Pseudo Keynesianism

As a solution to the crisis, I am more inclined with Hayek approach of taking the pain quickly and all up front rather than prolonging it as Keynes recommends. However, I dispute the interpretation of Keynes by modern media and experts.

Michael Pento has an interesting article about Keynesian approach. He uses the metaphor of an obese man getting opinion from Hayek and Keynes. While Hayek advises cutting down on food, Keynes advises opposite. And there in lies my problem with interpreting Keynes in modern context. 

At a very simplified level, Keynes suggested that keeping the aggregate demand stable should be the focus of government. While this is true, I believe given the context of the situation Keynes lived in, it is not the interpretation we must derive for our times.

My interpretation of Keynes

Keynesian solution, to my mind, is about bringing certainty on the job side. At what level of income this certainty comes is, just my argument not Keynes, immaterial. So the objective of Keynesian stimulus is to create stable employment. The aim of stimulus is not to push the money through the banking system to achieve this effect, but to use a robust, loss-less mechanism to achieve this end. If the banking system is impaired, it cannot be loss-less mechanism of choice. In such cases direct government employment is better alternative.

Keynes famously argued that how you deploy this manpower is irrelevant. For all practical purposes, he argued, you may simply dig a ditch and fill it up. The real deployment of Keynesian stimulus was targeted towards infrastructure construction. The highway program is a prime example. 

In my view, Keynes would have agreed with Hayek's solution. His endeavor may have been to achieve the change without the pain involved in Hayek's solution. Whether it is possible to change without the pain is a different question.

Keynes and Hayek as alternative approach to same solution

I believe, there are two ways to solve the crisis. 

First is by using the Keynesian solution in the right context. So focus on employment rather than bailouts. Focus on flexible employment rather than entrenching unions. A misdirected Keynesian approach is very costly.

Second approach is by using Hayek's solution. Take the pain, and thereafter let the economy revive. This approach does cost less and has no future tax repercussions.

The dangerous combination
Often what results as policy makers with little grasp of Keynesian option abandon it earlier and switch to Hayek eliminating all the future tax benefits built into Hayek's solution while causing as much pain before the recovery. The Hayekian recovery also takes longer as the first round of Keynesian stimulus, in all probability, has added to mal-investments. We are exactly at this point. The first few rounds of stimuli have been hardly successful. They have or will soon result in mal investment. Where will go next?

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My book "Subverting Capitalism & Democracy" is available on Amazon

The truth behind Encouraging home ownership

Here is a link I got today through Yves Smith at nakedcapitalism.com. Feds rethink policies that encourage home ownership - USATODAY.com. With the amount hubris exposed in recent months I doubt if home ownership was promoted for the sake of citizens.

Asset backed paper vs. Casino's deck of cards

A casino has as many decks of cards as it needs. The real world casino "the financial markets" do not have such access. They need each card to be backed by an "asset". Asset could be wide variety of things. It could securities or bonds which are ownership title of businesses. Assets could be the resources in stock piles or a right to use (mining) those resource like oil, coal etc. Now what if there is too much money at the hands of the too few people (mostly what I call big money - funds). These people can gamble a bit but soon the price behind one deck of cards goes through the roof. That is the time to bring in additional deck. So how can we create such real world card decks easily? Home mortgages!

If homes were exhausted, we can create MBS, CDO - more decks! Once that is done we can create default swaps on them. If those were exhausted we can create CDS on insurers of CDOs. Jolly God! here is the eternal fountain of asset paper - inexhaustible source of deck of cards!

Morality for you - profits for me!

I am surprised how economist expect the homo economicus can be expected to behave rationally for everything else except for mortgages defaults. I would rather encourage people who cannot pay to default. After all companies do it all the time and their credit rating does not get impacted.

Comments on Microsoft

John Hempton, who fabulously broke the banking solvency talked about Microsoft recently. In the third post in the series titled Microsoft – an accounting geek’s summarizes his purpose and lessons. I wanted to add some comments to this since the first post. So here it is:

