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    Government

    Anticipating the Unintended

    Frameworks, mental models, and fresh perspectives on Indian public policy and politics. This feed is an audio narration by Ad Auris based on the ‘Anticipating the Unintended’ newsletter, a free weekly publication with 8000+ subscribers.

    publicpolicy.substack.com

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    Copyright: © Pranay Kotasthane & RSJ

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    Latest Episodes:
    #122 Naya Paisa, Purana Qissa 🎧 Apr 11, 2021
    Show notes

    While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. Audio narration by Ad-Auris.Global Policy Watch: A Mint With a Role- RSJThe People’s Bank of China (PBOC) has been trialling a form of digital Yuan for the past year. Last week the trials entered their second phase. (Umm, they seem to have more phases for this than for developing their Covid vaccines).The Wall Street Journal woke up to the digital Yuan (paywalled) last week with this article that starts off like a Marquez novel:“A thousand years ago, when money meant coins, China invented paper currency. Now the Chinese government is minting cash digitally, in a re-imagination of money that could shake a pillar of American power.” What’s not to like an article that begins with hyperbole? But there’s some grain of truth there. Before we go further we need to make sense of sovereign digital currencies or what’s now being called Central Bank Digital Currencies (CBDC). What’s Money?Like we have written in an earlier post, money performs three roles for us: it is a store of value, it is a medium of exchange, and it is a unit of measure. Through it we save for the future, pay for goods and services and measure the value of very different things using a common unit. These roles mean anything that aspires to be a currency (the usable form of money) should have a relatively stable value over time and should be widely acknowledged as a store of value and unit of account among people. If it does so, the network effect takes over after a while and it becomes a widely used currency. Throughout history, a key feature of a sovereign state was its control over the supply and circulation of money that’s used within its boundaries. The royal mints, after all, have been around for more than two thousand years. As modern nation-states emerged through the 19th and 20th centuries and as global trade increased, central banks emerged to manage the monetary system and provide financial stability. There are three forms of money in any modern economy: * Banknotes: These are physical paper currency notes issued by the central bank that we all use in our everyday lives. This is a direct promise by the central bank to pay the holder of the note a specified sum of money. This promise is printed on all currency notes.* Bank Deposits: Ordinary people and businesses don’t hoard banknotes to conduct their business. They deposit their money in commercial banks. These deposits are stored in electronic form by these banks. The banks offer two services to their customers. They convert these deposits to central bank money in the form of banknotes when you demand it at an ATM and they offer to transfer your money to someone else through a payment system that exists between banks. Unlike banknotes, your deposits aren’t risk-free. They aren’t backed by any sovereign guarantee. A bank will be able to convert your money into banknotes only if it is solvent and it is able to honour its commitments. We have seen instances of a bank failing to do so in India (Yes Bank, PMC etc).* Central Bank Reserves (“reserves”): Commercial banks have their own accounts with the central bank where they deposit their funds. These deposits are used by banks to pay each other to settle transactions between them. The reserves are the other form of central bank money apart from banknotes. These are risk-free and therefore used for settlements among commercial banks. Where does CBDC then fit in?Simply put, a CBDC is a digital form of a banknote issued by the central bank. Now you might think we already use a lot of digital money these days. Yes, there’s money we move electronically or digitally between banks, wallets or while using credit/debit cards in today’s world. But that’s only the digital transfer of money within the financial system. There’s no real money moving. The underlying asset is still the central bank money in the form of reserves that’s available in the accounts that commercial banks have with the central bank. This is what gets settled between the commercial banks after the transaction. This is an important distinction. We don’t move central bank money electronically. But CBDC would actually allow ordinary citizens to directly deal with central bank money. It will be an alternative to banknotes. And it will be digital. CBDC: The Time Is NowSo, why are central banks interested in CBDC now? There are multiple reasons. One, cryptocurrency that’s backed by some kind of a stable asset (also called ‘stablecoin’) can be a real threat as an alternative to a sovereign currency. Stablecoins are private money instruments that can be used for transactions like payments with greater efficiency and with better functionality. For instance, the current payment and settlement system for credit cards in most parts of the world has the merchant getting money in their bank accounts 2-3 days after the transaction is done at their shops. A digital currency can do it instantly. For a central bank, there could be no greater threat to its ability to manage the monetary system than a private currency that’s in circulation outside its control.Two, in most countries, there’s an overwhelming dependency on the electronic payment systems for all kinds of transactions. As more business shifts online and electronic payment becomes the default option, this is a serious vulnerability that’s open to hackers and the enemy states to exploit. A CBDC offers an alternative system that’s outside the payment and settlement network among commercial banks. It will improve the resilience of the payment system. Three, central banks need to offer a currency solution for the digital economy that matches any form of digital currency that could be offered by private players. Despite the digitisation of finance and the prevalence of digital wallets in the world today, there’s still significant ‘friction’ in financial transactions all around us. You pay your electricity bill electronically by receiving the bill, then opening an app and paying for it. Not directly from your electric meter in a programmed manner. That’s just an example of friction. There are many other innovations waiting to be unleashed with a digital currency. Central banks need to provide a platform for such innovations within an ecosystem that they control. CBDC offers that option.Lastly, digital money will reduce transmission loss both ways. Taxes can be deducted ‘at source’ because there will be traceability of all transactions done using CBDC. It will also allow central banks and the governments to bypass the commercial banks and deliver central bank money in a targeted fashion to citizens and households without any friction. The transmission of interest rates to citizens for which central banks depend on commercial banks could now be done directly. While these are the benefits of a digital currency, there are other massive macroeconomic consequences including the loss of relevance of bank deposits that we have with our banks. A CBDC that offers interest would mean we will have a direct deposit account with the central bank. This will mean a move away from deposits in banks to CBDC with the central bank. Also, the nature of a bank ‘run’ will change. Today a bank ‘run’ means a rapid withdrawal of banknotes from a bank by its depositors who are unsure of the solvency of the bank. This takes time and is limited by the amount of money available in ATMs. In a CBDC world, the ‘runs’ will be really quick and only constrained by the amount of CBDC issued by the central banks. Depositors will replace their deposits with CBDC pronto. This secular move away from deposits will increase the cost of funds of commercial banks. They will have to depend on other sources of funds than the low-cost deposits that customers deposit every month in the form of salaries to them. A reduction in deposits will reduce the availability of credit in the system. This will have a repercussion on the wider economy. It will also mean greater demand for reserves from the central bank by the commercial banks to provide credit to their customers. Central banks will increase their reserves and their balance sheets will become bigger. In summary, central banks will become more powerful. China’s Digital Yuan Play For these reasons, I believe CBDC is inevitable in this decade. Central banks will have to contend with the competition of cryptocurrency and the needs of the digital economy. They will find a mechanism to create a ‘platform-based model’ where the central banks create CBDC using a Distributed Ledger Technology (DLT) or a centralised ledger model while allowing private players to provide interfaces for customers to deal with this ledger. They will have to provide some level of comfort on privacy to their citizens by separating the transaction layer of CBDC from the core ledger. But for China, the benefits of a digital Yuan do not just stop there. Beyond these benefits, a CBDC is a boon for a surveillance state as it turns into an ‘eye in the sky’ for every transaction happening in the economy. For China where all banking is owned by the state, the secular shift from deposits of commercial banks to CBDC is also a lesser problem. And most importantly, China is looking at leadership in CBDC to replace the US Dollar in global trade. A digital Yuan is the most feasible option for it to challenge the entrenched ‘dollarisation’ of the physical currencies around the world. 88 per cent of global trade is done using the US Dollar and it is what sustains the Dollar as the global reserve currency. For China to replace the US as the future global superpower, it will have to find ways to make Yuan the reserve currency. An early lead in adopting CBDC for domestic and cross-border payments is a great option to make a real fist of it.China’s early trials in this space will force a response from other large economies on CDBC. The interoperability of sovereign CBDCs and how quickly the US is able to put together a CBDC alliance that counters China will be interesting to watch. In the meantime, I expect the current Chines regime to overplay its hand here like it has been usual for it in the last few years. Expect China to play hardball with the digital Yuan in global trade. This will be an interesting space in geo-economics to watch. PolicyWTF: Casually Banning Films CommitteeThis section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?— Pranay KotasthaneMost film certification authorities in democratic republics categorise movie content according to age-appropriateness and nothing more. But India’s is an exception. The Central Board of Film Certification (CBFC) — commonly referred to as the “Censor Board” — also plays the role of a film editor. The CBFC is empowered to ask filmmakers to drop certain scenes. Not just that, the CBFC in its wisdom can just plainly refuse to certify a movie. In such cases, filmmakers have the option of appealing to the reviewing committee of the CBFC. If even that fails, they could hitherto appeal to a 5-member Delhi-based tribunal called the Film Certification Appellate Tribunal (FCAT). This tribunal has now been shut down through an ordinance along with eight other tribunals. The stated intent is that this move will streamline legal recourses. Filmmakers will now have to appeal to High Courts directly and wait for the law to take its own (long) course. In other words, “tareekh pe tareekh, tareekh pe tareekh, tareekh pe tareekh…”You would have already guessed why this is a PolicyWTF. Higher transaction costs, the existing burden on our High Courts, lack of state capacity, yadda yadda yadda. You can read these arguments here, here, and here. I won’t go there.Instead, let’s address the larger PolicyWTF - the CBFC itself. As long as it is a government-appointed body with the power to play the role of a film editor, absurdities will continue. It is for this reason that the Shyam Benegal Committee in 2016 recommended that the CBFC’s powers to modify and change movies should be taken away and it should purely function as a certification body. Exactly what was needed. But it was also exactly what the government wouldn’t allow. And so, five years after that report, we still have a CBFC which is rubbing its hands to also edit OTT content. Moreover, the percentage of films without any cuts fell to its lowest levels over the last 100 years in 2016-17. And now, even the FCAT has been shut down. Clearly, film censorship is going in a direction opposite to what previous committees have recommended. So, is there a solution to this meta policyWTF? Yes, turns out markets can help here. In 2016, my former colleagues Madhav, Adhip, Shikha, Siddarth, Devika and Guru wrote an interesting paper in which they recommended that film certification should be privatised. Deploying the Banishing Bureaucracy framework, they wrote:The CBFC be renamed the Indian Movie Authority (IMA) and that the primary purpose of the IMA would be to license and regulate private organisations called Independent Certifying Authorities (ICAs) which will then certify films. The certificate granted by ICA will only restrict what age groups the film is appropriate for. This is the only form of pre-censorship that is necessary in today’s age as all other restrictions on film exhibition should be applied retrospectively. The choice of ICAs available for producers to approach will render the question of subjectivity moot as the producer can switch to another ICA if unsatisfied with the certificate. The IMA will set the guidelines for the ICAs to follow and will be the first point of appeal.In other words, this solution reimagines the CBFC as a body that grants licenses to independent and private certification organisations called ICAs. These ICAs need to adhere to certain minimum threshold criteria set by the CBFC. Beyond these criteria, some ICAs may specialise themselves as being the sanskaari ones trigger-happy to award an “A” certification while others may choose to adopt a more liberal approach. In the authors’ words:This will allow the marketplace of ideas to draw the lines of what kind of content is fit for what kind of audience with the government still being capable of stepping in to curb prurient sensibilities.This solution has the added benefit of levelling the playing field between OTT content and films. Currently, the CBFC has no capacity to certify the content being churned out on tens of streaming services. By delegating this function to private ICAs, the government can ensure adherence to certification norms.In essence. just as governments can often plug market failures, markets too can sometimes plug government failures. Reforming our ‘Censor Board’ requires giving markets a chance.There’s a lot more detail in the paper about grievance redressal, certification guidelines, and appeals procedure. Read it here. PS: A couple of days after the FCAT was shut down in India came the news that Italy on the other hand has abolished all film censorship and moved to a self-certification system instead. Saluti! A Framework a Week:Tools for thinking about public policy— Pranay KotasthaneDr Yuen Yuen Ang is one of the most insightful writers on China’s economy. Her first book explained how China managed to escape poverty. Her second book, China’s Gilded Age: The Paradox of Economic Growth and Vast Corruptionhas a framework on corruption that’s relevant to us in India.The framework classifies government corruption on two axes — “who in the government engages in corruption?” and “does the money giver get anything in return?”. Four types of corruption result from this categorisation as shown above.Ang claims that in most East Asian economies, the dominant mode of corruption is “access money” — bribes given to political…

    Full show notes at the publisher

    #121 Mundell's Trilemma; Sumption's Dilemma 🎧 Apr 07, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

    PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

    📣📣📣 Announcement: Admissions are now open for the summer cohort of Takshashila Institution’s 12-week Graduate Certificate Programme in Public Policy. Visit takshashila.org.in/courses to find out more.

