Monthly Archives: September 2011

Law of demand in the labour market ?

There was an interesting article on CNN-money today, on increasing the minimum wage to boost the US economy.  Whats interesting about this article is it goes beyond the problem of unemployment into the closely related problem of underemployment. Many Americans today are doing jobs which are very low paying.

Dr Paul Osterman of MIT argues that raising the minimum wage is the way to go to improve the economy, he is backed by Paul Sonn of the National Employment Law Project action fund and Alan Krueger potential new American chief economic advisor. (I find that encouraging). William Dunkleberg who represents the National Federation of Independent Businesses disagrees, he says raising wages will reduce the demand for wages and result in more unemployment. (I am strongly sensing a libertarian here, who the Keynesian in me tends to disagree with.)

We have all seen this argument before, allow the markets to deal with themselves and lead to the optimal wage. Any interference is counterproductive. What if I find more displeasing are some of the comments advocating frugality and saying you should be able to live off 7.5 dollars an hour without demanding more. So let me point out what I disagree with rather than just cribbing! (You should stop me when I go off on those rants).

Firstly, since when did we start thinking that wages should be determined by what people can live off ? I know people in Africa living off less than a dollar a day, so should that be the new wage ? Alright now that is done away with! I want to ask, why do businesses exist ? They exist to serve a demand. A demand which arises from the same workers they pay. Right now interests rates in the United States are very low, (yes I know the banks are still unwilling to lend, but that would change too if large consumer demand is perceived) I would suspect that the lack of ¬†incentive to produce doesn’t arise from a lack of availability of funds but from the perceived lack of demand from the population. Out of work or underemployed people aren’t going to create the demand required by the economy.I know, it is very similar to the economics during the depression, that’s even better reason to not make the same mistakes again. YES, the solution is to raise their wages and give them the confidence to spend more, a perceived consumption demand coupled with low interest rates should boost confidence to increase investment too. This could also additionally lower the onus on government spending to drive aggregate demand. (Don’t the libertarians have a problem with that too ? , Well you cant have it all your way !) .

I am not saying raising the minimum wage is a sure shot solution to the slump in the economy and the debt crisis, but it definitely is a step in the right direction.

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Posted by on September 28, 2011 in Economics, keynes, labour market, Politics


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Macroeconomics Summarized

Mercantilism – Get more gold!

Classical – Do nothing and nothing will go wrong.

Keynesian – In the short run, SPEND. In the long run, you are dead.

Monetarists – In the short run, PRINT notes (following rules), In the long run, do nothing and nothing will go wrong.

Neoclassical – Whatever you do, Surprise them! or do nothing and nothing can go wrong.

New Keynesians – When jolted, PRINT! SPEND!


Posted by on September 27, 2011 in Economics, Humor


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Inflation and the Indian dream

For a long time now, India has taken pride in being largely insulated from the global economic slowdown. True, Indian exports suffered, but it was also an opportunity for the exporters, especially software firms to diversify into markets other than the north american markets. India Inc was still hiring during the worst of the crisis. The Reserve Bank of India had a broad smile as the merit of years of regulation of the financial markets once thought of as unnecessary chaining of the economy was now vindicated. There wouldn’t be a sub-prime type crisis in India, despite exposures to North American markets India was still strong. Growth would not be badly affected. Then came news of the European slowdown and suddenly nobody was too sure anymore, India wasn’t going to stay immune to the global slowdown forever.
Indian growth is now at 7.7 percent. On an absolute scale a wonderful number, but not enough for the young nation to grow out of poverty. The RBI is not optimisitic.

However, can we blame the Indian slow down on international markets ? No doubt international effects are being felt in India, but it would be very dangerous to brush aside serious defects in the home economy by pointing the finger at the outside world. For one, Indian exports have been gaining momentum despite these slowdowns. New markets are being found in West Asia, Africa and South America. What is the problem then ? The answer is Inflation.
No, The RBI is not printing a lot of cash to fund government expenditure, infact the opposite is happeneing, monetary policy being followed is pretty tight. Where does the problem lie then ?
Maybe the traditional women of India who still do the bulk of the cooking will have an answer before the ones who meddle about with economics. The prices of commodities are increasing. India is suffering from severe supply side bottle necks. We must realize that despite everything that happened from the 1990s, India still has a large agrarian economy. A media or a middle class that ignores this fact doesn’t make it go away. The manufacturing sector too is ignored while focusing on the services boom. Growth has been dull in both these sectors. Food prices keep increasing, especially basic vegetables most used by the Indian middle class. India needs to wake up to the harsh reality that so much of its economy directly depends on the monsoons! Structural reform in agriculture and also manufacturing is what is required. Tighter monetary policy is what we get.
All economists agree that in the long run money is not a part of the real economy. Agreed short term monetary policy is essential, but what is the use if we do not combine it with a long run vision of improving the underlying problem ?
Demand is another key issue, demand has been increasing in India ever since the middle class got richer. This includes the demand for food. More Indians eat out today than ever before. Rising tomato prices havent stopped Bangalore from having a Tomatina of its own. Population doesn’t decrease either, neither does agricultural land increase. Monetary policy is not magic to solve a long term issue though it may ameliorate the temporary warning signals.
Bangalore needs to realize its a part of India, fed by Indian farmers.
I am totally for a booming service sector, but keeping in mind what is needed in the ground level to sustain it.


Posted by on September 12, 2011 in Economics


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