Sanjeev Sabhlok's blog

Thoughts on economics and liberty

The importance of urbanisation – a lesson for India

In a 1996 term paper on urbanisation in India (here) I made "a reasonable projection… that about half a billion additional people will have to be accommodated in the towns and cities of India within the next 30 years." That was on the basis that India would follow policies of freedom.

It is a well known relationship in economics that the extent of urbanisation is correlated with the economic success of a nation, as evident from this chart:

 Source: Working paper of the Commonwealth Treasury, Australia.

India's urbanisation continues to remains extremely low, and very badly managed. Apart from ensuring the policies of freedom that I've advocated elsewhere, the way to do it properly is to seriously empower local decision making. For details see this article in Freedom First

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Are FTI’s views synonymous with mine?

This question has come up in the past and I've addressed it both internally on FTI and on various blogs, but I thought I'd publish a recent clarification that I provided on the internal FTI forum – so that those interested can fully understand that FTI is not Sanjeev, nor vice versa!

Let me assert quite vigorously that it would be a total travesty of what I'm been advocating – (a) citizen leadership and (b) freedom – for FTI's views to be, at any stage, be seen as being synonymous with mine! This is a team of leaders we are talking about, not a bunch of followers.

Remember that I'm just one of the members of the team (and, indeed, only an Honorary member) and do vigorously try to persuade and explain but have never and will never impose anything on anyone. Why else do we vote as equal members on FTI, for instance? Nothing on FTI is decided by me. Only through equal voting by all members, and I've myself modified my views on occasion after a vigorous FTI debate.

Much as I'd like everyone on FTI to agree with the views I propound in BFN or DOF, no one on FTI is even remotely expected to "follow" these  views. They must form their own opinion. All I ask is that they do so after extensive reading, analysis and thinking, and avoid any rush to opinion. That means they must be open to challenging their own views, as well. This preference for independent and critical thinking is detailed in two extensive chapters in DOF. To me, this, above all, forms the foundation of liberalism.

I always suggest that we should trust in no one but ourselves and refuse to follow anyone (including me!) just because he or she has written a book or article or has a few certificates acquired from here or there including 'Nobel' and other prizes – just trinkets. Think for yourself!

Critical thinking is therefore the foundational principle of FTI. Get to understand things and then lead, as a citizen. That is the only way for people to become genuine leaders. And we all know that there is simply no place on FTI for any follower. Only independent, self-respecting citizens are allowed: those who will leave no stone unturned in their quest to find the best solutions for themselves and India. We are here to contest and debate with each other: never to be sycophants or stooges of anyone – living or dead. 

To me, FTI should (and does) reflect the best of the Indian mind, a liberated Indian mind that is able to think for itself. 

As Vivekananda said: "Liberty in thought and action is the only condition of life, growth and well-being: Where it does not exist, the man, the race, and the nation must go down."

So let's be free! Be not bound by any chains!

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The irrational fear of deflation

In an article in the Australian Financial Review today, 28 July 2010 ("Prospect of deflation looms as the next big threat" by Philip Baker), Ben Bernanke was cited as having said eight years ago in a speech that "Sustained deflation can be highly destructive to a modern economy" because it would apparently lead to (these are Baker's words now) "slow death from a rising real burden of debt".

Also, apparently, "Policy makers don't like deflation because it is difficult to stop. .. [Policy makers] can't use the traditional tool of rate cuts to spur growth and stop inflation." Therefore, Gerard Minack (a Morgan Stanley equity strategist) is cited as saying, "no one is more scared of deflation than today's cohort of central bankers."

That this fear of deflation is totally irrational can be demonstrated in two minutes. Let me do so briefly, here, in a simplistic analysis that aims to get the main points across.

1. Price is determined by the convergence between supply and demand.

2. People always want more, and as their income increases, they keep asking for more of everything (including bigger, better, more quantity, etc.). Therefore except in highly exceptional circumstances, demand does NOT decline. Let's therefore assume it to be fixed or increasing, at least for the most part.