    - RSJ

    A couple of short takes for the mid-week edition.

    An Obituary

    Robert Mundell, the Noble Prize winning Canadian economist, died at his Italian home on Sunday. He was 88.

    His obit in the New York Times read: Robert A. Mundell, a Father of the Euro and Reaganomics, Dies at 88.

    I had mixed feelings when I read that line. Sure, you could argue Mundell’s works provided the intellectual foundation for the Euro and Reaganomics. But there are many other economists who might be ahead in the queue for claiming credit for those two phenomena. And then these aren’t exactly the greatest of times for either Reaganomics or the Euro.

    Mundell’s greatest contribution to me was to set up a branch of economics singlehandedly. He theorised about international monetary policy when the idea itself was inconceivable. It might appear a bit odd today but notions of free cross-border movement of capital and a floating exchange rate weren’t anywhere near mainstream in the early 60s. Mundell almost presaged the future interconnected global economy and the monetary theory that would underpin it.

    And to top it all, he summed it all up in a way that has set the bar for brevity for all future economists and policymakers. He proposed a trilemma, an intuitive interpretation of his theory, which made it the touchstone of the neo-Keynesian macroeconomic paradigm. The trilemma, also called the impossible trinity, is a beautiful representation of economic reasoning.

    The policy trilemma says a country must choose between free capital mobility, exchange-rate management and monetary autonomy. Only two of the three are possible. A country that wants to fix the value of its currency and have an interest-rate policy that is free from outside influence cannot allow capital to flow freely across its borders. Think India during the 70s.

    If a country chooses free capital mobility and monetary autonomy, it has to allow its currency to float. This is India now.

    And if the exchange rate is fixed but the country is open to cross-border capital flows, it cannot have an independent monetary policy. Think countries now in the European Union.

    Robert Mundell helped policymakers and central bankers think of the fiscal and monetary policies as two separate instruments to achieve varying objectives. His was a beautiful mind.

    RIP.

    An Interview

    I also came across this interview of Jonathan Sumption over the weekend. Lord Sumption is a retired Justice of the Supreme Court of the United Kingdom and earned his reputation with his brilliant 4-volume history of the Hundred Years War.

    The preface to the interview sets the stage for his responses thereafter:

    “Over the past year, his unabashed criticism of lockdown policies has turned him into something of a renegade. It is a development that mystifies him; as he sees it, his views have always been mainstream liberal, and it is the world around that has changed.

    In the course of our conversation, the retired judge doesn’t hold back. He asserts that it is becoming morally acceptable to ignore Covid regulations, and even warns that a campaign of “civil disobedience” has already begun.”

    I will reproduce three of his answers below from the Unherd site that deeply resonated with me:

    On the ethics of law-breaking:

    “I feel sad that we have the kind of laws which public-spirited people may need to break. I have always taken a line on this, which is probably different from that of most of my former colleagues. I do not believe that there is a moral obligation to obey the law… You have to have a high degree of respect, both for the object that the law is trying to achieve, and for the way that it’s been achieved. Some laws invite breach. I think this is one of them.”

    On the dangers of public fear:

    “John Stuart Mill regarded public sentiment and public fear as the principal threat to a liberal democracy. The tendency would be for it to influence policies in a way that whittles away the island within which we are entitled to control our lives to next to nothing. That’s what he regarded as the big danger. It didn’t happen in his own lifetime; it has happened in many countries in the 20th century, and it’s happening in Britain now.”

    On the fragility of democracy:

    “Democracy is inherently fragile. We have an idea that it’s a very robust system. But democracies have existed for about 150 years. In this country, I think you could say that they existed from the second half of the of the 19th century — they are not the norm. Democracies were regarded in ancient times as inherently self-destructive ways of government. Because, said Aristotle, democracies naturally turn themselves into tyranny. Because the populace will always be a sucker for a demagogue who will turn himself into an absolute ruler…

    Now, it is quite remarkable that Aristotle’s gloomy predictions about the fate of democracies have been falsified by the experience of the West ever since the beginning of democracy. And I think one needs to ask why that is. In my view, the reason is this: Aristotle was basically right about the tendencies, but we have managed to avoid it by a shared political culture of restraint. And this culture of restraint, which because it depends on the collective mentality of our societies, is extremely fragile, quite easy to destroy and extremely difficult to recreate.”

    HomeWork

    Reading and listening recommendations on public policy matters

    * [Podcast] On Persuasion, Yascha Mounk and Dr Leana Wen sit down to discuss the failures of expert opinions, the deadly consequences of inaction, and what the West needs to do to improve public health for the decades to come.


