The GP 'Macro Bowl O' Economy !

The GP ‘Macro Bowl O’ Economy !

Ganga Prasad G. Rao

gprasadrao@hotmail.com

The world over, it is the same humdrum, the same reaction to the economic crisis that has afflicted nations across the globe. Every economic contraction, no matter of what origin must be responded to by stimulating the economy with low interest rates and ‘stimulus funds’. Pump prime an economy with ‘policies’ that have no credibility, shore up the very banks that caused the financial crash with their ultra-short trading, even indulge in a privately enriching market crash despite an obvious conflict of interest …..and when the economy fails, put your hands up, point your finger at the ‘other guy’, and walk away with your booty in the melee of a regime change. Macro-politics, my friend, is an art to master! So, in a world of no alternatives, let’s, for a change, break all taboos – I mean, academic - and imagine the unimaginable. Let us motivate a macro-economy with an entirely different rationale. An economy that does not hide its loot behind austerity programs, an economy that does not encash policies and regulations even before they are enacted, in fact an economy that cares, I mean a ….. ‘welfare state’, yes you heard it right, a ‘freebie economy’. A freebie welfare state when we aren’t able to even half-way support a subsidy economy? Sure sounds implausible. But ‘miracle’ is a word in the dictionary, right? So, let’s dare the odds and dream…I mean, read on!

Consider a society comprised of a set of households maximizing whose aggregate utility is the objective of the Government. Let HC represent a vector comprising of the entire set of households, and let i denominate the income-ranked ‘percentile elements’ within. HCi|i=k represents households in percentile i with income equal an arbitrary percentile, k. P denotes population, T represents the state of Technology, and Pc, the price of carbon, is a proxy for the (scarcity value of) the environmental commons. As the frontier of technology expands and the resource base expands, productivity increases in the economy, resulting in higher income, savings, wealth and investment (and a lowering of discount rates) among households. Due the existing inequity in household income, the expansion of the economy benefits the higher ranked household, HCi|i>>50 more than it does households HCj|j<<50. Such economic growth may be expressed as (GDP^f| Y^HCi|i>>50 > Y^HCj|j<<50), where GDP^f represent GDP-Efficiency phase, and Y^ represents the change in household income. In other words, income/wealth growth in the higher percentiles of households far outpaces income growth in the lower percentiles. Conversely, GDP growth could be ‘equitable’ (denoted by GDP^e) and reduce the disparity in income, ie, (GDP^e| Y^_HCi>>50 << Y^_HCi<<50). These two phases are not unlike an elastic rubber band that expands proportionately from a point of origin (a peg/stake) in the poorest household (GDP^f), and one that rebounds in favour of the poor (GDP^e) with the income of richest held constant. In times of recessions, similar logic holds. In a shrinking economy too, two phases are possible – an inequitable recession with the poor suffering larger losses than the rich, and an ‘equitable’ recession with the rich paying the price. In the latter case, the band, pegged to the poor, shrinks from the rich end, and in the former, the poor end of the band slides back while the ‘hedged’ rich hold their place at the far corner. Over time and across the expansionary and contractionary phases, the rubber band economy moves forward in fits and starts, much like a worm, occasionally backtracking some, perhaps to ‘straighten’ its path. If that were all to this 2-phase rubber-band economic paradigm, one would label it a ‘worm hole economy’ and move on to the next jingle on the idiot box.

But, what if we embellished this economy not with a ‘subsidy’, but a ‘freebidy’ that offered free a subset of consumption goods and services to a subset of households up to a certain monetary amount per period? The freebie consumption subset would comprise of both essential goods and upscale ‘luxury’ and high-tech goods. Eligibility would be determined by a cut-off household percentile, HCi|i = z, z being the percentile cut-off determined by a host of economic, demographic and environmental variables. Predictably, the percentile cut-off would rise with income and resource base, RB – a variable that half-proxies for technology as well. Anticipating the impact of the freebidy scheme on prices and labor supply, as well as a ‘freebie-exploiting society’, and to accommodate the environment, the percentile cut-offs is designed to roll back with wage rate, w, the inflation rate, r, the price of carbon permits, Pc, and with PLsw, the marginal bid for the issue of landfill permits to private landfill operators in an auction (a proxy for solid waste fee), and Pop, the Population:

Freebidy Percentile Cut-off, z = g(PCGDP^, RB^, w^, r, Pc^, PLsw^, Pop^),

where ‘^’ represents percent changes.

The cut-off plays an important role in separating the haves from have-nots. The latter group are supported economically with freebies - essentials are doled out up from the bottom percentiles of the household ladder, and luxuries handed free from the cut-off downwards. As income and the resource base expands from technology, knowledge enhancements, and reductions in cost of production, the standard of living and lifestyle expectations undergo revision, and more goods and services fall either in to the essential or ‘commodity’ category. Concomitantly, the percentile cut-off increases, consequent to which the ‘freebie subset’ enlarges. In recession, the logic reverses, and the cut-off percentiles fall, or equivalently, less of the freebie is available to eligible households. The intention, indeed the hope of this radical proposal, is that by offering essential or luxury goods and services free to the deserving and future consumers, the government could keep the economic juggernaut moving across recessions and depressions without resorting to patently self-deceiving macro-gimmicks. Thus distributed, economic growth is equity- enhancing; simultaneously, it enhances/preserves scale economies and permits a rationale for price discrimination while stimulating demand for luxuries and high tech products in those who likely to move out of the freebie net and turn future customers.

