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Economics and liberal philosophy intersect on the question of liberty. The economist might argue that minimum wage laws reduce welfare by banning Pareto dominant transactions between two agents that would make each better off without leaving anyone else for the worse. The philosopher might argue that it is our freedom to work for whichever wage rate we command: surely volunteerism should not be banned?

A similar and more resonant argument emerges in the market for sex: banning it is not just illiberal, but destroys value created in a transaction that makes both solicitor and prostitute the worse off without bettering anyone else, so long as the activity is private and unseen. This is an overwhelmingly popular argument among intellectuals, left and right, but faces severe limits. Indeed, much of the argument falls prey to what we might call the fallacy of marginalism or confusing marginal benefit with average benefit.

I am not arguing that prostitution should be illegal, per se, but want to provide a framework that will be more amenable to modern liberals and libertarians than the moralistic nonsense offered by social conservatives and can hopefully extend that reasoning to more salient topics like minimum wage, immigration control, and other illiberal regulation.

First, let’s state the philosophical argument, or what Kaushik Basu calls the “principle of free contract”

which asserts that when two or more consenting adults agree to a contract or an exchange that has no negative externalities on uninvolved individuals, then government has no reason to intervene and prohibit such a transaction. This principle is the product of two more fundamental ideas: the Pareto principle and consumer sovereignty. The Pareto principle asserts that if a change is such that at least one party is better off and others are no worse off, then that change is desirable. Consumer sovereignty asserts that each (adult) individual is the arbiter of that individual’s own welfare.

(I have not read this particular Basu paper, but enjoy his phrase and definition of free contract from his book Beyond the Invisible Hand – a book I read a long time ago, which inspired my love for economics.)

Therefore, if we aggregate over all such transactions, welfare and social good is maximized if and only if humans are free to contract. For this reason, economists are far less critical of moneylending at obscene – “usurious” – interest rates. But once we consider social norms the principle of free contract (PFC) is on substantially weaker footing.

Let’s use an example of prostitution to see how. Using a story from a TV favorite, The West Wing, imagine a young women paying her law school tuition through weekend prostitution. There is nothing morally repulsive about this scenario by itself, and it is a commendably efficient way to earn good money on a law student’s (presumably) busy schedule. To make the logical structure of the argument a little more transparent, let’s suppose Laurie – the prostitute – was actually using the money not to get through law school, but for LSAT prep to get into law school. This is not structurally different, but more intuitively forceful.

Laurie is now better off and ready to crack any exam and interview thrown at her as a result of elite prep classes affordable only to the few. However, seats at the top law schools are effectively zero sum: Laurie’s acceptance translates almost directly into her colleague’s rejection. This makes the application pool just a little more competitive on the margin. Now imagine a girl who just barely made it into law school without prep classes and, like Laurie, can neither afford to pay for elite classes or work in a normal job to finance resulting loans.

This girl, and everyone like her, will now be rejected because they only just made it. They would each all make it were they to also engage in a low time, high reward activity like prostitution. This argument continues: in the real world only several times because markets are not perfect, but theoretically ad infinitum.

Eventually, everything would be okay if all concerned were morally okay with prostitution. But Laurie is, let’s say, atheist – all of her compatriots that are practicing Catholics, Muslims, or just were morally uncertain about prostitution would be left behind. We know that within a capitalist system that those who do not work hard are left behind, and that is its greatest strength. But the assumption that contracts do not carry externalities is violated when others – to maintain the same standard of living – are compelled to do something that is against their moral code.

This argument can be terribly abused. I can stipulate it is against my moral code to work more than ten hours a week, and hence the government should ban everyone from doing so. That would be dumb, economically and morally, because most people do not hold this view.

But this is a more tenuous argument relative to prostitution. How many parents would say they are okay with their children participating in sex markets – with full and total consent – so that everyone else is better off, as liberal economic theory stipulates. My guess would be very few.

The side effect of free contract is forced homogeneity of the most aggressive principles.

In the sense of a “Protestant work ethic” that can be good, even great, by making once lazy and poor countries rich and prosperous – to summarize the nuances of economic history in five words!

The macroeconomist might say that both marginal and average welfare increase under free contract. Certainly if, between two convenience stores, the one owned by a hardworking immigrant stays open twenty-four hours, and the other closes at eight, competition will buoy per capita GDP, providing an illusion of a richer society. In reality, the microeconomist will reply, total utility – which is the cause of contention – is a tradeoff between work (dollars) and leisure. The higher GDP of the harder working country may not reflect a similarly higher utility if the value of leisure is high.

In fact, working hours are the clearest example of capitalism homogenizing the aggressive behaviors of hard work. This is most evident in the comparison of two similar economic structures – the United States and Europe – where the former is far richer by per capita GDP and works far harder whereas the latter is riddled with required vacations and regulated work hours. The United States being the more capitalist if the two, work ethic diffuses more rapidly from those innately or morally predisposed to such and those compelled into such through competition. But GDP does not account for the value of reading Shakespeare alone or watching NFL with your friends.

We can make this argument within the neoclassical structure as well by reconsidering the definition of “free”. If we no longer assume that the existence of choice implies the void of compulsion, it becomes clear that most contracts may not be free. For example, if I am providing my family a lifestyle commensurate with an income of $50,000 a year, and an immigrant moves and undercuts my prices, I can either choose to work the same hours for less income. But social commitments and a responsibility to family will encourage me to sacrifice leisure instead. Then, we may say, externalities exist to every contract making the idea of aggregated free contract a red herring in the case for liberalism.

Undercutting my personal wage rate is formally the same as working harder: indeed, if I choose to work for $4 instead of $8, hourly, I must spend twice as much time to maintain the same lifestyle.

This line of argument not only challenges the economic assumption that free contract is everywhere and always superior but also redefines the frame of a philosopher’s case for liberty. That is, under social obligations, am I really free to work less in the face of competition?

Ultimately, it is unlikely this argument can – or even should – change the mind of economists for most things. I, myself, am not convinced, but rather outlining what started out as a Devil’s Advocate case against prostitution or drug legality. In any case, for issues of social importance like prostitution, it bears (I think) significantly on the idea of externalities from the economic and social, rather than physical, outcomes of a contract. By definition, these are largely removed from standard economic analysis, but still follow similar principles of welfare and utility maximization.

I have touched, but not discussed, some philosophical pondering for another day. For one, what exactly constitutes “freedom”? This question has compelling implications, particularly so in markets for organs, surrogate mothers, and even plain, old, work.