3. If demand is constant or increasing, then the ONLY way for prices to fall is through increased supply. And when can supply increase? Only when production increases! That is the typical case in a modern society, through increased innovation.

In brief, DEFLATION IS A SIGN OF PROGRESS. It is without progress that prices would rise. Consider the price you've been paying for virtually anything – gadgets, cars, etc. Every price has been falling in real terms, even, often, in absolute terms. Falling prices are therefore the only genuine signal of progress.

So why do we have inflation? The only reason we have inflation is because of central banking. If they regulated money instead of issuing it, and allowed free information provision through free markets in money, there would be no, or minimal inflation.  It is central banking that creates inflation, not progress! Had progress not been as rapid as it has been, we would have experienced far greater inflation than we have. Get rid of central banking and you'll get rid of inflation. That's the message here.

Ben Bernanke needs to prove why, in a free banking economy, deflation would be destructive of the modern economy. He would fail to do so, since the ONLY way for progress to be reflected in the long run is through a decline in real prices.

The fact that central banking exacerbates asset bubbles is by now clear to anyone but the most mean headed economists. A way should now be found for central bank to completely shift its role. I have made some suggestions in another article (here).

Indeed, the basis of free trade is comparative advantage, that helps to DROP prices in both nations that trade. Trade and competition REDUCES prices. Without exception. Maybe Ben Bernanke needs to read up ECON 101. There is NO LOGICAL REASON UNDER THE SUN for prices to increase as a society advances.

[What about investors? Will then invest if they know that prices will fall? Of course!! Ask ask farmer. He knows that the more he produces because of good weather conditions the more others will produce and so prices will fall. And yet revenue R is NOT equal to P (price) but PXQ (where Q is quantity). The quantity produced generates a sufficient return on investment, that is why the farmer produces even in the face of falling prices. Just because mobile phone prices are falling dramatically does not mean that mobile phone producers won't invest in making them. After all Q increases dramatically over time. For instance I owned one mobile phone at one time. Today we have 8 working mobile phones in the house!  There are more TVs in Australia than the number of people. And so on. Ben Bernanke should not forget Q! Or is his view that Q is fixed in modern society!]

Examples of what progress should mean: 

When the price of an international phone calls falls to zero (it is now $0.005 per minute from Australia to Japan, Singapore etc – see gotalkmobile.com.au).

When the price of mobile phone calls is almost zero (it is now 1 paisa per minute in India – which is $0.0005!)

When the price of a super-powerful desktop computer falls to $300 (My first desktop computer for DRDA Dhubri in Assam in 1986, supplied by NIC – see my book on that early computerisation – was 20 times more expensive – not controlling for inflation or better AUD-INR exchange rate which would effectively mean it was 80 times more expensive !)

When antivirus software is free (I've been using avast! successfully for a few years now: no more annual payment to anyone)

When medical information becomes free (I found the answer to my heel pain on the internet. Local doctors and physios had NO CLUE ABOUT IT!  The demand for local doctors is now starting to fall to zero, and their price will soon fall close to zero as well. All I need to go them is for a medical certificate once in a while but if my employer agrees that I can diagnose my own viral flu, and self-certify, then half the doctors will go out of business).

When knowledge becomes cheap (I rarely have to go to libraries now: many books are found on google books (including mine), Gutenberg, etc.).

When the price of food barely moves. I've been paying $3.50 per kilo for chicken over the past 10 years in Australia because each time it is on sale I buy it in bulk and store it in the deep freeze. If a deepfreeze could store more cheaply, I could buy for an entire lifetime in one go and save my shopping time – and money!

When each car you buy is better for the same nominal price (i.e. lower real price).

ADDENDUM

Two key arguments are offered against deflation:

a) It reduces aggregate demand. Apparently as prices fall, "consumers delay purchases because prices will be lower tomorrow than they are today". This reduces demand, leading to further price falls. 

This is only partially true. As prices fall, demand for normal goods increase.

