The Ponnappan / Jai's Bucket list for the Next Decade ;) ~ MIT's top 10 picks for the world's next fintech leader

As the shock waves from the affirmative Brexit vote start to dissipate, there has been an increasing chatter concerning the fate of London as not only Europe's financial services hub but also a hub for startups as well. While Dublin, Berlin and Madrid are all strong contenders in the race for startup ecosystem supremacy, London by far is one of the strongest, particularly in the fin-tech sector.

Billions of capital continues to be pumped into the FinTech phenomenon with its soaring popularity an attractive proposition to investors. Companies continue to develop the industry through innovative ideas providing a wide variety of cost-effective services to customers and increasing efficiency and flexibility within the financial business.

Although we recognize the need for empowerment through connectivity worldwide, we view the Financial Technology application as one that goes beyond any brick and mortar institution and any country, but is malevolent to reinvigorate and lead the banking sector. 

We look forward to playing our part in catching this industry as it continues to expand into the mainstream financial sector in the midst of both calm and choppy weather.

FinTech visionaries are trying to remove the middle-man or intermediary and question conventional corporations who are less comfortable with software. 

FinTech start-ups are demonstrating that momentum is firmly with them; the speed with which they can develop in comparison to the world’s leading organizations is remarkable. The prolonged success of companies is testimony to this ascendancy.

Why Beautiful Brexit Makes Perfect Sense to Jai (& The Ponnappans)

Thank You, David (@DavidShrier at MIT)

A brief comment/Analysis of the Fin-tech Sector to date:

This is evident from the Innovate Finance 2020 Summit 2016 held in April where over 1400 people attended, including many power global leaders, technological experts and data analysts celebrating this new era of finance.

Friedrich Nietsche, German philosopher, once said this, 

"Want is not an proven reality, but rather an interpretation" 

The methodology: 

"In other words, it's all about making processes simpler and life easier."

When Jai throws a punch(Agility). 

I am always going for the bull's Eye(Accuracy).

It will hurt!(Seasoned)

Away from its prosperity and magnetism, just how sustainable is FinTech? 

There is a fear that Fin-tech may interfere too heavily with traditional business models, even though it provides a flexible and alternative crossing point for customers and businesses. 

(root cause/empowerment)

For years one has to mold and tend to those boulder shoulders. To design, strengthen, size and shape them just like a sledge hammer.

Financial services will always be in popular demand providing the worldwide economy is flourishing. Sending money, storing it, spending it, securing it - the functions are endless. 

Despite all that they have to offer, Fin-tech businesses still trail banks in terms of their market dominance even though the disparity is becoming less and less each year. For fin-tech companies, a relationship with a major bank is often a game-changer — for both sides of the equation. 

Becoming Agile(or hybrid) takes many years and many seasons of rigorous and relentless training, trying, testing, failing, experimenting and succeeding.

My source of inspiration & strength:

"Boxing agility drills are designed to help improve your speed and quickness while in the ring. Although many boxers develop their speed and agility to improve their punch accuracy and effectiveness, many boxing agility drills will also help you improve your defense skills."

Taking into consideration the speed with which the technological revolution and digital interference overwhelmed traditional industries, it seems outlandish for professional services giant Deloitte to recommend that it is unlikely that Fin-tech companies will have more than 6% of the market by 2025. Save for Santander, most banks are unhurried in their approach to utilizing financial technology. Because of this they are being caught up by Fin Tech companies who must now be considered as serious rivals.

Soon enough, the wealth management industry will have to contend with the widespread adoption of block-chain and artificial intelligence. We hope to be in a position to help the industry grapple with those future challenges -- which is why we are taking a full-time research role in studying global financial technology.

I've been focusing my thoughts, research and studies about our industry as a whole, To understand what's changing at the core of the economy, where one thing disconnected from another can impact in a Butterfly effect how people buy investments and move money.

Enterprise is a whole different bag of hammers, with much greater levels of complexity and product demands than what comes in dealing with consumers. The question whether some of these guys are up to that -- from my experience, firms that are consumer and try to pivot into the enterprise space, it usually doesn’t work out well.

