Economics for Non Economists 5 – Inflation - Why is the government’s inflation rate lower than my personal experience?

By Girish Menon

Some of you would have realised that in the China virus season the supermarkets have raised prices and stopped offering discounts on many goods. As a result you would have experienced rising food bills which according to layman knowledge should translate into inflation*. At the same time, you may have read many economists predict a period of recession, deflation** and high levels of unemployment. So how is it that when you are experiencing inflation personally, economists predict the existence of deflation?

It all depends on the way the inflation rate is calculated.

The UK government uses the Consumer Price Index (CPI) to estimate the inflation rate in the British economy. It works like this:

1. Every year a few thousand families are asked to record their expenditure for a month. From this data the indexers estimate the types of goods and services bought by an average household and the quantity of their income spent on these goods.

2. With this information, surveyors are sent out each month to record prices for the above mix of goods. Prices are recorded in different areas of the country as well as in different types of retail outlets. These results are averaged out to find the average price of goods and this is converted into index numbers.

3. Changes in the price of some goods are considered more important than others based on the proportion of the income spent by the average household. This means that the above numbers have to be weighted before the final index is calculated. 

---Topics covered earlier

Relation between Debt and Profit

Explaining GDP and Economic Growth

Quantitative Easing

What is a Free Market

---

Consider this example:

Assume that there are only two goods in the economy, food and cars. The average household spends 75% of their income on food and 25 % on cars. Suppose there is an increase in the price of food by 8% and of cars by 4% annually.

In a normal average calculation, the 8% and 4% would be added together and divided by 2 to arrive at an average inflation of 6%

However, this provides an inaccurate figure because spending on food is more important in the household than spending on cars. Food is given a weight of 75% and cars are given a weight of 25%. So the price increase of food is multiplied by ¾ (8*3/4 = 6) and added to the price increase of cars which is multiplied by ¼ (4*1/4 =1) which will result in an inflation of 7%.

Therefore if the inflation index was 100 at the start of the year then it will read 107 at the end of the year.

The accuracy of inflation calculations

As the example makes clear this calculation is based on an imagined average family’s spending patterns. There maybe only a few families in the UK that have the exact same spending patterns as imagined by the government.

Theoretically, different rates of inflation could be calculated within an economy by changing the consumption patterns or weightings in the index. This will explain why the inflation that you experience may be higher or lower than the government’s inflation rate.

* Inflation is an average increase in price level compared over a previous period.

** Deflation is an average decrease in price level compared over a previous period.

Disinflation means the inflation in the current period is lower than the earlier period.

The Supreme Court must remember: It is supreme because it’s final not because it’s infallible

Whilst justice is important, judges must not take themselves too seriously. Even if their amour propre is offended, it does not mean the institution has been questioned or justice brought into disrepute writes Karan Thapar in The Indian Express.


 

Are judges special or is justice special? It’s an interesting question and not because it’s a tricky one. Actually, it’s the issue at the heart of the debate around the Law of Contempt. It’s been discussed before but two cases of contempt against the human rights lawyer Prashant Bhushan in the Supreme Court have brought it back into sharp focus.

The first contempt case, called the Tehelka case, dates back to 2009 and hasn’t been heard for the last eight years. Why in the middle of a COVID crisis, when the Supreme Court is only functioning virtually and many cases are rejected because there is “no extreme urgency”, has this case been given priority? When the Court cannot find time for the Citizenship Amendment Act or habeas corpus petitions from Jammu and Kashmir, are we to believe this case is more important?

Of course, the Court’s concerns are allegations regarding the judiciary and corruption, made by Prashant Bhushan and published by Tehelka. But if this has really scandalised the Court how come it didn’t act for 11 years? The second contempt case is mystifying. It arises out of one of Bhushan’s tweets commenting on a photograph of the present Chief Justice. The Court claims his tweet “brought the administration of justice in disrepute … undermining the dignity and authority of the institution of Supreme Court in general and the office of the Chief Justice of India in particular”.

