recovery, similar to the recovery from the recession of the early 2000s, should be a matter of grave concern for those that care about the stability and the growth of the US economy. It is time to seriously examine and to question all claims about recovery in the US economy that neglect the employment aspect.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Who de-inspires America less and how the outcome of the 2012 US presidential election depends on it

Can the American political system remain the American political system once it begins to become more serious about issues ? Take away catchy slogans like " Compassionate Conservatism " and " Change - Yes We Can " and Si Se Puede and all that and one gets a sense of how it must feel like in Beijing. Well, the slogans are not completely gone, but the mood has definitely changed. The sloganeering of the Romney campaign looks more rooted in issues - " Smaller, Simpler, Smarter " at least makes you think about government and the way government should work, whether you support his specific policies or not. The Obama campaign's " Forward " slogan, while less catchy than the 2000 and 2004 slogans, continues the same kind of vagueness. Apparently, there is a Bruce Springsteen song called " Forward - and Away We Go " behind the Obama campaign slogan. If the lyrics I read on the internet are accurate, then this song seems to be preaching ( or at the very least endorsing ) a kind of obsession with amoral philandering or putting a spin on some serious immoral philandering, depending on who you are. This the US political discourse can best do without during such bad economic times, with waning power abroad and with uncertain prospects for the future. Will the political atmosphere in Washington feel more and more like the one in Beijing as the realization dawns that giving long and deep tax cuts and hoping everything will turn out fine or sending the US military on missions with unclear objectives and unclear moral justifications and hoping that it will improve US image or power or goodwill abroad does not work.

How do you inspire the public if you are a Democrat ? You talk about the middle class and the poor. You talk about fighting to change the tax code so that it is less skewed in favor of the rich. You talk about curbing the influence of the super-rich on legislation. Obama's first term did not yield any good deals with the Republicans as far as taxes go. Paranoia about the effect of higher taxes led to extension of the Bush tax cuts. In such an environment, it is very difficult for an incumbent Democratic president to come up with campaigning strategies that enthuse the Democratic base ? Why do you expect your second term to be any different from your first term when it comes to taxes ? The fear of a double-dip recession is real and Republicans swear by ideology that favors lower taxes even when GDP growth is good ( although the scientific rationale behind this herd mentality is highly doubtful ). Also, Mr. Obama, why did you make the payroll tax cut into a bargaining item ? How do you enthuse the Democratic base after resorting to this kind of haphazard bargaining with Congressional Democrats ? During his first term as President, Obama has been anything but coherent on the tax question. His stances on taxes look more coherent now than towards the middle of his term. However, how do you convince the Congressional Republicans on the question of selective tax increases and tax decreases given the fact that you yourself went along with the continuation of the Bush tax cuts ? Should you promise tax increases when the recovery from the last recession is so weak and the job numbers are so alarming given the fact that you did not veto extension of Bush tax cuts that were passed using economic weakness as justification ? Mr. Obama, are you telling Americans and Democrats that you will veto any further extension of the Bush tax cuts ? If you are a Republican trying to enthuse voters about the economy, you sing the same old tune about the virtues of low taxes and how it spurs investment and growth. Unfortunately for Romney, a decade of Bush tax cuts hasn't had a very positive effect on investment in the US or on the US economy overall. Looks like Romney wants to give more tax cuts to everyone. But this raises questions about what he will do about the deficit. Talking about huge spending cuts is okay. However, he would do well to remember that when the Republicans had the White House and the Congress for several years during the Bush presidency, they could not cut spending. And if he wants to cut deficits purely through spending cuts, he needs to explain which items he will cut. Will he go with large defense budget cuts ? Are there good, credible, non-risky private sector alternatives for the government programs he may want to cut ?

After fighting two costly wars with very questionable benefits to the country, the US finds itself in a position where its military and geostrategic activities are being met with serious opposition or outright hostility. With the continuation of economic sluggishness, the ability of the US to project its power abroad has decreased drastically. America's rhetoric about being the champion of democracy around the world is being met with more skepticism. The process of reducing American troops in Iraq and Afghanistan is already underway. Generating partisan debates on foreign policy questions becomes difficult in these circumstances.