It doesn’t take an economist to question the financial sustainability of the proposal, or an environmentalist to question its environmental sustainability. That a ‘freebidy’ in isolation is unsustainable unless there is near limitless resource or near zero-cost, environmentally benign, production technology is well known. But this proposal does not assume either; it is designed within the confines of ‘closed finance’ so that the freebidy economy automatically limits itself to what is sustainable. In essence, the proposal is initiated, dependent and bounded by ‘macro, strategic/hedge money pots’ that nonetheless serve to allocate and bound expenditures and investments in the real world. These money pots are in the nature of funds tied to ‘economic drivers’ - Inflation, Potential GDP (Gap), Solid waste (remediation), and Product quality – that impact on the nation’s health, and which are anticipated, staked and hedged by the industry and the government. To this, one could potentially add random and non-random, natural and anthropogenic ‘phenomena’ such as wars and communal strife, or earthquakes and monsoons, which too are anticipated and hedged at the start of a new term.

Toward such a closed, sustainable financial allocation, let us first recognize the stakes and claims of the Government and the Industry. Following a win at the hustings with its plank, the Government, cognizant of its obligations to serve its citizens, aligns its monetary policies along a targeted Potential GDP which implies a certain M2 Growth and anticipated inflation rate. In a complementary move, the Industry counts on a certain amount of environmental obligation (the price (of carbon) of polluting the commons, Pc), and some permitted environmental damage (Solid Waste, implicitly translating to a prospective pot of money, SW 2key). The Industry joins the Government in accepting a ‘Service’ obligation which they split in to boom-cycle and bust-cycle 2keys. The Government, aware that the potential GDP will likely not be achieved or adhered to, and that its trend will be interrupted with booms and busts, stakes a boom-time ‘Inflation 2key Potential GDP 2key’ ‘self-interest’ card, while the Industry pursues a ‘Product Quality (PQ) Bakey Solid Waste 2key Share’ strategy. The two sides exchange their respective bakeys, ie, the Government offers to the Industry an Inflation 2key Bakey, while the Industry does not mind the Government sharing in its SW 2key Bakey. In Bust, the Industry falls back to ‘Product quality 2key SW 2key Bakey’ and the Government to its Inflation Bakey Potential GDP Gap 2key. The Government seeks the PQ 2key bakey from the Industry in return for the Potential GDP Gap 2key Bakey. These funds are then applied by the two sides toward their freebidy obligations/offers as explained below.

In the context of the reality of macro-cycle involving growth periods and recessionary phases, due which prices, inventories, and interest rates cycle up and down, it’d be appropriate, even opportune, to bifurcate the ‘freebidy’ set of goods two ways: in to Essentials and Luxury, and in to Durables and Consumables. Such categorization is consistent equity goals of the government, with the impact of the interest rate cycle on the demand for durables, the impact of interest rates on durable inventories, and of those inventories upon prices. The categorization also helps focus funds specifically to targeted families for targeted outcomes.

		BOOM				BUST
		ESSENTIAL		LUXURY		ESSENTIAL		LUXURY
		Durable	Consumable	Durable	Consumable	Durable	Consumable	Durable	Consumable
BOOM	SW 2key Bakey		Ind	Ind
	SW Bakey Share	Govt			Ind
	Inflation 2key		Govt
	Inflation Bakey				Ind
BUST	Pot GDP Gap 2key						Govt
	Pot GDP Gap Bakey							Ind
	PQ 2key								Ind
	PQ Bakey					Govt

In Boom, the Government chooses to discharge the service obligation; it applies the Service 2key to serve the indigent households down from the percentile cut-off, while the Industry is too busy minting money to care about the bakey. In this phase of the economic cycle, the Government and the Industry share their ill-gotten Inflation and SW 2key bakey with the indigent. The Government, inherently more caring for the poor than the Industry, sponsors the free issue of essential-consumables to Household below the cut-off in a bottom-up fashion until the Inflation 2key pot runs out. The Industry, always seeking to expand its business and profit from it, offers ‘luxury consumables’ as freebies to those near the ‘income-knee’ (the percentile cut-off). Between the Government and the Industry, the Inflation pot and the SW 2key bakey pot obtain some equity gains to the indigent and prospective lifestyle gains to those at the threshold of crossing the ‘poor-rich threshold’.

In Bust, the Industry takes over the obligation, and sponsors voluntary organization with the Service 2key to serve the poorest in society. The Government is too busy with its economic policy-making seeking an end of the recession, to worry about the bakey. Beyond their service obligation, the Government and the Industry switch to two other pots: the Potential GDP Gap and the Product Quality. The industry shares its PQ 2key as durable-consumable freebies with prospective consumers just below the percentile cut-off. In addition, it supports those IPOs that support the cause of product quality, energy efficiency and resource/material conservation. The Government chooses to ‘invest’ the PQ Bakey in essential durables among the poor households at the bottom of the percentile ladder. It also offers its PGDP Gap 2key to freebidize essential consumables. In all cases, the allocations by the Government/Industry between essentials and luxuries and between consumables and durables follow the proportions in which the 2key and bakey were taken by the two opposing parties.

The function ‘g’, which determines z, the critical freebidy percentile cut-off variable, and which weights the various socio-economic and demographic variables, is further calibrated in an accounting sense with the size of the various money pots involved. As technology advances, more resources are discovered, and as production turns more efficient – both cost-wise and environmentally, both Potential GDP and Product Quality money pots expand, the percentile cut-offs advance higher in to the household income distribution, and the society turns incrementally a welfare state. Conversely, if inflation rears its head, if population expands unsustainably, if there is palpable resource scarcity, or if the environment deteriorates due inefficiency in production, the percentile cut-off shrinks back, reducing the size of the freebidy pie to what is sustainable given the money pots on line.

