How to Help Farmers

Every time the media does an emotional story on farmer suicides or farmer protests, there are suggestions for what government should do. Usually these suggestions include more subsidies, price supports, and other forms of government intervention. There is one solution that is never mentioned, but is by far the simplest one.

To increase farmer incomes, it is necessary to reduce the number of farmers. The law of supply and demand tells us that when the supply of something is very high relative to demand, the price it can fetch is very low. The same law applies to farmers as well. Let’s look at some statistics.

In developed countries, on average, about 4% of the workforce is employed in agriculture. In the US, only 2% work in agriculture. Compare that with India, where almost 50% of the workforce is in agriculture. The farmer population of India exceeds the entire population of the US.

Saturation is ruining farmers’ incomes

Not surprisingly, farmer income is high in the US and Europe, due to lower supply, while a supply glut of farmers ensures that farmer incomes are very low in India. The average farm household in the US makes around $80,000 annually. In India, that number is just Rs 77,000 ($1,200) annually.

How does having too many farmers impact farm income? The main reason is that it hampers productivity. Because there are so many farmers, the average farm size in India is just a couple of acres, compared to the hundreds of acres in developed countries. Large farmers can reap the benefits (pun intended) of economies of scale. They can use tractors, elaborate irrigation systems and other techniques that would not be cost effective on small Indian farms.

As expected, the productivity of Indian agriculture is far lower than that in the west. Another reason why having too many farmers is bad is that it reduces the bargaining power farmers have, due to increased competition.

Now that we know how an excess of farmers causes misery to them, the question is why does India have so many farmers?

Why do farmers continue to farm with such low incomes?

Many of those farmers are not required, and could be more productive at other jobs, such as manufacturing. This disguised unemployment is a huge problem in India. In most other developing countries, people moved from agriculture to manufacturing, but not in India. Why?

The reason for that is the bad policies which are currently in place. Manufacturing in this country is hobbled by complex labour laws and other regulations, which creates a lack of job opportunities for farmers who desire to leave agriculture.

Next, farmers are not allowed to sell their land as they please. Government dictates that farm land may only be sold to other farmers. If a farmer wants to sell his land to an industrialist, he needs the government’s permission, which is difficult and costly to obtain. This creates a barrier to exit agriculture. There are also land ceilings, which limit the amount of land a single farmer can own, creating the aforementioned problem of small farm holdings.

The often praised minimum support prices (MSPs) have their role in the problem as well. They help only the large, politically influential farmers, from mainly Punjab and Haryana, while keeping the small ones just one bad harvest away from financial ruin. The repeated loan waivers similarly subsidise low productivity and keep farmer incomes low.

The Solution

The solution I am proposing might not be an election winning formula as loan waivers and MSPs are. From an economic point of view, however, it is the most simple and efficient thing to do.

Removing the regulations on manufacturing will create job opportunities for farmers wishing to leave agriculture. Next, the government should do away with subsidies, minimum support prices and loan waivers, since they incentivise unproductive methods of farming. Eliminating them would induce more people to seek manufacturing jobs.

Finally, it is essential to repeal the land ceilings and land use restrictions. When so many people leave farming, their tiny farms can be consolidated into fewer but much larger operations, benefiting from economies of scale and boosting productivity. Large farmers also have more bargaining power, enabling them to get better prices for their produce in the market, without needing government subsidies.

What is the main take away from all of this? It is that there are numerous good ways of helping farmers improve their situation in life. None of them involves more government interference. On the contrary, government officials need to stay out of the way and let market forces work.

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Government, Not Automation, Destroys Jobs

A few weeks ago, road and highways minister Nitin Gadkari said that driverless cars would be banned in India in order to “protect jobs”. This kind of fallacious argument is nothing new. For the past year or so, newspapers have frequently had articles arguing that automation is to blame for job losses. Even intelligent people like Bill Gates have made outlandish suggestions such as taxing robots to compensate workers who will lose their jobs.

By doing a superficial analysis, one may indeed say that automation causes job losses. But on digging a bit deeper, one sees that bad government policies are the root cause for unemployment.

