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THE IRRELEVANCE OF THE SCANDINAVIAN MODEL

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With America in crisis, there is a lot of talk about the alternatives to the American way. Even within America, people have begun to sit up and take notice of the way things are done in Western Europe. And some look wistfully towards the more egalitarian model of the Scandinavian countries.

As an outsider, and as an Indian, here are my thoughts about the Scandinavian model being the sensible way forward, in preference to the “crisis-exposed” American way.

At the outset, I must confess to some prejudices in favour of America. The fact is, even as I live out my life thousands of miles away from both America and Scandinavia, not a day passes when I am not grateful to America (and to Americans) for some aspect of my life that is now infinitely better thanks to their talent and creativity. I really cannot say the same for Norway, Sweden, Denmark or even Finland. (Disclosure: I make use of a Nokia cell phone but not Ikea furniture; I do not drive a Volvo car and have never been the recipient of a Nobel Prize.)

To begin with, the Scandinavian model of a comprehensive “cradle-to-grave” welfare state is financed by high levels of taxation with a steeply progressive income tax regime.

In terms of ethnic composition, these are all very homogeneous societies and generally closed to immigrants, especially from the third world. Therefore, citizens who pay out large amounts of taxes always have the implicit assurance that the benefits are going to their own countrymen.  (Think of the reaction if India becomes a welfare state and word gets around that Bangladeshis are flocking in to claim benefits here.)

Besides, all these countries consistently rank as the top performers in the various surveys about levels of corruption, transparency and the efficiency of public services. Therefore, taxpayers in these countries have the further assurance that the money they pay is actually being put to good use, and not lost to waste and graft. In turn, this means there is far less resistance to the idea of paying more taxes.

It will now be obvious that the conditions existing as above are not those that can easily be replicated elsewhere. The model may therefore have less relevance for America and almost none for India.

From India’s point of view, there is the other issue that being an expensive model, it presumes the existence of a prosperous majority who can then pay for those who fall behind. In fact, any welfare state presupposes a minimum level of prosperity; you cannot go about building a welfare state on a foundation of unrelenting poverty. That should take India out of the picture (for the foreseeable future, at least) as far as following the Nordic footsteps go.

As for America, despite all the evidence of heartlessness in its workings, there is something special about this country I have only recently come around to appreciating. This is the idea that the idea of America is not just for the Americans, it is for every one of us.

In America, it’s called the “American Dream”. We know for a fact that this is not a carefully put up mirage meant to lull and buy peace with its underprivileged. Examples abound of people rising from the dirt and living the dream. And perhaps the most wonderful thing about the American dream is that it is open, in some degree or other, to just about everyone around the world.  We know of so many ordinary folks in our own midst, born into modest circumstances and now living the dream in America.

As for the Scandinavian model, the last time I checked, I did not come across a “Scandinavian Dream”. And if there is one I happened to miss, I know for sure it’s not meant for me, my family, or my friends.

Critics make the point that for a wealthy country America’s social indicators are well behind those of its peers. There is a reason. When you have been letting in millions of the dirt-poor from all around the world, and with many millions more having let themselves in, averages—and social indicators are, after all, averages—are bound to suffer. A classic example is Germany today. During much of the eighties, West Germany was among the top European countries in terms of GDP per person. These days, Germany figures behind Britain and pulls in behind even Ireland. So, did the German economic miracle run out of steam? Not quite. In 1989, Germany let in about 17 million of its poor cousins from the former East Germany and the average has been depressed since then.

This is not to deny that the Scandinavian model takes good care of its own citizens. The American model takes less good care of its own citizens, but it also cares for millions of poor from around the world who were allowed in with honour and dignity. Every year, nearly one million immigrants to the country are granted American citizenships. This is over and above the fact that all children born in America, even to foreigners and illegal immigrants, are ipso facto American citizens.

The choice then is a no-brainer. If you happen to belong to one of the Scandinavian countries, yes, yours is the way ahead. For the rest of the world, it is the American way that holds promise.

And then, when you think of a Swede, a Norwegian, a Dane or a Finn, you think blond, and you think blue eyes. Think of an American, and you suddenly realize you just cannot think along these lines. To me, that is the explanation why the American Dream has such a powerful resonance across the world.

