Krugman on India

You’ve read by now that prominent economist, NYT columnist, and fierce Bush administration critic Paul Krugman was recently awarded the 2008 Nobel Prize for Economics (possibly to the detriment of Jagdish Bhagwati & Avinash Dixit)

Mr. Krugman received the award for his work on international trade and economic geography. In particular, the prize committee lauded his work for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.”

He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman

Although most of Krugman’s groundbreaking work was in trade theory, and despite the Rise of India being one of the biggest trade stories of the last decade, I wasn’t able to dig up too many comments from him about the Desh. The exceptions, however, are pretty interesting…

This interview with the Business Standard isn’t dated but the context sounds like it comes from late 90s / early 2000s right after the “Asian Financial Crisis” -

Business Standard: Assuming you were at the helm of India’s finances at this point, what would you be doing to steer the economy?

Paul Krugman: Well, I’d probably be advocating pressing ahead with reform… imports need to be liberalised. India should stop talking of disinvestment and start talking privatisation. They should deregulate as many remaining areas as possible. You see, India has had incomplete reform so far.

It’s much more than what was there earlier, by far, but that’s still only half way there. I would go for a strengthening of the banking system. Close the weak banks and impose serious capital requirements on the strong ones. Leave currency convertibility where it is. It’s an extremely dangerous world out there. The risks of getting caught in the pinball game are too high. But what I’m not clear on is the Budget and the macro position. I don’t know enough about these to make any specific comment.

You made the point about closing down weak banks. But in India, the social costs of this move could be disastrous…

You see, it may sound hard-hearted, but you cannot keep unsound financial institutions operating simply because they provide jobs. There can be a huge amount of damage a bad bank can create. There is a cruelty to our market system, but that cruelty cannot be eliminated. The alternative is fraught with danger, that of carrying on with the weak banks.

How do you think India has fared against the background of the Asian turmoil. Why, if at all, is the situation here not that bad?

India has avoided the worst. The answer is partly in the fact that the restrictions discouraged both inflows and outflows of short-term capital. The answer can also be attributed to the fact that India did not become flavour of the month too soon, or too long ahead of the crisis and was a relatively late entrant. For instance, among the troubled Asian economies, the ones which have been saved are the late entrants like the Phillippines.

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p>Krugman gently points out the dark cloud on the silver lining of India escaping the East Asian turmoil… Namely, much of India’s insulation could simply be attributed to the fact that the amount of accessible capital per individual in India was pretty low to begin with - particularly in the 1990s. By contrast, the argument goes, the other South East Asian economies had more capital flowing in than ability to productively absorb it (thus introducing local asset bubble distortions as it flowed in and later flowed out… sound familiar? ) With India, by contrast, most folks argue that the real problem is the reverse (and who knows, perhaps microfinance could plug some of the gap)

Personally, although I disagree with many of Krugman’s political pieces (and alas, practically since W took office, a substantial chunk of Krugman’s writing has been predictably & fiercely partisan), I do actually agree with a lot of his underlying economics writ large. I forget who said it, but it’s been pointed out that while the differences between economists gets a lot of airplay, the surprising amount of material where economists of most stripes agree rarely gets the same attention. And many of these have a rather direct bearing on both domestic policy within and US policy towards India –

There are lots of good reasons to be annoyed with Paul Krugman. (Like here, here, and here). But as a cock-eyed optimist, I’m very happy to have him around. Think about it: The world’s most famous left-wing economist:

1. Blames European unemployment on labor market regulations that hold wages above the market-clearing level. (The Accidental Theorist, Part 1)

2. Publicly and articulately advocates free trade without hemming or hawing. (Pop Internationalism)

3. Identifies anti-globalization activists as the enemies of the world’s poor. (The Accidental Theorist, Part 3)

4. Titles an essay “In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All” (The Accidental Theorist, Part 3)

5. Points out that if you oppose Big Government, you should favor cutting Social Security, Medicare, and other popular programs. (“The Lost Fig Leaf”) Sure, he’s hoping to scare us away from libertarian rhetoric, but there’s no use running away from the truth.

