Tsipras' Proposal: Who is he kidding?

I was impressed by Tsipras' political maneuver in the bail out negotiations, that I was surprised and shocked by his U-turn. Reading through his proposal, I'm more than disappointed to find nothing new. In other words, the proposal is almost the same as was demanded by the Troika. To make things worse, the parliament jumped in with him, today.

Greece's proposal for EU bail-out aims at attaining a fiscal surplus of 3.5% of GDP by 2018. An ambitious target, nonetheless achievable. However, I strongly doubt if the proposal put forth could ever achieve it. It fails to recognize the driver behind the fundamental problem that led Greece to this debacle in the first place. I'm confident that the creditors are wise, but wants Greece to swallow its one poison, so that they can make bucks of the market.

To start with the proposed VAT reform, Greece aims at taxing restaurants and catering services at 23%. This would mean that franchise outlets like McDonald's and KFC could lose it attraction, pushing the unemployment rate higher, which would only reduce government income. Further, operating business would tend to highly under-report their income, leading to loss of revenue. The proposal, elsewhere, mentions of strengthening the enforcement agencies by criminalizing tax evasion. Won't that increase the overhead cost for tax collection?

The VAT reforms put forth by Greece also aims at reducing tax for theaters whose tax would now stand at 6%. I wonder, why is this preferential treatment to the theaters. First of all, in a tough economy, not many would have enough disposable income to enjoy the comforts of theaters. Second, it would encourage youngsters to look forward to theaters as sustainable sources of employment, which is not the case as one could observe from all over the world.

Another thing in the VAT reforms that I couldn't quite understand is, why the basic food should cost more than the pharmaceuticals? Basic food, along with energy and water, is to be taxed at 13% while pharmaceuticals are to be taxed at 6%. So, is Tsipras encouraging Greece to an unhealthy lifestyle? Or is he favouring the pharmas? This is akin to asking Greece to fall sick as it is cheaper to have medicines than to have food. Would sick population contribute to economy?

Further, the proposal put forth aims at tightening the definition of farmers to bring more people in the tax ambit. However, I think this proposal is made to target either small farmers or large farmers. Who is going to be targeted, we have to wait until Tsipras "defines" who is a farmer? Further reforms to Fiscal structural measures, aims at increasing corporate tax to 28% from 26%. I'm not sure, if Tsipras and his finance minister are in their own perceived state of Greece superiority. While, most of the population is unemployed, the hike in corporate tax would only increase in flight of capital and jobs. Further, those corporations who remain to operate in Greece would not be able to compete globally, again leading to loss of jobs and government revenue. I would like to draw attention to the Laffer Curve on taxation. This study is highly controversial and in some cases disproved. However, I think in the case of Greece, it may hold good as it may encourage foreign investments and corporations to operate from Greece.

The put-forth proposal proposes to provide disincentives for early retirement. However, I think it is infringing upon one's personal rights. Smart youngsters, would most likely take undeclared works and stash the money in some foreign accounts to cash during retirement. Of course, the proposal aims at identifying undeclared works. But how is Tsipras going to make that work? The law enforcement agencies as well as those who undertake those jobs are going to benefit from such works. The former through bribes and the later through additional untaxed income. I think Tsipras and his finance ministers are in the era of "barter system". Now the youth can take jobs from anywhere and earn from anywhere, store their revenue as bitcoins and cash them when they require. How is Tsipras going to address this issue? Ban Internet? Or create an agency to investigate and enforce compliance? Where is he going to pay the overhead cost of setting up the infrastructure from? From more debt?

The proposal also aims to hire more managers to make the system efficient. Even the Tories in Canada do the same. At least they have a hidden agenda, their meaning for efficiency is shutting down services and cutting federal jobs. So, does Tsipras have the same in his mind? If so, unlike Canada, Greece unemployment will rise leading to social and economic backlash. Is he prepared to deal with that? More importantly, does he have enough money (required to pay severance, unemployment benefits, etc.) to deal with that?

