India’s new tax code?

This video reminds me of one of my college classes relating to Asia.  We discussed how China was leading the way with its foreign direct investments, and creating capitalistic free zones.  Unfortunately, we are seeing how that played out, but it was a good run and if they can figure out their water and pollution issues they will probably be quite successful.  Half of the quarter was dedicated to India.  Our professor was Indian and seemed so frustrated with India and the amount of bureaucracy and red tape.  To have anything done required stamps, signatures, and more stamps and signatures before a final approval.  It kind of reminds me of Obama’s health care proposal, and what it will do to free enterprise.

The first time I visited India we drove from Agra to Jaipur.  Now the road is four lanes, and paved.  However, when I went in 2005 it was a two lane road filled with scooters, camels, donkeys, cows, buses, cars, and I’m sure I’m missing a few things (many of these are still on the road in 2009).  At that time the road was under construction, which made the drive even more precarious not to mention we almost slammed head on into a bus going 60 Mph  (I was luckily asleep, and found out afterwords).

For the dividers and to have traffic change lanes they were using bricks.  At first I just couldn’t belief it, and then I sort of nodded my head and thought well it is India after all.  All along the journey there are small cones sticking up into the sky spouting smoke, and all around were bricks.  So, from a semi-practical standpoint I can understand, but imagine trying to move all these bricks when the time came.  No barricades to hopefully prevent being run over, but a small series of bricks.

I was just there in 2009 and some things have changed, but much is the same.  A lovely country in many respects, but very 3rd world at the same time.  Getting horrendously sick in Agra didn’t help matter nor did being at the hottest place on the planet.  However, what struck me was the construction of the underground.  They already have one, but it is being expanded at a rapid pace for the upcoming Commonwealth Games Delhi 2010.  All around the ground is being ripped open, but there  are dividers, there are areas you can’t go so it seems like a step up.  For the rest of the country I can’t speak.

Now we get to the big news.  I think it is big new because simplification of the tax code is no small feat.  Watch the following video.  Instead of raising taxes, India is proposing to drastically simplify its code.  No tax up to a certain point (in the video), a 10% tax on incomes above said level.

Without knowing all the details… what does this potentially mean?

Let’s start with a few basics about the government and taxes:

1) Governments don’t have an income  — I know someone will try to refute this, but the majority and I mean majority of income comes from two places.  Its tax base meaning you and me, and through inflation.  You know that thing that Ben Bernake is so fond of doing these days.  Right we aren’t experiencing drastic price inflation at the moment, but he is monetizing debt like crazy, which means printing money out of thin air and buying crap with it.

2) As a government provides more services it needs more cash.  How do they get that?   See #1

3) Government doesn’t like to reduce its tax income because that means it has to provide fewer “services”, subsidies, welfare programs, etc…  This makes getting elected more difficult, because people want to be provided for.

4) With a smaller government due to a reduced “income” there is less of a foothold on controlling its society.

5) Less control over its society means more free will to the people.

You may or may not agree with me about points 1-5, which is fine as I won’t take it personally.  What it does mean is that people will have more money in their pockets to utilize as they see fit.  Who wouldn’t want more of their hard earned cash to spend as they wish.

I imagine if India passes this reform, and it is what they say it is there will be a boom in India.  Business will flourish, people will come out of their shacks, and start producing on a grander scale.  For clarification when I say shacks I mean it literally.  There is a staggering amount of poor people in India, crippled, sick, and desperate.

As businesses grow due to increased retained earnings, which will be used as productive capital there will be an increased demand for employees.  Greater demand for work, wealth increases all around, and everyone’s living standard rises.

For the sake of the people of India if this proposal is what it might be I hope it passes.

So, take a couple minutes and watch this!

Site Down

Well it seems that my site had a bit of a hiccup, and was down. I tracked the problem down and it seems that wp-supercache was causing some um issues. Now that it is disabled all is well. I plan to post more commentaries once I get this big project for work completed as it is all consuming!

Socialized Heathcare… Do we want this?