Jeffrey Dorfman, somehow a professor at the University of Georgia, has the scoop in Forbes India. Normally, it’s not even worth writing about articles that are misleading and profoundly confused. But when it comes from someone of supposed repute making the worst possible argument a rejoinder can be important. I’m writing this post as much for the pro-Austerians as the pro-Keynesians. It would be smart for the anti-stimulus crowd to disavow the worst arguments made to their effect, like this from Dorfman.

First, I ask the Forbes editors, how they used literally the same title for two, entirely different articles:

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(Both are bad; the latter is infinitely superior to the former. And what’s with the asymmetric punctuation?)

Of course, when an article starts with a moral, economic, social, political, and philosophical absolute like “Government spending cannot generate economic growth” we already know a train wreck is en route. No meta-rational person could possibly write something so absolute. (Frequent readers know that I don’t discount supply-side factors at all, and have written about their recent importance contra singly-demand side theories). More refined believers of Say’s Law sometimes criticize Keynesians for misrepresenting the idea as simply as “supply creates its own demand”. (David Glasner, by the way, has some of the best analysis of Say’s Law in a sensible context). But here’s Dorfman claiming the Keynesian caricature:

You cannot buy a product unless somebody has manufactured it and is ready to sell. If supply is unchanged, an increase of demand results in bidding among buyers and higher prices. More demand without more supply does no good. Therefore, economic policy should focus on the supply side, encouraging businesses to invest and create.

Several things here confuse me. I was taught that aggregate nominal demand is the sum of consumption, investment, and government purchases. It would seem to me that “encouraging businesses to invest” would then constitute “aggregate demand”. Was I taught wrong? More likely, “encouraging businesses to invest” – as demand side a phenomenon as that may be – is just code for tax cuts and deregulation. (The former of which, by the way, is stimulus spending!)

More importantly, unless one rejects wage rigidity completely and absolutely “higher prices” are exactly what the economy needs. Then again it is entirely possible the writer believes that “aggregate supply is always an everywhere a vertical phenomenon”.

And then comes the kicker:

The only problem with these arguments is that all the purported facts are misstated. In reality, few countries in Europe have reduced government spending. For those that have, growth is generally better than it is in countries that have continued to expand government spending.

Data on 30 European countries from Eurostat, the official statistics agency of the EU, show that only eight countries cut government spending between 2008 and 2012. Of the eight, only Iceland and Ireland faced significant outside pressure to impose austerity. The others are Bulgaria, Latvia, Lithuania, Hungary, Poland and Romania.

Many countries that have purportedly tried austerity and failed are not on the above list. Greece, Spain, Italy and Portugal increased state spending. Italy is the only one of those four whose hike in government spending (4.1 percent) is below the EU average of 4.9 percent over 2008-2012. Greece (8.3 percent), Spain (13.3 percent) and Portugal (5.8 percent) were more profligate than the average European government.

Aside from the fact that austerity must be measured on potential output – as elusive a statistic as that may be – it’s inane to write that there was no outside pressure for spending cuts. Here’s a nice (graphically, tragic otherwise) diagram from Reuters for Greece:

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“Agreed with the EU, ECB, and IMF”, by the way, should be interpreted as “outside pressure”. A smart “real” indicator for austerity would be public sector disemployment. And that’s been tried across the pond here in the United States, by the way, not to any great avail. (Of course, the titling of this article suggests I do not share the same definition of “try” and its derivatives).

We continue:

Eurostat also contains data on GDP growth rates from 2008 to 2011 (2012 data are not ready for all countries). In terms of GDP growth only two of the eight countries that practised austerity were below average: Iceland and Ireland. Iceland had a meltdown of its banking system, so it is a special case. Ireland had a big real estate bubble that popped, causing a bank crisis and enormous government deficits. Both were among countries with the severest recessions.

This is called making exceptions when your theory fails. Of course, more than eight countries practiced austerity and this makes no sense to begin with since countries that practiced austerity might have stronger fundamentals – like the United Kingdom compared to Greece. And, since the author is from Georgia, I wonder which other country had a “meltdown of its banking system” and “a big real estate bubble that popped” thereby “causing a bank crisis and enormous government deficits”. But this line of argument would suggest Dorfman agrees that random correlations do not suggest causation.

He, surprise, does not:

As further evidence, the correlation between government spending growth and GDP growth is negative (–0.14) for these 30 European countries, meaning they move oppositely—higher government spending growth leads to lower GDP growth. If Keynesians were correct—that government spending increased growth—the correlation would be positive.

I actually wasn’t planning on writing this post until I read this paragraph. This was written by an economics PhD who teaches America’s tuition-paying students. And we’re talking about the University of Georgia, a taxpayer funded, research university. For one, citing a slope without a relevant r squared or a regression without a p value should be illegal. But slightly deeper statistical analysis isn’t even my point. Even if Dorfman doesn’t agree, were he to be making the best possible case against stimulus, would it not be worth at least noting the possibility that countries that engaged in deeper austerity had stronger fundamentals? That countries which couldn’t as rapidly curtail deficits had structural differences that makes said observation entirely useless?

Or, more importantly and subtly, while everyone (actually, read the article and scratch that) knows that “correlation does not imply causation”, few people really, intuitively accept that causation doesn’t imply correlation. I’ve discussed this in some more detail previously, but there is no reason to accept that Keynesians would only be right if “the correlation [was] positive”. By the way, to challenge your priors, check out Australia, which weathered the recession far better than any other country, and its government spending.

But, hey:

The Europe-wide negative correlation between government-spending growth and GDP growth, combined with the fact that three of the four countries with the best GDP growth tried austerity, suggests that austerity has some empirical support in Europe. This brief look at the data is not enough to prove austerity works, but it certainly has not been the widespread failure Keynesians claim.

A “Europe-wide negative correlation”, of course, is filler talk since it makes no sense to regress statistics randomly across a complex system that is the European economy. For example, the United States “tried austerity” and did way better than many European economies. Does this mean sequestration worked? Not really – just that hiking interest rates in the depth of a recession is really dumb. Not to mention the extremely small sample size.

If only economic zombie theories were as small in number as the extent of the data sets used thereof.

I’m sorry. Is Forbes trying to laugh at its Indian audience?

The latter half of the 20th century was a great time for American liberalism. Our big, but more or less market oriented, government – for the first time – used public policy as a means of substantially curbing inequality across the country. The story of postwar America was of the middle-class autoworker living a good life.