With election season being what it is, I doubt you’ll see any of these points surfacing on his fav candidate’s website but it’s nice to know Krugman does ultimately advocate them.

39 thoughts on “Krugman on India

  1. Thanks for the walk-through of Krugman’s work in his field, though there’s something rather disturbing about reading economic commentary peppered with emoticons and winks.

  2. practically since W took office, a substantial chunk of Krugman’s writing has been predictably & fiercely partisan

    To be a critic of Bush’s economic policies does not qualify as fiercely partisan. Overwhelming, mainstream economists have been critical of Bush. The only apologists being the Trotsky Right.

  3. From 8 years ago:

    The Economist magazine recently polled 91 academic economists who specialize in public policy. 60% of them responded and were asked to grade the presidential candidates’ economic plans as if they were student term papers. The economists gave both presidential candidates mediocre scores. On average, Al Gore scraped by with a B minus while George W. Bush only managed a straight C. While Gore clearly did better, neither achieved a grade worth bragging about. Both candidates received an A grade from fewer than 10% of the economists. Far more professors gave the would-be presidents’ economic plans failing grades. [Link]

    If Bush’s economic platform got a C from most economists, and that was before he took office, then Krugman’s attacks might better be understood as expressions of the consensus opinion.

    Here’s the opinion of another Nobel Prize winner in Economics:

    Stiglitz seems to claim that Bush will go down with a lower reputation, in economic terms, than Herbert Hoover. [Link]

    Lastly, here’s the retrospective assessment by Libertarian economist Alex Tabarrok:

    Have libertarians gained on other margins in the past eight years? Not at all. Under the Republicans we have been sailing due South-West on the Nolan Chart – fewer civil liberties and more government, including the largest new government program in a generation, the Medicare prescription drug plan, and the biggest nationalization since the Great Depression. Tax cuts, the summum bonum of Republican economic policy, are a sham. The only way to cut taxes is to cut spending and that has not happened. [Link]

    Is Tabarrok also “predictably & fiercely partisan”? He’s certainly from a different sector of the political spectrum than Krugman. Perhaps these assessments are simply very widely shared.

  4. people don’t remember that before 2000 krugman was kind of perceive by many on the left as a major “friendly fire” offender; he’d have good stuff to say about m. friedman but constantly diss economic thinkers like bob reich. but as they say, krugman is still a moderate liberal as he always was. the landscape has just shifted.

  5. If running away from Bush and the current republican party, and embracing the democratic agenda is fiercely partisan, there’s some few republicans who sure are fiercely partisan this year.

    As for Vinod’s post, at least he doesn’t talk out both sides of his mouth like Greg Mankiw who congratulated Paul Krugman in his post, and promptly linked to Dan Klein’s rant about Krugman “if you want to learn more about Paul Krugman”, which while cladding itself in academic sounding third personhood and disclaiming party loyalty, is clearly riled up about Krugman’s powerful anti-republican posts, and comes up with such gems as:

    The commitment to a social-democratic ethos as against poor people’s interests is by no means specific to Krugman. He typifies something much wider, the establishment sort of social-democratic mentality as manifested in the United States.
  6. I can see no reason why the following can’t be something said by Barack Obama’s campaign. You are biting off more than you can chew here.

    5. Points out that if you oppose Big Government, you should favor cutting Social Security, Medicare, and other popular programs. (The Lost Fig Leaf) Sure, he’s hoping to scare us away from libertarian rhetoric, but there’s no use running away from the truth.

    It is also quite interesting that Krugman derided Robert Reich once as a policy entrepreneur. He can be quite pugnacious indeed.

  7. I forget who said it, but it’s been pointed out that while the differences between economists gets a lot of airplay, the surprising amount of material where economists of most stripes

    Yes, stripes like somewhat dark grey, medium dark grey, slightly darker dark grey…Cmon dude. He is an American neoclassical. Of course he agrees with other neoclassicals. If you want to see difference, look at Wallerstein or Mushtaq Khan or any number of other economists who are now able to get a slightly fairer hearing because the Washington Consensus is dying/over. And yet, still not fair.

    but as they say, krugman is still a moderate liberal as he always was. the landscape has just shifted.

    exactly, razib. though i would add “moderate liberal in an American context.”