" Green jobs " was a big cathphrase of the 2008 elections. The Romney campaign website mentions that he will try to make the US energy independent by 2020. Americans should be skeptical about the achievability of energy independence by 2020. As for the effect on the overall economy, any new green jobs will replace conventional jobs, new green investment means less non-green investment etc. So, the Green economy thing is more about sustainability and resource independence and less about overall job creation. It depends a lot on how fast the scientific and research establishment, public and private, is able to come up with good solutions and cheap alternatives. It probably calls for a Beijing-style approach rather than a Washington-style approach.

China bashing has been resorted to by both Romney and Obama at one time or the other. However, calling China a currency manipulator misses the point. Low wages and other structural factors figure prominently in why China is exporting so much to the US. Different countries try to keep their currencies low or high depending on their economci needs and circumstances. It is wrong to give false hopes to the public on this question without paying serious thought to the complex economics involved.

It may be a good thing after all that Americans will have to pay more attention to facts and issues rather than gimmicks while deciding their president this time around.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Who does rich America belong to, if not to America ?

Browse the internet and you will find some interesting analyses about US, European and OECD corporate tax rates. The big question that arises in my mind when I study these analyses is this - who does rich America belong to, if not to America ? Once one considers tax loopholes, top American multinational corporations are paying lower taxes overall compared to their European counterparts. Now, corporate taxes do not form the largest component of tax revenues in the US, income taxes do. Still, when fiscal deficits are such a big problem, all the revenue sources need to be considered as regards their costs and benefits.

So, what should be the priority if one is trying to frame the right corporate tax policy for the US ? Should closing tax loopholes take priority ? Or should changing corporate tax rates take priority ? Corporations are already taking advantage of loopholes like tax havens and lowering corporate tax rates is unlikely to make them stop using these loopholes. As for the extra share of the profits they will retain if corporate tax rates are decreased, will it lead to increased investment in the US and will it be investment of a type that creates a lot of jobs ? Given their propensity to move production to low-wage countries and to countries with fewer environmental restrictions, and given the recent tendency of US financial institutions to invest money in risky, high-expected-return foreign assets, one should be pessimistic about the ability of lower corporate taxes to yield overall economic benefits for America. In fact, it may just end up lowering US corporate tax revenues without doing anything positive on the investment or job creation front. Therefore, closing of corporate tax loopholes looks like a better option for US policy makers. Structural factors like wages and other costs will figure prominently in the investment decisions of American corporations and tax rate changes that are unaccompanied by tax code changes designed to close corporate tax loopholes will most likely affect the revenue from corporate taxes and not achieve anything in the growth or jobs areas.

Now let's dwell on income taxes and rich America for a moment, shall we ? Rich America got income tax sops, thanks to the G.W.Bush Republican wave. I mean these weren't gigantic sops, if one goes by percentage changes etc. However, these cuts were large enough to increase deficits to an extent that exacerbated the debt problem so that now, the debt projections to 2025 or thereabouts look quite alarming. And what about jobs ? We had a long jobless recovery phase after the recession of the early 2000s. We now have one of the worst, if not the worst, job scenarios since the Great Depression. And what about social insurance ? Not impressive, if one compares to many European countries, for example. And where has the money from the lower taxes gone ? A lot of it has found its way to risky investments abroad through US financial institutions.

As rich Americans try to use their influence on the political establishment to bring about decreases in taxes or to extend previous tax cuts, and as they become more and more global in their approach towards investment and money-making, there is a high chance that these Americans will be less economically integrated with the society they are part of. Mr. J.K. Galbraith used the term " Affluent Society " to describe the rich about fifty years ago. In the early twenty-first century, should we start using the term " Ostensible Americans " to describe the new ultra-globalized rich Americans ? It has been quite a journey in elitism in the world's biggest economy from Mr. Galbraith's Affluent Society to the new ultra-globalized American elite. Not that globalization is bad per se. Not that rich Americans should forego good business opportunities abroad. But there need to be limits to how much rich Americans are allowed to avoid their share of the responsibility for fixing the country's finances while pursuing risky investments abroad. And it is also time to start thinking seriously about the limits to which businesses can be allowed to flee abroad in search of low wage rates etc. In other words, it is time to realize that the Americans with money to invest are not just competitors with the Europeans and the Japanese and the Chinese. They are Americans with responsibilities inside America. GDP growth without good job growth should lead to serious introspection in the country as to its long-term effects on American society. It is time to halt the slide towards ostensible Americanism.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

