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Krugman on Economic Policy Uncertainty

August 11, 2013 in Economics

By David Gordon

In his column “Phony Fear Factor,” published in The New York Times on August 8, 2013, Paul Krugman mocks the view that “economic policy uncertainty” helps to explain the failure of the American economy to recover from the collapse of 2008. Unfortunately, Krugman displays little knowledge of the view he wishes to challenge. He says very little about it. As he sees it, it is the “the Great Whinethe declaration by one leading business figure after another that President Obama was undermining confidence by saying mean things about businesspeople and doing outrageous things like helping the uninsured.” Cutting away the rhetoric, Krugman is saying that the view he wishes to challenge claims that business is unwilling to invest because of a hostile “climate of opinion” in the Administration, as well as policies that business dislikes.

But this is not the uncertainty hypothesis, at least as this is found in the best version of it, the brilliant work of Robert Higgs on “regime uncertainty”. Krugman nowhere refers to Higgs; instead, he cites, if only to dismiss, the paper “Measuring Economic  Policy Uncertainty” by Scott R. Baker, Nicholas Bloom, and Steven J. Davis, economists from Stanford and Chicago.. The uncertainty view, as the word suggests, is that business is reluctant to invest because it isn’t possible to foresee what the government intends to do. The view is not that the government follows policies that business doesn’t like: if these were known, it would be possible for investors to take them into account. The claim, rather, is that investment is lacking because people are in the dark about the government’s intentions.

Krugman, following a paper of 1943 by the Polish Marxist Michal Kalecki, claims that business propagandists appeal to the lack of business confidence in order to deter the government from instituting policies that go against the interests of the wealthy. No doubt they do, but Kalecki’s point does not speak at all to the surely plausible hypothesis that doubt about the government’s intentions may adversely affect investment.

Krugman has another argument against the uncertainty view.  Recovery has been “slow”, he euphemistically says; but this is merely “the normal aftermath of a debt-fueled asset bubble”. Besides, we have failed to spend enough money. The logic of Krugman’s argument is hard to discern. It is hardly a point against the view that regime uncertainty inhibits investment to say that current investment has not …read more


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Between Rock, Sand and a Hard Place

August 11, 2013 in Economics

By Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar

In several areas, Indian rules and regulations make honest business impossible. The only choice is illegal business or no business. This underlies the suspension of Durga Sakthi Nagpal, the IAS officer in Uttar Pradesh who took on the sand mafia and paid a heavy price.

Sand is essential for construction. Sand, gravel and cement are mixed to produce concrete. But an acute sand shortage has been created by licensing and environmental bottlenecks. So, mafia groups are mining river beds illegally across India. It’s easy: one mechanical excavator can extract several truckloads of sand every night.

Sand helps retain monsoon water in river beds, releasing the water gradually in the dry season. Excessive mining endangers this. Central and state governments have detailed environmental rules for extraction, made even tougher by court interventions. Ideally, we should have environmentally safe mining that meets rising construction demand.

Instead we have grossly insufficient legal mining, huge illegal mining, sand scarcity for construction, and big illegal profits split between the mafia and politicians.

A former cabinet minister recently declared that political parties are now funded mainly by the mafia, not by big business. This again is part of the untold Durga Sakthi story.

Politicians used to demand bribes for mining licences. Now, they deliberately hold back leases to make sand scarcer, and more profitable. One news report from Lucknow says that Uttar Pradesh used to allot 2,800-3,000 leases per year for mining sand, gravel and boulders. But in the last year, the number of leases has come down to 1,900. According to one officer, not a single legal mine exists in the districts of Pratapgarh, Jaunpur, Varanasi and Bijnor: old leases have expired but no new ones have been. UP politicians have first created and then exploited a grave sand shortage. Other states are not far behind.

The courts have unwittingly worsened the situation. Acting on NGO petitions, the Supreme Court had laid down detailed guidelines for environmental scrutiny of larger sand tracts, but left the states free to deal with small patches. But after the Durga Sakthi incident, the National Green Tribunal has banned sand mining on even the smallest areas without clearance from the Ministry of Environment and Forests or the State Environment Impact Assessment Authority.

This is well-intentioned, but has immediately worsened the sand scarcity and made illegal mining more profitable. The stock market price of all cement companies has slumped, since a shortage of sand means …read more

Source: OP-EDS