Citizen Economists » spending

When and Where Do Great Feats of Architecture Come About?

Ajay Shah — Wed, 23 Mar 2011 19:50:46 +0000

Why do some places achieve great feats of architecture, while others routinely opt for merely functional structures? The economist
in me is instinctively unsatisfied at a claim that America lacks great architecture because they have poor taste. Taste-based explanations are a cop-out. Instead, how about the following five angles:

Surplus

To go beyond merely functional structures requires resources to spare. At low levels of income, people are likely to merely try to get some land and brick and stone together. In these things, we have nonlinear Engel curves. Pratapgarh looks picayune because Shivaji lacked surplus.

The desire to make a statement and to impress

Ozymandius wanted to make a point: He wanted ye Mighty to look at his works and despair. I have often felt this was one of the motivations for the structures on Raisina Hill or the Taj Mahal.

Arms races

There may also be an element of an arms race in these things. Perhaps the chaps who built the Qutub Minar (1193-1368) in Delhi set off an arms race, where each new potentate who came along was keen to outdo the achievement of the predecessor. I used to think that the Taj Mahal (1632-1648) was so perfect, that it could not be matched, and thus it put an end to
this arms race. But then I saw the Badshahi Mosque in Lahore (1671-1673), and I had to revise my opinion. We are used to
thinking of Aurangzeb as a bit of an ayatollah, but in the Badshahi Mosque, there is genuine beauty, and more than a hint of rivalry with the Taj Mahal. And that same arms race may have mattered all the way into the 20th century: perhaps if Delhi/Agra/Lahore had not been strewn with majestic structures, the British would have approached Raisina Hill (1912-1931) differently.

In similar fashion, perhaps the great cathedral building of the European continent had an element of an arms race, where each team was keen to outdo all that had come before.

As in biology, it is hard to predict where an arms race will erupt, but one can argue that if and when some quantum fluctuations
set off an arms race, then it can lead to great flourishes of architecture.

Transparency

You only need to impress someone when there is asymmetric information, where that someone does not know how great you are. Shah Jahan needed to build big because the targets of his attention did not know the GDP of his dominion and his tax/GDP ratio. In this age of Forbes league tables, Mukesh Ambani does not need to build a fabulous structure for you to know
he’s the richest guy in India. A merely functional house suffices; a great feat of architecture is not undertaken.

Accountability

The incremental expense of going from a merely functional structure to a great feat of architecture is generally hard to justify. Hence, one might expect to see more interesting architecture from autocratic places+periods, where decision makers wield discretionary power with weak checks and balances.

From this point of view, let’s think about architecture in India and China and the outlook for this in the coming decade. China is
undertaking great feats of architecture today. What explains this, and how might things shape up?

Surplus.: China’s GDP has grown fabulously and has generated this surplus. Perhaps India’s new buildings will match up to China’s within 10-15 years, when India’s GDP matches the present Chinese GDP. But the other four elements of the reasoning go against
such a prognosis.
The desire to make a statement and to impress.: The lack of legitimacy of the Chinese State implies that there is a greater desire to impress.
Arms races.: Has there been a competitive element in China’s construction, where each person running a project is out to prove he’s better than those that came before? And in India, perhaps one or more powerful people could set off an arms race. Gujarat’s GIFT project could represent a first salvo of that.
Transparency.: The greater transparency in India reduces the urge for architecture.
Accountability.: The greater accountability in India reduces the outlook for great feats.

Deflation

Russ Nelson — Thu, 18 Mar 2010 17:53:06 +0000

I’ve written about deflation twice before: Deflation and Deflation 2. Third time’s the charm?

The common wisdom is that deflation of the currency is bad. When money deflates, it becomes more valuable, even when you do nothing. So the theory is that people won’t spend their money, because it will become ever-more valuable.

That theory cannot be true.

Look at the PC market over the last 30 years. In each one of those years, the PC became more reliable, faster, came with more memory and storage. The original MDA display was one color and text only. The CGA had 16 colors and 640×200 bits. The price — of the computer you really want to have — has stayed constant, at about $5000.

If the story told about deflation was true, then you would always be better off delaying your purchase of a PC by 6 months. You could be confident that the PC you would buy would be a more valuable PC.

Except … that people did that very rarely, if ever. The standard advice was always “don’t wait to buy a computer, because there will always be a better computer on the horizon.”

So, in a situation where people can predict a constant stream of increase in value, people STILL made the trade. Thus, I think it’s safe to predict that in a similar situation, where people could predict a constant increase in the value of their money, they would spend their money as needed.

Recession: Keynesian or Hayekian

Vipin Veetil — Thu, 25 Jun 2009 18:40:12 +0000

In the Times of India I hear is all about “infotainment”, with more information less entertainment in economic times. So as far ET columnists go hardly can one hold them the standards of an academic debate, loose ends are quite natural. But what about sheer inconsistency, or gross error?

Swami ET article today is titled “Beware: Recession maybe Hayekian”. My faint smile on reading the title soon disappeared when I read this

“The current recession looks more Hayekian than Keynesian. A Keynesian recession represents a sudden fall in demand, and can be remedied within six months by pumping enough purchasing power into the economy. A Hayekian recession, however, is caused by misallocation of resources over a long period, driven by unrealistic interest rates, ending in a bust that requires years of structural adjustment. Such a recession can last a decade (as in Japan in the 1990s)”.

Swami goes on to argue that many a crises have been Keynesian and successfully solved by government spending. My contention here is not that Keynesians are wrong, that point I have already made. But that one cannot argue that some recessions are Keynesian others Hayekian!

The Hayekian method involves a complete reject of the aggregate demand and supply framework. Hayek rejects and warns us against the very idea of “capital” as a homogenous commodity at the very beginning of “Pure Theory of Capital”, turning our attention to the structure of capital in a system of production.