  8. 3. Identifies anti-globalization activists as the enemies of the world’s poor. (The Accidental Theorist, Part 3)

    I remember reading this simple piece back in the day, mentions Bangladesh.

  9. 10 · Manju said

    The world’s most famous left-wing economist

    To be fair, Bryan Caplan did not say “living”. Besides, calling Krugman left-wing is a massive stretch.

  10. A couple of India related issues that Krugman has weighed upon: 1. Nuke deal — he wrote a column against it. 2. India’s policy against full convertibility — Krugman (unlike, say, the economist ) supported RBI’s policy here.

    (too late to dig up the articles, but should’nt be too hard)

  11. Krugman’s takedown of Bush has been loud, but it has not been shrill:

    The right has been running a vicious campaign of slander, and most commentators, in response have given descredited right wing ideas a degee of respect that they do not deserve. Consequently unvarnished straight talk comes across as partisan in comparision, especially since Krugman has gone after the equivocators who attacked him with a vengence. The Krugman Truth squad and Orkent’s attacks on Krugman have not stood up well to scrutiny, or to the test of time

    Also, as pointed out earlier, the US has been moving right for a while now, so previously centric ideas are now considered to be left wing. To be fair, Krugman has moved left, when it comes to globalization, and has a more sympathetic view of those left behind, than he did at the time of Seattle.

  12. 14 · DizzyDesi said

    To be fair, Krugman has moved left, when it comes to globalization, and has a more sympathetic view of those left behind

    In fact, he has admitted to that himself observing that the extent of income inequality, and the degree of wealth concentration in the underdeveloped countries as a result of free trade was far more than he had expected (if I recall correctly, he cited the example of Mexico).

  13. I think it’s limited to characterize Krugman’s op-ed pieces as partisan — absolutely there are whole years of shrill “what on earth is going wrong! are you people crazy???” articles, but overall Krugman’s disagreement with Bush comes down to far-right (relative the 12 pre-Bush II years) politics and policies.

    At any rate, I always feel like I’m missing something when he does interviews that include commentary on India. There’s a more substantial or developed rationale, but we don’t often get to crack it open unless you tease out his prior theories and then try to apply them back.

  14. sorry to go off topic but aravind adiga has just won the booker prize in england for his first novel called the white tiger. the booker is like your pulitzer.

  15. 10 · Manju said

    8 · Dr Amonymous said
    Marx?
    dead. check the dustbin for remains

    Hey, thanks for misconstruing my point again! You’re always so useful for that! And then they wonder how threads get jacked. ;)

  16. Maybe Krugman should have been posted in Bernanke’s position. Don’t know. (Krugman probably wasn’t impressed with Dubya’s stimulus package, among other issues. Certainly it didn’t too much for the US economy. Only Laura Bush got stimulated.)

  17. 23 · gm said

    Maybe Krugman should have been posted in Bernanke’s position.

    Actually, Bernanke is probably one of the best people around to handle the situation, given that his area of research has been the great depression. He has great credibility among economists of all stripes, and I believe most of them have been impressed by how he has handled it. Word has it that he pushed hard for investment in banks only to be rebuffed by Paulson (and who knows, maybe they didn’t have much of a choice from a political vantage point), the only question is why Paulson dithered for so long and wasted two weeks with a bad approach. Hopefully, the change of mind hasn’t come too late.

    (According to Brad Delong, of the many economic hypotheses made for the great depression, his theory based on credit markets locking up is the only one that is still left standing after the events of the current crisis (as compared to Friedman’s theory of money supply, or DeLong-Summers’ theory of deflation)).

  18. (According to Brad Delong, of the many economic hypotheses made for the great depression, his theory based on credit markets locking up…

    By his, I mean Bernanke’s.