The proposal aims at adjusting zonal property taxes, preventing fuel smuggling, etc., but fails to provide any incentives to encourage declaration of true income, increase employment, attractive industries, attract foreign investments and lacks a sustainable path to compete in global market. At the most the proposed measures would aggravate Greece's debt and unemployment crisis. Grexit may have been a better alternative.

It seems Tsipras out maneuvered not only the EU but also successfully fooled the Greece electorate. 

Austerity aids who?

...Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds...

In my previous post, I had argued that austerity would only lead to further austerity as it shrinks the economy. Keynesian Theory of economics is a classical theory that every student of economics would come across. Then, why are the EU nations and IMF administering the hard-pill of austerity on Greece. Why UK administers austerity when it has only increased poverty? Why is Canada administering austerity, when it claims to be well-off in the media? Why is US administering austerity? Some one should be benefitted by it, right? Who gets benefitted by austerity and who loses?

Runners first

During the European Debt Crisis in the later part of 2008, many European countries assumed the indebtedness of their banks to prevent them from failing. This left many of the European countries in debt to the extent they were not able to pay their debts without assistance from third parties such as EFSF (European Financial Stability Facility), ECB (European Central Bank) and IMF (International Monetary fund). Since many of these organizations require austerity as a part of their bail-out programs, countries are forced to impose austerity measures. 

For example, Ireland imposed austerity measures when it assumed the debts of its private sector banks and had to be assisted by the EU and IMF. While Ireland eventually recovered and ended its austerity in the 2015 budget, the impact of austerity was substantial. Property values collapsed making people pay mortgage more than what their property worth.  The economy shrunk resulting in widespread employment which rose from 4.2% in 2007 to 14.6% in 2012. Ireland also saw huge emigration with around 34500 people leaving Ireland between 2009 and 2010. However, the impact of these measures were felt most by those who could not bear it. 

Similarly, austerity measures imposed by UK due to its bank bail-outs were also affecting the poorest population who could hardly bear the impacts. As of 2014, close to a quarter of the UK population are in poverty. Unemployment rate rose from around 5.7% in 2007 to over 8% in 2012. However, since 2012 unemployment rate has shown gradual decrease. However the austerity was again found to affect the poorest of population. 

Though here two countries are taken as an example, we could make a point that the poorest of poor are those who'd be affected the most, the losers to austerity. This is also because the poor are the biggest consumer of public services, which takes the major hit due to spending cuts. If people tend to commit suicide  then austerity is effectively eliminating poor instead of poverty. 

Winners next

Naturally, those who hold and control government debts gains the most. When the governments bailed the banks, the investors benefitted from the austerity as their assets grew while the poor suffered as it is their jobs and earnings which was taken to pay for bailing out the banks. Naturally, investors and the wealthy were the big winners. 

Further, when the governments cuts its services and shrinks its work force, the private sectors see a increase in the supply of labor. Most of these labor could be acquired at low cost, particularly for short-term. Temporary workers are neither paid on par with the permanent workers nor have the benefits of the latter, in many countries. Further, their employees could be forced to put on more hours at work with the threat of lay-off. In other words, austerity helps big corporations and the wealthy to exploit the labor of the poor. 

Naturally, the rich-poor divide has grown sharply since 2007 with many billionaires seeing large increase in their wealth. 

Conclusion

Clearly, Austerity aids the rich, corporations and the investors...

There are many studies hailing the rich and the reason for the growth of their wealth as due to their wise investments. However, these studies/articles carefully "forget" to mention that poor and middle class don't have enough disposable income to invest, in the first place. Further, while the rich may have their investment knowledge transferred from their parents or bought, the poor and middle class are left in the dark. 

