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Posts Tagged ‘India’

One of my great frustrations (and there are many) is that the conventional wisdom about economic history oftentimes is wrong. It is very common for students to learn things that simply are not true.

Let’s add to that list by looking at the issue of child labor. The conventional wisdom is that child labor was a regular feature of an oppressive capitalist system and that children were eventually saved from abuse thanks to government intervention.

Hardly. Child labor was – and still is, in some places – a way for desperately poor people to stay alive and perhaps create a stepping stone for a better future. And capitalism-enabled prosperity is the best way to end the unfortunate practice.

I previously cited some World Bank research, in a postscript to a column on bureaucracy, showing that restrictions on child labor had negative long-run effects on income for poor people.

Let’s augment that research. Here are some passages from a very sobering study about the unintended consequences of restricting child labor (h/t: Dev Patel via Tyler Cowen).

While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness. In this paper, we examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. Using data from employment surveys conducted before and after the ban, and using age restrictions that determined who the ban applied to, we show that child wages decrease and child labor increases after the ban.

Some basic economic analysis shows why this happens.

…families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor.

And it’s worth noting that there are all sorts of harmful secondary effects.

The increase in child labor comes at the expense of reduced school enrollment. We also examine the effects of the ban at the household level. Using linked consumption and expenditure data, we find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban.

The bottom line on this issue is that some children are born to very poor families in very poor nations. In those tragic situations, child labor is a matter of survival rather than a lifestyle choice.

I don’t think that the businesses employing children are noble. Indeed, I wouldn’t be surprised if some of them mistreat kids. And even the nice ones probably would seem horrifying to those of us lucky enough to live in rich western nations.

But I also don’t believe in putting good intentions above real-world results. Businesses that employ child labor are offering a better (or, to be more accurate, offering a less-worse) opportunity for people stuck in horrid poverty. Capitalism is the only effective escape from economic misery.

Let’s close with some libertarian satire. It’s focused more on sweatshops, but it also applies to child labor (and “neoliberal” refers to “classical liberal” rather than modern leftism).

For what it’s worth, child labor was ubiquitous in the western world prior to the explosive growth that was unleashed by free markets and limited government.

If we want poor children in poor families from poor nations to have a better life, we should urge the same policies in the developing world. Assuming we prefer good results over good intentions, of course.

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I wrote a four-part series about how governments are waging a war against cash, with the first two columns looking at why politicians are so interested in taking this radical step.

  • In Part I, I looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, I reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.

Part III and Part IV are also worth reading, though I confess you’ll just get additional evidence to bolster what I wrote in the first two columns.

Today, let’s look at a real-world example of what happens when a government seeks to curtail cash. It happened in India last November, and I wrote about the disruption that was caused when the government banned certain notes.

But maybe the short-run costs were acceptable because there are long-run benefits. That’s certainly possible, but the evidence suggests that the Indian government is doing long-run damage.

Derek Scissors of the American Enterprise Institute has a new column on what’s happening with India’s economy. He is not impressed.

There is certainly a long-standing and extensive corruption problem. The discussion of “black money” has become so absurd, however, that it has little relation to corruption. …Taking currency notes out of circulation in a surprise move late last year was said to target black money inside the country. Seizure of cash was justified by a huge amount of hidden funds. …For political reasons, black money is being wildly exaggerated as an economic issue. …Directly related to hoping there is trillions in black money is wanting to tax those mythical trillions. All governments chase revenue but India’s pursuit seems especially misguided. …Good policy enhances competition and individual economic rights for the sake of greater productivity and personal income. Being obsessed with black money, tax revenue, and GDP growth does nothing to enhance competition or individual rights and leaves ordinary Indians worse off.

India’s central bank is even more critical, bluntly stating that the plan failed, as reported by the BBC.

