Depression , Democracy and Demagoguery – the deadly trio !

My late grandfather Prof R Easwara Pillai was an eminent historian and an amazing story teller . He had mastery over three subjects and how they connected with each other – Economics, Politics and History . I grew up listening to him telling me stories that would emphasize useful principles from these three disciplines . I would never forget his explanation of the theory of diminishing marginal utility – the fourth mutton cutlet will not taste as good as the first !

I didn’t major in any of the three subjects my grandfather loved – I chose to become a mechanical engineer like my father . But thanks to the love for all three subjects (especially history) that I developed hearing those stories , I have continued to read up, listen and learn what I could .

For the last couple of months , I have been thinking about the post Covid world from many different angles and have posted some thoughts on future of IT services , the need for holistic solutions , and the impact on China .

Today morning I posted the following on FB about the economic realities that India and US are facing ,

The two major economies that I have an interest in are US and INDIA . Both need to kick back into growth but their options are rather different .

INDIA is a much smaller economy in size – both aggregate and per capita . But it has been growing at a much faster clip . Even with revised numbers – INDIA might be able to grow at around 2% when US etc might enter negative territory .

US – and many other developed countries – has been pumping money to help local businesses get through the hard times . INDIA has not done anything similar – though when it comes to taking care of citizens with food and medicine and containment, INDIA has done a magnificent job . But let’s focus on the economy angle now .

The unfortunate reality is that India can not afford to do what US does in terms of a massive influx of cash into the economy . If we look at the tax revenue assumptions in last budget – we can easily figure out that it was unrealistic to begin with . Now with income and trade both coming down , there is no way to make a lot of tax revenue in this fiscal .

US can absolutely print money – dollar is a strong reserve currency . That’s a limited option for INDIA . I have no doubts INDIA will also print some rupees but the inflationary risk is higher and may be 1% of GDP via this method is already enough to take INDIA back to a period no one cares to be in .

INDIA Government thus will need to borrow heavily at least for this year – some from within the country and some from abroad .

Government bonds are a viable strategy . But the domestic market for it will be weakened by both corporate and personal savings affected by the shut down . Still – there are still healthy and large balance sheets who might think about this favorably . And there are plenty of rich people and some NRI inflow to make this work

International borrowing is a more complicated problem . INDIA has made it easier to invest . But that means we need consistent tax policies (which doesn’t happen very well) , tight inflation management (which is quite good now but needs to continue), and consistently good credit ratings (also done decently so far). But there is one thing INDIA can not control – investors can also trigger a liquidation based on how their home country policies (and political rhetoric) changes . All that said – INDIA needs international money to get through this .

Whatever happens , I hope government doesn’t get stupid and just start taxing more on existing base like the disastrous policy of 1974 that Mrs Gandhi brought out . The irony was that MMS was the tax policy creator who then under Rao was also the bold leader to bring INDIA to the modern world .

I hope INDIA starts to take manufacturing seriously from now on – especially when there is a global will to move some out of China . That in turn might be something that US needs to look at seriously too . A lot of the pain in US was caused by letting

most of manufacturing leave our shores .

The two historic events that are used to compare and contrast the covid crisis are the Great Depression and the spanish flu . I had a chance to read up on the former a lot during the 2008 financial crisis and I brushed up on that a bit in the past few weeks .

The most chilling part of that horrible decade starting 1929 was the rise of Adolf Hitler . Just a few years ago – he tried to overthrow the government and got jailed. Strangely he wasn’t deported to his birthplace of Austria because the good judge thought Hitler thought and acted like a German and hence can stay in Germany . Nazis were not taken seriously – and eventually Bavaria even let them back into official existence . Hitler by then had realIzed that being a demagogue was a lot easier to get to his goals than the use of violence . The depression gave him the perfect platform – primarily around tackling unemployment – to consolidate power . By 1933 he was the Chancellor of Germany !

A lot of evil happened in his long tenure . It made me think about the trio of depression, demagoguery and democracy – which is the unfortunate intersection of economics , politics and history .

History – even recent history – is full of people who used demagoguery to great effect for their purposes . Senator McCArthy might be the best example that a lot of people can relate to in this context .

Demagoguery is not binary – it’s a continuum for politicians in any functioning democracy and probably cannot be avoided . So then the logical next question for me is what’s the flaw in democracy itself ?

History and politics have an intersection in the past that perhaps can provide a clue .

The great philosopher Socrates wasn’t a big fan of democracy the way it was practiced in Greece . His point of view was something like this

A ship needs a captain who knows how to navigate a ship at sea – and not just a random person who was elected to the role of captain by people who don’t know what skills a captain needs . Similarly if you let people to vote who haven’t been taught to think deeply about the role of politics and administration – then you will get bad results and rabble rousers !

Essentially Socrates put the onus on educating people before they are allowed to vote . So in his view – you can’t vote just because you are of a certain age and was born inside the country .

Given the general lack of civics education in this country , I guess what we dislike about politicians can be traced back at least partly back to us ! And if we haven’t thought through what we need in our elected representatives and administrators – and a depression hits us , the demagogues will have a field day and we may not like the results very much .

What happened to Socrates eventually ? Demagogues of the time charged him with “corruption of the youth” and by a thin majority, the 500 jurors voted him guilty . He was – quite tragically – put to death by poison .

The life of Socrates was some 2400 years ago , and Hitler’s was less than a century ago . If we haven’t yet learned the lessons from the past intersections of economics, politics and history – we better start now !