– Some purchases cannot be postponed. Just because one knows that milk prices will fall tomorrow one does not reduce consumption of milk today. Instead, one may consume more in order to smooth consumption. Forty years ago ball point pens were pretty expensive. Today they are so cheap I buy 50 at a time and don't really care whether I lose one. Similarly one can't postpone buying a car or TV. Consumption smoothing requires a uniform consumption across the future. I know I can get a really nice and cheap computer just one day before I die. Will I therefoe postpone my consumption of a computer?

– Some purchases can be postponed, things like an investment property. If I want to buy a house to rent out, I'd like to buy it reasonably cheap. But what do I do with the money I've allocated for the house today? Put in the bank? Buy shares? Possibly. I would expect that in a rational market the returns on all classes of assets would maintain a relatively similar proportion.

It is also true that the value of the total product can decline if the prices fall fast enough. That might mean a lower GDP in nominal terms, but a higher GDP when controlled for the real value of money.

In conclusion, the claim that demand falls is not quite obvious. The actual situation can go either way.

b) It "causes the cost of borrowings to rise, and this starves the economy of vital spending by businesses." How? E.g. If nominal interest rates are zero and deflation is 10 per cent a year, then the borrower must pay repay the loan with dollars that with purchasing power more than the amount originally borrowed. So businesses delay borrowing which exacerbates the downturn.

This is only partially true. If I am a business that manufactures computers, I KNOW that prices of inputs will continuously fall over time. And yet I invest because all I care for is the net profit after tax and interest. If I keep my costs down, then even if the revenue falls, my profits net of taxes and interest does not. As a savvy businessman I anticipate price falls and work accordingly. There is the issue of sticky wages, but that, too, can be controlled through appropriate design of wages in a free market.

Very rarely could the price of a product determine a business decision. It is always the next return on investment that drives decisions. If interest rates are low, then net profit rises by an amount that potentially offsets reduced revenues.

ADDENDUM

From Peter Schiff:

Economists have come up with the bizarre concept that falling, or even stable, prices squelch demand and deter consumption. The idea is that if consumers know that something will cost less in the future (even if it’s just 2% less) they will defer their purchases indefinitely, perhaps waiting for the cost of their desired product or service to approach zero. They argue that this can push an economy into a deflationary spiral of falling prices and diminished demand which may be impossible to escape
But this idea ignores the time value of a product or service (people will tend to pay more for something they can enjoy sooner rather than later) and the economic law that shows how demand goes up as the price falls. But common sense has absolutely nothing to do with the current practice of economics. Instead, the dominant argument is that inflation is needed to seed the economy with demand.

However, this argument is merely a smoke screen. The only thing that inflation can do is to help governments spend. Economies do just fine with low inflation. In fact during the late 19th century, in the Great Sag, the United States experienced sustained deflation while creating much faster economic growth than we have seen in the last few generations. As recently as during the early 1960s the U.S. experienced consistently low inflation (barely 2%) and strong economic growth based on government figures. But in their call for more inflation, modern economists tend to forget or downplay those periods.” [Source]

ADDENDUM

Europe and Deflation Paranoia, by Frank Hollenbeck

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ADDENDUM

ONLY governments love inflation/ higher prices so they can reduce their debt burden. And only confused Keynesians can cook up the nonsense of "reduced aggregate demand" to justify inflation. Ignore the stupid title of the video. This is once again an opportunity to learn about basic economics. Peter Schiff if once again, on the money.

David Wessel on low inflation by Larry White

Is deflation bad? by Scott Sumner

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Hayek on Deflation and the Great Depression

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A book that challenges wrong ideas about deflation: DOWNLOAD: Deflation and Liberty by Jorg Guido Hulsmann.

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A good summary of theory and evidence to rebut fears about deflation:  The deflation naysayers

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A post on FB that demolishes the deflation arguments.

Do we really need to fear deflation? – Martin Feldstein

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Why deflation is good news for Europe

Why Is the Fed Punishing My Parents? (the ethical case against inflation)

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Who owns Australia?

I migrated to Australia from India about ten years ago and got busy with setting down and writing and thinking about India. Not everyone who migrates to Australia does that. Some even become fans of Carlton.

