Archive for July, 2011

A Detroit in Gujarat??

July 29, 2011

Mint has this quick edit on Ford setting up its second car-making plant in Sanand, Gujarat, next to the plot where the Tata Nano is made.

The edit says this Sanand could become India’s Detroit with so car manufacturing companies coming up.

Actually I hope it doesn’t. Detroit is actually an amazing case study on how a great city could bite the dust.

In 2010, the city had a population of 713,777 and ranked as the 18th most populous cityin the United States.[2][14] At its peak in 1950, the city was the fifth-largest in the U.S.A., but has since seen a major shift in its population to the suburbs. Between 2000 and 2010, the city’s population declined by 25%.[14] Among major American cities during the decade, only New Orleans experienced a greater decrease by percentage.

Unlike other cities, Detroit could not move beyond cars. As most if these US car companies like GM, Ford lost market share so did Detroit.

See these great pictures from Time.com. Then there are lots of articles on Detroit decline. This one explains that there were reasons for Detroit decline other than car industry fall.

Though I must add Sanand is still far away from Detroit and is still a small town. But it should be aware of the history of Detroit and choose a more successful global city as its aspiration. Detroit case study is pretty tragic and should not really be applied..

Short note on inflation and mon pol

July 29, 2011

There is a nice note on the topic by Richmond Fed.

Price stability is a significant objective of monetary policy. When inflation is high, variable or both, it interferes with the efficient operation of the economy and can reduce economic growth. In addition, once inflationary expectations have been set, bringing inflation back down can be painful.

It explains the basics of inflation index, why price stability is important and how monetary policy helps. A nice short explanation for students of monetary economics and can use it in their exams/papers etc…

Nudging people to use gmail

July 29, 2011

Google has this new website which nudges people into shifting their emails to Gmail. So in case your friends/colleagues etc have not moved/switched to gmail, you can try and nudge them into using.

There are three steps by which you can choose your friends (from your mailing list) and send them a personal invite for the same.

They nicely call it intervention:

You’ve probably already improved the lives of your friends and family members by helping them switch to Gmail, but what about that one friend who still hasn’t made the switch? It’s time to take a stand and stage an intervention.

Will be nice to know people who have switched to gmail nudged this way..

Econ Bloggers imply fiscal multiplier is only a theoretical concept

July 29, 2011

Econ Bloggers Survey for Q3 2011 is out. The pdf of survey findings is here.

In this survey, few bloggers are picked and asked to write a question which they think is interesting. This question is then attached to the survey for bloggers to respond.

In this edition, Mostly Economics was asked to frame a survey question. ME’s question and choices were (thanks to Tim Kane of Kaufman foundation for helping frame the q properly):

Did fiscal policy expansion in 2009, particularly ARRA (“the stimulus”), mitigate or alleviate the impact of the crisis?

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Bank of North Dakota – Case Study of the only state owned bank in US

July 28, 2011

Wow! I did not know about this at all.  Bank of North Dakota in the state of North Dakota is the only state-owned bank in US. It was opened in 1919 as North Dakota farmers  were having difficulty securing adequate credit at a  reasonable cost.

Unlike India where we have banks owned by Central government and are called state-owned/public sector banks, here state-owned bank means owned by state. US Federal govt is not in any business of owning banks. BND is the only state govt owned bank in US.

It has come across as a nice professionally run bank with low NPAs and high profitability and returns. It also just has one branch in Bismarck and has not really expanded throughout the state. Its deposits are not insured by FDIC but are guaranteed by the full faith and credit of the State of North Dakota.

The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with Bank of North Dakota, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government.

There were talks post crisis that State governments in US should also have their own government-owned banks. They thought this might have helped them ward off crisis. Their own bank could have infused more liquidity/credit and also provided some dividend to help in fiscal crisis.

Boston Fed did a superb study looking at whether State of Massachusetts should have a bank modelled like Bank of Dakota. Their analysis shows the experience have been mixed. Overall research shows Bank of North Dakota has played some role in development of North Dakota State but not really an exclusive role.

There are 4 reasons for setting a state-owned bank:

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Great divide between academic, business and government economists

July 28, 2011

Mark Thoma has this another superb article on state of economics. He looks at examples from medical industry where academicians work closely with practitioners. In economics we have very little association between the two.