Circumventing Regulation

Take the case of driverless cars. Driving is not a high skill job. Low skilled workers are abundantly and cheaply available to do it. Why, then, is Uber so interested in developing driverless cars? It is because governments around the world have imposed costly regulations, or outright banned Uber to save the taxi cartels.

Never mind that this creates an immediate job loss for just Uber drivers. It gives Uber an incentive to invest billions in developing driverless cars to circumvent the burdensome regulations. This will ensure that all drivers will lose their jobs in the long run, including the taxi cartels governments are trying to protect.

Lant Pritchett, at the Centre for Global Development, wrote last month of a similar problem in the US. Workers from central and Latin America could easily do low wage jobs in the US. But minimum wage laws and immigration restrictions make labour artificially expensive.

That is precisely why Amazon is pouring billions into drones. In the absence of government intervention, it would be far cheaper to hire low skilled immigrants for delivering parcels. But since government won’t allow that, it is cheaper to use drones. Most delivery jobs in the US will be eliminated in the near future as a result of bad immigration policy. Policy which was, ironically, made to save those jobs.

Note the tremendous inefficiency this creates. The world’s scarcest resources, entrepreneurs and scientists, are working to economise the most abundant resources, namely low skilled labour. All of that entrepreneurial and scientific talent is being wasted due to bad government policies. Pritchett rightly laments that this makes it harder for poor people to escape poverty.

Pritchett’s observation is nothing new. In January, I wrote that even Karl Marx understood how technological progress is distorted when government tries to protect certain industries or occupations. A case in point is Indian manufacturing, which government tried to protect from foreign competition.

Countries at a similar level of development have labour intensive manufacturing which makes use of cheap labour. In India, the opposite has happened. Whatever little manufacturing takes place in the country is extremely capital intensive. Why did this happen?

Laws Are Expensive

Before 1991, government imposed extremely high tariffs on imports, to encourage domestic manufacturing. Manufacturing grew, but it became more capital intensive over the years, even though cheap labour was abundantly available. The explanation for this lies in India’s complex labour laws.

India has nearly 250 labour laws between the centre and the states. The cost of complying with these labour laws is so high that companies found (and still find) it cheaper to use machines than to hire people, creating the phenomenon of jobless growth.

All of this evidence points to just one culprit, when it comes to unemployment. It is not greedy corporations, and it is not automation. Ridiculously ill-conceived government policies are the sole reason that low skill jobs are dying an untimely death.

Trade Will Keep the Peace on the China-India Border

In what is becoming a tradition, Chinese troops have again crossed the border into Indian territory, this time in Sikkim. Indian and Chinese soldiers are facing off at the border, trying to see who blinks first.

As usual, politicians and people on social media are calling for a boycott of Chinese goods. Their idea is that we should punish China for this act of aggression. Such rhetoric is useful to score political brownie points, or garner likes and retweets on social media. It also makes no sense from an economic point of view.

Anybody who has ever gone shopping will point out the impracticality of boycotting Chinese products. A very large percentage of products in the market are made in China. Almost every electronic gadget, such as the computer I typed this on, is made in China. The most mundane of products, such as office supplies and kitchen utensils, are also mostly made in China.

There aren’t many locally produced alternatives that can compete with Chinese products at low prices. Government has made sure of that by imposing a labyrinth of regulations on manufacturing, resulting in lack of domestic production.

But forget for a moment the impracticality of the whole proposition. There is another good reason for not boycotting Chinese products.

If Goods Don’t Cross Borders…

A phrase often misattributed to the great French economist Frederic Bastiat says, “If goods do not cross borders, armies will.” This great insight has been proven true time and again. World War II was caused, in large part, by the protectionism and decline of global trade in the 1930s.

Better still, consider the example of India and China, before liberalisation. When the Indo-China war took place in 1962, both countries had closed economies. The governments had imposed high tariffs, preventing any trade from taking place between Indian and Chinese people. Sure enough, when goods were not crossing borders, armies did.

Now consider the opposite case. Market oriented reforms took place in China in 1978, and India in 1991. A major part of these was lifting of trade barriers. Since then, things have improved greatly. War seems highly unlikely. Even with these border stand-offs being a regular feature, no real violence takes place.