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Written by Ranjan Sreedharan

January 8, 2010 at 12:09 am

Posted in US and the world

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America’s Secret Competitive Advantage is a Dirty Secret

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(Note: What follows here is an executive summary of my article with the same title that is available as a working paper on RePEc (Research Papers in Economics). The full text is available at the following link

http://mpra.ub.uni-muenchen.de/22024/)

EXECUTIVE SUMMARY

Michael E Porter, a leading management thinker, identifies seven uniquely American competitive advantages to explain the country’s pre-eminence. He points to America’s environment for entrepreneurship, its science, technology, and innovation machine, its institutions for higher learning, its strong commitment to competition and free markets, its efficient capital markets (especially for risk capital), and its fundamental dynamism and resilience that embraces a willingness to restructure and take losses.

In this paper, I argue there is another critical competitive advantage for America in relation to its other democratic peers. It is the fact that in American presidential and congressional elections, about half of the electorate never turns out to vote. And the unique competitive advantage arises from the fact that unlike in other Western democracies, the people who end up staying away from voting in the U.S. belong overwhelmingly to its poorest, least educated sections.

Before considering why this should amount to a competitive advantage, I look at reasons why the poor in America vote in far lesser proportions than their numbers. For instance, the rules governing voter-eligibility are determined by state, as well as, federal laws. Historically, many of the southern states have had a nasty record of officially and unofficially making it more difficult for blacks and poor whites to vote, a position that largely prevailed until the Voting Rights Act of 1965. Other reasons include the disenfranchisement of its prison population, which, at two million, is the largest in the world. Moreover, felony disenfranchisement laws in most states make it difficult for ex-felons to vote. As a result, about 5.4 million offenders and ex-offenders (about 2.5 percent of the electorate) were excluded from the voting rolls in the 2004 presidential election. Also, the fact that Election Day in the U.S. is not a national holiday makes it difficult for those holding low paying jobs (where wages are paid by the hour) to go out and vote.

The upshot of it all is that the average voter turnout in America has been historically lower compared to its peers, and the poor in America vote in far lesser proportions than their numbers. For instance, during the presidential elections of 2008, despite extraordinary efforts by the Obama campaign to mobilize poor and minority voters, a CNN exit poll found that only 18 percent of those who turned out to vote, earned an income of less than $30,000 per annum against the 34 percent of American households that belong to this category.

Why should this amount to a competitive advantage for the American economy?

A critical factor which determines the economic success of a country is how well it strikes a balance between its short term needs and long term requirements. The short term interests veer towards more spending and consumption, while the long term interests lie in greater investment for the future and in shaping an environment conducive to creation of wealth.Essentially, the poor and the disadvantaged within a country would tend to have a short term outlook. Their interest would lie in having the government spend more on generous social security benefits and subsidies and in laws that protect labour. They would be far less enthused by the investments and sacrifice required to further the economic well-being of the country over the long term, or in promoting the entrepreneurial class. I argue that it is the short term considerations that hold sway in democracies where the poor vote in large numbers. I cite the example of India where populist policies have always pulled in the votes, with negative long term economic consequences.

America’s overriding economic success has much to do with its “national consensus”, built around old-fashioned virtues like respect for property rights, free trade and free markets, lower taxes, flexible labour laws, and a culture that fosters individual responsibility and celebrates individual success. I contend that this consensus has been kept alive in large measure by keeping its poor away from voting.

In contrast, Western Europe and Canada have seen an alternative consensus emerge which emphasises more frequent state intervention in economic matters, a comprehensive social security net, and a tax regime with a higher burden on the rich—in the cause of a more equitable society. Arguably, this alternative consensus could emerge in Europe because the national elections in these countries do not effectively (and insidiously) keep out the poor as they do in the U.S.

In the concluding parts, I look at some of the recent trends in the voting patterns in U.S. national elections and predict a swing towards the more liberal values of the Democratic Party. I argue that the current “Republican revolution” that began with Reagan in 1980 may have come to an end for now.

I conclude with the contention that America is headed towards a future where it becomes more equitable (like Europe) but at likely cost to its hitherto extraordinary competitive edge. ***

Written by Ranjan Sreedharan

December 10, 2009 at 12:59 am

Posted in US and the world

IMPROVING THE GEITHNER PLAN, WITH A SIMPLE MORATORIUM CLAUSE

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Predictably, the Geithner plan has evoked a mixed response among economists. Even liberal economists are a divided lot. Paul Krugman is very clear that it will not work (he called it “cash for trash”) while Brad DeLong (of UC Berkeley) is convinced it is a good bet. Without getting into the specifics of the arguments on either side, I believe there is a simple way in which the plan can be improved and made more effective.