So medical academics apart from looking at how human body works also works on potential threats/new diseases etc. In economics it is mostly about how economics works and very little to do with treating health of economy and firms.

He starts interestingly:

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Why Indian public is not angry against persistently high inflation?

July 28, 2011

This has been a question asked by a few.

Arvind Subramanian of PIIE adds more thoughts on the matter. He says it is a mystery how public has been so far silent on this high inflaition. Barring some cries against few food items (like onions in 2010), the public has been more or less silent. What are the reasons. He points to six possible reasons:

  • (i) Protection of rural India — Rural India incomes protected via NREGA which now has wages indexed to inflation..
  • (ii) Declining importance of food — NSS surveys show share of food in consumption declined from 41% to 29%, hence less impact of rise in food inflation
  • (iii) Decline in fixed-income earners — more wages seem to be indexed to inflation so people are not really concerned
  • iv) Rise of debt-financed consumerism — This is a good point. He says people are increasingly financing consumption via debt:

according to RBI data, personal consumer loans increased roughly threefold during the 2000s from 3 percent of GDP to about 10 percent. Higher inflation lowers the real cost of borrowing and effectively subsidizes consumption. However, this argument is valid only if borrowing is at fixed rather than floating interest rates, and consumer loans in India tend to be of the latter type.

  • (v) The absence of large price changes — may be price changes are more incremental and not onetime big changes for people to note
  • (vi) Growth matters more: people seem to be more concerned over growth..

Hmm…

In the end he says:

In any event, since higher inflation tolerance is still just a possibility, its causes unclear, and its reversal not improbable (as in 2008), RBI should not relax its guard. And the government should help with some serious fiscal consolidation on its part. The Sita of macroeconomic stability should not be sacrificed by diluting the Lakshman rekha of 5 percent inflation.

Another point he makes towards beginning is how RBI is one of the few better run institutions in the country:

Keeping inflation low and stable has been one of India’s major policy successes. On the strength of this achievement, the Reserve Bank of India (RBI) could pride itself as one of the better-run public institutions in the country. But conducting monetary policy was among the easier jobs in India. In some ways, RBI had little choice but to deliver macroeconomic stability because of the propitious political economy of inflation. The politically assertive middle class has had low inflation tolerance, with 5 percent considered the threshold —or Lakshman rekha —beyond which the clamor for action, never constrained by apathy or acquiescence, becomes difficult to ignore. RBI’s policy merely reflected an unavoidable respect for the inflation preference of key voters.

Bicycles getting crushed under India’s rushing prosperity

July 27, 2011

This is a superb article which came in ET yday. It is by Neeraj Kaushal of Columbia.

She points how we in India are giving up bicycle where west is taking it up. One keeps getting to hear from friends oin Europe and US, how bicycles are kind of getting preferred. In US one can even take bicycles in the metro train and use it extensively on roads. There are lanes for cycles etc.

Apart from bicycles one even sees some picking up for the cycle rickshaw. And it is not in some random low key regions. One sees these rickshaws in Times Square in NY!

Kaushal says cycles has other benefits apart from lower traffic congestion:

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What is the source of increase in US debt?

July 27, 2011

In a followup research to this, Kevin Kliesen and Daniel Thornton point the source for rise in US debt.

It is mainly on account of rise in expenditure in mediclaim and social security. As these expenditures are difficult to reduce (and would only rise), strains on debt to continue:

This analysis suggests that the increase in the debt over the period 1975-2007 was not only a consequence of increased government spending without increased revenues, but also that the government increased payments to individuals through Social Security, Medicare, and other payments without sufficiently reducing spending elsewhere in the budget. In short, these trends, as the CBO’s recent Long-Term Budget Outlook makes clear, will continue to strain federal, state, and local budgets as they consume an ever larger percentage of federal spending dollars.

A friend pointed to this wonderful link on US debt clock. Must check this!

Lessons on debt ceiling from Denmark

July 27, 2011

Jacob Funk Kirkegaard of Peterson Institute points to debt ceiling lessons from Denmark.