    This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com

    #120 Narrative Dominance Apr 04, 2021
    Show notes

    While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.📣📣📣 Announcement: Admissions are now open for the summer cohort of Takshashila Institution’s 12-week Graduate Certificate Programme in Public Policy. Visit takshashila.org.in/courses to find out more. Global Policy Watch: A Short History Of The Breitbart DoctrineBringing an Indian perspective to burning global issues- RSJIn edition #117 where we covered the resignation of Pratap Bhanu Mehta, we had a polemic by Edward Skidelsky as suggested reading in our homework section. We specifically quoted this line:“The ‘woke’ left is currently pursuing this goal by way of a Gramscian “long march through the institutions” — a progressive co-option of the schools, universities, state bureaucracies and big corporations.” What’s this ‘Gramscian long march’ that’s mentioned here? That’s the first question for this post.Separately, I was drawn to a U.S. national survey done by Cato Institute last year on freedom of expression. The results weren’t surprising to me (including the stupid graph that I have copied below from their site):“Strong liberals stand out, however, as the only political group who feel they can express themselves. Nearly 6 in 10 (58%) of staunch liberals feel they can say what they believe. However, centrist liberals feel differently. A slim majority (52%) of liberals feel they have to self‐​censor, as do 64% of moderates, and 77% of conservatives. This demonstrates that political expression is an issue that divides the Democratic coalition between centrist Democrats and their left flank.”I take the ‘strong liberal’ in the US to be the progressive wing of the Democratic party. They are the ‘woke’ Skidelsky was referring to in his article. There’s no equivalent survey of this kind in India. But I would venture to suggest the “strong liberals” in India might not poll as well on speaking their minds nor would the Indian conservatives be as reticent as their American counterparts in today’s times. Based on incidents like P.B. Mehta’s resignation that seem to have become more frequent in recent years and the ‘chilling effect’ that follows, I would guess these percentages might just flip in India. Anyway, the percentages aren’t of interest to me. My interest is in the phenomenon. This dominance of one side that makes the other side self-censor themselves. What explains this? That’s the second question for this post.That Old Chestnut: The Breitbart DoctrineBoth these questions - on Gramscian long march and on self-censorship - bring me to the oft-repeated Breitbart doctrine:“Politics is downstream of culture.”That is, change the culture and sooner, politics will change. Now you’d think this was an insight that galvanised the American conservative right following the Obama takeover of the establishment. It was what got Trump into the White House with Steve Bannon in tow. That this was part of the right-wing toolkit. Nothing could be further from the truth. The left was likely the originator of the idea that culture influences politics. To understand this better, we will go through a short history of ‘manufacture of consent’ and ‘cultural hegemony’. Knowing it will help address the two questions raised at the start of this post as well. Manufacture Of ConsentThe term ‘manufacture of consent’ first appeared in Walter Lippman’s book ‘Public Opinion’ (1922). For Lippman, the world was too complex for an ordinary individual to comprehend. In order to make sense of it, people carried a mental image of the world inside their heads. These pictures were what drove groups or individuals to act in society in the name of Public Opinion. A strong democracy, therefore, needs institutions and media that help in creating the most accurate interpretations of the world in the minds of the people. But this isn’t easy. Lippman was worried democracy relied on something so irrational as a public opinion that takes shape in the minds of poorly informed and easily manipulated people. For Lippman, policymakers and experts should use narratives for ‘manufacture of consent’ among people which enables public opinion to be channelled in a manner that’s consistent with what’s good for society. Lippman believed persuasion and the knowledge of how to create consent through ‘propaganda’ will change politics in the age of mass media. As he wrote:“A revolution is taking place, infinitely more significant than any shifting of economic power. Within the life of the generation now in control of affairs, persuasion has become a self-conscious art and a regular organ of popular government. None of us begins to understand the consequences, but it is no daring prophecy to say that the knowledge of how to create consent will alter every political calculation and modify every political premise. Under the impact of propaganda, not necessarily in the sinister meaning of the word alone, the old constants of our thinking have become variables.” Noam Chomsky and Edward Herman in their book ‘Manufacturing Consent’ (1988) picked up this idea to argue media outlets are “are effective and powerful ideological institutions that carry out a system-supportive propaganda function.” Market forces and an entrenched establishment control the mass media which manipulates public opinion by revealing only half-truths and distorted facts that serve their interests. It manufactures consent through propaganda while keeping the ill-informed public in thrall with distractions and entertainment. Chomsky has since argued this control of mass culture through media and institutions and the ‘manufacture of consent’ is essential to the survival of capitalism.Gramsci And Cultural HegemonyWhile Lippman was writing about the need for the ‘manufacture of consent’ using culture in a capitalist democracy like America, Antonio Gramsci, an Italian neo-Marxist was thinking on similar lines in a prison in Mussolini’s Italy. Gramsci started with a simple question. Why didn’t the working class living in an oppressive regime (anything that’s non-Marxist was oppressive in his view) revolt more often when they could see clearly how badly the economic balance was tilted against them? Why didn’t the exploited rise in revolt more often?Gramsci argued a capitalist state had two overlapping spheres that helped it to thrive. There was the ‘political society’ that ruled through coercion and control of means of production which was visible to all. But there was also the ‘civil society’ that ruled through consent and control of minds. The civil society was the public sphere of ideas and beliefs that were shaped through the church, media or universities. To him, the capitalist state was successful in ‘manufacturing consent’ among people through the ‘cultural hegemony’ it set up through its control of the public sphere. People living in such societies didn’t question their position or their exploitation because they thought this was the ‘natural state’ of existence. The cultural hegemony was so complete and overpowering that there could hardly be any mobilisation of people against the ‘political society’ which ruled through coercion. The minds of the people were brainwashed through propaganda. Gramsci, therefore, concluded that for the struggle (or revolution) to take over means of production to even begin, the people will have to win the war over cultural hegemony. He used the WW1 terms that were in vogue then. For the war of manoeuvre (that is a direct attack over the enemy) to be successful, it has to be preceded by the war of position (digging trenches and cutting off enemy lines etc). The people will have to win the war of ideas and beliefs by creating their own cultural hegemony and taking over the public sphere through control of religious institutions, media and universities. This is the ‘Gramscian march’ that Skidelsky referred to in his article.This was a far-reaching idea about how the nature of power had changed in a world where universities and mass media shaped people’s thinking. The power of engineering consent using culture is the first step to launch a successful attack over an existing power structure. While Garmsci used neo-Marxian terms to expound his ideas, the broader implications of his argument were clear. In short: establishing cultural hegemony is the first step to winning the minds and eventually, the votes of people (we are talking of democracy here). Over time, this hegemony in the public sphere will earn you the long-term consent of the people who will consider it their ‘natural state’. Self-censorship will follow as an outcome of this hegemony. That addresses the second question on why people self-censor themselves.Over a hundred years since Lippman first wrote about ‘manufacture of consent’, the idea that politics is downstream of culture has only acquired greater currency in a saturated media space that all of us inhabit now. The left and the right have both acquired the toolkits to fight this ‘war of position’ in various democracies around the world. In the US, it is ‘woke left’ on a supposed Gramscian march today. In India, I suspect, the shoe is on the other foot. But the march is definitely on.India Policy Watch: Mandal AgainInsights on burning policy issues in India- Pranay KotasthaneA Constitution Bench of the Supreme Court is set to announce its judgment on the Maratha quota case. Amongst other issues, the court will decide on the question if state governments can breach the 50 per cent reservation ceiling. This 50 per cent limit comes from the Indra Sawhney judgment of 1993, which legally upheld the recommendations of the Mandal Committee Report. Legal issues aside, today’s political reality makes this judgment even more riveting. Perhaps all political parties appear to be in favour of going beyond this 50 per cent limit, although in different ways. The NDA government has already increased reservations to ~60 per cent in central-government jobs, central-government educational institutions, and private educational institutions through the 103rd constitutional amendment in 2019. The additional 10 per cent seats are now meant to be reserved for economically weaker sections (EWS) of citizens not already benefiting from reservation. In other words, this quota is for persons from non-SC, non-ST, non-OBC classes, as long as their earning is below a defined income threshold. On the other hand, many caste-based and one-caste-dominated political parties are in favour of breaching the 50 per cent ceiling in order to extend or increase quotas for their caste base. The gap between the court-prescribed ceiling and the political reality has become unsustainable. To use a Ravi Shastri phrase, “something’s gotta give”. Not to forget, that 50 per cent ceiling number itself is quite contrived. Read what the Indra Sawhney case judgment says:Just as every power must be exercised reasonably and fairly, the power conferred by Clause (4) of Article 16 should also be exercised in a fair manner and within reasonably limits - and what is more reasonable than to say that reservation under Clause (4) shall not exceed 50% of the appointments or posts, barring certain extra-ordinary situations as explained hereinafter. From this point of view, the 27% reservation provided by the impugned Memorandums in favour of backward classes is well within the reasonable limits. Together with reservation in favour of Scheduled Castes and Scheduled Tribes, it comes to a total of 49.5%. Beneath the legalese, observe the narrative power of numbers at play. Any measured phenomenon creates implicit norms of what is “too high” or “too low”. The 50 per cent limit seems intuitively “just right” or “balanced” — half of the seats have quotas while the other half doesn’t. This powerful narrative largely survived for over 25 years but seems to be falling apart now. And so it appears that reservations have ceased to be a means to correct for inadequate representation of certain disadvantaged sections. Instead, reservations have become springboards for all groups to demand proportional representation. The implicit norm now is that the State needs to enable representation of groups in educational institutions and government jobs according to their proportion in the population; the question of historical disadvantage has been relegated to an incidental criterion. Moreover, the general equilibrium effect of quotas is that group identities have become sharper and more powerful. Is there another way out?There is no doubt that a republic founded in a society with a long history of systematic discrimination will inevitably resort to some affirmative action. But is there a way out beyond caste-based reservations? Nitin Pai and I had proposed one such alternative a couple of years ago in FirstPost:Consider this thought experiment. There are no predetermined quotas for any posts. Positions are filled only based on a composite score of all applicants. The composite score is a combination of two measures. The first is an inequityscore — calculated to compensate for the relative disadvantage faced by an applicant.The second measure strictly represents an applicant’s ability to be effective for the position they are applying for. Selection is on the basis of the composite score. No seats are reserved and yet the score allows for addressing multidimensional inequity much better than current methods.The inequity score can be used to indicate relative disadvantage along several dimensions: individual, social and geographic. Different factors can be assigned different weightages. For instance, given the salience of caste in the Indian social context, the greater the disadvantage a community faces, the higher the weightage.In addition, we can incorporate other parameters into the inequity score — parents’ level of education, income levels, rural upbringing, or even childhood nutritional deficiencies. Currently, our system of quota-based allocations does not account for non-caste disadvantages that have a disproportionate impact on life outcomes.A national commission for equity can be formed to propose and review parameters and their weightages within a cooperative federal framework. It doesn’t have to be one-size-fits-all solution. States can assign their own factors and weightages according to the local conditions.The second measure — an effectiveness score — can then be kept completely independent of equity considerations. It can take the form of a test, an interview or any other indicator to assess candidates’ ability to perform the job they have applied for. Information about the inequity scores can be masked from evaluators of the effectiveness score.By filling positions based on a sum of the two scores, it becomes possible to be more comprehensive in addressing social inequities while also creating stronger incentives for an individual pursuit of excellence.Satish Deshpande and Yogendra Yadav had proposed a similar model for higher education way back in 2006:An evidenced-based model addressing multiple sources of group and individual disadvantages helps to de-essentialise identity markers such as caste or religion; that is, it provides a rational explanation why specific castes or communities are entitled to compensatory discrimination and undermines attitudes that treat such entitlements as a “birth right”.In essence, this solution tries to solve for both “merit” and “disadvantage”. The opponents of reservation claim that quotas directly undermine efficiency and merit. The proponents of quotas on the other hand find the notion of merit completely odious. They argue on these lin…

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    #119 That 2008-like Feeling Mar 31, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

    PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

    - RSJ

    We have been trying to make sense of the three key trends dominating the global financial markets over the past 12 months - the excess liquidity in the system driven by loose monetary policies and stimulus announced by central banks the world over, the persistence of the central banks to keep interest rates at historic lows without worrying about potential inflation, and the booming equity markets that seem to be completely divorced from the ground economic realities during the pandemic.

    You can read some of our previous posts on these here and here.

    How long can these trends sustain? Who knows?

    The perpetual optimism on which the wheels of finance move shows no signs of abating. Now, history has shown these are trends that are neither sustainable nor safe for ordinary investors. But optimism is the opium of the masses. “This time it is different” is what you usually hear as a record new stimulus is passed or markets touch new highs. But like Scott Sagan wrote in his book, The Limits of Safety:

    “Things that have never happened before happen all the time.”

    Three Strikes And…

    The world is full of surprises and three events in the past quarter should give regulators and investors a pause.

    First, Melvin Capital lost half of its $13bn fund during the GameStop saga in January this year. Melvin had taken massive leveraged short positions against the GameStop stock convinced its business model has no future. Well, the Redditors on WallStreetBets organised themselves to do the world’s first RNS (radically networked society) driven short squeeze. Melvin couldn’t reverse out of the trade soon enough. Only an emergency line of $2.75bn from other hedge funds kept it afloat. We have covered the GameStop shenanigans here.

    Second, the collapse of Greensill Capital, a ‘supply chain finance’ company doing Enron-like things in a decidedly dull corner of finance. The full impact of its fallout is yet to be ascertained. The collateral damage so far has been impressive: London-based steelmaker GFG alliance (run by India-born Sanjeev Gupta) is facing an existential crisis; a German retail bank that Greensill had bought has gone down; Credit Suisse that funded Greensill through securitisation of its invoice finance arrangement had to write down huge losses; Bluestone Resources, a US-based coal mining company that’s left high and dry without Greensill’s funding pipeline; and Tokio Marine Insurance that underwrote the risks Greensill’s clients and investors in Credit Suisse funds were taking is still counting its losses.

    The Greensill story is a good example of how it is not different this time. Supply chain financing has been around for a long time. Company A buys goods from a smaller Supplier B and promises to pay it (say) in 90 days. Ideally, B would like to be paid immediately but it usually lacks the bargaining power. Company A would prefer to pay as late as possible since it improves its cash flow and use it to further its business. Enter C, the Supply Chain Financier. C promises to pay B faster but at a small discount as the cost of getting its money quickly. It then collects the full amount from A. In a way, C pays on behalf of A and then collects the money from A over a period of time. It is like a traditional short-term loan that’s backed by the security of the invoice. And how does C get the money to pay to the suppliers faster? Usually, C would issue commercial papers (unsecured promissory notes) to obtain funds from market participants looking to park their excess funds for a short-term to back their invoice arrangements. The spread it makes between the two is C’s business.

    But in a world where the liquidity is high, interest rates low and stock markets at their peaks, there’s always money looking for avenues to make some ‘extra’ return. Greensill had a perfect plan for them. Instead of issuing commercial papers, it securitised the supplier invoices into short-term assets and offered them to the likes of Credit Suisse and other asset management firms. In other words, these invoices were turned into a different financial instrument which could now be positioned differently to investors. With this, the stage was set to get into riskier bets and shuffle the risk around in a way that made investors believe they were still investing in a safe supply chain financing instrument than something more complex.

    These investment firms launched Greensill-linked funds and raised money from investors who were drawn to the promise of almost risk-free returns that were higher than money market funds. Greensill also got insurance companies to back the risks underlying these funds to make them appear safer and more attractive. This was mortgage-backed securities (MBS) that brought down Lehman Brothers in 2008 all over again. Not content with this, Greensill went a step further. It started advancing funds to its clients based on anticipated future invoices. That is, there was no supplier and no goods purchased. But it was giving money in anticipation of business being done with a supplier in future. In effect, it started offering long-term loans to its clients in the guise of short-term, low-risk loans with neither the insurer nor the funds like Credit Suisse being wiser to their tricks. It was only a matter of time before the house of cards would collapse.

    Third, the implosion of hedge fund Archegos Capital late last week caused by extreme leverage. With GameStop and Melvin Capital, the leverage was on the short. With Archegos, it was on the long side. It borrowed money from the usual Wall Street names - Nomura, Credit Suisse (again!), Goldman Sachs and Morgan Stanley. But it used a derivative known as Total Return Swaps (TRS). The mechanics of this were simple. The hedge fund borrows money from the Bank to invest in stocks through a swap agreement. The hedge fund pays a small interest to the Bank, say, 2.5 per cent. The bank pays out any upside of investment made by the fund back to it. If there are losses, the hedge fund makes it up for the bank. This means the hedge fund makes investments without owning the asset. The bank has no real downside. The bank loves TRS because they make large fees from such arrangement without setting aside a lot of capital when compared to actual trading in securities. Being flush with liquidity in a low-interest environment makes such arrangements appear too good to resist for the banks.