Banks continue to use their supremacy to command high remittance fees and long-winded transaction times, but ultimately they will need to look into forming partnerships allowing them to apply FinTech services into their systems.

The technological landscape continues to progress as does the attitude towards money and the handling of it. Is it realistic to think that in the future our planet will be restricted to mobile and cashless payments as our inclination moves away from using cash frequently, if at all?

For a long period, the intent of Fin-tech has been to deliver speedy transactions at a reduced cost for the back and middle office of financial institutions, while the office facade develops relationships with clients and remain very much person-driven. 

Fin-tech businesses are moving away from offering a wealth of services and instead are providing precise dispensation specific to the customer. 

I see a change in that: from offering many to many to offering one service to a very specific niche and really focusing on providing superior product experience in that niche.

What FinTech has captured is a growing trend and grasped the current habitual climate around how we access and use money. It is going against the conformist who follows regulations which relies on banks developing their services and providing customers with an option not in place during its fabrication.

In today’s society, it is customers who require flexible models to correspond with the fast pace of life – suitably tailored for the constantly changing needs of individuals and organisations.

Digital platforms continue to advance with it now possible to take a loan from Paypal or get inventory financing from Amazon – further substantiation that FinTech is identifying ways to boost core financial communications and enhance the customer experience.

FinTech is going to continue shaping the landscape of the financial sector: My vision is that there’s going to be a lot of value for the consumer out of finance and FinTech going forward because of this change. Long-term it is difficult to gauge how much potential there is for further growth, but there is no doubt FinTech will continue to make a significant impact on the industry – watch this space. 

The Race.. Is On... 

With Europe still reeling from the implications of the Brexit, London’s supremacy in fintech (already under pressure from other conurbations) is now in question.  Who will take the leading role as the world’s fintech capital? We’ll examine the contenders…

Lead horses:

Singapore: We pick Singapore as our #1 contender to displace London as fintech capital of the world.  With a significant government effort to support fintech innovators (the Monetary Authority of Singapore even has a “Chief Fintech Officer”), dynamic incumbent banks like DBS and UOB, and a location that accesses the broader ASEAN region, we feel Singapore’s moment is at hand – if London isn’t able to maintain focus in the face of disruption, and if Singapore can fight off the sharp competition coming up immediately behind...

NYC: New York has unseated Boston as the #2 overall venture capital cluster in the U.S., with a heavy fintech spin thanks to the robust financial services industry coupled to a vibrant entrepreneurial ecosystem.  However, the local regulatory environment hobbles the Big Apple’s efforts to claim the top fintech spot (see: BitLicense). 

Hong Kong: Long a center of entrepreneurship and financial innovation, Hong Kong has maintained position in the shift to the new generation of fintech companies.  Ernst & Young places Hong Kong at 29% fintech adoption, the most anywhere in the world1. Its more liberal set of corporate regulations make it the natural interface between mainland China and the rest of the world – and China barely missed beating the U.S. for total venture capital activity in 2Q 2016 according to Preqin2. 

London: The Square Mile may be down, but she isn’t out.  London remains one of the largest innovation clusters in the world, retaining a sharp focus on fintech innovation with progressive government (in terms of fintech regulation and policy initiatives), a world-class set of universities, and a dynamic workforce with some of the best drawn from across Europe and around the world.  Goldman Sachs and Morgan Stanley announced intentions to remain engaged, but JP Morgan threatened moving “a few thousand” jobs3.If growth-oriented leaders can stave off isolationists, London will continue to reign.

Credible contenders:

Shanghai: It should come as no surprise that the top of our “contender“ list is the financial capital of mainland China.  Fiercely competitive, housing one of two independent exchanges, Shanghai is core to China’s drive to make the RMB a reserve currency. 

Zurich, Geneva & Zug: 12% of Switzerland’s economy is financial services, and the Swiss people and government have embraced the fintech revolution.  Swiss venture capital activity is consistently top-ranked, if not as energetic as London or New York and hindered by restrictive immigration policies. Although perhaps unfair to aggregate three municipalities into a single “Swiss cluster”, for our purposes they are equivalent to others in their peer group, and reasonably well coordinated. 

