Ideology and Economics by Paul Krugman

Pleasure...Ideology and Economics


IMPORTANT***

Crowding-Out...

Article;
Staggered Rise in Diesel Price will Squeeze Inflation


Comment; I agree with targeted subsidy but what will happen to transport costs. If fiscal deficit fuels inflation then, “how exports become uncompetitive?” Inflation means more money in circulation it gives exports a competitive advantage in terms of the value of money and also the value in terms of foreign currency. We can see this example in India itself; inflation is high and currency depreciating. Depreciations give country competitive advantage. If we can not exploit the situation due to higher interest rate, is a not a thing to be amazed… Actually it is a self correcting process but it is not working due to central banks intervention. Economy’s demand needed to be restricted because people are getting more and are spending more. Investment needs to be recycled to the good and services market through savings. But since now we are spending more we have less to save. Interest rates by banks are enough to attract depositor but unable to spark investors due to higher interest rates. Moreover the demand is coming from the bottom of the pyramid due to employment creation in the economy. The chain breaks where high interest rates keep a tab on investment. The main problem is employment creation and little inflation motivates the market. Public employment creation is crowding-out private employment creation. We have to decide which one, private or public; employment creates reasonable inflation levels…

Fuel Subsidies are Anti-Inflationary...

Article;

Reduce Subsidies Raise Capital Expenditure for Economic Revival


Comment;

Fiscal deficits are inflationary because government spending is increased but subsidies on essential products like fuel are there to contain price rise and inflationary effects since transport cost is a major determinant of prices of goods in an economy. A paper by Paul Krugman Increasing Returns and Economic Geography for which he has been awarded Nobel-Prize too says that transport costs play a major role in the overall price structure of an economy. Therefore from the point of view of inflation subsides are good because they keep expenditure on transport divided between government, and, the economy (consumers and producers). If the government had not shared the prices of fuels then the whole price for fuel must be paid by the economy, consumers and producers, both. To sum-up, subsidies are anti- inflationary, but, they increase government expenditure and sometimes revenues are short but the impact of rise in fuel prices is felt by all. The government either has to prop-up production of fuel, which in the short-run not possible or it can help reducing the pressure on their prices paid by the economy. In the long run we will pay the fuel bill if we are not dead…

Economic Thoughts...

  Article; Austrian School of Economic Thought Gaining Influence as Nations Tackle Debt    Comment;   Use of quantitative easing was not fully supported by many economists including Paul Krugman. His stand was that the economy is in liquidity tarp and the US economy needs fiscal policy. Markets are unable to lift an economy in liquidity trap, only govt. can boost economic activity through public expenditure. We needed to affect demand by higher wages. As far as gold standard is concerned even gold does not have an intrinsic value. It is only used to produce jewelleries nothing else. Moreover deregulation of banks in the US, mainly the shadow banks, were responsible for the sub-prime crisis...

We do not need to worry too much about growth...

Article;

8 percent growth target for 12th plan an ambitous one : Prime Minister

Comment;

If China can grow 8% amid all the crises in the trading regions like the US and Europe India too can achieve 7-7.5% if it goes for domestic demand. China’s dependency on exports for growth is well known and is also advised to concentrate on domestic demand. In India the Reserve Bank of India has subdued the demand for investment by not lowering the key interest rates. And the day repo rates will go down investment economic activity and growth rates will pick-up. We can easily expect the growth rate for Indian economy at 7.5-8% if inflation and repo-rates come down. I can easily remember how fast the growth picked up back in 2008 when the economy received high doses of fiscal and monetary stimuli due to sub-prime crisis in the US. I do not think we need to worry too much about growth …

We can achieve 8% before 2014...

Article;
India's return to 8% growth rate is unlikely to happen before 2014-15


Comment

;

The only thing that is holding Indian growth story back is high inflation. Inflation in India is a structural problem. Markets are not that efficient. They take too much time to respond to increases in demand pressure. They do not operate with sufficient or reserve or spare capacity. Any little increase in demand is likely to upset the supply conditions. Prices are very sensitive under these supply conditions. I hope FDI in multi brand retail would help removing supply side bottlenecks and consumers (we all consume but we all do not produce or supply) would be benefited in form of lower prices. As far as the question of expected growth rate of Indian-Economy is concerned i’m sure economist would not have expected a growth rate lower than 7-8% if RBI had lowered the key interest rate-repo and reverse repo rates- by 50-100 basis points. One more thing that any central bank takes into account is unemployment rate. If unemployment increases, growth rate decreases and vice-versa. Only if the unemployment rate in India above the RBIs target, RBI has some room to lower key interest rates by choosing a higher inflation target around 10%. If it does so we can easily see the growth rate of Indian economy around 7-8% in the next 4-6 months…

He Supports My View Although not Directly....

Something ( Everything) Rotten in the State of Macro