Anticipating the Unintended

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#111 'Tu Tu Main Main' In the Information Age Mar 01, 2021

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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 of the good folks at Ad-Auris. If you have any feedback, please send it to us.Global Policy Watch #1: A Bit About BitcoinBringing an Indian perspective to burning global issues— RSJWhat should we make of bitcoin? Should we think of it as the best performing asset class in the last decade? After all, it was priced at $1 in April 2011 and its current price is about $45,000. But was it designed to be an asset? Surely, no. Satoshi Nakamoto, who invented bitcoin, was driven more by angst than greed while writing the 31,000 lines of code that he put out to the world on Jan 3, 2009. Satoshi (a pseudonym) wrote a 500-word essay - Bitcoin: A Peer to Peer Electronic Cash System - to explain the working of the system he had created. The logic was simple - a software system that would spew out some 21 million bitcoins over two decades with people interested in the coins ‘mining’ for them using their computing prowess. Satoshi was clear about his aim. He had seen the global financial crisis and he could no longer trust the conventional currency (also called fiat currency) issued by the governments. All he could see around him was central bankers printing money mindlessly to prop up a system where the ordinary individual had no say. And the banks were willing to design more creative and more toxic products that only benefitted them. As he wrote:“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”So he decided to take the governments and the banks out of the equation by his design of bitcoin. People could now transact with a currency that was purely digital, encrypted and anonymous with a distributed public ledger that kept track of the movement of the coin to ensure it isn’t used twice by the same owner to dupe someone. It was quite neat. More importantly, there was no bank or intermediary to get in the way of the transaction nor was there any central banker that could decide arbitrarily how many coins should be in circulation. This was a libertarian utopia. The last bastion of the state could fall now. Fiat currency, an imagined and a coercive construct of the state could now be challenged.As the last decade has shown, bitcoin hasn’t exactly replaced fiat currency as a medium of exchange in any meaningful way. But that doesn’t mean it has slunk away into anonymity. It has seen a remarkable rise in the last six months with some of the smartest people in the world betting big on it. Bitcoin or cryptocurrency has never been a more mainstream part of discourse ever. There are multiple ways of looking at cryptocurrency and make sense of what’s happening here. I will take the most traditional one for this edition. And, maybe, over the next few months go a bit deeper into this area. Today, I will take the economic theory lens to evaluate cryptocurrency and its most valuable manifestation, bitcoin.Let’s understand fiat currency a bit better. Why do all of us believe a Rs. 500 note has any value? Well, Econ 101 class would tell you that’s because the sovereign has decided it is a legal tender that’s worth Rs. 500. There’s a promise right there on the currency note signed by the RBI governor. That’s very reassuring. But does that explain why we don’t use any other commonly agreed medium of exchange? Back in the days when I stayed at a hostel, we used cigarettes or Old Monk as a medium of exchange. There were always more cigarettes and Old Monks in the hostels than currency notes (this was the pre-ATM era) and these had a stable range within which its value moved. If someone needed my help with an assignment, 2-3 cigarettes did the trick. Now the question is what if this was replicated at a larger scale? The demand for Rupee notes would fall and its value would fall notwithstanding the Governor‘s promise. So, why does this not happen more often? The answer is that old reason for most things in our society. Network effect. Since most people use Rupee as a medium of exchange, it is easier for the next person getting into a transaction to use it as well. Network effects create an exit barrier for people to adopt any other new medium of exchange and an entry barrier for that new medium wanting to usurp the position of the Rupee. You will need a lot of initial momentum going if you were to establish yourself as an alternative. And how will you generate that momentum? I mean why will people use you as an alternative? It isn’t like the Rupee is failing to meet your expectations as a medium of exchange.But is that enough? Is Rupee valuable because we all collectively believe in the myth it is valuable? That sounds more Harari than real economics. So, let’s go back to the question of why do we think a Rs 500 note has a value. Some of the more original thinking in this area was done by the formidable Austrian school economist Ludwig Von Mises at the beginning of the last century. His view was that we use something as a medium of exchange today because at some point in the past it actually had a real intrinsic value. In his time most currencies traced their origin to a precious metal and overtime were backed by that real asset however nominally. That’s fine but what explains the value of Rs. 500 today. There is no real asset backing this except some vague notion of trust. Also, there’s no real reason why should we all believe that this myth of the Rupee having value will continue forever. What if we continue printing money endlessly leading to spiralling hyperinflation sometime in future? What if there’s a worse global pandemic in future that cripples the global economy? What if we know a meteor is on course to collide with Earth in the next 12 months? What happens then? Will we accept a medium of exchange that has no real value if we know our future is uncertain or doomed? Think of that last person willing to accept a fiat currency as a medium of exchange. Why would he take that risk? Doesn’t make any sense for him because there's no future person to whom he can give this currency for its value. We believe in fiat currency because someone in future believes in it too. No future means no such belief. Now work backwards. Why would the last but one person accept it if he knows the last person won’t? If you follow this backward induction logic to its end and if we all know the future is uncertain and (somewhat) doomed, you will conclude the value of fiat money will be zero in future and therefore it should be zero today. If you think about it this way, fiat money and this whole business of printing money to get over a crisis is a giant Ponzi scheme. Fiat money should have no value today. Whatever value it has now is a bubble. So why do people call bitcoin a bubble and not fiat money? Well, turns out there is one big use case of fiat money - paying tax liabilities owed to the state. If you remember this was an argument used to explain modern monetary theory (MMT) too. If the only way to pay taxes to the government is through fiat money, then there is a periodic demand for it by the citizens. This goes up as the economy grows or as the government taxes more. Now we can avoid the backward induction logic problem that we discussed earlier. The fiat money has a value that’s non-monetary; it pays your taxes. This won’t allow its value to go to zero in future. Therefore it will have value today too.On such arbitrary plank of state coercion the edifice of human progress rests.So, what about bitcoin then? Like I said earlier it is as much a bubble as any fiat currency of today. There are three problems it has to solve. One, its unique architecture is both a feature and a bug. That there can only be that many bitcoins prevents anyone from flooding the market with them. This keeps its downside protected and makes it a stable store of value. But on the other hand, a limited stock of coins means the value of bitcoin will continue to rise to preclude its use as a medium of exchange. I mean why will you use bitcoin when you know it will be more valuable in future. You will store it. The ‘good money’ will go out of circulation. The old Gresham’s law will apply. Two, if people don’t use it as a medium of exchange, it won’t create network effects. Lack of network effects will mean it won’t create enough momentum to replace fiat currency. This is a chicken and egg problem. Three, there will be transactions where people will seek anonymity or privacy that will be good use cases for cryptocurrency. But will illicit goods and services on the dark web or those sought for by fringe libertarians be a market large enough to justify the crazy valuation that bitcoin has currently? Through a conventional economic prism, the whole bitcoin or cryptocurrency opportunity looks like an asset bubble. There’s a small probability that many Silicon Valley founders and mavericks will ‘bootstrap’ the network effect for a cryptocurrency by making their goods and services available only in that currency. This will bestow intrinsic value to them beyond being a medium of exchange. That’s the only chance it has. Unless the sovereign decides to start its own cryptocurrency that can be used to pay its tax liabilities. But that is for another edition.Global Policy Watch #2: Disagreement in the Information AgeBringing an Indian perspective to burning global issues— Pranay KotasthaneA democracy is as good as the discourse it fosters. And it needs no convincing that discourse has plunged many levels in many democracies across the world. Redeeming our discourse requires two necessary but insufficient components: education in critical thinking, and praxis in disagreeing well. Critical thinking is where we desperately need philosophers. Philosophy’s focus on argument as a topic of study has a lot to offer. Only when we have a methodological understanding of arguments can we train ourselves to reason well. Only when we reason well will we be able to reflect and reach independent conclusions. If I were asked what is one course that should be added to high-school curricula, it would definitely be critical reasoning. The other component, learning to disagree well, is a skill that needs a massive upgrade in the information age. We are not good at handling disagreements. We have a tendency to equate an attack on our opinion as an attack on us. This verb ‘attack’ itself illustrates how strongly we perceive disagreements. All this was known yet manageable until we didn’t have social media. People disagreed but within their social circles, with people they shared some similarities they could always go back to when confrontations got ugly. But social media changed things dramatically. For one, it put us in contact with the opinions of people we otherwise know very little about. And two, it put our online selves in an endless status competition. The result: outrage without real disagreement, confrontation without camaraderie. None of this is going away. And this is precisely why diagreeing well is a core skill in the information age. We are still only beginning to scratch the surface of what it means at an interpersonal level or a social media platform design level. Nevertheless, Ian Leslie’s Guardian Long Read article makes a good start.His answer is two-fold. One, narrow the status gap. Leslie writes:“People skilled in the art of disagreement don’t just think about their own face; they’re highly attuned to the other’s face. One of the most powerful social skills is the ability to give face; to confirm the public image that the other person wishes to project. In any conversation, when the other person feels their desired face is being accepted and confirmed, they’re going to be a lot easier to deal with, and more likely to listen to what you have to say.”..“When a debate becomes volatile and dysfunctional, it’s often because someone in the conversation feels they are not getting the face they deserve. This helps to explain the pervasiveness of bad temper on social media, which can sometimes feel like a status competition in which the currency is attention. On Twitter, Facebook or Instagram, anyone can get likes, retweets or new followers – in theory. But although there are exceptions, it is actually very hard for people who are not already celebrities to build a following. Gulled by the promise of high status, users then get angry when status is denied. Social media appears to give everyone an equal chance of being heard. In reality, it is geared to reward a tiny minority with massive amounts of attention, while the majority has very little. The system is rigged.”Two, lower the identity stakes. Leslie writes:“..what drags participants into destructive conflict is usually a struggle over who they are… That our opinions come tangled up with our sense of ourselves is not necessarily a bad thing, but it is something we need to be aware of when trying to get someone to do something they do not want to do, whether that’s stop smoking, adapt to a new working practice, or vote for our candidate. Our goal should be to prise the disputed opinion or action away from the person’s sense of self – to lower the identity stakes. The skilful disagreer finds a way of helping their adversary conclude that they can say or do something different, and still be themselves.”More concretely, he identifies having a disagreement without an audience is one way of lowering the identity stakes. People feel more comfortable changing opinions beyond the performative glare. But this approach is suboptimal because it relies on reducing diversity of thought. The other approach is to “just be nice” at a personal level, to make an adversary feel that they can revise their opinion without losing face. All this sounds quite difficult, of course. But the key takeaway for me was to think about disagreement as a necessary skill for the information age. I strongly recommend the entire article. It is an important theme of our times. and we need to pay a lot more attention to this line of inquiry.PS: Two book recommendations for learning critical reasoning. Fundamentals of Critical Argumentation by Douglas Walton, and Critical Thinking Skills by Stella Cottrell. To get things started, there’s a good podcast by Oxford University as well. PolicyWTF: Compulsory Philanthropy — I Told You SoThis section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?— Pranay KotasthaneIn #108, we subjected the Corporate Social Responsibility (CSR) Law to an “anticipating the unintended” treatment. Turns out there’s evidence to back all those claims too! Gautam John, one of the most steadfast supporters of this newsletter, sent us a paper that analysed the impact of government intervention on CSR funding since the mandatory CSR law came into effect in FY 2013-14. The authors Rajgopal & Tantri conclude:* Overall, there is a marginal increase in the average CSR spending since the law came into effect in 2013-14. But ...* “High CSR” firms — companies that used to spend 4% to 5% of their profits on CSR before the law came into effect — reduced their spending to…