The Japanese economic experience and what the US should learn from it

Gross Domestic Product and the growth rates of Gross Domestic Product do not tell the whole story about any economy. However, they are two parameters that get a lot of attention both in the news media and among economists and economic analysts. Japan has slid behind China in terms of annual GDP over the last two decades and its growth rate has languished. As we look forward to the next decade or so, will the American economy start resembling the Japanese economy in many ways ? Let's look at some similarities. Japan has a very high public debt to GDP ratio, around 200%. The US public debt to GDP ratio is around 100% and may well reach the kind of level Japan has now in another decade, even if the US Congress succeeds in cutting the annual budget deficit to around 0.6 trillion from the current deficit of more than a trillion. Low taxes failed to spur Japanese GDP growth to the extent the Japanese policy framers wanted and Japan has recently decided to pay more attention to its spiralling debt to GDP ratio. The US obsession with low taxes is producing consequences that are similar to Japan. The GDP growth numbers have been either bad or unimpressive. What makes it worse is the fact that whatever GDP recovery has happened recently has not led to good net job growth rate in the US. Large government budget deficits tend to create pressure on the current account and the trade balance of a country. Japan was a strong net exporter. However, its trade balance has come under pressure recently and its large government budget deficit may well be a major contributing factor. The US has been a net importer and persistence of the government deficit will keep creating pressure on this front. As the composition of Chinese economic production and the composition of China's exports and imports change in the coming years, the export and import numbers of the United States and some other countries may see a lot of changes. One needs to keep in mind the fact that both the export and import amounts and the trade deficit matters. The sustainability of the US trade deficit and current account deficit depends on the willingness of non-US entities to buy US assets. Unimpressive GDP growth rates, crises in financial institutions, unsteady corporate profits and vulnerable public finances do not create the right conditions for the inflow of foreign money into the US. While Japan has avoided some of these problems due to its strong export strength in the past, it may also start encountering some of the problems that the US has been having.

In other words, the US and Japan have a lot to learn from each other's economic experiences. How these two countries tackle the problems of high public debt to GDP ratios, pressure on trade balances and current account balances, reliance on foreign money and the contradictions between reliance on foreign money and unimpressive economic performance at home will affect the future economic trajectories, not just of these two countries, but also the economic future of the world.

A few crucial things need to be kept in mind while comparing Japanese economic problems with similar economic problems in the US.

1. Japanese net public debt is around 110% of GDP, much lower than its gross public debt of around 200% of GDP. The percentage difference between gross and net public debt of the US is not that high. So, among very big economies, as opposed to smaller European countries, the US may well have the most serious public debt problem, even more serious than Japan, as we speak.

2. Only 6% of Japanese public debt is in foreign hands. On the other hand, China owns about a trillion dollars worth of US treasury bonds and Japan about 1 trillion dollars worth.

3. The unemployment rate in Japan is around 4.5%, which is much lower than the current US unemployment rate of around 8%. This has implications not just for policies designed to promote higher GDP growth etc, but also for public finance. The need to bring unemployment numbers down and the need to keep fiscal deficits under control will create tensions in the fiscal policy area.

4. Poverty rates in the US and Japan are similar if one goes by the criteria used in the respective countries. However, the fact that this poverty is accompanied by much higher unemployment in the US means that it becomes much more difficult to come up with policies designed to keep both low while ensuring public fiscal stability.

5. The current account deficit of the United States is sustainable only if private and government entities in the US keep attracting enough foreign money. The United States is likely to face bigger problems in this area than Japan in the near future.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

What happened to investment in the United States despite the G.W.Bush tax cuts ?