Indians returned almost all of the high-currency notes banned in last year’s shock government crackdown on illegal cash, the central bank says. It said 15.28tn rupees ($242bn) – or 99% – of the money had made its way back into the banking system. Ministers had hoped the move would make it difficult for hoarders of undeclared wealth to exchange it for legal tender. The news that it did not will raise questions about the policy, which brought chaotic scenes across India. …Many low-income Indians, traders and ordinary savers who rely on the cash economy were badly hit. …As per the RBI data, it’s safe to say that demonetisation has been a failure of epic proportions. …Agriculture, the rural economy and property – which rely largely on cash transactions – were sectors hit by the ban. It also contributed to a slowdown in economic growth.

Indeed, the former head of the central bank warned the government ahead of time that the plan wouldn’t work. Here are some details from a Bloomberg story.

Raghuram Rajan was governor of the Reserve Bank of India in February 2016, when he was asked by the government for his views on demonetization… “Although there may be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals,” he wrote in the book. “I made these views known in no uncertain terms.” …speculation has raged over who thought up the policy, with the debate getting more divisive last week as a slew of data showed demonetization contributed to a growth slump without meeting its targets. …the cash ban devastated small businesses. More than 1.5 million jobs were said to be lost and newspapers reported deaths linked to the decision.

Rajan correctly observed that the best way to boost tax compliance is with low tax rates.

“It’s not that easy to flush out the black money,” Rajan had said, using the local term for cash stashed away illegally to avoid tax. He added that he’d rather focus on the incentives for black money, such as tax rates.

Amen. This is a point I’ve made over and over and over and over again.

Meanwhile, the Indian Express also has a column, written by a former Chief Economist at the World Bank, on how demonetization has been a failure.

…a wealth of analysis and data have become available. Demonetisation’s half-anniversary is a good time to take stock of this historic decision. The verdict is clear. It was a monetary policy blunder. It achieved next to nothing, and inflicted a large cost on the poor and the informal sector. …demonetisation took the wind out of India’s sails. My calculation is that around 1.5 percentage points of growth were lost to it.

A column in the Harvard Business Review pours cold water on the notion that demonetization is an effective way of reducing corruption.

The original reason given for the drastic demonetization action was to expose the so-called “black” market, fueled by money that is illegally gained and undeclared for tax purposes. …banks were estimated to have received 14.97 trillion rupees (around $220 billion) by the December 30 deadline, or 97% of the 15.4 trillion rupees’ worth of currency demonetized. …These rates of deposits defied expectations that vast troves of undeclared wealth would not find their way back to the banks and that black marketeers would lose this money since they would not be able to deposit their undeclared cash without being found out. This didn’t happen.

It probably “didn’t happen” because the government was wildly wrong when it claimed that cash was the problem.

…when corrupt people need places to park their ill-gotten gains, cash normally is not at the top of their list. Only a tiny proportion of undeclared wealth is held in cash. In an analysis of income-tax probes, the highest level of illegal money detection in India was found to be in 2015–2016, and the cash component was only about 6%. The remaining was invested in business, stocks, real estate, jewelry, or “benami” assets, which are bought in someone else’s name.

Indeed, the Washington Post reports that the new notes already are being used for illegal purposes.

For the first few weeks of demonetization, it was common to meet Indians who felt that their collective suffering and inconvenience was justified because it would ultimately usher in a less corrupt, more equal India. But as the initiative enters its second month, more and more reports are emerging of seizures of vast quantities of hoarded cash in the new notes. Like water reaching the sea, the corrupt, it seems, have found ways to navigate around the government’s new obstacles. …A sense is building that while millions of Indians languish in ATM lines, the old black money system is simply restarting itself with the new notes.

The real story is that the corruption is caused by government, not cash.

The biggest question is how people are getting their hands on such huge stashes of the new currency. …one way: visiting your local politician.

What’s especially disappointing is that the United States government took money from American taxpayers and used those funds to encourage India’s failed policy.

And here are some excerpts from a report by the Hindu.