​Frankfurt: Germany is Continental Europe’s startup leader and Frankfurt is where the action’s at for German financial services. The sociopolitical environment limits labor market liquidity, and limited risk tolerance is a handicap, but flawless execution can catapult Frankfurt to the fore. 

Shenzhen: Also strong on the list is Shenzhen, home to a new generation of Chinese entrepreneurs with a dynamic, vibrant ecosystem in the making, as well as the other independent exchange in China (besides Shanghai).  If Shenzhen and Hong Kong were able to more closely coordinate activities, they could create a dominant “supercluster”.

Dubai: Dubai’s economy is built on diversifying beyond oil to a broader set of industries, and its position as a congenial environment for foreigners coupled to enlightened government policy makes for a legitimate position as a contender. Weather, economic volatility and other agitations surrounding the region are downsides.

Mumbai: Long a workhorse of the Indian entrepreneurial miracle, Mumbai continues to push the boundaries. The National Biometrics project is now spawning startups seeking to provide financial access and inclusion, leveraging cornerstone identity. 

Luxembourg: €3.5 trillion of assets are under management in Luxembourg4, and financial services comprise 27% of the economy5.  The government, academia and industry have banded together to pioneer the next wave of financial innovation, if they can move beyond the country’s traditionally conservative approach to business (disclosure: MIT has an agreement to advise on this effort). 

Dark horses:

Several jurisdictions are working to make themselves attractive to fintech entrepreneurs, including the Caymans, Barbados, Austin TX, Sao Paolo, Paris, Dublin, Moscow, Johannesburg, and Lagos in Nigeria.  Will one or more of these dark horses be able to carve out market share?  

And the winner is…

The next three to five years will see the outcome of the race unfold.  Where is the smart money going?  One thing’s for sure: Brexit uncertainty in London means greater opportunity for other regions around the world.

Entrepreneurship, Innovation and Corruption ~ Changing Scenarios that Define the Corrupt

      
          The Harvard Business Review is running a very interesting and insightful story on how money in politics is having a deleterious and increasingly eroding effect on U.S. innovation and the economic environment that fosters the same.


How Corruption Is Strangling U.S. Innovation
http://blogs.hbr.org/cs/2012/12/how_corruption_is_strangling_us_innovation.html

An excerpt from the original entry:

" If there's been one topic that has entirely dominated the post-election landscape, it's the fiscal cliff. Will taxes be raised? Which programs will be cut? Who will blink first in negotiations? For all the talk of the fiscal cliff, however, I believe the US is facing a much more serious problem, one that has simply not been talked about at all: corruption. But this isn't the overt, "bartering of government favors in return for private kickbacks" corruption. Instead, this type of corruption has actually been legalized. And it is strangling both US competitiveness, and the ability for US firms to innovate.

The corruption to which I am referring is the phenomenon of money in politics.

..Somehow, it seems that every time that [Mickey Mouse] is about to enter the public domain, Congress has passed a bill to extend the length of copyright. Congress has paid no heed to research or calls for reform; the only thing that matters to determining the appropriate length of copyright is how old Mickey is. Rather than create an incentive to innovate and develop new characters, the present system has created the perverse situation where it makes more sense for Big Content to make campaign contributions to extend protection for their old work.if you were in any doubt how deep inside the political system the system of contributions have allowed incumbents to insert their hands, take a look at what happened when the Republican Study Committee released a paper pointing out some of the problems with current copyright regime. The debate was stifled within 24 hours. And just for good measure, Rep Marsha Blackburn, whose district abuts Nashville and who received more money from the music industry than any other Republican congressional candidate, apparently had the author of the study, Derek Khanna, fired. Sure, debate around policy is important, but it's clearly not as important as raising campaign funds.