    Things were going well for Archegos as it went about building massive levered long positions in media stocks like ViacomCBS and Discovery and various Chinese internet stocks. Some of these were quite illiquid stocks where Archegos almost owned half of the total stocks available for trade. Till ViacomCBS, whose stock had gone up 3X over the past year, decided to do a $3bn share sale wanting to capitalise on its good fortune. This backfired and the stock nosedived. This triggered a margin call and we were back to 2008 again. Archegos couldn’t cough up funds to cover the losses and the brokers dumped the shares on their behalf. The forced liquidation led to a massive selloff late last week across markets. Nomura and Credit Suisse couldn’t get out fast enough and warned of significant impact to their earnings. The worries of a contagion started going around. No one is sure if the collateral damage has been contained.

    Safety Valves Or Canaries?

    One way to look at these three events is to consider them as the safety valves of capitalism. There are excesses that happen in each cycle and the market mechanism is subverted by a few players. But there is a reckoning soon enough and the markets are better off for it.

    The other way is to view them as early signs of a looming crisis - the canaries in a coal mine. It is often said bubbles aren’t merely about skyrocketing valuations. The underlying truth to any bubble is the shortening of time horizons in the market. Everyone is out there to get rich and get out as quickly as possible. This snowballs very quickly attracting more short-term traders to make massive bets with levered money with ever-shrinking time horizons.

    The markets might well take these events into their stride (as they seem to have done). The three firms collapse and everyone moves on.

    That’s the end of it.

    Or maybe not. This might just be a beginning.

    HomeWork

    * [Article] Apropos of nothing related to this post: Robin Hanson on “how best to explain UFOs if they are in fact aliens!”


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    #117 A Resignation Mar 24, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

    PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

    - RSJ

    A short mid-week note on some points that have emerged from the Pratap Bhanu Mehta resignation issue.

    Let’s take the issue of ‘shrinking liberal space’ in the public discourse and how this is another example of it. All politics is a contestation of narratives. The primary motive is to have your narrative dominate while diminishing the rest. So, from a realist lens, this is what every political party aspires to while few achieve. Therefore to expect any different from any dominant political grouping is to live under a delusion. You might desire a secure and self-assured dispensation that lets a thousand different and often dissenting ideas bloom. But that ideal state of affairs is rare anywhere in the world and in history. India is no stranger to a narrative dominating its body politic for decades. Good or bad is beside the point here. There’s another narrative in town now and, naturally, it wants to dominate forever.

    Questions

    That brings us to a couple of questions. Isn’t good or bad that was conveniently brushed aside above, an important point in this context? If this narrative dominance is what is to be expected, should this be a worry for India?

    Well, narrative dominance of any kind is an unstable equilibrium. For three reasons.

    One, we aim for dominance but once we achieve it, boredom sets in. No one likes to watch games where their team is so dominant that there is no contest. Over time we lose interest or we create two versions of our team to play against each other. Soon it is “us” versus “them” again. Either way, the narrative dominance is broken. This is also the reason there can never be a successful conservative-only or liberal-only social media platform in the long term. People crave to argue. To go one up on others. They will invent enemies if they have to. We have written about Schmitt’s friend-enemy construct in politics before here.

    Two, narrative dominance of any kind doesn’t emerge out of a vacuum. It is built on the vestige of a previously dominant narrative. Those who were dominated by the previous narrative, remember those times. The humiliation and the rage of being under it is the fuel that sustains the current narrative. Unfortunately, humans are mortal. They die and a whole new generation arrives who have no first-hand experience of the previous narrative. They only learn about it from the surviving members who tell them about the horrors of the past. Or, from books. That’s one of the reasons why changing history textbooks is always on the agenda of every dispensation in the world. You control the past, you control the future. But time wears down everything eventually. In the pre-internet era, this could take multiple generations to come to a pass. That has shrunk now. Alternative narratives sustain themselves online and the information velocity facilitates their spread.

    Three, there’s always a tendency to overreach among those who are driving their narrative dominance. Nothing remains sacrosanct in their desire to dominate - university, media, courts, law enforcement agencies, regulators or independent bodies. In a democracy, with strong independent institutions, the checks and balances in-built in the system come into play to counter this. This is a battle of attrition between institutions and political formations. The institutions usually win because they are designed to be permanent. They are necessary for democracy to survive. If they are subverted, democracy withers away.

    The Indian Problem

    Between the three, the institutional response tends to be the fastest way to counter-narrative dominance. The other two could take time and a lot could be undone during that period. The challenge in India is the institutional mechanism has been systematically weakened over many decades. To begin with, we inherited colonial institutional and legal structures that weren’t exactly suited for liberal democracy. Whatever gains we made in building new institutions and strengthening them were lost starting from the 70s. The Emergency being a high watermark of that era. Since then it has been one step forward and two backward on this. The reasons why a state or the union government in India can make citizens or private entities (like a private university) fall in line are two-fold. One, there are just too many outdated laws often working at cross purposes that are impossible for anyone to manage. This gives the state the power to haul you up for breaking the law. Two, the willingness of the institutions to do the bidding of the political class because their independence has been compromised. This means a CBI or a Tax raid is always around the corner. Coercive institutions are a structural problem and there’s little incentive for political parties to change this.

    This seems like an irreversible slide. The problem with this slide is clear. Overtime when this narrative loses steam and an alternative narrative emerges (as it will), expect its adherents to be keener to dominate every sphere. To eliminate space for any dissent. And they will do so using the same tools - political and ideological mobilisation that overwhelms the institutions.

    Pratap Bhanu Mehta might have been countering the narrative of the current regime in his op-ed pieces. But the larger point he was making was probably beyond it. He was alerting us to the dangers of this inevitable slide.

    HomeWork

    Reading and listening recommendations on public policy matters

    * [Article] “The Spectre of Totalitarianism: The worst offenders in the new climate of intolerance are our universities”writes Edward Skidelsky in The Critic. Money quote: The “woke” left is currently pursuing this goal by way of a Gramscian “long march through the institutions” — a progressive co-option of the schools, universities, state bureaucracies and big corporations.


