US Debt Crisis

It is generally accepted that nations can have a certain amount of debt in their books. Especially if their economy is growing steadily. What should be the percentage of this debt compared to the size of the national economy (GDP) is a matter of debate.

This sovereign debt is useful, in that it offers a lot of old people an excellent investment possibility. Especially if the debt is from a top-notch country, whose economy is stable, whose paying power is steady, and is rated well by the rating agency. The US was one such. Pension funds normally subscribe to such debt. Countries with excess foreign exchange will subscribe to this. Right from China, Japan, India, Russia and Brazil hold the US treasury bills.

However, US economy has been going downhill. US govt. deficits have been increasing drastically. There are several infographics explaining the crisis very well. This Washington Post graphics shows that for the current year, the revenue deficit for the US govt. will be nearly 33%! That is, for every $3 the government spends, it has to borrow $1 from others. One can look through the spending and see that a big chunk of the spending is in Social Security, Medicare and Medicaid (amounting to roughly 50% of the total spending), another major spending of nearly $900 billion on defense and an interest repayment of around $251 billion.

This level of borrowing is unsustainable. Their existing debt by the end of 2011 will be $15.5 trillion. It is also expected that over the next 10 years, they will have to borrow a further $6.7 trillion. That is, by 2020 (or 2021), the US national debt will be around $22 trillion.

This is a nation, whose financial health is extremely weak. All indications are that it is not going to be fixed even in the coming decade. US debt is likely to become costlier; that is nations that are lending money to the US will start charging more interest, making the interest repayment costs very high.

What could be the alternate solution? Drastic budget cuts (which will sound very republican, but that is the only solution) including in defense (which the republicans don't like), increase in tax rates for the corporates (very democrat-ic) and enforced compliance, more spending in own healthcare infrastructure like Britain rather than the spiralling cost of Medicare/Medicaid etc.

American system of Social Security is too complex. It is not easy to completely dismantly that. These are people who have paid taxes over the last few decades and it is not fair on the part of the government to simply cheat them out of their entitlements. But the government has to work out some deals to ensure that future Social Security payments are not too high; which would also mean that they should probably start charging less Social Security taxes now. Which would mean, they will have to find some other way of increasing revenue, which would mean increasing income taxes. But that may not be sufficient.

Therefore, the federal government should consider imposing a federal sales tax across the country, over and above any state sales tax. Even a marginal 2% across the board sales tax (from cigarettes to liqour, consumer goods to heavy machinery, gasoline to food) will result in substantial earnings for the federal government. It is not clear to me whether there is any constitutional provision that will make it impossible for the federal government from charging such a tax. If so, it is the job of the legislators to amend the constitution appropriately. I can't see any other way out.

BJP and Yeddiyurappa

Why is it so difficult for BJP to sack Yeddyurappa? That the man is corrupt is so obvious. The evidence is mounting. If he is not sacked immediately, then BJP will lose the position it has built in Karnataka. That Yeddyurappa has contributed to that should not be reason enough to stick to him now.

BJP can gain a lot by letting Yeddyurappa go and after 5-6 months call for a flash election with someone else - perhaps Ananthkumar - at the helm and may end up with a better majority that what it has currently.

Poor Economics

I am reading the book Poor Economics: Rethinking Poverty and the Ways to End it by Abhijit Banerjee and Esther Duflo. I haven't read a book that has impacted me more. Every page has made me pause and think. There is so much to quote from it and discuss, I will be violating the fair use policy on quotation. Do read this book. I strongly recommend it. Here are couple of paragraphs from the book that I read yesterday:

In a study [in India] designed to find out whether ... prejudice influenced teachers' behaviour with students, teachers were asked to grade a set of exams. The teachers did not know the students, but half of the teachers, randomly chosen, were told the child's full name (which includes the caste name). The rest were fully anonymous. They found that, on average, teachers gave significantly lower grades to lower-caste students when they could see their caste than when they could not. But interestingly, it was not the higher-caste teachers who were doing this. The lower-caste teachers were actually more likely to assign worse grades to lower-caste students. They must have been convinced these children could not do well.

And then, as a continuation,

Children themselves use this logic when assessing their own abilities. The social psychologist Claude Steele demonstrated the power of what he calls "stereotype threat" in the U.S. context: Women do better on math tests when they are explicitly told that the stereotype that women are worse in math does not apply to this particular test; African Americans do worse on tests if they have to start y indicating their race on the cover sheet. Following Steele's work, two researchers from the World Bank had lower-caste children in the Indian state of Uttar Pradesh compete against high-caste children in solving mazes. They found that the low-caste children compete well against the high-caste children as long as caste is not salient, but once low-caste children are reminded that they are low-castes competing with high-caste children (by the simple contrivance of asking them their full names before the game starts), they do much worse.

How do we work towards helping every child achieve its fullest potential? How to we eradicate the ills of a caste system that has psychologically impacted Indians (both "high" & "low" castes) that one's intelligence and ability are linked to the castes in which they are born, even though it has been proven convincingly by scientists that such is not the case?

RBI increases Interest rate again

In what is certain to seriously affect the middle class consumers, RBI, afraid of inflation, has increased the interest rate yet again, by 50 basis points today.

My current home loan (which I will be exiting by September 2011) with ICICI Bank, is at an interest rate of 14.25% and that was before the current increase. Not sure, if ICICI will promptly up it to 14.75%. I am shopping around with other banks, and the interest rate appears to be more like 10-10.5% depending on the type of facilities you are looking at. This could also go up by the same 50 basis points.

Surely, there are better ways of handling inflation? Where will this lead us to? Industries will collapse at this sort of interest rate. Middle class will stop buying houses and vehicles. This will in turn affect the manufacturing and white goods sector, and so on.

Raising interest rates has hardly impacted the inflation though. So why do the same thing again and again and hurt the middle class?

Raja's defense

It is still unclear to me what CBI's case is against Raja. If they say that he has taken money from Telcos to give them license without going for auction, then CBI has to provide the proof for the same - money trail, evidence for conspiracy etc.

If, on the other hand, they are showing that his not auctioning the spectrum meant that companies like Swan and Unitech making "profits out of re-selling the spectrum" resulting in loss to the exchequer to the tune of around Rs 22,000 crore, then the case is a non-starter.

Raja's defense yesterday, focused on this very issue.

Interview with Bill Gates on his Educational Philanthropy: WSJ

An excellent interview in Wall Street Journal with Bill Gates:

"I watched the movies. I saw 'To Sir, With Love,'" he chuckles, recounting the 1967 classic in which Sidney Poitier plays an idealistic teacher who wins over students at a roughhouse London school. "But they didn't really explain what he was doing right. I can't create a personnel system where I say, 'Go watch this movie and be like him.'"

Instead, the Gates Foundation's five-year, $335-million project examines whether aspects of effective teaching—classroom management, clear objectives, diagnosing and correcting common student errors—can be systematically measured. The effort involves collecting and studying videos of more than 13,000 lessons taught by 3,000 elementary school teachers in seven urban school districts.

"We're taking these tapes and we're looking at how quickly a class gets focused on the subject, how engaged the kids are, who's wiggling their feet, who's looking away," says Mr. Gates. The researchers are also asking students what works in the classroom and trying to determine the usefulness of their feedback.

 It is important for us in India to carefully follow what Bill Gates is doing in the educational space. Over the last 65 years we have invested a lot in education (not enough, but still a lot). It has not achieved what we wanted.

We need to look at improving the quality of education as much as the quantity of education.