Economists and politicians who favor tax cuts as growth-promoting measures have some explaining to do if one considers recent investment numbers as a percentage of GDP in the United States. They are low, probably lower than 15% of GDP. And aren't low taxes supposed to spur GDP growth through higher investment, among other things ? So why is the investment sentiment so anemic and why is the investment climate so negative ? American financial institutions have been investing funds abroad in hopes of high returns. They got burned in France and in other European countries recently and they got burned in East Asia about 15 years ago. But do you see what I am getting at here ? American business and financial entities aren't really enthused about investing at home ! And this ten years after a big, elitist tax cut. I mean there seems to be a serious lack of scholarship and awareness about the tax-growth question. How has investment as a percentage of GDP been so low during a prolonged low-tax period ? Have rich Americans run out of good options ? I mean, come on, rich Americans ! We are counting on you to pull us through this morass, through this troubled climate. I mean, the CEOs are earning their millions, right ? And corporate profits aren't really all that low, are they ? Where are the new investment ideas and why aren't American business and financial entities investing more at home ?

Is it just due to business sentiment and investment sentiment or is it due to a strong global pull on available money or is it due to structural factors ? So, the housing market collapsed and isn't a good investment option for some time. And a lot of low-end manufacturing is shipped overseas. And automation is becoming more prevalent in manufacturing ( this has implications for the employment generation capability of investment and employment generation is crucial for the US right now ). So, is it all up to the service sector in the United States and has the business community in the United States run out of ideas when it comes to new investment in the service sector ? How does the US economy improve investment prospects in the service sector in a way that creates a lot of jobs, which America needs right now ? Should the Congress seriously start considering taxing large investments made abroad by US businesses and US financial institutions ? Or pass legislation that mandates a portion of such investments made abroad to be contributed to workers training and retraining programs in the US ? And who will come up with the training and retraining programs that ensure that the employment market does not get into frequent or prolonged traffic snarls in the US ? These are all questions that need careful consideration if the economic challenges facing the United States are to be solved in a way that leads to sustainable economic recovery.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Sluggish Indian GDP growth and foreign direct investment in India

So it has been twenty years since India embarked on what is widely described as the neoliberal phase in its economic history. The exigencies of the early 1990s probably justified this change in course. Economists and economic historians can be expected to debate this question for quite some time to come. Not only the Indian National Congress, which initiated this policy change, but the Bharatiya Janata Party too, embraced the new paradigm. For a while, all seemed well. However, twenty years later, a dispassionate assessment of the successes and failures of India's economic policies of the last twenty years shows that while GDP growth rate did accelerate, it did not translate into the kind of inclusive economic growth that is necessary for socio-economic cohesion in a country like India.

As GDP growth rate slows, the policy framers in New Delhi have decided to give the country more of the same medicine. They have decided to blame the slowdown in GDP growth on " global " factors and they have decided to initiate a slew of foreign direct investment initiatives which they think will restore Indian GDP growth back to its former robust trajectory. While global factors like the Great Recession in the United States and the debt crises in Europe have most likely played a role in the slowing down of GDP growth in India, the policy framers in New Delhi would do well to keep in mind the fact that the Indian economy still has deep structural flaws and that not all of these flaws are of a kind that laissez faire policies or globalized approaches can solve. Not only that, these policy framers have also conveniently forgotten the fact that retail is much more of a zero-sum game than, say, manufacturing. And allowing FDI in retail may just benefit foreign corporations at the cost of Indian businessmen. As for the " benefit to farmers " that these policy framers are shouting about, the people of India and the farming community in India desrve to know what is the additional advantage that foreign retailers will provide to farmers compared to indigenous retailing players. And these policy framers also owe the country an explanation as to the amount of extra net investment that FDI in retail will bring and the net benefits after disruptions to domestic retailing entities are taken into account. There is a similar problem with FDI in insurance and pension sectors too. The people in India who can afford insurance policies of different kinds are probably already buying policies from domestic providers. It stretches one's credulity to think that there are Indian consumers who are waiting for American or other foreign insurance providers to start operating in India before they start buying insurance policies or that those who are buying policies from domestic providers now will spend much higher amounts on policies from foreign providers. No intelligent debate on this issue can take place unless the policy framers tell us what is the amount of extra economic activity that will result from allowing FDI in these sectors and who will benefit from these moves and how much and over what period of time. And the people of India also deserve to know where these numbers are coming from, in other words, which economist or which group of economists or which government agency or which bureaucrat or which politician has done the cost-benefit analyses necessary to assure the people of India that these FDI moves are in the best interest of the country and they deserve to hear quantitative claims from the government given the fact that the government is advertising this as a major policy initiative. It is time for the political parties in India to start scrutinizing the claims of the policy framers in the best interests of the country and the people of India deserve more than vague assurances. Quantification of benefits is key to any serious and meaningful political debate on these questions. Embarking on such serious changes to the country's investment framework without good quantification can cost the country dearly later on if mistakes are made and if the cost-benefit implications are not properly understood. And if the government cannot come up with good quantitative analysis by experts, it needs to explain why the people of India should pin their hopes on these new policies.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

