Do We Need a Lender of Last Resort? Lessons from Australian banking history..

October 21, 2014

Nicolás Cachanosky of Mises Institute argues what Austrian school argues best- There is no need for a central bank.

Why can’t banks manage the money on their own? Why do they need a LOLR?

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Assessing economic projections of Finance Commission..

October 21, 2014

Nithin K of IIFT and Rathin Roy of NIPFP evaluate the economic projections made by Fin Com.

FinCom has been broadly right in its revenue projections. But its expenditure projections have gone awry:

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Thinking about Catalonia break up from Spain referendum now..

October 21, 2014

The vote is set to happen on 9 Nov 2014.

Angel Ubide of PIIE in this piece argues lessons Catalonians need to draw from Scots:

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Paanch Kahani – five Ramayana stories of central banking…

October 20, 2014

Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).

This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking:

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The world needs to stop listening to American MBAs…..

October 20, 2014

Something which should have happened long ago.

The sheer imperialism of American education in business and economics has just made it a one-dimension world. Moreover, with much of the knowledge coming from American shores may/may not apply to the contexts in other countries. Despite these serious limitations, US MBA education continues to dominate the world MBA curriculum.

Questioning American status quo extends to many fields….

When humans bite/kill sharks..

October 20, 2014

How humans have turned around the game on sharks. Making a hysteria over terror, number of sharks have been reduced greatly.

Bradnee Chambers Executive Secretary of the UNEP Convention on Migratory Species of Wild Animals (what a job title!!) covers the issue in this article.

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Crisis in Vishakhapatnam and Japan….letting economics rule

October 20, 2014

On last Sunday, ToI Had this story by Mr Amit Dasgupta, former diplomat who lives in Vishakhapatnam (link unable to find).

He says how we have stooped so low in India. Even during deep crisis in Vizag, people were looking to make money:

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China ..from virtuous cycle to vicious cycle…

October 17, 2014

It is kind of funny to imagine how quickly an economy declines once the whole world (read economists) start praising the growth rates, models etc.  We have seen this across host of countries.

China is one such example. What was once touted as Chinese strength – undervalued currency, limited growth of finance sector, role of government, industrial policy etc. – is becoming its weakness as well.

Keyu Jin of LSE writes on how Chinese have entered the vicious cycle:

Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.

That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization.

Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.

But the model also carries considerable costs. Indeed, China is now locked in a vicious economic circle, sustained by seemingly unrelated distortionary policies that are, in fact, deeply interconnected, even symbiotic.

And the story has started in another direction. How convenient economics is really. Argue on both sides with ease.

I have another side of the story. Countries and companies which wish to grow and in a sustained manner should avoid all the hype and buzz. The policy-makers should maintain a low profile and not be too bothered about what the world has to say. The more you avoid all the attention and photo-ops better are the chances for growth and sustenance. But this is so difficult to practice..

Coal industry and corruption cases are not limited to India..

October 17, 2014

Nice piece by Marina Lou of Greenpeace International.

She says how coal industry worldwide is rife in corruption:

Juan Pablo Perez Alfonso, one of the founders of OPEC, once compared the world’s fossil-fuel use to “drowning in the devil’s excrement.” There is certainly plenty of evidence supporting his prediction that the fossil-fuel industry, with its powerful corrupting influence, will “bring us ruin.” Indeed, coal-related corruption stories are breaking worldwide, shining a light on the murky space between “illegal” and “improper” where the extractive industries work.

Last year, in the Australian state of New South Wales, the Independent Commission Against Corruption investigated former Labor ministers Eddie Obeid and Ian Macdonald for conspiring to defraud the state over the issuance of multi-million-dollar licenses for coal exploration and mining. Today, the ICAC is conducting an even more far-reaching and complex investigation into a number of figures from the Australian Labor Party and the Liberal/Nationals Coalition, including for favoring the interests of Australian Water Holdings, a major infrastructure company.

Last month, India’s Supreme Court found that all 218 coal-mining licenses allocated by the government in 1993-2009 had been granted in an “illegal and arbitrary” manner, with the committee responsible for the process lacking transparency and rife with corruption. Following the landmark decision, the government has canceled 214 of the coal block allocations – and has fined several companies that have already begun production.

