Friedman On Drugs

Friedman argues for legalization of drugs.
This is a moral issue. I really don't think that there should be any debate on this.
Drinking of alcohol is illegal for minors. Should we start thinking about legalizing it just because it will bring in more revenue for the manufacturers/retailers and also government (through sales/VAT tax collection)?

Increase in South-South trade

Australia for expanding ties with India
Besides mining, agriculture, education and services, which were some of the core areas of bilateral trade and investment between India and Australia at present, Australia was keen to focus on other potential areas of business like food and beverages business, automotive sector, aerospace industry etc, informed Micheal Carter, Counsellor Commercial, Australian Trade Commission.
“India happens to be the fourth largest export destination for Australia, it is a very important strategic partner for trade, but the current export import activity between the two countries is largely confined to mining and mining resources, education, services, agriculture, and more of a resource-based relationship which can be widened. There is a lot of scope for business and possible collaboration in the areas of food and beverages particularly wine, travel and tourism,” he said.

Australia's exports to India was worth around 12 billion Australian dollars last fiscal.

With a fall in demand from the developed countries like USA, Germany, and the UK, a number of countries are beginning to look for new key trade partners. Although, India is the 4th largest destination for India, Australia is trying to expand trade. This is very critical for countries (like India and Australia) that have a robust banking system in place. For such countries, demand will either come from within (i.e., domestic consumption) or from external sources (i.e., non USA, UK type countries)
Expect to see more trade agreements in the future.

Split or Steal?

http://www.youtube.com/watch?v=p3Uos2fzIJ0

The above is a link to a video of a game show- Golden balls
I saw this video on Greg Mankiw's blog

Great video!! There are three key components- 2 participants and one large bag of money. Each player has to choose one option- Either 'Steal' or 'Split'. The owner of the money is determined based on the choices that these participants make.

Here are the rules:
1. If both the players choose steal then no one wins anything from the prize money
2. If both the players choose split then the money gets split between the two
3. If one chooses steal and the other split, then the full amount goes to the former

Sounds similiar to the prisoner's dilemna problem?

Not exactly. There is a slight difference here. In the actual prisoner's dilemna problem the two individuals are not allowed to talk to eachother. So decision making is very difficult. One has to assume what the other person will do and then take a decision based on it.
However, in this game show the participants are allowed to talk to eachother before making a choice. This does not make one's job easier but it certainly gives a chance to an individual to convince the other person to choose something (in this case 'split'). For example, if you and I are in the game, then I can convince you to split the money with me by choosing 'split'

Obviously 'split'-'split' is one option. But again this means that both the participants will have to trust eachother. You can never be sure about anything here.

In all the different videos that I have seen, i noticed, a typical style of people was to convince the other person to choose 'split'. Then, the smarter (and evil) ones, after convincing his/her opponent to choose 'split', would choose 'Steal' themselves. This is how most of the people (if not all) approach this situation. Effectively, the winner betrays the other person. I didn't see any winner enjoy his/her victory. After all adopting this strategy will mean betraying someone on the NATIONAL TELEVISION. I wouldn't like to show people that I can betray others for some money.

I can think of another strategy. Let us assume that there are 2 players in the game 'A' and 'B'. Our objective is to make A win more than 50% of the prize money (i.e., by not splitting the money).

When 'B' tries to convince 'A' to choose 'split', 'A' tells 'B' that he/she will choose 'steal' and is ready to give a share of your prize money to 'B'. How do you think will 'B' react? He/she will have two options-

1. Choose 'steal'- 99% of the people will not choose this. 'A' has already made it clear that he/she will choose 'Steal'. Now if 'B' chooses 'steal' then obviously no one will win anything...and this will also make 'B' look like an idiot on national television. Why will anyone choose 'steal' when he/she knows that the other person will also be choosing 'steal'
2. Choose 'Split'- All the Bs of the world will prefer choosing this. Obviously 'A' has made it clear that it will share a certain percentage of the prize money. B' will have no other option but to trust 'A'

Why is this approach better? This approach will make things predictable for both the parties. There is no ambiquity. Obviously player 'B' can also choose 'steal' and make sure that no one wins anything. But I don't think that anyone would do that (not on national television)
This will not make 'A' feel guilty about winning. After all it was a deal!!