Full show notes at the publisher

#110 Will There be a Yangon Spring? 🎧 Feb 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.Global Policy Watch: No Telefoon in Rangoon - RSJMere Piya Gaye Rangoon Wahan Se Kiya Hai Telefoon is how C. Ramchandra immortalised Rangoon (Yangon) in our collective memories all those years ago. Unfortunately, ‘wahan se kiya hai telefoon’ is a tad difficult these days for the people of Yangon. Myanmar should be aware of the idea of eternal recurrence by now. That all events in the world recur in the same pattern over an eternal series of cycles. The coup earlier this month by the Tatmadaw (the armed forces) was a case of history repeating itself three times over in its short post-war history. The reason served by the military had a familiar ring to it. It alleged widespread voter fraud in the November 2020 elections that led to a landslide victory for Aung San Suu Kyi helmed National League For Democracy (NLD). The quasi-democracy that was in place in Myanmar since 2015 didn’t mean any loosening of the iron-fist of the Tatmadaw. It retained its control on the key levers of power. For it to allege voter fraud in elections is comical. It must follow then it is admitting its incompetence in being dictatorial. Anyway, leave that aside. History has shown logic isn’t a particular strength of military junta anywhere in the world. But irony is The senior-most military leader Gen. Min Aung Hlaing had this to say:“I would seriously urge the entire nation to join hands with the Tatmadaw (Army) for the successful realisation of democracy.” Then the junta went digital with its defence. In a country where Facebook is the internet, it posted this on its official site:After many requests, this way was inevitable for the country and that's why we had to choose it. And soon it blocked Facebook and disabled the internet for the sake of ‘stability’ in the country. The tanks were on the street and midnight knocks on the doors of NLD leaders began. Suu Kyi was taken into custody and the crackdown started. It was 1988 once again for Myanmar. The eternal cycle had recurred.As Nietzsche wrote:"Everything has returned. Sirius, and the spider, and thy thoughts at this moment, and this last thought of thine that all things will return". Myanmar has been living through a transition to a fledgling democracy over the last decade. A new constitution that allowed for representative democracy and elections took shape in 2008. In 2015, NLD won the general elections and Suu Kyi became the State Counsellor (the equivalent of PM) of Myanmar. She is constitutionally barred from becoming the President because she was married to a foreigner and her children aren’t citizens of Myanmar. There was an uneasy truce between her and the military over the last term as Myanmar saw an unprecedented period of opening up to the world, growth and freedom for its people. Anyone who visited it in the last five years would vouch for how ‘normal’ it felt. So, why the coup now? There’s never an easy answer to this. For all you know it could be General Hlaing having a bad hair day. But let’s look at it through the frames of political and social philosophy to arrive at few likely reasons.Firstly, the old Weberian power and legitimacy lens. Power is the ability to impose your will over others despite their resistance. Legitimacy is when this power is considered fair, even appropriate, by those over whom it is exercised. As Weber wrote:“The basis of every system of authority, and correspondingly of every kind of willingness to obey, is a belief, a belief by virtue of which persons exercising authority are lent prestige” Power needs prestige to be legitimate. Else, it is coercion. In Myanmar, the junta always had power but rarely legitimacy. In the quasi-democracy era, the junta ceded a thin sliver of power to the NLD. But legitimacy is a strange meal. It can feed that feeble power and bestow it with enormous strength. A second term for NLD would have done exactly that. Power is a zero-sum game. The army generals know it. People sense the winds of change fast. The military couldn’t take any further chances with this version of democracy. Self-preservation kicked in on Feb 1, 2021.Secondly, a recurring self-delusion that most authoritarians suffer from is how popular they are among the masses. The Constitution of Myanmar was drafted in a manner that favours large, majoritarian parties. You get a disproportionate number of seats regardless of the margin of victory on vote count. This was, of course, deliberate. There were two reasons for this. One, Myanmar is a multi-ethnic country with a distinct minority presence in its southwestern and northeastern borders. But the polity (the military and the NLD) is dominated by the majority Burmese Buddhists. A majoritarian Constitution is quite convenient. Two, General Hliang probably harbours political ambitions. His term ends this year. He backed the opposition in this elections thinking a victory would see him transition to being a President soon. The results were a shocker. 83 per cent of seats to NLD. The way the election rules have been drafted (by him) would now suggest an almost permanent NLD majority for the next many elections. This wasn’t acceptable. His network of businesses and the many interests of his family and friends could not be left to the mercy of mere civilian politicians. The general didn’t see himself in his labyrinth. This is the old authoritarian problem. You overestimate your popularity. No one tells you the truth. You call for the elections. Then you can’t handle the truth (no copyright issue here; Aaron Sorkin is a friend). Exhibit A of this behaviour is Indira Gandhi right after the emergency. Exhibits B, C, D.. are all dictators too many to name here. This is why good authoritarians go the other way. They change the constitution to reduce the freedoms of the opposition, they extend their terms or they take elections out from the political equation. General Hliang must speak more often to his friends who are on his speed dial - Xi, Putin or Erdogan. Thirdly, this is as good a time to mount a coup with little or no fear of international repercussions. Political cosmopolitanism is in a state of irrelevance now. The idea that states should be subject to some kind of international morality and they must behave in a manner consistent with it is at its weakest. The pandemic has further raised the walls at the borders. Transnational economic or political ideas have to contend with them. It is no surprise that international condemnation of the Myanmar coup is muted. China has asked all parties to resolve their differences internally (ha!). ASEAN, the largest market for Myanmar, has responded in a similar vein. The Biden administration has imposed sanctions and this will be followed by a few other western democracies. They hardly matter. Myanmar has lived in isolation for long to be concerned with them. So, what does the future hold for Myanmar? Will this emergency be a mere one-year interregnum and will we have democracy back after it? Freedom is addictive. Even in the smallest of doses. There’s a view that whatever passed off for democracy in the last decade will be too strong in public memory for the junta to erase altogether. Despite the internet ban, street protests are spreading and, importantly, the arms of the state like bureaucracy, police and public servants (bank or healthcare workers) are participating in a departure from the past. Will these be enough? As a realist, I understand the state can play the waiting game for long and with an increasing degree of coercion. There’s little likelihood of a Yangon spring this season. Global Policy Watch: I am Small, I contain Multitweets— Pranay KotasthaneDo I contradict myself? Very well then I contradict myself; (I am large, I contain multitudes.)— From Walt Whitman's Song of Myself That's too nuanced a point for social media warriors of all persuasions. After all, it's now possible to judge and crucify someone — notwithstanding their unique life experiences and resulting perspectives — merely on the basis of what they tweet. Or what they don't. Just imagine. Our social media profiles — filled with inane and often ill-thought System 1 garbage output — are our most important extrinsic manifestations. It's tragic.Two recent instances drove home this point to me yet again. One, an Indian-origin Oxford University Student Union President-elect had to step down after someone dug up her old Instagram posts containing some pretty terrible (and not even funny) wordplay about a holocaust memorial. As if the label “insensitive” wasn’t sufficient, more posts were dug up to also label her "racist" and "anti-LGBTQ". What the person is today in real life, I have no idea. But what seems pretty clear to me is that past Instagram mistakes don't deserve anything more than a sincere apology. That’s unfortunately not the case though. If the internet remembers everything, social media extracts a heavy penalty for everything remembered.The second instance was a shoddy article in The Caravan titled Establishment Man: The Moral Timidity of Sachin Tendulkar. Among other things, the author was able to make gross generalisations such as "… Tendulkar also shares the worst traits of the Indian middle-class: its indifference to the general good, its lack of commitment to the values of human rights and democracy, and its intellectual vacuousness" merely on the basis of Tendulkar’s Twitter feed. The specific accusation is that while Tendulkar joined the orchestrated chorus against Rihanna's tweet, his 'Twitter stayed silent' when Wasim Jaffer was removed as the coach of the Uttarakhand cricket team.This is not a defence of Tendulkar. As much as I admire him as a cricketer, I understand that a great cricketer can also be a craven follower. But I do have a problem when this judgment gets made merely on what he didn’t tweet about. For instance, the author is quick to conclude, on the basis of a Twitter feed that “..his personal decency has always been accompanied by a deeply ingrained timidity towards authority, a primal fear of upsetting any establishment, whether cricketing or otherwise.” Yet, Tendulkar’s 2009 statement “Mumbai belongs to all Indians”, going against the well-entrenched parochial ‘Marathi Manoos’ politics, doesn’t get even a cursory mention. Similarly, the author doesn’t even attempt to show if he investigated Tendulkar’s off-Twitter support for Jaffer’s shameful ouster. After all, there is a lot someone like Tendulkar can do — and we can expect him to do in this case — than merely signal virtue on Twitter. The Wrong Path ChosenThese two instances illustrate that we give others’ social media feeds way too much importance. The first instance follows a well-established practice of digging up old tweets to defame a present-day achiever. This tendency ignores the fact that the most important human preference is our ability to change our past preferences. Moreover, the more we label people, the more we polarise our politics. Philip Tetlock claims that text analyses studies show that people already tweet more like politicians (signalling virtue) or as prosecutors (assigning blame) rather than as hypothesis testers. And so, disproportional attention to our social media past will only make more people don the role of politicians and prosecutors — ready to fight every battle across the world while burning bridges in our vicinity. The Tendulkar case is a more recent trend — people are to be judged not only on the basis of what they tweet but also what they don't. This too has a similar effect of pushing us into becoming prosecutors who are obligated to jump from one burning issue to the next without solving any.Finally, to pay disproportional attention to our social media selves is both foolish and dangerous. To rebuild broken bridges, we need to assume by default that people contain multitudes. It's going to be tough. Answer to the Quiz in #108Yes, the answer is BR Ambedkar, who else? Those were the excerpts from the election manifesto of the Scheduled Castes Federation from 1951. SCF was a precursor to the Republican Party of India. The entire election manifesto is a fascinating read. As one can expect from Ambedkar’s writings, this manifesto is not just a vague litany of promises but a rare well-reasoned agenda. Sample this:IV. Co-operation between Scheduled Castes Federation and other Political Parties 51. Mere Organization does not make a party. A party means a body of people who are bound by principles. Without principles a party cannot function as a party for in the absence of principles there is nothing to hold the members of it together. A party without principles is only a caravanserai. The Scheduled Castes Federation will not, therefore, ally itself with a Political Party which has not laid down its principles and whose constitution does not demand a pledge from its members to stand by those principles and whose principles are not in antogonism with these of the Federation.52. It is not enough to have political ideals. What is necessary is the victory of ideals. But the victory of ideals can be ensured only by organized parties and not by individuals. For these reasons the Federation will not support independent candidates who belong to no party except in exceptional cases...54. As regards other Political Parties, the Scheduled Castes Federation’s attitude can be easily defined. The Scheduled Castes Federation will not have any alliance with any reactionary Party such as the Hindu Mahasabha or the R. S. S.55. The Scheduled Castes Federation will not have any alliance with a Party like the Communist Party the objects of which are to destroy individual freedom and Parliamentary Democracy and substitute in its place a dictatorship.The manifesto can be read here (page 386). Don’t miss it. We found out about this document in a Puliyabaazi with prominent Dalit intellectual and entrepreneur Chandra Bhan Prasad.HomeWorkReading and listening recommendations on public policy matters* Sabastian Strangio in the Foreign Affairs: “Myanmar’s Coup Was a Chronicle Foretold” * Are coups good for democracy? A paper by George Derpanopoulos, Erica Frantz, Barbara Geddes and Joseph Wright. Answer: “We find that, though democracies are occasionally established in the wake of coups, more often new authoritarian regimes emerge, along with higher levels of state-sanctioned violence.” 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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#109 Google Isn't Feeling Lucky🎧 Feb 18, 2021

Show notes

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

Google and the Australian government are on a warpath. There is a proposed new law - the News Media Bargaining Code - that forces Google and Facebook to pay media publishers for links to the news on their sites. While other countries have tried to regulate and make Google and Facebook pay for the content they freely use from news sites, this law is a global first.

The Code

Here’s a brief summary of the Code from the Australian government press release:

The Code will support a diverse and sustainable Australian news media sector, including Australia’s public broadcasters, by:

* encouraging the parties to undertake commercial negotiations outside the Code;

* enabling digital platforms to publish standard offers, which provides smaller news media businesses with an efficient pathway to finalising agreements with digital platforms;

* establishing a negotiation framework under the Code that allows both parties to bargain in good faith and reach binding agreements;

* ensuring that an independent arbiter is able to determine the level of remuneration that should be paid under a fair and balanced final offer arbitration model should the parties be unable to reach agreement; and

* setting clear and workable minimum standards for digital platforms including requiring 14 days advance notice of deliberate algorithm changes that impact news media businesses.