       ..Ars Technica reports that Derek Khanna is getting axed over his memo detailing the conflict between laissez-faire-oriented free market ideals and the regulatory monopoly that is copyright. 'The Republican Study Committee, a caucus of Republicans in the House of Representatives, has told staffer Derek Khanna that he will be out of a job when Congress re-convenes in January. The incoming chairman of the RSC, Steve Scalise (R-LA) was approached by several Republican members of Congress who were upset about a memo Khanna wrote advocating reform of copyright law. They asked that Khanna not be retained, and Scalise agreed to their request. "

“Greed & Power-lust is a weed that grows only in the vacant lots of an abandoned mind. ” ~Ayn Rand

           The multifaceted Intent and the efforts to control and curb corruption increases levels of trust in the ability of institutions to effectively enforce laws/rules of trade in a fair manner. With varied periods of time pervasive bureaucracy and increasing red tape also tends to create a stagnant climate where corruption can and will flourish, with officials often demanding bribes for the myriad permits needed to carry on business among several other things. Entities and groups with a political and financial upper hand often tend to dominate and predate in a market such as this. High handed corruption as a result continues to remain a major deterrent to distributed and diverse economic activity. Often a better control of corruption has been historically associated with rising levels of innovation and entrepreneurship. Absence of such a critical and defining trust, would invariably restrict the scale and scope of trade and inversely effect productivity and investment in innovation and entrepreneurship.

        Yes, the puzzling relationship between entrepreneurship, innovation, and corruption suggests corruption is inversely correlated to economic growth, entrepreneurship and innovation. That is, beyond all debates and arguments several studies across the globe conclude that as corruption goes up, economic indicators go down. The scope/effects of corruption on business is mediated and outlined by several factors, all of which are related to the ability to reliably enforce rules that promote fair trade and transparency.

“Political corruption, social greed, and Americanized quasi-socialism can ruin even the most wonderful places. California proved that.” 

~Tiffany Madison

         Entrepreneurs and innovators are motivated by the portion of the value created by the venture that they are able to capture for themselves. As corruption increases, entrepreneurs face the risk of losing some of those profits to opportunists taking advantage of the corruption on the value chain. As a result, some potential entrepreneurs become discouraged and abstain from pursuing new business opportunities. The dampening effect of corruption has often been compared with that of taxes. Under this school of thought, corruption would differ from taxation only in the lack of public revenue generated. No matter the depth or potential of their innovations, all of their efforts to solve challenging industrial/social/economic problems could be stymied and nullified by corruption and unscrupulousness that favor the connections and short-term gain of a few over the long-term benefit of the industries they serve, the economy and the populace. Corruption is one of the most restrictive and intractable issues around the world, It is comparable to a wider and deplorable socio-economic disease that pervades and plagues entire cultures and economies  It inhibits the development of a stable and prosperous economy and the flourishing of an active democracy and citizen sector. Demanding transparency and fostering a culture in the public and private sector of accountability and  rule of law is perhaps the only real feasible approach to tackling this issue in the United States.

Sincerely,

Jai Krishna Ponnappan

------------P.S-------------

Blessed is The Fruitful Hand

“Among a people generally corrupt, liberty cannot long exist.” 
~Edmund Burke

“Evil is not just a theory of paradox, but an actual entity that exists only for itself. From its ether of manifestation that is garlanded in perpetual darkness, it not only influences and seeks the ruination and destruction of everything that resides in our universe, but rushes to embrace its own oblivion as well.

To accomplish this, however, it must hide within the shroud of lies and deceit it spins to manipulate the weak-minded as well as those who choose to ally themselves with it for their own personal gain. For evil must rely on the self-serving interests of the arrogant, the lustful, the power-hungry, the hateful, and the greedy to feed and proliferate. This then becomes the condition of evil’s existence: the baneful ideologies of those who wantonly chose to ignore the needs and rights of others, inducing oppression, fear, pain, and even death throughout the cosmos. And by these means, evil seeks to supplant the balance of the universe with its perverse nature. 