These two cases have brought contempt of court back into focus and that’s the reason why the question I started with is important. As regards the cases themselves, they were heard on consecutive days last week (the 4th and 5th) and in both cases a three-judge bench presided over by Justice Arun Mishra reserved judgement. It’s expected in a week or 10 days. If good sense prevails he ought not to be sentenced. I now want to turn to what ought to constitute good sense in this matter. The answer to the question at the very start hinges upon it.

The concept of contempt is a centuries old British law abolished in 2013. At the time the British Law Commission said the purpose was not just “preventing the public from getting the wrong idea of judges … but where there are shortcomings it’s equally important to prevent the public from getting the right idea”. In other words, one intention was to hide judicial corruption. The concept, therefore, clashed with the need for transparency but also freedom of speech.

As far back as 1968, Lord Denning, Britain’s former Master of the Rolls, had this to say of the Law of Contempt: “Let me say at once that we will never use this jurisdiction as a means to uphold our own dignity … nor will we use it to suppress those who speak against us. We do not fear criticism, nor do we resent it. For there is something far more important at stake. It is no less than freedom of speech itself. It’s the right of every man, in parliament or out of it, in the press or over the broadcast, to make fair comment, even outspoken comment, on matters of public interest … we must rely on our own conduct itself to be its own vindication.”

In 1987, after the Spycatcher judgement, when the Daily Mirror called British Law Lords “You Old Fools” or, in 2016, after the Brexit ruling, when the Daily Mail called three judges “Enemies of the People” the British judiciary consciously and sensibly ignored the headlines and did not consider contempt prosecution. In fact, Lord Templeton’s comment on the Spycatcher headline is worth recalling: “I cannot deny that I am old; it’s the truth. Whether I am a fool or not is a matter of perception of someone else … there is no need to invoke the powers of contempt.”

A similar position was adopted in a 2008 lecture by Justice Markandey Katju: “If a person calls me a fool, whether inside court or outside it, I for one would not take action as it does not prevent me from functioning, and I would simply ignore the comment or else say that everyone is entitled to his opinion. After all words break no bones”.

More importantly, Justice Katju added: “The test to determine whether an act amounts to contempt of court or not is this: Does it make the functioning of judges impossible or extremely difficult? If it does not, then it does not amount to contempt of court even if it’s harsh criticism … the only situation where I would have to take some action was if my functioning as a judge was made impossible … after all I have to function if I wish to justify my salary.”

I think that answers the question I began with. Whilst justice is important, judges must not take themselves too seriously. Even if their amour propre is offended, it does not mean the institution has been questioned or justice brought into disrepute. Judges deliver justice, they do not embody it. They should never forget their Court is supreme because it’s final not because it’s infallible. When they lapse they can be criticised, but of course, politely and fairly.

I hope the Supreme Court will bear this in mind when it pronounces on Bhushan’s two cases.

प्रशांत भूषण पर मुक़दमे में क्या हुआ? Yogendra Yadav

 

Wilburton walkout ends exciting game

 by Girish Menon

 

CamKerala 3s (CK3) were around 162 runs for 6 chasing Wilburton’s 208 with 14 overs left. A partnership of over 6 overs and 40 runs had developed between Fabio and this writer when Fabio cross bats their spinner over midwicket. The ball is caught but the fielder was standing on the boundary line. Umpire Adarsh signals a six but Wilburton walkout ending an exciting game that appeared to be once again moving towards CK3.

For scorecard please click here

 

Wilburton turned up for this game at Comberton with a mood to right the wrongs they suffered against TAC in a friendly last week. Their 16-17 year old betrayed this view as he was the first arrival on the ground and told this writer that in the last match TAC had been liberal in calling wides and no balls. This lad righted TAC’s wrongs by being unduly harsh on CK3’s wides, no balls and lbw appeals. That set the tone for the game and this writer had to indicate to Saheer the harshness of the wides and the no balls. Another notable incident was during CK3’s run chase. The same lad denied CK3 a four by claiming the ball did not cross the line. Some CK3 players watching the incident began protesting this decision while a Wilburton spectator joined the argument on the other side. A pregnant Martha (Savio’s wife) was so convinced the ball had crossed the line that she was seen expressing her view.

