25 years of economics reforms but banking woes come a full cirlce: Making India less dependent on banks..

February 24, 2017

Prof JR Varma has a piece saying 25 years of economic reforms has led to remarkable turnaround in equity markets. But banking sector remains the same with woes coming a full circle.

He says we should take measures to make Indian economy less reliant on banks. In an interesting comparison, he compares banks to a CDO:

Read the rest of this entry »

Brahmin adopted by SCs can get quota job..

February 24, 2017

India’s battle for backwardness gets murkier.

In a new case, Punjab and Haryana High Court said:

Can a person avail the benefits of reservation under Scheduled Caste (SC) if he was born a Brahmin but was adopted and brought up by SC parents? In an order that will have wide-ranging ramifications, the Punjab and Haryana high court has held that such a person cannot be denied a government job under the reserved category.

The court has also clarified that the adoption would be considered valid even if the regular format has not been followed and customary law has been employed.

Haunting melodies from life of Bollywood musical genius Khayyam

February 24, 2017

Khayyam saab turned 90 last week and Ajay Mankotia pays a nice tribute to his work. As kids one was always stung by his work but didn’t pay attention to the name behind the songs. It was only over time that one realised that all those wonderful songs (and many more) came from his stable alone. No words or praise can do justice to the sheer quality of his work.

Hope many more birthdays to come..

The battle for backwardness in India…

February 23, 2017

Prof Rohini Somanathan has a piece in Ideas4India:

We must also realise that no set of concessions granted by the central and state governments can lead us out of the current conflicts over reservations. This is because placing two castes in the same category does not give them equal status, but rather shifts scarce goods across them. No matter where a caste is placed in the scheme of things, there is always a better place to be. This is best illustrated by the Gujjar demands for reservations in Rajasthan in 2006. The Gujjars were already part of the OBCs but wished to be re-classified as an ST. The reasons were obvious. There were many literate OBCs who were competing with them for jobs and university seats but relatively few of the tribes had enough education to be rivals. The probability of entering elite institutions was therefore much higher as an ST. The Meenas of Rajasthan were the most influential within the STs and the new Gujjar demands led to violent clashes between these two groups. The Gujjars then pushed for compartmentalising the OBC quota to guarantee them a 5% share of reservations, but the Jats, who were OBCs in Rajasthan found this unacceptable. Finally, the category of Special Backward Classes was created, consisting of the Gujjars and four other groups and they were given a 5% quota. This, however, took the fraction of total reserved seats to above one-half and the courts stepped in to strike down the notification. Last September, in a similar move, the Nishads of Bihar petitioned to move from the OBCs to the SCs.
With hundreds of castes already labelled as backward, the most educated within them gain from reservations. This has widened inequalities within scheduled groups. In Bihar, for example, Dhobis and Musahars are both SCs, but 14% of Dhobis complete 10 years of schooling, while only 1% of Musahars do so. It is inconceivable that they will converge in social standing if SC quotas are our only means to equalise opportunities. In 2007, the Nitish Kumar government created a new group, Mahadalits, to help communities like the Musahars, but it was only a matter of time before the Dhobis and Chamars also wanted in.
Caste reservations first emerged to promote equal treatment in a society where untouchability was widely practised. They have now degenerated into a scramble for privilege and a catalyst for communal conflict. Many state elections are being held in 2017, including Punjab, Gujarat and Uttar Pradesh. Punjab has already announced OBC status for the Rajput Sikhs. It remains to be seen whether politics in the other states will also be dominated by lobbies for reservations or whether our leaders can focus on expanding the social and physical infrastructure that we so badly need. Only 15% of children in rural India have easy access to a high school, only 4% of villages have a primary health centre, and income transfers to the poor and the old are negligible for most families. The Indian State now has the capacity and the data needed for modern methods of redistribution – through public goods, social insurance, and progressive taxes. It is time to use these to move forward.
India’s political economy of development remains as interesting as ever..

Vera Smith’s five reasons for central banks : Are They Any Good?

February 23, 2017

I doubt how many of today’s monetary scholars have read Vera Smith’s dissertation- The Rationale for a Central Bank? What must have been a must read some years ago is hardly part of any course these days. The thesis was written under Hayek’s supervision and looked at reasons behind formation of various central banks.  We take central banking for granted without looking at various ways in which they come in different countries.

