It is nice to have such articles in Project Syndicate.
Mario Livio an astrophysicist at the Space Telescope Science Institute in Baltimore says some blunders turn out to be brilliant as they lead to real progress in science.
EPW edit in the latest edition says the Interm budget 2014-15 was a tribute to the rating agencies. Well the previous budget was a tribute to the rating agencies as well. In his book Lexus and Olive Tree Thomas Friedman starts it by showing the importance of rating agencies. The book was written way before the crisis but the power of CRAs continues.
What has mattered in the last two years is achievement of the fiscal deficit target and not the mechanics of how it is achieved. Just do it the rating agencies seem to say and Finmin seems to oblige.
He says there are no real reasons for worry with respect to US. Though Europe has to prevent itself from becoming another Japan. For Japan, it has to continue to make efforts to come out if its nearly 25 year mess:
Kudos to Mint for agreeing to publish this interesting piece by Anurag Behar. He actually disagrees with recent Mint pieces which support education vouchers and says this is Mint’s case of politics trumping its economics!!
On 3 February, Mint’s main editorial suggested that “school vouchers” will help solve India’s problems in school education. To use a distinction thatMint often makes, this is Mint’s politics trumping its economics. The reality is that school vouchers will make things worse, both in terms of quality and equity in the Indian education system.
He says we need to stick to basics of education and not look at fancy solutions (which have not even worked in the west..):
We need to work on the fundamental issues in school education instead of focusing on such superficial, counter-evidential, and misleading ideas. Some of these fundamental issues are: grounds-up reform of our teacher education, cultural changes in the system—including empowerment of schools and teachers, examination and text-book reforms, etc.
Pensions is an area which requires deep knowledge of many things. It is a hugely fascinating sub-area in finance on which there is little research.
HBSWK discusses this interesting case study on how GM has tried to pass its management of pension liabilities to a different company. Importantly, it says that despite defined benefit plans becoming history, they are still not dead as those liabilities still have to be paid. With interest rates at record low levels, they have to pump more funds in these funds.
companies are still on the hook for paying benefits to those employees who have already been promised them. As their workers age, employers face the difficult question, How are we going to make good on those promises?
Increasing the pressure are two other factors. Life expectancy has increased, adding to the length of time corporations are required to pay. And interest rates have fallen to historic lows, increasing the funding that companies must set apart to make up for the lower yield on the assets already in place.
“Companies have had to increase their contributions exponentially as interest rates declined,” says Viceira. That strain was a major factor in bankruptcies in the steel, airline, and car industries. More and more, companies are looking for a way out of pension plans, while still making good on their obligations.
They have three choices, says Viceira. The first is to do nothing and continue to invest in equities, hoping the numbers will work out. The second is to work a deal with employees for a lump-sum payment covering the value of their pension, walking away without further obligations. That number can be large, however, and few companies can afford to pay out all that money at once.
Third is to give the pension management to a professional firm:
The final option is for companies to “de-risk” their pension plan by putting assets into more predictable investments that generate enough income while still reducing the risk due to market or interest rate volatility. To do that, some companies are turning to the experts in evaluating risk: insurance companies.
In the HBS case study Prudential Financial-General Motors Pension Risk Transfer: Back to the Future?, Viceira, with Emily A. Chien, wrote about the historic de-risking of GM’s pension plan for salaried employees, a $25 billion deal negotiated last year. GM transferred its assets to Prudential, which then promised to make good on the benefit payouts in the form of guaranteed annuities.
Today is a day for Latam economies.
Mexico, US and canada signed NAFTA in 1994 which was pitched as a win-win agreement by trade experts. It has been 20 years since the agreement. What is the evidence?
Overall, Guillen states, “NAFTA has been great for Mexico. The only doubts are about whether it has been good for the United States. I believe it has been, but there is more of a mixed balance between losers and winners [in the U.S.]. For Mexico, it is a total success. The problem in Mexico, though, is that the export industry there has not been big enough to employ everybody in a large population…. Inequality has been produced, not because the wages of low-wage workers got lower, but because a significant number of workers are now receiving higher wages.
“It is obviously good, but it would be even better if, instead of only 30% of Mexican workers earning those very high wages for Mexico, you could get 70% of the workers.” For that to happen,Mexico will have to overcome its shortage of capital, he adds.