 

The game began on a disappointing note for CK3 who were denied the chance to bat first (despite having a 75% probability of doing so according to captain Saheer). After a couple of early wickets Wilburton consolidated their innings with a couple of mature gentlemen, one of who later played as the wicketkeeper and was the agent provocateur of the walkout. This man swatted a few full tosses and egged on the lad to be harsh on no balls etc. This pair put on a good partnership and Wilburton edged towards a good score. The other partner scored a 70 and shepherded the rest of their batting which was not poor. In a late flourish CK3 took a flurry of wickets and Wilburton were all out in the 40^th over. Debutant Herald bowled an excellent spell of offspin, with Saheer and Himanshu helping to wind up the innings.

 

CK3 started tennis ball style trying to hit boundaries. This was epitomised by Freddy who hit a six and trying to repeat the action was bowled in the next delivery. So, the run rate was high but wickets kept tumbling. Arun tried to calm things down and he had a good partnership with Saheer before Saheer was declared run out. Herald also declared Arun out lbw which brought Fabio and this writer to the crease. Fabio and this writer operated on the principle that if CK3  batted the full 40 overs then a win would follow. It was decided that one boundary and 1-2 singles was what would be attempted each over and good balls defended. What happened thereafter has already been highlighted in the introduction and will go down in CK3 folklore.

 

Wilburton players followed the script of the pigs in Animal Farm with their dictum " Our Umpires Good, Theirs Cheats". Also, revenging the TAC game against CK3 because of 'similar looking people' may be considered racist. They also ensured a continuous flow of sledges while CK3 were batting.

 

CK3, after last week's start with its main players declared lbw, may have seen the writing on the wall as far as lbws go in self umpired village cricket leagues.  And Captain Saheer’s Cornwall holiday mood may have ended quickly due to above events at Comberton.

Modi is unassailable in India

 

Economics for Non Economists 4 - The Marriage of Debt and Profit in Capitalism

 by Girish Menon (Adapted from: Talking to my Daughter about the Economy by Yanis Varoufakis)

How does a new entrepreneur start?

 Let’s call her Indira. Indira will need some money (capital) to hire the factors of production i.e. to pay wages, for raw materials, machines and for rent to start her business. Since she will only get money after she has sold her goods, she has to take a loan to get started and the loan taken to get started is called Debt.

 Also, since the amount of wages, raw materials and rent are decided in advance the only person who does not know what she will end up with at the end of the process is Indira the entrepreneur. Hence achieving a profit becomes the most important goal for Indira in order to survive and not to end up with unpayable debt.

---For earlier articles

Explaining GDP and Economic Growth

Quantitative Easing

What is a Free Market

---

 Entrepreneurs as time travellers

 When Indira takes a loan to get started, what is she actually doing? In the format of a sci-fi movie, she is looking into the future through a semi-transparent membrane. Sensing an opportunity, she then pushes her hand into the future and grabs the revenue she will make and pulls her hand back into the present.

 If Indira has discerned the future accurately, then she will be successful and will earn enough to repay the loans that she borrowed to start with. However, if she has predicted the future wrongly then her business will fail and she will be unable to repay her loan and become bankrupt.

 Bankers as time travel agents

 Nowadays bankers create money out of thin air. Yes, they have the power to type the numbers in your bank account and money is created. Since bankers have very few constraints on the amount of money they can conjure, they have great incentive to lend money and earn interest and other fees. After all the more money they create and lend in an economy the greater the profits for themselves.

 Bankers - Heads I win and tails you lose

 Earlier, bankers would lend to entrepreneurs like Indira if they trusted her to able to repay her loan in the future. But nowadays banks have found a way to insulate themselves from Indira’s failure. For example, once a bank has given a loan of say £400,000, then the bank would chop up this loan into little pieces and sell it on to others i.e. in return for lending the bank £100 each; four thousand investors would each be given a share in the £400,000 loan. Thus the bank has already recovered the loan and will make a profit when Indira repays her loan. If Indira goes bankrupt then the four thousand investors will lose their money.