Update: My friend Pooja very rightly pointed out that the game show organizers may not allow people to negotiate like that. Such an agreement between all the A's and B's of the world will reduce the game show organizer's probability to retain the prize money from 1/4 to zero

Government officials talk up country’s economic prospects

Source: Economictimes

Private banks start lowering lending rates

Source:Business-Standard

Dose of the day: Tax cuts...but with a difference

Everytime an economic crisis arisis the debate between those who advocate free market play and those who advocate state intervention becomes hot. A similar kind of debate started when this economic crisis started last year. Thankfully, now people unanimously agree that in order to come out of this crisis the state will have to play a pivotal role.

In the past few months the RBI has lowered its policy rates drastically and has urged the banks to lower their lending rates. I am completely in agreement over this. However, today I see excessive reliance by the govts on monetary policies. There is a need for fiscal policies too. It is essential to understand that in a country like India there is no liquidity crunch. We have a demand crisis.
Cheap loans will be taken up by only those who can see demand for their goods. For example: As a CEO of a manufacturing company, I wouldn’t take cheap loans to expand unless I see some demand for my goods. Why are people not buying? Is it because they are short on cash or don’t have access to cheap money? Both to some extent

Today there is a need to boost demand and increase confidence. This recession will worsen if we don’t boost demand.
How to boost demand? This is where fiscal policy comes into play. Indian govt has already announced several stimulus packages. Actually, some people have been asking the govt to stop this spending as it is leading to higher debt levels. Coming back to the point- We can boost demand if we give money to the people. We need tax cuts. But there are two problems with simply reducing taxes-
1. Tax revenue will fall –something that the govt may not want at this time
2. People will definitely welcome this step, but may not start buying. In a country where there is no proper social security, people may be more tempted to save that extra bit of money. (Makes sense- In uncertain times, I would definitely start saving more)

Can we have a plan that not only gives people more money but also gives them an incentive to buy more? I can think of one
The Income tax department gives a Rs 1 lac deduction under section 80c to income earners. This Rs 1 lac deduction is allowed for those who invest this amount in mutual funds/PF/govt securities or other money market instruments that come under section 80c. This provision allows people to subtract that amount from their taxable income and save tax. What happens with all these savings? Basically these savings are loaned out to others. Savings become investments. This is a way through which the govt incentivizes people to save and invest. This is govts way of making people save. Can there be a similar way through which the govt can make people buy and consume?

Yes, here is the plan-
Similar to giving a tax deduction for purposes of saving, the government should give a tax deduction to give people an incentive to buy more. Let’s say that govt gives an additional 50,000 tax deduction under the law to people who consume durable goods. People who buy such goods and shows receipts of such purchases to the govt will get a tax deduction for that amt (less than or equal to 1 lac). How to keep track of this consumption? Well, the govt can start manufacturing special machines that can generate a unique receipt number. Ex- For consumers in New Delhi- receipt nos may start from NDLXX___. These machines can be sold to all companies in the relevant industry.
Now this is a simple plan, but its implementation can have huge benefits-
1. Tax revenue- Yes, the income tax revenue will fall in general. However, the govt will be able to generate more sales tax revenue by expanding the tax base. Sales tax revenue leakage has been a problem for a long time. But now companies will have to buy such govt manufactured machines which will generate receipts and consequently track the sales
2. Demand- Consumer demand will increase. As I mentioned earlier, India is not in a liquidity crunch. Now people will have more money and more incentive to buy goods. Just as the govt used to make people save money by giving tax deductions, now it can make people consume more by doing the same
3. Employment in the govt sector- This new machine will have to be manufactured somewhere...and you will obviously need people to do the manufacturing, distribution, governance, etc

This plan is very ambitious and has its own shortcomings- Given that it is a fiscal policy, its approval by the parliament may take sometime and may also face resistance. Also, manufacturing & distribution of such machines will take sometime.
But I think that this is a long term solution. It is not just to tackle this recession.

Any thoughts?

India’s growth may drop to 4.3% in 2009: OECD

India’s economic growth may slow to an 18-year low of 4.3% in 2009, with falling exports offsetting expansion in domestic demand, the Organization for Economic Co-operation and Development (OECD) said on Tuesday.
Though the country’s gross domestic product (GDP) grew at a meagre 1.3% in 1991-92, the only growth rate comparable with the current projection was in 2000-01 at 4.4%.
OECD economist Sean M. Dougherty told Mint that “this is due to a fairly broad-based slowdown in global economy and less to do with the Indian economy,” adding that India’s external sector will bear the brunt of the slowdown.
Source: LiveMint

4.3% looks very pessimistic.

Here are some of the other predictions for the growth of the Indian economy in 2009-10:

World Bank-4%
CLSA- 4.6%
IMF-5.1%
UN- 6%
ADB-6.5%
Indian govt-7.1%