The United States on Wednesday described India’s demonetisation drive as an “important and necessary” step to curb illicit cash and actions. “…this was, we believe, an important and necessary step to crack down on illegal actions,” Mark Toner, State Department spokesperson, said in response to a question. …Acknowledging that the move inconvenienced people, Mr. Toner said it was “a necessary one to address the corruption.”

It’s worth pointing out that the U.S. government was encouraging India’s bad policy during the waning days of the Obama Administration, so it’s possible that taxpayers no longer will be funding bad policy now that Trump is in the White House.

I hope there’s a change, but I won’t hold my breath. The permanent bureaucracy has a statist orientation and it takes a lot of work for political appointees to shift policy in a different direction. I hope I’m wrong, but I don’t think that will happen

P.S. The Indian government also is hurting the nation – and poor people – with a value-added tax. Bloomberg has a report on some of the misery.

Before Prime Minister Narendra Modi introduced the country’s new goods and services tax on July 1, Ansari said he was earning 6,000 rupees ($93) a day selling leather jackets, wallets, bags and belts. But India’s new tax classified leather products as luxury items and raised the rate to 28 percent — more than double the 13.5 percent tax levied until June 30. Since then, his business has collapsed. “My business is down nearly 75 percent,” Ansari said… India’s vast informal economy — which accounts for more than 90 percent of the workforce — is struggling under India’s new tax rates…broader pain being felt by many small-and-medium-sized businesses in India’s informal sector, said K.E. Raghunathan, president of the All India Manufacturers Organisation.

The bottom line is that India needs more economic liberty, building on some good reforms in the 1990s. Unfortunately, politicians today are delivering bigger government.

P.P.S. If you want to read about some symptoms of India’s bloated government, the country has a member in the Bureaucrat Hall of Fame, it also produced the most horrifying example of how handouts create bad incentives, and it mistreats private schools to compensate for the wretched failure of government schools.

P.P.P.S. Here’s a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.

Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?

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The welfare state is bad news for both taxpayers and recipients.

Pervasive handouts also are a mistake because they create incentives for very bad behavior.

And I’m not just talking about the incentive not to work. Welfare enables and encourages utterly horrifying examples of misbehavior.

But there’s a new example that probably would win the prize if there was a contest for the most sickening behavior enabled by governments giveaways.

People in India apparently are feeding their older relatives to tigers is order to get cash payments from the government.

I’m not joking. India Today has a story on the matter.

What if suddenly a lot of elderly folks start dying because of fatal tiger attacks? Either the tigers have targeted the old people especially or something is just not right. …Authorities surmise that people are sending older members of the family into the tiger reserve for them to become a prey. Once killed, their bodies are relocated to fields, and staged as victims of a tiger attack, so that the respective family can claim lakhs in compensation from the government.

Here are some added details from the Times of India.

Authorities suspect local families are sending older members into the forest as tiger prey, and their bodies then relocated to fields, to feign attacks and claim lakhs in compensation from the government. Villagers aren’t entitled to compensation if their kin die in the reserve. There has been a string of recent fatal tiger attacks on the elderly, with seven deaths reported in the proximity of the Mala forest range alone since February 16. …Locals, however, say family elders were willing participants in the whole affair. “They think that since they can’t get resources from the forest, this is the only way their families can escape poverty,” farmer Jarnail Singh, 60, told TOI.

And the U.K.-based Daily Mail also has a report on this bizarre situation.

Elderly relatives are being sent into tiger reserves to be killed so that families can claim compensation in a horrifying new trend in India. Younger family members appear to be targeting Pilibhit Tiger Reserve in Uttar Pradesh by sending their elders into the forest to be mauled to death before dumping their bodies in nearby fields. Villagers are not entitled to claim compensation if they die in the reserve, but if they are killed in a tiger attack outside the reserve, they can cash in on government money. …The revelation that this is a deliberate ploy to cash in on compensation money was triggered by Kalim Athar of the Wildlife Crime Control Bureau (WCCB).