Positive Multiplier

 Suppose Indira is successful, she will hire workers, buy raw materials… these factor suppliers will receive wages and rents and buy more goods and the process of recycling goes on a positive and upward scale increasing GDP, more employment, more new businesses etc.

 The Crash

As the economy grows, banks will lend even larger amounts of loans until it reaches a point when the loans they have made are so vast that the economy cannot keep pace. At this point realization dawns that the large loans will not be repaid and the economy crashes.

 Due to the bank’s enthusiastic lending the once successful Indira may now find it difficult to repay her loan. She will now have to close down her business and the workers and suppliers will no longer get wages or rents. This may affect other businesses and a downward spiral starts resulting in bankruptcies, lower GDP, unemployment….

Debt, Profits and Crashes

Thus debt is indispensable in capitalism. There can be no profit without debt. However, the very same process that generates profits and wealth also generates financial crashes and economic crises.

Modi redefined secularism with Ram Mandir as Hindu voters were fed up of Sonia-Left version

Assumptions that Indian secularism died with Ram Mandir bhoomi pujan are bunk. It is enshrined in the Constitution, and is worth preserving writes SHEKHAR GUPTA in The Print



 

Did Indian secularism die on 5 August in Ayodhya? It follows, then, that a new Indian Republic would have been invented, a Hindu Rashtra.

If you accept those two arguments, a third becomes inevitable. Any Indian with a belief in our secular Constitution can then say this isn’t the country I was born in. And, I am going away. To America, where else, but only once Donald Trump goes this winter and immigration eases up.

To be upfront, we dismiss all of these assumptions as bunk. First of all, the rumours of the death of secularism are just that, rumours, and vastly exaggerated too. Sorry, Mark Twain, to drag you into the messiest side of our politics. Second, the death of secularism has been announced several times before; on a rough count, about as often as our commando comic TV channels declare Dawood Ibrahim dead.

Sorry for that odd comparison. But a rumour is a rumour is a rumour. Of course, it is fun if you are a masochist and relish self-flagellation.

A very vast majority, in fact almost all of the 138-plus crore of us here, have no green cards or benevolent uncles or foundations waiting to take us to America. Or Europe. Or that new destination with sex appeal for some, Turkey. We have to live in an India governed by whoever the people choose, based on the same Constitution we hold so dear.

In the past 35 years, secularism has been pronounced dead by the Right after Rajiv Gandhi’s action on the Shah Bano case (1986), the proactive ban on Satanic Verses (1988), the unlocking of the gates of Babri Masjid-Ram Janmabhoomi, Shilanyas and the launch of the national election campaign from Ayodhya with the promise of Ram Rajya (1989).

Then, in 1992, with the destruction of the mosque, followed by widespread communal riots. What else could you expect from a prime minister who “wore khaki chaddi (RSS shorts) under his dhoti?” Arjun Singh drafted Sonia Gandhi to come in with Sanjivani Booti, but that had short-lived effect in Kaliyuga. Indian secularism was again pronounced dead in 1996, when Atal Bihari Vajpayee put together India’s first BJP-led government, even if it lasted just 13 days. It was three more than what Congress party’s affable spokesman then, V.N. Gadgil, had predicted it to be, a “ten-day wonder”.

The next time Indian secularism died was in the Gujarat killings of 2002, and then died again and again as Modi kept winning there. It was then that we could foresee May 2014, May 2019 and now 5 August 2020, being scripted. I wrote two National Interest pieces, in the wake of the 2002 and 2007 Gujarat elections, anticipating the inevitable and unstoppable rise of Narendra Modi as a dominant national leader (‘The Modi Magnifier’, and ‘If Modi wins on Sunday’). The second even said Modi’s short-sleeved kurtas would become a political fashion statement.

Am I a Modi fan, or to use that expression fashionable these days, a ‘bhakt’? Not even Modi will accuse me of that. But I am a journalist with eyes and ears open. Indian secularism was pronounced dead in 2014 and again in 2019. But on 5 August, that is earlier this week, it was still alive to be killed yet again. But hang on, you might say, this time I have seen its corpse. You would be right. 