    This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com

    #116 India's rajamandala Mar 21, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.India Policy Watch #1: Choose Your Nationalism WiselyInsights on burning policy issues in India- RSJA short note on nationalism to think about for this edition.There was the usual brouhaha in media last week over a few international agencies downgrading India on some kind of global ‘freedom index’. The usual reactions have followed. For some, it is a validation of all they see happening around them. Our freedoms are being eroded and we watch silently, they claim. As Majrooh wrote (in that Guru Dutt romcom ‘Mr & Mrs 55’): “मेरी दुनिया लुट रही थी, और मैं खामोश था” On the other hand, the establishment and its supporters view this as another ‘left-liberal-woke’ attempt to malign a new, confident India. To them, there is freedom in India to freely express your dissent and criticise anyone. The old order of the privileged elite who feel left out in the present order is keen to paint India in poor light. They have been discredited and rejected by the masses, yet they persist. This is the argument made by the ‘nationalists’ (or atleast that’s what their Twitter handles claim).The CounterThis was following the usual script on social media. We took interest, however, when the Minister of External Affairs (MEA) was asked about these ‘freedom’ reports. He dismissed the basis for their conclusions and questioned their intentions. More importantly, he gave two interesting counters to the usual ‘Hindu nationalist’ branding of the current dispensation in large sections of global media and among thinktanks. The first was factual - they call us nationalists but we are leading the efforts in donating vaccines to countries around the world. We have already shipped over 40-50 million vaccine doses taking a humanitarian view instead of keeping them for ourselves. Tell us which western democracy is doing so? Then the second point - in these countries almost every elected official takes the oath of office with their hand on a holy religious book (America and the Bible were possibly what he meant). Do we do so in India?Social media was abuzz with this clip. This is the ‘new, confident India’ was the usual comment among the partisans. Well, maybe it is. Who knows? To me, this incident is another useful lens to view nationalism. There are two things to parse here. One, is ‘vaccine diplomacy’ the antithesis of nationalism? Two, is the taking of an oath of office on a holy book blurring the lines between the church and the state?A Masterstroke Let’s tackle 'vaccine diplomacy’. We go on in these pages about international relations being guided by matsyanyaaya - big fish eating small fish. This is realism at play. All morality stops at the boundary of a nation-state. Beyond that is Hobbesian chaos. Going by this, donating millions of vaccines to other nations while you haven’t vaccinated your own would seem insane. But that would be taking a narrow view of matsyanyaya. International relations is a long game with a clear understanding of your adversaries and their strengths. Vaccine diplomacy for India is a perfect counter to China in the post-pandemic world. China’s conduct in suppressing information during the initial phase of the pandemic and its bullying behaviour around the region later are open flanks for India to exploit. Donating vaccines at an early stage of their mass production checks all the boxes of being a reliable friend in international relations - it is relevant and timely, and it involves sacrificing self-interest to help others. That it provides a counter to the view in global media about this being a nationalistic dispensation is an added bonus. This act isn’t one of those false masterstrokes. This is the real thing. What Kind Of Nationalism?Now on to the oath and the holy book business. What’s the core issue here? If you peel the layers, there are two questions to be tackled. * How important is the role of ethnocultural nationalism in the building of a modern nation-state?* If it is important then what kind of ethnocultural nationalism should a state strive for to achieve its objectives of peace and prosperity for its citizens?On the first question, it is hard to argue against the advantages of solidarity and a communitarian outlook that ethnonationalism engenders among the members of a nation. Universal brotherhood is great in the abstract but all kinship is real and very specific. The idea of a free individual owing allegiance to higher human ideals while being aloof from the emotions and instincts of his immediate surrounding is bizarre. It isn’t sustainable and it motivates no real action. It can never help in the project of nation-building. Nationalism might be seen as ‘false consciousness’ to the liberal but it is a tangible driver of change among its adherents. It can move mountains. Ethno-cultural examples of nation-building abound in modern history. From the white Anglo-Saxon Protestants who built America, the ethnic chauvinism that welded modern Germany during the pre-WW1 period or the cultural renaissance that motivated imperial Japan between the wars. Even the rise of China in the past quarter-century is an ethnocultural project.Now if that’s true, what about the second question? What kind of ethnocultural nationalism should the state strive for? There’s always the danger of an ethnocultural movement ascribing a core moral or cultural value to a nation that excludes a significant minority from it. This is almost certain if the ethnocultural value is derived from a glorious past (real or imagined) which is lost today because of reasons beyond the control of the majority that believes in the value. The notion of Aryan supremacy and its undermining by Jews in the past or the belief in the supremacy of the Japanese subjects of Sun God and its imperial project thereafter are examples of this. The momentum of a nationalist movement is beyond the control of those who start it. History has shown it destroys a lot before it builds something. And what it builds is rarely sustainable. It is never easy to balance liberal-democratic values and nationalistic attitudes. A middle ground is often sought but rarely achieved. This was the project that faced the leaders of modern India at its founding moment in 1947. They chose a modern conception of the Indian nation - liberal, tolerant and statist - and promoted cultural and historical artefacts that supported this ethnocultural nationalism. That was the middle ground they chose to build a modern India. This is what they thought worked for successful liberal, democratic nation-states they saw around the world. It was bold and it was a clear break from the past. And let’s be clear. It was also the only option that wouldn’t have plunged the nation into anarchy. This project of building ethnocultural nationalism caught the imagination of people in the early years. However, as recent years have shown, it didn’t grow deep roots. Why? It’s a whole different story and we have covered a few of the reasons on these pages. In any case, India is back at that moment in its history. What kind of ethnocultural nationalism must it choose for the current project of nation-building? That’s at the heart of the debate these days. The democratic mandate seems to suggest upending the consensus of its founding moment. There’s always the lure of learning the wrong lessons from history. Did India choose unwisely then or did it get the execution wrong over the last 70 years? It is hard to build and easy to destroy as Amit Varma says in his newsletter. There’s a lot to think over here. Choose your nationalism wisely. Lastly, the American Presidents take the oath of office placing their palms on the Bible. Sure. But they don’t open it to run the country. There’s a balance. Matsyanyaaya #1: Quad Not Being Square AnymoreBig fish eating small fish = Foreign Policy in action— Pranay KotasthaneIt’s amazing how often and quickly a common, powerful, and abrasive adversary can make States bury their mutual differences. China as an adversary has reliably displayed all the three attributes, and in the process, created a new geopolitical formation — the Quad.This formation, of course, is not new. It has hummed and hawed for nearly fifteen years. But it is China’s rapid growth and arrogant conduct that has breathed life into this idea. And finally, last week was the first time when the four heads of State met and proudly declared to the world that the Quad is here to stay and act. This reminded me of Edward Luttwak’s prescient analysis from his 2012 book The Rise of China vs The Logic of Strategy:“Other things being equal, when a state of China’s magnitude pursues rapid military growth, unless the resulting shift in the power balance passes the culminating point of resistance inducing the acceptance of some form of subjection, it causes a general realignment of forces against it, as former allies retreat into a watchful neutrality, former neutrals become adversaries, and adversaries old and new coalesce in formal or informal alliances against the excessively risen power.”In other words, for China, with great power came great adversaries.This Quad summit meeting is significant at two levels: procedural and substantive. By procedural significance, I mean that for the four States to meet and release a joint statement is itself a big deal. Usually, different countries have different readouts on major issues. The joint statement was followed up by a joint opinion piece under the names of the four heads of state. In diplomacy, where words are everything, the willingness to agree on terminologies, definitions, policy proposals, and actions with not one but three other differently placed partners, is major progress. Think of these joint statements as the diplomatic equivalents of conducting joint military exercises. Extrinsically, it is an exercise in signalling to the adversary. Intrinsically, it helps develop some comfort working in unison.By substantive significance, I mean the creation of three working groups on vaccines, critical and emerging technologies, and climate change. While China is a glue that can hold these countries together, it can’t be a fuel that propels the Quad forward. That requires a positive agenda of action items, which these three working groups do. Of the three areas, the vaccine partnership seems to be the most well-thought-out. In short, all four countries have agreed to expand the manufacturing of COVID-19 vaccines at facilities in India and give these vaccines to countries in the Indo-Pacific. Sanjaya Baru describes the geoeconomic significance of this move thus:“What Quad has already achieved in geo-economic terms is to use the Asian demand for Covid-19 vaccines as an opportunity to create a four-way economic relationship that combines the benefits of American research, Japanese funding, Indian manufacturing capacity and Australian marketing network to supply vaccines to Asian developing countries. This is without doubt a smart idea and one that can ensure its equal ownership by all four partner countries.”From the Indian perspective, Quad giving an impetus to vaccine investment in India pours cold water on the usual doubts that prevent collaboration with western countries. The second working group on critical and emerging technologies seems to be the most undercooked. For starters, there isn’t an agreement on the definition of critical and emerging technologies. The Trump administration did label 20 technologies as critical and emerging but to expect multilateral cooperation on all twenty would be a high cost, low returns approach. We have argued earlier that a better approach would be to secure semiconductor supply chains first for three reasons: “one, the semiconductor industry underlies all critical technologies. Two, it is perhaps the most globalised high-value supply chain and no country can become entirely self-resilient. And three, all four countries have complementary strengths in the semiconductor supply chain.”Better if the four countries can demonstrate measurable success on less controversial technologies such as semiconductors before dealing with the more vexing questions of cyber governance, data privacy, and AI governance. Finally, this Quad meeting was initiated by the US president, putting all doubts to rest that the Biden administration might soften its stance against China. In fact, the US now seems to have a more concerted strategy to contain China. That they have a leader who is not abrasive is itself a big relief for the other partners.Matsyanyaaya #2: NayaaPakistan Again?Big fish eating small fish = Foreign Policy in action— Pranay KotasthanePakistan is back in the headlines these days. Surprisingly though, for good reasons. First came the much-needed Line of Control ceasefire agreement earlier this month. Since then, no ceasefire violations have been reported. And last week came a couple of conciliatory statements by the Pakistani Chief of Army Staff and PM Imran Khan.Gen Bajwa had this to say:.. let me say profoundly that we are ready to improve our environment by resolving all our outstanding issues with our neighbours through dialogue in a dignified and peaceful manner.However, it is important to state that, this choice is deliberate and based on rationality and not as a result of any pressure. It is our sincere desire to re-cast Pakistan's image as a peace-loving nation and a useful member of international community. Our leadership's vision is Alhamdullilah transformational in this regard. We have learned from the past to evolve and are willing to move ahead towards a new future, however, all this is contingent upon reciprocity.Pakistani PM Imran Khan echoed:“Pakistan could not fully exploit its geo-economic potential unless it improved its ties with neighbours by strengthening trading connection and establishing peace in the region.” The ceasefire agreement and these two statements mean that the marginally hopeful types are again entertaining these two questions: has Pakistan turned a corner finally? Will we see a sustained improvement in India-Pakistan relations?On the first question, it’s too early to conclude. However, there are a few signs. Pakistan did not ratchet up tensions on the western border all through 2020, at a time when India was busy dealing with the China threat. Two, from Pakistan’s standpoint, India’s changing of Jammu & Kashmir’s constitutional status provided it with a potential casus belli to escalate terrorism. It hasn’t yet done so. What explains this change in strategy? Probably a mix of new drivers and constraints. The major drivers are a dawning realisation that deploying terrorism as state policy has done more harm than good and the need to impress the new US administration. The major constraint, and one that’s hurting them most, is a flagging economy with declining external benefactors. To answer the second question, let’s revisit the theory of constructivism in international relations. Constructivism contests the realist worldview that anarchy in international relations immutably leads to a security dilemma. Constructivist theorists argue that while amassing power remains the most important priority in a state of anarchy, this competition doesn't imply permanent confrontation. In Alexander Wendt’s now-famous “construction”: Anarchy is what states make of it. In other words, while all…