Wow. I’m almost at a loss for words.

Imagine the conversation around the dinner table. “Good news, Granny, we’ve arranged an overnight trip for you to the nature preserve.”

It’s even more chilling if the old people are actually willing participants. “Son, make sure to make the scene look realistic after you move my body out of the preserve.”

In some sense, this is actually a broader story about bigger issues such as the degree to which the burden of government is reduced to enable more economic growth in India, including in rural areas. Or the proper balance between environmental stewardship and the needs of the surrounding community.

But it’s hard to focus on those big-picture issues when old people are being sacrificed to tigers to get loot from the government. Somebody – either the families or the willing old people – deserves induction in the Moocher Hall of Fame.

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As part of yesterday’s column about global growth, poverty, and inequality, I realized that I’ve written several columns about economic policy in China, but never once focused on overall policy in India.

Indeed, a quick look through the archives reveals only three columns that even addressed specific policies in India. And all of them were negative.

So it’s time to assess overall economic policy in India, which means this is an opportunity to point out that there are some positive developments in the world’s second-most populous nation.

One of my Cato colleagues, Swaminathan S. Anklesaria Aiyar, wrote an exhaustive study on India’s economy last year. The bottom line is that there’s been some progress, most of which took place in the 1990s.

India’s economic reforms over 25 years have transformed it from a low-income country to a middle-income one. But to become a high-income country, India must liberalize the economy much further.

At the risk of oversimplification, India has gone through three phases since its independence after World War II.

It began with a long period of statism and socialism.

Here are some additional excerpts from the study describing that grim period. And I’ve augmented those passages with India’s awful score from Economic Freedom of the World in 1975, when it only scored 4.33 on a 0-10 scale.

…until 1990, India was…hamstrung by a million controls, imposed in the holy name of socialism and then used by politicians to create patronage networks and line their pockets. …The public sector was supposed to gain the commanding heights of the economy. Nothing could be manufactured without an industrial license or imported without an import license, and those licenses were scarce and difficult to get. Any producers who exceeded their licensed capacity faced possible imprisonment for the sin of violating the government’s sacred plan targets. …Indian socialism reached its zenith in the 1970s, when the banks and several major industries were nationalized. The top income tax rate rose to 97.75 percent, and the wealth tax to 3.5 percent. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. Meanwhile, the population virtually doubled, meaning the absolute number of poor people doubled.

Now let’s look at some good news.

There was a small amount of reform in the 1980s, which became much more significant amount of reform in the 1990s.

In 1991 India embarked on major reforms to liberalize its economy after three decades of socialism… P. V. Narasimha Rao became prime minister in 1991. The Soviet Union was collapsing at the time, proving that more socialism could not be the solution for India’s ills. Meanwhile, Deng Xiaoping had revolutionized China with market-friendly reforms. And so Indian politicians turned in the direction of the market too. …After 1991 direct tax rates gradually came down substantially… The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent.

Notice, by the way, that lower tax rates led to more tax receipts. Yet another piece of evidence for the Laffer Curve.

Though I’m much more interested in whether people benefited, not whether politicians collected more money.

And the paper reveals that the reform era generated significant dividends.

Twenty-five years later, the outcome has been an outstanding economic success. India has gone from being a poor, slow growing country to the fastest-growing major economy in the world in 2016. …Per capita income is up from $375 per year in 1991 to $1,700 today. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country. …areas that were comprehensively liberalized saw the disappearance of corruption. Before 1991, bribes were needed for industrial licenses, import licenses, foreign exchange allotments, credit allotments, and much else. But economic reform ended industrial and import licensing, and foreign exchange became freely available. Lower import and excise duties ended most smuggling and excise tax evasion

There’s even been good news on poverty.

Now let’s shift to bad news. Simply stated, India needs a lot more reform, but it doesn’t seem to be happening.

As illustrated by this chart showing the country’s annual scores from Economic Freedom of the World, India is mired in a modern era of policy stagnation.

