Why gauging inflation is so hard: It is made up of several components..

August 26, 2016

Barry Ritholz tells us the obvious which alas is ignored. We treat inflation as one number which somehow could be controlled and managed by a central bank. However, inflation is made up of prices of several products and services. These prices in turn depend on the nature of industry of the product. If it is a monopoly, prices will remain sticky/unchanged and if more competitive, prices will change more often.

Inflation isn’t dead; it just might not be where you think it is.

To find significant price increases, you need only look in the right places. There are many goods and services with rising prices, as well as those without. Together, they tell a fascinating tale about the modern global economy. Understanding the forces driving prices higher — or not — is crucial to investors and policy makers alike.

Given that the Federal Reserve has been trying to generate inflation for much of the past decade, the significance of the distribution is both important and telling. Why some prices are rising at twice the median rate of general inflation is worth delving into. 

Look at the chart below: it show specific categories of goods and services versus the entire basket of goods and services that makes up the consumer price index.

Let’s look a little more deeply at each category.

There are multiple factors responsible for such diverse break-up. Text-books and medical care remain monopolies, food and beverages due to dollar depreciation, software/toys/wireless due to competition and so on.

In the end:

So what might we conclude from looking at the chart’s component parts? Maybe only that it’s a little easier to see why the Fed has been having a hard time getting inflation to rise. While some prices are indeed up, many powerful forces have driven other prices lower — and these are forces that the Fed can’t easily influence. Until there is a substantial and sustained increase in wages (or a huge drop in the dollar), inflation may very well remain below the Fed’s 2 percent target for a long time to come. 

Not a lesson just for just Fed but all other central banks as well..

The US Federal Govt is ending its 30-year history with private prisons

August 26, 2016

Today is a prison day on this blog.  I just blogged about how noodles are replacing cigarettes as the preferred currency in US prisons.

Now this bit of news on US Federal Govt ending its experiment of private jails:

The US government said this week that it would reduce and eventually cease its use of private prisons.

“[Private prisons] compare poorly to our own Bureau facilities,” Deputy Attorney General Sally Yates wrote in a memo to US officials. “They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs … they do not maintain the same level of safety and security.”

According to David C Fathi, director of the American Civil Liberties Union’s National Prison Project, this memo represents a sea change in the attitude of the US government towards privatised corrections.

“This really is a historic reversal of the last 30 years,” he says. “It’s even more significant as a signal that’s being sent and quite probably a harbinger of things to come.”

However, while the announcement will have a significant impact on certain prisoners overseen by the federal government, this will change nothing for the vast majority of the US prison populace.

This is because state governments run their own prisons and quite a few have contracted it to private players.

That 19 percent of federal prisoners are in private facilities may seem to imply a massive presence of corporations within U.S. corrections, but the federal government houses only 12.7 percent of U.S. inmates. As a result, even if the Justice Department went beyond its announced plans and immediately transferred all privately housed inmates to federally operated facilities, only 40,000 of the more than 1.5 million U.S. prisoners would be affected.

The American prison system is overwhelmingly operated by states, and state data underscores that incarceration is firmly under public-sector control. The governors of 20 states are surely not going to heed calls to close private prisons, because to do so they’d have to open one first. Among those states that do house inmates in private facilities, many do so sparingly. For example, at the end of 2014, Alaska, Maryland, North Carolina, South Carolina and South Dakota each held no more than 30 prisoners in private facilities. (That’s a number, not a percent.)

This para caught my eye:

,,,,Former presidential candidate Bernie Sanders, who campaigned for such a policy change, spoke for many liberal politicians when he praised the move as a major step toward reducing mass incarceration: “It is an international embarrassment that we put more people behind bars than any other country on earth. Due in large part to private prisons, incarceration has been a source of major profits to private corporations.” Yet despite the outsize attention they draw in some political quarters, private prisons are bit players in the sorry drama of mass incarceration.

This is crazy to think. You privatise/outsource the prison services to a private player. For the private player getting more inmates is linked to profitability. So you prison more and more people!

Here is a nice article how a private prison works:

A public prison is naturally non-profit. The end goal is to house prisoners in an attempt to rehab them or remove them from the streets. A private prison, on the other hand, is run by a corporation. That corporation’s end goal is to profit from anything they deal in.

In order to make money as a private prison, they receive a stipend from the government. This money from the government can be paid in a multitude of different ways. It can be based on the size of the prison, based on a monthly or yearly set amount, or in most cases it is paid based on the number of prisoners that the prison houses.

