Archive for the ‘Economist’ Category

Why both Keyensian and Free market economic schools are wrong…

November 26, 2014

Jess Sachs says recent crisis has exposed both these dominant schools of thought (just read on..he actually advocates planning!!):


The Federal Reserve’s Escape from New York..

November 26, 2014

Prof Simon Johnson’s recent piece is on governance at Federal Reserve. In his typical style, he lambasts what has been going on at Fed esp. at NY Fed.


Is ECB a rabbit in the rabbit/tortoise story? (and Fed/BOJ tortoise??)

November 26, 2014

Harley Bassman of Pimco thinks so.

Aesop relays the tale of a hare who ridicules a slow-moving tortoise, who then challenges the hare to a race. The hare soon leaves the tortoise far behind and, confident of winning, takes a nap midway through the race. When the hare awakes, however, he finds that his competitor, crawling slowly but steadily, has crossed the finish line before him.

Investors may wonder how long the European Central Bank (ECB) will slumber after taking an early lead in the race to expand its balance sheet to facilitate growth across the eurozone – the world’s second-largest economy.

We could call it an economic fable…

It has come to pass that the first- and third-largest economies on the planet – the U.S. and Japan, respectively, and the tortoises of our tale – have engaged in massive quantitative easing (QE) programs as a means to spur monetary velocity (via increased asset velocity – that is, the rate at which assets circulate). Yet some analysts insist the eurozone may not follow suit.

He goes on to suggest that QE may not work in theory but does in practice…

Poem – The Mathematician in Love (could easily apply to economists as well)..

November 18, 2014

William John Macquorn Rankine (a Scot  civil engineer, physicist and mathematician 1820-72) has written this amazing poem (HT: came across this poem in one of the threads discussing history of math and economics).

The poem is titled as mathematician in love but very easily fits in for an economist too. Being a Scot, he would have surely heard/ known of this field called economics developed by his fellow Scotsmen Adam Smith and David Hume. But I guess the field of economics was not really as mathematical then, otherwise he would have been advised to add economist there as well.

Just read these lines:


Evolution of money…from playing cards to e-currency

November 18, 2014

Superb speech from Carolyn Wilkins of Bank of Canada.

In particular she points to this picture placed in one of BoC  halls which shows evolution of money.


50 years of Solow growth model…implications and impact

November 17, 2014

A nice interview of Prof. Robert Solow in McKinsey Quarterly (MQ). The interview celebrates 50 years of both the model and MQ.

The best thing about the interview is that it discusses how Solow model was actually applied to the real industries. What is Solow model? Well it says what matters for growth is not labor or capital but technology. What did the actual evidence show?

The Quarterly: What, if anything, surprised you about the findings of the early MGI studies?

Robert Solow: What came as something completely new to me was that if you looked at the same industry across countries, there were almost always dramatic differences in either labor productivity or total factor productivity. To my surprise, it turned out that most of the time, certainly more often than not, the difference in productivity—in the auto industry or the steel industry or the residential-construction industry in the US and in countries in Europe—was not only substantial but couldn’t seriously be explained by differences in access to technology.

We also found that the productivity differences could not be traced to differences in access to investment capital. The French automobile industry, much to my surprise, turned out to be more capital intensive than the American automobile industry. So it was not that either. The MGI studies instead traced these differences in productivity to organizational differences, to the way tasks were allocated within a firm or a division—essentially, to failures in managerial decisions.

I was, of course, instantly suspicious of this. I figured to myself, “What do you expect a bunch of management consultants to find but differences in management capacities? That’s in their genes. That’s not in my genes.” But MGI made a very convincing case for this. And I came to believe that it was right.

:-) Gave some legitimacy to the consulting industry..

What drove management? Competition..

The Quarterly: So management was the primary factor in productivity differences?

Robert Solow: Yes, and there was another surprise, for which there was partly anecdotal, partly statistical evidence. If you asked why there were differences that could be erased or diminished by better management, the answer was that it took the spur of sharp competition to induce managers to do what they were in principle capable of doing. So the idea that everybody is everywhere and always maximizing profits turned out to be not quite right.

MGI made a very good case that what was lacking in these trailing industries in other countries—or in the US, in cases where the US trailed—was enough exposure to competition from whoever in the world had the best practice. And this, of course, can apply within a country. We know that in any industry, there is a whole distribution of productivity levels across firms and even, sometimes, across establishments within a firm. And much of that must be due to the absence of any spur to do more.