  19. Congratulations to Paul Krugman for winning the Nobel Prize! Always liked his op-ed pieces in NYT. Loved it when he smacked down Bill O’Reilly on TV. Bill’O, eat your heart out!

  20. 26 · Kev said

    Congratulations to Paul Krugman for winning the Nobel Prize! Always liked his op-ed pieces in NYT. Loved it when he smacked down Bill O’Reilly on TV. Bill’O, eat your heart out!

    …not so fast…Bill’O is anti-intellectual. He will trumpet his ignorance about the Nobel.

  21. And why should Krugman’s pieces not be partisan, especially when faced with a partisan administration that driving this whole nation into the ground on the basis of partisan economic theories? I applaud an economist who takes a stand and comments on current affairs in a way we can all understand.

  22. The only reason Krugman won the award, which should have gone to Bhagwati, was because of Krugman’s politics. Shame on the Nobel committee.

  23. 29 · H Barca said

    The only reason Krugman won the award, which should have gone to Bhagwati, was because of Krugman’s politics. Shame on the Nobel committee.

    I guess you just heard about the Nobel Prizes a week ago or so.

    Nobel prizes are given for Academic research. In Krugman’s case, it could have been rewarded for a number of things he writes about (his theories on macroeconomics, etc.) In this case, he was awarded for his research on international trade, or what he calls intra-industry trade. It says so at the top of this page, see for yourself. Anyone who says it’s because of his politics is being willfully absurd, extremely ignorant or both.

    And as for economics having public views on recent politics, guess what? Most of the best known economists regularly engage in political debate. In fact, economic theory IS political. That’s nothing new, except maybe to you.

  24. 3 · Ennis said -

    If Bush’s economic platform got a C from most economists, and that was before he took office, then Krugman’s attacks might better be understood as expressions of the consensus opinion.
    Here’s the opinion of another Nobel Prize winner in Economics [Stiglitz]…
    Lastly, here’s the retrospective assessment by Libertarian economist Alex Tabarrok…
    Is Tabarrok also “predictably & fiercely partisan”? He’s certainly from a different sector of the political spectrum than Krugman. Perhaps these assessments are simply very widely shared.

    Ennis, the issue isn’t whether economists like / dislike the Bush program. It’s clear that a sizable % don’t although it’s probably hyperbole to call it the worst administration since Hoover…. Nixon’s wage/price controls & Carter easily come to mind as actively doing more damage… then again, Stiglitz and Krugman are often quite aligned.

    The real issue is whether Krugman, in his zeal, sometimes let academic rigor slip in order to take shots at Bush. For ex., here’s Tabarrok himself pointing out a case where this is perhaps true.

  25. CC – If you believe that the Nobel commitee does not indulge in politics when awarding the prize, then I have a bridge to sell you. Ever wonder why Gandhi wasn’t awarded the Nobel for Peace? OR, Why Naipaul receeived the Nobel right after 9/11?

  26. Krugman worked on the concept of economies of scale. His theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. No developing country with large-scale mobility in short-term capital is immune to these crises. India, fortunately, did not make the same mistakes. Had the crisis come, there would have been economic devastation, and the crisis would have fed on itself,” according to Krugman.

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  27. 31 · vinod said

    The real issue is whether Krugman, in his zeal, sometimes let academic rigor slip in order to take shots at Bush. For ex., here’s Tabarrok himself pointing out a case where this is perhaps true.

    Well, there is no issue there on the facts. The CEA projections turned out to be wrong, and wildly over-optimistic, and just happened to be wrong in the direction necessary to sell Bush’s economic policy. Tabarrok claims this was just an honest mistake, Krugman says it fits with the pattern of the Bush administration of bending policy to propaganda purposes (see Iraq, WMD, for example). Has Bush’s bunch earned the benefit of the doubt? On anything?

    More specifically, Tabarrok is claiming that the projections were merely a return to trend, and “no one could have known” it would be different this time. But as Brad DeLong points out in his response (http://www.j-bradford-delong.net/movable_type/2004_archives/000498.html) they did know it was different, and adjusted GDP growth projections accordingly, but used employment projections that were inconsistent with the adjusted GDP numbers. Now no-one can prove motivation, but there’s certainly a case there, and a track record of deceit by the Bush Administration.

