India too follows the failed global economic prescription -- Rob Peter, to pay Paul.

I have got tired of reading the same faulty prescription. The economic way forward being suggested by all and sundry is a failed model. And yet, every other day you see the same analysis, the same arguments, and the same approach being suggested ad nauseatingly. What has happened to this country? Where has our collective wisdom disappeared? Must we be cowed down by the blackmail being continuously unleashed by the rating agencies as well as the international financial institutions?

This is in reality what is meant by populism.

The populist perception is not often pragmatic. I agree. And this is exactly what I am worried about. The populist perception today is that with the fiscal deficit likely to grow, at a time when current account deficit is already galloping, the Finance Minister must ensure that the investment climate remains favourable. Stepping up expenditures is something the government can ill afford at the moment. So the axe must fall on welfare schemes.

Diesel prices have already been freed, and GAAR deferred. Taxing the rich is not the right way, and therefore the only solution these economists and economic writers have is to shower more tax concessions and freebies to India Inc.

If this was workable, and would help kick start the economy, I wonder why the same formula is not working in Europe. All the years of austerity drive, following the economic recession of 2008-09, hasn't seen the European economy showing any signs of emerging out of woods. Greece, Spain, Ireland, Italy, France, Germany and you name it. All European countries are grappling in the dark having blindly followed the IMF prescription. While public outrage has spilled to the streets, unemployment and poverty is growing. With many living in their cars, the crisis has put cash starved Greeks on their bikes. Unemployment in Greece has grown to 25 per cent. Greece is not an exception.

The reality is that the countries that imposed harsh austerity measures are deeper into crisis. In Greece, Spain and Portugal -- where austerity provides a test case -- unemployment is soaring.

International Monetary Fund (IMF) has finally admitted that it had underestimated the damage from its austerity drive. IMF chief economist Olivier Blanchard has in a paper admitted that it didn't fully understand how austerity will not be able to rejuvenate economic growth. As a caveat, and as a face saving, IMF says that austerity works well if fiscal multiplier are small, but for large economies it actually ends up increasing debt-to-GDP ratio.

Should India therefore follow the European decline?

Regardless of what is happening globally, the rich want to extract the last pound of flesh. You shouldn't therefore be surprised at the populist discourse. As the Budget day nears, the decibel pitch increases. It will reach its crescendo on the day Mr P Chidambaram will stand up to present Budget 2013. As expected, the stock markets will first register a fall (this is a blackmail tactic they have perfected) before the Budget is presented, and as the Finance Minister showers freebies on business and industry, it will rise.

But should we succumb to populism? Just because the entire public policy space is occupied by austerity hawks -- in India, they use the phrase: Spending cuts -- does not mean that we have to keep quiet and accept the faulty economic regime. It does not mean that the populist view -- Rob Peter, to pay Paul -- should be accepted just because everyone is saying so.

Are a handful of Corporates holding the global economy to ransom? Are political leaders afraid to fall from 'fiscal cliff'

 Millions of workers protested against spending cuts across Europe on Nov 14. This picture is from Madrid/Spain.

I don't understand how can any sensible person, least of it an economist or a policy maker, justify this paradox. The US economy is in crisis when many businesses are sitting on record levels of cash on their balance sheets. "Amid a lackluster earning season that have featured many companies missing sales expectations, cash balances have swelled 14 per cent and are on track toward $ 1.5 trillion for the Standard & Poor's 500, according to JP Morgan. Both levels would be historic highs "(Companies Are Sitting on More Cash Than Ever Before. CNBC.com Oct 23, 2012. http://bit.ly/RGCSRz). Apple alone sits over $ 117 billion.

What's the situation in Europe? According to Ernst & Young "In the Eurozone, corporates overall hold around Euro 2 trillion, in the UK the FTSE 100 are holding 750 billion pound sterling, and US corporates hold more than US$ 2 trillion." 

US President Barack Obama, getting into his second term, had talked consistently about the "rich paying their share" to prop up the sagging economy. Many believe he won because he spoke the language of the majority, the 99 per cent. But no sooner the elections results were out, I see the mainline economists launching a tirade against his election promise of imposing higher taxes on the rich. You watch them articulating their flawed hypothesis on CNN, you can read them in The Economist, and of course their voice resonates in the corporate-controlled media across the globe.

The "fiscal cliff' argument is so strong and so well entrenched in the political thinking that the European governments too have been blindly adopting it to overcome the euro zone's debt crisis.

Far away in India, at a time when GDP is on a downhill path, newspaper reports say: "At the end of last fiscal, India Inc was sitting on cash and cash equivalents -- liquid investments that can easily be converted to cash -- of over Rs 9.3 lakh-crore or $ 166 billion." (Slowing Economic Growth: Companies like RIL, CIL and Infosys sit on a cash pile of Rs 9 lakh crore and refuse to invest. Economic Times, Aug 20,2012. http://bit.ly/RGCSRz).And still, the UPA II is Gung-ho over the move to open up for FDI in retail, expecting just $ 3 billion in the next five years !