So an interesting conclusion to me was that international trade serves a purpose beyond exploiting comparative advantage. It exposes high-level managers in various countries to a little fright. And fright turns out to be an important motivation.

The Quarterly: So competing against the global best-practice leaders is a way to encourage your own industry to use best practice?

Robert Solow: Yes, and it goes beyond that, even. Competing as part of the world economy is an important way of gaining access to scale. If you’re a Belgian company or even a French company, it may be that best practice requires a scale of production larger than the French domestic market will provide for French producers.

So it’s important for such companies to have access to the international market. That was not something I had thought of. And I don’t think anyone had—at least I had no reason to think, within economics, that there had been much thought about management activities as a big difference between best practice and less good practice. We had always thought, “Well, people seek profits. And if they seek profits, they’ll have to adopt best practice.” Not so.

He says the future research shd look at productivity in services sector:

The Quarterly: Looking toward the future, are there other issues in economics that MGI’s sector-level approach might be helpful for?

Robert Solow: I would like to see more work on the determinants of productivity and productivity increases within the service sector. To begin with, I don’t think we even have a very clear idea about the relative capital intensity within the service sector or between the service sector and goods-producing sector.

I remember I was once writing something in which I was describing the service sector as being of relatively low capital intensity. And then I stopped and remembered that the following day I had an appointment with my dentist and that my dentist’s office was as capital intensive a 500 square feet as I had ever seen in my life.

So I think the place where the MGI approach is most needed right now is in the service sector. There has been service-sector work within MGI, and outside of it as well, but not as much as is warranted in view of the 70 percent or more of all employment in advanced economies that’s in service industries.

The Quarterly: Are there particular places in the service sector where you’d look first?

Robert Solow: Well, that brings me to another MGI result that I found fascinating. At one point, we were trying to understand the industrial basis, the sectoral basis, for the acceleration and deceleration of productivity growth. And one of the things we found was that the two largest sectoral contributions to the acceleration of productivity growth when it was accelerating and, presumably, to the deceleration when it was decelerating came from wholesaling and retailing.1 Both of them, at the time, were low-productivity sectors and low-productivity-growth sectors. But they employ so many people that a slight improvement in the productivity of retailing makes a large contribution to the increase in national productivity.

There has been some work on that, but I think the work is needed now more in personal services. God knows, in healthcare. And education. Or child care. All sorts of things.

Nice bit..Calls himself an ordinary macroeconomist…hope most of us really ordinary economists also believe the same..


Underemployment vs. unemployment…Why overeducaton is as much a problem as undereducation?

November 17, 2014

Brian Clark, Clement Joubert and Arnaud Maurel raise an important issue. When we link labor markets to education the focus is on how undereducation leads to unemployment and so on.  We hardly look at the other side of the story which is how overeducation leads to underemployment where people do not get the jobs as per their education levels. There are ample stories of this kind as well where graduates run taxis and so on.

The authors raise this concern from an American perspective but could be a more global problem as well. Much of the work we do hardly requires knowing just basic skills of 3 R’s (reading, (w)writing and (a)rithmetic).  Unless you get into rocket science kinds of work, just basic is more than enough. But we are really required to pile on more and more degrees just for the sake of it. It is funny how you need an advanced MBA to sell shampoos, hair oils, balance accounts and so on. One can just do all these tasks by just being a simple graduate. But then this is how it is. The society forces us to spend our time more and more on getting education which does not add much value overtime.

Plus with rising costs of education, students have additional burden of debt on their heads. This is how the authors start the post:


Central Bankers and bahavioral biases

November 17, 2014

Andy Haldane of BoE discusses the issue in this speech.

He first lists the behavioral biases and then suggests what central banks can do to overcome the biases:

Preference biases – where the decision maker might put “personal objectives over societal ones, such as personal power or wealth”   

Myopia biases – “people differ materially in their capacity to defer gratification” and studies suggest that people who show greater patience “outperform their impatient counterparts in everything from school examinations, to salaries, to reported life satisfaction”. 
Hubris biases – over-confident individuals are “more likely to be promoted to positions of influence” but tend to pursue “over ambitious targets” like “undertaking over-complex company takeovers. That way nemesis lies”