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    #115 Anti-State, Anti-Government Or Anti-Nation? 🎧 Mar 14, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.India Policy Watch #1: Sedition, Blasphemy, DefamationInsights on burning policy issues in India- Pranay KotasthaneA Delhi Court Session Judge’s admirable order granting bail to activist Disha Ravi in the #ToolKit case made me reflect on sedition as a concept. Here are a few initial thoughts emanating from that exercise. Fair warning: this is a conceptual discussion and not a legal one. If detailed legal critique interests you, head over to these two articles by Gautam Bhatia (1 & 2). The “crimes” of sedition, blasphemy, and defamation lie along a continuum. They are categorically similar in that they punish the written or spoken word directed at some other entity. Where they differ is the targeted object. Defamation laws punish verbal or written attacks against a person or a group of people. Blasphemy laws punish utterances against something considered sacred by a group of people whereas sedition laws punish utterances that can threaten the State. A Few DefinitionsBefore wading in any further, understanding three political science terms — nation, state, and government — is important. State is a political construct, an abstract political institution. Max Weber’s instrumental definition of the State as “a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory” is especially relevant here. To ensure that all its individuals’ liberties are protected, a State is invested with the powers to use violence or force to prevent other belligerent groups from terrorising individuals. It is for this reason that a State maintains armed institutions like the police and the army. Going by this definition, an anti-State act would be the one that challenges the State's monopoly over the legitimate use of physical force. In other words, an act of violence or the use of force by anyone other than the State becomes anti-State. Government is a temporary governing body of the State. If the State is like a corporation, the government is like its management. State is semi-permanent. It will live on until it is overthrown or replaced and a new social contract is established. Unlike the State, the government is composed of a set of people organised into a hierarchy. When the electorate vote, they choose their government and not the State. By this definition, an anti-government act would be the one that criticises the policies, strategies, and directives of the governing body in power.Nation, on the other hand,is a mental construct. Ernest Gellner defines this concept precisely yet comprehensively thus:“Two men are of the same nation if and only if they recognize each other as belonging to the same nation. In other words, nations maketh man; nations are the artefacts of men's convictions and loyalties and solidarities. A mere category of persons (say, occupants of a given territory, or speakers of a given language, for example) becomes a nation if and when the members of the category firmly recognize certain mutual rights and duties to each other in virtue of their shared membership of it. It is their recognition of each other as fellows of this kind which turns them into a nation, and not the other shared attributes, whatever they might be, which separate that category from non-members.”In other words, nations are imagined. People belong to the same nation only if they consider themselves to be so. An anti-national act thus could be of two types. One that denies the existence of such an imagined community. For example, libertarians could argue that only individuals matter and not the groups these individuals are a part of. And the other view imagining a nation along lines different from the dominant belief. For example, communism sees workers across the world as one “nation”.What is Sedition then?With these key differences out of the way, we are now in a position to understand sedition and blasphemy laws. Sedition laws can lie on a continuum. In dictatorships and party-states, sedition laws are applied wantonly to criticisms of the government. That is, being anti-government itself is being seditious. In most modern democracies, however, sedition laws punish only those anti-State actions which have the capability to directly challenge the State’s authority. Thus, criticism of the Republic of India would not count as sedition but inciting violence against the police would count as sedition. Crucially, being anti-national is not the same as being seditious. On the other hand, blasphemy laws penalise a subset of anti-national actions, the ones that call into question something held sacred. As the idea of individual freedom has gained prominence, blasphemy laws have been repealed in many places. Not in India though.The Indian Sedition LawNow we are in a position to understand sedition in India. India’s sedition law i.e. Section 124A of the Indian Penal Code has colonial origins. Unsurprisingly then, being anti-government was reason enough to be labelled seditious. Tilak, Gandhi and scores of other leaders were tried for sedition.After independence, the stated aim was to get rid of sedition laws altogether. That never happened. Sedition law continued in its colonial avatar. What did happen is that the application of such laws reverted to a stricter interpretation. Anti-State acts were penalised and not anti-government ones as a result of a right to freedom of speech and expression. In subsequent court rulings, the scope of sedition was further truncated. Only those anti-State acts that had the tendency to incite violence or disturb law and order were deemed to be seditious. This dissonance between the original definition and application continues to this day. See for yourself. The sedition law says: “Whoever, by words, either spoken or written, or by signs, or by visible representation, or otherwise, brings or attempts to bring into hatred or contempt, or excites or attempts to excite disaffection towards, the Government established by law in India, shall be punished with imprisonment for life, to which fine may be added, or with imprisonment which may extend to three years, to which fine may be added, or with fine.Explanation 1.-- The expression "disaffection" includes disloyalty and all feelings of enmity.Explanation 2.--Comments expressing disapprobation of the measures of the Government with a view to obtain their alteration by lawful means, without exciting or attempting to excite hatred, contempt or disaffection, do not constitute an offence under this section.Explanation 3.--Comments expressing disapprobation of the administrative or other action of the Government without exciting or attempting to excite hatred, contempt or disaffection, do not constitute an offence under this section.Note how wide-ranging this law is. Even disloyalty and all feelings of enmity count as sedition. Now read the qualifier that the Supreme Court added in Kedar Nath vs State of Bihar 1962.“..the sections aim at rendering penal only such activities as would be intended, or have a tendency, to create disorder or disturbance of public peace by resort to violence. As already pointed out, the explanations appended to the main body of the section make it clear that criticism of public measures or comment on Government action, however strongly worded, would be within reasonable limits and would be consistent with the fundamental right of freedom of speech and expression. It is only when the words, written or spoken, etc. which have the pernicious tendency or intention of creating public disorder or disturbance of law and order that the law steps in to prevent such activities in the interest of public order.”In non-legalese, for an action to count as seditious, its connection with violence is necessary according to the Supreme Court but not so according to the original framing in the penal code. This dissonance is a problem. To such an extent that the same judge presiding in two similar cases (Disha Ravi’s and Safoora Zargar’s), referring to the same 1962 judgment, reached two diametrically opposite conclusions! In Safoora Zargar’s case, bail was denied on the grounds that the connection of an act with violence is not necessary. In the Disha Ravi case, bail was granted on the grounds that the connection of an act with violence is necessary. The other problem is the political economy of India’s sedition law. Because it is construed as a grave anti-State offence, it is cognisable i.e. investigation and arrest can happen based on just an FIR, and non-bailable i.e. bail is subject to the decision of a sessions judge. Such strict provisions mean that the police slap sedition charges indiscriminately and by the time charges are cleared, many years pass by. The process becomes the punishment.Clearly, this needs fixing. The Way ForwardBroadly, there are three ways out. The first method would be to revise the sedition law to end the dissonance between the text and its subsequent interpretation. Make the link with violence a necessary condition for the application of sedition. A second way is to scrap the law altogether. If the tendency to cause violence is what triggers sedition, there are enough and more laws in place to address such actions. Even if this law were to be struck down, provisions to punish acts inciting violence against State, government, or other people will still be applicable.A third way out is to address the political economy question by making sedition a bailable and non-cognisable offence. With nothing to gain by slapping the additional charge of sedition, its usage is likely to decline. A solution with a similar effect is to make police personnel comply with additional requirements before arresting a person for sedition. The Bombay High Court tried to do this in the Asim Trivedi case by issuing guidelines to police personnel listing specific preconditions. A failure to adhere to these guidelines made the police officer liable to dereliction of duty. To what extent these guidelines been adopted since then, I do not know. Given my biases, the second solution is the ideal one. But it’s also the most unlikely one in the current situation. We in fact run a real risk of going the other way — sedition laws might well revert to punishing anti-government utterances and blasphemy laws might be used more frequently. Given this reality, focusing on changing the incentives of police might be more practical.For now, I’ll leave with these lines in Disha Ravi’s bail order that need to reach far and wide:“Citizens are conscience keepers of government in any democratic Nation. They cannot be put behind the bars simply because they choose to disagreewith the State policies. The offence of sedition cannot be invoked tominister to the wounded vanity of the governments. Difference of opinion,disagreement, divergence, dissent, or for that matter, even disapprobation, are recognised legitimate tools to infuse objectivity in state policies. An aware and assertive citizenry, in contradistinction with an indifferent or docile citizenry, is indisputably a sign of a healthy and vibrant democracy.”India Policy Watch #2: The Coming InflationInsights on burning policy issues in India- RSJLast week Pranay wrote about the Domar rule and how to think about public debt sustainability. Pranay and I have long held economic growth is a moral imperative for India now. Domar’s paper, like Pranay wrote, makes it clear that growth is necessary even if you favour a big government. The argument is simple. Governments are free to borrow and spend on their favoured programmes. They can run deficits without worrying about today’s deficits turning into tomorrow’s higher taxes or higher inflation only if the national income (r) grows at a rate faster than the interest rate (i). That is if “r” > “i”, we are fine with deficit spending. The logic is simple. If you grow faster than the interest rate, you can keep your debt to GDP ratio at a constant level. So, please go ahead and spendbut choose wisely. Spend in areas that will yield higher growth rates in future. Growth will take care of your debt burden.Since we are in the territory of public debt sustainability and role of government spends, I thought it would be useful to bring the Fiscal Theory of the Price Level (FTPL from here on) into this discussion. So, consider this an addendum to Pranay’s piece. Price stability or inflation control is a key goal for all governments in a democracy. Why? Because they want to win elections and nothing irks public than price rise. So, there are two questions in public policy on this issue - a) how do we tame inflation and b) is there an optimal level of controlling it?Now, the usual macroeconomic explanation offered to the first question was simple. Inflation is managed by the monetary policy of the central bank. An independent central bank focused on price stability will manage it by controlling the supply of money. If the total output grows at x per year and the money supply grows at y, then over a period of time the prices will grow at (y-x) per year. That’s your inflation rate. Simple. There’s a problem though. It assumes the demand for money among people today is uniform across. This isn’t true. Because all of us have different beliefs about the future. If our view of future inflation is different, our need to hold money today will be different. This means there could be many paths to price stability other than just the monetary approach. These paths are varied depending on households’ views about the economy’s future state. And that’s influenced by fiscal policy. So, according to FTPL, a tough and independent central bank is good to have but it alone cannot guarantee price stability. Fiscal policy will have to work in tandem. Government’s choice of how it finances its debt has a key role in how inflation plays out in future. The central banker must continue to convince the government to adopt the right stance on fiscal policy.On the second question - how much inflation control is optimal - FTPL suggests allowing price levels to swing to any wild variations to the government’s budget. This gets a bit complicated but a simple summary is that in times of economic shocks like a pandemic it is efficient to allow prices to go up. That done, let me move to add my nuance to Pranay’s explanation of Domar’s rule. No one can argue about “r” > “i” logic. The key questions about the deficit, however, are for how long and how much? If you have a fiscal deficit of one per cent for one year and you take the next five to grow higher than the interest rate to offset it, you’re fine. But what if you keep adding a five or six per cent deficit every year for a decade and more? As a somewhat laidback, retiring fiscal hawk, this is what worries me when I see unlimited deficit spending all around. A trillion here in stimulus and another trillion there and soon we are talking about some real money here. My worry is we have reached a stage where “r” > “i” cannot support the deficit spending. So inflation will come in. That’s my view. A high inflation future is inevitable. Addendum squaredRSJ makes an important point. “r” > “i” is a necessary but insufficient condition. The reality is that “r” needs to be sufficiently greater than “i”. That’s because the “r” > “i” condition rests on the assumption that the prim…

    Full show notes at the publisher

    #114 A Self-Help Text For Andolan-jeevis 🎧 Mar 11, 2021
    Show notes

    - RSJ

    Two somewhat random thoughts triggered this edition.

    One, we have been talking about Radically Networked Societies (RNS) a fair bit here. These are non-hierarchical networks of individuals who share a common identity and take up a cause they are passionate about through adroit use of social media platforms and cellphones. In an RNS, there are no clear roles, the decision making is amorphous and the leadership is diffused. But things move really fast. The state which has to contend with RNS is hierarchical, slow and regimented. It can’t keep up. We have seen this with the many protests world over that have been triggered by RNS. Forget the state, even nimble hedge fund managers have found it difficult to stay in step with an RNS-like Reddit forum, r/wallstreetbets. We have made the case RNS are here to stay and the state will have to find a solution to control them.

    But over the weekend I was struck with a thought. What have these RNS movements truly achieved? Have they turned themselves into mass movements and brought dramatic change anywhere? The answer is no. Over the last decade (starting from Arab Spring), there have been innumerable RNS movements driven by Twitter, WhatsApp and other platforms that have created a stir and captured media imagination. But they have been transient. Their long-term impact is yet to be seen. Does anyone really believe that the most long-lasting among RNS instances like Black Lives Matter or Occupy Wall Street will ever morph into something like the Civil Rights movement of the 60s or, more impossibly, the Russian revolution?

    No.

    So, the question: why?

    Two, the majoritarian problem that’s facing many democracies the world over today. This is the ‘tyranny of the majority’ that Burke and Tocqueville had warned about almost two centuries ago. So, the question is how do you trump majoritarian-ism in a democracy which is designed for it? Granted, it is not where a democracy should have reached, but having reached there how does it get out from it? A solution I have written about in previous editions is to do nothing. My argument has been it is impossible for a large agglomeration to remain stable over a period of time. It will splinter because the concept of political is about the existential distinction between friend and enemy like Schmitt wrote. So, you just wait for nature to take its own course. But that doesn’t seem a proactive solution to many. There must be a way to counter-mobilise the masses, they argue.

    So, the question: is there a way?

    Enter The Longshoreman Philosopher

    Both these questions - why the many RNS movements haven’t turned into real mass movements and why is it difficult to counter-mobilise against majoritarian tendencies - bring me to the works of Eric Hoffer. More specifically, his first book - The True Believer: Thoughts on the Nature of Mass Movements (1951).

    Eric Hoffer was an intellectual like no other. Consider this: he never finished even grammar school, he was blind between the age of 7 to 15, and he worked every day of his life as a longshoreman in the docks of San Francisco doing hard physical labour. Yet, or maybe because of these, Hoffer was a peerless social and moral philosopher with dazzling aphorisms and insights. At the age of 53, he wrote The True Believer, a slim book that packs in, to my mind, the most number of insights per page than any book I have read. It will be impossible to sum up the book in a few lines but let me try with a few helpful extracts from the book. Just to be clear, these do no justice to the richness of the text when read in full.

    First, Hoffer establishes all mass movements, religious, political or social, are interchangeable. When the situation is right for a mass movement, it is right for any movement regardless of belief or dogma. So, for Hoffer, every mass movement from Christianity to Communism to Fascism have the same underlying features. As he wrote:

    “Since all mass movements draw their adherents from the same types of humanity and appeal to the same types of mind, it follows: (a) all mass movements are competitive, and the gain of one in adherents is the loss of all the others; (b) all mass movements are interchangeable. One mass movement readily transforms itself into another. A religious movement may develop into a social revolution or a nationalist movement; a social revolution, into militant nationalism or a religious movement; a nationalist movement into a social revolution or a religious movement.”

    Second, the movements get off the ground by what Hoffer called ‘Men of Words’. Most people don’t like change, no matter how dissatisfied they are with their present. They will seek change at the margins. They look upon a rabble-rousing change agent with suspicion. Men of Words, on the other hand, are different. Their core skill is their ability to articulate the need for change in a benign yet persistent manner. They find an audience with the restive masses with their farsighted prescriptions for change without an immediate sense of urgency.

    “…. the man of words prepares the ground for the rise of a mass movement: 1) by discrediting prevailing creeds and institutions and detaching from them the allegiance of the people; 2) by indirectly creating a hunger for faith in the hearts of those who cannot live without it, so that when the new faith is preached it finds an eager response among the disillusioned masses; 3) by furnishing the doctrine and the slogans of the new faith; 4) by undermining the convictions of the “better people"— those who can get along without faith—so that when the new fanaticism makes its appearance they are without the capacity to resist it.”

