Accountants Truly Are Marvelous People

Narendra Modi and his government have for long promised to give up their control over state owned firms by selling them off. Now, the media says that the government will meet its disinvestment goal for the first time. Here’s a slice:

The government is all set to cross annual disinvestment target this fiscal for the first time with Oil and Natural Gas Corp. Ltd (ONGC) buying the centre’s entire 51% stake in Hindustan Petroleum Corp. Ltd (HPCL) for Rs36,915 crore.

Notice what happened here? Government has not actually sold off its holdings in HPCL. This is just one government owned firm (ONGC), buying another. Arun Jaitley is going around claiming that this gives government an additional Rs 37,000 crore.

This is akin to me transferring my wallet from my right pocket to my left pocket and saying that I am now wealthier by doing so. Yet government, somehow, can now spend almost an additional Rs 37,000 crore and still claim that it is being fiscally responsible.

This is not an isolated case. PSU holdings are too complexly intertwined, with many PSUs owning shares in each other, but all ultimately belonging to government. This prevents us from knowing the government’s true fiscal condition. For example, Air India borrowed massive amounts of money from government banks. Its debts, however, are not included in the national debt, even though they should be, since taxpayers are ultimately on the hook for its mismanagement.

Indeed, accountants are marvelous people, who work in mysterious ways. Nothing at all would prevent them from spending 200% of the national income and still claiming a budget surplus.


The Fallacy of Good Intentions

Recently, 60 economists, including Abhijit Banerjee, Debraj Ray and Jean Dreze, wrote to Arun Jaitley, asking him to increase government spending on old age pensions and maternity entitlements.

These economists have fallen prey to the fallacy of “good intentions”. The great economist Milton Friedman rightly said that it is a mistake to judge policies and programmes by their intentions rather than their results. The move advocated by these economists is intended to help pregnant women, newborn children and elderly people. It will end up hurting all three groups, and more.

This is very counter-intuitive. After all, giving senior citizens or pregnant women more money should make them better off. But there is a concept in economics, called the Law of Unintended Consequences. Government meddles in the economy with the intention of solving a problem, but ends up making the problem worse or creating another problem.

The US and European countries have large amounts of government spending on the kind of welfare schemes that our economists are requesting from Arun Jaitley. Let us see whether these schemes helped people in America and Europe or hurt them.

Social Security

In the US, people are forced to pay into a government programme called Social Security. They pay a part of their salaries during their working years and receive pension from the government when they retire. Similar schemes are found throughout Europe. This sounds very appealing, until one realises that these are just giant Ponzi schemes.

Governments tax the current working population, to pay pensions for the current ageing population. As long as there are fewer old people claiming pensions and lots of young people paying taxes, the scheme works wonderfully. When there are more old people claiming pensions and fewer and fewer young people paying taxes to fund those, the Ponzi scheme collapses. By 2090, the US government will be facing a $32 trillion shortfall in Social Security funding, which is almost twice the size of the US economy and little less than 10 times the tax revenue collected today.

India might have a large (and growing) youth population now, but these youths will grow old. The birth rate will keep falling, as it has been for a long time. If government starts paying pensions for everyone in India, we would face a similar economic disaster in the future, where too many old people will be claiming pensions, with too few young people paying taxes to fund them. Just look at what is happening in Europe.

The Ponzi welfare state is the reason Greece, Spain, Italy and other European governments are in such debt crises, because they have predominantly ageing populations and cannot extort sufficient taxes to fund their populist measures. To sustain their Ponzi schemes, European governments have had to provide financial incentives for people to have more children. Which brings me to the next point.

Maternity Benefits

In the introduction to the letter, economist Jean Dreze wrote that the government should provide maternity benefits to all pregnant women, so they can have nutritious food and focus on raising children. As Dreze wrote:

A fair amount of recent research in economics brings out the lifelong value of adequate care in early childhood. That, in turn, depends a great deal on mothers’ access to health, nutrition, rest, resources and power. This is the main reason why the National Food Security Act 2013 provides for maternity entitlements of Rs.6,000 per child for all pregnant women, except those already covered in the formal sector.”

Such assistance is also provided in the US. What were its effects? It broke up the family structure. In 1960, 73% of children in the US lived in two parent families, and only 5% were born out of wedlock. In 1964, the government launched a slew of welfare schemes, including assistance in obtaining food. Today, less than half of all children in the US live in intact families. Blacks, who are mostly poor, have it worse. Nearly three quarters of black children are raised by a single parent.

