Archive for the ‘Economist’ Category

How the committee that saved the world ended up nearly destroying it..

September 11, 2014

Adam White has this stirring piece in City Journal. article is a review of Geithner’s recent book.

This is a piece which all the policymakers in economics and finance shot current should read. The central message is never take yourself too seriously. Don’t let current successes turn into hubris as you never know when it will all come crashing down. One major reason why we saw such spectacular failures in economic policy-making in West apart from dubious economics was enormous amount of arrogance and belief that I know all. When the luck runs out it all becomes too ugly.

There should be far more humility than we see in financial elites across the world. All of them come from very similar backgrounds and education profiles. Much of the differences they try and show are just a hogwash. Most of the time, they try and take credit for much of that is happening across their economies and the world. We are seeing plenty of this in India too.

The committee of Rubin, Greenspan and Geithner (add Summers too) was seen as the thing in 1990s:

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The decline of honeybees and its impact on agriculture..

September 10, 2014

Nice post by Julian Lee of WB. That too on a topic which we hardly discuss and think about.

He says how decline of honeybee population is leading to decline in agri prospects:

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The mirage of “world class research”.. why India is so much behind?

September 10, 2014

India is often seen as a supply side story i.e. we need to resolve our several supply bottle knocks to meet the huge demand. Once supply is sorted, growth rates are a given.

There is one area where it is not supply but demand side which needs a relook – research in universities. Prof. Dinesh Mohan in this superb article points to several issues clogging our research. He says mirage of world class research. I would say leave world class let us even come to cattle class category (for lack of a better metaphor).  We are even unable to educate properly leave research..

Prof Mohan starts with Indian President’s parrot like words:

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If urbanisation is associated with prosperity, why are today’s urbanising countries poor?

September 9, 2014

Edward Glaesar has this superb piece on this paradox. Usually, we think of urbanisation as somethign that leads to prospertiy. As countries have developed, so has urbanisation leading to higher incomes etc in today’s developed economies.

However, in case of developing economies story is different. Urbanisation has risen but so has chaos and filth. It is not the urbanisation story we saw in the history of today’s developed economies:

Over the last half-century, a once overwhelmingly rural world has become ever more urban. In 1960, the urbanization rate in the majority of poor countries was less than 10 percent. Just 3 percent of Botswana’s population lived in cities, for example, while Kenya was 7 percent urban and Bangladesh (then East Pakistan) was 5 percent urban. Even China had only 16 percent of its people then residing in cities. Nowadays, China is more than 50 percent urban and Botswana more than 60 percent. In those two countries, industrialization and increasing prosperity have accompanied the population shift to cities. China’s real per-capita incomes have risen 25-fold since the early 1960s, and Botswana is more than 17 times wealthier. This has been urbanization’s usual historical pattern. In 1961, a 1 percent increase in urbanization was associated with per-capita earnings growth of 3 percent. And the trend is even stronger today: in 2011, a 1 percent rise in urbanization was associated with a 5 percent boost in earnings.

Yet while urbanization continues to correlate with prosperity, recent years have seen the striking rise of a new phenomenon: urbanizing countries that remain poor. Urbanization has increased from 5 percent to 28 percent in Bangladesh and from 7 percent to 24 percent in Kenya, for example, but prosperity has stood still. The urbanization of these poor nations doesn’t take the form of midsize urban centers, like those that sprouted along most of America’s major nineteenth-century waterways, but typically of a single megacity. The Nairobi agglomeration has a population of 3 million; Dhaka has 15 million inhabitants. The Democratic Republic of the Congo is the ultimate example of this new form of impoverished urbanization. Its capital, Kinshasa, has 8.4 million people, while per-capita income in the country is about $250. Haiti is also an extreme case, with an urbanization rate of over 50 percent and a per-capita income under $1,000. Karachi has 13.5 million inhabitants; the per-capita income in Pakistan is about $1,200.

These impoverished big cities are mostly located in poorly governed countries, lacking stable institutions and strong property rights, which helps explain why economic growth hasn’t taken off in them. But if these vast urban agglomerations aren’t providing much economic opportunity, why are rural people still moving to them? And how can such cities, with extremely limited resources, deal with the perpetual demons of density, including contagions, crime, and housing? Can a megacity of almost 9 million people in a country where incomes average $250 a year be anything but a hell on earth? Cholera rages in Port-au-Prince and Kinshasa; hundreds are killed each year by the commuter trains of Mumbai. The awful downsides of urban poverty might seem to support limits on urban growth or a more aggressive focus on rural development. But cities are the present and future of the developing world. The great challenge of our century will be to make them livable.