  28. My Papers:-

    Theory of insulation

    Preface

    ————-.

    When globalization was a hot matter & everybody was gunning for it, mainly from developed countries & there were discussions all over on how important were GATT, WTO, Uruguay Rounds & a few persons & groups of poor & developing nations were opposing it as they thought it was a clever ploy of developed nations to exploit their markets.

    Later it was found globalization more adversely has hit the developed nations. And for the time being developing nations are benefiting (as from making & exporting cheap goods & outsourcing) as they (poor & developing nations) have enormous and endless supply of cheap labour, owing to huge poor population and ample availability of child labourers. One can’t curb it (the child labour), whatever law or regulations one can prescribe or try to enforce.

    For a sideshow (window dressing) in some factories you will not find them, but where cheap goods & mass productions are going on in smaller, scattered factories and at subsidiaries of big companies (a smart little technique to obviate the law, but very effective) and in vast unorganized sectors: industry to agriculture to sundry odd jobs, child labour is very handy & the main stay.

    Add with that huge young labour force, skilled & unskilled, but mainly unskilled but very hardy workers, mostly illiterates or half literates, but very fit for blue colour jobs, they throng in very large numbers from countryside to cities ( if you want a proof or want to see by your own eyes? visit to UP, Jharkhand, Bihar, MP provinces of India & southern, western & northern provinces of China). Poor & developing nations have ample quantity of both skilled & unskilled labourers, but mostly unskilled young labourers and an unending supply of them.

    But ultimately with the fall of economies of developed nations they also will reel down and with a more catastrophic effect, as, if these labour force undergo job losses & are driven out of work, with no assets & means to fall back upon, one should not dwell in dreams, that they will happily migrate back to the countryside, where they originally belonged and get back the sordid & low income occupations (mostly agriculture) they had left for good.

    But now China’s strategy is (also of some east Asian nations) supply cheap items (I am consciously “not” using the term cheap goods) to the poorer nations, exploit the markets of poor & developing nations, as these poor now have enough raw cash to buy cheap items & developed nations are in crisis & cheap items hardly have a good market there & exporting there is hazardous (of late China is taking measures to obviate this problem by investing for building bases in vantage & frontline countries), so better to cash on these poor nations & their people.

    This is a vast matter, it demands separate analysis, so leaving it now.

    Now, I begin on the theory.

    Law of nature

    ————————.

    “Theory of insulation” says every region, estate, geographical area; nation should have an insulated, (not isolated) existence of its own, a separate identity, a separate social culture, a separate lifestyle, a separate work culture, above all a separate financial system. It is a law of nature.

    Advocates of globalization were for openness, open doors, for free unhindered trade & flow of money. Not only that, they wanted the world to bring into one financial system(globalization) by breaking of all financial barriers, so that open & unrestricted trade could be done, and also wanted free flow of money in & out, with or without a base (an office, or an installation or a collaboration).

    The idea was advanced by rich & developed nations & their conglomerates.

    Here, I want to remind people of GATT, WTO, Uruguay rounds (search in internet, you will find what not they cried for, even to the extent of “principle of most favoured nation status for all” & also see, all circulations of that times 1994 to 2006, all carried news, views regarding the above & how dislodging of trade barriers will ensure a provertyless, prosperous world.

    Now, I break into my thesis.

    I wrote this in 2004 & sent copies to Cambridge & Illinois economics depts. by Regd posts, but they gave no heed to it, as all economists & professors at that time were too engrossed in globalization, so could not perceive its implication & overlooked the fact. Also at that time saying anything against globalization or proposing even a little contradictory view or suggesting some precautions by discerning persons (the economists) carried risks of degrading oneself.

    Insulation is a nature’s law & system.