The economics behind this is very simple. Because government subsidises child rearing in America, women don’t wait to get jobs, or marry someone who does, before having children. They have more children, and earlier, than they would have without government assistance.

The real problem here is that women who can’t even take care of themselves are given incentives to have children, whom they are not equipped to raise. Children raised in such troubled environments are more likely to turn to crime as they grow up.

The Pradhan Mantri Matru Vandana Yojna (PMMVY), Narendra Modi’s new maternity benefit scheme, is just another dirty populist measure. But it has a saving grace. It will give benefits only for the first child. Jean Dreze sees this as a bad thing. He believes that taxpayers should pay the expenses of any number of children a woman might chose to have, but can’t afford to raise on her own. That would be even worse, since more children would be raised by parents who can’t raise them properly.

Experiences from the western world have clearly shown that while governments provided social security and maternity benefits with the best of intentions, they created far bigger problems in the process. The economists who have written to Arun Jaitley advocating similar policies would have been wise to look at the results of these policies, rather than their intentions.

The Irony of Wage Regulations

There is ample evidence that minimum wage laws cause unemployment. Yet, government officials, in their infinite wisdom, love imposing minimum wage laws.

This somewhat funny news story ought to make them think twice about this. From the report:

In a move that can only be described as bitter irony, the Maharashtra government is looking to shave its workforce by 30 per cent so that it can afford to pay the remaining employees as per the Seventh Pay Commission recommendations that are due to be implemented soon.

Yes. The government itself is feeling the effect of minimum wage laws. The Seventh Pay Commission entails an increase in pay for government employees, as well as additional allowances for housing, clothing, child care expenses and so on.

There is some poetic justice in the fact that government is having to lay off employees since it cannot afford to keep paying them the higher salaries.

Of course, the union is not happy with the lay-offs. From the same report:

“A cut in 30 per cent of the 19 lakh approved workforce in phases will lead to a strength of just over 14 lakh. Then, who will work for the people?” he (union leader) said, warning that the union would oppose the proposed cuts.

And the Maharashtra government is not alone. Earlier this year, the central government also decided to slash its work force by a fourth.

More than other jobs are expected to go of the central government employees, whose performance is not upto the mark. Overall, the centre will lay off 25 percent full-time central government jobs.


The central government employees unions said they will strongly oppose any government jobs cut scheme, if it is announced.

Perhaps now that they are at the receiving end of government stupidity, bureaucrats will see how minimum wage laws devastate millions of workers who lose their jobs. But given their track record, I wouldn’t hold my breath.

The Global Entrepreneurship Circus

Recently, the government of India organised a so called Global Entrepreneurship Summit (GES) in Hyderabad. For a couple of days, the media made a big hype of it. On the front page of every newspaper, and on every news channel, it was the main story, simply because Ivanka Trump was in attendance. Like everything else that involves politics and politicians, it was all show and no substance. Narendra Modi and Ivanka smiled for photographs, there was a robot that can greet people and make small talk (somewhat redundant since Modi was already there), and a whole lot of speeches were given.

But let us look at the stated goals of the summit, and what it did, if anything at all, to achieve those goals.

Empowering Female Entrepreneurs

The first aim, was to encourage women to start their own business, which is a worthy goal. Currently, only about 14% of the businesses in India are run by women, of which 83% are just one woman businesses, with no other staff.

What did the summit do to enable female entrepreneurship? It consisted of numerous master classes, where industry veterans told their own stories of how they started out, the mistakes they made along the way, and useful things they learnt. While it is nice to know tips and tricks, one cannot really use them unless they have both the skills and the capital to start their own business.

Where do they get those skills and capital? Majority of the entrepreneurs initially work for someone else, learning essential skills on the job, which they later apply in their own ventures. Earnings from a job also helps them accumulate some of the capital necessary for starting out on their own. This is where the crux of the problem lies.

India has so few female entrepreneurs simply because it has a very low proportion of women in the labour market. The female labour force participation rate is only 27%. If women cannot get the experience and skills that come only from having a job, they will not be able to start their own businesses.

The question, then, is why do women not get jobs? Sure, there is some cultural stigma to women working outside their homes, but that can’t explain the entire shortfall in female labour force participation. If stigma were the explanation, developing countries similar to India, such as Bangladesh and China, for instance, would also see this problem. But in Bangladesh, 43% of the women find work, as do 63% in China.

What is it that Bangladesh and China have, but India does not? The answer is large, labour intensive manufacturing sectors, which all countries at a similar level of development have. India famously skipped the manufacturing part, and jumped from agriculture, directly to the service sector.