But my hand has now been forced. I’ve been forced finally to devote some of my very precious spare time to Australia as well. Too many bizarre policies keep surfacing that threaten to affect me as a citizen – if I don’t speak up. Plus good citizenship requires everyone to participate in their society. So I’m opening my batting with a forthright view about Australia’s optimal migration intake, and optimal population size. My position is simple: No more: more or less. Stop! 

Australia shouldn’t even have admitted me (despite my PhD and all that) ten years ago for even then Australian cities were heavily crowded. In 2000, when I landed up here, the congestion on the Eastern Freeway in Melbourne used to extend up to a kilometer before the Hoddle Street exit. Today cars back up beyond the Bulleen Road exit, about six (even eight?) kilometers from Hoddle street. And now, ten years later, after already boosting Australia’s population significantly during this period, there is now rampant talk of increasing Australia’s population by 50 per cent or more! Stop! I ask for the simple and ordinary right to live a quiet life without wasting my time in traffic jams. 

And can someone please tell me what’s the problem with having the 22 million people we have today? Are we facing poverty, or is our quality of life in shambles that we need to bring more people to save us? Let’s understand this basic fact, that population and income and quality of life have absolutely nothing to do with each other (if you are not clear about this, please read the work of my doctoral dissertation committee member, Richard Easterlin, in Growth Triumphant. I can explain in detail, as well, but another day).

Countries with small populations can have high per capita incomes, equally as countries with large populations can have low per capita incomes. It is the system of governance, and level of freedom that matters, not population. Thus, at the beginning of the 20th century, Australia had the highest per capita income in the world but only 3.7 million people. Today Australia has six times the people but many other countries have overtaken Australia without ‘putting on’ as many times the number of people. 

The key question, however, has nothing to do with population size. It has to do with what we are and what we want to be. People keep suggesting that Australian cities are less dense than Singapore. But why is such a comparison relevant? Why should Australia give up its lifestyle to mimic the miserable lifestyle of crowded cities elsewhere in the world? 

I would ask this basic question: Who owns Australia? Are we a free democratic country where the choices of people (‘common masses’) are respected, or are we a two-penny dictatorship that bows to the whims of its ‘rulers’? In a democratic free society people matter. All over Australia, local councils are unanimous in the view that if high-density buildings are ‘needed’ by someone in the state or federal headquarters, these buildings should be built in some other place, not inside their council! And they are absolutely right. They represent the people who own Australia. The people who own Australia refuse to change their lifestyle just because some ‘ruler’ wants to shove more people down their throat.

I don’t care much, personally, for many arguments advanced by local councils which are often full of people a bit too fanatical about their heritage and culture. For these cultural dilettantes, beauty and amenity is usually preferable to functionality. For them the idea of rebuilding their city every ten years: broadening its roads, building flyovers, demolishing buildings that are over forty years old, is anathema.  I may not personally care for these conservative views, but I suggest that Australia has one thing that Singapore doesn’t, which is freedom and respect for its citizens. Australia ought to respect the views of its own citizens, people who want to live in sprawling suburbs, people who prefer narrow roads to wider ones, and those who want to preserve buildings built more than forty years ago in a variety of ungainly architectural styles. Let’s live peacefully with all our cultural fanatics and not bulldoze Australia, in order to make a Singapore out of it, literally speaking: without freedom of choice.

The counter-argument by control freaks (often found inside state and federal governments, their natural watering hole) seems to be that since local councilors are freaks anyway, that they should be forced to allow us to rebuild our cities to their centralist tastes and convert them into Singapore. And the way to do that is to apparently increase public transport. Apparently this magic pudding will can overcome all barriers to increased population. Apparently, with more of public transport we could avoid congestion in Australian cities no matter whether they increased ten times in size. 