Groupthink biases – people tend to adapt their view to confirm to those around them and also have a “tendency to search and synthesize information in ways which confirm their prior beliefs”.     
There is little doubt that central banks have suffered from either all or some of these biases over the period with hubris bias being the biggest.
BoE (and others in their own ways) have tried to get out of these biases:
To tackle preference bias, the Bank’s does not set its own objectives.  It has three policy making committees – for monetary policy (MPC), financial policy (FPC) and prudential regulation (PRA Board). In addition, “to ensure the actions of the Bank’s policy committees are well-aligned with society’s wishes” their targets are “set ex-ante in legislation by Parliament acting on behalf of society”. 
To prevent myopia, the Bank of England has been made independent from government when choosing how to set monetary and financial policy to achieve their respective objectives.  These decisions have been given to an institution “whose time horizon stretches beyond the political cycle”.  Andrew suggests that central bank independence has been successful at taming “the inflation tiger” but he warns that “as some countries are finding today, the tiger is capable of biting back” in the form of low and falling inflation expectations. Andrew notes that while inflation expectations in the UK have held up pretty well, this is something he is “watching like a dove.”
To guard against Hubris at the Bank, “all policy decisions … are made by Committee rather than an individual” which “provides some natural safeguard against over-confidence bias”.  Andrew notes that external MPC members have contributed importantly to the diversity of opinion on the committee “on average they have been around twice as likely as internals to dissent from monetary policy decisions”. 
Finally to ward off groupthink, each member of the policy committees is individually accountable for their vote or view, and this should encourage “a variety of analytical perspectives”. That said Andrew notes that analysis of MPC minutes suggests that they did not devote enough time to discussing banking issues in the run up to the financial crisis, something that in hindsight, “looks like a collective analytical blind-spot”. He argues that despite all the changes to the Bank’s policy responsibilities since the crisis, “it is too soon to tell whether any remaining blind-spots remain”. Also, in his view “improvements to the Bank’s forecasting process have some considerable distance still to travel”.
Have these committees worked? I mean it just has people with very similar backgrounds trained in the same kind of economics. How can views be any different? We make a big deal of dissents. Have these dissents dissuaded the chief of the central bank from taking a different path? All we have is hype around dissents, nothing more nothing less. Groupthink continues despite committees
Much of fight against inflation was brought during highly comfortable global times. We are now seeing serious limitations on what central banks can achieve on inflation as well. Despite so much easing, deflation pressures remain in most adv economies. This is against expectations that we will have high inflation due to these policies by many experts. The  standard ideas have just failed really. But hubris continues..
All these biases can only be avoided if alternate schools of thought are encouraged in economics. The subject should be more interdisciplinary and humble. Just by saying we have committees and encourage diversity, it does not happen.  When most students are made to think in one standard way, diversity is just a myth and groupthink a reality..

Why Keynes is important today?

November 14, 2014

Eco Historians Peter Temin and David Vines have this article.

There is huge animosity to fiscal stimulus today based on Ricardian equivalence. The authors show how Keynes faced a similar situation in 1930s:


Does corporate ownership of media lead to conflict of interest?

November 13, 2014

Recently there is increased spotlight and criticism due to increasing corporate takeover of the media. People feel over a period of time. much of the news is going to be managed and presented to suit corporate interests. We are seeing it partly as the media has gone completely berserk over anything that the government does. It has just lost its basic element of journalism.

Anyways, this paper shows that conflict of interest is rather limited. In a really innovative way the authors figure the conflict of interest. They look at movies which are produced by these big media houses and movie reviews in newspapers owned by the same media houses. Ideally, we should think that these reviews shall be biased. But the authors figure no such thing:


Book Review – The travels of a T-Shirt in the global economy..

November 11, 2014

I mean one can just put all trade books/papers away and just read this book.

Prof. Pietra Rivoli of Georgetown Univ has written a terrific book which needs to be widely read.  Stumbling on the book was sheer luck as I have hardy seen the book being mentioned anywhere. As one of the reviewer says Rivoli has achieved the nearly impossible. Another one calls it part travelogue, part history and part economics.

Prof. Rivoli builds this really fascinating story of how T-shirts are made. For this she goes into history of cotton. On this she realises how US has been the leading cotton producer for around 200 years now. This is surprising by itself considering how other countries are nowhere close to US. In other industries we have seen either massive or atleast some changes. But in case of raw cotton, nothing. US remains the undisputed leader. Questioning this why takes her to history of cotton, history of industrial revolution, history & geography of US and all kinds of other histories. The reason is how US had the basic ecosystem for allowing agri business to flourush – prop rights and so on. And in recent times, the dominance is there due to active govt support in form of subsidies and trade barriers. So first half (or more) is actually abt efficeny of US industry and latter half due to policy. So a mixed story here..