For its part, Indonesia is set to revoke the contracts of 17 coal producers that failed to pay government royalties. And, since the beginning of this year, the country’s corruption commission has been focusing on the extractive industry, including the state officials who facilitate mining companies’ illegal activities.

Likewise, China’s ongoing anti-corruption drive – the largest in its modern history – has begun to focus on the coal industry. Last month, two Communist Party officials from the coal-rich Shanxi province were charged with corruption and abuse of power, signaling that Shanxi may well move to the forefront of President Xi Jinping’s quest to eliminate entrenched corruption in the Party’s ranks. As Gao Qinrong, a former journalist from Shanxi, recently described the province, “It has coal; coal brought money; that brought corruption.”

These stories highlight a simple truth: Where the coal industry operates, bribery and venality are likely to be rampant. But this does not have to be the case. In order to reduce – if not eliminate – such corruption, several fundamental weaknesses in the regulation of how mining contracts are allocated must be addressed.

Then there are obvious ideas on how to limit corruption by increasing transparency. The natural resources if not managed well end up being a curse. I mean if places like Aus cannot manage, it is really difficult for others as well. So what to do? Make corruption legal in such cases?

 

Economics of Parenting…linking inequality with parenting styles

October 17, 2014

Pikeetymania all over… Inequality is being linked to all kinds of things and this time on parenting styles.

This this post, Matthias Doepke and Fabrizio Zilibotti connect the two things.  They say in societies where equality is high, parents allow children to be more imaginative and be carefree. In societies, where the ineq is high, parents are more demanding and strict:

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Maximising happiness does not maximise welfare…

October 16, 2014

Well, one cannot do anything  in excess. Earlier we said growth alone is enough. Now we just want to push happiness. The idea is be balanced. Both are important in their own ways.

Edward Glaeser, Joshua Gottlieb and Oren Ziv point why maximising happiness is not enough.

Governments are now measuring happiness, or subjective wellbeing, and some have begun trying to maximise it. This column discusses recent research showing that happiness is not the same thing as utility. The choices people make suggest that they have desires and objectives other than happiness. It is therefore possible to make people worse off while increasing their reported subjective wellbeing.

The authors show why people stay in cities which are not as happy:

In Glaeser et al. (2014), we measure subjective wellbeing across US regions using a large national survey. We use responses to a question in the Behavioral Risk Factor Surveillance System (BRFSS) conducted by the US Centers for Disease Control and Prevention (2005–2010), which asks,

“In general, how satisfied are you with your life?”

Possible answers are “very dissatisfied”, “dissatisfied”, “satisfied”, and “very satisfied”. We adjust the responses for demographic characteristics and sampling error.1 We can then determine each area’s subjective wellbeing for a comparable person.

We map these adjusted measures for each US metropolitan area and non-metropolitan region in Figure 1. (The Washington Post has produced another version of this map here.) We see that the Rust Belt, which includes areas such as Detroit and much of the Midwest, generally has lower subjective wellbeing than the rest of the country. From the mid-19th century the Rust Belt developed extensive manufacturing, but it declined significantly during the second half of the 20th century. New York City and much of California also have lower reported happiness, while the happiest areas are concentrated in the West, Upper Midwest, and rural South.2

When we examine relationships between life satisfaction and a range of area characteristics, the most striking fact relates to urban decline. As Figure 2 shows, cities experiencing the lowest population growth rates from 1950 to 2000 report significantly lower life satisfaction. This pattern shows up in our regressions with very strong statistical significance. It is robust to numerous specification checks and different assumptions about functional forms.

The welfare consequences of these differences depend on whether people are actively choosing where to live. If people are choosing to live in less happy areas when they have other options, this would suggest that they are making a conscious choice in favour of an area despite its low happiness. Figure 3 shows the distribution of population based on the happiness of the area where each person lives (as measured above). We show two distributions, one for people who moved between metropolitan areas from 2010 to 2011, and one for non-movers. For the movers, we use the adjusted life satisfaction of the new areas where they chose to live after the move.