Denmark too has a debt ceiling but is much higher than the public debt/GDP ratio. In US, debt ceiling is much closer to public debt/GDP ratio.  So there is no real chance of politicizing the event in Denmark as it has been the case in US.

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The Vanishing US- EU Employment Gap

July 26, 2011

Is the title of this alarming post in NY Fed blog.

They point how the once US pride – its labor markets – is losing steam as well. The enployment to population ratio was always higher in US compared to Europe:

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Comparing inflation under various RBI Governors

July 26, 2011

Apart from a super hawkish RBI Q1 2011-12 policy, there are some other interesting things to note.

Jul-11 was Dr Subbarao’s last policy meeting unless his tenure is extended. And there are quite a few similarities between Dr Reddy’s and Dr Subbarao’s tenure towards the end.

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RBI’s super hawkish monetary policy Q1 2011-12

July 26, 2011

RBI shocked most market participants by upping the policy rates by 50 bps to 8% in its first quarter review of mon pol 2011-12. Barring very few, most expected a hike of 25 bps in this policy and then may be another 25 bps hike in Oct-11 policy. People expected RBI to pause in Sep-11 review.

People are saying RBI has front loaded of all future rate hikes in this policy and may be no more in future. However, on my reading the Governor’s statement there is no real hint of any pause anytime soon. The statement remains highly hawkish and vigilant on  inflation.

RBI uses some strong language to reinforce its committment to fighting inflation and restore credibility:

It is expected that these policy actions will:

  • reinforce the cumulative impact of past actions on demand;
  • maintain the credibility of the commitment of monetary policy to controlling inflation, thereby keeping medium-term inflation expectations anchored; and
  • reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.

I have not seen RBI use this language before. But this was needed as market participants were feeling because growth has slowed down, RBI might pause etc. But this is not what RBI intents. It does mention growth concerns but just reports them as figures. It also says some indicators show slowdown but those are interest rate sensitive and hence expected to decline. Other variables like exports etc are still robust:

there are signs that growth is beginning to moderate, particularly in respect of some interest sensitive sectors. However, there is no evidence of a sharp or broad-based slowdown as yet. Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggest that demand is moderating, but only gradually. As such demand side inflationary pressures continue to prevail. Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance.

It maintains inflation is and remains the most important concern:

Inflation continues to be the dominant macroeconomic concern. The headline WPI inflation rate was 9.7 per cent in April 2011. The provisional inflation figure was 9.1 per cent in May 2011 and 9.4 per cent in June. Given the recent pattern, these numbers are likely to be revised upwards. Thus, the headline WPI inflation rate for Q1 of 2011-12 remained stubbornly close to double digits and inflationary pressures continued to remain broad-based. Both the level and the persistence of WPI inflation are a cause for concern.

Non-food manufactured products inflation was 7.0 per cent in April 2011. According to provisional data, it rose to 7.3 per cent in May and remained high at 7.2 per cent in June. This should be seen in comparison with the average non-food manufactured product inflation of 4 per cent over the last six years. The persistence of  high  non-food manufactured products inflation suggests that producers, operating at high levels of capacity utilisation, are able to pass on rising commodity input prices and wage costs to consumers. Early corporate results for Q1 of 2011-12 suggest some moderation in margins. However, such moderation so far has been modest, implying that pricing power persists.

It has increased inflation forecast for Mar-11 from 6% to 7%. That is pretty prompt again. After underestimating inflation for most of 2010-11, it is now serious about inflation projections. Having said that, most expect inflation around 7-7.5% for Mar-11. Revision by RBI might just lead people to revise it further..

There are some risks to inflation outlook as well –

  • Performance of monsoons
  • Crude oil outlook uncertain
  • Element of suppressed inflation via subsidies
  • Administered prices in the WPI basket which could be raised as well like coal

It has even lowered growth projections for money supply and credit. Overall, RBI projections for Mar-11 are:

  Apr-11 Jul-11
Growth 8% 8%
Inflation 6% 7%
M3 16 15.5
Non-food Credit 19 18

Risks to its outlook are:

  • Global commodity prices and their impact
  • Financing of current account deficit. Mentions some shift towards FDI has taken. To be maintained
  • Food inflation depends on global commodities and monsoons
  • Fiscal Deficit remains a concern as subsidy burden likely to overshoot targets. This could impact inflation as well.