Further, I believe the system itself is designed to aid the investors. While I cannot say for every country, I could about India and Canada. In India, the rich has the money to buy the Govt. officials and vital information to make informed decisions on their investment, though illegal. In Canada, the start-up visa program, I believe, was designed with the interest of the investors (venture-capitalists) in mind. For example, it wouldn't include crowd-sourcing opportunities to raise capital. The system provides little opportunities for immigrant researchers for entrepreneurial pursuits though, those pursuits could create more jobs for Canadians... Rich again has an opportunity to get a investor visa or buy a business...

This makes me wonder, if the Governments real intentions are to help its people or only a section of its population. I'm afraid, the Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds. However, what I don't understand is why people don't realize this and why they are falling prey to politicians' lies...

Top 5 reasons why Graduate Studies are (actually) encouraged

In my last post, I was discussing why a bachelor-degree drop-out may have a better chance at earning more money than a graduate with doctorate. Now, I share my top 5 reasons on why, irrespective of the grim picture for the graduates, is graduate studies encouraged:

1. To compete with other countries

Countries are constantly competing with one another. China, a once developing third world country is now aspiring to excel US in economic and military might. It would have never been possible without the strides in science and technology. Even in India, which was once dependent on farm produce is increasingly dependent on IT services for its GDP. The significance of science and technology and consequently graduate education could not have been well said than Mr. Bill Gates himself. So, in short, higher studies fuel economy and country's might, without which the status and prominence of the country itself would be lost. This one of the reasons, why every country is trying to promote education, particularly higher education. And a very noble one. However, what is there for an individual? While some may argue that while the country grows individual grows it cannot be the case for everyone. As when the country grows, increase in inflation would offset the increase in income. Second, corruption and nepotism grows, making it difficult for people without money or influence.

2. To generate cheap labor for research

Don't get me wrong, but research is costly. Getting qualified individuals for the job is much more. The funding usually provided for research in the universities are highly insufficient to hire contract or consulting scientists. So, most of the Universities and laboratories tries to get things done by exploiting young graduates who have energy and are ready to work without any benefits, in the hope of landing a good position someday. From my experience, I cannot blame the scientists. They are very helpful. Sometime, might go out of their way to get you a position. However, they can only do so much when  the funding cuts limits the number of academic and research recruitment (think about superdocs and junior scientists). But what is disturbing is that none would ever say that by pursuing PhD you are going to put your economic future at risk! I definitely don't know if those scientists hope things would get better, or colluding with their political bosses, or forced not to sensitize the next graduate or outright selfish... In any case, the final sufferer is the graduate. 

3. To exploit workforce

Mr. Bill Gates, Warren Buffet were trying to promote STEM education. However, it seems his own company is not inclined to even give a chance to STEM graduates (postdocs) other than from Ivy league universities. Personally, when I doing my undergraduate degree in engineering Microsoft wouldn't even set their foot on our university irrespective of the fact that Tata, Cognizant and a whole lot holds our university in good esteem. Trying to prove myself, was one of my motivations to pursue higher studies. Anyway, that is a different story. However, their constant promotion is only likely increase the workforce supply, which would naturally lead to the exploitation of workforce. For example, many IT companies in India force their employees to work over 16 hrs without weekends and holidays. I was once penalized, as not being time inflexible, for completing my work before 18h00. The employees have no say because, they are easily replaceable with someone with a need. In the case of recession, some companies laid off their employees but they had no reason to, most of their projects are long-term and most of them saw hike in their profits, generated by these lay-offs. They could do so due to the huge supply of workforce...

In my perspective, Mr. Gates, is either trying to generate cheap labor for his industry or is completely misinformed of the reality.

4. To attain social status

This is a very common reason for parents motivating their children to become graduates and is more common when they are from socially/economically backward community. I believe, this is their subconscious drive to prove that they are equal. While education does bring some social status, the ultimate status is determined only by one's paycheck... Even if the person is a noble laureate, he gets his insurance coverage only based on his premium and net worth, not on his contribution...!

