Thursday, September 29, 2011

Should Rich Pay Higher Taxes?

Yesterday's newspaper The Hindu reported that India's tainted home minister Mr. Chidambaram wants to raise taxes on rich people (you can read the full story here). He was quoted as saying, “We must raise the tax revenue to defend [the expected aggregate decline of resources]. I know many people won't like this. But, I think, I can summon up the courage to make the statement...I [was] the Finance Minister who slashed your tax rates. Therefore ... you must be prepared to pay higher tax rates, especially the rich must be prepared to pay higher tax.”

Is Chidambaram right about his proposal for raising tax on rich people? Is his policy economically and financially sound? Readers of my blog will know my answer that any kind of taxation is an outright theft of peoples' hard earn money. But I will let one of the greatest economist of 20th Century, Ludwig von Mises, answer these questions. I am reading his extremely important book The Causes of the Economic Crisis right now and came across a couple of paragraphs which specifically addresses this issue of 'raising taxes on rich people'. This is what Mises said,

One widely held view, which easily dominates public opinion today, maintains that taxes on wealth are harmless. Thus every governmental expenditure is justified, if the funds to pay for it are not raised by taxing mass consumption or imposing income taxes on the masses. This idea, which must be held responsible for the mania toward extravagance in government expenditures, has caused those in charge of government financial policy to lose completely any feeling of a need for economy. Spending a large part of the people’s income in senseless ways—in order to carry out futile price support operations, to undertake the hopeless task of trying to support with subsidies unprofitable enterprises which could not otherwise survive, to cover the losses of unprofitable public enterprises and to finance the unemployment of millions—would not be justified, even if the funds for the purpose were collected in ways that do not aggravate the crisis. However, tax policy is aimed primarily, or even exclusively, at taxing the yield on capital and the capital itself. This leads to a slowing down of capital formation and even, in many countries, to capital consumption. However, this concerns not capitalists only, as generally assumed. The quantitatively lower the ratio of capital to workers, the lower the wage rates which develop on the free labor market. Thus, even workers are affected by this policy.

Because of tax legislation, entrepreneurs must frequently operate their businesses differently from the way reason would otherwise indicate. As a result, productivity declines and consequently so does the provision of goods for consumption. As might be expected, capitalists shy away from leaving capital in countries with the highest taxation and turn to lands where taxes are lower. It becomes more difficult, on that account, for the system of production to adjust to the changing pattern of economic demand. (pp. 175-176)

Now, do I need to say anything more?

Mr. Chidambaram must understand that he has no rights to poke his nose in private business affairs. His wrongheaded economic policies will ruin the Indian economy and society if implemented. I dearly wish that instead of innocent honest hard working common man becoming unemployed, all these politicians become unemployed forever. Then and only then this country and our world can progress.

Saturday, September 24, 2011

Prime Minister Dr. Manmohan Singh's UN Speech - An Analysis

Yesterday Indian prime minister Dr. Manmohan Singh delivered a speech in New World Order's headquarter i.e., UN (United Nations) in Washington D.C. I just casually read couple of paragraph and found many things which are worthy of critical comments. Below I am critically analyzing PM's speech. PM's speech excerpts will be quoted and will be followed by my comments.

1. Till a few years ago the world had taken for granted the benefits of globalization and global interdependence. Today we are being called upon to cope with the negative dimensions of those very phenomena. Economic, social and political events in different parts of the world have coalesced together and their adverse impact is now being felt across countries and continents.

Comment: This means that neither the prime minister nor his team of economic advisers had any idea about the economic bubble which was developing in the western world. With the whole world (except few Austrian economists) he too took the artificially created fiat paper currency economic growth for granted! I wish he knew about the 'Austrian Business Cycle Theory'! I wish he also knew how the western world empires, especially American empire uses words like globalization to further their imperialism!

  
2. The world economy is in trouble. The shoots of recovery which were visible after the economic and financial crisis of 2008 have yet to blossom. In many respects the crisis has deepened even further.