There are economic reasons to doubt that we’re reaching a crescendo in the era of increased polarization: skill-biased technological change being key among them. But the more pressing issue is social, political and, unfortunately, broadly unmentioned. Perhaps the ferment in economic structure due to automotive and other technology played an important role in creating the new middle-class.

However, it is indisputable that Roosevelt, Truman, and Eisenhower era policies of very high taxes and public spending played an even more important role. Most Americans today cannot comprehend the extent to which the Federal Government was involved with economic life just two generations ago.

In a democratic society, this implied incredible political will to create progressive institutions. I have little doubt that if we wanted to, policy could cure inequality with a broad enough mandate – like that given to Roosevelt.

But this obscures something important. The Great Recession might have been the worst economic event in American history since the Great Depression. But it wasn’t the Great Depression. Living standards for the median and poor in America might be at their relative minimum since the Great Depression. But not their absolute minimum.

To understand the difference between then and now, citing GDP per capita is just not enough, because the mean blurs tail skews. In 1933, the average income for the bottom 90% was less than $7,000 dollars. In other words the average Chinese (who is very poor, by the way) lives much better today than most Americans did then.

The political will in a democratic society to vote to eat, be clothed, and provide for your children is very strong.

The equivalent figure today is over $30,000. Sure the rich today are unimaginably wealthier – but that doesn’t change the evaporation of fundamental want.

This is to say that we may never again see the political will from the country as a whole necessary to employ policy to curb inequality. This is to say that the Kuznets Curve for inequality in democracies might well be bimodal.

Probably not. A commenter recently got upset with me for saying:

Don’t subsidize long-distance rail (unless it’s Hyperloop). I don’t, unlike many other progressive wonk types, have any passion for really nice, high-speed transport between urban hubs. That’s a lie I personally do, but I depart from liberal ideology that it’s a social benefit. Think about it, the people who most intensely travel the Northeast Corridor – or between San Francisco and Los Angeles – are affluent professionals that take many more flights than the average American, are more likely the fly in environmentally-shitty business class setups, and all around typify the East Coast Elite Liberal stereotype. That it’s treated as some sort of environmentalist’s dream is a joke. (In fact, a 100% tax on business class, 200% tax on first class, and 50% tax on all economy flights after your first two in a year is a great idea).

He (or she) noted:

About rail: the population you observe is a selected sample. With rail, more people are likely to transport themselves; how do you account for this? The answer is far trickier than what you make it out to be.

I think this criticism is very fair. I made a rather blanket generalization from anecdotal evidence and it is possible, even probable, that my sample is itself highly biased. (For example, though I think the government should be helping many people, I personally do not know anyone that should fall into this category). Maybe the Northeast Regional is a lifesaver for much of America’s poor and lower-middle and I’ve misjudged the program completely.

So I decided to do a bit of research. But first, let me state the theoretical reasons why high-speed rail should never be at the top of a liberal’s agenda. By “theoretical” I do not mean abstruse mathematics or Euler Equations, but simple logic. Let me also say this is an important post, personally, because it marks a rather strong shift from my previous prior that we should encourage massive spending on high-speed rail across the country. I have some good things to say about rail, and I’ll get to that in the end, but I’ll first outline the case against.

Sometimes anecdotes can be generalized – especially those of broad economic judgement – and, as it happens, this weekend is a good time for me to write this post. I’m planning a trip from Philadelphia to Princeton tomorrow evening and I have two good options: a local connector via Trenton or Amtrak’s Northeast Regional. The former takes roughly four times as long (two hours to Amtrak’s half), requires a connection, but comes about $50 dollars cheaper.

There’s no reason for me – or most of America – to take the Amtrak. And that’s the problem with the high-speed emphasis of the conversation. Time is money but, for most of us, it isn’t much. Moreover, with smartphones, books, and sufficiently comfortable seats, the extra hour isn’t even time wasted as it once may have been. Of course, for America’s liberal, particularly coastal, elite – it is. Daily readers of the New York Times earn way more than most people, and their fodder, like Tom Friedman, work and play in circles where than hour is worth a lot of money.

This, by itself, doesn’t mean high-speed rail is ineffective. For example, slower speeds aren’t too bad for relatively short distances – say between Philadelphia and Princeton – but become a pain when we’re talking transnational services. Wouldn’t it be nice to get from Brooklyn to the Beltway in thirty?

Unfortunately, the usage of these services are almost exclusively beneficial to the somewhat upper middle class, if not only affluent. Flying JetBlue (as anyone not yet a millionaire should be doing, without whining) is, and in all likelihood will continue to be, a cheaper option. At this point, the high-speed rail activist points out that flying is shitty for the environment.

This is a concern that I sympathize with deeply. In fact, as Christie Aschwanden writes in Slate, the best thing you can do for the environment isn’t to become vegetarian, drive a Prius, or shop at Whole Foods but to stay within a hundred miles of your home and avoid flying to the extent possible.

But I am, and you should be, concerned about an argument to socially guarantee a rail service to clear the conscience of the rather select group that will use it. I would rather institute draconian airline fuel surcharges with annual exemptions. That is, most Americans barely fly, and when they do it’s probably for an important reason. Therefore, tax the first flight at 15%, and all subsequent flights in increasing intervals of 30%. Tax business class at 100% and first at 200%. Or something similarly aggressive.

As Aschwanden points out, telling an educated professional not to go to a conference or important business meeting is difficult. It’s why flying isn’t stigmatized like driving a hummer – it’s too important an action for the would-be stigmatizers. The tax system, in this case, is our friend.

And, by the way, some might say a “carbon tax will fix it all” but this isn’t the case for flying. Because the emissions are at a very sensitive part of the Earth’s atmosphere, the marginally emitted unit can be about four times as bad. More importantly, the worst part of a carbon tax is its regressive nature, and tilting the incidence to the wealthy is a good way to stem the welfare losses.

Ultimately, the data back my story up. The liberal argument for high-speed rail derives, primarily, from perceived environmental benefits, and subsidies for the poor. The environmental benefits can obviously be extracted in a more efficient manner (which the frequent fliers will hate, but so be it). But what of the poor? Well this is from a paper by Nevine Geroggi at the Center for Urban Transportation Research and Ram Pendyala at the Department for Civil and Environmental Engineering at the University of South Florida:

It was found that nearly half of the low income and elderly made no long-distance trips in the 1-year survey period. In addition, it was found that long-distance trips made by these groups were more likely to be undertaken by bus and geared towards social and personal business activities. The paper discusses the implications of these findings in the context of transportation service provision and policy formulation.