Despite such imperfections, Kemmsies believes that “NAFTA is on the cusp of being a great success,” but he also worries that “Mexico will kill the golden goose before it lays an egg” by imposing export taxes on foreign firms doing business there before those firms are fully convinced they should be in Mexico for the long haul. “Mexico has to worry about overplaying its hand” before the global automakers and other foreign investors have sunk their roots more firmly into Mexican soil.” Given the fragile state of the global economy – and the uncertainties surrounding Mexico’s ambitious reform efforts — many foreign companies “are still scared and risk averse. We are not [yet] past the start-up stage in Mexico.”
As was well known at the time of NAFTA’s passage, the main purpose of NAFTA was to lock in a set of economic policies, some of which were already well under way in the decade prior, including the liberalization of manufacturing, foreign investment and ownership, and other changes.26 The idea was that the continuation and expansion of these policies would allow Mexico to achieve efficiencies and economic progress that was not possible under the developmentalist, protectionist economic model that had prevailed in the decades before 1980. While some of the policy changes were undoubtedly necessary and/or positive, the end result has been decades of economic failure by almost any economic or social indicator. This is true whether we compare Mexico to its developmentalist past, or even if the comparison is to the rest of Latin America since NAFTA. After 20 years, these results should provoke more public discussion as to what went wrong.
No wonder eco is called dismal science..One just does not know what has worked and what has not..
Apparently Simon Kuznets seems to have said these wonderful quote. I mean the quote is so good that one has to keep remembering it and repeating it. He meant nothing really changes with respect to these countries. Though Japan really pushed itself out of the quote developing really fast till the 1990 crisis. But Argentina remains in the list perennially.
In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world. The country was a magnet for European immigrants, who flocked to find work on the fertile pampas, where crops and cattle were propelling Argentina’s expansion. In 1914 half of Buenos Aires’s population was foreign-born.
The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies. From this vantage point, it looked down its nose at its neighbours: Brazil’s population was less than a quarter as well-off.
It never got better than this. Although Argentina has had periods of robust growth in the past century—not least during the commodity boom of the past ten years—and its people remain wealthier than most Latin Americans, its standing as one of the world’s most vibrant economies is a distant memory (see chart 1). Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.
The political symptoms of decline are also clear. If Argentina appeared to enjoy stability in the pre-war era, its history since then has been marked by a succession of military coups. The first came in 1930; others followed in 1943, 1955, 1962, 1966 and 1976. The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.
It goes on to say how Argentina keeps making mistakes and never learns. I mean despite all this reading one fails to figure why it is a place full of ideas that dont’ work? As Tyler Cowen says:
Yes of course there was bad policy, but how did the country get into such a bad idea trap to begin with?
The same mistakes over and over again. Political economy of the country does not allow the country to rise..
Blind focus on just macro and econ stuff and ignoring things like geographical changes (which then impact economics),makes the discipline so narrow. Lot of economics is driven by geographies after all whether it is economies or people, they belong to a certain geography. But the textbooks (and research) hardly mention the role of geography. So hardly things are covered in this space.
So got this newsletter from CPB Netherlands about this seminar (paper here) on the topic of Northern Sea Route. NSR apparently is a sea route along the coast of Russia which is open just for two months as it is remains frozen in rest. Now the ice seems to be melting in the region due to global warming and this means the route can remain open for most part of the year.
The paper looks at the econ implications:
Finance Minister in his 2014-15 interim budget speech says:
Last year, when I read the Budget speech, WPI headline inflation stood at 7.3 percent and core inflation at 4.2 percent. Through the year, inflation saw its ups and downs. At the end of January 2014, WPI inflation was 5.05 percent and core inflation 3.0 percent. Both the Government and the RBI have acted in tandem. While our efforts have not been in vain, there is still some distance to go. Food inflation is still the main worry, although it has declined sharply from a high of 13.6 percent to 6.2 percent.
One may question whether RBI and FinMin have acted in tandem to tame inflation as latter was more into growth issues. But the differences over which index to use – WPI or CPI- remains. And this is not the usual FinMin RBI fight (as they have stopped for the wrong reasons) but has much deeper ramifications.