To ensure efficiency in the allocation of freebies, the administrator of this system issues ‘Durable-‘ and ‘Consumable-Freebie points’ to the target group that, in aggregate, sum up to the available funds. These points are bankable across time, but are neither exchangeable across type of good or across recipients. The recipients of the freebie points exchange them for the various durables and consumables offered in the freebie basket, each priced in points equal the prevailing market price. This strategy, tantamount to gifting extra, albeit conditional income, preserves consumer choice, maximizes aggregate utility gain among the indigent and minimizes the efficiency and investment distortions so characteristic of subsidies. Thus designed, the freebidy proposal is efficient, closed, sustainable, and self-perpetuating.

Despite the break from traditional economic wisdom, and the overtly unsustainable incentives that it induces, the freebie economy has its advantages. First, it provides essentials for the really poor. Since a PDS is in place, it’d be straightforward to replace subsidized goods with rationed freebies. The strategy, though, is more advantageous with income-elastic luxury goods than essentials, since it permits ‘judicious’ price discrimination in the cover of cross-subsidizing of the poor by the rich, and simultaneously serves to pull the poor up through the lifestyle ladder. For good measure, the freebie economy is advantageous to ‘Bharat’ as well, for the increase in consumption among the masses would help expand margins due cost economies of scale. The ‘freebie policy’ is a rational one to adopt when technological advances turn scarcity to abundance (such as resource discoveries) without a concomitant increase in demand, or when technological advances increase the rate of obsolescence in the market. The strategy serves implicitly as a labor supply control instrument too. If blue collar wages rise unsustainably, as they do during economic booms, the freebie cut-off percentile falls, forcing those marginal households to compensate for the loss in freebies by supplying labor, thus forcing blue collar wages back down. Such strategy is particularly opportune when unemployment rises, or when wage pressures threaten to stymie economic growth. And, despite the strategic plays around solid waste, the freebie strategy serves as a conservation policy too. By offering a limited amount free, the strategy induces households to constrain their consumption to the rationed freebie. Such strategy is applicable to environmentally injurious, albeit essential consumables. In an economic downturn, the strategy keeps the industrial engine going by offering ‘luxury’ durables to households just below the percentile cut-off. The opportunity cost of freebidizing such households is mitigated, on one hand, by interest rates that are at the bottom of the economic rate cycle, and on the other by lower inventory costs (and by the fall in the price of durables with the fall in consumer demand during recessions). Implementing the ‘closed’ freebidy scheme smoothens out the demand for durables and in turn the inventory of consumer durables. The built-in incentives and dis-incentives in this proposal drive the economy to find a sweet spot that is a pareto compromise between, on one hand, equity and efficiency, and on the other between efficiency and the environment. It even obtains an implicit and endogenous rate of societal technological advance, as well as product-specific innovation and obsolescence rates. Over time, the society moves incrementally toward an environmentally, financially and even a technologically sustainable welfare state.

Now, for that word in the dictionary…

Dial M for Miracle, Right?

TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

Ganga Prasad G. Rao

Election campaign financing and reform has been at the forefront of politics for the undue influence it has on everything from candidate choice, the platform, the choice of constituencies, the party manifesto itself, even post-election strategies and policies of parties, whether winners or otherwise. The lack of a credible, public, legal, and ethical system to raise finances for election campaigns (and for other normal political activities) has induced many an ill in our society – from corruption and fraud to conspiracies, murders and allegation of electoral manipulation with ‘foreign’ money.

One of the primary inadequacies with the existing system which raises funds from special interests is the overt expectation, post-elections, of returns, even immediate and substantial, for political contributions made prior to elections. Such expectations, admittedly difficult to deny post the electoral win, have resulted in many an administrative lapse/oversight, mis-guided policies, regulatory loopholes and legal grey zones. The harm to the economy, in terms of efficiency losses, and the exacerbation of social inequity could lead to unforeseen, yet large and irreversible consequences in years and terms in to the future. This realization has spawned many an effort to correct the problem, most of them revolving around raising Election campaign funds, ECFs, publicly. Solutions – ranging from involuntary wage deductions, voluntary contributions with tax returns, or a (sales) tax-surcharge – have been mooted, but did not find favour for reasons of impracticability, or worse, a ‘who will bell the cat’ syndrome. Elsewhere, there is the matter of the Government timing its policies to produce results toward the end of its term, so it could leverage its incumbency advantage to pull away in the race for financial contributions and, indeed, with the elections itself. For these and other reasons, it is necessary to consider alternate means of financing elections and ‘satisficing’ coalition partners and the opposition during the term of the ruling party.

Let us therefore take a tentative step forward and consider an admittedly unconventional strategy for financing elections, a strategy that fills the Election pot with ‘contributions’, Hallelujah!, from friendly and unfriendly nations across and beyond our borders. But why? And how? The ‘why’, as it turns out, is easier than the ‘how’. Elections decide the future direction of the nation for the immediate term, and even for terms to follow. And wouldn’t friendly and unfriendly nations - trading partners and competitors – seek to influence that direction much as our MEA seeks to extend its ‘panchsheel-moderated’ influence to SAARC, ASEAN and nations beyond? And if the future of one nation were inextricably intertwined with the futures of friendly and competing nations, wouldn’t it make sense to design a system that permitted each nation to pursue its foreign policies through an overt, legal monetary route – even one that influenced policy though electoral choices - than through underground channels that brought diplomatic disrepute?