Now, half of the low income made no long-distance trips in the sampled year. Contrast that with the average of seven long-distance trips made by the “average” American. Of course, I scare quote “average” because statistically speaking average quantities do not reflect the median American. Since long-distane travel follows a power law relationship, the large handful of affluent (or busy working class) people making weekly trips heavily skews the picture.

Liberals generally talk about high-speed rail as a way of replacing airplane traffic, but the social welfare point of their argument somewhat more evaporates when you realize  air travel is used for business purposes at over twice the rate of all other transportation methods.

You’ll find even more important data here. Usage of intercity rail services is correlated positively with education and income, and very negatively with those who haven’t completed college. In fact, the correlation continues quite steeply not just at the “mildly affluent” income level of $100-150k but well beyond. If the conversation were limited to Amtrak, the divide would likely be even worse.

A subtly of the pro-rail argument is that we as a country should replace airplane traffic with more rail traffic, and use the government to achieve this outcome, rather than just use less airplane traffic to begin with. This wouldn’t bother most of America – which uses the interstate highway system to travel – but it certainly would cost the affluent. The conservative political establishment generally doesn’t seem to give a shit about the environment, so they don’t begin the argument at all. But that’s not much better than using the whole country’s purse for the betterment of a small group of people.

In fact, the liberal argument might be worse in that the fact that so many of us (unfortunately, I may not write “you”) even fly to begin with undermines our environmentalist credo. It’s like a watered down version of the joke where a Hollywood star drives a Prius to his private jet.

Note that while it is true that rail is environmentally healthier than using a car, it would be too expensive – and not socially efficient – to build high speed rail across all of the country. It would only be smart to link major commercial hubs – and this won’t help most people.

The driving assumption of this argument is that what does not help the poor should not be the government’s objective. That’s a dangerous line of thinking. In all likelihood, considering our record low interest rates and need to employ the unemployed, a large-scale project that doesn’t help the poor may not even be a bad idea. But I’m not convinced rail would help even the middle class as much as the affluent in general and select members of the middle or poor. We can expand two-year educational opportunities and make healthful eating options available to the poor; we can expand the EITC and cut payroll taxes. I do not see why we should build a railway given these tradeoffs.

If high-speed rail is such a great idea, it should be privately financed by those interested. My guess is America won’t get its own TGV even if we institute aggressive airplane taxes. And that in and of itself speaks to the meek social utility thereof.

A lot of people are skeptical of the idea that a Ricardian tax program on land and natural resources can finance the kind of government we need. I’ve outlined – in some detail – why this isn’t the case but some prominent voices, like Paul Krugman, disagree:

But [Henry George – late champion of land taxes – has] been out of favor for decades, especially in graduate schools. Economists are trained to ignore him. Paul Krugman came to Berlin in 2008, right when the subprime crisis had started to rumble, and I asked his opinion of Henry George. He squinted and tried to remember the name of the book. “Uh — Progress and Poverty I think is the [main text]?”

“That’s right.”

“Well, look. Believe it or not, urban economics models actually do suggest that Georgist taxation would be the right approach at least to finance city growth. But I would just say: I don’t think you can raise nearly enough money to run a modern welfare state by taxing land. It’s just not a big enough thing.”

The context was health care. “We’re having enough trouble trying to make sure we repeal the Bush tax cuts,” Krugman added, “and trying to shift to a completely different base of taxation is just not going to be on the table.”

When we’re talking about revenue positive tax reform, it’s useful to understand a) from what activity and b) from what individual the marginal tax dollar is generated. In a welfare maximizing system, the answer to (a) would probably be something very bad for the world like carbon and the answer to (b) would be Bill Gates. More generally, we should first tax activities that harm the world – like global warming – before we tax activities that help the world – like working. Similarly, we extracting a marginal dollar from the rich is vastly less welfare inefficient than doing so from the poor.

Most of the time, these guiding principles are in tension with each other. A tax on externality-generating activities – like a levy on gas, carbon, or natural gas – tend to disproportionately hit the poor. Likewise, a tax on the rich usually comes from what we would usually consider “good” – like returns on human or capital investment.

Land is a big exception*. Land – like almost any other store of value – is disproportionately owned by the rich. (Remember, land excludes value added property, so democratic ownership of houses across flyover country doesn’t make as big a difference as you might imagine). And while land isn’t “bad”, per se, because its ultimate supply is perfectly inelastic there is no welfare loss in its taxation (granted, there are no welfare gains either, unless it offsets an even worse tax).

(*Another notable exception might be congestion taxes in cities which fall on the people who take cabs or private cars instead of public transportation. In other words affluent tourists and the local elite).

Some people I’ve talked to don’t grasp the idea that land is inelastic. They tell me that companies will stop “improving” land for more productive use. It’s always surprising how confused people are about the idea of land. By definition land is unimprovedI don’t want to tax people who’ve built nice buildings on land or, for that matter, even deforested dense areas for efficient development (though I’d support anti-deforestation laws for entirely different reasons). That’s why property taxes are dumb.

But I want to disarm some misconceptions. When Paul Krugman says “Land is just not a big enough thing” he’s echoing a broadly held, and to some extent true, belief. In 1980, Paul Samuelson wrote:

Historically, pure land rent has become a declining fraction of GNP and NNP.

Ironically, 1980 was an important, if gradual, turning point:

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These figures – land rent share of income – are, for reasons I’ll get to later, quite a bit underestimated. But for now I’m more interested in the rate of change. After secular decline during the postwar expansion, land rents have increased not just in value, but in proportion, to the incomes of the wealthiest.

The biggest reason for this is, I think, the steep rise in inequality over the same time period. Conceptually, this is a pretty sensible argument. As mass affluence increases, as it did between 1940 and 1970, demand for consumer luxuries – like fridges, air conditioners, and garments – grows quickly. But as incomes of the median workers stagnate, while those of the rich grow precipitously you see a shift in demand to zero sum goods – or land.

Think about it, beachfront property, Manhattan penthouses overlooking Central Park, and second homes in Aspen have all increased rapidly in value in the Inequality Era. That’s because as the number of people who can afford luxury products has grown substantially, so too has the dollars chasing said land.