Karl-Friedrich Israel has a piece in Mises Institute which looks at five reasons given by Smith for having a central bank. Smith gave these reasons during GOld Standard days. After many years, do the reasons remain valid?

Read the rest of this entry »

The 10 rupee coin chaos in Karnataka and the fake Rs 2000 note from Children Bank of India..

February 22, 2017

The RBI chef recently said it is important to be thick skinned in such jobs. He also added that “everyone has agreed that not just the RBI, but the wider banking system has done a “Herculean job” over the last few months. Well it is fine to be thick skinned and congratulate oneself, but it is also important to respond to what is going on. However, thick skinned does not mean one becomes insensitive and stops responding completely.

Ever since the central bank agreed to unleash the demonetisation, the Re 10 coin has been one of the unintended victims. There are repeated rumors that this Rs 10 coin is not legal tender. It even got a rare response from the Central Bank on Nov 20 2016 that there is no such case and Re 10 remains legal. But no repeated assurances after that.

So once again the rumors built in Karnataka and no one is accepting the 10 rupee coin. The media reported this on 10 Feb but there is no official notice from the central bank. So people are not accepting the Rs 10 coin in Bangalore (not sure about other regions in the state) and it has been nearly 10 days:

Read the rest of this entry »

Bond traders betting on Euro break up..

February 22, 2017

Joe of Bloomberg points to this interesting article. The article shows how investors anticipating some exits from Euro are buying short term German bonds. Though, the risks are not as large as seen in 2010 period.

However, the sources of concerns are different. He adds that this time the risks are from political troubles and Draghi’s 3 magic words “whatever it takes” will not help:

Once again, traders are placing bets on a breakup of the euro area. Investors are piling into short-dated German government bonds, which would presumably be the safest of safe havens if calamity were to strike.

But is the euro really at risk of a breakup? You’d think, perhaps, that if the currency survived 2010-2012 then it can survive pretty much anything. And obviously at this point (at least going by peripheral spreads) investors aren’t anywhere near as concerned as they were back then.

But one thing to consider is that the problems faced back then by Europe were essentially about monetary architecture. Governments lacked a fiscal union and a central-bank backstop, exposing them to the whims of bond vigilantes. Mario Draghi solved the problem in 2012 with his “whatever it takes” speech.

This time, the stresses building in Europe are perceived as more political. Anti-euro factions are on the rise while mainstream center-right and center-left parties are seeing their support melt away. As risk transfers from the monetary realm to a political one, these problems won’t go away with three simple words from a central banker.

Hmm..

RIP: Prof Kenneth Arrow..

February 22, 2017

Another giant passes away. Prof Kenneth Arrow was a giant of the giants. His work continues to inspire (or mentally harass!) students till date.

Here is a nice obituary.

Crony Capitalism: Shifting fortunes of Indonesia and Malaysia

February 22, 2017

Interesting piece on how tides have turned for the two countries.

Earlier Indonesia was a hotbed of cronyism but now it is Malaysia:

With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.

One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition. In Indonesia, Basuki Tjahaja Purnama, a Chinese Christian who is the governor of Jakarta, is running for office while defending himself against charges of blasphemy against Islam in a country of predominantly Muslim voters. Malaysia’s embrace of an ideology of Malay supremacy and the low interest rates that invite a debt bubble are impediments to a dynamic economy.

But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak.

Najib, who was elected in 2009, says hundreds of millions of dollars in his personal bank accounts came from a gift from an unidentified Saudi donor, denying a U.S. Justice Department complaint filed in federal court last July that accuses Najib of stealing from a Malaysian government investment fund, 1Malaysia Development Berhad, or 1MDB. 

The markets have noticed this:

The divergent growth rates are reflected in the stock market, where the 539 companies in the Jakarta Stock Exchange Composite Index gained 287 percent during the past 10 years, according to Bloomberg data. That’s more than three times the 95 percent return during the same period for the 30 companies that make up the FTSE Bursa Malaysia Kuala Lumpur Index, and amounts to Indonesia outperforming Malaysia by 7.6 percent each year. The gap has grown more pronounced since 2014, as the Indonesia market has outperformed Malaysia’s by 9.3 percent annually.

In the bond market, Indonesian government securities provided a total return (income plus appreciation) of 100 percent since 2010. That’s 6.5 percent per year more than Malaysian government debt, which returned 30 percent over the same six years, according to Bloomberg data. Since 2014, Indonesia’s advantage has widened to 7 percent.