And once all that was good has been extinguished by corruption or annihilation, evil will then turn upon and consume what remains: particularly its immoral servants who have assisted its purpose so well … along with itself. And within that terrible instant of unimaginable exploding quantum fury, it will burn brighter than a trillion galaxies to herald its moment of ultimate triumph. But a moment is all that it shall be. And a micro-second later when the last amber burns and flickers out to the demise of dissolving ash, evil will leave its legacy of a totally devoid universe as its everlasting monument to eternal death.”
~ by Adam Turquine. The excerpt is taken from the sequel to 'Beyond Mars Crimson Fleet'

“When one gets in bed with government, one must expect the diseases it spreads.” ~ Ron Paul

CORRUPTION PERCEPTIONS INDEX 2012

            Looking at the Corruption Perceptions Index 2012, it's clear that corruption is a major threat facing humanity.


         
           Corruption destroys lives and communities, and undermines countries and institutions. It generates popular anger that threatens to further destabilize societies and exacerbate violent conflicts.

            The Corruption Perceptions Index scores countries on a scale from 0 (highly corrupt) to 100 (very clean). While no country has a perfect score, two-thirds of countries score below 50, indicating a serious corruption problem.

           Corruption translates into human suffering, with poor families being extorted for bribes to see doctors or to get access to clean drinking water. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure, as corrupt leaders skim funds.

          Corruption amounts to a dirty tax, and the poor and most vulnerable are its primary victims.

So, How do we Counter the Effects of Public Sector Corruption?

              *Governments need to integrate anti-corruption actions into all aspects of decision-making. 
              *They must prioritize better rules on lobbying and political financing. 
               *They must make public spending and contracting more transparent, and make public bodies more accountable.

              After a year with a global focus on corruption, we expected more governments to take a tougher stance against the abuse of power. The Corruption Perceptions Index results demonstrate that there are still many societies and governments that need to give a much higher priority to this issue.

~ Jai Krishna Ponnappan

Bitter Sweet Reforms | A Retail Foreign Direct Invasion in India ?

      
        This is a comment in response to an article on the Times of India The original post,


" How Sonia Gandhi was persuaded to back reforms. Read here: http://toi.in/lnWreZ "

Image Ref. http://tinyurl.com/9wv47se

My response,
                 And now, this is what the first surgical incision looks like ;)
Many of us who have followed the situation with reforms and FDI's for several years are fully aware of who exactly in terms of foreign groups and financial entities have been steadily lobbying, bribing and laying down the pressure to enter into the Indian market space and greatly gain out of it. It is important to note that it won't be easy for local players to even come close to tackling, competing or coexisting with the new competition, it won't be easy either to curb foreign investments from serving as instruments for parasitic economics that will over a period of time, perhaps less than a decade, drain capital permanently away from this country.

-----------------------------

Update as of 7th December 2012

          A comment in response to a post seen on cnn ibn,

" FDI now the law of the land, Opposition graceless in defeat: Anand Sharma http://ibnlive.in.com/news/fdi-now-the-law-of-the-land-oppn-graceless-in-defeat-anand-sharma/309386-37-64.html "

Find the original post here,

Image/Ref. http://tinyurl.com/atxxvtq

           

            Just give it 5-10 years; Parasitic economics and exploitation is nothing but an inevitable reality, it is the only tried and tested strategy that will make an entry with tapping into such a large, promising and unexplored market feasible and highly profitable. Over the last decade or so we have seen several examples of this across smaller markets and weaker economies in Europe. At an estimated $450 billion retail is large enough to guarantee a huge impact in India, especially for all those regional ethnic sub-economies that depend on it as a seasonal driver of growth and stability. I guess time will make it clear to all the naysayers that FDI stands for 'Foreign Direct Invasion' ( Represented by Agents of Economic Imperialism, Remember the East India Company? ) 

..as opposed to anything else.