Comment: There were no green shoots after the financial crisis of 2007. World economy never recovered. World governments (including India) and their central bankers just printed and spent a whole lot of money to stop the inevitable recession. Because of that gigantic spending spree of governments (stimulus packages and thug banker's bailouts etc.) the economy was showing phony signs of recovery. At that time I said that this money printing is actually going to make matters worse and it will turn the recession into a greater depression of this century. And now we can see that happening. Situation in September 2011 is much more worse than situation in 2008. By printing truck load of money these people just kicked the cane of depression down the road for couple of more years! Delaying the recession is going to make it more prolonged and painful.  

  
3. The traditional engines of the global economy such as the United States, Europe and Japan, which are also the sources of global economic and financial stability, are faced with continued economic slowdown. Recessionary trends in these countries are affecting confidence in world financial and capital markets.

Comment:  First of all, global economy is not a 'car' and US, Europe and Japan were never a source (engine) of global economic and financial stability. Japan is in recession since last 20 plus years, United States government is the root cause of all these troubles which the world is facing today and the creation of EU and Euro sowed the seeds of sovereign debt mess we see there today. 

4. These developments are bound to have a negative impact on developing countries which also have to bear the additional burden of inflationary pressures.

Comment:  Developing countries are equally responsible for creating inflation in their local economies through reckless easy money policies. PM should refrain from blaming western world for his own mistakes. India can very well avoid inflation if they follow sound monetary policies.

5. Declining global demand and availability of capital, increasing barriers to free trade and mounting debt pose a threat to the international monetary and financial system. Questions are being asked about the efficacy of the Bretton Woods institutions.

Comment: I just wish Mr. PM read Henry Hazlitt's, From Bretton Woods to World Inflation.

6. The Palestinian question still remains unresolved and a source of great instability and violence. India is steadfast in its support for the Palestinian people's struggle for a sovereign, independent, viable and united state of Palestine with East Jerusalem as its capital, living within secure and recognizable borders side by side and at peace with Israel. We look forward to welcoming Palestine as an equal member of the United Nations.

Comment: My only suggestion to Mr. PM is to follow a 'Neutral' foreign policy. Meddling in foreign affairs will always ruin your country.

7. Terrorism continues to rear its ugly head and take a grievous toll of innocent lives.
  
Comment: He should ask himself a question that, what is the root cause of terrorism? If he will ask then he will find the answer in foreign occupation! Indian army is occupying Kashmiri peoples' land and this terrorism is just a blowback of that occupation.
 
8. Iniquitous growth, inadequate job and education opportunities and denial of basic human freedoms are leading to growing radicalization of the youth, intolerance and extremism 

Comment: His own government (and all governments basically) is also following these same policies. India is a socialist country where words like 'freedom' are alien. If he is so worried about basic freedom of people then why not stop meddling in Indian peoples' lives.  He should begin by abolishing income tax. Income tax is the fundamental attack on individual's private property and thus his freedom. Can he do it?

9. We have no choice but to meet these challenges. We will succeed if we adopt a cooperative rather than a confrontationist approach. We will succeed if we embrace once again the principles on which the United Nations was founded --internationalism and multilateralism.

Comment: UN was founded only to create Anglosphere power elite's One World Empire. Mr. PM should better know about this.

10. More importantly, we will succeed if our efforts have legitimacy and are pursued not just within the framework of law but also the spirit of the law. 

The observance of the rule of law is as important in international affairs as it is within countries. Societies cannot be reordered from outside through military force. People in all countries have the right to choose their own destiny and decide their own future. 

Comment: Mr. PM should know that only the Libertarian law will enable the world to be a peaceful, just, prosperous and civilized place.If he is really serious about law then he and his government should start implementing this law in his country. Mr. PM and his government should let Indian people choose their own destiny and decide their own future! He should put his money where his mouth is.