The service sector creates relatively few high skill jobs. It cannot create the crores of jobs required for India’s men and women. I have on numerous occasions described how India’s complex labour laws prevent a large industrial base from developing. Having too many labour laws makes it unprofitable to hire workers. As a result, what little manufacturing takes place in this country relies heavily on machinery, and not labour.

With regards to women specifically, there are numerous regulations that hurt their chances at employment. There are several labour laws that were passed with the noble intention of helping women. The law mandates paid maternity leave, having a crèche facility if the firm employs more than 30 women, places restrictions on the hours women can work and the maximum workload they can take on, among other things.

All of this means that it is cheaper for employers to hire a man, than a woman, for the same job, and save on the additional costs of maternity leave, babysitting and so on. The law effectively forces employers to discriminate against women, and hire men wherever possible.

If the government were really serious about encouraging female entrepreneurship, it would first get rid of all the unnecessary regulations that create hurdles to finding jobs. Until then, only women from rich families, who could afford a good education for them, will benefit from such summits.

Key Sectors

The government wanted to promote a few key sectors in this summit. Let us forget for a moment the fatal conceit of this central planning mindset, where government decides which sectors are important. For now let us look at just two of these sectors and whether or not the summit will really help them.

The first is health and life sciences. Given the government’s tendency to impose price controls on medicines and medical equipment, there is little incentive for entrepreneurs to enter the market. When government recently capped the price of stents, manufacturers pulled out their latest models from the market, or refused to launch them at all. This ended up hurting patients, who now have fewer choices. Unless government stops meddling in the health care market, summits like this are meaningless.

Media and entertainment is cited as another important sector. Of course, the first problem is the rampant censorship done by government. Another problem is again, price controls. In some states, like Tamil Nadu, movie ticket prices are capped by the government. When it comes to television, entertainment channels are not allowed to charge more than Rs 12 (~$0.2) per month as subscription fees. If government prevents producers from making a return on their investment, they have no reason to produce good movies and television.

Government does not need to do more to promote female entrepreneurship or better healthcare or media and entertainment. On the contrary government intervenes too much in the market, preventing these sectors from flourishing and women from succeeding. Instead of wasting time with these silly summits, government officials would be wise to get rid of unnecessary and burdensome regulations.

Entrepreneurship Can Succeed Where Politics Fails

I have always maintained that black markets are the best way to alleviate poverty. They are also proving themselves the best way to preserve freedom. Two interesting cases came to my attention last week alone, to illustrate beautifully how a little entrepreneurship does far more to defend life and liberty than all political action combined.

Make Your Own Medicine

High drug prices are a huge problem in the US. Because government grants monopolies to pharmaceutical companies, a pill that costs only 5 cents in India, costs $750 in the US. That’s a one and a half million percent difference in price. It also leads to stuff like EpiPens costing $600 dollars.

Politicians have been ranting about it. From Bernie Sanders to Donald Trump, everyone says that drug prices are too high. Advocacy groups have been telling Congress to lower drug prices. But none of that has yielded results.

In contrast, bio-hacker Michael Laufer has done far more to make life saving medicines cheaply accessible. He created the EpiPencil, a cheaper version of the EpiPen, which costs only $35. Laufer also has plans to launch what he calls the “Apothecary Microlab”, which is a chemical reactor costing $100. That, along with free recipes, would enable people to make their own medicines at home.

Now there are some risks to doing this. Medicines require chemicals to be mixed in a very specific manner and quantity. A few micrograms off could mean the difference between life and death. It is important to note that none of this is Laufer’s fault.

If the United States government could learn something from its Indian counterpart and stop supporting monopolies, drug prices would instantly come down and people could just buy them cheaply. The Food and Drug Administration was established to ensure that drugs are safe. Ironically, by backing pharmaceutical monopolies, they might just make drugs a lot more dangerous.

There are possible market solutions that will emerge, however. One is that cheap DIY testing kits could be made available to ensure that home made medicines are safe. Another alternative is that small scale, black market manufacturers could crop up in each locality, with the technical know how to test the drugs they produce.

Rendering Gun Control Useless

Defense Distributed founder Cody Wilson has been innovating in a similar spirit. The self-described “crypto-anarchist” is selling a milling machine, called the “Ghost Gunner”, for $1600. The machine allows the user to fabricate their own metal guns at home. Wilson says the user simply has to download open source design files onto their computer, and use a point and click interface to get started. No expertise required.