As for the ‘how’, if there is mutual awareness, if not tacit recognition of each other’s ‘extra jurisdictional’ monetary influences, then the same could instead be routed through the Sovereign Wealth Fund, SWF, route. Every nation has a Sovereign fund, a fund ostensibly meant to protect the nation’s wealth in the present and the (long) future. Thankfully, these Sovereign funds operate within and without the confines of one’s own nation, and against one another, bilaterally and multi-laterally. What if we exploited their geographical spread across nations to create as many election pots as SWFs, and framed rules under a ‘Hedge (Opposite) ZS’ paradigm to fill them? A Sovereign fund, due its decades-, even century-long vision, seeks more than merely a monetary return; it seeks investments that turn its nation financially, economically, socially, and environmentally sustainable over that duration. That ‘sustainable threshold return’, determined by wealth, resource endowments, and technology, will likely approximate the ‘very long-run’ real interest rate (one can’t do any better with a ‘VLCC’ fund seeking to avoid turbulence in that many dimensions) over the ‘floor’, the floor being the ‘natural rate of gold price inflation’ (one can always postpone a future for a lowly return that approximately matches gold inflation). Aware of this band of low returns, the upper boundary of which varies across nations, the SWFs consciously exploits short- and intermediate-run ‘market exuberance’ to sweep away gains which have their origins in excess volatility, excess returns, or a ‘bakey’ on Potential GDP (the Potential GDP ‘Gap’). These gains find their way in to various pots – overt Foreign aid and a Strategy fund for extra-jurisdictional legislative initiatives if a friendly nation, and a 2-pronged ‘Slush funds for covert military assistance plus a Peace dividend to incentivize economic and military cooperation’, if an unfriendly nation. Since politics determines who takes over the reins of the government, the SWF finds it appropriate that the Peace dividend be offered toward election campaign funds, so the winner, regardless of which party, would be receptive to a peaceful, co-operative future upon forming the new government.

Nations might differ in the ‘threshold returns’ they set for their SWF given their resource endowments, stage of development and expectations for the future. In turn, this translates to varying degrees of involvement in the capital markets of other nations and implies different behaviour in the markets, and indeed contributions to the ‘Peace Dividend ECF’. A rich nation that seeks to be just and sustainable might adopt a lower threshold return than a developing nation and distribute more of its gains among ECFs than the latter. Consequently, the rich nation may offer a larger contribution to the ECF than would a developing nation.

If level changes in the Equity section of the market are indicative of achieving performance benchmarks or falling short of them, Equity and Bond volatility of lessons or interim compensation/exploitation, changes in Bond levels of ‘secular’ reductions/increases in inequity, and Complements of the presence of ‘opposites and hedges’, then, given nations could be friendly or competitors, and the ‘home’ government either to the Right, Center, or Left, there are, potentially, several alternative configurations for the allocation of SWF funds in Boom and Bust years across asset classes. However, using the ‘principles’ as enunciated above, two illustrative, albeit aggregate allocations for a pair of SWFs is proposed below:

FRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
	SovA Comp (20%)	Volatility	SovB Comp (10%)
SovA Comp (20%)	SovB Key (65%)	Level	SovA Key (50%)	SovB Comp (20%)

Nation_A Peace Dividend: Sov_B Bakey(5%)

Nation_B Peace Dividend: Sov_A Bakey (10%)

UNFRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
SovA Comp (10%)	SovA Comp (5%)	Volatility	SovB Comp (10%)	SovB Comp (10%)
	SovB Key (50%)	Level	SovA Key (60%)

Nation_A Peace Dividend: Sov_B Bakey (30%)

Nation_B Peace Dividend: Sov_A Bakey (25%)

Thus structured, the Peace Dividend pot is the sum of gains from capital markets and strategic residual nations pay each other to avoid overt military, economic, or diplomatic confrontation in the current time frame. The pot could also be alternatively interpreted as representing the monetary translation of resolved and unresolved issues in international trade, diplomatic/military relationships and social/religious contracts/benchmarks, or as representing certain viewpoints and (unilateral) decisions by the SWFs. By the nature of the allocations, the ECFs shrinks when SWFs prefer to stay invested in peace time, and enlarges in those years when the two nations turn unfriendly and lock horns with each other. By offering the Peace Dividend toward the Election Campaign fund, the nations mean as much to share the ‘spoils’ with political parties, as it means to hold them responsible for correcting the unresolved issues in the new Parliament.

In a multi-lateral context, each nation would be investing across the capital markets of friendly and unfriendly nations, and the SWF allocations turn as much more complex. It is suffice to point out, however, that in such cases, the SWF would invest much less at home and distribute a larger share of its portfolio in investments abroad. Further, the allocation to any single market would be a small fraction of its market capitalization and, indeed, of the SWF net assets. Consequently, the ECF, now comprised of contributions from several SWFs, would take on an international flavour and seem like an International Election Fund. Extrapolated to all democratic nations, the ECFs would constitute a global system for cross-financing of elections.

The focus now shifts to how the monies available under the Election Fund are apportioned across the various parties – ruling and opposition. To aid in answering the question, consider a proposal that rewards and punishes the Ruling party and the Opposition in some relation to their economic and social performance. In a democracy, parties make ‘offers’ to voters via their manifesto/agenda and nominate candidates to pursue them. Due the majority criterion, populist policies – policies that are privately enriching to the masses in the immediate- or short-run, but zero-sums across time, space, and the environmental commons, are preferred by voters. Due competition, parties seek to better one another with their offers, and thus push the more greedy or desperate amongst themselves to stake a manifesto that implies extreme, unsustainable exploitation of the commons and future generations. Such economic exploitation is facilitated by interventions in various economic spheres, specifically, interest rates, subsidy-induced government borrowing and budget deficits, exchange rate and trade policy, and industrial policy. A Government that follows a zero-sum strategy, ‘depreciate ‘n export’, or ‘exploit the environment’ strategy is likely to:

a) lower short-term interest rates,

b) lower Corporate/Capital gains/Personal Income taxes,

c) announce populist subsidies that enlarge the budget deficit and induce an unsustainable fiscal deficit,

d) resort to laxity in enforcing environmental laws and regulations, and

e) artificially depreciate currency to boosts exports if at the cost of stoking domestic inflation.