In other words, so much more is needed to help India become a rich nation. Yet the reform agenda has been spotty in the past two decades, or even nonexistent.

Here are some final excerpts, accompanied by India’s most-recent EFW scores.

Many old price and quantitative controls should be abolished, and yet more are being enacted. Extensive controls permeate the entire chain of agricultural inputs, outputs, and processed agricultural goods (notably sugar). New price controls have been clamped on seeds and even on royalties paid by seed companies to suppliers of technology. The tax regime is uncertain, and many cases of retrospective taxation have tarnished the investment climate. …Even as old controls have been liberalized, dozens of new regulations are issued every year relating to new areas like the environment, health and safety standards, forests, and tribal areas. As with the old controls, the new controls are issued in the name of the public good and are then used by politicians and inspectors to line their pockets. …The bureaucracy is notoriously corrupt and slow moving… Public-sector corporations remain large, wasteful, and unreformed. Government banks still control 70 percent of bank lending, have the worst record of bad loans and financial losses, and yet are such convenient cash cows for politicians that no party wants to privatize them. …To reach high-income status, India must become a much better governed country that opens markets much further.

The good news, if you compare the 1975 and 2014 EFW scores, is that India now enjoys much more freedom than it did at the peak of the socialist era.

That being said, there are 111 nations with more economic freedom, so there is a lot of room for improvement.

Let’s close with a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.

Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?

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The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.
  • In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.

Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.

The Financial Times explains what happened.

India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.

Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.

When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?

I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.

On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.

The ripple effect of the policy is large and unpleasant.

…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.

As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.

When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.

I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.

In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.

In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.

Writing for Bloomberg, Elaine Ou has a negative assessment of this proposal.

India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.

Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.

In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.

In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.

…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.

A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.

With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.

And the impact on a small-business owner.

His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.

By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.

A farmer also has been hit hard.

It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.

Bloomberg reports on some of the bizarre unintended consequences of this bad policy.

Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.

To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.

Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.

So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.

As already noted, the battle against counterfeit currency surely is worthwhile.

But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.

And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).

The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax.

And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.

If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.

Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.

Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official.  As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”

And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.

Remember, if the answer is more government, you’ve asked a very silly question.

P.S. If he wants more future prosperity, Modi also should make sure the government no longer attacks private schools.

P.P.S. And it also would be a good idea to reform civil service rules so that it doesn’t take two decades to get rid of no-show bureaucrats.

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It’s that time of year. Those of us who wait until the last minute are rushing to get tax returns filed (or extensions submitted).

So it’s also a good time to remind ourselves that there is a better way.

Economists look at the tax system and focus on the warts that undermine growth.

Other people focus on the immorality of the tax code.

Most of these problems have existed for decades and are familiar to people who have the misfortune of working for tax reform.

But every so often, policy wonks like me get surprised because we find out that things are even worse than we thought.

For instance, here are some excerpts from a very disturbing article in The Hill about the IRS’s we-don’t-care attitude about fraudulent use of Social Security numbers.

…illegal immigrants…use other people’s social security numbers (SSNs) to get jobs and then file their taxes with their IRS-issued Individual Taxpayer Identification Numbers (ITINs). Although the tax returns contain false W-2 information, the IRS continues to process them, and the agency does not notify the people whose SSNs were used. …Koskinen said that in such cases “it’s in everybody’s interest to have them pay the taxes they owe.” …Rep. Dave Brat (R-Va.)…told The Hill on Friday that he was “shocked” and “horrified” by Koskinen’s response. …House Freedom Caucus Chairman Jim Jordan (R-Ohio)…said Friday that Koskinen’s comments about illegal immigrants’ tax returns are “just one more example of why Koskinen is doing such a poor job and should be impeached.”

As a quick aside, I’d be very curious to get some confirmation about Commissioner Koskinen’s assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered through the tax code.