The policy stance is same barring an important change. It adds manage the risk of growth falling significantly below trend. So, once again hints growth issues concerns but inflation remains a priority.

Its policy guidance says:

Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which, in turn, will  be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation.

Overall, a shocker of a policy reaction from RBI. It would please a central banker/monetary economist but is obviously not going to be liked by market participants. Look for an inflation trend that shows sustainable downturn. As of now, it looks far away.

Way to make real rates positive

July 25, 2011

RBI has been trying to make a point that interest rates are not really negative.

They were negative earlier but not anymore. In an earlier speech, RBI Dep Gov Subir Gokarn said one should be loosking at other interest rates as well. So apart from Repo, if you look at lending rates one gets positive real rates. So one gets a different picture using different interest rates. It depends on what you use and RBI is looking at all these issues.

RBI released Q1-2011 Macro and monetary report released before the monetary policy. One of the section in Monetary and Liquidity Conditions chapter has discussion on real rates. It says:

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Minnesota govt shutdown — a superb case study/experiment to see whether govt useful or not

July 25, 2011

It did not cross my mind but the Minnesota Govt shutdown for 20 days is a superb case study. The shutdown was from Jul 1 2011 to Jul 20 2011. Here is a liveblog on the proceedings.

I came across this exciting article from Chuck Raasch. He says the shutdown points some government services are very useful. The shutdown points we need to bury certain thoughts about government being a necessary bad:

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US Federal deficit issues to impact US states as well

July 25, 2011

It is unimaginable how far this debt ceiling issue has gone. The deadline of August 2, 2011 is just a week away and still nothing. It is just like Europeans really. American econs criticised Europe for reacting late on Greece in 2010 and now are facing the same music.

Moody and S&P had raisd concerns that US could be downgraded if these debt ceiling/deficit issues continue. Just to further the problems, Moody’s has released this list of 5 states which are going to be adverself effected by this issue of US Federal deficit and debt.

The five states are:

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20th anniversary of India’s economic reforms — half full or half empty?

July 25, 2011

If we assume India’s reforms started in 1991, we just completed twenty years of economic reforms. On 24 Jul 2011, then Finance Minister Manmohan Singh ushered landmark reforms and liberalised the economy.

At the end of the speech FM said:

Sir, I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come.” I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

There is little doubt that India did wake up and even woke up the world with some impressive growth numbers and creation of wealth. The perception of India being a country of snake-charmers and elephants changed dramatically to a country having software and amazing potential. Based on this, current FM Pranab Mukherjee says – Glass is indeed half full if not full.

However, in terms of absolute numbers barring growth much looks the same.  Niranjan of Mint did point this out in a Feb-11 article. Final inflation numbers might actually be higher than those seen in 1991.

I was just reading the Budget Speech by FM in 1991. He explains the background and what made such a budget necessary. One could just use 1991 speech to explain today’s times as well (except that it is not a crisis background):

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Debt and Delusion

July 22, 2011

Bob Shiller in this article says most of the market reaction on debt crisis is overstated and irrational exuberance:

The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

An interesting contrarian point. Read the whole thing. Shiller always has different things to say…

When did America begin its gallop towards economic supremacy?

July 22, 2011

This should be a great paper to read.

As always, the authors Peter Lindert  and Jeffrey Williamson provide a summary in voxeu.

The findings are pretty interesting:

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Traffic Congestion case study: Increase supply or limit demand?

July 22, 2011

Troy Senik of Center for Individual Freedom points to this interesting case study from Los Angeles.

Basically LA is supposedly always suffering from traffic problems. The average Angeleno loses 80 hours a year to gridlock. It is a huge area and greater LA area has around 18 million people. There is no realy culture of public transport and people love their cars. Despite wide road network, it is always congested (Any city in India would love to trade traffic with LA; they would then know what traffic is all about). They have massive freeways but are always chocked and is ranked as city with worst traffic in US.

Now, there was this nice case. The city authority decided to close a road to tear down a bridge over the road. The road was very important link in the whole grid and people called it a disaster:

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