The US economy, the directionless US political establishment and the helpless US democratic system

According to recent reports, the number of Americans registering as independents has shown an upward trend in the last 4 years. This is a welcome trend given the lacklustre performance of the Democrats and the Republicans over the past 12 years, both in the White House and in the US Congress. However, with elections already near, there is no major momentum in favor of any third party candidate, at least, nothing like a Ross Perot effect or a Ralph Nader effect. With the fears of a double-dip recession hanging over the US economy, neither the Democrats nor the Republicans have come up with any good plans to fix the short-term and the long-term problems in the US economy. And the times call for an astute balancing of both these aspects of economic management. While Mr. Romney has allegedly made statements to the effect that he does not care about the 47% of Americans who do not pay taxes, thereby projecting himself as an anti-tax Republican, Mr. Obama has not done himself much credit on the tax front by incorporating a payroll tax increase as part of his negotiations with the US Congress, thereby casting severe doubt over his ability to champion traditional Democratic economic stances and his ability to solve pressing US economic problems like historically high poverty rates. Tax rates have been low in the US after the George W. Bush tax cuts for about 10 years now. While Republicans are likely to favor tax cuts as the panacea to the economic growth problem and the unemployment problem in the US, they should come up with explanations as to why low G.W.Bush-era tax cuts have not led to extraordinary growth and why the country has seen a deep recession and a painfully slow and doubtful recovery from it while the low tax rates due to these tax cuts have persisted. There is a lot concern about a possible fiscal cliff if automatic doscontinuation of Bush tax cuts and automatic spending cuts come into effect. However, the Congress should be able to pass new legislation to delink the spending increase part from the tax increase part. Not only that, the Congress should be able to frame new legislation that imposes different tax rate increases on different socio-economic segments if the best interests of the US demand it. And Democrats need to hear some explanation as to why payroll taxes have been made into a bargaining item rather than focusing on other taxes like income taxes. Given the disastrous performance of the private sector in securing the retirement savings of seniors in recent years, why are the Democratic party and Mr. Obama being so cavalier about payroll tax cuts given its implications for the Social Security system and social welfare in the United States ?

Given these directionless wanderings on the part of the two major political parties, one is led to wonder why third party alternatives have not caught the imagination in the recent election season. The economic problems facing the United States are unprecedented in many ways. Great Depression-like dynamics have become compounded by globalization dynamics. Will the intellectual establishment in the United States step up to the plate in the current economic and political climate and possibly create alternative political formations ? Unfortunately, United States does not have a very good record on this front. Ross Perot was a right-winger when it came to things like taxes and flogging a dead horse on the taxation front may prove to be very counter-productive, especially for the long-term fiscal and economic health of the United States. The Green Party has not caught the voters' imgaination to the extent necessary to effect historic change in the direction and component of economic policy in the United States. The Occupy movements have not translated into political action to the extent necessary to bring about legislative change that fixes America's economic malaise for the short-term and for the future. So, what America probably needs now is some brave professor, somebody who can think beyond traditional frameworks like Monetarism and Keynesianism, and can come up with solutions that make the capitalist system more humane and also that enable near-term and future economic stability and economic growth. Somebody who the Americans can turn to in this rather gloomy economic climate where GDP growth rates have become delinked from human welfare and where fiscal stability nightmares are in the offing.

by C. Jayant Praharaj ( send comments to cjpraharaj.web@gmail.com )