But setting that aside, it’s completely outrageous that the IRS doesn’t let taxpayers know that their Social Security numbers have been stolen.

Congressman Jordan (and George Will) are right. There should be consequences for a government official who treats taxpayers with contempt.

Though Koskinen does deserve some credit for honesty about tax reform, as reported by the Washington Free Beacon.

IRS Commissioner John Koskinen told lawmakers on Wednesday that implementing a flat tax would be simpler than the current tax system and would save the agency a lot of money. …Rep. Blaine Luetkemeyer (R., Mo.) asked Koskinen whether a flat tax policy would save the agency money. …”clearly if you had a two-page form or a one-page form where you got rid of all the deductions and everything else and people just paid…a flat tax…it would be simpler for taxpayers and it would be much simpler for us,” Koskinen said. …Luetkemeyer asked Koskinen for more specifics about how much of the IRS’ current budget of $11.2 billion could be saved if a flat tax were implemented. “…it would be a lot,” Koskinen said. “It’d clearly be a sea change, a difference in the way the place operates.”

To call the flat tax “a sea change” is an understatement. As explained in this video, research from the Tax Foundation shows that the compliance burden of the tax code would fall by more than 90 percent.

And the economy would grow much faster since a key principle of the flat tax is that revenue should be collected in the least-damaging manner.

Though if you’re worried that a flat tax is too timid and you would prefer no broad-based tax for Washington, Mark Perry of the American Enterprise Institute shared this wonderful image.

Which is why October 3, 1913 may be the worst day in American history.

Some people claim that it would be impossible to have a modern society without an income tax.

Well, the Cayman Islands, Bermuda, and Monaco are very modern, and all those jurisdictions enjoy great prosperity in large part because there is no income tax.

And we could enjoy the same freedom and prosperity in the United States. But only if we reduced the size of the public sector.

In other words, we could free ourselves of the income tax if we could somehow get rid of all the programs that were created once the income tax gave politicians a big new source of tax revenue.

The challenge is convincing politicians to give up their ability to buy votes with other people’s money.

Incidentally, this is why we should be stalwart in our opposition to the value-added tax. The experience with the income tax shows that politicians will expand the burden of government spending if they obtain any significant new source of revenue.

Let’s close with a somewhat amusing look at how tax compliance works in India. Here are some blurbs from a story in the Wall Street Journal.

For five years, real-estate developer Prahul Sawant ignored government orders to pay his taxes. Then the drummers showed up, beating their instruments and demanding he cough up the cash. Neighbors leaned out windows and gawked. Within hours, a red-faced Mr. Sawant had written a $945 check to settle his long-standing arrears. Shame is the name of the game as India’s local governments try new tools to collect taxes from reluctant citizens. …Thane’s municipal commissioner, Sanjeev Jaiswal, is resorting to public embarrassment of tax scofflaws. …Since the drummers started work early this year in this suburb of Indian commercial capital Mumbai, property-tax revenue has jumped 20%, said Mr. Jaiswal.

It’s also safer for the tax bureaucrats to rely on drummers.

Tax collectors in Vitawa-Kalwa are glad the drummers, and some security officers, are touring the neighborhood with them. “When the staff show up to collect tax alone, people get angry and beat them up,” said S.R. Patole, the assistant commissioner, who is responsible for revenue in the area.

And if drummers don’t work, the municipal commissioner has a back-up plan.

Mr. Jaiswal…plans to deploy groups of transgender women, known in India as hijras, to perform mocking dances to shame tax delinquents. Hijras are widely believed to be able to impose hexes.

I’ll have to add this story to my collection of “great moments in tax enforcement.”

For what it’s worth, I’m on the side of the taxpayers because of the Indian government’s legendary ability to waste money.

P.S. If you’re a late filer and need some humor to get through the day, here’s my collection of IRS-related jokes: A new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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What’s the difference between libertarians and conservatives? I’ve touched on that issue before, citing some interesting research which suggests that the underlying difference involves cultural factors such as attitudes about authority.