Moreover Swami makes no mention of why there might be a fall in aggregate demand in the first place to cause a Keynesian recession. And since we are talking about a Keynesian syndrome, the cause must be independent of central bank policies. For people like Krugman, Stiglitz the cause may lie in “animal spirits”, which is consistent with their political philosophy. But what about Swamy who won the Bastiat Prize.

Also note that though he says this recession is Hayekian, there is no mention of “central banking”, “centrally determined price of capital”, etcetera.

Infotainment is all good, but an article with absolutely no academic grounding is a real pity. And I am not entirely sure whether such writing does Austrian economics and libertarian politics any good. Your call.

Also read my earlier critique of a Swami ET piece here.

And another incorrect portrayal of Hayek by Meghnad Desai (he offered a Marx-Hayek solution to US crisis) here.

American Recovery and Reinvestment Act?

Moyo Mamora — Thu, 26 Feb 2009 18:10:45 +0000

The American Recovery and Reinvestment Act, commonly known as “the Obama stimulus plan” or “bailout plan” got signed into law recently, after weeks of haggling in the House. The stimulus plan has a total price tag of $787 billion, and represents 5.5% of gross domestic product (GDP), although its impact on the economy may be less and will be spread over several years.

The bill can be categorized into 3 major parts with a common goal of stimulating the economy:
1. Direct payments to individuals
2. Federal tax cuts
3. Purchases of goods and services

Outlining some parts of the bill as follows,

Direct payments to individuals:

$41 billion to extend through December, 2009, the extended unemployment benefits program that was scheduled to begin phase-out in March; increases jobless benefits by $25 per week; includes a temporary suspension of taxation of certain unemployment benefits
$14 billion in special one-time payments to recipients of Social Security, SSI, and disabled veterans

Reductions in federal taxes

Individuals:

$116 billion for a refundable tax credit of up to $400 per worker ($800 filing jointly), phasing out beginning at $75,000 of income ($150,000 for joint filers)
$15 billion expansion of the Child Tax Credit
$70 billion for a one-year extension of the Alternative Minimum Tax patch
$14 billion partially refundable $2,500 higher education tax credit
$6.6 billion for an enhanced tax credit of $8,000 for first-time home buyers
$5 billion for extended bonus depreciation and increased small business expensing for capital expenditures in 2009
$20 billion in tax incentives for renewable energy and energy efficiency, including cost of renewable energy facilities, energy efficient home upgrades, purchase of plug-in hybrid vehicles

State and local governments:

$22 billion for new bond program for school construction, rehabilitation and repair, and private activity purposes

Purchase of goods and services:

$87 billion in matching Medicaid payments
$30 billion for power grid improvements, advanced battery technology, and state and local government energy efficiency improvements
$15 billion for scientific research
$7 billion for broadband services to underserved areas
$19 billion for improvements to healthcare information technology
$25 billion Cobra subsidy for nine months
$54 billion State Fiscal Stabilization Fund for schools and public safety
$13 billion for Title I education grants
$12.2 billion for IDEA education grants
$29 billion for road and bridge construction
$16.4 billion for mass transit
$18 billion for clean water and flood control

So what can one say about this? When life was good in the American economy people generally spent money without thinking too much about it, pretty much spending money that was not really theirs to satisfy cravings that could have been subdued by discipline. Then a brief slowdown in the economy gave rise to the credit crunch, and then folks began to realize that money can’t be spent on every whim, because it wasn’t as freely available as it was. Now this plan suggests that the broke US government in debt to the tune of about $12 trillion wants to add another $1 trillion in debt to its books, with the hope that spending this “non existent” money, will help revive the economy. In other words let’s do what we did to get us in this mess to get us, only we’ll do it on a much larger scale. This thought process embraces the idea that if it was not really worth it before because it was stupendously expensive in the boom years, it is absolutely necessary in the contraction years, and we need to keep the price high still. Like everything that goes in simple into the House, it comes out much more complex and filled with pork, the bailout plan went in at approximately $700 billion, and came out closer to $1 trillion.

Going back to some basics in fiscal policy, the government can only raise money by:
1. Taxing it
2. Printing it

Now because the government is not a “for profit” organization and merely a regulatory one, ideally it has no business interfering in markets. However Keynesian economist believes that in times of economic contraction, the government ought to spend its way out of the contraction. Everything we see around today are evident of Keynesian economist in Washington. Are they wrong? I don’t know, but they do have a lot of excesses that don’t make sense in my basic understanding of free market capitalism.

With all that said, back to the issue, so this Act proposes to cut taxes and print more money, the first will create further deficit (make the broke government more broke) and the second will cause mega inflation (except you believe the government will print just enough money that the economy needs to be “stimulated”).

So the point of this Act is to facilitate spending, and get people back in jobs, which makes sense, but do the benefits outweigh the cost? I don’t think so. I believe these economists are acting like the economy should grow forever. The economy had grown malignantly in the past couple of years in a period of extreme prosperity and people developed bad habits, these habits are what the current recession is supposed to change, as well as clear all blocked atteries in the heart of the economy. Shouldn’t America allow the process of creative destruction to take place, given that America prides itself in her free markets? There have been extreme excesses in the economy that require an extreme contraction to clean up, should the big three really collect bailout money when they make CRAPPY cars? Should banks really get bailout money when they made UTTERLY STUPID investment decisions? Should consumers be given bailout for BAD CHOICES? Should pornographers be given bailout money because people are beginning to realize that they don’t need porn but their wives?

The system should clean itself up, and the government should do what it takes to make the process not as painful as it should be, but I don’t believe government should act like there’s something that can’t fail. Heck the system failed, why is that so hard to accept!