The Code will initially apply to Facebook NewsFeed and Google Search. Other digital platform services can be added to the Code in future if there is sufficient evidence to establish that they give rise to a bargaining power imbalance.

404 Error

Google’s reaction was swift. It went for broke in its open letter addressed to Australians:

The ability to link freely between websites is fundamental to Search. This code creates an unreasonable and unmanageable financial and operational risk to our business. If the Code were to become law in its current form, we would have no real choice but to stop making Google Search available in Australia.

For Google, search is free and neutral. Its proprietary algorithm takes your search term, trawls the net, ranks the relevant sites and presents to you a million search results in order of what it thinks will be most useful to you. This is free because that’s Google’s mission - to organize the world's information and make it universally accessible and useful. Along with your search results, it throws up a few relevant ads that might be of interest to you based on your search. These are clearly identified and highlighted as ads. It makes money through them. Search and ads are different silos for it. There’s a separation (or so Google would have us believe) between the church and the state

For Google, paying news publishers to link people to their websites is a slippery slope. Other businesses will soon demand for the same. The search algorithm will no longer be pristine. Soon there will be bidding wars to appear higher on the search ranks. The whole principle of open internet will be vitiated.

The Australian government responded to Google’s open letter with PM Morrison indulging in some plain speaking:

“We don't respond to threats. Australia makes our rules for things you can do in Australia. That's done in our parliament. It's done by our government. And that's how things work here in Australia."

Meanwhile, Facebook decided yesterday it will block its users and news publishers from posting links to news sites because of the Code.

Best Of Both Worlds?

So, how should we think about this?

Well, first let’s get all the good that Google has done for the world out of the way. Google has been the among the most transformational tools ever made available to humankind. It deserves its extraordinary profits and market cap.

But there have been unintended effects of its dominance especially for news media. News publishers have lost customers as print has fallen out of favour. Their digital properties don’t draw in as much ad revenues and most traffic to them is routed through Google or Facebook. Classifieds which were the other source of their revenues have also gone online. The subscription model might be the way forward but no one has really seen it scale. It still looks like a niche game.

There’s hardly a viable business model to run a mainstream newspaper with extensive ground reporting, investigative pieces and deeply researched stories. What has replaced these are free websites with commoditised news from the wire, paid articles masquerading as news, listicles with clickbait-ey headlines and, of course, fake news or disinformation sites with specific political agenda. Poor quality news for free will drive away good quality reportage - that’s the Gresham’s Law for media.

The downstream impact of this in culture and politics has been huge. If this were to continue and the price for news nudges towards zero, the supply of news will also be eventually zero. All we will be left with is views, opinions, hearsay and manufactured disinformation.

The question therefore is this. Does the bargaining code like that’s being taken to the Australian parliament solve this problem? Sure, Google will be forced to come to the table and negotiate a deal with the publishers. This will mean some additional revenues for them to support journalism that matters to them. But let’s play this out a bit. Different media houses will have different bargaining power. The smaller ones who might be doing cutting edge work won’t have any power to cut a deal for themselves. Google will now have an incentive to push certain types of links over others. Maybe it will present the links from sites whom it doesn’t have to pay on top of its results. You might have the cheaper, low quality journalism being promoted. More Gresham’s Law in action. Will that be a good outcome? Or, will Google play arbiter in ranking the results based on what’s the best commercial deal for it? It will interfere in the search results. Remember it is a publicly listed company. It will do what’s in the best long-term interests of its shareholders.

Lastly, there’s a more fundamental shift in the business model of the traditional news publisher that’s needed for them to survive in the long run. An annual boost of income from Google is welcome but not enough. The ability to unbundle their core product, using digital tools to deliver news beyond the written form, flexible subscription options and continuing to invest in content are all steps many of them have taken to remain relevant. They will have to continue investing in them and thinking beyond to fight the good fight.

Google itself has worked on a solution to compensate publishers through its platform called Google News Showcase. As the Google open letter said:

“With News Showcase, we would pay for publishers’ editorial expertise and for beyond-the-paywall access to news content for users—not for links to news content.”

But the hitch here is the News Showcase doesn’t exactly even the playing field between Google and media outlets. Google has unilaterally decided this is a model that works best for others and it’s now their way or the highway. It’s a bit odd that an organisation that wants to convince the world it isn’t a bully should use a one-size-fits-all model for all publishers or threaten exiting a country because it doesn’t like a proposed new law. It does the exact opposite. The natural question that comes up is if every other country follows the Australian model, will Google exit them all?

A more flexible and negotiable News Showcase model is possibly a better option than the News Media Bargaining Code approach that’s being thrust upon Google in Australia. The principles of open internet and free search are too critical to be compromised. It is in Google’s interest to continue to make its model more palatable to publishers than have governments interfere in a space where there’s no real market failure. It appears that’s the way it is going after the strong response it received from the Australian PM. The deal it struck with Nine Entertainment yesterday seems to suggest that. This wasn’t possible even two weeks back:

A fortnight ago Nine was dismissive about the Showcase product, insisting it would not negotiate with Google until the law was passed.

“This is what monopolies do, they put an offer, in the form of Google Showcase, but not offer to negotiate,” a Nine spokesperson said at the time.

“It has to be all on their terms and that is not an approach we will participate in. We support the legislation the government is proposing as the best way to secure a fair payment for our content.”

The impending law seems to have got Google back to the negotiating table. If that’s what the law intended to do, it is a good lesson for Google to be proactive about offering flexibility to media platforms world over. We need good quality journalism that’s financially viable and we need an open internet. There shouldn’t be a trade-off between them.

HomeWork

Reading and listening recommendations on public policy matters

* A quick primer by The Guardian on the proposed Australian law and its background

* Tim Berners-Lee in The Guardian: “Australia's proposed media code could break the world wide web”

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

#108 We Need To Talk About State 🎧 Feb 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.Not(PolicyWTF): Acknowledging State FailuresThis section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?- RSJWe rarely miss an opportunity when the political or the administrative class make an announcement or draft a policy that goes against our ideology of common sense. So, it is only fair we write about the rare occasion when someone gets things right. Even if it is only in a speech. Something New This was that week. Here’s our PM speaking in the Rajya Sabha about the state spreading itself too thin and the unfortunate demonisation of the private sector in our polity. The Print reports:While doffing his hat to the private sector Wednesday for its contribution to the growth and development of the country, Modi questioned the “power centre we have created in the country by handing over everything to babus”. “Sab kuch babu hi karenge. IAS ban gaye matlab woh fertiliser ka kaarkhana bhi chalayega, chemical ka kaarkhana bhi chalayega, IAS ho gaya toh woh hawai jahaz bhi chalayega. Yeh kaunsi badi taakat bana kar rakh di hai humne? Babuon ke haath mein desh de karke hum kya karne waale hain? Humare babu bhi toh desh ke hain, toh desh ka naujawan bhi toh desh ka hai,” Modi said.(Babus will do everything. By dint of becoming IAS officers, they’ll operate fertiliser warehouses and also chemical warehouses, even fly aeroplanes. What is this big power we have created? What are we going to achieve by handing the reins of the nation to babus. Our babus are also citizens, and so are the youth of India.) I don’t know when words of this nature were last spoken in the Parliament. Maybe Minoo Masani made a few speeches of this kind during the heyday of the Swatantra Party. But to have a hugely popular PM, one with the rare ability to make the public do his bidding, speak these words suggests a shift in direction that was long-awaited. Anyway, that speech came on the back of weeks of protests against farm laws that had morphed into Ambani-Adani bashing. The names don’t matter. A few decades back it was Tata-Birla. We have also had the usual reports about how the pandemic has exacerbated inequality purely on the basis of notional wealth created by a rising stock market. And there have been bizarre articles devoid of any economic logic as well. These are familiar grounds. We have framed it as growth or redistribution trade-off in a few of our past editions. Like many others, we have argued India needs growth before worrying about redistribution. We have also done our best to dispel a notion deep within our psyche. That we are in some kind of a giant zero-sum game and someone winning must mean someone is losing. Is that it? Or is there more that can be brought into this debate?The state must aim to foster conditions in a society that advance the well being and prosperity of its members. No one argues with this goal. The fundamental question of public policy then is what are the means it must adopt to create this environment? Should the state aim for equality among its member through redistribution of its resources? That there can be no harmony or stability in a society unless there’s fairness and equality among its members.Or, should the state guarantee the fundamental rights of the citizens, provide for law and order that safeguards them against anarchy and then get out of their way. People don’t want the state to legislate for some notion of equality that’s in its mind. They want freedom and security. That would do. Thank you very much. The old Rawls versus Nozick debate Rawls’ seminal A Theory of Justice argued for justice as fairness (the title of a later book of his) with two key principles. First, the greatest equal liberty principle which proposed people’s equal basic liberties should be maximised. Rawls conceived of an artificial construct called the original position - a state where each one of us has to decide on the principles of justice behind a veil of ignorance. That is we are blind to any fact about ourselves; we are ignorant of our social position, wealth, class or any natural attribute. Behind this veil, Rawls asked how would we choose the principles of justice for the society? For Rawls, the logical choice for all of us would be what he called the maximin strategy that would maximise the conditions of those with the minimum. This gave him his second principle - the social and economic inequalities should be arranged only to provide the greatest benefits to the least advantaged. Nozick agreed on the liberty principle with Rawls. But he had a strong disagreement on the idea of maximin. For him, any distribution of wealth (or holdings as he termed it) is fair if it comes about by a just and legitimate distribution. He defined three legitimate means. First, where the acquisition of a property that is unowned is achieved through the enterprise of a person and this act doesn’t disadvantage anyone else. Second, a voluntary transfer of ownership between two consenting entities. And third, a redressal of a past injustice in acquiring or transferring the holdings. Anyone who has acquired wealth or holdings through these means is morally entitled to them. Any attempt by the state to redistribute it would be a serious intrusion on the liberty and, therefore, unjust. So the goal to reach a patterned distribution of wealth had a problem at its core. Once you achieve such a delicate balance, how do you maintain it? Every random economic act from there on will disturb the balance. And such random acts will be too many for the state to control. The state will then have to constantly meddle in the lives of its citizens to redress the balance. This meddling will spiral out of control soon till the state takes over the lives of its citizens completely in a totalitarian future. For Nozick state can act to redistribute only with the consent of its citizens. If people voluntarily redistribute their wealth (means #2) to others and want to design a society on that principle, they are free to do so. But the state cannot impose it against their will. To me, the first point of agreement between Rawls and Nozick is critical from an Indian context - the liberty principle or the basic freedoms that must be guaranteed to every citizen. These cannot be violated or the absence of such freedoms should not be tolerated even if doing so in some ways increase the aggregate prosperity of the society or help the poor. Before we argue about redistribution, we must ask if we have created a society that satisfies the greatest equal liberty principle. That must be our first goal. Postscript:I don’t remember when I lost my faith in the ability of the state to improve the lives of its people. Perhaps there wasn’t an exact moment. Growing up the state was all around me. I spent most of my childhood in what used to be called a ‘colony’. One of the many that dotted the semi-urban Indian landscape in the 80s. A small industrial township whose heart beat to the rhythm of the government-owned factory at the centre of it. My school, my playground, the hospital and even the temple were all run by the state. The state then subsidised a world-class higher education programme for me. At the turn of the millennium, I entered the workforce. If you had cut me then I would have bled state. Over the next two decades, I lost my faith. Gradually. Two factors led to it. One, I understood the privilege that allowed me to take advantage of the generosity of the state. The accident of my birth - a savarna Hindu male born in the mid-70s to educated parents - seemed to play a disproportionate role in my relative success. I noticed the state could barely enable others to do well who weren’t born to privilege like me. They didn’t have the freedom that I took for granted. The state was absent to those who needed it the most. Two, the state had tremendous confidence in its capabilities that, unfortunately, was inversely related to its actual performance. This led the state to have its finger in every pie with poor outcomes. The state cast its long shadow in everything I did. It was present everywhere.The Indian state was simultaneously ‘omnipresent’ and ‘omniabsent’ depending on who you were. One thing was common though. The consequences of both were terrible.Once I saw through the nature of the state, I couldn’t ‘unsee’ it. The sorry spectacle of the flailing state, as Pritchett called it, was all around me. I wondered how others couldn’t see it. Why despite the overwhelming evidence do we look for the state to solve problems where there was no apparent market failure? Why did the state not narrow its focus on things that really mattered and build capacity in them instead of spreading itself too thin? Whenever I read about the argument for state to get into further redistribution, I cannot help but ask how does the end result of this patterned distribution look like. Is there really any end to it? Why should we let it meddle even further into our lives trying to get the redistribution right? Why can’t the state focus on ensuring the privilege I was born with is made available to all its citizens? That would fulfil the first principle agreed upon by both Rawls and Nozick. The rest is just criminal overreach. PolicyWTF: Compulsory PhilanthropyThis section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?— Pranay KotasthaneWe in India love our oxymorons. Back in college days, we had “compulsory elective” courses. Similarly, many government interventions are what my senior colleague Narayan Ramachandran calls “voluntary mandatory” — voluntary according to the law but mandatory in practice. The most common example is the requirement to submit the “voluntary mandatory” Aadhaar for accessing any government service. To this venerable tradition, add one more - “compulsory philanthropy”. Philanthropy implies choice. It is an act of generosity, of empathy. But that’s not how the State sees it. Under the name of Corporate Social Responsibility (CSR), philanthropy was made mandatory starting in 2014. That move didn’t go as well as the State desired (surprise surprise!). One, there wasn’t just enough CSR expenditure forthcoming. The highest total CSR expenditure, clocked in FY19, was just about ₹18,000 crores. For reference, the union government earned ₹20,000 crores in FY20 through the Education & Health Cess alone. Two, new frauds emerged, with some companies funding dubious CSR projects that clawed money back to their promoters (duh!). And three, and this is the most important one. Fearing the wrath of the State, many companies spent their CSR funds on the “safe” subjects such as primary education and health, precisely the areas where the State’s role is supremely important. In other words, this had the effect of allowing the State to outsource its core functions.Given these problems, the union government notified changes to the CSR rules last month (you can read the gazette notification here). These changes are all too familiar — increase disclosure requirements, mandate impact assessments, and of course, generate more accounting work. To balance it out, there are some positives too — a regimented list of subjects that qualify for acceptance of CSR has been replaced with a negative list, while the CSR provision has been decriminalised (phew, small mercies!).I will evaluate the impact of these new rules at a later point in time. For now, I want to return to the purpose of CSR and debunk three common arguments made in favour of mandating philanthropy.The first argument is that CSR is just corporate tax by another name, so why bother. I agree that once you make philanthropy mandatory and statutory — India is the only country in the world to do so — CSR becomes tax-like. And yet, it is only worse. Anyone doing business in India will attest that it’s impossible to do so without breaking one of the thousands of rules and laws that demand compliance. Now with new rules and additional compliance requirements, CSR becomes another tool in the hand of the State to corner businesses and worse still, create new corruption opportunities. There are three costs associated with any tax-like mechanism: the cost of collection, the cost of compliance, and the cost of market distortion. Mandating CSR is a tax in which the cost of compliance is way too high for it to make any economic sense. If the objective is to mobilise resources for social welfare, there’s a much better tax-like mechanism — it goes by the name ‘tax’. The second argument is that look, many great things have happened because of CSR — lakes are being maintained, schools have started functioning, and drinking water is being provided. So why not get companies to do even more?I call this argument the cost-blind fallacy. Any expenditure worth ₹18,000 crores is, of course, going to do some good things. In a complex system, even the worst of public policies always have some positive benefits. That doesn’t imply that anything goes. Since every policy also has a cost attached to it, it’s benefits need to be compared with the costs incurred. So, has anyone asked what were the explicit and implicit costs of mandating CSR? Does it make the State more complacent having outsourced its work? What are the compliance costs for companies? Does it make companies already involved in philanthropy of their choice scale back their efforts to satisfy government paperwork? Without an answer to these questions, recounting a few successful examples of CSR is poor reasoning.The third argument is that companies spending money on social welfare will be more efficient at achieving the required outcomes than our already stretched-out State. A quote from this Business Standard report gives a good idea about this line of thinking:“India has huge inequalities in society and there is much to do about our environment. It is not possible or fair for the government to tackle it alone. It would also take many, many years to see the results. The reason CSR law was brought in was to make industry an equal and responsible stakeholder in the development process.” This argument falls flat on two counts. One, development successes are not achieved by “equal” stakeholders trying to fix each other’s failures but by each stakeholder doing well at what it is supposed to do in the first place. It’s not about ‘everyone doing everything’ but about ‘everyone doing at least one thing well’.Previously, I have argued how hyper multi-objective optimisation lead to poor institutions and policies. Let the objective of the market be to bring prosperity and create livelihoods. Burdening it with social welfare conditions will lead to a situation where it achieves neither of the outcomes.Two, to think that companies can easily plug government failures is deluding ourselves. All of CSR expenditure in FY19 less than one-third of union government expenditure on MNREGS alone. It’s only the state that has the resources and stamina to provide public goods. It must be held accountable for that. No amount of philanthropy can be allowed to wash the State its hands of the results. In sum, compulsory philanthropy is akin to the Indian State reprimanding Markets and Society by saying: I won't do what I'm supposed to but why the hell aren't you two doing what I'm supposed to do?India Policy Watch: Resources for Budget AnalysisInsights on b…