Why does trade bring peace? Because the Chinese know that they can get a lot of money by selling their goods in India, there is a huge opportunity cost to war, which was absent in 1962. Now in case of war, Chinese firms stand to lose a whole lot of profit.

Buy Even More Chinese Goods

The way to ensure peace and avoid conflict is to make war an even more costly proposition, for both sides. The government of India should get rid of all tariffs, quotas and trade restrictions. This would make Chinese goods cheaper, making the market for them even bigger.

Investing in India should be made easier. Complex labour laws and other onerous regulations on manufacturing should be done away with. As wages rise rapidly in China, Chinese firms are already looking to set up factories elsewhere.

India could be a great destination for those factories, generating jobs for many people, and also producing goods which might get exported back to China.

These steps would ensure that there is no incentive for conflict. If Xi Jingping decides he wants war, it would be Chinese factories that he would have to bomb in India. Chinese industrialists would pressure their government to maintain peace since they would stand to lose a lot of money otherwise.

If we want to avoid such border confrontations in the future, it would be wise to not boycott Chinese goods, but to embrace them even more fully, for if goods do not cross borders, armies will.

Uber, Ola and Lessons from the Apartheid Era

Black-cab drivers of London, and drivers of “black and yellow taxis” in Delhi have been petitioning the authorities to deny Uber and other ride-sharing companies a license renewal. That is, unless the companies pay their drivers a minimum wage plus benefits.

“What a great show of solidarity”, you might think. These drivers are seemingly trying to help their competitors. But are they really? To understand what they are really trying to do, we must look back at the apartheid era.

 

Eliminating Competition

Before the apartheid era in South Africa, when there were few labour protections and laws, blacks had little difficulty finding employment. Blacks were unskilled, so they offered to work for lower wages than their white counterparts. As a result, employers had little reason to discriminate against blacks, and in fact preferred hiring blacks over whites.

How could white workers have dealt with this issue? The obvious way would have been to accept lower wages to compete with blacks in the labour market. The other approach was to get the government to legislate blacks out of employment, which is what they did. Labour unions composed entirely of white workers lobbied the government for a minimum wage law.

By artificially setting a wage rate higher than the market rate for blacks, the government created unemployment among black people.

Given that they were paid more than the minimum wage, why did they lobby for it? It was to eliminate competition from black workers. And they did not even attempt to hide that fact. Gert Beetge, a racist and secretary of the Building Workers’ Union, said “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.”

The South African Economic and Wage Commission also gave its valuable insight: “The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”

The economic principle behind this is very simple. If something becomes more expensive, people buy less of it. By artificially setting a wage rate higher than the market rate for blacks, the government created unemployment among black people.

Economist William Harold Hutt, in his book The Economics of the Colour Bar, blamed the minimum wage law as one of the main causes of injustice during the apartheid era.

In the United States, the Davis-Bacon Act was passed in 1931. The law required that all workers be paid the “prevailing” local wage, which was effectively decided by fully white labour unions, and higher than wages for blacks. Several lawmakers at the time spoke of “cheap coloured labour” competing with white labour. The law was again designed to remove blacks from the labour market.

 

History Repeats Itself

In London, taxi driver unions have been lobbying the local authorities to deny Uber a license renewal, unless it pays its drivers a minimum wage and offers paid leave. Now why would people driving black-cabs want to ensure a higher pay for their competitors? It’s not because they care about Uber drivers.

They just want to make it too expensive for Uber to employ drivers in London, thereby eliminating competition from Uber. Then these drivers of black-cabs will have a monopoly as they did before, and can continue charging high prices to commuters.

The only difference is that the unions are not explicitly saying this, and have managed to fool a few Uber drivers into joining their cause. It is interesting to note that the black-cab drivers began calling for better working conditions for Uber drivers before Uber drivers themselves.

They are trying to eliminate competition by making Ola and Uber drivers too expensive to hire.

The same thing has been playing out in Delhi. The Delhi Commercial Drivers’ Union has petitioned the Delhi High Court demanding benefits under labour laws for Uber and Ola drivers. This essentially means fixed fares regardless of supply and demand. They also want the companies to keep paying the drivers bonuses that they were paying initially, and to raise the minimum fare.