-----------------------------

Update as of 9th December 2012

          A comment in response to a follow up on the story as seen on cnn ibn,

"Walmart spent Rs 125 crore on lobbying to enter India: Report http://ibnlive.in.com/news/walmart-spent-rs-125-crore-on-lobbying-to-enter-india-report/309563-7.html"

Image Ref. http://tinyurl.com/ajhy8v7

           Although it is safe not to know the Actual figures (vs. what can be disclosed), $25 million, even in relative terms to many Indians.. is still small change compared to the market space they hope to capture and dominate in the coming future. The big question concerns the impact it will have on 'All Things Local' when they employ their standards and practices out there. ( We've seen how well all the IBMs and Accenture's of the IT world have faired in India for a while now) Again, time will tell, but the interesting question that will remain unanswered and obscure is what exactly prevented them and made them take so long since 2008.  Sadly, I'm sure that for some time to come many of the affected and their families will have to dig deep to the very bottom of their hearts when they think of this large American Brand and those corrupt leaders, Both here and there, along with this rather cheap number, that makes all their miseries possible as their hardships come to life.


As a sincere and frank reminder, 

Dear friends (Concerned Citizens/ Journalists/ General Public), 

          Keep a close watch of this company's policies/ business practices, including discrimination, anti competitive practices, aggressive/predatory pricing, the corporation's foreign product sourcing, treatment of product suppliers, environmental practices, the use of public subsidies, low wages, poor working conditions, and the company's security policies. Do you know of retailers out there who would engage in product selection that promotes a new ideology/agenda or even subtly inject a propaganda into the masses. Here's a fine example of all this and a lot more in Walmart. Unfortunately over the years there has not been enough unity or fair democratic values or an essential sense of equality in opportunity among average Americans here to even conjure up or imagine a boycott, but I'd like to believe that this Spirit is still strong in a place like India.

Best Regards.

Sincerely,

Jai Krishna Ponnappan

Unchain the European Union

           
       I usually refrain from commenting or expressing my views about this. But as a personal principle I strongly oppose all forms of binding and depleting dependencies/ instruments of enslavement... The EU has had too much of this senseless incompetence. So here we go, this is in response to a post on Debating Europe ( via their Social Media Page )


The Original Post,

" State of the Union: President Barroso comes out in strong support of ECB President Mario Draghi’s move towards ‘unlimited’ bond buying and gets the biggest applause of the morning. What do YOU think?

ref. http://www.debatingeurope.eu/2012/09/12/liveblog-barrosos-state-of-the-union/"

~ The entire address is available in the video link at the bottom of their page.

The avoidable skepticism and crisis within the EU is owed primarily to the incompetence of some of its leaders and their inability to refrain from facilitating draining and parasitic economics.

Response,


 "They may say they are acting within the ECB's mandate but are they really acting to ensure the stability of the Euro? They are undermining and clearly exposing the capacity of member nations and their leaders to resolve the crisis at the earliest by doing what ever is necessary to initiate urgent reforms. This move is nothing but yet another incautious, conditional and risky leap of faith. It is really disappointing how they have exposed their inability to work with governments to ensure and guide an all crucial reform agenda.

P.S ~ Their cause for applause comes with strings attached. They are poised to enter into a vicious and self perpetuating addiction to the central bank while complacently stagnating their economies."

Sincerely,

Jai Krishna Ponnappan

P.S ~ I wish I had the time to debate this but yes this is just the beginning of what I really hope digging down to the root of this crisis should look like..... at least in the coming future.

How Steep is that Fiscal Cliff ?

This is a comment in response to a post on CNBC's page,
https://www.facebook.com/cnbc


" CNBC's Maria Bartiromo on the 'fiscal cliff': "Leave it to Washington to make the worst decision time and again. And we all pay the price."

Read her full commentary on the fiscal cliff & what Washington is doing to fix it: http://www.cnbc.com/id/48701543

Are you worried about the potential layoffs and economic impact that could come as a result of the 'fiscal cliff' at the end of the year? "

Are you worried ? 

Yes, unfortunately, this isn't a joke that ends with a trivial one word answer or an election result for that matter. 