 

As things stand, the plan would provide huge sums of taxpayer money to the private sector (in the form of equity, and, more substantially, debt) to enable them to purchase distressed assets (ultimately mortgages) from the banks through a process of competitive bidding among themselves. Implicit in this is the idea that once the distressed assets are acquired, the buyers would have the staying power (arising from the fact that much of funds laid out would come from the government at next-to-no cost) to bide their time till such time property prices have recovered. At this point, so the idea goes, they would be able to sell at a decent profit.

 

Here is a suggested modification to the plan. Instead of the idea of holding on to the property till a market turnaround being implicit, I suggest that the plan should incorporate a specific legal moratorium on the resale of such properties. This would be a statutory provision that would bar the resale of properties acquired under the plan for a minimum period of one year or more, the exact moratorium depending upon the location. In places where the supply of foreclosed properties is high and where real estate prices have fallen sharply (Florida, for instance), the moratorium period can be kept much longer, say as long as three years and more.

 

The advantage in putting in a legal bar on the sale or re-sale of such property is that it will immediately serve to choke the supply of foreclosed properties that have contributed so much to the downward spiral in real estate prices. I also believe the psychological impact on the market from supply being choked by a legal requirement (even as there is a stock available) would be far greater than when the market believes that some suppliers are merely waiting for a good price. Therefore, if the idea is to give a shot-in-the-arm to the real estate market, then obviously a situation where a certain portion of available stock cannot be legally sold would do a lot more than when some suppliers are known to be merely holding out for a “good” price.

 

This would, of course, impose an additional holding cost on the agencies vested with the authority to buy such assets from the banks. However, with the bulk of the funds coming from the federal government, the cost to the private partners would be negligible, though it might delay the eventual payout. Moreover, as against the delayed payout, there is also the prospect of better profits. And then, one way to minimise the holding cost, would be to have these properties (carrying a moratorium on their resale) rented out, in which case the rental income might substantially offset the interest/carrying cost.

 

Of course, in practice it would also be necessary to ensure that properties emerging from the moratorium are staggered out. Otherwise, if they all hit the market in a bunch, it would depress prices all over again. Also, the way things are now (thanks to securitisation), figuring out who actually owns a particular mortgage would be no easy task. But then, this is a different aspect to the problem which will have to be looked at separately.

 

As I put it in the title of this article, it is a simple idea, but one which might just be worth a shot. ◄►

 

Written by Ranjan Sreedharan

April 1, 2009 at 6:13 pm

Posted in US and the world

George Bush and his legacy, why he still has hope

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Cochin, India: 18 Nov. 2008

It is fair to say that when George Bush leaves the White House in two months time, he will do so not with a feeling of dejection at his colossal failures. Instead, he will carry with him a sense of deep hurt and injured pride that his accomplishments are so seldom acknowledged by his countrymen and the world at large. Indeed, in these the twilight days of his disastrous presidency, it is likely that he subsists entirely on that fond hope of politicians (the unlucky and the incompetent alike) that history will judge them far more kindly than their contemporaries have.

At the moment, it does seem a very tall order. A fairly recent (April 2008) survey of 109 professional historians[1] in the United States revealed that over 60 percent of them rate him to be the worst American president ever. This will not come as an eye-popping surprise to anyone. After all, here is a man who possessed the contra-Midas touch. Everything he touched has turned unfailingly into dust.

He began by breaking up the existing international order and sullying America’s image in the world. He followed it up by wrecking the economy, accumulating massive amounts of national debt and topped it off by bequeathing a banking and financial crisis so acute, it draws comparison with the Great Depression. Finally, and we know it now that the elections are over, the Republican Party is rudderless and almost in tatters, having lost heavily in the Congressional elections as well. George Bush, it may be said, broke the world, broke America and broke his own party.

And yet, all is not lost as yet. Indeed, going by historical precedent, there is still hope that history will take a kinder look at what Bush has wrought.

To begin with, the legacy of an American president for that matter, just about any other position is not only about what he has done or what his achievements and failures are. It is also in large measure, about what his successors do after taking over from him. A weak, inefficient successor tarnishes your legacy, because the failures are allowed to fester without course correction. Equally, a capable successor burnishes your legacy because he builds on your accomplishments and corrects or covers up for your failures.

In the case of George Bush, there is no denying that the failures are many and massive. To ensure the kinder, gentler look from history, he badly needs a strong, capable successor who can methodically address the many loose ends he will surely leave behind, and who can be counted on to undo some (if not all) of the damage already done. In Barack Obama, George Bush may have exactly such a person.