The union, like its British counterparts, consists mostly of “black and yellow taxi” drivers. They are trying to eliminate competition by making Ola and Uber drivers too expensive to hire.

The court has yet to decide whether or not Uber and Ola drivers are employees. Currently they are classified as independent contractors by the companies, and are therefore outside the ambit of labour laws. If the court declares them to be employees, Uber and Ola might have to raise fares, or stop operating altogether in Delhi. This will restore the “black and yellow taxi” monopoly and make life harder for commuters.

Let us hope that the authorities in London and judges in the Delhi High Court see these petitions for what they really are; not solidarity with fellow drivers, but an attempt to eliminate competition and create a monopoly.

The Welfare State is a Slave Master

Recently I read a very peculiar news report. It said that the Spanish government has appointed what the media are calling a “Sex Tsar”. It is officially a “commissioner for the demographic challenge”, whose job is to persuade the people of Spain to have more sex, and by extension, more children. The Spanish are not alone. In 2016, the Italian government ran a “Fertility Day” campaign to get people to have more babies. The Swedish government has initiated a study into the sex lives of its citizens, to find ways to increase the amount of sex Swedes have.

If that was all there is to the story, we could chalk it up to politicians being their usual ridiculous selves and have a good laugh about it. But this nonsense has serious economic causes and potentially far reaching consequences.

The Welfare State

In each of the three cases, the main reason governments wanted more children was to save the welfare state. The welfare state is the biggest Ponzi scheme on Earth, as the great economist Milton Friedman explained.

As long as there are more tax payers (young, working people) than those who are receiving benefits of the welfare state, the whole operation runs fine.

The problem starts when people have fewer babies, as in Europe. This will result in a larger number of old people depending upon the government, which will have to tax a smaller and smaller working population to finance the benefits. Without new fools to con, the Ponzi scheme will collapse. Even Paul Krugman understands this elementary fact about welfare schemes like Social Security.

Immigrants could compensate for the shrinking population in Europe and increase the tax base for governments. But the governments have closed borders to refugees from Syria and other countries (due to political compulsions), making immigration more difficult precisely when they need more people. If they cannot get more taxpayers through migration, the only alternative is to get their citizens to have more children.

A Little History Lesson

In 1807, the United States Congress outlawed the import of slaves, akin to the immigration controls in modern Europe. Because slave masters could not get in more slaves from Africa, they established “breeding farms”, as Ned and Constance Sublette describe in their book titled “The American Slave Coast”.

On these breeding farms there were far more women and children than men. Slaves were encouraged to have stable family lives. As economic historian and Nobel laureate Robert Fogel explained in his book “Time on the Cross”, most slaves were sold with their entire families, or only when a slave wished to separate from his family, separately. In fact, as distinguished economists Thomas Sowell and Walter Williams have pointed out so often, more black children were raised in two parent families during slavery, than are today.

Was this because slave owners had any love for their slaves? Not by any stretch of the imagination. The slave owners simply wanted to maximise profits by encouraging their slaves to have more children. They gave rewards to women for having children, similar to the tax benefits or payments offered by a welfare state. Just as politicians can stay in the welfare business only if citizens have more and more children, the slave owners could stay in business only if slaves had more and more children. They knew that, and acted purely in their selfish interests, just like politicians.

Next, Fogel pointed out that living standards for slaves in the South were comparable to those of free workers in industry. The master ensured the welfare of his slaves, just like the modern welfare state.

There is yet another striking parallel between the welfare state and slavery. People such as George Washington and Thomas Jefferson believed that slavery was a terrible thing-Jefferson called it a “great political and moral evil”-yet they continued to hold slaves. They justified it by saying that slaves are not capable of taking care of themselves. In the event that they set the slaves free, they argued, the slaves would fall into destitution and suffering. In other words, slaves could not take care of themselves.

This argument made by Washington and Jefferson is exactly the same as that made by proponents of a welfare state. History is bound to repeat itself if people don’t pay attention the first time around.