Imagine coming for a meeting not knowing that in the next you are likely to get fired for no real fault of yours.
RBI’s recent TAC was one such meeting. The minutes were released recently which said the meeting happened on 20th Jan. The policy was held on 28th Jan. It is ironical that on 21st Jan 2014, Patel Committee submitted its mon pol framework report. And as we know the PC recommends scrapping TAC and instead make a MPC much like BoE etc.
The gap between TAC and monetary policy struck me as have been tracking this for a while. The gap between the two looked a bit wide. So just looked at the dates of the two events. As TAC minutes were published from Jan-11 policy onwards, So here it goes:
|TAC date||MP date||Gap|
I was kind of right. Mostly the gap has been 6 days (9 out of 13 times). It was 7 days in 2 cases and 8 days in 2 cases, including the recent one.
It can’t be just a matter of coincidence that the report was submitted on 21st. The head of the committee was part of TAC being the DG of RBI. So surely, things were known. Either the TAC could be held on 22 or the report submitted a little earlier. some might say this was because of travel issues. Not sure as during policy time most of the seniors are present. And you could ask them to be present..
This could have led to some debates within TAC members on their comments on the new framework. This is no small policy change as the whole framework is expected to undergo change. RBI top brass could have sought suggestions/comments on the proposed policy change. Fed I know calls experts to comment and share their views apart from mon pol decision. Something similar could be done for this so called change as well.
As this blog has said earlier as well, one does not know why RBI has been following such an adhoc approach with respect to this report. It looks like a pet project of RBI top brass. I mean the committee did not even invite comments from public/experts and in 7 days flat has adopted some suggestions from the committee. No one knows what is the status of the report and how it just gives the Parliament a miss on critical decisions related to RBI Governance..
I am wondering what RBI top brass was thinking when the TAC members were giving their suggestions. Perhaps laughing and thinking that this is your last meeting and lecturing us. In that case why did RBI really waste their time and resources to bring them to RBI and give their policy suggestions. The policy decision on 28 Jul was anyways beyond logic and one did not need TAC suggestions which largely argued to pause.
Perhaps RBI did not want any comments on this seeing some resistance. So just kept it secretive just like the debt swap deal..So much so for transparency in mon policy..
Criticism of Gross Domestic Product (GDP) as an indicator of the health of the economy has grown in recent years, in part because of a new focus on measures of subjective well-being or ‘happiness’. This column argues that the debate needs to distinguish between the different purposes of measurement: economic activity, social welfare, and sustainability are distinct concepts and cannot be captured by a single indicator. There are good arguments for paying less attention to GDP and more to indicators of welfare and sustainability, but it would be a mistake to adjust or replace GDP.
If not replace, atleast the hype over GDP numbers should decline. Whichever country it is, GDP numbers attract way too much attention typically from financial markets. It takes the attention away from far more important things. If GDP is an imperfect as other indicators, the hype should be less like other indicators too..
The interim budget 2014-15 event is over and perhaps the hype will continue for a few more days. As expected the Budget was a showcase for how thankful this country should be for having UPA in power. Highest this, highest that and all kinds of statements were made..
As I was scanning the various statements, came across this interesting one on education loans. The government has announced a moratorium on education loans raised between 2009 and 2013:
Prof William J. Luther of Kenyon College has developed an interesting way of teaching macroeconomics.
He develops podcasts (like NPR Radio podcasts)and sends it to students before the class. It has been very effective:
Unfamiliar with aggregate concepts like gross domestic product and inflation, many introductory students struggle to understand the big ideas in macroeconomics. Macroeconomic educators typically respond with boring lectures aimed at bringing students up to speed; or, by jumping to the interesting topics their students are not yet prepared to consider.
In an effort to combat this problem, I have incorporated NPR’s Planet Money podcast into my Principles of Macroeconomics course. I describe the podcast and provide a list of episodes others might find useful. In my experience, the Planet Money podcast is well received.
Students enjoy listening to the assigned episodes. They report that it made them more interested in the principles course, helped them understand the relevance of macroeconomics, and increased their understanding of many macroeconomic issues. Most students also feel more comfortable discussing macroeconomic issues having listened to the podcast. And nearly half of those students surveyed say they will continue listening to the podcast after the course ends.
Interesting way to make macro interesting..