Full show notes at the publisher

#107 An Enemy A Day....🎧 Feb 12, 2021

Show notes

- RSJ

We have been writing about Radically Networked Societies (RNS) for the past couple of editions. Maybe you have had enough of it. But not the world around us. After the Rihanna/Greta tweet episode that led to the government mobilising its own RNS with film stars and cricketers in the van, we now have moved to the next stage of the battle of RNS.

New Front

The government this week asked Twitter to remove over 1000 accounts and posts which it believes spread misinformation about the new farm laws. Twitter responded by reducing the visibility of the hashtags that contain harmful content and suspending more than 500 accounts, some permanently, that violated its rules. But the government isn’t satisfied with the response. It has upped the ante now with not so subtle threats of arrests of Twitter officials if the company didn’t comply with the government orders under Section 69A of IT Act.

Into this mix jumped in Koo - Twitter’s Indian knockoff with the added feature of sending messages using eight Indian languages. The usual atmanirbhar noise was made by its founders and investors and soon we had ministers, MPs and ‘nationalist’ Twitter users advertising their migration to Koo. Of course, as the shift to Koo gathered momentum, the other camp started mock celebrating the ‘cleaning up’ of Twitter.

It is apparent there’s a level of government support to scale up Koo. The reasons are obvious. The government views the global social media giants with suspicion based on their broader liberal inclinations around the world. These companies follow their own free speech code and won’t always toe the government line on key issues. The impact of RNS in mobilising an opinion against a government plan was clear from the recent events. Why would the state want to be held to ransom by non-state actors with low stakes and a disproportionate voice? The solution to this for the state is either to curb the freedom of social media sites or to promote a homegrown site that can be controlled. My guess is we will try both.

Will it succeed?

Probably not. Why?

Well, let’s first get the most obvious reason out of the way. Network effect. Social media sites are addictive because of it. Koo might get a few users in the early days who are swept in with the momentum. But like we have seen in the past with Whatsapp users moving to Signal or left-wing Twitter users moving to Mastodon (remember), these things don’t really take off. People find the user interface clunky, miss features familiar to them or find a truncated version of their network that force them back to the old platforms. Network effect is a very strong moat. I will be surprised if Koo bucks this trend.

But network effect is not the lens that interests me here. If you were to apply a political philosophy lens to this migration to a like-minded social network, there are a few interesting points to consider here.

Firstly, your politics is defined more by what you specifically oppose rather than what you support. Your opposition is what defines you in specific terms; in fact, politics comes about because some people group together in opposition to others. This is a bit of a rehash of the Schmittian claim that the specific political distinction in society hinges on the friend-enemy distinction. Schmitt believed any difference that marks out a group from the other will take a political hue if it has the strength to align them into opposing and warring camps ready to inflict real damage onto others. Now I have no sympathy or time for Schmitt in general. The man was a fascist. But on this, he makes a compelling argument. You take away the friend-enemy distinction and the political engagement fades away. Leo Strauss writing to Schmitt in 1932 had summarised Schmitt’s view on political distinction:

"because man is by nature evil, he, therefore, needs dominion. But dominion can be established, that is, men can be unified only in a unity against—against other men.”

So, the right or the left-wing aiming for a social network that only has people like them and no enemies to unite against is a recipe for long-term disengagement with politics for its members. Confronting the enemy and beating them on any platform is necessary for the political existence of a group.

Secondly, a homogenous identity within a group invariably splinters the agglomeration. There is a simplistic assumption that once the friend-enemy distinction disappears because there is no longer an issue that separates members of a group, the political contest ends. This was the predominant assumption in the early 90s when the liberal democratic order felt it had vanquished the other. As later events have shown, political identity abhors a vacuum. People will find another identity to take on that will replicate the intensity of political conflict of the past. To repeat Straus: "because.. man needs dominion.” Any move to sequester your group from your enemies will lead to your group finding enemies within to fight.

Thirdly, it is ironical to find the right-wing or the conservatives (as loosely defined in India) moving to a platform that will encourage their common identity. The conservative critique of liberalism is that it aims for a vague universalism and a common bond among people across all markers of identity. The individual identity that’s built over centuries, that’s localised and which is linked to tradition and custom gets subsumed in this utopian ideal. This is an anathema to the conservatives who value individual identity and distinctiveness. To transition out of platforms that support diverse identities, however inimical to you, to single identity platforms will be going against the core belief of conservatism. It will diminish conservatism eventually.

To close, exclusive social media platforms based on ideologies might take off if they somehow create their own network effect fast enough to retain a critical mass of their members. However, it will also sow the seed for the future splintering of the group. A homogenous unit is the most fragile. Diversity is anti-fragile. And there are benefits of having enemies.