11. There are many other things that we can do. We must address the issue of the deficit in global governance. We need a stronger and more effective United Nations. We need a United Nations that is sensitive to the aspirations of everyone - rich or poor, big or small. For this the United Nations and its principal organs, the General Assembly and the Security Council, must be revitalized and reformed.

Comment: Well, he should better address the issue of deficits (here, here) of his own government.

12. The recent assassination of Professor Burhanuddin Rabbani in Kabul is a chilling reminder of the designs of the enemies of peace in Afghanistan. It is essential that the process of nation building and reconciliation in that country succeeds. This is vital for ensuring peace and security in the region.

Comment: Nation building succeed? In his speech he said we should not force countries from outside and now he is supporting nation building in Afghanistan! That's Orwellian doublethink.


Rest of his speech is full of contradictions just like the ones which I cited above. And in any case such talks hardly matters. What is important is these governments' actions against their people. And their actions of not allowing us to live freely speaks a lot about their intentions of never leaving their political powers voluntarily.

Thursday, September 8, 2011

Will the Indian Economy be overheated by 2012?


Recently the Business and Economy magazine which is published by IIPM asked me to write a column on Indian economy's future. They specifically wanted to know whether the Indian economy will overheat i.e., will it experience high rates of inflation or possible hyperinflation. Below I am reproducing my column which I wrote for IIPM. This will give an idea to all of you for what economic dangers we all are facing in coming future.

 

Will the Indian Economy be overheated by 2012?


By
Madhusudan Raj,
Alumnus, Ludwig von Mises Institute, Auburn, Alabama, U.S.A.

and

Visiting Lecturer in Economics, Department of Human Resource Development, Veer Narmad South Gujarat University, Surat, Gujarat, India.



If I reinterpret the economic meaning of this nonscientific Keynesian language of overheating[1] of the economy then the question is, whether the Indian economy will experience very high level of inflationary effects by 2012? Although we Austrian economist know about the dangers of making any precise prediction of the future state of the economy, but nonetheless based on theoretical and thymological knowledge it is possible to discuss some of the possible future scenarios. What is going to happen in future will mainly depend on what kind of economic - especially monetary - policies the Indian government is going to pursue in present. In the following paragraphs I analyze possible governmental economic policies and their consequences.

First and foremost, if you are reading everyday news headlines and doing daily shopping in the market then you must by now be knowing that the economy is already experiencing the harmful effects of high rate of inflation - which government has created by printing gigantic amount of money after the initiation of 2007 financial crisis - in the form of high prices of various goods and services. Apart from the present day inflationary situation in future mainly two things can happen:

  1. If the Indian government and RBI continue to follow their present day easy money policy of printing heaps of money out of thin air then inflation or possible hyperinflation is already created by them. If they print and spend this money now then its effect in the form of high prices of goods and services or alternatively and more accurately stated, the lower purchasing power of money will be seen in 2012 or possibly by the end of this year. Giving a precise date for such phenomena is impossible as well as not advisable because economy is very complex and there are many factors which can alter the situation very quickly e.g., a possible drought this monsoon combined with reckless easy money policy of government can result into very high prices even before 2012 or a sudden collapse of dollar, a possible break-up of EU and demise of Euro, or may be the collapse of unsustainable Chinese economy can also have a big impact on the Indian economy. In short, rupee will continue to lose its purchasing power as long as Indian government and RBI are running their money printing presses at full speed; and   
  2.  If they stop printing money then you will see a healthy liquidation of prior mal-investments and economy improving quickly through corrective recessionary phase. People need to understand that recession per se is not bad; what was bad was the prior artificial boom which was created by the central bank through its lackluster easy money policies. If there is no artificial boom to begin with then there won’t be any recession. During recession entrepreneurs adjust their actions according to the subjective time preferences of individual citizens by allocating resources where they are most urgently needed by them. So, if government stops printing truckload of money then economy will enter into a brief period of recession and then again start its normal course of action.