Lack of moral and strategic clarity in US intervention in Syria

There are some reports that there may be links between some Syrian opposition groups fighting against the Assad regime and Al Qaeda. So, where does this leave the US administration in terms of its own definition of moral clarity in its funding of some anti-Assad groups ? And what are the implications for strategic clarity in US policy in Syria ? Or, since strategic clarity may be too much to hope for in the confusing situation in Syria, what is the overarching strategy vision of the US government in Syria ? Is it neocon/New Democrat reasoning about democracy in other countries ? If so, it does become enmeshed with the Al Qaeda question and the question of what kind of frameworks are considered okay by neocons and New Democrats. Does the United States intend to get into the nitty-gritty details of what to do about Al Qaeda presence in whatever scenario the Syrian situation evolves into ? What about the possibility of an Iraq-like situation where regime change does not lead to lasting peace or security or dividends for the United States ? At the moment, it looks like the United States has no moral clarity, no strategic clarity and no strategic coherence on the Syrian question.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Syriza and the question of fiscal austerity in Greece

The Syriza party in Greece has made its opposition to fiscal austerity known in somehwat clear terms, but it has not spelled out clearly how it intends to sustain anti-austerity policies in the short or medium run. If Mr. Tsipras wins the election and decides to follow anti-austerity policies, chances are that credit rating agencies will downgrade Greek debt to junk status again. In such a scenario, it will become prohibitively costly for the Greek government to borrow and sustain a deficit. So, unless Mr. Tsipras can give Greeks the assurance that the Greek government can keep borrowing at affordable rates, how does he intend to implement anti-austerity measures ? Once the treasury bond market starts charging exorbitant interest rates on government bonds, he may be forced to increase tax rates a lot to meet the government expenditure levels he wants. This can further exacerbate his problem by possibly deepending the recession. The existing bailout agreement imposes a certain level of austerity, but Mr. Tsipras needs to state his arguments as to how he intends to guarantee that an even more severe form of austerity is not thrust on the Greeks in the short and medium run by announcing an end to austerity measures. In other words, wanting to end fiscal austerity and actually being able to end fiscal austerity are two different things. It is not clear if Mr. Tsipras and the Syriza party have thought this aspect through. As for the issues of Greek sovereignty and Greek economic independence, the heat of election-time politics may not be the best atmosphere in which to decide the right framework for these things.

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

A derailed agenda called " nation-building " and the Syria question

Democrats may come and Democrats may go, but American idealism, or the projection of certain well-entrenched and mainstream and dogmatic American notions of idealism in the international arena, trudges on, well, kind of. We are talking about that term that has been used and abused by American and Western strategists and that carries a whiff of condescension for many discerning observers of the international scene - " nation-building ". While the neocons cool their heels and the United States goes through a reappraisal of its geopolitical capabilities after wars in the Middle East that seem to have done more harm than good for the United States and its future prospects, the Democratic administration under Obama has showed all signs of continuing the Clintonian new Democrat/ Neocon ( what's the difference between the two, really, outside of domestic economic policy ? ) paradigm in foreign affairs. " Nation-building " is in many ways a manifestation of American naivette when it comes to the question of morality in international affairs. At its worst, this term is an euphemism for new attempts at empire-building in the name of humanitarian intervention. Many of the same people who push for these policies in other nations while ignoring some very pertinent complexities like the unique socio-economic landscapes of nations argue against what they call " one-size-fits-all " policies in domestic economics.