As Kabir said all those centuries ago:

“निंदक नियरे राखिए, ऑंगन कुटी छवाय,बिन पानी, साबुन बिना, निर्मल करे सुभाय।”

(Keep your critics close, they improve you)

HomeWork

Reading and listening recommendations on public policy matters

* The Wired on How to Break Out of Your Social Media Echo Chamber

* From the Hesiod’s Corner, Carl Schmitt: The Friend-Enemy Distinction

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

#106 Exit, Voice, Loyalty, And Mia Khalifa Feb 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.India Policy Watch #1: Rahne Do, RihannaInsights on burning policy issues in India- RSJIn one of the recent editions on GameStop, I wrote about the Gamma squeeze and I was particularly pleased with myself. After all, there might not be many newsletters who over the last year could have shoehorned Dr Shreeram Lagoo, Louise Glück and Gamma squeeze into their editions. Maybe there’s someone up there who is keeping an eye out for me. Because this edition has Rihanna and Mia Khalifa (careful now) in it!What a time to be alive and, importantly, to be writing on public policy!The Farm Laws BackstoryWe have written quite a bit on the new farm laws in the past few months. I believe the laws are critical to transforming agriculture in India. Pranay agreed on the potential of the laws but questioned the timing and the lack of a narrative by the government to make them acceptable to all stakeholders. He felt this could get sticky.Turns out he was prescient. A simple stakeholder mapping exercise would have revealed the key farmer groups in Punjab and Haryana would be the most impacted by these laws. They needed specific attention. Further, the years of paranoia built by the Indian state itself about corporates, profits and other capitalist bogeys in farming would not just go away by a stroke of the pen. It should have been expected that it will be used by those in opposition to create a counter-narrative. A government that encourages opinions and arguments within its cabinet and among its coalition partners would have figured a way to anticipate and resolve these issues. But the usual shock and awe playbook that this dispensation favours came into play. An announcement about the new farm laws was made at the peak of the pandemic as part of the COVID relief package. Then came the ordinance, and finally the farm bills went to parliament where they were passed with a voice vote in Rajya Sabha. That, remember, was the only place where there was a half-decent chance of a debate. It was not to be.Now you can argue that almost every party has in the past had similar laws as part of their manifesto. Or there have been umpteen committees who have recommended opening up of agriculture and dismantling of MSP. But only a political novice would believe these would mean everyone opposed to the government today would lay out the red carpet for these laws. Nothing this sensitive and transformative will be accepted in our fractured polity without building a narrative for it. But there wasn’t any strong ‘sell your story’ efforts for a set of reforms that if pitched right might have actually been supported by Greta Thunberg. After all, the groundwater depletion and other ecological imbalances in many states are because of incentives and distortions the MSP provides to grow crops alien to the land. In A No-Win SituationSo here we are. The farmer protests have gathered strength. The government has offered an eighteen-month delay in implementing them. The commitment to continue with MSP has been made. In short, the reforms are dead in water. But it has made zero difference to protests. Because while making these conciliatory moves on one hand, the government has gone into an overdrive painting the farmers as anti-nationals and terrorists. The protests now have morphed into a Shivji ki Baraat - all kinds of assorted species are in it. Then we have the unedifying spectacle of spikes being nailed and battlefield-like fortifications on roads leading up to national capital. This is to prevent the farmers from entering it. This has now gone beyond farm laws. Into this mix walked in Rihanna. On Tuesday, she tweeted out “Why aren’t we talking about this?’ with a link to a CNN article about headlined, ‘India cuts internet around New Delhi as protesting farmers clash with police’ to her 101 million followers. Soon Greta Thunberg and Mia Khalifa tweeted their support to the farmers. That’s it. The radically networked societies (RNS) of their supporters coalesced with the network of Indians who were protesting the laws. So in the red corner, we had the Radically Networked Society -1 (RNS1). The government got into the act. Soon we had Indian film stars and cricketers supporting the laws (and more). And in the blue corner, we had the RNS2. To top it, the Ministry of External Affairs (MEA) also came out with an officious sounding formal statement asking global celebrities to stay away from matters relating to India. We now have a triangular contest of sorts - the state, RNS1 and RNS2. Going DeeperThere are a few issues involved that merit discussion and conceptual clarity. Let me attempt to tackle them. Your thoughts are welcome.* Like Pranay says, every issue is global by default in the times of RNS. You don’t have to be universalist to take a position on an issue that doesn’t affect you directly. Social media allows you to take a position and broadcast it to your followers. And you will. A vocal stand on issues generates cohesion among the members of your RNS. Cohesion strengthens RNS and draws more members. This is the RNS flywheel (Jeff Bezos who secretly reads us would be so proud of me for this analogy). * Celebrities have taken a stand on issues unrelated to their countries for decades now. They are private citizens and they are free to do so. And there will be more of this kind of activism seen in future. The challenge for the state is, in the times of RNS, they can inflict serious damage on the objectives of the state by supporting a counter-narrative. I’m staying away from whether the objectives of the state are right or wrong for now. The state is hierarchical and it cannot be agile enough to contend with the speed of RNS mobilisation. The state has two options - continue with its slothful response or mobilise its own RNS. The Rihanna tweet followed by the tweets of the ‘state celebrities’ is the Indian state’s recognition of the power RNS, its own limitation to counter it through official means and its signal to others that it can mobilise its own RNS. Should states be doing this? Probably some action was needed as self-preservation is the primary goal of the state. RNS is a threat and they must learn and deploy counters to it. Also, this was a way to pre-empt other celebs from jumping on to the bandwagon. The rest of the narrative built about these celebrities being paid or being on the payroll of George Soros (that’s one guy with all the time and money with him to support leftist causes, around the world, apparently) is meaningless drivel. That’s just the loony supporters and the IT cell discrediting the other RNS. It is stupid and it helps mobilise the opposing RNS. * The other question is how should we view Indians who encourage global celebrities, organisations or governments to take a stand on government action. Do these acts constitute support for violation of our sovereignty? Firstly, global organisations and foreign governments do take positions on acts of other governments all the time. These positions are conveyed through diplomatic channels as a matter of routine. In case this doesn’t work they use the media to make their position known. The most common of these issues are those where there is an established global order of going about things. For instance, just last month the US Treasury department put India on the list of currency manipulators. Now, is this a violation of our sovereign right to manage our currency? We live and trade in a global order. So we should abide by its rules. Else, others will act in a manner that will question our sovereign moves. On other occasions, the issue could be of the government action violating human rights or being undemocratic. This is a tricky area since it is not easy to define them. But that hasn’t stopped India to opine on others over the years or vice versa. Secondly, there’s no such thing as internal matter as the Indian state likes saying. In the RNS world, issues are global. Also, the farmers’ protests haven’t emerged out of thin air. There’s a cause and an effect. So, it serves no purpose to ask others to keep off our lawns if there’s smoke coming out of our house. Fixing the smoke is our problem, of course. But others asking us to have a look at it isn’t a violation of any sort. They are only making statements.Thirdly, and this is perhaps the most important point, private citizens of India raising their voice against certain actions of the government in domestic and international platforms is not the same as treason against the state. The state exists because the citizens have given it the legitimacy to use violence. The citizens can and should question if the state steps beyond it. There’s a line there that the citizens can’t cross where their acts, not words, can threaten the existence of the state. But that line is quite distant. It can’t be invoked on the smallest of pretences. Unfortunately, this has now turned into conspiracy theories about a deep state wanting to destabilise India or preventing its pre-destined rise to being a superpower. Superpower pre-requisite #1 is to be secure enough not to wallow in conspiracy theories against you. Read more about USSR on this. * The other point I had was about the role of institutions in a democracy. Acemoglu, Johnson & Robinson have argued about the nature and the strength of institutions as the fundamental reason for the sustenance of a democracy and for its long-term economic growth. This explains why democracy has struggled to develop roots in countries like Myanmar or in many nations that won their independence following WW2. And also, why its sustains in India. All the revisionism about our history, our freedom struggle or about Gandhi, Nehru and Ambedkar won’t wear out a single unvarnished truth. The founding fathers of our Republic built institutions and served to strengthen them to sustain our fledgeling democracy. Why do I bring up the point on institutions here? Well, a question I have asked in the past week is what prompted a host of our celebrities to copy-paste the exact tweet to support the government? And did the irony of following a government diktat to the letter while taking a stand against propaganda was lost on them? Do they really believe in the benefits of the farm laws? Is this a show of patriotism? Or, are they toeing the line of the state because it is in their interest? Maybe it is the first two. But I’m sure there is an element of toeing the line here based on how coordinated the act was. And this toeing the line isn’t a new thing. Previous governments have done the same or worse. What do our celebs fear? Compare this with the stands taken by celebrities, sports personalities and many CEOs during the Trump era. The simple conclusion you reach is the US state can’t use its institutions to go after you. The police, the FBI and the tax authorities won’t find a hundred reasons to file charges. Their institutions are strong and they follow their own code. Plus, the state isn’t overbearing. Its laws don’t encompass every aspect of your life in a manner that you cannot ever claim you haven’t violated them. The question we must ask is what does the easy falling in line of celebrities or the fear of protesting against laws say about the state of our institutions and the nature of the state? And if our institutions are indeed weakening, what does it portend about the future of our democracy and our long-term growth prospects. Among the great skills of the present government is how easily it can shift any discontent against its actions into the territory where it is the strongest. Nationalism. Over the years it has also built a strong media ecosystem that advances nationalism as a primary means to reach the objectives of the state - economic prosperity and protection of sovereignty. Unfortunately, history has shown nationalism is a blunt instrument to achieve sustainable prosperity. The Khalistan flags seen during protests or Rihanna’s tweets give the government ready props to fight the battle of ideas on farm laws on the grounds of nationalism. There, even if it loses the battle, it will win the war. The question is if that holds true for India too.Addendum— Pranay KotasthaneI have three short points to add to RSJ’s comprehensive take. One, every protest should be assumed as being global by default. Gandhi’s political genius was to get the masses to participate in the freedom struggle at a low opportunity cost, by just spinning a charkha. Today, this job doesn’t require a Mahatma, it justgets done by the internet. Showing instantaneous support for any cause across the world is now almost frictionless. It can be done with low opportunity costs. Even when there’s no immediate cause, there’s work happening — latent identities get created or reinforced through social media tuned for rewarding polarisation. Come the next immediate political cause and this powder keg is ready for use. ‘Nolocus standi’ arguments are pointless.Two, those with the lowest stakes in an issue might end up being the more powerful voices. Because the entry barrier is so low, you don’t need to have much at stake to show support. Such a scenario complicates dispute resolution as those with the highest stakes can get sidelined. Even worse, the state machinery will be hard at work to establish nefarious links between those with high stakes/low power and those with low stakes/high power, with the aim to discredit both.And three, the more aggressive the State response, the more fodder it is for future RNSes. The State that responds, positions itself as the villain which brings together more people. It becomes the ‘other’ that creates the ‘us’. Once that happens, all that remains is the next political cause to emerge. India Policy Watch #2: Politics and Visual StorytellingInsights on burning policy issues in India— Pranay KotasthaneIt irks me when someone forms a strong opinion on complex issues just by watching a Netflix series, movie, or documentary. Chernobyl and The Social Dilemma come to mind. Both these rather well-made series ended up confirming biases against nuclear power and social media respectively. Visual storytelling is evocative. It can create powerful narratives that elicit instant responses from what Daniel Kahneman calls the fast brain. The more a visual story appeals to our emotions, the more the need to temper the fast brain response with reflection, education, and discussion.And yet, our movies can reveal a lot about our politics. Not through what they show but through what they cannot show. For example, would it be possible today for a mainstream movie to have a plot in which a Muslim man elopes with a Hindu woman? Or would it be possible to recreate the iconic Mahabharat parody scene from Jaane Bhi Do Yaaro today? What happened to Tandav and Munawar Faruqui indicate otherwise. This should worry us all. An insecure society abridges individual creativity and distracts the State from what it is supposed to do. It is this insecurity that paves the way for pakistanisation of a society.PS: A French Netflix parody A Very Secret Servicecame as a refreshing change. The politically incorrect and satirical take on France’s national security apparatus spares none. I couldn’t help but rue the fact that something on these lines is unimaginable in present-day India. India Policy Watch #3: The Constitution in a Knowledge GraphI…

Full show notes at the publisher

#105 The 2021 Union Budget 🎧 Feb 03, 2021

Show notes

- RSJ

The once in a century budget is now behind us. The reaction to it has been positive even among those who tend to be sceptical about the economic management of this government. What we are interested now is to understand if the budget portends a more fundamental shift in the economic policy or the outlook of this government.

Quick Take

As a newsletter, we like to avoid quick takes on events. But this time around a quick take is unavoidable. Here’s our take:

First, after a long time, we have had a budget that is transparent about the finances of the government. The expectations following a year like we have just had were low. The government has used it to present a tough but true picture of its finances. The fiscal deficit for FY21 (the current year) is pegged at 9.5 per cent of GDP. The deficit for FY22 is estimated to be 6.8 per cent and the glide path to a 4.5 per cent target in FY 26 has been laid out. This will mean a deviation from the FRBM Act. The government plans to submit a fiscal deviation statement and introduce an amendment to the Act.

Off-budget chicanery like the FCI borrowings from National Small Savings Funds (NSSF) that were done to keep the fiscal deficit optically low is being junked. There were no new (questionable) welfare schemes introduced and the tax regime was left untouched. These are good signs. Also, the long-drawn glide path suggests the government is being realistic about the recovery while shedding some of its fiscal conservatism. The broad message is it is willing to spend to support the recovery and initiate a capital investment cycle.