The inferior performance of Malaysia’s debt is reflected in the country’s deteriorating fiscal outlook during the past two decades. Since 1997, when both countries saw their surpluses transformed into deficits, Indonesia kept its budget close to balanced with an average annual deficit of 1.32 percent of its GDP, according to data compiled by Bloomberg.

Nothing is granted..

Evolution of currency denominations in India – From Rupee 1 to Rupees 10000

February 21, 2017

I came across this wonderful book – The Indian Financial System (1985) by RK Sheshadri, former Deputy Gvernor of RBI (1973-76). It is perhaps one of the most useful books to understand how Indian monetary and fiscal system has evolved over a period. It has amazing amount of information and facts which helps one know many aspects of Indian macroeconomic system and not just financial system.

From the book and other data available with RBI, I tried to draw a timeline of the various currency denominations in India. I have also updated it as his analysis ends in 1985.

This is how the timeline looks:

  • 1861       Paper Currency Act allowed denominations of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1000.
  • 1871       Allowed Rs 5 and Rs 10,000 which were issued in 1872.
  • 1910       Rs 20 discontinued as not much in demand. Reintroduced in 1972.
  • 1917       Re 1 introduced due to shortage of silver; discontinued in 1926.
  • 1918       Rs 2.5 issued for the same reason; discontinued in 1926.
  • 1935       Issue of Rs 50 discontinued due to lack of demand, reintroduced on 17-May- 1975.
  • 1940       Re 1 reintroduced.
  • 1943       Rs 2 introduced.
  • 1946       Demonetisation of Rs 500 and upwards.
  • 1954       Reintroduction of Rs 1000 and 10000 along with a new Rs 5000 denomination.
  • 1978       Demonetisation of Rs 1000 and upwards.
  • 1987       Reintroduction of Rs 500.
  • 2000       Reintroduction of Rs 1000.
  • 2016       Demonetisation of old series of Rs 500 and Rs 1000. Reintroduction of new Rs 500 and a new denomination Rs 2000.

Interesting to note that we had Rs 2.5 albeit for a short time as well.

Of all the denominations, Re 1 is the most interesting. It was first planned to introduce the note in 1893 but did not happen. It was finally issued in 1917 due to shortge of silver. As silver prices declined in 1920, these notes withdrawn in 1926. The notes were again printed in 1933 (in England) as silver prices rose dur to Silver Purchase Act 1934. However, the crisis receded and notes were not issued.

Though they were issued on 1940 due to again – shortage of silver. The issuance was done under the Currency Ordinance (1940). AS the ordinance was made during World War II, India and Burma Emergency Provisions Act 1940 amended the the 9th schedule of Government of India Act (1935). This allowed continuance of all the ordinances issued during World War II. Thus, it continues to provide the authority to Government to issue Re 1 note.

So much so, the Government stopped printing Re 1 notes a while ago, the ordinance remained much to surprise for lawmakers:

Remember the Re1 note, or the last time you saw it?

It may well have gone out of print, but an ordinance promulgated to facilitate its birth in 1940 is still in force, despite the fact that the Constitution grants no more than six months of life to an ordinance.

Notably, the currency ordinance issued by the colonial British government to print the Re1 note is going to survive, as it did two bids earlier when a finance ministry panel in 1997 and then the law commission in 1998 recommended its repeal on the ground that the note is no longer printed.

The parliamentary standing committee on finance stumbled upon the currency ordinance, 1940, recently while examining the coinage bill, 2009, aimed at replacing four existing laws on metal coins and tokens.

Flummoxed by its queer longevity, the committee headed by former finance minister Yashwant Sinha asked the ministry if the ordinance promulgated in 1940 was ever enacted as a law.

“No. The currency ordinance, 1940, was promulgated after passing of the India and Burma (Emergency provisions) Act, 1940, which provided that ordinances made during the period of the Emergency beginning June 27, 1940, (imposed to meet the exigencies of World War II) would not lapse within six months,” the ministry told the lawmakers’ panel.

“This made the currency ordinance, 1940 of permanent nature,” it said, adding that after Independence, the Indian government adopted it thorough a presidential order in 1950 to adopt various British laws.