Let’s suppose that it costs $100 per day to house a prisoner (assuming full capacity, including all administration costs), and the prison building can hold 1,000 inmates. A private prison can offer their services to the government and charge $150 per day per prisoner. Generally speaking, the government will agree to these terms if the $150 is less than if the prison was publicly run. That spread is where the private prison makes their money.

As in any business, saving money wherever possible increases the bottom line. Expanding also allows the business to bring in more money, but it needs capital to do that……this means if they can cut services from their list, then they save money. Suppose a prison cuts out the cleaning services and the cost per prisoner drops to $90 per day. They instantly earn an additional $10 per day; a number that can add up quickly if there are 1,000 prisoners in the facility. Cutting cleaning makes the company more money: but provides unhealthy and inhumane living conditions for the inmates. Cutting costs ultimately affects the prisoners and diminishes the quality of their living quarters.

Finally, the law needs to be structured in such a way that allows a steady stream of new inmates. This ties back to that lobbying aspect: stricter laws mean more people in the system. More people in the system means more money for the prison. Many have argued that this is the entire reason that the war on drugs was started: another set of laws that could incarcerate thousands of people every single year.

Hmmm. This is what has happened in US as well. Keep the inmates coming so cash flow of the private company remains steady

This issue of prison organisation is divided into two categories. First, who should run the prisons? Centre govt or State Govts or both? IN US it is both. In India it is the responsibility of State as per the India Constitution. The centre broadly supports the state in financing and management of the jail system. In India, we have many types of jails run by different states ( see this more detailed publication, fascinating, to know all this).

The second categorization is of course whether the public sector should run the jails or should let private sector do the job? Based on US experience, perhaps giving the entire project to private sector is problematic. It is difficult to imagine that the private sector actually messed up so much. This should have worked as a better model as it is difficult to imagine the govt running the prison any better.

This discussion on prisons is really exciting to think about. There are so many issues here which make it a great case to explain economics and its dilemmas as well…

Ramen noodles are replacing tobacco/cigarettes as preferred currency in prisons

August 26, 2016

Literature on various types of money points how tobacco/cigarettes are used as currency especially in war camps and prisons.

Cigarettes are now being replaced by Ramen noodles in prisons as the most precious commodity (HT: MR blog):

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Does negative marking impact exam writing?

August 25, 2016

Really interesting research findings by Pelin Akyol, James Key, Kala Krishna.

They use a Turkish data on an exam where there was negative marking. Did the marking effect student’s choice of whether to skip the question or guess the same? What about gender differences given girls are seen as more risk averse.

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Lehman and Fed: Mystery deepens..

August 25, 2016

Prof. Laurence Ball’s paper has been making news. The US officials let Lehman go in really adverse  times. They have told us the i-bank could not be saved as it did not have any collateral. Though, few doubted this narrative.

In this shorter post, he explains that this narrative is wrong. Lehman could have been saved and it was just a political decision to let it go. They also underestimated the costs of the blowup:

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Doing economic history in Africa: experiences from the archives in Uganda

August 24, 2016

Nice post by Michiel de Haas, Felix Meier zu Selhausen and Kate Frederick. Two of them are economic historians in Africa.

They point to their experiences in building archives and connecting dots in Uganda:

The field of African Economic History is flourishing. The rising number of participants at the annual meeting of the AEHN, the increasing flow of articles in mainstream economic history journals and thriving research groups in Lund, Wageningen and Stellenbosch, just to name some of the larger research clusters, testify to this. The ‘new economic history of Africa’ is strongly data driven, with researchers using published and unpublished sources to create datasets, establish and compare trends, and conduct statistical analysis to tease out causality (for discussion and an overview, see the recent paper by Johan Fourie (2016)

To further expand our empirical knowledge of long-term African development, the potential of colonial archives in Europe is hardly exhausted, with researchers using trade, tax, wage, price, climatological, and criminal statistics to make a wide range of new and compelling contributions. However, there is much scope to venture beyond Europe’s missionary and government archives, which tend to focus on key administrative matters and provide only limited information on the seemingly mundane and practical intricacies of colonial rule. Previously neglected, individual-level data sources have already shown to harbour great potential to advance our knowledge of long-term African development. Recent contributions have utilized sources preserved in archives on African soil, including military recruit records, the performance files of police officers, hospital registries, and the marriage records of Anglican Africans.  