Second, the lack of private investment growth was a key problem in the economy over the last decade. There are multiple structural and governance reasons for the same - we have not had real reforms on resolution or liquidation of stressed assets, many key industries have turned oligopolies aided by arbitrary regulatory regimes and there’s an absence of a long-term economic plan that gives entrepreneurs the confidence to make long-term bets.

The budget shows some intent in tackling these issues. There is a significant government investment planned to develop infrastructure. The details of the plan will have to be seen because on the surface the contribution of infrastructure spending to the fiscal deficit (in percentage) doesn’t seem to be moving. But I think we should give the budget the benefit of doubt here. And this spend is required because, given the state of the economy, the government will have to be at the forefront of cranking the investment cycle. The private sector can come in later to buy these projects with good gains for the government and run them efficiently. There are multiplier benefits of investing in infrastructure and the private investor confidence will follow. The announcement about privatisation of two PSU banks and one general insurer is also welcome. It might not mean much in real terms but it signals a bolder approach to reforms. Private investments are the subject matter of confidence.

Third, like many budgets that have come and gone, this one promises divestments and privatisation of public sector units across industries. But there are a few points of difference. There’s no way the fiscal deficit math will work out over the next many years in normal course of events. Not even when you consider the gradual path suggested in the speech. Unless, of course, the government raises capital through strategic stake sale in PSUs. Other ideas like monetisation of government land are attractive but trickier. So, its hands are forced this time and there’s a sense that the Overton Window has shifted on divestment. Also, the speech was more specific in its intent. It named names. This will get done.

Fourth, there are a few areas where the government is either out of ideas or continues to peddle bad ideas. The atmanirbhar and nation-first ideology is now well and truly established as it marks its entry into the budget document. Random custom duty increases make no sense. We should focus on making ourselves competitive and we have written multiple editions of this newsletter arguing why this reversion to the economic thought of the 70s will be counterproductive. But what’s a bad idea worth if it doesn’t grow roots?

The other rehash is the proposals to set up an Asset Reconstruction Company (ARC) to house the bad loans (“bad bank” as it is known) and incubating another Development Finance Institution (DFI). Both these proposals don’t address the root causes of financial sector stress. At best these are band-aid fixes that will take a lot of time and effort to set up and they will go down the same path of irrelevance. The solutions to ‘twin balance’ sheet problem lie in more fundamental reform in regulation, resolution framework and in reducing the arbitrary role of the state in the industry. We will have to wait for that day.

In summary, it is a good budget as much as we find it futile to rate a stock-taking exercise. The problem on hand is two-fold. The government will have to balance a whole host of conflicting objectives.

The liquidity in the system is at an all-time high. RBI narrowed the reverse repo corridor and sucked some liquidity out of the system a couple of weeks back. Yields that were moving up gradually over the last few months accelerated upwards after the budget. The FX operations of RBI continues because it has to constrain Rupee from appreciating too much. We are in danger of being called a currency manipulator. The dollar purchase continues to add to the liquidity. With the express tasks of controlling capital flow and the exchange rate, the impossible trinity comes into play. We start to lose control of the domestic monetary policy. This is evident as the money market rates have become unmoored from the policy and gone below repo levels.

The RBI also has to manage inflation, spur growth and support Rs. 12 trillion of government borrowings next year. This is a non-trivial challenge. Inflation is moderating but there are fears it will go up. The increased cess on petrol and diesel, continuing high liquidity and existing concerns that we still haven’t got all supply chains running to pre-Covid levels mean we can’t be complacent on inflation in the near future. But growth will need an accommodative stance while liquidity will need to be high to support borrowing. It is a conundrum. It will require great sagacity and wisdom to thread this needle.

For macroeconomy watchers, the next few years will be wonderful. We are keeping the popcorn ready.

On the Defence Budget

— Pranay Kotasthane

The first five items of the Union List in the Constitution all deal with defence. As the foremost responsibility of the Union, no budget discussion is complete without understanding the government’s spending plans on defence.

To understand the defence allocations for FY22, we need to understand what happened in FY21.

The revised estimates of FY21 have increased by a marginal 2.3 per cent over what was proposed in the last budget. But there’s been a significant change in the composition of this expenditure. The revised pension expenditure went down by nearly ₹9000 crores while the capital outlay increased by nearly ₹20,000 crores in the same period. This implies that the government has defrayed pension expenses over multiple years while focusing on capital outlay.

Most of this increase in capital outlay is accounted for by committed liabilities for equipment already purchased by the navy and the air force.

The FY22 budget retains the same level of expenditure as the revised expenditure figures of FY21 except on pensions, which are budgeted to go down by a further ₹10,000 crores.

On the revenue side, with the Fifteenth Finance Commission recommending a non-lapsable fund for funding modernisation, the government can earmark proceeds from the sale of surplus defence land and sale of defence public sector enterprises for modernisation. Over the long-term, this route holds some promise.

The key lesson is that the government managed to just about maintain defence expenditures at pre-COVID levels in the pandemic year. To confront China’s aggression, India’s military planning needs a change in approach; hopes of a sudden increase in defence allocations should be laid to rest.

HomeWork

Reading and listening recommendations on public policy matters

* On the defence budget, here’s a quick take by Pranay

* Ajay Shah reminds that reversing the dip in private investment should be the parameter for evaluating budget performance.

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

#104 No More GameStop Puns Jan 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.Global Policy Watch: Capital Markets (Enter, Stage Right) - Radically Networked Societies - RSJIt is difficult to write a newsletter this weekend and not talk about GameStop. Even for a public policy newsletter. But I like to believe if you hold your gaze long enough at any news going around, you will find a public policy problem. This becomes especially true if you run a twice-a-week public policy newsletter. Everything starts looking like a public policy issue soon enough.Anyway, a lot of what’s happened with the GameStop stock over the last couple of weeks is part of the broader gusts of change that’s buffeting society and culture since the global financial crisis (GFC). In that sense, it is useful to try and look beyond the story to understand the GameStop phenomenon. But let’s not get ahead of ourselves. Let’s do a quick recap of the story.GameStop is a brick-and-mortar video game seller. A fairly routine presence across large malls across America, GameStop was meandering its way into irrelevance over the last many years. After all, who goes to the mall to buy video games anymore? And then the pandemic arrived to compound its woes. Its days seem numbered. Soon it would join the likes of Blockbuster, JC Penney and scores of other businesses that couldn’t reinvent themselves for the digital age. That was the consensus on Wall Street. The Short SqueezeBut the Street is a strange place. A business with no prospects is also an opportunity to make money. By shorting its stock. You borrow a few shares of the company from someone (usually a broker) and you sell them in the market. Since you are borrowing the shares you pay a small charge for it. Plus the broker wants a bit of insurance in case things go bad. So you keep some money in an account that the lender can access in case things go south. Since you believe the stock price will go down, you wait for it to happen. When it does, you buy the same number of shares at the lower price and return them back to the broker. You pocket the difference. This is how it goes for any ordinary investor. If you happen to be a star fund manager of a hedge fund, you make it known to the world you are shorting the stock. You have a platform to voice your views and you send out a signal the stock will tank. Often this turns out to be a self-fulfilling prophesy. The stock does go down on your word and momentum does the rest. You make a tidy profit for your clients and a fat commission for yourself. Of course, plans go awry too. The stock goes up contrary to your bet. You think this is temporary so you wait. But the broker is nervous and wants some assurance. So you top up the account where you had put some money in case things went bad. If the stock keeps rising, you have to keep topping this up. Since your loss can be unlimited (the stock can keep rising), you feel hemmed in as the stock rises. You feel squeezed. So you decide you want to call this bet off. The only way to do this is to buy the stock at an elevated price. You do that. But remember you are not the only one who had shorted this stock. As the likes of you buy the stock at the elevated price, the price goes up further. And other short sellers feel the squeeze. This is called short squeeze. It can wipe you out. That’s that. Life is too short to know any more about short selling.And The Gamma SqueezeOn the other hand, there are people who bet the stock price will go up. That’s usual. The riskier bet is buying a call option on a stock. Here you don’t buy the stock. Instead, you buy an option that the stock will go above a certain price. This is a small bet. You lose all money if the stock doesn’t reach there. But if it does, you make a lot of money on a small bet. Since this is a bet, there’s always the other party (market maker) that’s sold you the bet. They sell many such bets. And to hedge their bets they go out and buy a small number of the underlying stock. In case the stock price does go above the bet price, they will atleast recover some of their losses if they own that stock. For simplicity let’s call the rate of buying the stock to hedge the bet as ‘delta’. You can see where this is heading. If the stock keeps going up and more people buy call options, you will have the market makers buy more of that stock. This in turn drives the price further up. That is the delta keeps becoming faster. This rate of change of delta is called gamma. It is like acceleration. And this kind of squeeze in favour of stock going up is called the gamma squeeze.Life is complicated enough already to know any more about Greek letters in stock markets. Unstoppable GameStop Events conspired in mysterious ways to bring both the short squeeze and the gamma squeeze to the GameStop stock overt the past few weeks.* There’s a Reddit forum (r/WallStreetBets) that has a mix of investors - small-time investors with deep knowledge of the markets (very few), bored young men (mostly men) who trade in markets for a lark (few more), thrill-seekers and degenerates who trade by turning economic logic on its head (many more) and gullible new investors who are drawn into this in the hope of getting tips to make a quick buck (the largest number). The forum members see themselves as Davids taking on the Wall Street establishment (Goliath). Fun fact: only 14 per cent of Americans directly invest in individual stocks and 3 out of 4 of them belong to the top 20 per cent of American households by income. Calling themselves the ‘little guys’ is a bit rich.* Sometime last summer a few members of the forum started making a case for GameStop as a stock that’s undervalued. The stock was trading at about $4 then. There was no rationale. It was pure optimism backed by hopes of a turnaround in the business. But that’s how even the best equity analysts often make a case for a stock. Or a VC fund values a start-up. The stock caught fancy of a few members in the forum and rallied a bit. * In September, Ryan Cohen, an entrepreneur who sold his online pet store Chewey for $3.5 Bn a few years back, bought about 12 per cent of GameStop at $8.4 per share. Cohen believed he could turn GameStop into an online success. This was the validation the WallStreetBets members were looking for. The stock doubled in three months soon after.* In January this year, things got weirder. GameStop was one of the most shorted stocks in the market (the total shorts were more than the available outstanding shares). As it rallied up, some of the prominent short sellers started talking down the stock. Particularly, two firms - Melvin Capital and Citron Research - called out the insanity around the stock. Now a word about short sellers, hedge funds and other established fund houses on Wall Street. For years since the GFC, there’s been a wave of simmering anger against them from the retail investors. Deservedly. These firms have done it all - cartelisation, manipulation of stocks leading to fake momentum and selling toxic products to ordinary investors. The calling out of GameStop rally by them triggered something extraordinary.* The WallStreetBets forum decided to apply the short squeeze on the short-sellers. It was the mother of all squeezes. Meanwhile, GameStop brought Cohen and his two buddies on to their Board. Momentum was on. Gamma squeeze was in. The stock went berserk. From $20 to $320 over two weeks with wild fluctuations. Over 20 Bn shares were being traded daily making it the most traded stock in the world. Nothing had changed in its underlying business. In fact, the numbers were looking worse. But this wasn’t about GameStop anymore. * In these two weeks, the whole thing has turned into a movement. It is no longer about making money. It is about making a statement. Socking it in the face of the establishment. There’s no logic anymore. It is a cult. Citron and Melvin have closed their positions and made extraordinary losses. These wins have given more life to the movement. Shorted stocks of companies that can hardly have a future have quadrupled. These include names like AMC, Blackberry (remember) and Nokia. The whole thing is nuts.The bar for absurdity in Wall Street lore is high. Short squeezes have a long history. The original baron, Cornelius Vanderbilt, once short squeezed the life out of NYC Council members who were betting against him. The railroad empire he built was the result of that. George Soros took a $10 Bn short position on the British Pound and almost broke the Bank of England in 1992. And in the early days of the pandemic last year, the crude oil price went below zero. There’s something about the GameStop story that tops them all. There was a rational economic explanation to the earlier events however bizarre they appeared. This one goes beyond economics.Markets In The CrosshairsFour trends now deeply embedded in our culture and politics seem to have marked their arrival in the markets with this story. * Radically Networked Societies (RNS) meet Capital Markets: Nitin Pai and Pranay define a radically networked society as a web of hyper-connected individuals, possessing an identity (imagined or real), and motivated by a common immediate cause. The emergence of RNS aided by cellphones, cheap data connectivity and social media platforms is a phenomenon for the hierarchical state to contend. The immediate cause that motivates an RNS could be irrational but before the state or the established institutions can even put their shoes on, the RNS might have gone around the world twice with their message. This is what fuelled the bizarre stories emerging from the suicide of a Bollywood star during the pandemic or with the rise of the QAnon movement in America. Well, RNS is now in the markets. The WallStreetBets is a classic case of RNS. A bunch of hyperconnected, mostly anonymous investors who view themselves as Wall Street outsiders and whose immediate cause is to take down short sellers and hedge fund managers. That their chosen targets are a greedy, egoistic bunch divorced from reality has made their job easier. The story sells itself - the long due revenge of the ordinary investor. * Knocking the experts off their pedestal: The experts are all sold out. They have an agenda and they won’t tell you the truth. That’s the message that’s mainstream now in politics and culture. This is what drives the anti-vaxxers, climate science deniers, trade protectionists and other conspiracy theories going around. Now add the Wall Street experts to this list. If a research analyst says a stock has no future, bet against her. Do the irrational thing and if it pays off for even a day, you have been proved right. * The crowd is right: What are people like you buying, watching, eating or wearing? So many people can’t be wrong. If I can watch and enjoy something based on what others are watching, I can buy a stock the same way. Zero brokerage platforms like Robinhood and Public have built their business models around this. Gamify the stock markets. Make it addictive. The millennials seeking thrill sitting at home during the pandemic have a new destination. Buy stocks, buy options and have fun. Let them buy high, sell low and take a selfie while doing so. You earn street cred doing this within your community. Who cares about the losses? YOLO.* It is personal: Hyper-personalisation, the market of one, call it by any name. You are now invested deeply in your belief and your platform. It is your identity. The echo chamber you inhabit keeps reinforcing this belief. After a while, even the platform has no control over you as Twitter and Facebook have seen over the years. And Robinhood discovered to its dismay last week. They will take you down too. Because it is all personal. You can’t just let Citron Research or Melvin Capital have a view about GameStop that’s contrary to yours. They have to be taken down. The GameStop phenomenon is just the beginning. It is like the Arab Spring of 2011 engineered on Twitter. Today it seems like a moment when the little guys took on the big, brutish establishment and won. This victory, like that of the Arab Spring, will be pyrrhic. The genie that escaped from that movement has been hard to put back into the bottle. The markets will now have to contend with the genie. It is out. For those like us who battle to protect the fast receding middle ground everywhere, this is a new front. Anything that elicits support from both Alexandria Ocasio-Cortez and Ted Cruz must give the classical liberal a pause. That moment for Capital Markets is here. A Framework a Week: Three Functions of the StateTools for thinking public policy- Pranay KotasthanePublic Finance in Theory and Practice (1973) by Musgrave and Musgrave has an elegant classification of budgetary functions. Since you’ll be bombarded with the news about the union budget over the next few days, this classification would be of some use. From a public finance perspective, the three main functions of the State are allocation, distribution, and stabilisation. Allocation of social goods needs to be done primarily by the State because the market is likely to under provide such goods. Consider a private company willing to install street lights in your area for a fee that will be collected from all residents. Residents are likely to underpay because the benefits of good lighting will accrue to strangers beside themselves. Most people would prefer freeriding, the result being unlit streets. Here’s where the state comes in to allocate such social goods and imposing mandatory taxation, it tries to prevent freeriding. Distribution of income or wealth is another important and perhaps the most controversial function of the State. If the income distribution is not in line with what the society perceives as being “fair”, the State tries to alter the distribution pattern. For example, it is now widely accepted that poverty and food insecurity are undesirable in the Indian society and hence there is broad support across the political spectrum for some subsidies to the poor.Further, there are three fiscal instruments for redistribution:* a tax-transfer scheme, combining progressive taxation of high-income with a subsidy to low-income households. example: tax money used for a direct benefit transfer for low-income families.* progressive taxes used to finance public services, especially those such as public housing, which particularly benefit low-income households. * a combination of taxes on goods purchased largely by high-income consumers with subsidies to other goods which are used chiefly by low-income consumers. example: GST rate of zero for grains and salt but tenwty-eight percent for cars.All three instruments of distribution distort markets and hence need to be used in moderation. In a previous edition, we have written why a tax-transfer scheme is better than loading a tax-system with multiple objectives. Finally, macroeconomic stabilisation seeks to achieve desirable levels of macroeconomic indicators such as inflation and unemployment since the market-determined values might not be optimal. Increase in the budget for the employment guarantee scheme (MGNREGS) due to COVID-19 is an example of budgetary policy being used to stabilise the unemployment situation. Stabilisation can happen through these two instruments: * Monetary instruments such as interest rates, discount rates, and open market operations, or* Fiscal ins…