First Step: Watch this video on Canadian Healthcare

Did you watch the video?  I would embed it so you can watch it here, but it seems that due to technological limitations (or decisions) that isn’t going to happen.  And no I’ve decided against figuring out how to circumvent such actions.  So, click the link already.  It is only 20 minutes out of your life to watch a humorous yet somewhat painful video on the realization of socialized health care.  Don’t believe me then click the link.

Obama Plan: How do we pay for it?

You may be wondering what my take on the Obama plan is.  Well, firstly I want to know how we are going to pay for it.  Really, Social Security is going in the red, and so is Medicare.  Last I check in the red means that it isn’t profitable, and also means that there is no money to fund it.  Tax reciepts are down significantly, not to mention State Tax receipts.

So, the “income” that the Federal Governement receives is down.  Remember that the government doesn’t actually make or produce anything and is soley funded by us the taxpayer.  So, to pay for this we are going to go further in the red.  We already have a trillion plus deficit for 2009, which means borrowing or printing substantial sums of money.

While Univeral Health Care sounds wonderful, but again to pay for it we have to get the money from somewhere.  That somewhere is from the “rich”.  Maybe you feel entitled to health care, maybe not.  Essentially what is going to happen is that money will be siphoned from those with high incomes to subsidize the plans.  This is a blatant transfer of wealth, which is what the government does.

At what point do high income earners decide that enough is enough and decide to earn less?  If I were taxed at say 60%, which means I get to keep 40% of my income my incentive to earn more declines.

Rationing: Supply and Demand

Here is where socialized health care gets interesting.  Let’s say there is $100 billion dollars allocated to public health care per year.  For the moment don’t worry about the exact sums of money as this is an example.

With that $100b services can be provided up to that point.  Once that point is reached or even if we start to near that point where if anything else is spent then the program is in the red.  How might the administrators prevent that from happening?

1) You have to wait in line for your turn… these lines could get really long

2) Deny you service… bummer looks like you don’t get that MRI

3) Rationing, where there is a limited number of services available

So, in a perfect world we would all be healthy, and have 100% health care.  As much as I’d like that to be a reality we have to be realistic.  The only thing we get for free is the air we breath.  Anything else requires work, which then can be exchanged for a good or service.  I’m not saying our present system is perfect, by no means, but I don’t think this is the way.

A Tale of Two Depressions

The following content is from and the link to the original article is here.  All content is in its original version with no modifications.

I don’t normally completely republish posts, however I thought this one important enough to take such action.  We know that history tends to repeat itself, well humans do the same things over and over.

What struck me were figures 4 and 5.  If history does indeed repeat we are about to see a pull of liquidity, which will strengthen the dollar, while collapsing equity and commodity prices.  However, we have helicopter Ben at the helm who has studied the Great Depression extensively.  Regardless of his conclusions he knows that a reduction in liquidity will push us over the brink into a depression.

As I’ve said before he is threading the needle between depression and recession.  While depression is possible, the increase in the money supply coupled with an increase in government deficit spending at alarming rates points to inflation.  I have to keep an open mind as to the possibilities, which can be difficult when looking at exponential charts.  Perhaps we will have a one two punch.  Read on as it is a fascinating article…

A Tale of Two Depressions

Barry Eichengreen Kevin H. O’Rourke
4 June 2009
This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.

Editor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

Updated Figure 2. World Stock Markets, Now vs Then (updated)

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)

Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

New Figure 5. Industrial output, four big Europeans, then and now

New Figure 6. Industrial output, four Non-Europeans, then and now.

New Figure 7: Industrial output, four small Europeans, then and now.

Start of original column (published 6 April 2009)

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Figure 1. World Industrial Output, Now vs Then

Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Figure 2. World Stock Markets, Now vs Then

Source: Global Financial Database.

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Figure 3. The Volume of World Trade, Now vs Then

Sources: League of Nations Monthly Bulletin of Statistics,

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.


Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.

Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.

Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.

Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).

Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).
This article may be reproduced with appropriate attribution. See Copyright (below).