Archival documents in Uganda are in a state of flux after having been largely neglected or even destroyed during Uganda’s troubled post-colonial history. In recent years, things have been changing for the better. Social, cultural and political historians such as Derek Peterson (Michigan), Holly Hanson (Mount Holyoke) and Shane Doyle (Leeds) – just to name a few internationally renowned scholars – have been producing work that is firmly based on local source materials found in Uganda’s national, district and missionary archives.

Michiel de Haas and Felix Meier zu Selhausen share some of their experiences exploring a variety of source materials in Uganda. Michiel has been affiliated with the Makerere Institute of Social Research (MISR) in Kampala and visited the National Archives in Entebbe and five district archives. He has also conducted oral history interviews with cotton farmers in Eastern Uganda. Felix lived in Fort Portal for three years where he taught at Mountains of the Moon University. He has digitized marriage records from Anglican churches all over Uganda and in-patient registers from Western Uganda’s Kabarole Hospital.

Wow. This must be one of its kind experience. Church or any centre of religion archive is such a crucial place to understand initial development.

Are Public sector bankers underpaid or private/foreign ones overpaid?

August 24, 2016

We are highly  highly biased against the public sector especially the banks. It is as if these banks are govt owned and remain inefficient by choice. These banks at one time were private and run pretty much like other private banks of today and were highly efficient and dynamic minus all the technologies of today. It is a pity that they all were nationalised and things changed dramatically for them in future years. Less credit is also given to public sector as it provided most of the talent which shaped private banks later. But that is another story for another post.

One perennial issue since coming of private sector banks in 1994 is the disparity in pay scales. Actually, these differences would have existed even between 1969-94 as foreign banks and remaining private sector bank etc must have paid higher salaries than nationalised banks. But as nationalised bank jobs carried element of prestige as well, these differences would not have mattered. Now, there is not much prestige left and pay scales were low anyways. It has turned out to be a worst of both the worlds – low pay and low job status. This status bit matters as one continues to see talented people taking up central bank jobs which has similar low salary base but not in public sector banks.

We usually put the answer as salaries of public sector banks are too low. Another way is to question the high salaries of private sector/foreign banks.

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Capping price of movie tickets in multiplexes…a good idea?

August 24, 2016

There is little doubt that movie going has become a thing for the haves. There was a time that most people could afford going to cinema halls. There was just one screen and tickets were priced across income levels. There was dress circle for the lower income groups and balcony for the higher income ones. Dress circle seats were pretty much at level with the screen. Balcony seats like its name were much higher than dress circle seats and you actually had an ascending stair case with seats at the top being most preferred just like today as well. Some had box too appealing to even higher income groups than balcony ones.

Due to just one screen there were several seats and there was space for everybody. Then came this multiplex idea where one movie hall was broken into several ones and multiple screens were introduced. These screens were much smaller and so were number of seats in one hall. Unfortunately, the earlier policy of pricing tickets for all was done away with. The pricing was done keeping interests only of balcony and box goers. The prices were kept way too high and the dress circle audience has been mostly ignored. The older version of cinema is barely functional now and multiplexes run the show.

Infact, the prices continued to increase despite being already on the high side and it is now difficult for even balcony goers. This has caused resentment. Now there is little doubt that experiencing movies in today’s halls is much better than the past. But there is still a market for people which just want to see the movie and do not want to pay for the experience.

Ideally cinema industry should have figured this bit and tried to have cinemas for other income groups as well. This is especially true for the student community who just don’t have enough money to pay for movies but is a huge market. After all one tries to release movies after board exams knowing students will miss movies during this time. Likewise there are other low income groups as well.

But as industry has not figured this bit, govt is intervening and capping prices. First Tamil Nadu capped prices to 120 and now Karnataka is thinking of the same:

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This is your life in the soon to be silicon valley of India (Gurgaon)

August 23, 2016

Despite not being that old, I am already scared of how technology is taking control of my life. It is just becoming a case of an overkill. Samrat Singh on medium.com draws this future scenario of a start-up investor’s life in Gurgaon.

It is a future which is neither too far (some would say it is already there) nor it just applies to investors alone. I guess it applies to professions across the curve. Even just change the Gurgaon locations with those of other cities and the story is likely to be similar.

