From Philips curve for economics to Philips curve for politics..

An interesting article by Siddharth Singh of Mint. It is kind of interesting to put economics framework to figure all complex things in life.

He uses Philips Curve used in economics and draws a similar curve for politics:

Ask a central banker about the importance of managing expectations in an economy and he will tell you that perhaps it is the most important task he has to face. The trade-off between the rate of inflation and the rate of unemployment, the Phillips Curve—with a lower rate of unemployment leading to a higher rate of inflation—is a textbook example of how expectations affect economic outcomes. An increase in expected inflation in one period leads to an increase in actual inflation in the next period. Managing expectations is vital to keeping prices in check.

Something similar is afoot in Indian politics.

In a matter of less than a year, the Aam Aadmi Party (AAP), now in power in Delhi under Arvind Kejriwal as chief minister, has raised expectations of citizens to a high not seen in a long time in Indian politics. He has promised to root out corruption, provide cheap electricity and free water—to a certain limit—to the residents of India’s capital.

It is tempting to export the Phillips Curve to the political arena. The variables are, of course, different. In democracy, too, there is a clear link between expectations of citizens on various matters—a variable controlled by parties that come to power—and the confidence of citizens in government. The play is between expectations and confidence. Just as in an expectations-adapted Phillips Curve, expectations and confidence in the political system, too, pan out in lags. For example, at the start of a period—say just before elections—a political party can raise expectations to a very high pitch, totally out of line with what it can deliver when it is in government. If it is unable to meet them, citizens lose confidence by the end of that electoral cycle. This interplay is the normal stuff of politics at moderate levels of expectations. That’s how democracy works in India.

A bit of history regarding Philips curve. It was first modeled by AW Philips as a trade-off between change in wages and unemployment. The change in wages was then modeled more broadly as inflation and in countries where unemp data was not available, people used growth. So basically there is this inverse relationship between inflation and unemp leading to a downwards sloping curve.

In case of econ-philips curve, we have inflaiton on y axis and unemp on x-axis. The story stars like this. Say policymakers choose to allow a little inflation to lower unemp. This could be done by easing the interest rates and the Philips curve ended here.  However as per Friedman-Phelps, higher inflation will eventually lead to higher inflation exp. These exp will make overall inflation high leading to similar unemp rate seen at the start. This became the famous vertical Long run Philips curve.

In case of Political Philips curve, the relation is not really clear. Confidence and expectations are positively related. If expectations go up so does confidence. Just like E-Philips curve, we perhaps need to say expectations (y axis) and lack of confidence (x-axis). And again we can have the same story. In order to boost confidence, expectations are raised. As there is failure to match expectations, we move back to lack of confidence. However, we still have high expectations whereas it shoudl decline. So the model does not really fit as neatly but still the broad idea is conveyed…

The author towards the end says:

Is there no room for political change in India? That can be one cynical answer. There is, however, a more meaningful conclusion: Experienced political leaders never raise expectations beyond what they can deliver. And this does not mean that politicians who don’t make such promises are corrupt and cynical. For example, good administrators—Naveen Patnaik and Raman Singh come to mind—never make promises to deliver cheap electricity and root out corruption. It is not that they don’t want to get rid of these problems but they realize the limits of what can be done. There is also a class of leaders who make big promises without realizing what their fulfilment requires. One is forced to conclude that chief minister Kejriwal belongs to this class. He needs to borrow a leaf out of Reserve Bank of India governor Raghuram Rajan’s book in managing expectations. 

Well this is just the opposite. The new RBI Governor raised much higher expectations than anyone imagined. So actually AAP has taken a leaf from the RBI Governor really. In Governor’s case things worked. as monetary policy is no way as complex as Indian politics. Moreoever, he always knew this job was coming to him so knew things. With AAP leaders, this is not the case.

The article also has comparisons from India’s history to show how such previous attempts fizzled out. Despite similarities, there are differences. I don’t think any of those political parties got converted into a mass movement as AAP (sticking my neck out on this). Right from North to South, East to West AAP has seen a surge in followers. Some may call it a fashion/fad but who really knows. It was seen as a fad before Delhi elections as well. No one really believed in it even then before it became a phenomenon.

In this there could be another parallel with history. A friend pointed how AAP surge reminds of similar movements in US where we had similar situation of high corruption, gilded age, robber barons etc. The change was brought amidst huge public pressure which sowed the seeds for US growth and development. Can AAP enable this change?

Then there is another comparison with some Chief Ministers who get elected and do not go the AAP way (AAP has replaced UPA). Now these CMs have a well proven trackrecord (so far or atleast what we read in press) so can stick to basics of economics. But then can we say the same for new political parties? Could AAP come to power without providing freebies? But then what is more interesting is how other political outfits are looking to emulate AAP in this surge of freebies. Questions need to be raised at them as well.

So far, in the case of AAP it is a mixed bag. Political analysts are amazed but economic analysts are not. the white papers are amazed but brown ones are not. If AAP share was trading on a political exchange it would have been one of the biggest successes on debut. But its show on the financial exchange would perhaps resemble a nervous cliff. The aam aadmi is rushing to become a AAP member but the investor community is shaken. So far, AAP is hearing the woes of Indian residents and choosing to ignore the investors/analysts community.

This is also because we look at the situation from two different lenses. For older generation of economists who studied political economy (unfortunately I am not one of them), answers would perhaps be clearer.There is an urgent need to argue about AAP’s surge from a political economy perspective..