This is a pretty informative thought experiment. Land plays a big role in all of the products in the set of goods exclusively afforded to the affluent, and especially rich. While second homes and penthouses are a great example at the primary level, think about Ski Resort owners. If you want to Ski properly – that is on the Alps or in Colorado – those fake, manmade hills won’t cut it. You need a real mountain. The former is capital, and the latter is land. And boy do rich people love their Winter Chalets on the Swiss Alps.

Once you realize that land value is the most pristine of luxury goods – fake beaches are below the rich – the potential of land taxes becomes immediately apparent.

Now, you might be wondering after all this, if only 3-4% of the richest 1%’s income is land, there’s no way a total reform can include land values only. This is correct insofar as its ambiguity. The moral and logical extension of a land value tax would include similar levies on minerals, Internet domain names from common language words, and imputed rents from “middle America”. More importantly, there’s reason to believe this figure is understated, as discussed here. The last paragraph here is conspiratorial nonsense, but Fred Foldavary gives some pretty good reasons to believe that land rents are underestimated.

Part of the problem is because the United States pursued a program of broad home ownership – along with the fact that many affluent people own only one, expensive home without renting a second one out – so-called “imputed rents” become an important part of the picture. To calculate GDP, the government uses all kinds of tricks to estimate what you would have paid to live in your house had you not owned it. Even an average of $700 a month for everyone taxed at 50% yields a very significant sum. (Especially noting that the rich are easily paying the equivalent of $5,000 a month).

Granted, going back to the tradeoff between objectives of an optimal tax system, this would also “hit” many middle-class Americans.

There’s another critical point about taxing minerals. Many think about this from the point of profit from production without considering the consumer surplus from cheap consumption. That is, because most of us – especially the rich – would (if we had to) pay way, way, way more for a gallon of gas than we do, we’re rentiers each time we pay at the pump less than we would have. Because otherwise it would have been the company’s profit which is clearly rent.

Now, it’s important to note that a disproportionate amount of fossil fuel consumption should be attributed to the rich (just look at how much they fly, and in fancy business class configurations too!) That means their rent extraction from cheap fuel is orders of magnitude worse than the average American’s.

Note this argument has nothing to do with the environmentally-efficient price of carbon: we only note that minerals are a scarce, primary resource whose rents should be treated as land, and correct for the fact that most people would pay more for the average unit than we do. This is a very non-trivial point. Once you stipulate that not only the taxes, but consumer surplus, from minerals can be taxed under Ricardian principles, there is a gold mine of untapped tax revenue. Just look at the sales of America’s oil and gas sector. Along with land, and maybe a small levy on income earned above $1M we can finance a big government (25% G/GDP) with sensible tax policies.

Here we tease an important tension. A minerals tax (in reality what should be a carbon tax, but I’ll refrain from using that language here to divorce this conversation from environmental concerns) would disproportionately hurt the poor, as it is regressive, even if the rich disproportionately abuse the cheap fuel. This is a classic case where p(a|b) is very different from p(b|a). The best way to deal with this is to still heavily tax minerals – coal, oil, natural gas, etc. – but to provide a very progressive government spending system.

I want to summarize the most important part of this post as treating consumption of minerals as crucial a component of rents as profiting from the sale thereof. This adds another inefficiency beyond the environmental cost to even just innocently buying a gallon of gas. If we all used gas equally this wouldn’t be a problem, but we don’t, so our collective benefit should be socialized.

This is a particularly shocking problem if you think about how much the rich would actually pay for a gallon of gas (or unit of coal and natural gas burned if you’re of the Elon Musk class). For someone earning $500,000 a year or more, $20 a gallon would hardly seem like too high a reservation price. (After all, people in Europe earning well below that figure pay over half that). And what of air transport? This can’t be replaced with efficient, clean travel anytime soon.

The conversation on rents from land and minerals in this time of inequality has to begin. We might not be able to achieve all of our progressive goals with only a land value tax, but once we implement taxes on that principle the revenue is not trivial. Paul Krugman is unfortunately correct that this has all but disappeared from the Neoclassical, mainstream graduate schools. But I would expect the average consumer microeconomist to understand the rent from simple consumption better than anyone else. 

People like Paul Krugman can make this debate real in a matter of minutes. There is nothing utopian, idealistic, or useless about doing what Hal Varian’s Intermediate Microeconomics would tell you to do.

P.S. The name for this post comes, of course, from David Ricardo who first (or at least most prominently) advanced this argument:

It was from this difference in costs [between productive and unproductive land] that rent springs. For if the demand is high enough to warrant tilling the soil on the less productive farm, it will certainly be profitable to raise grain on the more productive farm. The greater the difference, the greater the rent. 

P.P.S. I plan to write some more on the evolution of economic thought regarding land. Some of the crispest writing on land rents comes from the classical greats like Ricardo or Henry George years after that. In any case, the modern arguments for land taxes usually come from the extremely utopian libertarian wing which makes a great argument but does alienate support from the “mainstream”. A lot of what Ricardo wrote doesn’t apply today, and mechanism of rent-seeking certainly manifests itself in subtler ways than before. But it is time to bring land and mineral taxes back into the heart of mainstream progressive discussion: something even the wonkiest seem hesitant to do.

I write mostly single-issue posts. But since someone asked me, it might be worth summarizing what I think would be a “dream” legislation reforming everything from taxes and immigration to monetary policy and farm bills. This is by no means thorough or exhaustive – but just a sampler of what I think would put the United States well on the cutting edge of policy (an honor currently held by Scandinavian countries). I’ll also link to subjects about which I’ve written somewhat extensively before.