You wake up at 8 AM with a headache. You blame it on the weird tasting wheat beer you had last night at one of those shady but hip looking craft breweries in Sector 29. You can’t remember the name because they all look the same and there is a new one around every time you go there. You do remember that their Zomato rating was an acceptable 3.9, but you think they’re actually more of a 3.5. You wonder if that “startup networking mixer” at that pretentious co-working space in Hauz Khas was a better idea. The thought of traffic on MG Road at night reminds you that it surely wasn’t. Also, the crowd at such things is even more pretentious, you tell yourself. You search for your phone. InShorts tells you, that same co-working space just raised 10 million, you wonder if they have openings. Living around Hauz Khas would be great.

You pick up the Economic Times and wonder why they don’t just start calling it the ‘Startup Times’. You browse through and see acquaintances on the ‘Young Leaders Awards’ list. You wonder if the application form tab is still open on your laptop and why you never got around to filling it. ‘Forbes 30 Under 30’ one day you say to yourself, then you realize you’re almost 30 already. There’s another story on Ritesh Agarwal today, you wonder where you were at 23. You were in B-School. You wonder why you went to B-School in the first place, that reminds you that your education loan installment hasn’t been paid for the last three months. You download that expense tracking app your friend just made. You try and register but the OTP never comes, you ping him saying let’s meet, you have feedback on the product you tell him. You wonder if he needs a co-founder. Another ET story talks about how Hauz Khas is emerging as a new startup hub. “Wannabe hipsters” you say while sipping that coffee you bought from Blue Tokai last month.

How apps are soon going to control everything we do..

Pakistan rise to No. 1 in Cricket Test rankings is nothing short of a miracle..

August 23, 2016

It just happened as India could not win against the hapless West Indies due to rain and poor ground management. Pakistan edged India by 1 point to top the Test match rankings first time since these rankings were made in 2003.

I mean to see Pakistan top the rankings is just crazy and a miracle. The country does not anymore host test matches at home and the entire cricket structure is just reduced to a royal mess. Despite this they have been producing is a few talented individuals who spice the contest once a while. And now they have surged to top position drawing with England in England against all odds. They have done this with lot of discipline and dignity which makes it a super plus. These two attributes have missed Pakistan cricket for a long time.

Here is a wonderful tribute by Kamran Abbasi who shows how high these odds have been making the achievement even more amazing. (He also highlights that Hockey World Cup was actually an idea from Pakistan).

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The story of two migrations and one reverse migration in Kerala

August 23, 2016

Interesting piece from P. Anima of Business Line. She points how years of migration from Kerala to Gulf led to rising job vacancies. These were then filled by migrants from other states especially North India and North-East India (where else??). Now, with rising nationalism in  Gulf, one is seeing reversal with people heading back from Gulf. How this will change the dynamics in the labor and social economy is yet to be seen.

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How did EPW start? One of the promoters was disillusioned with a hyped LSE graduate!!

August 22, 2016

EPW celebrates its 50 years and guess what? There is hardly any mention of it in the media as the people seem to be busy obsessing with new Indian central bank chief and write one flowery piece after the other (here is another rebuke). #EPWat50 hardly has any comments. So much so for Indian economy soothsayers that no acknowledgement is even made of the journal which has carried the burden all these years. One could disagree with EPW for its content (too left wing for the market oriented media) but one should atleast make some mention of it.

Anyways, here is a superb piece from Ashok Mitra (former editor who is 88 now!) who details the story behind the journal. Before EPW, there was Economic Weekly which started 17 years earlier in 1949. To cut the story short there was a person named Sachindra Narayan who was really good at economics and based in Dacca. Sachin was quite a character who got really well with people. He moved from Dacca to Mumbai and his brothers joined him.  One of his brother Hiten who once went on a trip with a LSE trained economist to UK:

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How Friedman’s helicopter drop is different from today’s helicopter drop? Step by step approach..

August 22, 2016

The authors call it a primer on helicopter money which will be missed by most as another of those primers which are hardly a primer. But this one is and needs to be read.

The authors take the balance sheet approach and explain how helicopter money actually works.

First, why Friedman version does not work today?

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The case of appointment at Indian central bank: When will our media/experts call spade a spade?

August 22, 2016

It is one thing to congratulate someone over his/her promotion but completely another to make such noise of the matter. Indian media has mastered the art of making a mountain of a molehill.The whole media looks for a common story and everyone talks in the same language. Currently the main big theme is not to give financial markets any bad signals. So all news is presented accordingly.