He points to lessons from NY:

Why has poor-country urbanization become so common when it was once rare? In the broadest sense, it is because the longtime connection between agricultural productivity and urban growth has been broken. From medieval times and for centuries afterward, famine-causing disasters didn’t send peasants flocking to the nearest town or city—that path led only to starvation. Staying close to the land offered the best chance of survival. Cities grew only when they could tap vast agricultural surpluses and, crucially, had the means to get that food delivered reliably from their hinterlands.

New York is a good example. Back in 1875, as it crossed the threshold of 1 million inhabitants, the city could easily feed itself with the products of fertile western farmland. Thanks to technological improvements like Cyrus McCormick’s mechanical reaper, the farms had begun to produce a lot more food than farmers needed to feed themselves. New transportation infrastructure—the Erie Canal and the Intercontinental Railroad—made it possible to move all that food swiftly to the city. And Gotham’s entrepreneurial success in finding markets for its relatively sophisticated products, like printed books and refined sugar, gave it the wealth to buy and transport the food, which, in turn, enriched America’s breadbasket. In earlier cities with more than 1 million people, like ancient Rome, military might and bureaucratic competence played the role that entrepreneurship did in New York. Unlike the Iowa farmers shipping wheat to Manhattan for profit, Egypt wasn’t willingly emptying its granaries to feed Rome. But the empire’s sword made sure that the food arrived all the same, efficiently moved over great distances by the Roman legions.

He points to further examples on how NY handled water, crime etc issues.

Though one is not really sure whether lessons can strictly be learnt and applied. It is not as simple as it looks. Even cities in developed world were a huge mess and it took them a while to sort the issues. Each country, city has to go through the troubled path and then find a solution. Two advantages which most most of today’s developed world had was either huge land area or low population or both. This made it easier to transform cities. In the developing world most countries don;t have similar  luxuries making it all the more difficult.

This does not mean it can’t be done. Just that the path is much tougher..

Namonia reaches Texas and Dallas Fed…

September 8, 2014

Wow this is some publicity and hype.

How many times do we see central bankers of praise politicians and that too of of other nations? In this case it is actually a Regional Fed chair – Richard Fischer of Dallas Fed praising the not so new Indian PM. I just casually read Fischer praising Indian PM on some website. I thought it must have been just some comment. But no it is a speech titled Texas Jagannath (With Reference to Indian Prime Minister Modi, a Hindu Goddess and Wodehouse’s Big Money) .

The speech is given at US – India Chamber of Commerce:

I am so honored to have been invited to join Ambassador (S.) Jaishankar this evening to celebrate the U.S.–India Chamber of Commerce and its many distinguished awardees.

Mr. Ambassador, I am delighted you are here in Texas tonight. I am going to give you a few statistics in a moment that I think will make readily apparent the reason for this large audience and why so many Indian entrepreneurs and professionals come to Texas. Then I am going to give you a snapshot of where the U.S. economy is at present and what we are grappling with at the Fed. But first, with your indulgence, I want to briefly speak of the relationship between our two great countries, India and the United States.

The logic of an enhanced strategic relationship between my country and yours is crystal clear, beginning with a harsh geopolitical reality: You live in a tough neighborhood and need us; we, in turn, need all the friends we can muster in your geographic sphere. It seems very timely that we overcome the history that has separated us and begin working more closely together.

During the Cold War, it was the view of many in the United States that India was too closely allied with the Soviet Union. American businesses that looked at India found it afflicted with the legacy of the worst of British bureaucratic administration. (The old joke was that you could never get morning tee times at any Indian golf course because the bureaucrats had locked them up at least until noon).

From an Indian perspective, America seemed too hegemonic. Attempts by U.S. companies to invest and do business in your homeland revived memories of the East India Company.

We viewed each other through the lens of the time and against a background of our own histories, with suspicion.

But the (Berlin) Wall came down, the economy has been globalized and cyberized, and new threats to security have arisen, many of them from nonstate actors or forces who operate from within failed states to inflict damage elsewhere. This is a time for like-minded people to unite and work together.

