Vivek Kaul
The iconic British band Pink Floyd once sang a song called Pigs(three different ones). The song written by Roger Waters was a part of the band’s 1977 album Animals.
A part of the second paragraph of the song goes like this:
You f****d up old hag, ha ha charade you are.
You radiate cold shafts of broken glass.
You’re nearly a good laugh,
Almost worth a quick grin…
These lines ‘supposedly’ take pot-shots at Margaret Thatcher, who was then the Leader of Opposition in Great Britain. Two years later she would take over as Prime Minister and become the longest serving British prime minister of the twentieth centenary.
But the protests against her would never really die down as she went around dismantling the welfare state that Great Britain had evolved into. In the process she caused a lot of pain to the British citizens. Waters and Pink Floyd would in their 1983 album The Final Cut, take more direct pot-shots at her and sing “Oh Maggie, Maggie what have we done?”.
When Thatcher took over as the British prime minister in 1979, Great Britain was plagued with high inflation. Businesses were not doing well as unions had grown to be very strong and workers went on strikes regularly. The government itself had bloated to the extent that it determined compensation for a third of the nation’s workforce.
In the aftermath of the Second World War, British politicians had embarked on industrial nationalisation and also introduced a welfare state. As The Economist points out “To a generation of politicians scarred by the mass unemployment of the 1930s, full employment became the overriding object of political life…But to keep employment “full”, successive governments, Labour and Conservative, had to intervene ever more minutely in the economy, from setting wages to dictating prices.” When the government tries to do too many things, it inevitably ends up making a mess. And that’s what happened in Britain as well.
Thatcher went around breaking down the structure of the welfare state that had emerged. As The Economist points out “Government spending was curbed to control the money supply…Industrial subsidies were cut, sending many firms to the wall.”
This went totally against the prevailing conventional wisdom. As the Financial Times points out “Against all conventional wisdom, she took an axe to public spending. At one celebrated meeting she even demanded an extra £1bn cut in spite of warnings from those present that the country would fall apart.”
Other than cutting down on government spending she also went around limiting the role of the government in the society as an employer as well as a decision maker. “Mrs Thatcher set about reforming the inner workings of the welfare state, attempting to introduce competition among health and education “providers” and to hand day-to-day decision-making to schools, hospitals and family doctors (thereby side-lining hated local-government bureaucrats),” writes The Economist.
She also started selling shares in government companies and made it an important source of revenue for the government. “In 1980-81 more than £400m was raised from selling shares in companies such as Ferranti and Cable and Wireless. Later came North Sea oil (Britoil) and British Ports, and from late 1984 the major sales of British Telecom, British Gas and British Airways, culminating at the end of the decade in water and electricity. By this time these sales were raising more than £5bn a year,” The Guardian writes.
She also purposefully went around breaking the big unions and told the world that Britain was a great place to invest in.
But these steps had a few negative repercussions initially. As industrial subsidies were cut nearly 10,000 businesses went bankrupt and by 1981 more than 3 million Britishers were unemployed. Interest rates rose to a record 22%. The government spending cuts created further trouble for the economy.
Yet things started to improve and by 1983, inflation had fallen to under 4% from a record 22%. By 1985, for the first time since the 1960s, the British government would not run a fiscal deficit. With all these steps Margaret Thatcher was able to revive a moribund British economy, and set it back on track again. She would later say “I came to office with one deliberate intent…To change Britain from a dependent to a self-reliant society, from a give-it-to-me to a do-it-yourself nation.”
Here is something that every Indian politician can learn something from. India right now is facing problems remarkably similar to what Great Britain did when Thatcher took over as prime minister (though Britain was a developed country then and India is not).
Inflation is at more than 10%. Business confidence is low. The various unions work in the interest of the workers employed in the organised sector (like they are expected to) and this has hurt a much larger number of those working in the unorganised sector. The much touted Panchayati Raj hasn’t worked. As Gurucharan Das writes in India Grows at Night “Most states sensing a loss of power, have resisted giving financial independence to panchyats and municipalities.”