People in countries that have a growing population, such as the US, or developing countries like India, should learn the lesson before it is too late, and take steps to roll back the welfare state while there is still time, or end up being slaves to the state.

New Delhi’s Monumental Ponzi Scheme

Sometimes, you just have to hand it to government officials. They can take their most terrible failures and present them as a success. Latest case in point, the budget deficit. Arun Jaitley calls it “fiscal prudence” to have a fiscal deficit of 3.2% of GDP, which will almost surely be revised upwards, since that is just an estimate.

But fiscal deficit does not tell the whole story. Reading the budget documents, one comes across a number called the primary deficit. That is the fiscal deficit minus the interest payments on loans that government has taken over the years. The primary deficit is just 0.1% of the GDP. Meaning that most of the fiscal deficit is there to pay back previous loans.

Just so it sinks in, I shall say it again. The government is taking new loans to pay back the interest on its old loans. In fact, 18% of the central government’s budget goes to these interest payments. Does that sound prudent? Because from where I am sitting, that is very, very irresponsible.

And I have not even spoken about the principal amount of the loans. The central government owes a debt of around 65% of the GDP. A debt which grows at an astounding rate of ₹1.32 lakh per second.

Borrowing to repay old loans is very similar to a Ponzi scheme. In fact, if any of us did that, we would be in jail right now, but when politicians do it, it magically becomes “fiscal prudence”.

“But why”, you might ask, “is this a problem?” Let us look at the some other countries that have gone down this path. Japan, which had gone down this path some time ago, lost two decades after that, during which the economy stagnated. Japan’s economy continues to be sluggish. Also, the Japanese pay more than 40% of their tax revenues for interest payments on old debt.

Or look at Greece which is stuck in an even worse debt crisis. The Greek debt to GDP ratio is 180%. The overall tax burden on the Greek economy, to service this enormous debt, is 34% of GDP (double of India’s 17%). This has led to massive unemployment (at 26.5%) and great political instability in Greece.

Why hasn’t it happened in India yet?

One thing any careful observer will notice about Greece and Japan is that they have relatively older populations. This is why their economic growth is considerably lower. India, on the other hand, has the world’s largest youth population, which will grow for the next few years. This demographic dividend is giving us higher economic growth and a larger tax base. This allows the government to service the debt, for now.

But, within a few decades, India will have the world’s largest aged population. As the tax base shrinks and more welfare benefits have to be paid out by the government, India will find itself in a similar debt crisis. In other words, the Ponzi scheme of New Delhi will collapse when there are fewer new subscribers.

The burden of that debt crisis, by the way, will fall on generations yet unborn. It would be morally reprehensible for us to saddle them with such huge levels of debt so that we can enjoy life today.

How do we curb debt accumulation?

The debt owed by the central government has been accumulated over almost 70 years. It will not be easy to get rid of it. It is not impossible, however. I shall explain the necessary steps to eliminate the debt and put India on the path of healthy growth.

First, eliminate the deficit. Having a budget surplus will allow repayments of the principal amounts and get rid of the debt in the next two or three decades. How do we create a surplus? One way would be to increase tax rates, but that is undesirable for economic growth, and will be politically damaging for any government. Therefore, the alternative that remains is to cut down government spending. In a developing country such as India, total government spending should not exceed 10% of the GDP, as recommended by the great economist Milton Friedman. When America was at this stage of development, the federal government did not spend more than 3% of its GDP. In India, however, the central government alone spends more than 10% of GDP. This slows down economic growth by taking resources away from a more efficient private sector.

However, tax revenues still need to rise. How do we increase tax revenue while keeping tax rates constant? The answer is to boost economic growth. What is the best way to increase economic growth? It turns out that when there are too many regulations and restrictions on economic activities, growth is slower. On the Index of Economic Freedom, India ranks an abysmal 123, behind countries such as Sri Lanka, Uganda and even Nigeria.

The sheer number of regulations in this country prevents the economy from achieving its full potential. The government needs to take serious measures to improve economic freedom in India. Doing so would unleash the productive energies of the world’s largest youth population, leading to higher incomes for people. This would translate into higher tax revenues without increasing tax rates.