An ordinance is a special piece of legislation made by the executive to meet an emergency when Parliament is not in session. But Article 123 of the Constitution stipulates that the ordinance will lapse unless it is ratified and made into a full-fledged law by Parliament within six months of its promulgation.

Asked by the panel as to why the ministry was not repealing it when it has stopped printing Re1 note, the ministry replied: “The 1940 ordinance may not be repealed as yet as one rupee notes continue to be in circulation though not being printed any more.”

The coinage bill, 2009, seeks to amalgamate four laws — Metal Tokens Act, 1889, Coinage Act, 1906, Bronze Coin (Legal Tender) Act, 1918, and the Small Coins (Offences) Act, 1971, into one comprehensive act.

So Coinage Act 2011 Section 28 says:

28. Continuance of existing coins

Notwithstanding the repeal of the enactments and the Ordinance specified in sub-section (1) of section 27,–

(a) all coins issued under the said enactments; and

(b) Government of India one rupee note issued under the Currency Ordinance, 1940 (Ord. IV of 1940), which are legal tender immediately before the commencement of the Coinage Act, 2011 shall be deemed to be the coin and continue to be legal tender in payment or on account under the corresponding provisions of this Act.

All this is so so fascinating.

History, law, currency, wars…there is a bit of everything in this. It is a pity we have not paid any attention to currency denominations in studying monetary economics. With the war on cash, much of this will be lost as well.

How exports from China are leading to rise in economic nationalism in Europe..

February 21, 2017

Interesting paper by Italo Colantone and Piero Stanig:

Yes, the planet got destroyed. But we created a lot of value for shareholders…

February 21, 2017

The title of the post comes from this depressing cartoon.

There is a related article by Yves Smith who writes the popular blog nakedcapitalism.

Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power of ideology and constant repetition in the business press, Pearlstein, drawing on the research of Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:

Let’s start with the history. The earliest corporations, in fact, were generally chartered not for private but for public purposes, such as building canals or transit systems. Well into the 1960s, corporations were broadly viewed as owing something in return to the community that provided them with special legal protections and the economic ecosystem in which they could grow and thrive.

Legally, no statutes require that companies be run to maximize profits or share prices. In most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor, has been looking for years for a corporate charter that even mentions maximizing profits or share price. So far, she hasn’t found one. Companies that put shareholders at the top of their hierarchy do so by choice, Stout writes, not by law…

For many years, much of the jurisprudence coming out of the Delaware courts—where most big corporations have their legal home—was based around the “business judgment” rule, which held that corporate directors have wide discretion in determining a firm’s goals and strategies, even if their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled that directors of the cosmetics company Revlon had to put the interests of shareholders first and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment rule that only applies once a company has decided to put itself up for sale. But it has been widely—and mistakenly—used ever since as a legal rationale for the primacy of shareholder interests and the legitimacy of share-price maximization.

Greed over everything else..

The price India paid as a part of British empire…

February 21, 2017

Dr Shashi Tharoor who hit headlines with his speech pointing to evils of British empire has another piece.

He says Indians have not held a grudge against the empire which is a puzzle.

Given India’s longstanding attitudes about colonialism, I did not expect such a reception. But perhaps I should have. After all, the British seized one of the richest countries in the world – accounting for 27% of global GDP in 1700 – and, over 200 years of colonial rule, reduced it to one of the world’s poorest.

Britain destroyed India through looting, expropriation, and outright theft – all conducted in a spirit of deep racism and amoral cynicism. The British justified their actions, carried out by brute force, with staggering hypocrisy and cant.

The American historian Will Durant called Britain’s colonial subjugation of India “the greatest crime in all history.” Whether or not one agrees, one thing is clear: imperialism was not, as some disingenuous British apologists have claimed, an altruistic enterprise.

Britain has been suffering from a kind of historical amnesia about colonialism. As Moni Mohsin, a Pakistani writer, recently pointed out, British colonialism is conspicuously absent from the United Kingdom’s school curricula. Mohsin’s own two children, despite attending the best schools in London, never had a single lesson on colonial history.

Londoners marvel at their magnificent city, knowing little of the rapacity and plunder that paid for it. Many British are genuinely unaware of the atrocities their ancestors committed, and some live in the blissful illusion that the British Empire was some sort of civilizing mission to uplift the ignorant natives.

This opens the way for the manipulation of historical narratives. Television soap operas, with their gauzy romanticization of the “Raj,” provide a rose-tinted picture of the colonial era. Several British historians have written hugely successful books extolling the supposed virtues of empire.