Full show notes at the publisher

#103 Constitution Chronicles: 4 Books & 2 Speeches 🎧 Jan 27, 2021

Show notes

- Pranay Kotasthane & RSJ

It’s the 72nd Republic Day today (as we write this). The Constitution of India is a revolutionary document. The past few years have seen some wonderful works of scholarship about our constitution. We’d like to call out a few here.

The Constitution will remain a distant and daunting document as long as we don’t develop a habit of referencing it directly. Thankfully, EBC has been publishing a coat pocketbook version since 2009. It works great as a reference book. And it doesn’t hurt that it looks elegant and makes for a wonderful gift. As an aside, a dream project of mine is to convert the constitution into a knowledge graph that visually connects the cross-referencing articles in the Constitution. If any AtU reader has the technical chops to make this happen, please ping us.

Madhav Khosla’s India’s Founding Moment: The Constitution of a Most Surprising Democracyis a brilliant and erudite work that is essential to understand the radical nature of our Constitution and the interplay of ideas and debates among people who cared deeply for this nation that led to its creation.

Rohit De’s A People’s Constitution: The Everyday Life of Law in the Indian Republic challenges the idea that our Constitution was the product of an elitist imagination whose impact in the lives of ordinary Indians was minimal. De uses four examples to make his case about the Constitution empowering the people of India to take on the state.

Tripurdaman Singh’s Sixteen Stormy Days: The Story of the First Amendment of Constitution of India shows how the idealism of the Constitution became a difficult burden to bear while running a government. No constitution can be eternally infallible. But we set a precedent of changing the architecture of our Constitution really early in the life of our Republic. We might never recover from that ‘original sin’.

Gautam Bhatia’s The Transformative Constitution: A Radical Biography in Nine Actsexplains in detail why the Constitution at its core aims to bring about a social revolution. Many a constitution aim to transform the polity and economy but few aim to change society itself. This is what sets the Indian Constitution apart. The classic work on this line of reasoning is Granville Austin’s The Indian Constitution: Cornerstone of a Nation.

This passage from Rohit De’s A People’s Constitution helps make sense of the remarkable achievement that the Indian Constitution is.

“The Indian Constitution was written over a period of four years by the Constituent Assembly. Dominated by the Congress Party, India’s leading nationalist political organization, the assembly sought to include a wide range of political opinions and represented diversity by sex, religion, caste, and tribe. This achievement is striking compared to other states that were decolonized. Indians wrote the Indian Constitution, unlike the people of most former British colonies, like Kenya, Malaysia, Ghana, and Sri Lanka, whose constitutions were written by British officials at Whitehall. Indian leaders were also able to agree upon a constitution, unlike Israeli and Pakistani leaders, both of whom elected constituent assemblies at a similar time but were unable to reach agreement on a document. The Indian Constitution is the longest surviving constitution in the post-colonial world, and it continues to dominate public life in India. Despite this, its endurance has received little attention from scholars. [Rohit De, A People’s Constitution, pg 2]

To explain the last point visually here’s a comparative chart plotting the number of constitutions against the year of independence for Asian states.

India, of course, falls in the heavily clustered zone labelled “independence era states” - political communities that overthrew European colonialism to establish new nation-states. Zooming in this era, we find that a handful of constitutions in Asia have survived. Only three amongst them had a constituent assembly that brought together people to make their own constitutions. And even amongst the ones where one constitution has survived this far, most have been beset by politically active militaries and dictatorships. The Indian constitution is without a doubt an exception to be proud of.

Among the many flaws that are often pointed out about our Constitution, the one we disagree most with is about how unmoored it was from India’s past. The accusation is we didn’t try and locate the great ideas and values of the Constitution in our past. This created a sense of distance of the ordinary Indian from the ideals of the people’s Constitution. We have two problems with this line of argument. First, this alienation from our tradition (if true) was to be bridged by later scholars and interpreters of the Constitution including legislators and administrators. The members of the Constituent Assembly shouldn’t have been expected to also write a commentary on it in parallel. Second, there are multiple references to how the principles enshrined in it are consistent with the best of our historical tradition.

Another common criticism is that the Constitution reproduced two-thirds of the GoI Act of 1935 and hence wasn’t transformative enough. What’s forgotten of course is that the 1935 Act itself was a result of a powerful Indian independence movement’s consistent political pressure on the British government. The charge of not being transformative enough” needs rethinking.

We will leave you with two excerpts of speeches made in the Assembly that support the assertion that the Constitution is consistent with the best of the Indian historical traditions while leaving out the undesirable elements.

On 17th October 1949, J.B. Kripalani made both the points we have stated above:

“Sir, I want, at this solemn hour to remind the House that what we have stated in this Preamble are not legal and political principles only. They are also great moral and spiritual principles and if I may say so, they are mystic principles. In fact these were not first legal and constitutional principles, but they were really spiritual and moral principles. If we look at history, we shall find that because the lawyers and politician made their principles into legal and constitutional form that their life and vitality was lost and is being lost even today.

Take democracy. What is it? It implies the equality of man, it implies fraternity. Above all it implies the great principle of non-violence. How can there be democracy where there is violence? Even the ordinary definition of democracy is that instead of breaking heads, we count heads. This non-violence then there is at the root of democracy. And I submit that the principle of non-violence, is a moral principle. It is a spiritual principle. It is a mystic principle. It is a principle which says that life is one, that you cannot divide it, that it is the same life pulsating through us all.

As the Bible puts it, "we are one of another," or as Vendanta puts it, that all this is One. If we want to use democracy as only a legal, constitutional and formal device, I submit, we shall fail. As we have put democracy at the basis of your Constitution, I wish Sir, that the whole country should understand the moral, the spiritual and the mystic implication of the word "democracy". If we have not done that, we shall fail as they have failed in other countries. Democracy will be made into autocracy and it will be made into imperialism, and it will be made into fascism. But as a moral principle, it must be lived in life. If it is not lived in life, and the whole of it in all its departments, it becomes only a formal and a legal principal. We have got to see that we live this democracy in our life.”

And more famously, Dr. B.R. Ambedkar in his last speech at the Constituent Assembly draws upon our past:

“It is not that India did not know what Democracy is. There was a time when India was studded with republics, and even where there were monarchies, they were either elected or limited. They were never absolute. It is not that India did not know Parliaments or Parliamentary Procedure. A study of the Buddhist Bhikshu Sanghas discloses that not only there were Parliaments-for the Sanghas were nothing but Parliaments – but the Sanghas knew and observed all the rules of Parliamentary Procedure known to modern times. They had rules regarding seating arrangements, rules regarding Motions, Resolutions, Quorum, Whip, Counting of Votes, Voting by Ballot, Censure Motion, Regularization, Res Judicata, etc.Although these rules of Parliamentary Procedure were applied by the Buddha to the meetings of the Sang has, he must have borrowed them from the rules of the Political Assemblies functioning in the country in his time.