    Everything survives because there is a natural insulation, insulation due to geography, distance, customs, habit, habitat, & immunity. For example, animals, plants survive because there is insulation between groups, colonies, species, races, but not isolation, as isolation is being alone, being cut off, but insulation is being part of the system with protected identities.

    Anything, for example, take the sun, it is the origin of life on earth and life survives as the sun is there, but we are insulated from the sun (not isolated) by distance & earth’s atmosphere, so we can live. Globalize the sun & we evaporate.

    So with animal or plant habitats, put them together they will hardly survive. But animal & plant groups are not isolated from each other, but there is insulation between the groups. All are dependent on one another for survival, all affect each other but the effect is beneficial & shapes them to be better, a healthy & protected competition, and a competition to evolve for the better.

    Darwin envisaged this law of nature & conceptualize “the theory of evolution” but did not talk about “the theory of insulation” or the necessity of insulation. But I found how must is the “insulation” by my long observation of nature, not only that, I happened to apply it to “the global financial system”. Soon it began to answer many financial puzzles the world financial system is facing now.

    Human beings

    So are human beings, be it national or cultural or any type of colonies of human beings, they are there, because there is insulation, not isolation, as isolation will cause elimination.

    Example: small colonies of Andaman’s, east pacific islands are dwindling as they are isolated.

    But, other human races are surviving as they are not isolated but insulated, there is an exchange of everything (not only trade) between them but there is a distinction, but in remote isolated islands, there is hardly any exchange so elimination is looming.

    Put all human races together, mix them, sure they will degenerate.

    From my observation of nature “theory of insulation” has come and as I applied it to “financial system” I got astonishing result.

    Financial systems

    Financial systems are also unique to every nation, every culture, every colony, every group, even every individual and a product of nature. They (the financial systems) have evolved over thousands of years. They prospered & existed as they had their own resilience. There was exchange of trade between them from primitive to modern ways but always with insulation, so they survived and are still surviving.

    Take any human civilization from mankind’s history they survived as they had their own resilience, an insulation, a protected identity, also they had trade, exchanges, interactions, may be very primitive, may be very limited. For example take Maya, Indus valley, Byzantine, Mesopotamian, Egyptian, Roman or Inca civilizations, all these great civilizations survived as long as they had insulation, protected identities, but also trade, exchanges & interactions, as soon as the balance went off (got too confined or invaded & exposed), they fell down. So with our modern financial system, we are not an exception to the rule. We are very much part of this nature’s governing law. Try to flout it, try to break it, we face the devastating consequences.

    It is a mathematical fact, that without insulation nothing can exist, also in “isolation” nothing can survive. I have named this “theory of insulation”.

    Advocates of globalization had no idea of this theory or natural concept.

    Even Joseph’s. Stiglitz who has written & analyzed so much about this subject of globalization, capitalism & finance could not comprehend it, so ended up without a conclusion.

    Then ——–. if this theory is true, then all financial systems must have some insulation for their survival, as global financial system is dependent upon one another (all financial systems, may be located at different geographical areas within a national boundary or outside), so if insulation is done away with, then one fin.sys. After the other will collapse, as in “domino effect”.
    And now we know how to remedy the “domino effect”.

    Those who say, free the markets, bring down all the barriers, so that all will prosper & a great global fin.sys. will evolve and that will take care of all, are unaware of this “theory”. They are not to be blamed for this as they could not envisage this “nature’s law”.

    Therefore, it is imperative every market (financial system) should have its own identity, an insulation, even being a part of the global financial system. Let all survive for the sake of own survival. If we break this law, the nature will teach us a lesson for this violation in a very brutal way. A small example, though lots have been written about this and many books also have been written on this, I actually mean “the U.S. financial crisis & its global fallout”. It is due to the breaking of institutional financial barriers, in short: sub prime home loans- securitizing them- issue of CDO against them- sell them (buyers hoped high returns as home price will boom, even if not CDO cant lose value)- issue credit default swaps, the CDS (insurances against defaults)- sell the CDS- then trade futures against these instruments, a dangerous amalgamation, a dangerous mixing.