Of course, no American administration in its right mind would pursue " nation-building " in any country without there being good national security justifications, or at the very least, without ensuring that there are no serious national security drawbacks. And if economic windfalls can be added to the mix, so much the better. The question of whether the United States should lead a NATO-led invasion of Syria or invade Syria alone given the Obama administration's negative views about the Bashar-al-Assad regime has acquired a lot of significance with the violence continuing in Syria despite the Kofi Annan-led peace efforts. The Syrian problem is a domestic conflict and poses no direct security threat to the United States. As for the economics, getting embroiled in a Syrian civil war can lead to unpredictable amounts of defense expenditure which can be a contributing factor in pushing the United States over some kind of fiscal cliff. In this kind of economic environment, how willing will the US Congress and the US public be to support a " nation-building " kind of regime change operation ? And the Europeans in the NATO alliance have their own serious economic problems to deal with. How much public support will there be in Europe for a NATO-led intervention in a civil war while efforts are on to bring about peace and reconciliation by other means ? NATO did attack Libya to effect a regime change. However, the historical and geopolitical considerations are never exactly the same from country to country. As for the interventions in Eastern Europe during the Clinton administration, the news reports were of ethnic cleansing and of genocide. This is not the case in Syria. The Obama administration needs to explain why one side in a civil war should be supported over the other and why current diplomatic efforts are not enough. Also, is the Obama administration against the Alawites or against Mr. Assad alone ? Why should the American public take a side in a civil war when the picture is so murky ? What does the American public know about what kind of government the Obama administration wants to put in place in Syria if the US does decide to attack and if the US does succeed in toppling the Assad regime ? Does the American public know what kind of human rights safeguards can be obtained under a new government that has the support of the US administration ? And what is the guarantee that the US will not make the same kind of mistakes it did in Iraq when it comes to setting up an administrative framework and ensuring the objectives it publicizes ? Or that it will not encounter the same kind of logistical problems ? While the Obama team may want to use Syria to deflect attention from economic problems at home, doing so may smack too much of cynicism to many. Helping to bolster the frameworks already in place may be the best option for the administration..

by C. Jayant Praharaj ( send comments to cjpraharaj.blog@gmail.com )

Short-term growth, long-term growth and the European debt crisis

Statements from EU officials, European politicians and European policy makers have highlighted growth as an area of concern in addition to debt and the sustainability of high debt levels. Several analysts have argued that fiscal austerity is the wrong way to go for Europe because it will adversely affect economic output. They would rather have European countries facing debt crises not increase taxes or decrease government spending at all. What is being forgotten by the opponents of austerity is that these European countries are at a critical juncture where they have to take decisions that are consistent not only with short-term economic health, but also with short-term and long-term stability, long-term economic output and long-term economic growth. Also being forgotten is the fact that some of these countries have high public debt to GDP ratios at the moment by international developed country standards and some others have high fiscal deficit to GDP ratios by international and developed country standards. And credit rating agencies have been quite unsparing when it comes to rating the treasury bonds of these countries. The concern over increasing treasury bond yields is very real and many of these European countries cannot risk getting into situations of outright debt defaults by allowing debt to GDP ratios to increase to unmanageable levels. Even much larger economies like the United States and Japan are having to take a hard look at their fiscal expenditure items and tax policies. The United States followed an almost perennial low-tax policy in the shape of the elitist Bush tax cuts both before and after the financial crisis of 2008-09 and while a double-dip recession may have been avoided so far according to official statistics, concerns over a return of recessionary dynamics still persist, and the labor market is still marked by high unemployment numbers by historical standards.

One other factor that tends to be ignored amid the hand-wringing about the effect of fiscal austerity on growth, which is based on Keynesian arguments, is that there is a monetary aspect of Keynesianism in addition to the fiscal aspect, and that monetary policy can prove to be efficacious in preventing a structural recession ( by which is meant here the fact that the recessions in several of these countries had their origins in the busts in their real estate sectors after what seems to have been a period of over-investment in these markets ) from spiraling into something worse than what it needs to be. And while one can argue about whether the ECB was prompt enough in providing necessary monetary stimulus, it has provided quite a bit of it in recent days. An expansionary monetary policy and fiscal austerity pull in different directions according to Keynesian logic. However, it may be the one way for these troubled European economies to balance the requirements of satisfying the demands of treasury bond markets and of preventing a real-estate-bust-induced recession from becoming an uncontrollable demand-based spiral. Had the recessions in these countries happened at a time when their debt to GDP ratios and fiscal deficits were less worrying, they could have embarked on both monetary and fiscal expansion. However, since the debt and deficit situations are not as healthy as one would like, the combination of monetary expansion and fiscal austerity seems to be the balancing act that many European economies need to do in order to obtain some Keynesian stimulus without sacrificing the goals of short-term and long-term government solvency.