But let’s narrow the question and look at the specific issue of how conservatives and libertarians differ on people’s right to make decisions about their own bodies.

By the way, this is not a discussion of abortion, which involves another person (or fetus, or baby, or clump of cells, or whatever you want to call it). Since there’s no consensus libertarian view on this issue (other than not having it subsidized by the government), I’ll let others fight it out over whether mothers should be able to abort.

Today, I want to look at whether people should be free to control their own bodies in cases when there’s a much more clear-cut case that there is no harm to others.

The obvious example is drug use. Libertarians believe that people should be able to use drugs, even if we happen to think they’re being stupid.

And I can’t help noting that more and more conservatives are realizing that the Drug War does more harm than good.

But let’s use a different example. The Washington Post recently reported that the government of India wants to prevent low-income women from improving their lives.

The issue is whether these women should be able to act as surrogate mothers.

India is one of the top countries in the world for couples searching for surrogacy that can be done far more cheaply than in the United States and elsewhere. It is a booming — and largely unregulated — business in India, with thousands of clinics forming the backbone of an estimated $400 million-a-year industry.

Before I continue, I can’t resist pointing out that – if we use words properly – the industry is regulated. But the regulation is very efficient because it’s the result of private contracts, not government edicts.

That being said, let’s not get distracted. The main issue is whether these voluntary contracts somehow are exploitative.

Critics have long said that fertility clinics and their clients exploit surrogate mothers — often poor and illiterate women from rural areas who are paid little.

But how on earth is this type of arrangement bad for Indian women?!?

A surrogate mother profiled in The Washington Post was paid $8,000: an amount 12 times what she made as a garment worker.

The article doesn’t specify whether the surrogate mother was paid 12 times what she earned in a year, or whether the pay was for the nine-month period of pregnancy.

Regardless, the woman clearly was a big winner.

Yet this practice somehow arouses antagonism among India’s political elite.

India’s Supreme Court recently labeled it “surrogacy tourism” and called for a ban. The government submitted an affidavit to the Supreme Court on Wednesday saying that it “does not support commercial surrogacy” and that “no foreigners can avail surrogacy services in India,” although the service would still be available to Indian couples.

I’m not sure why Supreme Court Justices are lobbying for legislation. Maybe India’s system somehow enables that kind of grandstanding.

But it’s not good for poor Indians, or the Indian economy.

More than 6,000 surrogate babies are born in India per year, about half of them to foreign couples, according to one industry estimate. “We are taken aback by the government’s stand against foreign nationals,” said Jagatjeet Singh, a surrogacy consultant in New Delhi. “On one hand, the government is promoting foreign investment and the medical tourism industry. And on the other, they are talking of banning foreign nationals from coming to India for surrogate babies. There are dual standards.”

My guess is that richer people in India (such as members of the political elite) don’t like being reminded that their nation is poor.

They’re probably somewhat chagrined and embarrassed that they live in a country where thousands of women will jump at the chance to rent their wombs to foreigners.

But even if that’s an understandable emotion (I’m a bit ashamed when foreigners ask me about FATCA, for instance), that doesn’t justify laws banning voluntary exchange between consenting adults.

Moreover, renting a womb isn’t like working in a strip club or being a prostitute. As a libertarian, I don’t want to criminalize those professions, which just makes life harder for women in difficult circumstances. But we can all understand why there’s some degree of shame associated with stripping and hooking.

Heck, I can even understand why some folks don’t like voluntary kidney sales. It’s human nature, after all, to prefer a world where nobody is ever tempted to make big decisions for reasons of financial duress.

Earning money by being a surrogate mother, by contrast, seems perfectly benign. Perhaps somewhat akin to guys who make money by going to sperm banks.

P.S. A related issue is “sweatshops,” which some folks want to ban even though that denies poor people an opportunity to climb the economic ladder and improve their lives.

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