This also means serial numbers are not required (they are required only when selling guns) so users can evade detection by the government. Background checks, waiting periods, permits and paperwork cannot be enforced any longer. This will be useful not only in the US, but also in developing countries where the police are corrupt/ineffective, and people would rather defend themselves.

The machine itself cannot be regulated. In Wilson’s own words.

“It’s just as regulated as a hammer — so good luck, there’s nothing you can do,” he [Wilson] said. “It’s just a mill. It’s agnostic. It’s not like it’s specially designed for gun stuff, it’s just that we also write gun software for this mill that we make. So, by breaking up these components, there’s no way of getting in-between any of it and stopping it from proliferating.”


Contrast Wilson’s entrepreneurship with what the NRA does. The NRA is portrayed as the number one threat to gun control. That’s nonsense. It would interest younger people to know that for most of the 20th century, the NRA was the main advocate for gun control, and even helped draft the first gun control laws in America. Even today, the NRA can and does support gun control legislation when it feels like it.

Cody Wilson has, in four years, done far more to protect gun rights than the NRA has done in its entire history.


Business vs Politics

What makes Laufer’s and Wilson’s strategy more effective than political action? The main reason is that instead of pleading with politicians to do something, entrepreneurs just do it themselves, and innovate out of the mess. As Mike Munger also points out, it is better to ask for forgiveness than permission.

Had Laufer and Wilson lobbied government to allow their activities, they would have been flat out denied. Now that they have already done it and posted the know how online, it is impossible to put the genie back in the bottle. Government cannot do anything to control guns or keep drugs expensive for much longer.

It is also very profitable, as seen in Wilson’s case, meaning many more entrepreneurs will copy the business model and improve upon it. The approach of business is scalable and easily replicable, which makes it more effective than political action. That is why I trust a single entrepreneur over entire political lobbies to preserve freedom in society.

What John Oliver Could Learn from Mises

I usually enjoy watching John Oliver’s show, Last Week Tonight, because it is funny and informative at the same time. His latest episode on corporate consolidation was, alas, not one of the best ones.

The segment has Oliver talking about how certain industries are being dominated by a handful of firms and how that is bad for consumers. He particularly focuses on the airline and telecommunications industries. So far so good.

Everyone agrees that a lack of competition in the market is bad. Oliver then goes on to blame a lack of regulation for this, and calls for more aggressive application of antitrust laws.

This reminded me of one of my favourite Mises quotes.

As a rule, capitalism is blamed for the undesired effects of a policy directed at its elimination. The man who sips his morning coffee does not say, “Capitalism has brought this beverage to my breakfast table.” But when he reads in the papers that the government of Brazil has ordered part of the coffee crop destroyed, he does not say, “That is government for you”; he exclaims, “That is capitalism for you.”

Corollary: Government regulation leads to calls for more government regulation to fix the problems created by previous regulation.

Mises wrote this outstanding paragraph right in the preface of his brilliant and insightful book, Interventionism: An Economic Analysis, which I recommend to everyone.

Oliver’s segment on corporate consolidation is a case in point. He takes a problem created by government, namely oligopoly, and calls for more government control to fix it.

Let us take the case of airlines. Why are there only four major airlines in the US? Robert W. Poole Jr., of the Reason Foundation, wrote way back in 2000 that the main obstacle to competition is the difficulty in obtaining gates at airports.

Large airlines sign long term leases with airport authorities, which gives them exclusive access to gates at airport terminals, shutting out competition from new entrants. It also gives airlines monopolies over certain routes. This, Poole shows, is due to the airports being government owned, and thus risk averse. A long term lease gives them a steady revenue stream.

He compares it with Europe, where airports are run privately. Since these airports are for profit businesses, they lease gates by the hour to individual airlines, thus preserving competition in the market.

More recently in 2016, David R. Henderson defended the merger of American Airlines and US Airways along similar lines, saying that the main constraint was gates, and not the number of airlines. He also pointed out that in Europe, foreign airlines were allowed to provide domestic flights, unlike in the US.

If a socialist cesspool like Europe has more, better and cheaper airlines, clearly a lack of regulation is not the problem.

This is not just restricted to airlines. Every monopoly or oligopoly that has been sustained over a large time period has been aided by government regulations and subsidies. For instance, there is the telecommunications industry, where government backs monopolies for firms like AT&T. The health insurance market in the US lacks competition because insurers are, among other things prevented from competing across state lines.