    So “theory of insulation” is very vital, so far unrevealed and demands a lot of research & debate as it may explain many financial riddle of modern financial system. I welcome & invite any further debate, research and additions.

    (This is a paper, so I would not stretch it further as in a book, but I believe I have explained my idea.)

    S.K.Das. (Subhro) Araria (India)

    Notes:

    1. Theory of insulation covers all gamut of economic activities, is all pervasive, everything on earth, even beyond earth.

      1. To come to this “theory” it took 6 years of research & a long observation of nature.

    Revised, 02/06/10

    Financial System & Cost of Education ———————————————-.

    As I studied global financial crisis and tried to delve deep into it to find the causes for the crisis and also its effects I observed some financial relations unseen so far. It is what, a fall out of a situation that is going to have on social, family and individuals’ financial health. I happened to observe something which was so far ignored or overlooked or was not touched upon. My analysis took the matter to a completely unexplored area so far, “the relation between financial system & cost of education”. Even great economists by “miss” perhaps, could not catch it or may be it escaped all eyes as it remained in disguise of a social or holy cause, so was hard to perceive, but when one analyses it on hard rocks of fact, it gives in. Here may I point that Joseph.e.Stiglitz & others got shortsighted by dwelling too much on U.S. financial crisis (not their fault, situation led them to) and failed to perceive it. As I studied educational systems, educational institutions, primary to higher to vocational levels and most importantly “the cost of education” and “connection of financial system with education”, more precisely “cost of education” for two years, I came up with some absolutely new revelations & analysis. The research or the analysis was not envisaged or done by anyone before. That there could be a connection between financial system & cost of education is quite a new concept, but the deeper the analysis & the research were done, it was found, it is not only true but a fact and a mathematical & theoretical truth.

    I start the analysis at point blank range. Why even after job market is crashing, the educational institutions are doing well, why are they unaffected by the crisis? Are they above all? Above the financial system? Rationally everything is governed by the “demand supply rule” but, it appears educational system does not come under this rule, and then if it is governed by the universal rule, why cost of has not crashed or at least come down or mellowed? But, deeper research reveals that the relation is there, but that is beyond ordinary perception, perceiving this requires a unique analytical approach. Once you reach there you begin to see a lot things, can analyze the present financial & social situations & coming (future) financial system & economy and the effect it is going to have on the economy & most importantly the social damage this will ultimately do.

    Contemplating on this I struck a unique analysis. I summaries this below:-

    1. High cost of education (be it any) rs20lac or more, (for example, in Indian context & in Indian rupees):- cost of education is (on other words extortion by educational institutions) very high even in a very bad job market. And surprisingly the cost of education is so high from preliminary level to higher level to vocational level.

    All the institutions charge too high and they have so many avenues to charge, so many means to milk the students & the families. This high cost of education is completely irrational compared to the job market (the availability of jobs or in other words non availability of the same) & affordability to meet the high cost of education by families & students. As most families & students grope frantically to finance the education and end up broke (who bother about broke, bankrupt families? all scratch their heads on failed corporates. But must one know broke families are far more devastating, damaging for a nation than the broke corporates. Broke corporates cause financial crisis, job loss, share price fall, but, broke families deplete the economy of a nation & break the backbone of a country, impoverish a nation, it is a very dire consequence.

    1. Cost of education is so high but, there is no job security. Although all vocational institutes claim 100% placements, but people are actually losing jobs.

    In developed countries situation is very bad. Job market is directly related to educational institutes, (any, vocational or the other). But it (cost of education) is totally defying demand supply rule. If job market is down so the cost of education should be down, but really is not. As if educational institutions are heavenly bodies, are floating in the space, not earthly things, so what, if global financial system crashes! They will not come down (with their heavenly costs) you have to reach out to them. Cough up what you have.

    1. To meet the cost of education, savings of families are vanishing. Now the situation is so, that families plan (save) from the day child is born or even before the child is born and begin to arrange money for the child’s education.