The UPA led Congress government has turned India into a welfare state by giving out subsidies. The total government expenditure for the year 2013-2014 (the period between April 1, 2013 and March 31, 2014) is projected to be at Rs 16,65,297 crore. This has increased by 134% since 2007-2008 (the period between April 1, 2007 and March 31, 2008) when it stood at Rs 7,12,671 crore.
The government is not earning enough to meet this increased expenditure. In the process its fiscal deficit, or the difference between what a government earns and what it spends, is expected to go up by around 327% to Rs 5,42,499 crore in 2013-2014 from 2007-2008.
This has meant that the government has had to borrow more and more to make up for the difference between what it earns and what it spends. Increased borrowing by the government has led to higher interest rates, as it leaves a lesser amount of money for banks and other financial institutions to borrow from. Increased government spending is in turn also responsible for high inflation and even higher food inflation. (For a more detailed argument read here).
The solutions to these problems are similar to what Margaret Thatcher did in Great Britain. One way of lesser government as well as bringing down the fiscal deficit is selling shares in public sector units. While efforts have been made on this front, the process remains remarkably slow. And on occasions the public interest in buying shares of these companies has been so low that the government has forced the Life Insurance Corporation of India to buy a bulk of these shares being sold. The government needs to be more active on this front.
Government spending needs to be cut as well and if not cut, at least controlled. The subsidies being doled out under programmes like NREGA are turning India into a give-it-to-me dependant nation. They have also fuelled high inflation. As Das writes “We need to be humbler in our ambition and our ability to re-engineer society…If the state could only enable access to good schools and health care, equity would follow.”
The government has tried to improve the education scenario by bringing in The Right to Education Act. One part of the act states that there will be no examination. This has increased the complacency among teachers and led to the learning process becoming even worse.
As Arvind Panagaria wrote in a recent edit in The Times of India “The latest Annual Status of Education Report 2012 (ASER 2012), published by NGO Pratham, documents an all-around sharp decline in student achievements from levels that were already low. In just two years between 2010 and 2012, percentage of fifth graders in public schools who can read second grade-level text has declined from 50.7% to 41.7%…Percentage of fifth graders who could do a simple two-digit subtraction with borrowing has fallen from 70.9% to 53.5% in two years.”
Why is this the case? As economist Abhijit Banerjee put it when he spoke at a literary festival in Mumbai in November 2012 “ Under the Right to Education every year you are supposed to cover the syllabus…It doesn’t matter whether the children understand anything. Think of all the class IV children who cant read. They are learning social studies and all kinds of other wonderful things except they can’t read…They are sitting in a class watching some movie in some foreign language without subtitles.”
And the solution as Banerjee pointed out is very simple. “We did one experiment in Bihar which was with the government school teachers. The teachers were asked that instead of teaching like they usually do, their job for the next six weeks was to get the children to learn some basic skills. They can’t read teach them to read. If they can’t do math teach them to do math. After end of six weeks the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously,” Banjeree pointed out.
The trouble of course is that the government is looking for perfect solutions, when it legislates. Be it the subsidies doled out under NREGA or education for all under the Right to Education. But perfect as they say is the enemy of good.
Perfect solutions also make the government bloated and turn it into a limitless state or what in more colloquial terms is known as a mai baap sarkar. Big governments and welfare states don’t work, that has proven time and again. And even western democracies which have become a welfare state have done so after nearly 100 years of economic growth.
Margaret Thatcher knew this very well and she went around systematically dismantling it. And this is something that Rahul Gandhi can learn from her. In his recent speech at the Confederation of Indian Industries, Gandhi said “A rising tide doesn’t raise people who don’t have a boat. We have to help build the boat for them.”
Very true. But what the Congress led UPA government is trying to do is exactly the opposite. Instead of helping people to build the boat. It is trying to give them free boats. And that has f****ed up the whole economy (with due apologies to Pink Floyd).
To conclude let me share a very interesting anecdote about Margaret Thatcher which I happened to read in the obituary The Economist wrote on her.