It is deeply troubling, then, that people blame free markets for problems created by government. As I write this on the eve of Mises’s birthday, I feel that there is an ever greater need to highlight the evils of government intervention; to direct people’s anger at the real source of trouble. During such times, brilliant minds like Mises will be sorely missed.

India’s Black Marketeers Will Save The Day

Black markets are the most under used tool for helping poor people. Black markets are often portrayed in a bad light by governments. They are untaxed, unregulated and therefore, it is argued, a hazard to public safety. A more sinister description often involves black markets being a cesspool of organised crime, overflowing with drugs and weapons, a source of income for terrorist groups.

Such portrayals are completely dubious. 90% of India’s workforce is employed in the informal sector, which includes everything from agriculture, to small scale manufacturing and services. A lot has been already written about how underground economies provide a source of income in developing countries, so I won’t focus on that. Instead, let us look at some other aspects of black markets.

India’s Black Market Schools

India’s public schools are infamous for their terrible quality. Teachers don’t show up, schools lack basic facilities such as toilets and drinking water. Not surprisingly, most children even in fifth grade can’t read. Even teachers don’t know what they are teaching. It is also natural that children drop out of such schools at alarming rates.

One would expect private schools to satisfy the demand for quality education. Under the Right to Education Act, government has imposed unrealistic requirements for starting a private school, such as having a fully stocked library, a playground, kitchen, separate classroom for every teacher and so on. Since real estate is very expensive, this cost would be passed on to parents if regulations were followed.

Entrepreneurs have found a simple way around this problem; just violate the regulations. They have started low cost private schools in their localities. The schools usually consist of a couple of rooms with chairs or benches, often in a rented space. The fees are incredibly low, Rs. 70-150 (~$1-2.5), per month, in rural areas and Rs. 200 – 600 ($3-10) in urban areas.

Since these are illegal, numbers are hard to come by, but one study estimates around 300,000 such schools in India. The teachers show up every day, and learning outcomes are far better when compared to public schools. Indeed, that is the only way to get parents to pay for these schools rather than sending their children to free government schools.

Millions of poor children have a shot at a better life thanks to these black market schools. Nobody in their right minds would call the entrepreneurs behind these schools criminals. Indeed, the only villain in this story is government, which regularly goes after and shuts down such schools. Thankfully, our heroic entrepreneurs are not deterred by such nonsense and continue to serve the poor.

Not Just Small Business

Black markets are not just limited to locals running small business. Big multi-nationals can engage in it as well. My favourite example of this is Uber. It violated all existing regulations on cabs, such as licence requirements and rates set by the government. It was banned in many states in India, and yet it bravely continued to operate.

When law enforcement was becoming too much of a problem, Uber found a brilliant technological solution to it, as Jeffrey Tucker explains. Greyball was a software that Uber used to detect bad actors. Whenever an undercover police officer would request an Uber cab in hopes of catching them red handed, the software would quietly cancel their request.

Uber’s participation in the black market provided millions of consumers with cheaper, better quality, and more reliable transportation. It also provided gainful employment to thousands of people, and helped bust taxi monopolies around the world.

A Superior Strategy

As opposed to political action, black markets are a superior strategy for advancing freedom and helping those in need. Imagine, for instance, that India’s school entrepreneurs never started their schools, but formed advocacy groups. After lobbying and pleading with politicians for decades, maybe, just maybe they would be allowed to legally operate schools. By that time, entire generations would have grown up without an education. By violating unjust regulations, they have improved the future of millions, and should be treated as heroes.

Indeed, people revere certain black marketeers. In 1930, the colonial government introduced a tax on salt production in order to protect the British salt monopoly. Mahatma Gandhi, and hundreds of his followers, marched to the village of Dandi in order to produce salt without paying the tax. After he did so, millions around the country joined him in the act.

Not even the Prime Minister would dare to call Gandhi a criminal, or an evil tax evader for participating in black market salt production. While we are on the topic of busting government backed monopolies, let us look at a similar event in recent times.

We economists have been speaking out against the taxi permit/medallion system for decades. No amount of newspaper columns or advocacy would move politicians. Within four years, Uber achieved what we could not.

When Uber showed no signs of backing down, the Maharashtra state government lifted the cap on the taxi and auto permits. Now there can be any number of auto-rickshaws and taxis, which will go a long way in busting their cartels. Let us hope that governments everywhere are forced to follow this example.

In an ideal world, all peaceful and voluntary interactions between people should be fully legal. Since that is not the case, it is far more effective to participate in black markets than to plead with government officials to change the rules. So the next time you feel like helping poor people or fighting for freedom, consider starting a business.