This democratic system India lost. Will she lose it a second time? I do not know. But-it is quite possible in a country like India – where democracy from its long disuse must be regarded as something quite new – there is danger of democracy giving place to dictatorship. It is quite possible for this newborn democracy to retain its form but give place to dictatorship in fact. If there is a landslide, the danger of the second possibility of becoming actuality is much greater.”

The above lines are followed by his famous ‘Grammar of Anarchy’ passage. He knew what he was talking about.

HomeWork

Reading and listening recommendations on public policy matters

* [Video] Ambedkar’s speech at the Constituent Assembly

* [Document] Judgment on Shankari Prasad vs Union of India: The First Constitution Amendment Act, 1951 was challenged in the Shankari Prasad vs. Union of India case. The Supreme Court held that the Parliament, under Article 368, has the power to amend any part of the constitution including fundamental rights.

* [Podcast] On Puliyabaazi, Rohit De joins Saurabh and Pranay to discuss India’s tryst with constitutionalism.

* [Article] Democracy and the Republic - the differences between these two concepts.

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

#102 How To Tame Your Elephant? Jan 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.A Framework a Week: The Basis of MoralityTools for thinking public policy- RSJThe other day at a dinner with a few friends (in our ‘bubble’) the topic of farm laws came up. The usual argument followed. Farmers need to be freed from the overbearing power of the state that has kept them poor for so long versus Ambani/Adani will take over and control food prices in future leaving nothing for the farmers or the consumers. Things were going according to the script till the issue of morality came up. Both sides were convinced they had the stronger moral argument to support them. Luckily, the dinner was served and good food quietened things down. This set me thinking about how we think about morality. Regardless of how we define political axes in India (left vs right, liberal vs conservative, statist vs free marketer), each side arrives at their ideology based on what they believe is morally right for the society. What’s the basis for our inherent self-righteousness and why does it differ among people?About MoralityJonathan Haidt in his superb book The Righteous Mind: Why Good People are Divided by Politics and Religiongoes deep into this question. When he was at graduate school, Haidt learnt about Kohlberg’s six stages of moral reasoning. This model (Kohlberg’s) developed in the early 60s held that moral reasoning which forms the basis for ethical behaviour evolves over six developmental stages. These six stages were broken into three levels: pre-conventional, conventional and post-conventional. Each stage was more evolved and better at responding to moral dilemmas than the last. Kohlberg’s six stages were:Level 1 (Pre-Conventional)* Obedience and punishment orientation* Self-interest orientation( What's in it for me?)Level 2 (Conventional)* Interpersonal accord and conformity( The good boy/good girl attitude)* Authority and social-order maintaining orientation( Law and order morality)Level 3 (Post-Conventional)* Social contract orientation* Universal ethical principles (Principled conscience) Haidt found something amiss in this model. It seemed too cerebral with the rational mind driving moral decisions. In 2001, he wrote The emotional dog and its rational tail where he presented the social intuitionist model as an alternative to the rationalist model. Haidt’s point was simple: moral judgment was widely believed to be caused by moral reasoning. Instead, he argued, we reach a moral judgment based on our intuitions that are shaped by moral and cultural factors (link 1 in the model below). We construct a scaffolding of moral reasoning after that to support our judgment (link 2). Judgments based on reason (link 5) and change in intuitions after private reflection (link 6) are quite rare. Theory Of Moral IntuitionIt is a far-reaching paper that helps explain a lot of things around us. What did Jefferson mean when he held certain truths as ‘self-evident’? Or, why do we now believe politics is downstream of culture? You can’t change politics unless you change culture. Why is this true? Or, why do you often end up in a political argument feeling frustrated that the other side doesn’t see your point of view which is moral or right?To Haidt, this is because of our moral intuition. We don’t know why something is wrong but we just know it’s wrong. Haidt defined moral intuition as:“..the sudden appearance in consciousness of a moral judgment, including an affective valence (good-bad, like-dislike), without any conscious awareness of having gone through steps of search, weighing evidence, or inferring a conclusion. Moral intuition is therefore the psychological process that the Scottish philosophers talked about, a process akin to aesthetic judgment: one sees or hears about a social event and one instantly feels approval or disapproval.” Haidt gave the elephant-rider metaphor to explain this. This is a metaphor to explain how our unconscious mind guides our conscious rational faculty. The elephant is the total of our intuitions and our unconscious influences. It is large and chooses its own path. The rational conscious mind is like the rider on the elephant. She thinks she is controlling the elephant but that isn’t true. “the mind is divided into parts that sometimes conflict. Like a rider on the back of an elephant, the conscious, reasoning part of the mind has only limited control of what the elephant does.” Only a very skilled rider can sometimes change the course of the elephant. That’s the reason only the really sharp minds on either ends of the political spectrum can intellectually and morally justify the intuitions of the masses and direct them to a political or social goal. As Haidt concludes in his paper:“The time may be right, therefore, to take another look at Hume’s perverse thesis: that moral emotions and intuitions drive moral reasoning, just as a surely as a dog wags its tail.” But this wasn’t enough. Why do we have different moral reasoning among us? Why do two brothers who grew up together in the same household often hold diametrically opposite political views? Our Moral FoundationsHaidt (with others) built the moral foundation theory to explain the differences in moral valence among people. They argued humans have six universal moral foundations that develop in them over time depending on culture, social interactions and their own understanding of the world around them. They proposed the five foundations of morality and later added a sixth:1) Care/harm: This foundation is related to our long evolution as mammals with attachment systems and an ability to feel (and dislike) the pain of others. It underlies virtues of kindness, gentleness, and nurturance.2) Fairness/cheating: This foundation is related to the evolutionary process of reciprocal altruism. It generates ideas of justice, rights, and autonomy. [Note: In our original conception, Fairness included concerns about equality, which are more strongly endorsed by political liberals. However, as we reformulated the theory in 2011 based on new data, we emphasize proportionality, which is endorsed by everyone, but is more strongly endorsed by conservatives]3) Loyalty/betrayal: This foundation is related to our long history as tribal creatures able to form shifting coalitions. It underlies virtues of patriotism and self-sacrifice for the group. It is active anytime people feel that it’s “one for all, and all for one.”4) Authority/subversion: This foundation was shaped by our long primate history of hierarchical social interactions. It underlies virtues of leadership and followership, including deference to legitimate authority and respect for traditions.5) Sanctity/degradation: This foundation was shaped by the psychology of disgust and contamination. It underlies religious notions of striving to live in an elevated, less carnal, more noble way. It underlies the widespread idea that the body is a temple which can be desecrated by immoral activities and contaminants (an idea not unique to religious traditions).6) Liberty/oppression: This foundation is about the feelings of reactance and resentment people feel toward those who dominate them and restrict their liberty. Its intuitions are often in tension with those of the authority foundation. The hatred of bullies and dominators motivates people to come together, in solidarity, to oppose or take down the oppressor.As Haidt writes in the book:“"the moral matrix of a culture is something like its cuisine: it’s a cultural construction, influenced by accidents of environment and history, but it’s not so flexible that anything goes. You can’t have a cuisine based on grass and tree bark, or even one based primarily on bitter tastes. Cuisines vary, but they all must please tongues equipped with the same five taste receptors. Moral matrices vary, but they all must please righteous minds equipped with the same six social receptors." Why We Differ?Over time Haidt developed a moral foundation questionnaire to understand how people from different political orientations (mostly from the US) valued the five moral foundations (the questionnaire dropped liberty). The results over thousands of surveys suggest the crux of the disagreement between liberals and conservatives (we are using the current American meaning of these terms here). Liberals value Care and Fairness deeply while Conservatives give almost equal weightage to all five foundations almost equally. As the abstract of the paper (the full paper is here) summarises:“Across 4 studies using multiple methods, liberals consistently showed greater endorsement and use of the Harm/care and Fairness/reciprocity foundations compared to the other 3 foundations, whereas conservatives endorsed and used the 5 foundations more equally. This difference was observed in abstract assessments of the moral relevance of foundation-related concerns such as violence or loyalty (Study 1), moral judgments of statements and scenarios (Study 2), “sacredness” reactions to taboo trade-offs (Study 3), and use of foundation-related words in the moral texts of religious sermons (Study 4). These findings help to illuminate the nature and intractability of moral disagreements in the American culture war.” Haidt (and Graham) argue that we need to use all five moral foundations to understand political or social issues. This suggests the onus is on the liberals to make the extra effort to go beyond their two values. This has earned the theory ire from the liberals. Haidt, who calls himself a liberal, has a more balanced view of this. He suggests we all need to step out of our moral matrix. We need to appreciate the diversity of our moral foundations. Once we do that it will be easier to step into others’ shoes.That, like it is apparent to all of us these days, is easier said than done. Matsyanyaaya: Vaccine DiplomacyBig fish eating small fish = Foreign Policy in action— Pranay KotasthaneIndia’s vaccine diplomacy was widely discussed this week. On one hand, a few heads of state and international media organisations lauded the Indian government’s decision to supply vaccine shots for free even as its own domestic vaccination campaign has only started. On the other hand, there were arguments suggesting that the government should’ve first vaccinated its priority population before letting a single vial out. That in the amoral context of international relations, giving away vaccines for free amidst a health emergency is unaffordable altruism. So, how to make sense of this?I would argue that it’s not altruism but national self-interest that guides international humanitarian assistance efforts by all states. The Indian government’s vaccine diplomacy can also be explained through this lens of self-interest. Let’s consider the facts first. 3.2 million Covishield vaccines have been supplied under grant assistance to a handful of neighbouring states out of the 11 million procured by the Indian government. Moreover, of the 30 million priority-sector workers supposed to be vaccinated under phase 1 of India’s vaccine programme, only 1.5 million have been vaccinated by Jan 23th. Now consider the options in front of the Indian government. One option would have been to wait for phase 1 to complete before gifting vaccines away. As such, this option doesn’t mean that the recipient countries would’ve been left high and dry. They would’ve had to wait for commercial exports of Covishield outside the GoI’s procurement like Brazil did. A second option would’ve been to block all commercial exports of vaccines manufactured in India until phase 1 is completed. A third option would’ve been to divert a part of the procured lot to select countries right at the outset to signal the positive role that India can play in the world order. The first two options can easily be argued as hard-nosed realism. But its the third option, the one that India chose, needs more reflection. While it is true that this one act of benevolence is unlikely to change the future behaviour of nation-states towards India, it crucially reminds the smaller states in the subcontinent that India cannot be easily substituted by China, especially given how opaque the latter’s vaccine journey has been thus far. Extending help in a crisis situation also improves India’s credibility in international fora. Finally, the norms of international cooperation have evolved in a way that makes complete apathy more costly than non-reciprocal overtures. In 2015, Pavan Srinath and I had written this in the context of humanitarian assistance and relief efforts:“Countries are expected to do a certain minimum amount of international disaster relief, be it unilaterally, or through contributions to charities. This minimal assistance has increasingly acquired characteristics of altruism. Many animals give out distress calls for the benefit of the herd and at possible cost to itself. Similarly, international disaster relief is a slowly becoming a norm that is obeyed without explicit rewards except that of building an atmosphere of cooperation.”In short, India’s vaccine diplomacy is an act of self-interest but not selfishness. As for the question of vaccinating Indians, it’s not the lack of doses that are holding things up. The government needs to enlist the help of private enterprises to increase the pace of vaccine deployment as soon as priority-sector workers have been reasonably covered.HomeWorkReading and listening recommendations on public policy matters* [Video] The Moral Roots of Liberals And Conservatives: Ted Talk by Jonathan Haidt * [Article] Kohlberg’s Stages Of Moral Development * [Blog post] This meta-post on Gulzar Natarajan’s Urbanomics blog is a must-read for anyone interested in public policy in India. Don’t miss the linked article: Overcoming behavioural failings: Insights for public administrators and policymakers. 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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