Left to his own instincts and judgement, George Bush would have preferred John McCain. But then, if there is an enduring lesson from the Bush presidency, it is that it is possible for one man’s gut feelings to be consistently wrong, even when he holds the highest office in the land.

George Bush hoped that John McCain would succeed him as president. He did not get his wish. I believe he has been fortunate. At a time when what America needs above all is day-to-day competence in its president, John McCain ran on a platform whose primary offering was more of muscular American leadership with no sense of this country’s diminished circumstances. In contrast, Obama appeared to be the more level-headed choice, if only because he had a better grasp of how much the country has fallen.

And here is an irony. Thanks to George Bush not getting his wish, his legacy stands a better chance of that kinder look from history that he so craves.

There is a recent parallel Bush can take heart from. These days, whenever Americans are asked about their great presidents, a name that consistently figures among the top is that of Ronald Reagan. There is a feeling that Reagan won the cold war for America and that his reign marked a period of quiet prosperity. Actually, the truth is a little more complex. When Reagan came to power, America was the largest creditor nation in the world. When he stepped down, America was the largest debtor nation in the world. During his eight years in office, the country’s national debt increased three-fold to US$ 2.9 trillion dollars, with the federal budget running up massive deficits year after year. Reagan was, however, lucky that when he stepped down, the economy was still doing okay. His vice-president (the senior George Bush) who succeeded him, was not so lucky. By the time he went up for re-election, the economy was in a serious recession and he lost tamely to Bill Clinton (remember the line “It’s the economy, stupid.”)

And yet, if Reagan is remembered kindly today, credit must also go to the Clinton presidency which revised taxes, kept spending in check, presided over the largest peace-time expansion ever in the economy, and methodically turned a chronic budget deficit into what seems unimaginable now a surplus. Once this was done, it was so much easier to look kindly at the Reagan presidency.

However, the biggest failure of the Reagan years is something few Americans are even aware of. Under Reagan, America was actively involved in funding and arming the Afghan Mujahedeen who were then fighting the Soviet army. It led to defeat for the Soviet Union and was judged to be a great success. It is also claimed that the cost imposed on the Soviet Union by this action was one of the reasons for the subsequent collapse of the Soviet empire.

Whatever be the truth about the Soviet collapse, it is a fact that the Mujahedeen were soon to transform themselves into the Taliban and that one of the less prominent figures in the Mujahedeen who happened to receive substantial American help (routed through the Pakistani military) was Osama bin Laden. What happened next is too well known to require reiteration. Okay, in politics, your enemy’s enemy is very often your friend. But equally, it is also plain good sense (not to mention good policy) to look a little closely at exactly who this enemy’s enemy is, and ask a few hard questions about what he really stands for. It was a remarkable failure of the Reagan presidency that no such foresight was shown. Thanks to this gross negligence, we have an area in New York that today goes by the name “Ground Zero”.

As for George Bush, talk about lack of foresight being likely to create many more problems in the future is premature. His eight reckless years at the helm have given rise to too many burning problems that require immediate attention. Therefore, while it is likely that America will continue to pay a price well into the foreseeable future, chances are like Reagan before him Bush will not be blamed for these.

And then, if Barack Obama’s administration turns out to be a competent, capable effort, able to extricate America from Iraq, restore the country’s standing in the world and bring order to its failing economy, it is conceivable that in 15 to 20 years time, people in America will begin to forget how bad things really were under the Bush presidency.

And then, George Bush will have his wish, with historians and academics looking back on his reign with sympathy for a simple man who boldly set out to do what he thought was right without fear of the consequences. Who knows, one day Iraq may actually become a modern, progressive Democracy. Trust the American right-wing then, to rush to proclaim, “all thanks to Dubya”. Not long afterwards, count on a legend to spring up around Geroge Bush as the American president who brought freedom and democracy to the people of Iraq.

Sounds far fetched? Remember, Reagan is already lionised as the American president who won the cold war for America. Never mind that an economic system where planners and bureaucrats were setting some 24 million[2] different prices, would have imploded on its own, sooner than later.


[1] Surveyed by the History News Network of George Mason University, http://hnn.us/articles/48916.html

[2] Thomas Sowell: Basic Economics, A Common Sense Guide to the Economy, Chapter 2, page 17

Written by Ranjan Sreedharan

November 18, 2008 at 11:43 am

Posted in US and the world