  1. Immigration permit markets. The Federal Government would implement a monthly quota on the number of immigrants it wants and auction those on the open market. This would ensure that the n immigrants that are selected are the best n in the pool of all immigrants. Individuals, firms, cities, and states may all participate in the auction.
  2. Eliminate corporate taxes. That doesn’t mean “cut taxes”. Tax revenue should be higher, but corporate taxation is a dumb way to get there. It’s not that I have a problem with “double taxation” per se, but it adds many layers of unnecessary complexity. 
  3. Get rid of the minimum wage for new labor market entrants. Within a immigrant permit market framework, the minimum wage unfairly hurts the young as well as poor and unskilled immigrants. This is a humanitarian issue. Labor market regulation should be deeply relaxed for five years after the first day of employment as a major in the United States.
  4. Replace it with a negative tax for the poor. I support expansion of the earned income tax credit, but it’s deceptive to speak of it as a substitute for the minimum wage. A good portion of the credit actually goes to employer, implying that it is complimentary with a minimum wage.
  5. Replace all levies on labor and capital income with taxes on land, carbon, and minerals. This is so self-evidently important that it’s hard to defend in a paragraph. There’s a good argument to be made that so-called “Georgist” taxes can’t fund our government. Fine – but at least we should “use it all up”, if you will, before we tax productive activities like working and investment. That’s doubly-true for carbon.
  6. Finance any shortfall thereof in revenue with a 10% tax on all income earned over 1 million dollars. Or 15%. Or 5 million. It doesn’t really matter. Most people hate income taxes not because they pay too much, but because they pay at all. The documentation is annoying, and April 15 is an understandably crappy day. The simple fix is to make sure that only a remarkably small number of people even pay. 
  7. Offset positional externalities by taxing luxuries. I’m normally not a fan of government bureaucracy and regulation, but perhaps the Federal Government should create a “Luxury Monitoring Board” that studies and publishes a yearly report of items whose value are mostly positional (that is to say zero sum). Institute a tax on said items. This has big public choice problems, but a lot less than other programs: plus it’s politically easier than raising sales taxes or something regressive like that.
  8. Stop subsidizing roads. We subsidize roads in all kinds of ways. Public lots underprice parking, roads are a shared good, etc. People who drive twice as much should pay twice as much. Therefore the government should extract itself from provision of urban road services and fund everything via toll.
  9. Don’t subsidize long-distance rail (unless it’s Hyperloop). I don’t, unlike many other progressive wonk types, have any passion for really nice, high-speed transport between urban hubs. That’s a lie I personally do, but I depart from liberal ideology that it’s a social benefit. Think about it, the people who most intensely travel the Northeast Corridor – or between San Francisco and Los Angeles – are affluent professionals that take many more flights than the average American, are more likely the fly in environmentally-shitty business class setups, and all around typify the East Coast Elite Liberal stereotype. That it’s treated as some sort of environmentalist’s dream is a joke. (In fact, a 100% tax on business class, 200% tax on first class, and 50% tax on all economy flights after your first two in a year is a great idea).
  10. Subsidize cheap and efficient local transport. America is a driver’s country, and we shouldn’t change that as there would be large, path-dependent externalities in doing so. Electric vehicles are still well out of reach for the average guy. Forget Tesla, even the Chevy Volt doesn’t come cheap. We should vastly increase tax credits for local efficiency. Oh, and, make space for buses.
  11. Have the central bank target nominal income. Here.
  12. Move to a much deeper rules-based fiscal policy. That means focusing on a lot more unemployment insurance and reemployment credits. That removes the political element of discretionary stimulus and molds expansionary expectations thereby dampening the initial effect of a demand shock.
  13. Get rid of the farm bill. Here.
  14. Get rid of the Department of Education and allocate every child into school by a random lottery. Public education is a bit (but not really) like the individual mandate. It works well if everyone uses it without segregation. There are big externalities in moving a rich kid from his bubble of a rich school to a poorer school because support from his parents will make everyone in the poorer school better of. For free! If you think about “parental positive influence” as a scarce good concentrated in the top 20% of the population, there is huge, huge inefficiency in having many rich kids go to the same school. In this case, redundancy is bad.
  15. End the war on drugs. I favor an all-out approach to this, but outline a somewhat original and more moderate, game-theoretic plan here. I don’t want my tax money to be wasted on a guy that smoked pot privately next door. There are not words to describe this illiberty and cruelty. It costs almost $100,000 to imprison someone, and the discounted present value of opportunity costs far exceeds that.
  16. Single payer medicine. Doctors are severely overpaid. The only way to break the healthcare-industrial complex is to neuter it with monopsony. 
  17. In similar vein, get rid of all occupational licensing. Because it’s dumb.
  18. Vastly increase spending in community colleges. Technical, applied education is where America’s middle-class future might be. Unfortunately, we can’t increase spending until we stop cutting it. Community college should be a public good.

Okay, so there it is. A (clearly progressive) wonk’s dream. This list also shows why I’ve lost a lot of faith in the Democratic Party. Can you identify even one of the above bullet-points that a single Democrat has supported? Maybe single-payer healthcare, but that’s all I can see. Even the talk on the drug war – which is the most important bullet on the list – is basically an argument about lowering mandatory minimums rather than getting rid of them. Like I’ve said before, democrats have poisoned themselves into believing compromise is the arithmetic mean of two dipshit ideas. This sentiment holds for almost every item on this list.

This looks like a liberal list, but there’s quite a bit of stuff on there that should appeal to a libertarian. In any case, nothing here is raw and radical – but logical and moderate. America is still probably the most innovative and efficient country in the world – even without the best policies and wonkish endeavors – but we can be a lot better with straightforward changes to the status quo.

Really. As I was moving into college we, unfortunately, had to keep a car in Philadelphia for quite a few days. And the whole ordeal reminded me how much I hate private parking lots. This is just another Georgist rant, so if you’re not into land inequality and inefficiency feel free to ignore it.

First, profits owners earn from parking lots is the purest form of rent in the modern world – because it’s all land. At least some of the money you pay to lease an apartment is value added by the owner – the building, insurance, and basic upkeep come to mind. But the parking lot owner does absolutely nothing. Of course, most modern lots are nicely paved, but most people don’t care about that. Roadside lots are paved for cars to drive on – not to park on – and 99% of us wouldn’t pay a cent more for a lot that’s paved as opposed to one of grass, gravel, or dirt. Therefore the entirely arbitrary initial distribution of land determines all profit earned by a few lucky landowners that do absolutely nothing to take your money.

But private parking is also a socially inefficient good, as it is a de facto tax on public transportation. Their existence lowers the opportunity cost of driving, which itself requires more land. Path dependency and positive feedback between private driving and parking creates a deeply inefficient city promoting rents not only landowners, but wealthy citizens.

Since roads are usually a public good, it’s difficult to tease out who earns the rent. But we know that rents are earned any and all times the initially primary land isn’t distributed equitably, so the benefit from public roads accrues almost exclusively to those who drive the most.

Who drives in New York City? Well most people take the subway. But any firm on Wall Street provides its entry level analysts a driving service – or at least pays for cab fare. And surely you’ve seen at least one or two black limos. I’m going on a limb and guessing that like me, most of you and America can’t afford one of those. For this reason, public parking for which the price is undervalued can be just as bad: it disproportionately benefits those who already own cars.