Some of the measures I suggested will be difficult to implement, but, there are only two options. Either those measures are implemented, and India goes on to become a healthy economy similar to Hong Kong and Singapore, or they are not implemented and India goes the way of Japan and Greece.

Why Trump Gutting the EPA is Good

Since he took office, Trump has been trying to do some very nefarious things, such as increasing restrictions on trade and immigration into the US. But he is also doing some good things, such as going after the Environmental Protection Agency (EPA).

He has issued a gag order to prevent EPA agents from speaking to the press or posting stuff on social media. There are also expected to be $800 million in budget cuts and that is just the start. He has expressed a desire to abolish the EPA entirely.

How is that a good thing? Won’t the evil corporations pollute even more? These are valid concerns. But the evidence goes against this. The fact is that EPA regulations have done very little to protect the environment and have proven harmful in quite a few cases.

Counterproductive Regulations

When we wake up, the first thing we do is take a shower. But the EPA has added a unique twist to this. In order to save water, the EPA has mandated that all shower heads come with a device called a flow restrictor. What this does is makes the water come out more slowly. Surely that helps conserve water, right?

No! What it does is take all the fun out of the shower experience, while making sure that people stay in the shower for 25 minutes instead of the usual five minutes, and use more water. Even Trump understands this!

Also, this is on a per shower head basis. For regular people, the shower sucks. The rich, however, can have fancy bathrooms with spray coming from all directions and enjoy the shower, while using far more water than they would have without the regulation.

multi-head-shower-system

What about pollution? The fuel for cars has been made more expensive by another nonsensical mandate by the EPA. Fuel manufacturers have to blend cellulosic ethanol into their product, since it would be less polluting. There is just one slight problem. It doesn’t exist yet, at any commercial level. The EPA has mandated the use of close to 53 million litres, while the total production is only about 76000 litres.

So what does this regulation do? It makes fuel manufacturers pay a hefty fine, which is passed on to consumers, while doing NOTHING to protect the environment.

But these are just mild inconveniences to consumers”, you are probably thinking. “Surely all the good that the EPA does must outweigh the damage, right”? Wrong. Regulations by the EPA have been known to kill people. In order to control particulate matter entering the atmosphere, the wise and benevolent EPA requires all diesel engines to be fitted with a filter. This filter needs to “regenerate” (burn off the accumulated particulates), at regular intervals, meaning the vehicle shut down against the driver’s will. This resulted in the death of a gunshot victim who was being taken to the hospital, when the ambulance shut down.

The EPA later exempted emergency vehicles from this mandate, but vehicles that had already been sold prior to exemption have not been retrofitted. Fire departments and hospitals are dealing with this by keeping the vehicles out of service for extended periods to keep the filters clean, putting severe limitations on emergency services and risking countless lives.

So how do we protect the environment?

Regulation, as we have seen, does little to benefit the environment, while having a lot of unintended consequences. This happens because regulators can not collect all the relevant information and incorporate it into their policies. That information is dispersed among millions of individuals and cannot be aggregated in any meaningful sense.

Thus we must rely on markets to help the environment. There is a widespread consumer demand for environment friendly products, and manufacturers are responding to it.

For example, there are showers that use air induction, meaning that the same force can be obtained while using less water, keeping the shower experience still fun. It also saves on electricity (and money), since there is less water to heat, which means that less fossil fuels are burnt.

As for pollution, the market is again ahead of the EPA. Several manufacturers have or are planning to enter the electric car segment? Why? Because consumers want those. Not only is going green increasingly fashionable, it is also getting cheaper every year.

A study found that the cost of battery packs used in these vehicles has been declining by about 8% annually, and is expected to decline further with mass production. Government, for its part, has continuously subsidised oil companies, which makes petrol and diesel relatively cheaper and encourages pollution. Stopping these subsidies and letting market prices work would speed up adoption of electric cars.

Trump might deny climate change all he likes, but he cannot stop consumers from demanding environment friendly products. That is the power of the market. By curtailing the EPA and letting the market take over, as far as the environment is concerned, Trump is doing the world a service.