This was seen in recent appointment of Indian central bank chief. All news suggest government bats for continuity and projected the appointee as this great economist which will continue to propel the Indian economy. Really? Earlier people appointed for this job were economists and bureaucrats working with finance ministry and shuttling to RBI (most were such cases) and very few with plain academic experience. This appointment hardly falls into any of these categories with most experiences in private/corporate sector. So the media calls it as  ‘inflation warrior’ with corporate background!! Some call the appointment as globally respected. I mean how?

I mean it is not even laughable as since when did any corporate have an inflation objective? Adjectives like warrior, laser like focus, lakshmanrekha etc are being used to define qualities which suit a military general than a central bank chief.

The usual things like IMF/ivy league connections are being highlighted without looking at any details. This piece even links 1991 crisis to the appointee’s CV! Neither topic of thesis nor past work is being analysed. And then what about the overall work experience and choice of firms? Do we associate them with expertise required for central banking? How come none of these attributes were even mentioned earlier?

Infact, a close look tells you the expertise was much to do with energy and infrastructure and less to do with monetary matters. There are a few papers on monetary matters but hardly of much importance. They are usual bit on inflation and fiscal deficit which are written across the globe by several economists.

In India, all it takes is a committee to become an expert on any matter. One could have easily identified better experts on inflation targeting.  And then implementing inflation targeting itself is a big issue. We are trying to chase something which other central banks are trying to give up. It was just a case of bad copy and paste as highlighted here.

Interestingly, we made similar mistakes with monetary targeting as well which was implemented much later in 1980s when much of the developed world was giving it up. In 1982, Gerald Bouey, then governor of the Bank of Canada, described the situation by saying, “We didn’t abandon monetary aggregates, they abandoned us.” This is a case which requires a detailed post and don’t want to get into several issues here.

Even nationality issues are raised each time. I still don’t understand why our esteemed economic advisers hide their nationality. Just disclose it and live with it. Now we learn that the appointee became an Indian national only in 2013 before taking the deputy position. And guess what media spins it as? It is a case of inclusive governance!!! As if anyone objected to nationality previous assignments in IDFC (which had major backing of the govt), Reliance and so on…

All this smacks at plain elitism and clanish in these matters. Just have the required ticks and all is well and the entire clan comes to celebrate and create hype.  Other countries are closely contesting all this elitism. See the case of French central bank for instance.

It is just too easy here. Just keep creating hype. Just spin the story whatever it is. Like a friend told me even if the government appointed a bank robber for the job, the media will say “the govt appointed someone who knows the true value of money”!

Again to reiterate, happy for the appointee. He would truly be laughing all the way to the bank knowing about so many qualities from the media.

But our media keeps stumping to new lows which barely does its job these days. Why not just call a spade a spade? It is time that the media gets more intelligent in evaluating the body of work which goes beyond the mention of IVY league names. The talent in India is poorly recognised. There are enough researchers here in India who continue to be ignored.

Infact why stop at media alone. Take our bankers and ex-experts. Read statements of any bankers and experts who fear taking on Indian central bank. All of them in one tone say the same thing be it any policy or appointment. How is it that not one says anything different?

GDP was one of the most important inventions of the 20th century, what about its place in 21st?

August 19, 2016

Nice article by Prof. Philipp Lepenies of Free University (Berlin). I didn’t know that US Commerce Dept actually called GDP as one of the most important inventions of 20th century.

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Economic and Political Weekly’s (EPW) 50th anniversary: A tribute…

August 19, 2016

EPW celebrates its 50 years of anniversary tomorrow. It transitioned from an Economic Weekly which started in 1949 to Economic and Political Weekly on 20 Aug 1966. For most students of Indian economy, the white and red journal has been a constant companion. It has also been a source of irritation as it comes out with new things to read every week!

Aniket Alam and C. Rammanohar Reddy pay a tribute to EPW on the eve of its 50th  anniversary:

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Monetary policy in a low r-star world

August 19, 2016

This short paper by John Williams of San Francisco Fed is doing rounds.

Williams says much of the developed world is stuck in a low r star or the neutral rate:

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15 August is an important day for monetary economy scholars…

August 18, 2016

It was on 15 Aug 1971 that President Nixon closed the gold-dollar window.

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Who brings fish to the table? Markets or firms?

August 18, 2016

Jeffrey Tucker points how technology and markets have enabled people in the interiors to eat fish.

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US regulatory industry is growing faster than the real economy

August 18, 2016

Nice article by Matthew Andrews  and James L. Gattuso:

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