We are like-minded in that we are democracies. But tonight we celebrate something even more fundamental. My reading of India is that, like in the U.S., your country men and women are more pragmatic and business-oriented than they are ideological or inherently bureaucratic.

The recent election of Prime Minister (Narendra) Modi offers the promise of making this abundantly clear. He was, after all, the chief minister for over a decade of the Gujarat, the most probusiness state in India. And almost every U.S. business leader I know has heard of Ratan Tata’s experience when he looked to Gujarat for an alternative to the frustration of his attempt to build a new car factory in West Bengal. As I understand it, Mr. Tata went to see Minister Modi, had a handshake deal in 30 minutes, and in 14 months the new factory was up and running. That almost makes Texas look like California by comparison!

So Mr. Ambassador, we are all watching for this first prime minister born since Independence to work his probusiness, nonbureaucratic, can-do spirit upon the whole of India. It is in America’s interest for India to thrive. We wish Prime Minister Modi, the government you represent with such distinction, and the Indian nation the very best of luck.

That is some marketing. One would expect such a speech from Texas Governor not Dallas Fed President.

How Yellen has become like a Hindu Goddess:

As you can see from this graphic, unemployment has declined to 6.2 percent, and the dynamics of the labor market are improving. At the Federal Open Market Committee, where we set monetary policy for the nation, we have been working to better understand these employment dynamics. This is no easy task. Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”[2]

Whether you analyze the labor markets with one arm or two, or six or 19, the issue is how quickly we are approaching capacity utilization, so as to gauge price pressures. After all, a central bank is first and foremost charged with maintaining the purchasing power of its country’s currency. Like most central banks around the world, we view a 2 percent inflation rate as a decent intermediate-term target. Of late, the various inflation indexes have been beating around this mark. Just this last Friday, the personal consumption expenditure (PCE) index for July was released, and it clocked in at a 1 percent annualized rate, a pace less than the run rate of April through June.

Does this mean we are experiencing an inflation rate that is less than acceptable? I wonder. At the Dallas Fed, we calculate a trimmed mean inflation rate for personal consumption expenditures to get what we think is the best sense of the underlying inflation rate for the normal consumer. This means we trim out the most volatile price movements in the consumer basket to achieve the best sense we can of underlying price stability. In the July statistics, we saw some of the fastest rates of increases in a while for the largest, least-volatile components of core services, such as rent and purchased meals.[3] So the jury is out as to whether we have seen a reversal in the recent upward ascent of prices toward our 2 percent target.

Interesting comparisons..

However, Hindu Goddesses with multiple hands are seen destroying some evil. In this case the evil is really unemployment and weak economy. Can Fed chair really do anything about destroying the evil?

US economy performs better under Democratic presidents…. Why?

September 5, 2014

Profs Alan S. Blinder and Mark Watson have this interesting post. They say it is always the case that US economy does better under Democratic President compared to Republicans.

Why is this?

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Book Review — Zombie Economics: How Dead Ideas Still Walk among Us

September 4, 2014

Just finished reading this book by Prof John Quiggin. As Prof Quiggin is from Australia, perhapsthe book did not become as famous compared to his American counterparts.

Actually this is a book which most experts and media in India should read. The kind of articles people write by simply aping the west is outright silly. And that too after seeing how the west has suffered recently.

In the book, Prof Quiggin thrashes five ideas which like zombies keep coming back despite their ugliness. These ideas were thrashed as crisis started but are again making a comeback:

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Buy and hold vs market timing portfolio strategies

September 4, 2014

There are certain things which do not make sense when comparing theory with practice. Finance theory shows that simple buy & hold/passive investing wins iver market timing/active investing. But in practice people keep trying to make more returns than markets. Few lucky ones blow their trumpets (and hide their losses when luck becomes dry). The rest keep trying just to waste more and more resources.

Infact theoretically, finance industry should not be as big and profitable. The profits are not made of market timing but via commissions and exorbitant spreads between costs and incomes of providing funds.

Yi Li Chien of St Louis Fed shows in this yet another small note how buy and hold wins over market timing:

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Importance of studying humanities/liberal arts for economic development..

September 3, 2014

Prof. Ned Phelps points to the importance of encouraging students to take up humanities.

He says it is wrong to think of bridging education gap via  education in STEM (science, technology, engineering, and mathematics) courses:

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As yields of Spanish and Greek Bonds equal US Treasury yields…

September 2, 2014

Christopher J. Neely of St Louis Fed says that despite the yields in two regions converging, risks remain in Europe. This is because bonds are paid in different currencies.

