Sridhar Vembu’s Blog

India is occupied in one of its periodic convulsions, arising from our caste-ridden, deeply divided society. The issue is reservations [affirmative action, in American speak] for traditionally disadvantaged communities in educational institutions. The government has also made noises about reservation in private sector jobs, though that is probably going to be a subject of a future convulsion. Unlike the American situation, in India, the percentage of people involved are huge. The proper comparison is Malaysia, with its Bhumi Putra [literally “son of the soil”] policy, to discriminate in favor of a large segment of the population. Depending on whose numbers you believe, the “Other Backward Communities” that are the subject of the present convulsion constitute anywhere from 30 to 50+ percent of India’s population - a substantial number in any event.

The reservation battle in India is really about scarcity of seats in educational institutions, particularly in medicine, for specialized disciplines. No wonder it is medical students that are at the forefront of the protests sweeping cities like New Delhi. No matter how the seats are apportioned, there are a large number of otherwise perfectly qualified candidates that can’t get in. This leads to absurd situations like someone scoring 92.6% in those all important exams getting in while someone with 92.1% doesn’t. Access to higher education should not be like winning the gold medal in the olympics, but unfortunately it is in much of India.

This issue is starting to burn North India now, but it doesn’t have the same emotive impact in the South, particularly in the state of Tamil Nadu. I have outlined the reasons in my post A Not-so-Brief History of the IT Revolution in India. I believe that “MGR Solution” is the only way out. To summarize it one sentence: Combine reservations with a massive opening up of education to the private sector, so the scarcity goes away.

In Tamil Nadu, reservation quotas are much higher already that what is now proposed by the Indian goverment - nearly 70% of the seats in educational institutions are reserved in Tamil Nadu, compared to little less than 50% proposed by the Indian government. But there is a massive surplus in higher education in Tamil Nadu, due to opening up to the private sector, so really no one is denied a seat, effectively taking out the sting of the reservation policy. This has worked wonders in Tamil Nadu and has made the state the leader in IT, if you measure by the number of people who work in the IT industry in India and world-wide. The state constitutes less than 7% of Indian population, but probably contributes 25% of all IT professionals in/from India. I would trace the reason to the explosion of educational institutions in the late 1980’s, which was part of the MGR formula of compromise on the reservation issue.

Today, reservation has lost its emotive appeal in Tamil Nadu, because practically anyone who wants higher education can get it, regardless of caste. For those who can’t afford it, there are heavily subsidized government institutions, not to mention cheap loans from banks to attend private colleges.

I hope Prime Minister Manmohan Singh, a world-class economist, sees the issue for what it really is: artificial scarcity in higher education due to government control, not caste. If higher education is not opened up massively, reservation issue will divide India for a long time, poison politics and society, and make progress virtually impossible.

Check out our web-based application creation environment ZohoCreator - something I had a hand in. It was conceived over 3 years ago, and took shape slowly. At that time I wasn’t thinking about online application creation at all, really how to create a better rule engine. As I learnt more and more about rule engines, it struck me that what we are looking for is a programming environment where build time and runtime are substantially erased. After all, the purpose of rule engines is to allow flexibility at runtime, so rules that govern an application can be changed. That quest morphed into a web based application creation environment.

It is really a culmination of several years of my thinking about programming languages, databases and the like. Stay tuned for more posts on this.

Here is an excellent op-ed piece in the Wall Street Journal today In Gold We Trust by David Ranson and Penny Russell. Mainstream economists treat gold as a barbarous relic. But gold has provided crucial insurance against monetory disorder, and in times like these, with inflation rearing its ugly head, we surely need that insurance. The fact that this inflation is even a surprise to the Fed is testimony to the shocking state of mainstream economics and its progressive decoupling from reality using sophisticated mathematics.

Economists of the Austrian School have been warning of exactly this outcome ever since the Greenspan-Bernanke Federal Reserve decided to print its way out of the recession caused by the last stock market bubble. That policy led to an even more dangerous real estate bubble, and skyrocketing commodities. As the Austrian-school inspired newsletter Daily Reckoning advised several years ago, “Sell the Dow, Buy Gold” as their trade of the decade - a trade that has done remarkably well (though I wish I were smart enough to have taken that advice ;-))

As the WSJ article concludes

The chickens are now coming home to roost, in the form of higher inflation. Even the government’s own massaged and adjusted inflation numbers can no longer hide this inflation, though it has been obvious for some time to anyone in the real world [i.e except ivory-tower economists like Bernanke]. It would be interesting to see if Bernanke will risk stoking even higher inflation by liberally supplying credit or risk causing a severe recession by fighting the inflationary beast he and Greenspan unleashed.

Bernanke’s academic history indicates he may err on the side of inflation, because he has long believed the nonsense that the best way to fight a depression is by printing money, in spite of the stagflationary evidence of the 1970s. And inflation is also damn convenient for a highly indebted government.

The only silver-lining (pardon the pun!) is that Keynesianism and the neo- variety of Krugman and his ilk will be thoroughly discredited in the coming global downturn.

It is poetic justice that a leading member of the ivy-league academia is in charge to take the fall when things go to hell. Good luck, Professor Bernanke. I hope you are smart enough not to take the entire blame yourself, but make sure to give “credit” where it is due, and link Greenspan to the coming mess. That is one issuance of credit this blogger will highly approve.

