Monday, December 08, 2008

Bailouts and Money flows

Past few months have been riddled with bailouts. And blogosphere was already weighing in on the cost to tax-payer angle. But it is now that the irony of the situation is being exposed. As christmas draws near and bonus figures get announced, we will have Paulson and Co. debate the future of unions and likel pay-cuts they might take.
Its like in the movie "Wall-Street"
The situation is very much like in movie Wall -Street where Gordon Gecko is scheming about unions on airline company while counting on the bonus gain. The movie, Micheal Lewis in Liar's Poker, Raghuram Rajan and others have raised an important issue. That of asymmetry of pay-offs of various stake-holders.
Asymmetry of Payoffs
The pay structure evaluated in cost-to-company terms is disproportionately stacked. The top management gets super high rewards whereas penalties are shared. This is always the case. Across all industries, levels note how proximity to money leads to higher pay-off without any value-addition. There are whole set of arguments if this is fair or not. The least discussed part about this problem is that this asymmetry creates money flow problems.
The GDP growth created by the economy tends to get aggregated at certain pockets thanks to this asymmetry. Further, the consumption basket composition varies significantly as incomes change - therefore it leads to beneficial implication for certain industries.
Problems of the Rich, by the Rich for the Poor!
In such a context, the tax payer, bears unfair burden of this bailouts. Tax-payer has to pay higher for items in consumption basket of the rich - real estate and education. Often they pay more than they can afford - just to break-in into the rich class. However, the unaffordability can catch up based on share of luck and lead to far graver consequences. Therefore Joe the plumber feels like he is on a speeding tread-mill while the energy generated is powering the Rich. So the tax-payer shares the down-side and has no perceptible upside to talk of.
Implications for social peace
Such mechanisms are hotbed for social unrest. It is at this time, government should actively support the cause of the common person. As of date US government is not seen doing anything along this lines. On the contrary, we find the measure undertaken are rubbing salt on deep wounds.
This is also destabilizing force on world peace. I strongly urge the sleepy governments to go into a war ready alert. India wake-up its time to be battle ready. Call me a cynic but its a risk!