In the last decade or two, in particular, popular histories of the British Empire, written by the likes of Niall Ferguson and Lawrence James, have described it in glowing terms. Such accounts fail to acknowledge the atrocities, exploitation, plunder, and racism that underpinned the imperial enterprise.

All of this explains – but does not excuse – Britons’ ignorance. The present cannot be understood in terms of simple historical analogies, but the lessons of history must not be ignored. If you don’t know where you’ve come from, how will you appreciate where you’re going?

This goes not just for the British, but also for my fellow Indians, who have shown an extraordinary capacity to forgive and forget. But, while we should forgive, we should not forget. In that sense, the powerful response to my 2015 speech at the Oxford Union is encouraging.

Well, am not sure about this. May be in elite circles things have been forgotten as nothing much changed for them. However, for an average Indian this bit of colonialism is pretty deep rooted and anger filled. The British schools may not be teaching about colonialism but most of us learn about it mostly from a negative angle. The huge response to Dr Tharoor’s speech proves this deep rooted anguish against colonialism.  Though, there is little doubt  that Raj has been painted pleasantly quite often than needed.

But then laws of karma are catching up?

The modern relationship between Britain and India – two sovereign and equal countries – is clearly very different from the colonial relationship of the past. When my book hit bookstores in Delhi, British Prime Minister Theresa May was just days away from a visit to seek Indian investment. As I’ve often argued, you don’t need to seek revenge upon history. History is its own revenge.

Is India’s tax base low?

February 21, 2017

Praveen Chakravarty of IDFC Institute adds to the debate with interesting data to ponder about.

His basic point is the threshold for exempting income tax is much higher than other countries. The ratio of per capita GDP to income tax exemption threshold is five times higher than world average.

Why is it then a big surprise that a mere 3 percent of Indians file income tax returns?

On the ratio of per capita GDP to income tax exemption threshold, India is a complete outlier in the world. The average ratio across 20 developed and developing countries is 0.5, i.e. the income tax exemption threshold in a country is only half its per capita GDP. For example, the average person in China earns 50,000 yuan but anyone earning more than 18,000 yuan will fall under the tax bracket. Similarly, the ratio of income tax exemption threshold to per capita GDP in Brazil is 0.8. It is 0.2 in the United States and 0.9 in Mexico. India’s ratio is 5 times greater than the world average. As the chart below shows, only Bangladesh has a greater ratio than India.

So, when the Economic Survey suggests that India has among the fewest taxpayers per 100 voters, it is equally important to consider this fact that India has one of the highest exemption thresholds for paying income tax.

So it is not fully fair to say India does not pay taxes. Lower the exemption limit and you have more people part of the tax fold.

In the Union Budget of 2017-18 presented by the Finance Minister recently, the income tax rate for the first income tax slab was lowered from 10 percent to 5 percent. So, India not only has a high income tax exemption threshold but also a very low rate for the first income tax slab.
Again, India stands out in this aspect compared to the rest of the countries in the world. The chart below plots the ratio of income tax exemption threshold to per capita GDP on the X axis and the rate of income tax for the first slab on the Y axis. As evident in the chart, India is a complete outlier yet again, even more of an outlier than Bangladesh, whose income tax rate for the first slab is higher.

Data source: Praveen Chakravarty
Data source: Praveen Chakravarty

In the last two decades, the income tax exemption threshold has increased six-fold from Rs 40,000 to Rs 2.5 lakh. In contrast, the average annual nominal incomes of Indians have multiplied only three-fold in this period.

It is thus premature to conclude automatically that India’s inordinately low tax base is entirely a function of massive tax evasion by Indians. While lowering the income tax rates, had the Finance Minister also lowered the income tax exemption threshold to say Rs 1.5 lakh, 1.1 crore more Indians would have automatically qualified to pay income tax. This would have brought India more in-line with the rest of the world in terms of exemption threshold to per capita GDP ratio.

Hmm..

One needs to dice and slice data to get more ideas..

Actually for a very long time we have been obsessed with taxes and who is paying them. We have not looked at expenditure side at all barring when it comes to subsidies. How efficient has Indian Government’s spending been all these years? One would hypothesise that the record has been a really poor one so far (would like to be proved wrong here).