1. Bundled software in India:
• India still sells laptops without the operating system. The proportion has gone down but it still exists where dominant volumes are.
• Ubuntu and Linux overall has not caught on because it is not user friendly. As it gets friendlier, expect Indians to move to Linux versions faster than Microsoft can cope with. All Microsoft needs to do is support XP. A lot of pirated Windows XP is still being used.
• Such a response is currently underway in mobile phones. I believe it makes sense it happens in mobiles first because, device capability is limited, hardware is cheap (from china) and Indians have unique needs (apparently more Indians need dual SIMs than elsewhere - in pagers we preferred the alpha-numeric ones etc.) I can't see why it cannot happen in laptops. (More about it below)
2. India Volume play suits Apple more: If you think about volumes as a driver, Apple makes much better sense. 
• We are paying $1000 for iPhones and if you see the penetration you will be amazed. If iPhone were to be available at $500 equivalent Apple would not be able to handle the sales volume. The user interface is mind-blowingly simple even my mom and dad got it right away. (They don't speak computer English). It is very intuitive. Through iPhones and iPads Apple can make a huge in-road into Indian market. They have to price it right though.
• Why I discussed about iPads is that most users do not need a laptop or a computer. They simply need a device that can connect them to the net. A phone is a little small for the purpose but a tablet is ideal. Indian government announced a tablet PC for $35 and it is pretty ok with camera and it works on Android. (It is for education institutes)
3. User friendliness is still paramount: While I worked on and loved Unix (was a programmer) but I think for regular computer usage, MacOS, Windows make lot more sense. Android is emerging as a significant alternative in tablets but it is nearly as good as windows CE. 
4. Distributed legal liabilities: Unix and its versions are popular for server side because of customizability. There is other side to the equation. Security is costly and Microsoft cannot release a lower end product without risking security issues. It is an easy legal target if it fails. So it has to put in lot of effort just to ensure base level security. Linux falls through the legal cracks as the legal liabilities are diffused. Just as small revenues amplify so do small legal claims.
5. About security: Security issues are dominant concern for Microsoft. It does not have control over where its operating system is being deployed. It does not know if clients are updating the OS or not. With emergence of Software as a service model (SAAS), Microsoft will breathe easy. I expect as SAAS starts getting prominence, MS will start unleashing its programming prowess to more beneficial use.
6. Still top institutional service provider: Microsoft juggernaut is large and has tremendous inertia backing it. The IT departments of top Microsoft clients are testing versions to be released in 2011 and 2012. Frankly, even Apple does not have that kind of sales and testing infrastructure on institution side.
7. MS as fast follower: For the consumer side, Microsoft is better characterized as a fast follower than a tech leader. It has always copied Apple and will continue to do so. (Panasonic to a Sony). There are two scenarios from here:
• Currently the environment is in flux so we cannot see Microsoft response but response will come and it will eat away a substantial share.
• The model has changed to a long-tail model. Microsoft noticed this with Zune. It came in very late once the product stabilized but that was too late for the market. So it is match step-by-step in phones. Here too it is a bit late but faster than with Zune. Eventually it will figure out.
8. It is the Microsoft game: The game Apple is playing was invented by Microsoft: 
• Microsoft dis-assembled the IT hardware and software value chain. It broke the integrated approach of IBM. Apple followed IBM model in hardware and OS and used Microsoft approach with additional software. But overall Apple is still more in IBM mode.
• Apple is breaking the mobile phone software value chain but it retain the hardware approach of IBM in phone space. In phone space it HAS to break the software value-chain. It is doing this through App architecture. That is straight into MS territory. Apple will face same issues as MS if it were as important to business community as MS. Thankfully Apple is sticking to consumer electronics side.
• Blackberry is more like thin-client server model we know. A Google-wave like protocol will break this model. My guess is Microsoft will break blackberry.
• The reason MS cannot fight easily because of legacy codes. Phones need light codes but MS codes is HUGE. But in phones and in computers MS has changed its stance to scrapping old format all together. MS will gain from it because there is so much knowledge that it has but cannot use - now all that will be possible.

Disclaimer: I am an Apple fan but I love Microsoft as well. MS Excel is probably the best product every produced. It also makes awesome mice. This is discussion about future of tech and not stock analysis of Microsoft.

Pensions are complicated

The Economist has a nice blogpost about Jobs, pensions and markets: Required reading | The Economist. Here is one important quotation:

Public sector pension funds have just followed the pattern of private sector schemes. Step one, promise employees better pension benefits in lieu of higher pay. Step two, allow older employees to retire early as a "cost-saving" measure. Both employ the economics of the never-never.

And this,

Pension funds are classic Ponzi schemes in which the benefits of retirees depend on the income generated by new employees. (This is true even of funded schemes, since they invest either in equities, a claim on the profits generated by future workers, or government bonds, a claim on their taxes.) They were thus bound to be in trouble once the demographic pattern shifted, and the next generation was no bigger than the last.

This is already a hot political issue as my US colleague notes in this post; as in Britain, attacks on public sector pensions are generally launched by the taxpayers' party (Republicans. Conservatives) and resisted by the public sector workers' party (Democrats, Labour). It will also be a legal issue. In Colorado, retirees are suing over plans to reduce the scope of their inflation protection.

The pension problem is not that straight forward. Paul Krugman posted an interesting study about public-sector and private sector wages. He points to a study by John Schmitt which concludes that after adjusting for education and age, public sector workers are not overpaid as compared to private sector employees. Wages ultimately impact pensions, so ideally pension liabilities should not be unjustly high. 

However, as the article points out, the pension scheme by design is flawed. We need other means to protect the lifestyle of the retired worker. By protect we do not absolve the worker of economic prudence, but ensure that some fixed income can be earned without having to continue rigorous work. So in the post-retirement phase the work is different. Such work opportunities must be available in the first place. Singapore uses such a concept creatively.

While, pensions scheme design may be flawed, it does not allow government to renege on its promises to older workers. I discussed earlier that changing terms of pension being equivalent to breaking contract or promises to the employees. I believe the modification of terms by government for common people is not a prudent move, particularly considering the enthusiasm with which AIG was paid.

In Sum
We do need pension reforms, but it has to be humane. Governments cannot simply cut pensions just because they cannot pay. After all didn't monarchy do it in similar way - spend and if you cannot pay kill your creditor.

Who is Rich?

The philosophical answer to the question "those who have more than they need" was always disconcerting. I never related with it. But looking at the situation of developed markets today, I have rediscovered the wisdom in the words. 

An indebted rich nation is not rich

By all counts, average American household is indebted. Those with high income but still indebted to the hilt cannot be considered rich. These households need to scale down their spending. To add to their woes, these households are facing an increasing tax burden.

Tax burden on households is based on incomes not profits
And this is a critical difference between corporates and individuals. When corporates face higher taxes, they increase their costs by investing in assets, paying higher salaries, etc. Thus, in my view taxing corporates is a better alternative than taxing individuals.

Taxing rich is better than taxing poor
Though this is obvious, rich often use corporations to park their earnings and thus get taxed lower. There should be differential rates for different income slabs - particularly at high income levels. Here the size of population is small but the value of tax collect is large.

Reference
New Yorker on Tax reform