Something did indeed die this 5 August in Ayodhya. It is just that it wasn’t our constitutional secularism, but a version of it confected after December 1992.

That the Babri demolition and the riots that followed angered a lot of middle-of-the-road Hindus also is a fact proven by election results that followed. This was especially so in the Hindi heartland, particularly Uttar Pradesh. After Kalyan Singh’s BJP government was dismissed, Mulayam Singh Yadav’s SP and Mayawati’s BSP took turns in power.

Both built their new politics around the redefined ‘secular’ vote. In Bihar, Lalu Yadav had already perfected the formula. The secular vote now came to be seen as Muslim vote.

It was around this new notion that old enemies came together in unlikely coalitions to keep the BJP out of power. The two United Front coalitions on daily wages, under H.D. Deve Gowda and I.K. Gujral, were both an arrogant negation of the popular will. The only time this new post-1992 “anybody but the BJP” secular formulation won a genuine mandate was in 2009.

The reason we call the post-1992 secularism a new formulation is because of how strongly Left politics and intelligentsia got involved in it. They rewrote the Ayodhya binary as: Did Ram even exist or not? This ran contrary to the Congress party’s cautious approach where minorities were patronised, but Hinduism never mocked.

If the new BJP was dyed deeper saffron, the Congress-led alliance’s secularism was now much redder. It led to a series of blunders: The abolition of POTA (Prevention of Terrorism Act), as a pre-condition to the formation of UPA-1, because the ‘Muslims’ felt victimised. Never mind that the same government, not soft on terror, simultaneously amended UAPA. Is it much softer? Ask Dr Kafeel Khan.

The Sachar Committee, which raised a question like the count of Muslims in the Army, and serial announcements of Muslim job reservations (which did nothing for Muslims), followed. The UPA government gave the nation’s highest peacetime gallantry award to a police officer killed in the Batla House encounter, and its top leadership then began raising doubts on it, to ‘assuage’ the Muslim sentiment. There were other missteps like Manmohan Singh’s statement on why he thought the minorities should have the first right on the nation’s resources.

Pre-Sonia, you would have never heard a Congress prime minister say such a thing. SP, BSP and RJD were winning power simply by hyphenating the Muslim vote with one or two other large castes, and then providing lousy governance.

At some point the voter, especially the Hindu voter, had enough of it. It is that secularism which finally died this week. Its beneficiaries had seen it coming. Or you wouldn’t have seen Rahul Gandhi’s new Dattatreya Brahmin avatar in janeu, and the big temple visits. Too little, too late. 

Narendra Modi would argue that all he has done is redefine Indian secularism according to the will of the people. He speaks with the strength of a repeat mandate. You can blame the people.

Irrespective of what the Constitution says, in a genuine republic, if enough people do not like something, they will reject it. Kamal Ataturk declared Hagia Sophia to be neither a church (which it was for almost a millennium until 1453), nor a mosque, which it had been since. He made it a museum. He was no democrat, but a benevolent dictator, albeit secular. He wanted religion out of politics.

Last month, Erdogan reversed it. Unlike Ataturk, he is democratically elected. Is his decision popular in Turkey or not? Does this, then, reflect the true will of the people? What was secular wasn’t democratic, what is democratic isn’t secular. Politics is a funny game.

You can’t elect a new people. Nor are the people of India such a lost cause. Enough Hindus still vote against Modi, in spite of his massive appeal. What they need is a better proposition.

I take you back to the summer of 1996, the Lok Sabha debate on the vote of confidence that the 13-day Vajpayee government lost. Ram Vilas Paswan, ‘secular’ then, made a brilliant speech. Babur brought only 40 Muslims, he said. They then became crores because you (upper castes) did not let us in to your temples, but the mosques were open, so we went there instead, he said.

Indian secularism is enshrined in the basic structure of our Constitution, further strengthened by the Supreme Court judgment on Ayodhya that shrewdly located the 1993 law protecting all other shrines in India within it. This is worth preserving. Indian secularism doesn’t deserve a tombstone. It needs a new shrine, in the manner that Paswan put it.