Senate passes the stimulus bill !!

Updating my blog within minutes of the Stimulus bill being passed in the senate!!

"Not a moment to Spare"

The stimulus package passed in house. Senate next. In Obama's words, "Not a moment to Spare"

Economic Stimulus (Part 1)

We all know what happens as we move on from autumn to winter season. The deciduous trees shed leaves primarily because the high costs involved in their maintenance would outweigh the benefits from photosynthesis during the winter period of low light availability and cold temperatures. And in spring the we see growth, renewal and new life. But can we stimulate spring during winter and expect similar results in terms of growth? I am not an expert in that field but a similar attempt is being made (and has been made in the past too), to stimulate growth back into the economies world wide.

The argument is made that people are suffering from a decline in income, and thus the government should give them money so they can buy more and put others back to work. Sounds good - but where does the government get the money? It must either tax someone else now or borrow more money, which diverts productive saving to current consumption. Either way, it is less than a zero-sum game.

Blogging

The last post was dated Jan 11th. The date on this blog is Jan 12th. Only difference is that the two posts are about a year apart. What kept me away from blogging this long? I am sure there is an economic reason behind it, Or to put it in other words, the reason can be explained in terms of economics. Watch out for details.

Free Market and TATA NANO

Its finally here. The (mental ?) barrier is broken. A car at an astonishingly low price. And we are not talking about a cart with 4 wheels and an engine, Nano is a car in most conventional sense. But it is facing some serious criticism.

• Nano will create congestion on Indian roads
• Pollution levels are going to hit all time high
• Low safety (International) standards

Some blunt assumptions have been made to arrive at the above points. First of all, the critiques believe that Nano is going to be so popular due to its low price that every Tanu, Dinesh and Hari will buy this car. I would say - let the market decide. I am sure the competition is also gearing up to produce low price cars, and India being a free market (sort of), car manufacturers are free to produce cars which they think the consumers are willing to buy. At the same time, the consumers are free to buy whatever car they can afford. Indian economy is booming, the people are getting richer. People will upgrade their standards of living. A family with small car will upgrade to a mid size car. What do the critiques have to say about that?

Second point is that road congestion is not a problem of a car manufacturer. Its the responsibility of the govt to provide better infrastructure. In the absence of mass transit systems, people are forced to arrange for their commute. Also Ratan Tata, the Chairman of TATA group has made a press statement that the TATA's do not have the resources to create the kind of congestion the critiques are taking about. The economic principles are evident here too. The raw materials - steel, plastic, rubber etc - required for a car are limited in terms of the availability. The alternate uses of these materials will determine the net availability of these to the car manufactures.

Lets say that the increased number of Nanos on roads does create a traffic problem. In such a case following outcomes are possible. The govt would be further pressurized to a) create more roads b) build mass transit systems c) develop suburbs. But these things do not happen overnight. What could gradually happen is that the demand for cars such as Nonos would fall. People could follow the western methods like car-pooling.

To conclude, whatever the situation might turn out to be, as long as the govt "does not" intervene to control the car manufacturing, the invisible hand of the free market will lead us to a solution.

Beer Story

The "Demand and Supply" Story of Beer and its ingredient - Barley.

A disaster has occurred in Germany: The staple drink—beer—is rising in price. The reason is that there is a worldwide shortage of barley, a major ingredient in the brew. This has pushed up the price of barley, and shifted the supply curve of beer to the left. I would think that the shortage is temporary—with higher prices of barley, more farmers will plant the crop. That should alleviate the shortage, bring the price of this input back down, and after a year or two lead beer prices back more or less to their current levels. Not much consolation for those wishing to quaff the brew of the holidays, but their pain is probably going to be short-lived (and, if they drink enough, they won’t remember it anyway!).

Link to this article on Freakonomics, and the many more from the Economics Thought of the day.

Now consider these scenarios
What if due to higher prices, the consumer shifts to cheaper drinks - perhaps carbonated drinks, or decides to reduce the consumption of beer. Thus reducing the demand for beer.

1) The farmers on the other hand continue to grow similar quantity of barley shifting the supply curve and bringing down the price of beer

2) Due to reduced demand for Beer, the cost of barley reduces. Thus alternate uses of barley (bread?) become available for a lower price

Left Turn Economics

UPS saved three million gallons of gas and reduced 28.5 million miles off its delivery routes. How? By reducing the number of left-hand turns. Read on

Some questions now.

1) How can we implement such a thing in India? Does the complementary rule - Reduce right-hand turns - help?
2) Can we derive an optimal number for the small vans (shorter trips) big vans (longer trips, complex turn schedules? ) combination.
3) Incorporate drop off schedule based on local traffic patterns?