Such interventions lead further to structural imbalances in bond and savings markets, currency markets, international trade and environmental protection. An ECF that distributes the Peace Dividend monies indiscriminately among political parties could exacerbate these tendencies, and cause irreparable damage to the economic and financial fundamentals of the nation. To staunch such irreparable economic damage, the ECF must so structure its ‘payouts’ that it incentivizes prudent and sustainable economic policy decisions by the political parties.

Toward constructing a ‘rule of thumb’ for ECF payouts across parties, first conceptualize a Payout Fraction, PF, designed simply as a counter-weight to the perverse incentives faced by political parties, in particular, the Ruling party, even if it implies, in the context of politics spanning the entire 180 degree Left-Right spectrum and the presence of friendly/unfriendly nations, a certain subjective judgement as to what is ‘appropriate policy’ and what isn’t. Let PF be a product of two variables: a time-dependent ‘Equity Rating’, Z, and a composite of policy variables and economic parameters, EPP, that measures the ‘ZS-Exploit’ strategy:

PF = k. Z.EPP

Z, the first component of the PF, constructed as A(t/60) and A(1- t/60) - where 't' represents the month count from the start of the new government for a 5 year term - provides for formal cognizance of the public perception of the government - the so called Approval Rating, A - in the distribution of electoral funds between the ruling party and the opposition parties. If the survey for the Approval rate were so designed as to limit itself to household and social welfare (an indicator of cost of living, livelihood standards, and social equity), then the above formula would be a time-weighted, see-saw combination of equity and efficiency measures. It’d apply directly to the Ruling party, but in the complement to the Opposition. In both cases, the fraction would vary over time albeit in opposing trends. The ruling party stands to gain much of initial fund flows from the ECF; conversely, the hand of the Opposition is strengthened toward the end of the term, thus offering a credible counter-weight to the incumbency advantage of the existing government.

The second component, EPP, must be designed to offer an appropriate corrective signal that, when applied to distribute monies from the ECF, would offer the appropriate disincentives to political parties and force them to refrain from engaging in short-term exploitive behaviour. That signal would only obtain if EPP targeted those instruments and policy variables that the Ruling party employed to exploit, intervene in, or influence outcomes. It is to the choice (and design) of these instruments, outcomes and policy variables that we now turn our attention to.

Many governments have exploited the trade-off between economic growth and the environment to jumpstart their economy. To counter this incentive, albeit ‘judiciously’, we include as the first term of the PF equation, the percent GDP growth net of the Inflation in the price of Carbon Permits; the inflation in the price of carbon permits being an indicator of the marginal severity of environmental exploitation. If the Government were environmentally judicious with its growth policies, the net would be positive, implying its environmental compromises resulted in higher economic growth. Conversely, poorly conceived, environmentally profligate industrial policies that raise marginal environmental damage and turn the net negative, take away from the Payout fraction to the Ruling party. Anticipating that the ECF will deny them campaign funds for being environmentally insensitive, the Ruling party either changes course or delays the environmentally injurious decision, thus averting the environmental wrong.

To the second term in the PF formula, we assign the task of catching the Government short if it pursues the all-too-familiar Keynesian ‘spend-big-on-subsidies-and-kickstart-the-economy-with-low-interest-rates’ strategy. Such strategy discounts the impact on government finances, in particular the budget deficit, and in turn leads to both inflation and higher long bond yields due inter-temporal and cross-sectional ‘crowding out effect’. To counter such ‘governance short-cuts’, the Payout Fraction is designed inversely related to the sum of the long-short rate spread and the inflation rate. This variable increases in magnitude with the extent of intervention and damage, and helps check any ‘irrational exuberance’ on the part of the Ruling party upon assumption of office.

The third strategy, that of ‘Depreciate ‘n Export’, involves intervening in the currency-exchange rate market to artificially depreciate the currency as a means to turn exports attractive. Such depreciation could be induced by a variety of tactics: from flooding the economy with excess supply of currency (M2), sustained selling of domestic currency to buy dollars in the currency market, to reducing the CRR. The ensuing boost to exports (which supposedly contributes to GDP growth) is tempered by the hike in inflation and the compensating rise in bond yields. Thankfully, the Payout Fraction has anticipated the flagrant exploitation of such a strategy in the bond-inflation summation construct, and the same is sufficient to internalize this perversity too.

Much like the Budget deficit is exacerbated by populist subsidies, the Current account deficit too is a reflection of exchange rate and terms of trade and, thus, is affected by trade policies. The Current account deficit is determined by the efficacy and the sustainability of exchange rate interventions. A Government that maliciously adopts a deficit-raising growth strategy must be held accountable to its voters. The ECF-PF route is a tentative means to obtain such control. A ratio of GDP growth to the sum of Budget deficit and Current account deficit reveals the effectiveness of both the subsidy economy and trade policy; it is a direct variable in the Payout formula. This ratio assumes values greater than 1 when the percent rise in the sum of deficits is outdistanced by the percent rise in GDP, and less than 1 vice versa.

Finally, the tendency to either reduce Corporate/Capital gains tax rate or personal income tax rates to assuage the business community or middle class voters can be anticipated with a construct that is simply the ratio of the sum of marginal Corporate, Capital and Persona Income tax rates to the yield on Long bonds. The rationale is that a reduction in tax revenues must be compensated for with the issue of more long bonds (short bonds would come to roost within one’s own term); in turn, raising long bonds incrementally causes its yield to increase. This construct trends in opposite direction to the short-run incentives of the Ruling party and serves to brake those unsustainable ambitions.