And cabs are used by more affluent residents who for god knows what reason won’t take the subway, or tourists. Tourists are almost always affluent Americans or wealthy foreigners. Why on Earth do we want to subsidize their experience on American land?

All of this is to say, that even if we need parking lots, the government should nationalize them all, and progressively distribute all profits. Sure richer people will drive more, but that should be offset by extremely progressive distribution of profits. All urban streets should be converted into public toll roads – preferably with a monthly pass that is proportional with the exponential of car size.

In the long run, demand for paved roads and parking will fall which will allow efficient entrepreneurs to build office space and public entertainment. Something actually good for society.

This also frees space for buses, which are a sadly under appreciated form of public transportation.

It’s become vogue for us liberals to hate on Goldman Sachs. But at least these guys, ostensibly, add value and provide crucial services. That idiot who owns a parking garage does not. Rents exist: socialize them.

Edit: I just realized there’s a similar argument from earlier today arguing for public schools as a “moral adjustment”. I’ll have to think more about this, but it seems pretty unreasonable expecting parents to send their kids to the vastly worse public school without expecting that all other parents of their class will do the same. Law is the only way.

A lot of people on Twitter today are arguing about the merits of government policy that advances public education by taxing private schools. That’s a bad idea. We shouldn’t tax private secondary institutions – we should get rid of them.

I’ve discussed this idea before, but it’s worth considering in terms of externalities on the margin. Normal discussions of elite educational privilege juxtapose the yearly expenditure per pupil at a public school in Camden against Andover, or something.

This is not the best metric. While many failures at the local level may be traced to a lack of funding, institutional arrangements are far more important. By this I mean, kids of smart, working professionals ensure a good education for their students not only with a higher tax outlay, but by constantly demanding teachers to live up to their potential.

In fact, you’ll find teachers in affluent suburbia complain about the over involvement of affluent parents in their teaching process. I can remember both my parents dealing with pretty big problems at my pretty good public middle school and very good private (international) high school. (My parents are actually huge believers in public education. Except even they’re not nuts enough to send me to such in India).

That teachers are constantly held to a higher standard institutionally forces the administration (which was, granted, decidedly shitty at my high school) to bring in better teachers and provide a better curriculum.

Rich parents will stop at nothing to make their kids’ education world class. Now let’s say the government passed a law forcing me – and ten similar friends – to go to the crappy high school across the river. They also passed a law preventing us from using private educational services to bypass the public system.

Even if the school in question received no more public funding, our parents would do their best to make sure the education was of a higher quality. Not immediately, but eventually: through more conversation with the administration and perhaps even private charity. The presence of rich kids in a poor class room pays huge dividends to the disadvantaged kids in the classroom.

At a microscopic level, this experiment is almost bound to fail by bureaucratic paralysis. But, more broadly, if a new law required that all kids may be randomly assigned to any public school in the area, and private schools were banned, affluent parents would ensure all schools that their kid might end up at were the best possible. They would vote their own property tax rate up, and finance huge fundraisers. They would have no other choice, lest their dear little son end up at a bad school.

There is huge public gain for every marginal transfer to this effect. Banning private schools would be necessary to prevent the rich from opting out of the system altogether. It’s also unlikely this would hurt rich kids too much, since affluent parents, we might say, are completely price-inelastic when it comes to the quality of their kids education. It just means less money for a ski vacation. Boo hoo. (Actually, if you subscribe to the public good externality hypothesis that I do, even this would be pretty small. But rich white and asian parents also experience disutility when their kids interact with lots of blacks wearing hoodies, so who knows about the welfare loss there…)

This would eliminate any need for broader governmental subsidies, and might even make obsolete the Department of Education. This is illiberty, but so is taxation, and so is the minimum wage. I’m not appealing to the libertarians who want an end to all government but the liberals who think some forms of illiberty are better than others. This is no different.

The best way to help society is to align the private incentives of the rich with the public goals of the poor.

This might be the most positive and hopeful post about the Republican Party I ever write. Paul Krugman’s pet insult – “Very Serious Person” – is more important to understanding America’s policy failures than most people realize, and goes well beyond economic illiteracy. More than anything, without understanding VSPness (henceforth “vispy”) – one can never comprehend how the Democratic Party screwed up so much in the past five years.

When I say “screwed up”, I’m not talking about Larry Summers or Bob Rubin, easily the most visible anathema of the Party’s left wing. The Democrats are vertically infected with vispiness in a way the Republican party is not. While many often talk about the GOP as a more “hierarchal” party (considering the nature of their primary selection process) – Republicans are freer and more iconoclastic.

What the neoliberal wing of Rubin is to Democrats, the neoconservative wing of Wolfowitz is to Republicans. But the establishment neocons are dead. Or will be dead soon (have you seen Dick Cheney or John McCain recently?) They inspire no one within the Republican ranks and reek of responsibility for America’s most embarrassing decade.

Let me be clear, I’m not (necessarily) a radical left-wing critic of the Democrat party. I want Summers at the Fed and I think Rubin has suffered far more blame than he deserves. But I worry about what it takes to get to the top. Not for the clearly brilliant young hotshots like Summers (one of Harvard’s youngest tenured faculty) but for the dumber tools in the shed. The guys who went to all the top schools, did all the right things, are smarter than the average guy, but are still kind of dumb. These are the people that have no original ideas of their own, but move the party forward in their own minuscule way. They are the people reporting to the guy reporting to the guy (reporting to the guy) reporting to Tim Geithner. Maybe they held a policy job at a think tank or made it through lower positions at Goldman. Or something.

The only way for this bland hero to advance in the Democratic Party, is to tow the Very Serious Party line. This will never bring them to the top, but it will secure their position as a kinda-sorta-maybe top official within the Democratic Party. There is no room for iconoclastic ideas. Not if you want a safe path to the top. You can’t ever become an iconoclastic insider.

Ron Wyden is a great example (except he’s by no means dumb). He is hugely influential, if only by forcing the Party a tiny-weeny bit to the left, but will never ever play a role at the top echelons of the Democratic Party. Wyden’s influence starts and ends with his status as an elected representative of the State of Oregon. Elizabeth Warren: ditto. They influence ideas, and perhaps even inspire the left-leaning youngsters in the party, but will never emerge as serious players in the Executive Branch.

Republicans are nothing like that. There is no party line to tow. Sure they have profoundly idiotic ideas and their constituents have a donkey’s understanding of economics. (Not that Democrats are that much better). But the kicker is the only way to become a Republican champion is iconoclastic flair. Rand Paul, Ted Cruz, and even Sarah Palin are hardly “establishment” in the sense of representing prestigious ideas. Not good ideas, prestigious ideas. That is the definition of establishment.