The Indian government over the years has also nicely spinned the story saying more taxes will enable State to deliver more and help India develop. Well the intention is welcome, but the history of development via taxes more so income tax needs to be understood from a historical perspective.

 

Where should Tata Sons chief look for advice? In Tata’s Archives..

February 20, 2017

It is not always one sees an article asking a new CEO to look into his own company’s archives!

So thank you Priyanka Sangani of ET for suggesting (HT: HITCH) the new head of Tata Sons to look into Group’s archives for advice:

Read the rest of this entry »

How economists should advise Governments: lessons from Walter Heller who pushed Kennedy to cut taxes…

February 20, 2017

Beatrice Cherrier’s blog is quickly becoming one of the blogs to read.

In her recent post, she points how Walter Heller as a Chief Economic Adviser managed to advise the Kennedy Government. This is important as there is lot of criticism on role of economic expertise:

Trump’s decision to demote whoever might be nominated chairman of the Council of Economic Advisers (CEA) from his cabinet has been interpreted as a final blow to a though year – in which economists’ advice has been systematically ignored by voters- within a though post-financial crisis decade. Economists are under the impression that since 2008, their expertise has been increasingly challenged, and they have offered several analyses and remedies: more micro, more data, more attention to distribution and less to efficiency, more humility, more awareness to the moral and political element in economic expertise, more diversity and more interdisciplinarity –economic education included- Few of these however rely on the whopping literature on the history and sociology of scientific expertise.

….

Histories of how economists painfully gained reputation and trust during the XXth century abound. Most of them are focused on public policy – data on private businesses are more difficult to obtain, and tracking economists’ influence on the public is elusive–. And none of them fail to mention the canonical proof that economists’ expertise is/have been influential: it was Walter Heller, 4th CEA chairman, who convinced J.F. Kennedy and L.B. Johnson to propose a massive income and business tax cut, passed by the Congress in 1964.

The facts are well-known: Eisenhower’s legacy was a sluggish decade, with growth stuck at 2,5% per year and unemployment at 8%. Recurring budget deficit, which topped 12 billions in 1959, prevented much needed defense, education and welfare expenditures. Kennedy’s campaign was consequently focused on the promise of restoring growth, of “get[ting] this country moving again.” The candidate had nevertheless straightforwardly rejected the fiscal stimuli proposed by those economists, including Paul Samuelson, who had participated in his Democratic Advisory Committee. Kennedy came to the oval office with the notion, inherited from his father, that the budget should be balanced and the money supply tightly controlled. Under the influence of his CEA chairman, Walter Heller, Kennedy became more favorable to sustaining a budget deficit, and by early 1963, he had submitted to Congress the largest peacetime voluntary budget deficit: $12 billion. He proposed to reduce income tax rate from 20-91% to 14-65% and corporate income tax rate from 52 to 47% and to abolish loopholes and preferential deductions to enlarge the tax base. He promised that, should the Congress pass his tax cuts, the 1965 budget would be equilibrated. The proposal was finally enacted in 1964, under Johnson. 1965 saw the smallest Federal deficit of the decade (1 billion), strong growth and unemployment down to 4%. The trend persisted throughout the decade, with inflation pressures slowly building in response to Johnson’s spending frenzy.

Thought the contribution of the tax cut to this period of prosperity, and to subsequent imbalances, is still fiercely debated, its positive spillovers on the whole profession commands wide agreement. Heller’s CEA has contributed to shift economists’ image from ivory tower technicians to useful experts and to strengthen public trust. It has been heralded as the canonical example for economists’ ability to increase society’s welfare, a symbol of a (some would say lost) golden age. The scope of Heller’s influence has, in fact, extended ways beyond the tax cut. He was instrumental in putting poverty on the presidential agenda, and, as recently unearthed by Laura Holden and Jeff Biddle, he was the one who turned human capital theory into an argument in favor of federal funding for education. His peculiar status as the “economic experts’ expert” was immediately recognized. He made Time’s cover twice in two years. No other CEA chair made the cover of the magazine before the late 1976, and none ever made it twice as CEA chair. But if the fallouts of his expertise are well known, its determinants are less so. The nagging question remains: how did he do it?

Read the post for more details.

What is interesting is how in US you can actually remain relevant as an economist knowing about policy and people. These ideas are so important for history of thought. Whereas in India there is no chance despite such a rich history..

When the IMF evaluates the IMF….