The truth is that despite unbelievably massive subsidies, public transport can never compete for popularity with cars for some very obvious reasons including that public transport is desperately crowded during peak hours and miserably scarce for the rest of the time. Worse, it is shabby, hopelessly uncomfortable, hot, and stinky. It also requires people to trudge through rain and sleet. No. Public transport will never ease congestion in the cities of Australia. They will need to be broken down entirely and rebuilt, in order to accommodate more people. That, the local councils won't allow. Which is their legitimate choice and must be repsected. 

But more importantly, why should we be asked to accommodate more people? Will anyone answer that question very clearly please. The other day Greg Sheridan, with whose views I generally agree, made a novel argument with which I simply can't agree. He claimed that a larger population would bolster Australia’s security! I’m afraid that won't work. Should the one billion strong China get in the mood of taking over Australia, nothing that Australia could do would prevent it, regardless of whether its population was 25 million or 250 million. And Greg’s assumption that new migrants will join the Australian armed forces is laughable. Or is Greg's implicit argument that more migrants will increase traffic congestion and slow down the progress of Chinese (or Indonesian tanks) on the freeways of Melbourne, thus increasing our security? 

I ask this basic question: Who will benefit from having more people in Australia? Clearly only the owners of big businesses, who will get more consumers and generate more profits. The middle classes will get nothing but congestion and crowding, and find it even more difficult to buy a house. Those at the bottom rung of the ladder will only get the minimum wage, anyway. So having more people in Australia will definitely increase inequality while creating a headache for everyone.

I sometimes begin to think that Australia is fast becoming Alice in Wonderland, with mad hatters running about helter-skelter, offering ‘solutions’ to problems that do not exist. No doubt it will be possible, with some level of ferreting out of data, to ‘prove’ that increased population may benefit Australia in some way. But at what cost? Are the views of people to be shunned in the process? Should local councils be shut down? Should Australia become a semi-totalitarian society like Singapore? These are the kinds of questions that need to be addressed before rushing in where angels fear to tread. 

And this great fear about demographic change (more elderly) is grossly misplaced. The elderly have their houses, don't they? Just ask them to fund their retirement partly out of these houses. Reverse mortgages are an option, among many others. And if we ever get short of carers, we can import them, then. Not now!

In summary, Australia enjoys a unique and high quality lifestyle that will not be improved, but made worse, by reckless increases in population. I am not against an increase (or decrease) in population. I'm against reckless, mindless increase based on false assumptions.

These FALSE ASSUMPTIONS include:

1) Larger population leads to greater economic growth (Sorry. Per capita income has nothing to do with absolute population size but everything to do with the level of freedom and competitiveness in a society)

2) Larger population makes a city more livable (this nonsese was spouted an otherwise sensible philosopher Tim Soutphommasane in The Australian today, citing a few large cities which were apparently 'more livable'. Tim, please take ALL large cities in the world today, and historically, and determine if there is/was ANY correlation between city size and "quality of life" (a fuzzy subjective indicator anyway). If what I'm saying is too hard to understand, please go take a basic first year course in statistics).

3) A larger population will increases Australia's security (Greg, was Japan very tiny during its being bombed out in World War II? You too need to learn some basic statistical techniques, and try to prove your point globally and historically. There is no such correlation.)

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Note: Unlike 99.99% of my articles which are written for Indians, this one is written for Australians. I wrote this on 30 April 2010 and sat over the first draft, being too busy with other stuff. Luckily over the past three months, things have changed somewhat in Australia and the mania for "Big Australia" has somewhat dissipated, despite the continued mindless outpourings of otherwise respectable commentators. So it is perhaps worthwhile putting out a common man's view here, and force them to question their assumptions. 

I'll add to this write-up and develop it further over time. Your comments might give me an incentive to keep working on it. So pl. feel free to provide your views.

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A basic common sense statement: "Population growth does not determine our economic growth rate. The debate about whether you favour a big or small Australia misses the point that the Australian economy can grow rapidly through boosting productivity, even if population growth slows." (Ed Shann, in AFR 9 August 2010, "Big or small misses the point".

Indeed, I would argue that mindless immigration will REDUCE Australia's productivity. Each time Australia gets some with low skills, its productivity goes down one notch.

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Some material that may be relevant (for later) 

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