At a time when so much money is in the hands of few corporates, I don't see any justification for the term 'fiscal cliff' to be flaunted all around. Not being a trained economist, it took me some effort to understand what 'fiscal cliff' actually means -- to overcome the growing fiscal deficit, increasing taxes and simultaneously going in for spending cuts. In other words, spending cuts means ushering in austerity. Ensuring austerity means reducing the fiscal deficit. That's what the IMF/World Bank prescribe when they lend monies for bailouts. But for some strange reasons, austerity does not mean providing tax concession to the rich and powerful. At the time when the world provided economic bailout packages (after 2008-09 economic meltdown) of roughly $ 20 trillion, no economist warned of "fiscal cliff".  No economist told us not to use the public tax-payers money to bail out the banks and the corporates.

In simple words, $ 20 trillion have gone in to shore up the bottom line of Big Business, insurance, banks and industry. It provided more wealth in the hands of the wealthy. In such difficult times, when the bailout packages should have been for providing more employment, health, education and food to the needy, it went into the pockets of the rich. The trickle down did not happened, it never happens. The entire economic system therefore works on the underlying but utterly flawed principle: "Privatisation of profits, and socialisation of costs.'

In US, despite the public rhetoric of President Obama, the fact remains as the New York Times states: "the White House agreed to cut at least $ 250 billion from Medicare in the next 10 years and another $ 800 billion in the decade after that, in part by raising the eligibility age. The administration had endorsed another $ 110 billion or so in cuts to Medicaid and other health care programmes, with $ 250 billion more in the second decade. And in a move certain to provoke rebellion in the Democratic ranks, Obama was willing to apply a new, less generous formula for calculating Social Security benefits, which would start in 2015." Even for the much-needed Supplemental Nutrition Assistance Programme, the proposal is to cut spending by $ 127 billion.

In Europe, as Reuters reports: "In Portugal and Greece — both rescued with European funds and under strict austerity programmes — the economic downturn sharpened in the third quarter, data showed. Portuguese unemployment jumped to a record 15.8 per cent while next door, in Spain, one in four of the workforce is jobless. Greece’s economic output shrank by 7.2 per cent on an annual basis in the third quarter as the debt-laden country staggers towards its sixth year of depression. Close to 26 million people are unemployed in the European Union while governments take aim at spending on treasured universal health care and public schools. Spain, Portugal and Greece have all slashed spending on pensions, public sector wages, hospitals and schools. But frustration has mounted as the cuts aggravate the downturn. In Spain, most of the savings have been gobbled up to meet higher interest payments on the national debt, swollen by the cost of rescuing banks after a real estate bubble burst." (Workers in Europe synchronise anti-austerity strikes. Nov 15, 2012. http://bit.ly/TKyMIZ).

With millions of workers thronging the streets across Europe in protest against spending cuts which has aggravated recession and led to mass unemployment, the frustration is growing. Whether it is the US, Europe or India, the average citizen is angry at the policies that is cutting into social security funding making it more difficult for them at times of an economic recession. But is this a sacrifice that the poor have to entail? How long can the ordinary people be made to suffer while the rich sit pretty over tons of hoarded cash? How long can the economic system allow concentration of wealth into the hands of a few while the world struggles for a decent livelihood?

Knowing that John Maynard Keynes had said: "The boom, not the slump, is the right time for austerity", I turned to Paul Krugman to see whether he prescribes any other solution. Here he goes: 

"Back in 2010, self-styled hawks -- better described as deficit scolds -- took over much of our political discourse. At a time of mass unemployment and record low-borrowing costs, a time when economic theory said we needed more, not less, deficit spending, the scolds convinced most of our political class that deficits rather than jobs should be our top economic priority. And now that election is over, they are trying to pick up where they left. (Deficit hawks and Hypocrites. New York Times. http://nyti.ms/TAy0Mr) 

They should be told to go away."(emphasis mine)

Reading Paul Krugman, and seeing the mass protests around the world, it is quite clear that a few corporates are holding the economy to ransom. Look at the Indian Prime Minister Manmohan Singh. To overcome the difficult prevailing economic situation, he is asking the cash-rich 25 public sector undertakings to invest Rs 2.5 lakh crore surplus they hold 'to reignite the economy'. But no such appeal is made to the private sector companies which are sitting over massive hoarded cash estimated to be more than 9-lakh crore or $ 166 billion. Is he afraid of annoying the corporates? Yes, he is. And so is President Obama, unless of course he walks the talks.

It seems unlikely that governments across the world are going to make any concerted effort to force the Big Business to cough out the cash they are sitting on. This is because as Paul Krugman says we have allowed the deficit hawks to hijack the economic agenda. It is because we keep quiet that the hawks take over. The fault is as much ours as theirs. #

Also see: Are Corporation holding the Global Economy for Ransom? Nov 17, 2012, Znet.
http://bit.ly/UMGHVa