February 20, 2017

Prof Charles Wyplosz has a piece on the recent IMF Evaluation Office report on the Greece rescue:

The IMF must be commended for imposing self-evaluation reports upon itself. They sometimes come on top of reports by the IMF’s Independent Evaluation Office (for the report on Greece, see Wyplosz and Sgherri 2016). It is about speaking truth to yourself, which can be delicate because the programme’s actors, most of whom are active in the building, have skin in the game.

These reports can fulfil an extremely important role if they identify mistakes that should not be repeated in the future. Does it happen? A previous self-evaluation took place after the first Greek programme. Many of its observations are the same as those of the second report, which is disheartening. The Fund argues that, because the first report was published after the start of the second programme, its conclusions could not be taken on board. It calls for a faster production of the self-evaluation reports. Would that be enough? Scepticism is warranted when we observe that a number of the mistakes reported in this report were already mentioned after the East Asian crisis.

With all its limitations, the fact that self-evaluation occurs and that the report is made public deserves to be commended. The procedure should be a model for the two other Troika institutions, the European Commission and the ECB. Most regrettably, self-evaluation is not part of their institutional culture. They seem to follow the prescription attributed to Napoleon: “In politics never retreat, never retract, never admit a mistake”. 

🙂

These lessons are hardly new. Similar issues were seen in previous IMF rescue plans as well. But IMF continues with its usual hubris.

The irony of all this is that role of IMF comes to eminence only during crises, But each time it makes same types of mistakes and remains relevant..

Seychelles demonetises its currency but there is enough time…

February 20, 2017

India has clearly set tall standards with its demonetisation exercise. The sheer volume of the exercise will always be tempting for governments worldwide.

Now Seychelles has decided to demonetise its notes. But the reason is very different. They has introduced new security notes earlier and just wanted to draw the older notes. Even times for withdrawal older notes is not three days as done by Indian government but the timeline is till 30 June 2017. Post 30 June 2017, the notes can only be exchanged with central bank (which hopefully will not go back on its promise):

Read the rest of this entry »

Wasted urban infrastructure: The city of Detroit

February 17, 2017

City/urban economics is always more interesting to read. Even if the papers are highly technical, atleast there is something real to learn and ponder.

This interesting bit of research looks at the issue of why in Detroit people do not live near the business centre of yore?

Centre’s Bhim vs Telangana’s Digital Wallet – A case of States’ entering currency policy?

February 17, 2017

No rewards for guessing who would win the battle between the two.  It is of course going to be Centre’s Bhim which will take over the TS wallet:

The Centre’s BHIM App and Aadhaar-based payments system have blocked the launch of the state’s own, TS-Wallet.

Chief Minister K. Chandrasekhar Rao had announced the launch of the of TS-Wallet — a mobile application for cashless transactions — in December last year. But bankers and service providers are said to be not particularly keen on partnering with individual state governments, after the Centre itself came out with the BHIM app and is now set to launch an Aadhaar-based payments system.

Bankers and service providers are also concerned about the security features of TS-Wallet, which was developed by the state’s IT department. The department had developed the app in December and had referred it to the government for final approval. There has been no progress after that.

The state government had even approached banks and service providers to form crucial partnerships while implementing the TS-Wallet system. But it was at this juncture, the Centre itself rolled out the BHIM App — which is the same at the state’s own digital payment solution.

“Bankers felt the TS-Wallet would be just a duplication of the BHIM App. Under TS-Wallet, we wanted waiver of all taxes and transaction charges. And banks had asked the government to bear some losses due to the waivers. We could not come out with a proposal on how much burden the government would bear due to which there was no progress on the TS-Wallet plan, official sources from the finance department revealed.

Though what is more interesting is all these digital payments are allowing Indian States to venture into the currency function, which was always the Centre’s function. As per Constitution, “Currency, coinage and legal tender; foreign exchange” is under the Union List (number 36 in the list).

But given how digital world is, it does not prevent State governments to offer their own digital wallets with some state related benefits/incentives  thrown in the scheme.  Unless there is a Constitutional amendment saying even digital currencies/payments will be a centre subject.

As the Centre tries to show its powers by rushing in the digital world, there are contrarian forces undermining (or atleast questioning) the very powers.

All this is so fascinating and ironical. It is taking us back to times when Princely State of Hyderabad issued its own currency. Whoever said this digital world is only about modernity is refusing to see how history is coming back…