    It causes strain on their finance, as income is always limited of a family so will resort to squeeze the spending, get ready more for future expenses & reduce present expenses. These reductions & squeezes are not enough to meet the educational costs, so they have to unlock their savings (being a banker myself, I come across so many cases). But alas! savings alone can not meet this high cost of education (like offering bunch of grass to the elephant for food) so only recourse now left is to “borrow” & please mind it, this “borrowing” is not the first borrowing of the family, but borrowing by an already indebted family, it is a borrowing by a family who already has availed of many loans, so the repercussion of this on the economy is huge.

    1. As the high cost of education is generally met by savings & debts, so families borrow huge sums for education of their children and become ultimately debt ridden and fall in debt trap. As they have already squeezed their personal expenses, so either they have to cut many more expenses or take more loans & divert debt funds (the loans taken for one purpose go to meet the other urgent obligations and the education cost), this will, naturally, create a catastrophic effect on the economy.

    2. Results of above situation lead to household financial crisis. Families take recourse to austerity, they spend less on all items & goods, so viability of the economy is adversely affected. If families start to squeeze expenses, some families even go to the limit of starving themselves on many items; one can envisage that such an economy is not a healthy economy, rather a sick economy, an economy with shrinking growth, having a negative growth variance.

    3. Less buying power of families due to this situation causes a huge effect on economy & results into a depleted economy. An economy with “less buying power of people” is an impoverished economy. It is a sign of a nation becoming poorer.

    A nation with less buying power is a poor nation, though it sounds harsh, but is an undeniable fact, an absolute truth. To counter it you (the govt) pump huge money into system, run a dangerous deficit financing, following a Keynesian policy, but you forget Keynes’ theory succeeded as there was 2nd world war & America reaped huge benefit out it. Industries, mainly arms industry worked overtime, but remember in normal circumstances if you do this you become doomed as Greece or mildly saying now as the U.S.

    1. Less spending spree (less extravagancy), please don’t mix it with less buying power, affects the economic boom.

    It is a very dangerous syndrome (mind it), because it prevents buoyancy of an economy & flourishing of an economy. An economy with such a syndrome is obviously heading for the doom. Just as a healthy body has an ample RBC count in the blood & with a lesser count one is anemic so for a vibrant economy, vibrant spending by people (not by handful ones, they neither build the economy nor shoulder the economy, only they are at the fringe, ride on the given infrastructure of the economy) is required. And if people are unable to do this then economy is bound to become anemic.

    1. Obvious results of above are slowing down of the economy. Job creation gets on a hold and ultimately results into job losses. And a financial crunch begins.

    This financial crunch leads to loan defaults, and loans defaults are in every area of the debt market, be it credit card loan, consumer loan, home loan, education loan.

    1. This results into a total financial crisis, a total economic slow down. Total economy comes under this grip. A vicious cycle, which affects all gamut of financial activities & businesses.

    2. Ultimately financial institutions are affected as loan defaults happen & off take of loans is slowed, putting financial institutions in trouble.

    This analytical approach about the relation between cost of education & financial system has not been pointed out before.

    Then, why educational institutions are still getting long queues? Because the lesser jobs are the more is the competition, so longer is the queue. As in hot summer days in African terrains animals vie for food & water & gatecrash.

    Example of this, if one knows only a few will get jobs then all will naturally strive more. This is a law of nature.

    More will try for the best institutes so one can be a cut above others. All most all educational institutions claim to be great & all the aspirants can’t make it to the elite ones so all institutes, be that of lesser reputations will get aspirants. Therefore educational institutions are not affected by the slow down immediately, but “this remaining unaffected” is for the time being only. The effect of failing economy, the job losses will catch them gradually, as they will be in the mood (rather in the mode) of sucking money but the depleted, disabled families, any more could not cough up that.

    This syndrome will gradually eat up entire society from inside.

    Now, we have seen a financial crisis but, then we are going to see a collapse of society. a depleted society, a social rot.

    S.K.Das. (Subhro) Araria (India)

    (This research took me two years. and I took three months to summarize this analysis. now i publish it and make it public.

    S.K.Das. Written 22/03/2010 Revised 07/06/2010