This is how it goes:
“As she(i.e. Thatcher) prepared to make her first leader’s speech to the Conservative Party conference in 1975, a speechwriter tried to gee her up by quoting Abraham Lincoln:
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot help the wage-earner by pulling down the wage-payer.
When he had finished, Mrs Thatcher fished into her handbag to extract a piec of ageing newspaper with the same lines on it. “It goes wherever I go,” she told him.”
This is something that Rahul Gandhi should really think about.
The article originally appeared on www.firstpost.com on April 10, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Pink Floyd
What have we done, Maggie what have we done?
John Maynard Keynes, the greatest economist of the twentieth century, had a line for most occasions. In his magnum opus The General Theory of Employment, Interest and Money, publishedin 1936, Keynes wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Margaret Thatcher, more popularly known as “Maggie”, the longest serving British Prime Minister of the twentieth century, who died of a stroke yesterday, was no different on this front. As an obituary in The New York Times points out “Mrs. Thatcher’s prescription for change was based on the ideas of the conservative economists Friedrich von Hayek and Milton Friedman. Hayek believed that political and economic freedom were inseparable; Friedman argued that economic productivity and inflation were determined by the amount of money the government put into the economy, and that the heavy government spending advocated by Keynesian economics distorted the natural strength of the marketplace.”
When Thatcher first took over as the Prime Minister in 1979, Great Britain had become the sick man of Europe ( a tag which was usually used for Turkey). To revive the moribund economy Thatcher fell back on the ideas of von Hayek and Friedman. Thatcher went after the trade unions which had a stranglehold on the British industry. She sold off government firms, cut subsidies to the the firms which were piling on losses (in the process many of them went bankrupt) and resisted suggestions that the government should carry out more social spending and create jobs. She introduced both tax and spending cuts.
Like her intellectual gurus Hayek and Friedman, Thatcher was a firm believer in the “free market”, over and above everything else. As The Economist writes in an obituary of her: “Mrs Thatcher believed that societies have to encourage and reward the risk-takers, the entrepreneurs, who alone create the wealth without which governments cannot do anything, let alone help the weak.”
Thatcher was not the only politician at that point of time who believed in the primacy of the market. Ronald Reagan, who was the President of the United States at almost the same point of time, also shared her belief.
And this unleashed an era of market triumphalism. As Michael Sandel, one of the greatest living philosophers, who works at the Harvard University, writes in What Money Can’t Buy – The Moral Limits of Markets “The era (of market triumphalism) began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom. And it continued in the 1990s, with the market-friendly liberalism of Bill Clinton and Tony Blair, who moderated but consolidated the faith that markets are the primary means for achieving public good.”
And this belief in the markets led to the proliferation of market values into spheres of life where they don’t belong, feels Sandel. As he writes in a piece in The Atlantic “We live in a time when almost everything can be bought and sold. Over the past three decades, markets—and market values—have come to govern our lives as never before. We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us.”
This led to ‘market values’ playing a bigger role in social life. As Sandel writes “Economics was becoming an imperial domain. Today, the logic of buying and selling no longer applies to material goods alone. It increasingly governs the whole of life.”
Sandel provides many examples of the same. There were more private contractors fighting the war in Afghanistan and Iraq, than American military troops. In fact, an individual can fight in Afghanistan or Somalia for as much as $1000 a day. “The pay varies according to qualifications, experience, and nationality,” points out Sandal. At $2,50,000 you can shoot an endangered black rhino in South Africa. Western couples can pay as little as $8000 to hire the service of an Indian surrogate mother. You can sell space to display advertising on your forehead for $10,000. Becoming a guinea pig for the big pharma companies in their drug trials can pay as much as $7,500. “The pay can be higher or lower, depending on the invasiveness of the procedure used to test the drug’s effect and the discomfort involved,” writes Sandal.
In the Great Britain and United States public safety has been taken over by private security firms. The number of private guards is nearly double the number of police officers. When Pope Benedict XVI, who recently retired, first visited America, tickets for his stadium masses were distributed for free. Soon they were selling on the internet for more than $200. Even religious goods have been turned into instruments of profits (On a different note this has been a great business model for all the babas and gurus who have popped up all over India).