Now the question is - which one is the more likely scenario? The answer lies in historic and thymological knowledge. If history is our guide then all that the past tells us is, that all governments are inherently inflationary in nature. Human nature indicates that people like to recklessly spend others’ money or the money which they can create out of thin air without doing any productive work. Politicians and bureaucrats are precisely in this position. They don’t have to do any productive work in the market to earn their income; they just have to rob the tax payers through taxation and inflation to go on their spending spree in the name of growth and development.  The absurd Keynesian economics, which government policy makers love to follow, gives them the much needed excuse for their reckless spending. Not only it provides excuses, but it advises them to actually spend more money to get the economy out of recession viz., the so-called pump priming program. I fail to understand how a normal person can advise a policy of fiscal extravagance when our economic woes are result of precisely this same policy of reckless government spending in past. How can you solve a problem of debt by taking on more debt? Einstein defined insanity as, that tendency of human beings of doing the same thing over and over again and expecting different results!  

Actually the government policy makers have painted themselves in the corner. On one side if they stop printing money then the economy will enter in a short but painful recession which for them is politically incorrect policy. Most mainstream economists see price deflation as a bad economic phenomenon thus they advise governments to avoid it at any cost. For them price stabilization is the best policy, which actually is the cause of this economic mess. Thus, to avoid the correcting recession they are just going to print more and more money. And this money printing is going to create high rate of inflation or possible hyperinflation in the economy, which again will be politically dangerous for them. In either case they are going to collapse the economy. Most mainstream economists will say that this is an unavoidable trade-off between inflation and growth! But, this so-called trade-off between inflation and growth is a pure myth; an artifact of faulty economic reasoning. In reality there is no trade-off between inflation and growth. We can have growth without inflation[2], but such policies are anathema to the politicians who always want to cling to power by keeping the public weak and dependent.

Considering this theoretical and thymological knowledge it is pretty much sure that government officials will continue to print money; they voluntarily will never stop wrecking inflationary havoc in our lives. They will finally be compelled by the market forces - i.e., peoples’ actions - to stop their inflationary madness. Such inflationary policies cannot help for long because sooner or later such situation will go out of politicians’ control[3] and a crack-up boom will ultimately collapse the whole monetary system of fiat paper currency, as it happened a couple of years ago in Zimbabwe.

Looking at this dire future, everyone should prepare for the worst because we are entering very volatile phase of our time where inflation and depression (stagflation) can follow by a possible world war because this very Keynesian economists - e.g., Paul Krugman - wrongly believe that destruction in the form of war or natural disaster etc., is good for the health of an economy! They believe that 2nd World War brought the American economy out of great depression! I don’t want to scare people and play a role of a doomsayer but at the same time I cannot afford to keep my audience in dark about the realities of today’s world. These are all possibilities which any sane person cannot afford to ignore today. So, continue to accumulate real hard assets like gold and silver regularly and stay away from paper promises. Preserving our wealth in the form of real savings will help us all in seeing through the coming economic disaster.  








[1] Nonscientific because economy is not a car and consumption is not an engine of that car so that the economy will overheat! Comparing economy with a car is absurd. Making such false analogies is very dangerous for understanding the true nature of the economy. Use of such metaphors can guide as well as misguide us in our understanding. This is the reason why it is necessary to use the precise economic concepts while doing sound economic analysis.
[2] Because of space constraint I cannot elaborate this point here. Interested readers can find the detailed analysis of this in, Jesus Huerto De Soto, Money, Bank Credit, and Economic Cycles (Auburn, Alabama: Ludwig von Mises Institute, 2006).
[3] Indian Prime Minister Manmohan Singh already said that, the inflationary condition is out of his control! Instead of making such irresponsible statements he should read and understand Henry Hazlitt’s brilliant one page explanation of inflation, Henry Hazlitt, "Inflation in One Page," The Freeman 54, no. 9 (2004): 41. Understanding inflation correctly will help him stop it.