5. To attain economic status

Many believe that higher education would lead to better income. There is some truth in that but also a lot of lies. As have indicated in my previous post, an undergraduate is likely to derive more benefits. This could be justified by the plethora of job opportunities available to them and low debt accumulated during those undergraduate studies. Further, since they start early, they are likely to accumulate more over the years. However, the situation would change immediately once you venture beyond your undergraduate degree. With Masters, the opportunity reduces, reduces further with PhD and proceeds towards zeros as the number of years in one's postdoc increases. Take my case for example, I left a nice job to do graduate studies in robotics. Yes, it is a very good subject with lot of civilian and military applications. The consequence, I'm now desperately hunting for a job after a PhD in remote sensing and 2 years of experience as a postdoc as my funding would run out in another 6 months. 

Conclusion

Now comes the interesting question, irrespective of the risks involved, how and why is that many of the articles continue to sing paeans encouraging graduate education? First, these studies project amazing life-time earnings based on past earners, who now have comfortable in jobs and have a decade or more years to retire. Those studies didn't take into account the present job market and its evolution over time to predict its future state. They conveniently left out the truth about the risks involved and were also "unethical" in failing to highlight the limits of their analyzes. Regarding why they do this, it may probably be to reduce competition. For example, if every one knows the truth about graduate education, they would try to emulate people in power i.e., businessmen and politicians, which would increasingly make the market competitive. Since, it is impossible to derive economic benefits from a perfectly competitive market, the best alternative for those in power is to make the people believe in a system of long-duration education. This would reduce the competition immediately and would also shift the unemployment crisis to a later date. 

Limitations:

This analysis is based on an average perspective. Ivy leaguers and "close-enough"s get preferential treatments, so they may not agree with this. And obviously certain subjects would be better preferred than other. These aspects are not discussed in this study.

Do you have any personal experience that buttress or counter the arguments in this post?
I would more than happy to hear from people with different views...!

Frugal Living may cost your job!

In the last few years, there have been many pages cropping up with tips on frugal living. I have also shared my views and practices in my previous post, on frugal living. However, since every micro-economic decisions has its implications to macro-economy and vice versa, I’m trying to offer here a different perspective.

Frugal living is based on the concept of reducing expenditures while maximizing one’s health and economic benefits. It is based on identifying the necessary expenditures from unnecessary expenditures and to act smartly. However, such acts, is also likely to reduce demand for products, which are likely to result in increase in unemployment as the owners and CEOs try to max-out their profits at the cost of employees, curb innovation, etc. These consequences would likely reduce Governmental income, which would increase the debt-to-GDP ratio (as GDP would reduce due reduction in demand) leading the country into the vicious cycle of austerity. This is depicted in the following graphic. 

A Simple Case Study - eschewing smartphones:

In my perspective, avoiding smartphones (cell phones, if possible) is one of the easiest ways of saving money and probably have enough to invest. However, when the demand for smartphones reduce, first the low cost manufacturers followed by the premium phone manufacturers would see a reduction in demand. This will force them to optimize their investments in a such a way so as to maximize their profits. One of the easiest ways to do that is laying-off employees. They would save money from the salaries of the laid-off employees as well as the exploitation of current employees. When there is a fear for lay-off the current employees tend to cling to their jobs by putting on more hours and working during weekends/holidays. This increase in unemployment is likely to affect the country’s economy adversely (though not that of the CEOs’ or the boards’). Further, in their effort to prioritize investments, they would also cut funding to many research programs, resulting in unemployment and loss of innovation. Further, app manufacturers, game developers, etc. would lose their market, leading to further unemployment. This would have adverse effect on economy as unemployment and debt-to-GDP would rise. Thus saving some bucks by avoiding a product is likely to throw-up people in streets without jobs.

Finally, for people wondering where do I stand, I stand with frugal living. Why? I’m in search of a job and I simply cannot afford otherwise. On the other hand, I strongly believe that the rich should spend more (preferably proportional to their asset) but in general, it is the poor who is spending more all over the world!