Combining the above ‘arguments’ of the EPP function, the Payout Fraction takes the form:

PF = k. Z. EPP{ [ (y_bl-y_bs)+i_p] , [GDP^/(d_b+d_ca)^], [GDP^- P_cp^] , [(t_c+t_cg+t_pi)/y_bl] }

where

^: percent growth rate of the relevant variable

Z = A(t/60) - Opposition; A(1-t/60) - Ruling party

i_p: (Price) Inflation

y_bl: Long Bond Yield

y_bs: Short Bond Yield

d_b: Budget Deficit

d_ca: Current Account Deficit

t_c: Corporate Tax

t_cg: Capital Gains Tax

t_pi: Personal Income Tax

P_cp: Price of Carbon Permit

Together, these variables measure the net impact of biased, politically motivated, or economically indefensible interventions in domestic, trade, taxation, currency, and goods markets. The Payout Fraction, tentatively proposed above, when computed and combined with the aggregate ECF pot for the nation (as determined by contributions from various SWFs operating in the nation’s capital markets) determines the flow of election funds to the Ruling and opposition parties. Thus designed, the Payout Fraction offers the right incentives to political parties no matter on which side of the government they sit on. It achieves the goal of ‘equitably’ distributing the ‘Bakey-Largesse-Sting’ from the SWFs among political parties who determine the economic course of the nation.

The upfront knowledge of the Payout Function, and the fact that any lapse in policy making enriches the opponent, ensures political parties anticipate their gains and losses under alternative strategies, re-consider incentives before and after the elections, and internalize the same in their policy promulgations. Finally, the advantage that the Ruling party has in terms of determining the size of its own Payoff (and that too, immediately) due promulgating policy at the start of the term is counter-balanced by the design of the Payoff function which enriches the Opposition toward the end of the term when SWFs are likely particularly active and when public opinion turns absolutely critical to survival.

The proposal above is, in the context of the globalized society we live in and the realities of the day, a practical solution to the issue of Electoral and Party financing. It obtains a degree of control on the perverse incentives facing political parties in elections by offering them a publicly credible and legal source of funds for campaigning, and guides the nation toward an equitable and an efficient economy by inducing prudent and enlightened policy making.

Besides, it leaves something citizens relish on their dinner plates…

…. A Corruption Bakey!

St. Patrick's Day? Nah !

St. Patrick's Day? Nah !

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar

'Life ain't easy for a sociologist' thought Patrick. How does a problem that is entirely the onus of inefficient producers and profligate consumers in a third-world country turn a 'problem child' of a Sociologist in a developed, even environmentally exalted nation? Surely, we did not create solid waste....and spread it around....or hire children, barely toddlers, in to lifelong slavery? If we weren't consulted in the matter to start with, why would it be dumped upon us for resolution.....and that too in the evanescent 2 weeks of summer in the upper reaches of Quebec? Jeez, even Guantanamo criminals enjoyed more summer! But summer work is summer work, particularly when his sponsor, now visiting India with this family, had paid for 3 summer courses that he was cramming in to his resume to graduate by August and move to latitudes closer (but not too close) to those whom he envied.

Glad he had taken a course in Economics the past summer, Patrick scoped out the issue so he could focus on the what the right questions were before venturing to find a solution. That solid waste was an externality was well known. Firms, even households who did not pay directly and immediately for the solid waste they generated, and certainly not by the pound, generated too much of it, and spread it to every nook and corner of their land. The near free availability of recyclable material in garbage induced ragpickers, a significant fraction of whom were (involuntary) child laborers, to make it their profession, thus institutionalizing a social problem inside of an environmental externality. Child labor in the solid waste industry was temporary, low paid, and one of the extremely hazardous occupations that irreversibly damaged their physical development. The distributed nature of recyclables across the landscape and its concentration in landfills, as well as the geographical limitations and restrictions imposed upon ragpickers who could only traverse and cover a limited 'trail' on any day, perversely ensured the participation of a larger number of ragpickers, particularly children. The frequent regeneration of waste and the absence of information on 'last search' resulted in repeated collection sorties by child laborers, which were wasteful, and simultaneously, unhealthy. Firms that processed waste were small-scale, largely in the un-organized sector, and cared not for ragpickers, much less their health and safety. The recycling of (waste) materials engendered incremental pollution of the environment, both on account concentration of contaminants in the waste stream, and due the use of energy in recycling and refining. Together, these aspects pointed to a dismal state of affairs in the solid waste industry, especially in third world countries that lacked resources to protect their children, regulations to anticipate and control the menace, and the political will to enforce them.

It was the incentives and dynamics of the recycling sector that unsettled Patrick some. During periods of economic growth, both the environment and child laborers, unlike the rest of the society, suffered unmitigated, even unnoticed excesses, infractions and damages that arose from the increase in economic activity. Similarly, a short-sighted drive to increase recycled content in products, or a higher price for raw materials - a boon to primary producers -(or, even an advance in recycling technology that turned lower quality waste economically recyclable) was detrimental to child laborers who were 'incentivized' to collect more from the waste even if at a cost to their health. The tragedy compounded if parents worked in the same line of business, for they often collected wages, formally or otherwise, for their children. Further, the temporary, part-time, now-on now-off nature of employment distracted child-ragpickers from other pursuits, particularly education and cultural development. Indeed, Patrick revolted from his own survey of the issue. What unholy system had brought about this hell upon the most vulnerable in developing societies? He feared it was an inferior hybrid of, on one hand, the Western brand of unbridled capitalism and the unintended and certainly the unanticipated impacts of technology and, on the other, 'Socialist laissez faire' that had exploited the third world's unorganized labor in the cover of pursuing a low-cost economy, or worse, a green cause. And it took no messiah to foresee that as consumerism spread across the rest of the per-capita, subsidy-ridden, corrupt third world economies, the conjoint problem of solid waste and child labor would only exacerbate. Indeed, Patrick wondered what nasty policies would be necessary to solve this knotty problem that straddled engineering, economics, finance, and sociology? A born realist, Patrick quickly surmised rules and regulations that either mandated recycled content in the manufacture of products, or prohibited child labor would be observed more in the exception. Clearly, a socio-environmental crisis loomed in the future, a crisis that begged for attention and was ripe for a novel solution.