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Book review – Exorbitant Privelege

September 1, 2014

I just finished reading this book – Exorbitant  Privelege – by Prof Barry Eichengreen, leading econ historian.

The book is really good as it goes into history of American Dollar and what makes it the most preferred currency across the world. As it talks about US Dollar one gets a flavor of history of international monetary system and the politics behind it. I mean hardly anything matters more than politics.

The book is simply written for a layman and explains many important concepts and trivia. For instance I learnt that Dollar got its name from Joachimsthaler (see this as well), a coin used in much of Europe. The Brits on colonising used this coin as not enough Pounds were minted. Hence, these thalers circulated which later came to be called as Dollars.

The book is full of these characters which led to the role Dollar plays in world economy today. Exorbitant Privilege was a term given by French Finance Minister Valéry Giscard d’Estaing to the status of Dollar.

The book discusses many aspects of US economy which led to the Dollar becoming the reserve currency of the world. he also discusses what countries like China need to do to unsettle US from its position. There is this discussion on Euro and how it has squandered the chance (atleast for sometime now) to replace the Dollar or atleast compete with it.

Highly recommended.

From Abe’s three arrows to Draghi’s three arrows…

September 1, 2014

Nouriel Roubini monikered as Dr Doom suggests that like Japan’s three arrows, Europe also needs its three arrows.

There is one crucial difference though which Dr Roubuini misses. In Japan this was done by PM Abe who could ask both his govt and central bank to participate in the bow and arrow strategy. However, in Europe’s case Roubini credits this shooting to Draghi who can hardly do anything to improve structural growth, take productivity reforms etc. It is the role of govt and not central bank. Moreoever, how does Draghi shoot all these three arrows across its 18 members?

Draghi can just shoot one arrow of more monetary stimulus. Rest it has no say.

It is also interesting to note how little criticism Draghi (% ECB) is getting vs how much criticism Bernanke (& Fed) got for all this QE business.

Argentina’s use and abuse of Keynes

September 1, 2014

Andres Velasco in Proj Synd piece says how Arg has got the message from Keynes wrong. Well, it is rare that a country gets anything right in economics.

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Washington Recaptured…

August 29, 2014

It is quite remarkable to see how Prof. Simon Johnson has stuck to the cause of crony financialism (crony capitalism is a little broader) and doing away with it.

Here he compares how Washington was captured by the Brits in 1814. And after 200 years it is being captured by Wall Street and Big Banks.

38 maps that explain the global economy..

August 29, 2014

Superb visual post on world economy by Matt Yglesias. Amazing maps on world economy each one showing a different story. It is still incomplete bit nevertheless.

It is so fascinating to learn economics this way. But most of our textbooks are so dry. The only pictures we have are those dreaded graphs.

Good show.

Should we call this Great Financial Crisis a Greater Depression instead?

August 29, 2014

Brad Delong certainly thinks so.

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How Beatles saved UK from its foreign exchange crisis in 1960s..(Some lessons for India too…)

August 28, 2014

A superb article in IMF’s F&D Sep-14 edition by Simon Wilson.

He points how Beatles helped UK tide off its forex crisis for some years in 1960s. Via its concerts it got foreign exchange to UK. It also became a case for live music being exported and recognised as a BOP earning perhaps for the first time:

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When a hamburger becomes a doughnut and other lessons about globalization…

August 27, 2014

There are two views on US economy. One it is on a perennial decline and other it shall recover given its strong institutions etc.

Daniel Inkenson belongs to the first kind and shows how US is on a perennial decline. Companies are quitting US and locating elsewhere. Reason – taxation issues, infra issues and so on.

He points how Burger King wishes to buy a Candian doughnut maker Tim Hortons and move to Canada:

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Is fiscal stimulus any useful ? Some evidence from US States spending on roads..

August 26, 2014

Sylvain Leduc and Dan Wilson get into one of the oldest debates on importance of fiscal stimulus.

They look at the evidence of whether and how US states used the fiscal stimulus given to them by the Federal Govt:

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NGDP targeting is more suited to developing economies..

August 26, 2014

Pranjul Bhandari and Jeffrey Frankel make a case for NGDP targeting in developing economies.

They say NGDP is more suited to developing world:

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