As for the structural aspect of the recessions, which has to do with labor markets and capital markets readjusting to real estate busts, it will most likely entail a significant amount of distress given the scale of the busts, given the fact that they happened in so many major economies at the same time and given contagion and feedback effects in a globalized economic framework. Is the recent double-dip in economic output in some parts of Europe due to fiscal austerity, is it due to delayed monetary stimulus from the ECB, is it due to an eurozone framework that has inherent limitations with a centralized monetary policy and a decentralized fiscal setup or is it the result of the labor market and the capital market adjusting to the busts ? Perhaps it is a combination of all of these. At least, it is extremely difficult to ascribe it with certainty to fiscal policy alone or to the timing issues in European monetary policy or to a structural readjustment. The recent monetary stimulus may help prevent unnecessary spillover from the real estate sector and that part of the financial sector that was exposed to the real estate market to other sectors. However, the original over-investment and bust in the real estate and construction sectors will also have to work themselves out through the decisions, often imperfect, of numerous economic agents. The history of crises in the real estate sector suggest that these readjustments take a lot of time. And economic science has not advanced to the point where the time-frame for an economy to readjust to a real estate bust can be predicted with any amount of certainty. Each country has its own peculiarities in the way mortgages are structured, the way returns from real estate investment flow to different economic agents, the amount of exposure of financial institutions to the real estate bust, the immediate effect of real estate busts on economic output and government finances, the effect on the treasury bond market and the feedback from the treasury bond market to the financial sector. Some of these dynamics are inevitable in the aftermath of a real estate bust and some others are induced by unnecessary paranoia about investment and demand outlook in the midst of recessions. Stimuli ( whether fiscal or monetary ) can help prevent or offset that part that arises from unnecessary paranoia. However, the part that has to do with labor market and capital market reconfigurations following real estate busts is difficult to address with mere fiscal or monetary measures. At a time when some European economies are undergoing distress due to structural problems arising from real estate busts, ignoring the other structural problem of worsening government solvency situations may just create a situation where stimuli ( monetary or fiscal ) are overwhelmed by the structural aspects. Doing so may mean harming long-term growth in a pursuit of short-term relief. There is a lack of good quantitative analysis as to the amount of spillover one can expect from one sector like the real estate sector to other sectors like the capital goods sector, the automobile sector, the electronics sector, the software sector, different service sectors etc. How much short-term relief can be realistically expected and how much short-term pain is unavoidable due to real estate busts are questions that have not yet been addressed systematically by the analysts. What should emerge from a consideration of the structural aspects and the stimulus aspects, however, is that if one stresses the stimulus aspect so much that one neglects the structural aspects ( like the real estate market, the labor market, the government sector's solvency ), one can end up nullifying the potential positive effects of a stimulus. That seems to be the big question right now in Europe, although the public debate has focused a lot more on the stimulus aspect ( at least in recent days ) than on the structural aspect. A more careful analysis may well reveal that the job of stimuli is stabilization ( prevention of unnecessary recessionary spirals ) first and short-term growth promotion next in the current European context. Also, care must be taken so that excessive emphasis on short-term economic output does not impair the structural aspects so much that the ability of governments to achieve economic welfare goals over the long run is compromised excessively. Or that the ability to sustain long-term growth is not impaired by a narrow focus on short-term economic output. In the middle of serious crises like these, there are no easy choices. Only the most naive would expect that the same kinds of remedies and policy measures that work for milder recessions and milder downturns will work when the crises are more severe, like the current ones. People who want overnight recoveries in Europe would do well to remember that the unemployment situation in the United States has shown only marginal improvement four years after the crisis began in the US and it is likely to take quite a bit of time to return to normal, and this despite the fact that the United States followed generous Keynesian measures, both fiscal and monetary, by extending the deep and elitist Bush tax cuts, by sending out tax rebate checks after the financial crisis began, by bailing out companies, by decreasing interest rates and by increasing the money supply. Structural differences between United States and Europe, as regards the private sector, as regards the labor market, as regards government finances and as regards the kind of welfare systems that the public wants should and have played a role in the differences in policy responses between United States and the European countries to their respective economic crises.

by C. Jayant Praharaj ( send email to cjpraharaj.blog@gmail.com )