As the above examples show profits could be made on almost anything, including death. And in her death even Margaret Thatcher became a part of the market triumphalism that she helped unleash.
Death pool is a popular game on the internet where people bet on celebrities they think will die by the end of the year. “Serious players do not make their picks lightly; they scour entertainment magazines and tabloids for news and ailing stars…popular pool choices are Kirk Douglas, Margaret Thatcher, Nancy Reagan, Muhammed Ali…Stephen Hawking, Aretha Franklin, and Ariel Sharon,” writes Sandel in What Money Can’t Buy. People who would have bet on Thatcher dying before the end of 2013, would have won some money by now.
While market values have grown into the western society steadily over the last three decades, they have grown much more faster in the financial sector where a price tag has been put on almost everything. Two particular concepts that were widely used to do this were securitisation and credit default swaps.
Around 2002, American banks (and even banks in Europe) started giving out subprime home loans. The best customers of the bank were prime customers. Those who did not fall into the category and were seen as not good enough to be lend to, were known as subprime customers.
Those were days that anybody and everybody got a home loan including subprime customers. This was primarily because banks did not keep loans on their books. They securitised them away. They bundled these loans together and sold bonds against them. The interest paid on these bonds was lower than the interest the bank was charging on the home loan. The difference in interest was the money made by the bank. This process was referred to as securitisation.
This process worked not only on home loans but it also worked on auto loans, consumer loans, credit card receivables, student loans, and what not.
The bonds were bought by investors of various kinds. When the borrowers of loans paid interest on their loans that interest was pooled together and used to pay interest to those investors who had bought these bonds. The same thing happened with the principal on the loan that was repaid by the borrowers. It was pooled together and used to pay off the investors who had bought these bonds.
By doing this banks no longer carried the risk of the borrower defaulting. It was passed onto the investor buying the bonds. Also the bank securitising the loan got back its money immediately and could thus give out fresh loans. And the more fresh loans banks made, the more bonds they could securitise. And they more bonds they securitised, the more bonds they could sell and charge commissions on that. Given this the banks were more interested in giving out more and more loans, securitising them and making commission on selling them, instead of checking the credibility of the borrower and whether he would be in a position to repay the loan.
Investors were not borrowed about the quality of the borrowers because the rating agencies had given AAA or the best ratings to these bonds. More than that they had also managed to buy insurance on these bonds. In 1997, JP Morgan had developed a financial instrument known as the credit default swap (CDS).
Investors who bought securitised bonds also bought a CDS against those bonds. They paid an insurance premium to the firm selling the CDS. And in case the underlying borrowers of the bonds that investors had bought defaulted, the investors got compensated for the losses by the firm selling the CDS. It worked like any other insurance contract would.
But over a period of time investors could buy a CDS even on a bond they did not own. In simple English this is what it meant. I can go and buy a life insurance on my life or for my car. If I die then my nominee gets paid by the life insurance company. If my car is damaged then the insurance company pays me the cost of getting the car repaired.
The CDS version of the same would be that anyone could go and buy life insurance on me or an insurance on my car for that matter. And as long as they paid their premiums if I died or my car was damaged they would be compensated.
The primarily player in the CDS market was the financial products divisions of the insurance major AIG, which was based out of London. So everybody thought they would live happily ever after because they had paid a ‘market price’ for being adequately protected. But that was not to be.
The borrowers started defaulting and this finally led to the financial crisis, the aftermaths of which are still on. All this could have been avoided if a ‘market price’ had not been put on everything and banks would have checked the credibility of the borrower before lending them money. But that was not to be as good old fashioned banking had been destroyed. And it all started with Ronald Reagan and Margaret Thatcher believing that markets were over everything else.
Let me conclude with some lines Roger Waters, that other Great Brit, once wrote:
What have we done, Maggie what have we done?
What have we done to England?
Should we shout, should we scream
“What happened to the post war dream?”
Oh Maggie, Maggie what have we done? – The Post War Dream – Pink Floyd.
The article originally appeared on www.firstpost.com on April 9,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)