John McCain was never the “maverick”. The Tea Party and Sarah Palin are. The Republican party demands a level of fresh thinking absent from the upper-middle ranking Democrats. A great example is the budget passed by the Senate Democrats (boring: a laughing matter, really) and the imaginatively forceful one passed by the House Progressives, which is comparable in magnitude to the Ryan Budget. The only difference is the House Progressives are a joke to Whig Democrats. The Ryan Budget is taken seriously among the Republicans.

A lot of people – liberals, wonks, “reformist” conservatives, whatever – treat the Ryan kind of nonsense as just a radical idea that has no hope. That is true, but only one side of the coin. On the other is proof that Republicans can pursue fresh and different ideas: ranging all the way from Chris Christie’s loud personality to Paul Ryan’s nutty-nutty budget.

That’s not to say any of the ideas are good, or that we’d be better off with a Ryan Budget than the not-here-not-there-blah Senate Budget (we wouldn’t). However, the Seriousness that plagues the Democrats has handcuffed them from embracing a single idea that the wonkish left deems to be smart. Land taxes. Single-payer healthcare (do you even hear them talk about it). Immigration permit markets. Oil nationalization. ENDING THE DRUG WAR. (Oh, no, let’s just wait seven years and when our approval ratings fall we should make some funny noises about those mandated minimums. Is there any reason the joker of a half-man that is Eric Holder still has a job).

Rather, the biggest debate of the day is whether a handful of people pay 35% or 39%. As if that matters. The Democrats are engaged in a hopeless match of maintaining the ’90s status-quo (which, granted, was quite good) not of policy, but of intellectual climate. At least the Republicans are redefining the debate.

My argument is hardly a call for more leftism in the party. I was hopeful about Elizabeth Warren but she’s been a real disappointment on monetary policy, which she clearly misunderstands. I want more rightism and leftism. The Democrats have poisoned themselves into believing compromise is the arithmetic mean of two dipshit ideas.

Paul Krugman, to my knowledge, has not said any of this, but has insinuated its implications in a way few other commenters acknowledge. His qualms go – almost 25 years after he won the John Bates Clark award – well beyond the economic. They are cultural and political.

I have never been inside the back rooms of Democratic policy action. But I can only imagine a few ex-think tank dudes sucking up to whatever they think Obama or Sperling or Geithner or Summers wants to hear.

In Rand Paul or Ted Cruz I see silliness. Mutated, confused, idiotic silliness. And that the Republican Party is tolerant to such makes me fearful for my own.

The interesting story of the day is definitely a rapidly “collapsing” Rupee haunted by abnormally high volatility over the past month. I scare quote “collapse” because it’s a term that reflects the Western bias of this conversation. If you’re an American who has invested in emerging market funds hoping for real gains intended for domestic consumption that beat an index well, then, you’ve been screwed. As far as India is concerned the depreciation is  of less concern. Still, Raghuram Rajan has his job cut for him, and I’ve discussed the Indian Rupee in this context before. However, since Paul Krugman blegs to learn what he is missing, I’ll offer a few things that worry me at the moment.

Primarily, like any other developing country with rentier bureaucrats, fuel subsidies are important to India twofold. First as a stimulant for middle class growth that demands transportation and electricity (generators are big); second as a key ingredient to important fertilizers without which the Indian farming model would fail.

Fuel subsidies pose an interesting problem for a country that will meet 90% of its oil needs through imports. (I mistakenly noted that 90% of oil is currently imported. That said, the greater the difference between the current figure and the future one, the worse one unit of depreciation will be). Basically all growth in India’s most important market will be financed from imports henceforth. On the one hand, the decisive role government plays in the energy market almost guarantees that deficits will face an upward pressure, in a time when yields are already rising. The sensible solution would unfortunately involve curtailing the provision of a good necessary for political success.

More importantly, as energy becomes the dominant theme in Indian trade – as it undoubtedly will – India looses the primary benefit of depreciation: exports. When trade structure is such that the cost effect (price of imports) of depreciation trumps the quantity effect (quantity of imports) the beneficial nature of depreciation is removed entirely. Known as the Marshall-Lerner condition, a country technically faces this dilemma when the summed price elasticity of imports and exports falls below one.

Usually, since goods tend to be price inelastic in the short-run, devaluations are not always immediately successful but work over time. Not so for dollar-priced oil. As the value of oil is already buoyed by demand from emerging markets, each point of depreciation for the Rupee is that much worse for its balance and budget. Using data from the International Financial Statistics and Direction of Trade Statistics from the IMF, Yu Hsing estimates that India may not significantly meet the Marshall-Lerner condition. Since the paper might be gated for some of you, I’ll copy the relevant result:

As the US real income declines due to the global financial crisis, the trade balance for Japan, Korea, Malaysia, Pakistan, Singapore, or Thailand will deteriorate whereas the trade balance for Hong Kong or India may or may not deteriorate depending upon whether the relative CPI or PPI is used in deriving the real exchange rate.

India – to my surprise – weathered a depreciation better than some of the other countries studied, but a statistically significant success was predicated on the deflator of choice to determine real interest rates.

While I am not confident that India fails to meet the condition, rising oil prices and domestic demand guarantees the cost and quantity effects may be a little too close for comfort.

That, of course, only considers the total trade balance. As mentioned, government is unlikely to weather the necessary inflation well, especially if Raghuram Rajan decreases liquidity reserve ratios (as he has wanted to do for a while) which would light an upward pressure on already rising yields. The feedback loops formed from a rising deficit, stalling growth, and decreased demand for Rupee bonds will result in unfortunately high interest payments.

A tangential point concerns rentiers like Reliance – owner of the world’s largest refinery – which benefit from rapidly rising prices in an inelastic-demand environment. Its influence in government, along with political concerns will make handling these ridiculously useless subsidies hell for any Democratic government predicated on shaky coalitions.

India has a lot going for it. A falling Rupee hardly highlights any structural problem insofar as its own domestic economy is concerned (but brings to bear important questions about international monetary systems, a discussion for another day). I am largely with Paul Krugman that this is nothing to fret about – we are still talking about a country where people cry about 5% growth – but am only cautiously optimistic regarding the political ramifications from such rapid depreciation. Krugman is right in principle, and sometimes that is not enough.