Then she moves on to how this cotton makes its way to China where cotton is processed and all kinds of garments are made inclusing T-shirts. Before China there were other countries which dominated this space like Uk, Japan, Korea etc. Each one gave way to other as labor costs were much lower in other countries. This bit of trade history is fascinating by itself.

Then how this T-shirt comes to US. This leads to other kind of history which is to deal with trade restrictions. How countries all through history have been uncomfortable with some or the other low cost producer is nicely told as well. This leads to lobbying and all kinds of ways to restrict and push trade. Infact, the competition could be within countries too. In a nice tale, how British woollen industry seeing competition from cotton industry lobbied and forced all Brits to leave cotton and continue to wear itching cotton is quite a story.

In all these stories, China has obviously come to the centrestage., The rise of China into all manufacturing industries including T-shirts needs to be understood as well.

The book finally has this amazing and ignored story of recycling of clothes.In detail, author explains how rich Americans dump their worn out T-shirts which are then sorted and sold to poor countries for a fraction of a price. This makes the industry  highly recyclable as well. The author adds the above trade is highly political and has become restrictive. It is in this recycling category, we actually see markets working really well. The government hardly intervenes to regulate this market. But this has led to questions of morality. Should Africans wear thrown away clothes of Americans? How Africans chose those clothes which have certain deo etc kind of fragrance. This shows the shirt was indeed worn by Americans and not really recycled again in Africa. This offends some people who think Africans deserve better. The other side argues better to have some clothes than nothing at all.

The sheer coverage of issues and yet be so simple is really the hallmark of this book. A story which will appeal to all kinds of people.  Cannot get better than this.

Must read..

The Free Market (and all that) did not bring down the Berlin Wall

November 10, 2014

There are certain narratives which are never questioned. One such narrative is rise of free market thinking in the last 30 years or so. Now, this itself was not new as before great depression we had similar thinking. But then you know our memories are short and most of us are ignorant of history.

After fall of Berlin Wall (stunning picture here) we are lectured through numerous articles and books that how that phase signalled the end of communism and rise of American brand of capitalism.In 25 years of celebrating Berlin Wall we continue to do the same. Some experts by force point whether certain leaders have learnt the free market lessons from the fall, least bothered whether  the leader knows anything about the event. They actually even add that yes these lessons have been learnt!

The reality seems to be lot different. This FP piece explains what really happened. What was just a mere effect is now touted as cause:


Economics of inclusion..

November 10, 2014

Prof Hausmann again. This time he writes on how we can make inclusive growth count.

The central idea is to get the basic infra going:


Eurozone banks…do we finally know their status?

November 6, 2014

There is huge buzz around European banks stress test. There have been tests before as well but did not exude enough confidence.

Wharton Prof Richard Herring discusses what is new in these tests and do we finally know the true status of European banks.

The basic complications over who shall fund the bill remain despite ECB coming into the picture now:


25th anniversary of fall of Berlin Wall: How have countries that broke from USSR faring?

November 5, 2014

A superb post by Branko Milanovic, an inequality expert who worked at World Bank (his blog on inequality is really good and promising).

He looks at how these countries are faring and data shows nothing much has happened. The hyped convergence to west has been an illusion for most. Only in case of Poland has some kind of development and convergence happened:


Why business people are poor economic advisers?

November 4, 2014

Prof Krugman has this nice article on the topic. He had written an earlier piece on the issue as well. But that was for different economic times. The logic is still valid though.


Central Bankers and the celebrity bubble they create…

November 4, 2014

Ken Rogoff writes an article which is a must read for all central bankers and the media which hypes them.

He wonders what is all this hype about central bankers? Why do we care so much about each word they say, their color of tie and god knows what all. Most central bankers love the publicity and hype and don’t shy from photo-ops and enjoy their sudden new popularity. In the process they don’t realise they are becoming victims of financial markets and governments:


Home prices since 1870 and why Ricardo seems to have been right..

November 3, 2014

Katharina Knoll, Moritz Schularick and Thomas Steger look at home prices since 1870 in 14 countries.

They show how home prices have risen mostly in the second half of 20th century:


Economics of Wikipedia: The value of open content production

October 31, 2014

Aleksi Aaltonen and Stephan Seiler have an interesting piece.

What drives Wikipedia?


Brazil is Belindia – Belgium + India

October 31, 2014

Andres Velasco reflects on the recent Brazil elections. I mean how quickly things turn around. Just three years back, people were praising the outgoing President Lula who had left a strong economy. And now we are discussing how Brazil will fight its recession.

Anyways, Prof. Velasco points to this interesting story. Brazil was named as Belindia by one of its econs 40 years ago:



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