Patrick set himself to task to address the conundrum. True, he was no production engineer, industrial economist or environmental specialist, but he had heard enough of 'Closed Cycle' to understand its significance for the problem at hand. A Closed cycle economy, structured around closing the flow of materials, ensured the intermediates, products and waste stream from one process, were separated, recycled and reconstituted/refined in to inputs and intermediates/fuel for other processes in the economy. Closed cycle held special reference for resolving child labor due its immediate influence upon the volume of solid (and liquid) waste generated. But how would one induce it? Taxes, yes. Theoretically, taxing waste streams by their volume or mass could induce producers to seek incrementally environmentally-friendly production technologies but they had been tried and were either economically or politically unpalatable. Was it the ice-tea, or a brain wave from his turbaned professor, that Patrick nudged, Sociology or otherwise, to seek a solution in the realm of finance and economics. It dawned upon him that the solution to the inter-twined problem of child labor and solid waste would require multiple pots of money that could be applied, as Economists would, to induce critical outcomes in both spheres along the way to a sustainable resolution to both problems. To this end, Patrick conceived of a Closed Cycle Fund and a Child Labor Fund .... and perked up! 2 funds could be a lotta ... moooolah! Hmmm...Perhaps the sun outside was a tad too bright? Heh? Might as well focus on the task and charge the Professor for time indoors!

With that treacherous thought, Patrick began to put together a 'structure' around the funds and their operations. He began by assigning objectives to the funds. The Child Labor Fund, CLF, instituted and monitored by an NGO, exclusively targeted the social problem of child labor. Its operations involved funding child laborers out of 'solid waste slavery' and, contingent on availability of resources, sponsoring their education until adulthood. The Closed Cycle Fund aimed to enhance material and energy efficiency so the industry would turn incrementally efficient and environmentally sustainable. And in a move barely short of genius, Patrick decided he would volunteer a fund for abating Global Warming. And why not? If Closed Cycle funded research and investment in new technology that reduced waste streams, surely there would be repercussions upon the industry and its GHG emissions as well.

Next and gingerly, Patrick explored possible sources for the money pots. Hadn't he heard about Judges recommending budgetary 'lines' to fulfill constitutional and human rights goals? Child labor being a long-pending issue on national and international human rights and social justice fora, was a logical and immediate choice for such a line, even if meant a co-ordinated, multi-lateral group of afflicted nations. As for Climate change, there already were several funds anticipating, abating, compensating for, why even exploiting the externality. He chose a variant that worked its way thru the capital markets by investing in equities and bonds, and cross-trading gains with carbon permits. That still left the Closed Cycle Fund luckless. Patrick looked to the Right, then to the Left, and was no better for it. Apparently, not many cared for a fund that would shrink today's inefficient economy and put out of work many living off that inefficiency. If adding Climate change to the 'Solid waste - Child Labor' equation was genius, Patrick needed outstanding brilliance to fill the Closed Cycle Money pot. He was aware though, of an organization, much like the ACEEE, that matched donations to its cause. In fact, the International Society for Material and Energy Efficiency, ISMEE, matched dollar for dollar contributions meant to further the material and energy efficiency of the economy. But where would he find the dollar - the 'seed money' - to double in to the Closed Cycle Fund? What if, ....but what if he put together the seed money from the 'Opposite Complement' slices (the fraction of the pie split, if unequally, with the opposite, or the 'other' side) of the GWF 'global pie' and the country-specific EPN 'pizzas' - an Environmental P-note being a financial instrument that a foreign government and its industry had together bestowed, if in lien, upon its trading partner nation toward compensation for environmental and allied damages....and then had the ISMEE match it? Wouldn't that create a money pot that expanded with the lassitude in the GWF and any lack of intent in the EPN Administrator? In other words, the more the GWF blinked, and the more the EPN Administrator winked, the larger would be the CCF seed money and the CCF pot twice as big - and justifiably! With much the same logic, the more autarkic a nation, the smaller was the EPN and the CCF money pot. And to complete the circle, pardon the pun, he 'permitted' the GWF, within each nation, to share the bakey, an equity slice, with small scale industries within the nation and 'balanced' it by assigning the EPN Bakey to the CLF. Thus designed, the (unlisted) small scale industries grew with the environmental lapses of large companies; besides in transferring the EPN-bakey to the CLF, the EPN Administrator was favored a second chance to redeem his failures in discharging solid waste obligations. So pleased was Patrick with his 'fund-raising campaign' that he almost, almost raised a toast to himself!

Finally, Patrick the methodical, set himself to design a 'schema' that strategized the operations of these funds within and without the capital markets, so they would achieve the goals of simultaneously addressing child labor, environmental sustainability, and the elusive closed cycle economy. Now, Patrick imagined that the Closed Cycle fund, despite professing to enhance the material efficiency, had sufficient self-interest in the industry to not obstruct it in its growth phase. However, in keeping with its objectives, the Fund signalled the environmental unsustainability of the industry during the growth phase by stoking and exploiting volatility in the Equity section. In this phase, the Closed Cycle Fund, CCF, exploited volatility gains and promoted the internalization of solid and liquid pollution externalities by supporting firms engaged in the environmental remediation in the equity section of the market. As the growth phase neared its peak, the Fund moved away to Bonds while issuing a 'Closed Cycle Bakey' to the extent the cause was ignored and the pot wasted. That bakey supported 'secondary producers' of recycled materials who would be under pressure as growth gave way to contraction. Since Closed cycle enhancements such as process re-design, re-tooling, even re-siting of production facilities obstructed production and imposed a substantial adjustment cost, including the opportunity cost of production lines being off-line, the CCF typically limited such funding to recessionary periods.The CLF, beyond supporting the (soft-landing of) the more materially-efficient firms and sponsored the re-training of 'child labor retirees' during the recession. Patrick, the Strategic thinker, also held back some bakey from the Bull phase to fund 'equity cheer' in the Bear phase by lending a helping hand in the elimination of child-labor, a social phenomenon whose very existence implied the failure of the fund.