Sridhar-

I agree that the economic gap in the US has been determined by those who participated in the asset market since 1982 (inflationary boom) and those who didnt. However, I am confused as to when the political developments will occur that you correctly rationalize - economic redistributive politics that should be occurring but are not, in fact, taxes are being cut for the highest incomes and for asset gains, federal social programs are being cut and the military complex is moving in two directions - federal employment for the poor is being cut with base closures, yet Northrup Grumman still has huge Pentagon orders that are at least stable YoY. This is not redistributive today or in trend.

Mark

Sridhar-

You exude modesty. However, Bernanke and Greenspan ‘get it’ as well, but their personal prestige is based on maintaining status quo, not openly admitting how asset inflation causes 5x the pain of consumable goods inflation. They know how it all ends and know that history will cast an unfortunate eye on their tenure, but to be noteworthy in your generation for just a moment!

Imbalances in India and China are much different than imbalances in the US. Unhappy people in China still freeze to death in the winter time, unhappy people in the US have only one car. You can’t underestimate the power of an aristocracy derived from the power of two colluding and thoroughly dominant political parties. $100 gas checks are one thing, but when the mortgage cycle cannot continue to inflate the Fed will be forced to purchase everyones home from the FDIC cartel. They will monetize this multi-trillion dollar disaster and of course it will be up to China (and Japan) to whether they want to continue to hold treasuries in a dollar weakening (at least against goods) environment. But as you said, until they achieve export/domestic economy balance, it is a decision they will avoid until they cannot avoid it any longer.

I got off my point, a republicans best friend is a democrat, especially when they can rotate offices and nearly split the vote 50/50 everytime. The last thing either group wants is a third party. Politics will play major role in the reorg. but not the catalyst in the US. So they collude and keep marginal tax rates of the Forbes 400 at 39%, 15% when they sell equity and hand out $100 gas rebates whenever needed. Fiscal deficits as far as the eye can see. Achilles heel every single time: CHINA (and india to a lesser extent). Can’t get around it no matter how hard you try. They enabled the world’s largest credit expansion in history to occur and they will also be the purposeful and accidental cause of the long decent.

Can we get enough intelligent minds wired into the Internet and hope that Metcalfe holds up and Kuzweil isn’t inaccurate by decades to find a solution - 8% productivity gr. to match our 8% debt gr.?

Mark

A very interesting Economic Focus column appeared in the latest edition of The Economist, titled Is Price Stability Enough? (subscription required)

The Economist has been concerned about asset bubbles for quite some time - even putting a falling brick on the cover to denote the bursting of the world-wide housing bubble - and has been very critical of the easy credit policy of the Fed in promoting these bubbles. Contrast it with Alan Greenspan’s formulation: a bubble cannot be identified until its bursting confirms its existence and it is better to clean up the mess after the bubble bursts with liberal doses of ultra-cheap credit.

The Economist article quotes the Chief Economist of the Bank of International Settlements, who takes an explicitly Austrian School view point, and argues that the low reported consumer price inflation, arising from the positive supply shock of China and India, has lulled the central bankers into running a very loose monetary policy. Instead of stoking goods price inflation, this extra money and credit has gone into asset markets world-wide, and more recently commodities markets. Without that faulty monetary policy, the world would have experienced benign, mild deflation, as has happened several times in the 19th century. America would not have run the extreme trade deficists it has been running and the housing bubble need not have happened. Unlike the bad deflation that comes after asset bubbles, supply expansions cause good deflation. After all, hasn’t the world benefited from falling prices of technology goods for decades, while the technology industry has prospered?

Austrian school proponents have said this for years, and yet mainstream economists have completely ignored them or worse. Paul Krugman calls the Austrians “liquidationists”, which only shows his intellectual arrogance coupled with ignorance of what the Austrian school is really about. After all, Krugman (along with Larry Kudlow) was calling on the Fed to pause its baby-step interest rate increases as early as fall of 2004, when the Fed had barely started it. Of course the Fed continued raising rates, and we still got the massive housing bubble in 2005, and a commodities boom. I hope Krugman-types never gets anywhere near power over the money supply - but wait a minute, isn’t Ben Bernanke exactly that?

Ben “Helicopter” Bernanke has sworn to fight even the remotest possibility of deflation and has all but guaranteed easy money for ever. Gold price has taken due note of the Bernanke guarantee. This is not going to end well - be very afraid.

I am a Paul Graham fan [though I have to say I am not much of a Lisp fan]. He has amazing insights, and even when I disagree with him, I find them valuable. His latest essay The Hardest Lessons for Start-ups to Learn is his best. The lessons are applicable for start-ups or new products. Coming from a company that ships a lot of products, I can personally identify with these lessons.

There is a lot of good advice in that essay. Perhaps my favorite is:

This is not just a start-up founder quality. It is the quality needed to succeed in any field in the real world. Just as in his case, I found this through experience and the lesson came as a surprise. I have had the misfortune of being ridiculously over-educated, spending many precious years of my youth in getting a PhD when the real world would have been the better teacher.

And along with fancy degrees came IQ worship, which is actually more damaging than the years wasted in school. Fortunately, real world taught me that success if far more than an IQ score. That is perhaps the most important lesson I have learnt in AdventNet.

That leads me to the one key area of disagreement I have with Paul: Lisp. Lisp is IQ worship distilled into language form. I can point to any number of highly productive, creative software engineers who will never make the cut if mastery of Lisp were required of them.