                  Given the scale of this one can't help but wonder.. Is there anybody out there that really cares about America? Silence is a sad way to answer such a reality. It is high time this nation and its people learn and prepare to brace and cope with the effects and consequences of going down that steep cliff. To put it mildly, it is pathetic to even hear or read of this or the empty arguments, the lack of political will or urgency and the senseless indecision that defies all logic. This did not happen overnight, and no one has the clear means or basis to outline the scope, the effects and the impact it is going to have on the economy. Americans should thank their leaders for leading them down this path and should take personal responsibility for what they have to live with and what is in store in the coming future. Putting the budget on a sustainable path will require significant changes in spending policies, tax policies, or both and given the way things are this is not something that will materialize that easily. Looks like someone will have to magically enforce this action. 

       FYI: The cliff is a series of major policy changes that will happen automatically at the end of this year if Congress does nothing. The big players on the tax side are the Bush tax cuts and the payroll tax cut. On the spending side, the automatic cuts included in last summer’s debt ceiling deal will take effect. But there’s a lot more, as you can see in this table from the Committee for a Responsible Federal Budget:

        The combined effect will be a huge fiscal contraction, one which, according to conventional economic theory, could pose a real threat to the economic recovery. Here’s how the major provision break down by category, courtesy of the CBO:

         The biggest provision is the Bush tax cuts, followed by the payroll tax cut and the cost of indexing the Alternative Minimum Tax (AMT) eligibility cutoff to inflation.

           The payroll tax break expires this December, and the Bush tax cuts expire Jan. 1, meaning that new, higher rates will take effect the following year. Since payroll taxes are deducted from wages every week, the effect there will be immediate, whereas the income tax rate increases only affect income starting in 2013. If employers adjust withholding, the effects could come sooner, but if there are logistical hurdles to that, the economic dent could be delayed.
The sequestration cuts will take effect starting in January too, meaning their impact, like the payroll tax cut’s expiration, will be more immediate. The cuts are evenly split, with $27 billion each in 2013 for defense and non-defense spending, plus $12 billion in cuts to Medicare.

Crunching Numbers & Running the Equivalent of a 
Simulated Economic Crash Test

      If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.

         The CBO estimates that the total effect of these provisions is a 3.9 percent reduction in the growth rate of GDP next year — enough to make the year’s total growth rate negative, plunging the country back into recession. What’s more, the mere anticipation of this change will reduce GDP growth by 0.5 percent this year. This change is not evenly distributed between the cliff’s components, as this chart from the Committee for a Responsible Federal Budget shows:

           Eliminating or reducing the fiscal restraint to be scheduled to occur next year without imposing comparable restraint in future years would have substantial economic costs over the longer run. However allowing the full measure of fiscal restraint now embodied in current law to take effect next year would have substantial economic costs in the short run.

What might policymakers do under these circumstances? 

                        One possibility is to leave current law in place, accepting the short-run economic costs of sharp fiscal restraint in order to put the federal budget on a sustainable longer run trajectory. Another possibility is to extend all current policies for a prolonged period, accepting the longer-run costs and risks of surging federal debt for some time. 

          An intermediate possibility is to extend some but not all current policies indefinitely (perhaps with some offsetting changes in other policies) or to extend or enact certain policies for a limited period. In particular, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period. 

Such a combination of policies would use fiscal policy to support demand for goods and services in the short run, while the unemployment rate is high and many factories and offices are underused, but would impose fiscal restraint to bolster the economy’s production over the longer run, when output and employment will probably be close to their potential. That approach to fiscal policy would work best if the future policy changes were sufficiently specific and widely supported so that households, businesses, state and local governments, and participants in the financial markets believed that the future fiscal restraint would truly take effect. If such policy changes were enacted soon, they would tend to boost output and employment in the next few years by holding down interest rates and by reducing uncertainty and enhancing business and consumer confidence. 

              Enacting policy changes soon would allow for implementing them gradually while still limiting further increases in federal debt and the corresponding negative consequences. Although there are trade-offs in choosing when policy changes to reduce future deficits should take effect, there are important benefits and few apparent costs from deciding quickly what those changes will be.


P.S ~ A surf-style song, by country artist Merle Hazard, about U.S. fiscal dysfunction.




Sincerely,
Jai Krishna Ponnappan