The Child Labor Fund, CLF, appreciating the hand of co-operation, pooled resources with the CCF in recessions to sponsor a bid-based auction in which child laborers of various ages were given the opportunity to bid for a lottery-lumpsum (various amounts adding up to the sum total available for this sub-cause) that would be offered to them in multiple draws along with a 'release' from child slavery. Child laborers of various ages, in various locations with different wages and 'earning potential' would bid themselves for the lumpsum. Typically, the Fund would seek to release the youngest of the lot for any arbitrary lumpsum lottery. The child laborer bidders, to the contrary, would seek the highest lumpsum for any given age, or equivalently, offer the oldest child laborer for any given lumpsum. Thus, the auction would achieve a 'half-way age compromise' in the choice of candidates released that excluded those at the extremes of the age profile of child laborers. In boom time, however, the CLF would offer a 'cumulative weighted' scholarship lottery. 'Released' child laborers, now endowed with the annuity from the 'release lumpsum', would bid in successive rounds of scholarship lottery with cumulative disappointment points from previous rounds, thus enhancing their chances of securing the scholarship in future rounds. Between the 'release lumpsums' in recessions, and 'scholarship lumpsums' in boom time, the CLF with  help from the CCF, secured the release of 'indentured' child labor and, after a delay, even their scholastic rehabilitation. (Patrick presumed the NGO would have anticipated the enlistment/identification as well as annuity and scholarship-related bank formalities before, during and after the auctions).

As Patrick conceived it, the Global Warming (Climate Change) Fund, GWF operated in a 'zero-sum returns', gross of inflation and currency valuations, across booms and busts (and across Equity, Carbon Permits, and Bonds). In boom time, it exploited the surge in equity valuations to exit with gains. Simultaneously, the Fund sold carbon permits in the Permits market to induce volatility, thus signalling the environmental unsustainability of the economic growth. It  used a fine balance between banking gains from the sale of Carbon Permits following price surges and 'using' them on behalf, and to support (unlisted) small-scale industries that ensured competition and aided in the controlling inflation. Ahead of recession, the fund strategically distanced itself from the industry, and moved in to bonds. During the recession, the GWF bought carbon permits and equities to sponsor Green-IPOs - IPOs of firms that surpassed the highest energy efficiency benchmark in the industry, and simultaneously  force the (involuntary) de-listing of waste-intensive, polluting firms. In this context, the CLF perceived an opportunity to co-sponsor with the GWF those IPOs that involved the introduction of superior closed-cycle/recycling technology, to jointly achieve mutually compatible goals.

These financial moves by the three funds brought about, as Patrick anticipated, various incentives upon the different stakeholders in his schema. Foremost, the reduction in the number of child laborers was a welcome outcome for the NGO albeit it excluded those at the extremes of the child laborers age profile. Perversely, the reduction in the number of child laborers in the pool would tend to increase 'wages' and therefore reduce the value of 'marginally recyclable products' which would turn 'non-recycled garbage'. Parents, who until then /previously explicitly or implicitly permitted child labor in their family, would be enthused by the regular income that the CLF annuity provided, and the prospect of a scholarship, and buy in to the scheme enthusiastically. On the Social front, the implementation of the periodic 'child-labor release' auction and the 'child scholarship lottery' along with retraining, would infuse a sense of hope and excitement among the most oppressed among third world societies. Why, Patrick believed he had even provided for a novel way to weigh equity and efficiency by having child labor release auctions compete with funds for process improvements. Elsewhere, the distribution of a 'bakey' in the CCF was perversely incentive enough for firms to turn efficient and take advantage of the 'efficiency pot'. Although the CCF recompensed the society for solid waste damages, that 'freebie' would be balanced against the possibility of involuntary de-listing from the stock market should firms turn waste-intensive. The prospect of a 'soft landing' in recessionary periods when the reversal of growth pulled the floor from under the stock price, was further incentive for investors to force management to adopt CC technologies. The voluntary listing and involuntary de-listing would serve to remind managers to improve upon their material-efficiency and reduce waste discharges. The GWF (in partnership with the CCF), between inducing volatility and supporting the SSIs environmentally ensured that the industry moved in the general direction of full cost internalization and environmental sustainability.

Patrick was astounded at how 'well-behaved' his idea was turning out to be. The three funds worked simultaneously to achieve a goal higher than their individual purposes. Beyond abating child labor, climate change and solid waste pollution, the system monitored and exploited any laxity due 'Agency problem' in the NGOs and Fund administrations. It anticipated and benefited from excessive profiteering in equities and carbon permit markets that might result due the pursuit of Keynesian stimulus programs, and even had an in-built incentive to ensure minimal inflation and true currency exchange rates. And all this without interfering with prices via taxes or subsidies (and exploiting each other's strengths). Patrick was no 'efficiency afficianado', but his 3-in-1 achieved multiple goals exploiting their scope economies in Capital markets.

Not a bad way at all to wrap up his summer work .... and look forward to Graduation in the Fall!