The idea is less happy places are compensating you for the same.

Given that areas have different happiness levels, and some movers nonetheless migrate towards less happy locations, they appear to be looking for something other than pure happiness. Otherwise we might expect everyone to move to Charlottesville, Virginia – the happiest metropolitan area according to our measure. What are less happy areas offering to offset their sadness?

Our paper presents evidence that unhappy areas can compensate their residents with higher real incomes. We use historical survey data to show that larger, more productive cities were unhappy even during their more successful days. Residents were compensated for this unhappiness with better job opportunities and higher incomes. During the Rust Belt’s heyday, firms located in these cities for their natural advantages, such as access to waterways, that made up for the loss in happiness.

When the value of these natural advantages fell, and the cities became less productive, their populations declined significantly. These areas remain unhappy, but the population decline drove significant decreases in housing prices. This lowers the cost of living, so declining cities can offer surprisingly high real incomes to partly compensate for their lower reported wellbeing. This tradeoff is consistent with a model in which happiness is one component of utility. It is harder to reconcile with the idea that happiness is equivalent to utility, or is individuals’ ultimate objective.

Hmmm..

Well, the idea behind happiness research is to show growth alone does not matter. One should not say that happiness alone matters..

How did history forget its role in public debate and the History manifesto

October 16, 2014

I had pointed to this book review of History Maifesto. The book is written by  and Jo Guldi.

Interestingly, the book is put up for free and looks like a great read. The conclusion chapter says:

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To regulate or not to regulate mobile apps market..

October 15, 2014

Cato’s regulation magazine has this article on growing mobile apps market.

Earlier mobile apps were mainly to do with games, chatting etc. Now Now thanks (0r no thanks) to apps like Uber taxi etc they are posing threat to incumbent businesses leading to all kinds of noises from the former.

So what should regulators do? Three options:

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Why asking Prof. Tirole for policy prescriptions is not right..

October 15, 2014

The newspapers/websites are full of Jean Tirole’s policy prescriptions. Some quote him and others pick his research to show the implications. However, if you read the research you wonder where is the prescription? Most of this scholarly research is ambivalent and laden with assumptions. It also tells you that either people who write such pieces have not read Tirole (and other past winners) or have not really understood the ideas.

David Colander writes a much needed post. He says people should not look for policy prescriptions from the prize winners. The Prize is for economic research which may have nothing much to do with policy.

He begins with the lamppost story and says we draw wrong lessons from it:

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Citigroup exiting commercial banking in eleven economies…

October 15, 2014

Just a news item but has important implications.

Citi is exiting commercial banking in eleven economies:

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Questioning high economic growth and long working hours…

October 15, 2014

It is interesting to read these pieces from the other side of the world.  A kind of world which has made us believe that growth is what matters. It should happen and rise at whatever costs.

Warwick Smith of Guardian questions this belief in this article and debunks the mainstream thinking:

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Swiss Gold Referendum: Issues and Implications..

October 14, 2014

Swiss Gold referendum is going to be an interesting event to watch out for.

Claudio Grass of Mises Institute speaks to a Swiss expert on the topic. Points to some insights into Swiss political economy and how if voted yes it will impact central banking and gold..

Arthashastra beyond economics and realpolitik…

October 14, 2014

The beauty of classics in economics is it is just not about economics alone. These books which continue to shape our economic thinking, were much more than economics. These usually covered a wide range of issues like politics, society, psychology, ecology, trade and so on.

Arthashastra is one such book which though is seen as a book on economy and politics, is actually much more. The people then had far more things to observe than their spreadsheets and as a result engaged with much broader spectrum.

Deepshikha Shahi Prof Political Science at the University of Delhi writes a paper in this regard. She says one can look at Arthashstra from an international relations angle as well:

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Are Services the New Manufactures?

October 14, 2014

Dani Rodrik in his new piece asks this question. His answer is obviously no..

He remains sceptical that services sector can replace the manufacturing space:
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Adjusting Human Development Indices with inequality…

October 14, 2014

Prof Joe Stiglitz has this interesting point on growing malaise in US economy. What was once a huge pride is now a huge failure and source of embarrassment:

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