    Third, once the ground has been set by the Man of Words, the fanatics enter. They love chaos and they seek anarchy. The old order is rotten to its core and only a complete dismantling of it will satisfy a fanatic. They don’t want to waste time to reform it. It has to be overthrown. The fanatics get the mass movement rolling not with their convictions but something more primal. Hate. As Hoffer wrote:

    “Mass movements can rise and spread without belief in a God, but never without belief in a devil. Usually the strength of a mass movement is proportionate to the vividness and tangibility of its devil.”

    The fanatics are ready to sacrifice their lives to smash the old order. This passion is great when they are in a life and death struggle with their enemies during the movement. But it becomes a problem when victory is in sight.

    “The danger of the fanatic to the development of a movement is that he cannot settle down. Once victory has been won and the new order begins to crystallize, the fanatic becomes an element of strain and disruption. The taste for strong feeling drives him on to search for mysteries yet to be revealed and secret doors yet to be opened. He keeps groping for extremes.”

    Fourth, the revolution is then saved from the fanatics by the practical ‘Man of Action’. This marks the institutionalisation phase of the movement. The change that was so desired and is now at the doorsteps needs to be perpetuated through institutions and systems. This has to be done by the Man of Action. The practical man looking for order. As Hoffer wrote: “The genuine man of action is not a man of faith but a man of law.” He is seeking stability and he will go to the extent of coercing the masses to perpetuate the hard-won change.

    “In the hands of a man of action the mass movement ceases to be a refuge from the agonies and burdens of an individual existence and becomes a means of self-realization for the ambitious. The irresistible attraction which the movement now exerts on those preoccupied with their individual careers is a clear-cut indication of the drastic change in its character and of its reconciliation with the present. It is also clear that the influx of these career men accelerates the transformation of the movement into an enterprise.”

    Hoffer believed a successful revolution works when these 3 roles - Man of Words, Fanatic and Man of Actions - are split among different people who play their parts and move on. However, he was aware there was a rare breed of people who straddled these roles depending on where the movement was at any point in time.

    “There are, of course, rare leaders such as Lincoln, Gandhi, even F.D.R., Churchill and Nehru. They do not hesitate to harness man’s hungers and fears to weld a following and make it zealous unto death in the service of a holy cause; but unlike a Hitler, a Stalin, or even a Luther and a Calvin,1 they are not tempted to use the slime of frustrated souls as mortar in the building of a new world. The self-confidence of these rare leaders is derived from and blended with their faith in humanity, for they know that no one can be honorable unless he honors mankind.”

    Hoffer Today

    Now back to the two questions I raised at the start of this edition - why the many RNS movements haven’t turned into real mass movements and why is it difficult to counter-mobilise against majoritarian tendencies?

    Hoffer probably has some answers.

    One, the men of words who can sustain a long campaign to “undermine institutions, discredit those in power, weaken prevailing beliefs and loyalties” are in short supply today. The modern men of words take on too many causes, speak on varied issues and often end up contradicting or discrediting themselves.

    Two, fanaticism is cheap on social media. The cost of fanaticism is low. This creates a temporary mob of impassioned supporters of a cause who are high on noise and low on stakes. They are all fire and brimstone behind the cloak of anonymity on these platforms. They lack the fundamental Hoffer-ian feature that distinguishes fanatics from others: self-sacrifice.

    As Hoffer wrote:

    “One of the rules that emerges from a consideration of the factors that promote self-sacrifice is that we are less ready to die for what we have or are than for what we wish to have and to be.”

    It follows that any counter-mobilisation against a majoritarian agglomeration must satisfy the requirements of a mass movement laid out by Hoffer. And what would that be? A real intellectual foundation that’s sustained over time by men of words followed by real activism and self-sacrifice by the fanatics to the cause. The men of action can then follow to institutionalise the change.

    As I was reading Vinay Sitapati’s excellent Jugalbandi: The BJP Before Modi, I realised how Hoffer’s thesis on mass movements fits perfectly to the two seminal political events of India over the last century - the freedom movement leading to Congress hegemony till the mid-80s and the rise of the BJP and Hindu nationalism from then to the present. Both involved men of words creating the grounds for stoking dissatisfaction over years followed by hordes of self-sacrificing fanatics getting the movement off the ground. That then sets the stage for men of action to codify and institutionalise the change. What our history has shown is any mass counter-movement to the current order will take years to fructify with the right conditions. Of course, the current order will try and prevent the building up of the right conditions. That’s what we see around us now.

    70 years since its first print, Hoffer’s ‘The True Believer’ has the best answers to the question that’s often asked in politics today - how will an alternative emerge? I can imagine a lot of people whom I can recommend it as an essential reading.

    HomeWork

    Reading and listening recommendations on public policy matters

    * [Video] An interview of Eric Hoffer (this is part 1. There are 4 more parts). The man was an original.


    This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com

    #113 Opioids, Domar Rule And Who Moved My Chips 🎧 Mar 07, 2021
    Show notes

    This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?PS: If you enjoy listening instead of reading, we have this edition available as an audio narration on all podcasting platforms courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.Global Policy Watch #1: Deadly AdviceBringing an Indian perspective to burning global issues- RSJThere are consultants and investment bankers who floor you with their presentations. And then there is Mckinsey & Co. When the ‘smartest guys in the room’ speak, you watch them transfixed. To use Coleridge’s immortal words: “He holds him with his glittering eye—The Wedding-Guest stood still,And listens like a three years' child:The Mariner hath his will.”You are often the wedding-guest and you listen to them like a three-year-old.I guess it didn’t exactly work out that way over the past few months when Mckinsey was answering questions about its role in abetting the opioid crisis. Not Caring About the ConsequencesOn Feb. 4, McKinsey & Co., the management consulting firm, announced a $573 million settlement with 49 State Attorneys General for its past work for opioid manufacturers. In Nov. 2020, Purdue Pharma pleaded guilty to criminal charges of not doing enough to combat the opioid epidemic that has ravaged the American heartland largely on the back of aggressive marketing of its flagship product, OxyContin. Purdue acknowledged it looked the other way when the prescription drug was diverted to the black market, it misled regulators to boost its manufacturing quotas and it paid doctors for random speaking gigs that were a way to reward them for writing more prescriptions for OxyContin. The costs to society were dramatic - over two million addicts and about half a million opioid-related deaths in the past two decades. There’s no other way to put it; Purdue Pharma was an evil enterprise that deliberately sold products that killed people while profiting enormously from it. And Mckinsey advised Purdue from 2004-19 on how to do this well.On Feb. 4, Kevin Sneader, global managing partner of Mckinsey, wrote a memo to all his colleagues on the settlement. It contained the oldest excuse in the book - we weren’t doing anything unlawful. That’s consulting-speak admitting we were unethical:“Indeed, while our past work with opioid manufacturers was lawful and never intended to do harm, we have always held ourselves to a higher bar. We fell short of that bar. We did not adequately acknowledge the epidemic unfolding in our communities or the terrible impact of opioid misuse and addiction, and for that I am deeply sorry.” And it contained this gem:“It is also a key reason why we chose the course of action announced today since it allows funds to be deployed quickly and directly to victims of the opioid crisis while avoiding a long and protracted legal process.” I’m not sure there is a consulting equivalent to that old Hindi proverb - “nau sau choohe maar, billi chali haj karne”. But Mckinsey could use it next time.The saga has followed a predictable course since. On Feb 24, the 650 global partners of Mckinsey voted to replace Kevin Sneader as its global managing partner. As far as Mckinsey goes, I guess, they have done all they could to put this behind them. The Slippery Slope In BusinessWhat makes a pharma company that set up its business to save lives go down the path of taking lives? Greed? There’s always the usual punching bag brought up when something like this happens - the Friedman doctrine. The purpose of a business and its sole social responsibility are to maximise shareholders value. That, according to its critics, gives businesses a free run to do anything. It makes greed legitimate. But does it? We put up a passionate defence of the Friedman doctrine on the 50th anniversary of that paper in edition #70. Friedman, as we have argued before, wasn’t making a case of untrammelled capitalism. In fact, he makes following the rules of the game fundamental to how a business must operate. As he concludes in that paper:But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book “Capitalism and Freedom,” I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (emphasis ours)Business ethics is often half-jokingly cited as an example of an oxymoron. There are challenges inherent in the market system for a business to be virtuous or ethical on its own. There’s the principal-agent problem, to begin with. The people running the business often aren’t the owners of the business. They have an incentive to maximise their short-term gains at the expense of all others. Then there’s information asymmetry between the business and its consumers. It is not possible for consumers to know everything about the products of a company. They trust the company to make products that are good for them. The company then has the incentive to be economical with the truth. There’s also the collateral damage problem on the society or environment that a business often inflicts. Pollution, for instance. It is what the economists call a ‘negative externality’. How does a business pay for it? If markets were to be left free from any intervention, businesses will exploit these failures for their benefits. They might make inferior or harmful products, take short-term decisions that hurt their consumers, workers or shareholders, pollute their environment or harm society. You could say in the long-run the markets will figure this out and punish them appropriately. But the social costs incurred by then will be too high. The Case for Regulations This is where regulators come in. The only reason for the state to intervene in markets through laws and regulations is to address these market failures. But it is a cat-and-mouse game between the regulators and those who are regulated. Most companies follow the regulations and get on with their lives. Not all. There’s always a temptation to go around them. And it isn’t too difficult. If a company decides to hide or obfuscate the truth, it can hoodwink a regulator for long. We have seen this play out many times over across sectors. But the case of Purdue Pharma is somewhat unique. It ran its racket of selling OxyContin as an opioid to addicts in plain daylight. Everyone who dealt with Purdue knew of it - patients, doctors, pharmacies, hospitals, auditors and consultants. The competitors knew of it. As did many reporters and writers who covered the opioid crisis over the past two decades in print and literature. Everyone except the regulator, which strictly followed the guidelines and only went by Purdue’s responses to their queries. So long as the responses and supporting evidence that went along with them were fine, the regulators considered their job done. And how did Purdue manage to do this?Well, there’s Mckinsey & Co. There’s no other way to put this. Purdue Pharma framed their problem this way - how to maximise the sales of OxyContin that included its abuse by addicts while keeping the regulators away with their smooth but inaccurate responses? And Mckinsey, the smoothest of the mariner, hath their will (as Coleridge would say) with their presentations. Presentations that did some unique cost-benefit analysis ever in the history of consulting. Valuing human life. Presentations that suggested if Purdue paid $14,810 per “event”, and if 2,484 customers of the CVS pharmacy chain overdosed or became addicted in 2019, Purdue would pay CVS $36.8m that year. There’s more there in those presentations that will shake your faith in humanity. As other cases and class action suits pile up, it is almost certain Purdue Pharma will cease to exist in its current form. The ‘philanthropic’ Sackler family that owns it will also have its day of reckoning. But what about Mckinsey? A $600 million fine and a change of its managing partner? That’s it? Seems like a fairly low cost to pay for some deadly advice. The financial sector regulators have learnt from the many financial crises on how to regulate investment banking and advisory businesses. These included personal criminal liabilities, fines and clawback of bonuses paid if a wrongdoing is proven in future. There’s something to learn from them to ensure those in the business of advising corporates bear moral responsibility for their services. Not doing anything unlawful isn’t enough. Else, it is only a matter of time before another partner will be putting up similar slides to turbocharge another unethical business. But can regulations ever be enough? Like we have seen over and over again, it won’t ever be watertight. Maybe a start needs to be made at business schools - the source of talent for these companies. Tom Peters, the bestselling author of many books on strategy and a Mckinsey alum, writing for FT makes this point:In my opinion, this is not unrelated to the OxyContin affair. I have long argued that we should “shut down every damn business school”. This rant is hyperbolic, but my reasoning is that business schools typically emphasise marketing, finance, and quantitative rules. The “people stuff” and “culture stuff” gets short shrift in virtually all cases. I agree. I’m not sure if there is equal importance given to the discipline of ethics as it is given to a course on Options and Futures in any MBA programme. You could structure a beautiful futures contract or devise a compelling strategy for enhancing sales force productivity using what you learnt in a business school. Those models could be terrible for society and your clients could be guilty of using human beings as means and not as an end in themselves. You could plead ignorance about these ideas. Or you could have read Aristotle and Kant at school and asked those questions before you began building your model. Reading Friedman isn’t a problem. Reading only Friedman is. A Framework a Week: The Domar Rule for Public Debt Sustainability Tools for thinking public policy— Pranay KotasthaneThis newsletter unabashedly bats for policies aimed at accelerating India’s GDP growth. We’ve reasoned out our position in myriad ways in previous editions. And yet, we realise that the sceptics aren’t fully convinced. The ideological challenges to GDP growth first — inequality, inclusive growth, and sustainability — continue to gain strength. So let’s try another line of reasoning: even if you are in favour of big governments, you cannot escape the prior need for higher GDP growth. Here’s how.Big governments need more money by way of higher taxation or higher borrowing. In the current economic situation when there are no profits to tax, governments across the world are competing to borrow money for restarting their pandemic-hit economies. In some economies like the UK, public debt has hit its highest level since 1945. Consequently, the interest rates these governments are promising their borrowers (bond yields) are rising. This higher borrowing comes at the expense of the savings of future generations who will end up paying taxes in repayment of this mountain of debt. Is there a limit beyond which the fetish for big borrowing becomes unsustainable? A classic 1944 paper titled “Burden of Debt” and National Income by Evsey Domar gives an answer.As the second world war was winding down, governments then faced a situation not different from today — the economic reconstruction needed massive borrowing. The policy orthodoxy at the time opposed wanton borrowing — today’s deficits would lead to tomorrow’s higher tax rates, they said. Domar disagreed. Instead, he said that governments running deficits weren’t all that bad especially in times of crises when private investment would decline. Instead, the crucial variable one should be tracking was the national income. With a set of assumptions, he derived that as long as the national income grows at a rate faster than the interest rate, tax rates settle to manageable levels. While it is true that higher deficits mean higher tax collections from subsequent generations, it doesn’t necessarily imply an increase in the rate of taxation. Provided that the economy grows at a robust rate, a smaller percentage of it hived away as tax can raise the same tax amount as would a higher tax rate raise on a slow-track economy. This is intuitive. For instance, a 12 per cent tax rate on an economy that is stuck at 100 units generates the same tax amount as a 10 per cent tax rate on a faster economy that has galloped to 120 units in the same period. In other words, compound growth counters compound interest.Domar’s conclusion is simple but profound: the problem of debt burden is a problem of expanding national income. The chart below illustrates this finding. At constant incomes (stagnant GDP), tax rates keep rising linearly. At the other extreme, when income rises at the same rate as the interest rate (2 per cent in this case), the tax rate remains constant. More interestingly, the sawtooth pattern below shows that even if there were recurrent wars every thirty years requiring recurrent massive government borrowing, tax rates would still be under control so long as the national income keeps growing handsomely.So, higher levels of public debt are not all bad. The key is to understand how that additional borrowing is being utilised. If this money is invested in a way that accelerates economic growth, debt will be sustainable in the long run. In other words, spending on physical and human capital is desirable, spending on wasteful subsidies is not. Now, armed with this framework, observe where India is. The interest rate on the government’s 10-year bonds is hovering at the 6.2 per cent mark while the GDP growth has barely turned positive last quarter after two consecutive quarters of negative GDP growth. Even before the pandemic hit, the situation wasn’t all hunky-dory. The slowdown of the last decade means that public debt sustainability has been worsening for almost a decade now. A chart in Business Standard has a good illustration of this risk. Without returning to higher GDP growth rates soon, even government borrowing will become unsustainable. And if the government doesn’t have the spending power, all other worthy projects of tackling climate change and inequality have no chance of success. Global Policy Watch #2: The Great Chip SqueezeBringing an Indian perspective to burning global issues— Pranay KotasthaneIf you’re planning to buy a new car, don’t. Because you’re staring at indeterminate delays as the semiconductor IC chips that make your car infotainment and control systems work are just not available in the global market. No one’s quite sure when this shortage would be resolved. Some estimates suggest that nearly 1 million fewer vehicles will be produced the world over in the first quarter of 2021 because of the semiconductor shortage. This peculiar market condition has been in the news for many weeks now. Two reasons are commonly cited. One, a massive advance purchase order from Huawei in anticipation of US sanctions last year gobbled up available manufacturing capacity. And tw…