For me the more interesting question is why have urban voters in Delhi voted for AAP despite its so called poor economic agenda? As economic analysts make us believe that UPA lost because of its poor economic policy. But on comparison, not much is different between the two in terms of economic agenda.

The Delhi vote goes on to show how lack of basics are hitting India’s urban life. Cost of living in urban cities has risen significantly, leading to huge distress. With loads of migration coming to cities, people want cheaper urban services. And hence the vote to AAP. They are more interested in living in the present rather than think too much about future. Kind of believing in Keynes dictum – In the long run we are all dead.

Now, not for once I am supporting AAP’s economic policy. There is hardly any economics there. But it does raise serious questions over how we are going to provide various urban services at affordable prices. Affordability is as much a issue as availability. Earlier we focused on former and now mostly on latter. We need to strike a balance if we have to take this so called economic development forward.

One does not know the route AAP takes from here on. Whether it will fizzle or become a force for change is unknown and we will only get to know as future unfolds itself. But it has surely shaken many a belief we had over India. It has raised far more questions than we have answers/solutions.

India is increasingly becoming a place where parties that are politically acceptable are not so acceptable economically and vice-versa.  Not sure which way should one look…

One Response to “From Philips curve for economics to Philips curve for politics..”

  1. Hemen Parekh Says:

    Transforming India

    Here is a PARTIAL list of initiatives that may transform India – if successful

    But let not ” Fear of Failure ” prevent us from undertaking a ” Out of Box ” thinking

    In a democracy , people have a right to differ

    Hence , many will not agree – but they must have their say

    In the end , there is only ONE WAY to find what works – and what does not

    BY TRYING OUT !

    MY LIST ( not in order of importance or priority ) :

    > Food Security Bill

    > Connecting 2.5 lakh panchayats thru broadband

    > Aakash Tablets for 220 million students

    > Lokpal Act / Delivery of Services Act ( ” Magic Wand ” App ? )

    > Bank Transaction Tax / Demonetization of Rs 1000 currency note

    > Aadhar Identification Card

    > Electoral Reforms / Right to Recall ( ” VotesApp ” mobile App ? )

    > CAG audit of Private Companies using Government resources

    > 4G Wireless Internet all over India

    > Delhi Mumbai Industrial Corridor

    > Amritsar-Delhi-Kolkata Industrial Corridor

    > Natural Resources Allocation Policy

    > Political Party’s Funds under RTI scrutiny

    > Social Media based marketing

    > Liberalization in FDI ( Entire economy – not just retail )

    > Direct Transfer of Subsidies to poor

    > Government funding of Elections

    > Interlinking of Major Rivers

    > ” India Post Bank ” with 139,040 branches in Rural areas

    > Bank A/C for every adult by 2016

    > Divestment / Closure of loss-making / bleeding PSUs

    > Imparting skills to 500 million youth ( NSDC )

    > Sulabh Sauchalaya

    Here are my own suggestions :

    > BLACK MONEY

    * As incomes climb ( for an individual or for a corporate ), reduce taxation
    rates for each higher slab ( inverse of present system )
    Eliminate incentive for tax – evasion
    Reward honesty / efficiency / productivity
    Celebrate Wealth-Creators

    No more “Black Money ” generators

    With such ” Inverse Taxation ” regime , we can

    expect Corporate and HNIs from all over the

    world , to pump in $ 100 billion worth of

    investment, EVERY YEAR , in our Infrastructure

    projects !

    * Introduce Amnesty Scheme for black money declaration
    No questions asked ( re Source of funds ) for investment in specific
    Infrastructure Bonds , with tax – free interest for 10 years

    > JOBS

    * With ever-increasing mechanization / automation in every sector of
    economy , there is no way , we can create 12 MILLION new jobs ,
    either in Organized or Unorganized sectors , year after year
    Creating just ONE job in these sectors , requires a

    Capital Investment of Rs 1 million ( Ave )

    Where can we find Rs 12 million million ?

    Our only hope lies in creating ” SELF – EMPLOYMENT ”

    To generate massive self – employment , provide generous , low interest
    loans and ” Tax Free ” income (up to Rs 5 Lakh/ year) for self-employed
    ( including Proprietary Firms )

    * Create an ” ONLINE JOB EXCHANGE ” to replace 943 existing physical
    Employment Exchanges , with 42 million current registrations

    Call it ” GLOBAL-RECRUITER ”

    Require ALL job-portals of India , to RSS feed into Global-Recruiter ,

    # Every single job advt posted everyday( including current )
    # Every resume posted everyday ( including current )

    Make these jobs and resumes ” searchable ” from ALL the job-portals ,
    irrespective of , on which job portal , these were posted

    After matching ” JOBS ” with ” RESUMES ” , Global Recruiter to send out
    daily Job – Alerts on the smart phones of the jobseekers , thru a mobile
    App , ” MY JOBS ” – against which , candidates can apply from mobile

    Make it mandatory for every Smart phone and Tablet sold ( or given away
    free ) in India , to pre-install ” My Jobs ” App

    And , most certainly , on those 9 million Aakash – 4 tablets for which
    tender opens on 28th Jan 2014

    Will Narendra Modi / Rahul Gandhi / Arvind Kejriwal etc , incorporate these , in their poll manifestos for April 2014 election ?

    * hemen parekh ( 15 Jan 2014 / Mumbai )

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