    Full show notes at the publisher

    #112 Courting Trouble Mar 04, 2021
    Show notes

    - RSJ

    Chaitanya Tamhane’s debut feature Court (2014) convinced me about two things. One, here was a global talent whose cinema will make us proud in future. He did that and more with his next feature - The Disciple (2020). I knew of the precocious Tamhane back from 2007-08 when his knowledge and analysis of global cinema of all stripes used to leave us awestruck. We were no mugs about cinema ourselves. But he was different. Next level as they say.

    That aside, it is the second point that I was left with at the end of Court that has stayed with me for long.

    Ruka Hua Faisla

    But to back up a bit, here’s what Court is about.

    It begins with a day in the life of an elderly Dalit activist, Narayan: a writer of protest songs and a teacher for poor kids living in the slums. A simple man of deep conviction he has devoted his life to causes that are dear to him. Soon, he is arrested because a manhole worker died by suicide after listening to one of his angst-ridden songs that seemingly abetted it.

    The trial is a Kafkaesque nightmare. It is clear that the manhole worker died because of inhaling the poisonous sewage gases. This isn’t anything new. The plight of these workers who go into the manholes without any safety equipment has been documented many times over. Yet, the public prosecutor and the state produce fake witnesses who testify against Narayan and bring up bizarre new charges like possession of illegal books (there’s one on Yoga) to make it watertight case against him. The state can’t accept the man died because of the abominable work conditions.

    Instead it must have been that old mass murderer over the ages - poetry.

    The autopsy report and the testimony of the wife nail the lie. This was no suicide. Meanwhile Narayan’s health continues to deteriorate while he is in custody. The judge grants him a bail for a surety amount of Rs. 1 Lac. Good news? Wait. The next day Narayan is arrested again on another trumped up charge. This time it is about sedition and for waging a war against the state. The case is back to the same judge who tells them to appeal to the High Court.

    The film ends with what appears like a complete non sequitur.

    We see Narayan on bail going back to teaching the poor kids in the slums. And then there’s a surreal bit to end the film. The judge and his family go out for a day long picnic. They travel in a minibus singing songs and playing antakshari. We see members of the family seek the judge’s counsel on different issues. The judge is like that old uncle we all know. He dispenses vacuous, outdated advice. The last scene has the judge dozing off on a bench mid-afternoon while the children play cricket nearby. A ball hits the judge mildly. He wakes up and promptly slaps the boy who has come to pick it up.

    The film ends.

    A Reflection Of Our Society

    There are multiple themes apparent in the Court: the vengeful state, an indifferent judicial system, the drudgery of bureaucratic work, the idealism of an aging activist and the tenacity of a young advocate who is representing him. However, I was struck by that last scene. What was that about?

    Over the last few years, I have thought about that scene often. Why?

    Well, let me offer you three recent newspaper pieces.

    First, here’s Shekhar Gupta in The Print on “how our judiciary is murdering the principle of ‘bail, not jail’ routinely”:

    “It is a challenge to decide which institution has declined over the recent decades, the police or the judiciary. But today, if you are someone the powers that be don’t like, they can easily find police officers to file a case with serious sections from the IPC, never mind if they don’t have a shred (or iota, which our judges prefer in their orders) of evidence.

    You might still think, certainly, they still have to produce me before a magistrate who would easily see through the police case that’s thinner on evidence than Coronil, if even that. And once the magistrate sees that, the order will be determined by that immortal line from the legendary late Justice V.R. Krishna Iyer: Rule is bail, not jail.

    Contrary to our belief, that Krishna Iyer line wasn’t immortal. If anything, it’s been murdered and cremated routinely, and at least three times in recent days. Check the cases of Munawar Faruqui, Nodeep Kaur and Disha Ravi. Our choice of three very young and vocal people is a conscious one.”

    Or, read this from The Economic Times:

    “Chief Justice of India triggered a controversy on Monday with his remarks in two cases. In one case, he asked a man accused of rape in a relationship with a 16-year-old, whether he was willing to marry the complainant. The man faces accusations of rape, cheating and criminal intimidation, besides charges under the stringent Pocso Act designed to prevent exploitation of children.

    The CJI’s remark was panned on social media.In another case, the CJI asked if a man’s sexual conduct, however brutal, could attract rape charges if it was made by his partner.”

    Or, how about this:

    “Justice Pushpa Ganediwala recently acquitted a man accused of groping a 12-year old girl's breast because he did not make skin-to-skin contact, and days earlier, ruled that holding the hands of a five-year-old girl and unzipping pants do not amount to 'sexual assault' under the POCSO Act.

    In two other judgments, she acquitted two persons accused of raping minor girls after noting that the testimony of the victims did not inspire confidence to fix criminal liability on the accused persons.

    "No doubt, the testimony of the prosecutrix (victim) is sufficient for conviction of the accused. However, the same ought to inspire confidence of this Court. It ought to be of sterling quality, Justice Pushpa Ganediwala said in one of the judgments.”

    I could go on and on but I think you get my drift.

    A Good Citizen?

    Why have things turned this way over the past few years?

    I have 3 reasons to offer. Firstly, we draw our bureaucrats and our judges from our society. Our society has progressed on liberal axis over the past seventy years. But not enough. It is largely illiberal. Secondly, society was illiberal in the past too. But there was no incentive for those running it to be illiberal while interpreting the law or administering a rule. Going by the evidence above, this seems to have changed as the state has turned illiberal. When incentive changes, behaviour changes. Thirdly, we seem to be sorely missing virtue in public life. In the absence of it we have deified certain institutions where virtue is often visible. Like the armed forces or the judiciary. There’s always a price to pay for deification without adequate scrutiny.

    That brings me back to that last scene of the Court. I seem to get it a tad better these days.

    Apart from the many other themes apparent in the film, the one that was running in the subterranean was that old question of Aristotle - who is a good citizen?

    Is an old activist fighting the good fight against the state, writing revolutionary poems and organising the downtrodden to demand for their rights, a good citizen? Or is a learned judge with the majesty of law by his side, lording it over a court where the witnesses are fabricated and charges are often false, a good citizen? The society and the state have an answer. But is that the truth?

    Tamhane answers this in that brilliant coda to his film. The activist whom the state considers a threat is busy teaching kids despite his troubles while the judge with no care in the world wastes his time in a frivolous picnic and slaps a boy who disturbs his afternoon siesta.

    Court was released in 2014. Like all good art it is timeless.


    This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit publicpolicy.substack.com

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