Archive for October, 2012

Four Magic Tricks for Fiscal Conservatives in US (Seeing the magic work in India as well..)

October 31, 2012

A fab piece by Prof Jeff Frankel who is making a habit of writing some amazing articles.

In this he points to four magic tricks practiced by American politicians while posing as fiscal conservatives. All the four tricks apply to Republican Presidential candidate Romney who has promised to cut budgets deficits and pose as fiscal conservative:


Some suggestions to make improvements in teaching economics…

October 31, 2012

What’s the use of economics? – a Voxeu debate has generated some interesting responses.

The latest one by Alan Kirman is a nice read. He says we should use the crisis as an opportunity to bring much needed changes in teaching economics:


Which models do we need in times of crisis?

October 30, 2012

Benoît Cœuré, Member of the Executive Board of the ECB comes to the rescue of economists and state of economics.

He says we may have missed figuring the onset of the crisis.


RBI’s Monetary Policy Review : Q2 2012-13

October 30, 2012

Here is the analysis of RBI’s monetary policy  held today. Here is  the expectations report. The policy matched my  expectations mostly.

This is to be read along with RBI’s statement and macro report by RBI released yesterday. However the second report outlook may/may not match the actual policy..

Politics and sham of naming Riksbank Prize in economics as Nobel Prize..

October 30, 2012

Yasha Levine of (amazing website name) writes this article saying there is nothing like Nobel Prize in economics. ( I read a similar article by Ira Basen as well). However, this one is a bit too acerbic.

He points to this interesting politics of why this Prize came into being.


Indians are using the lessons of behavioral economics to nudge citizens …

October 29, 2012

An article which gets a huge thumbsup from this blog.

It mentions couple of areas where FinalMile, a firm has used beh eco to nudge citizens into better decisions:

  • Prevent people from crossing railtracks (covered earlier as well). Though I would love to see an empirical study on this experiment to back the claims.
  • Road safety
  • Garbage

Great to know all this and hope to read much more in future..

Broken BRICs..

October 29, 2012

A nice article by Ruchir Sharma.

He has been criticising this fancy acronym BRIC since his book Breakout nations  was released. In this he calls BRIC as PAST ITS SELL-BY DATE:


How Acceptable are Economic reforms in India?

October 29, 2012

Though I have mentioned this speech in my previous post, I  think I need to mention it again.

Yashwant Sinha looks at state and acceptability of economic reforms in India. The speech was given at Stanford – How Acceptable are Economic reforms in India?

He looks at reasons why reforms are not acceptable despite 21 years of reforms. He lists several points:


Bridges to somewhere atleast…

October 29, 2012

Loads of holidays last week and coming weeks as well. So blogging has been weak.

An essay on the topic by Justin Yin. It was written in 2011 but missed it. He says — More austerity won’t save the global economy. Building infrastructure just might.


From the Indus Valley Civilisation to Today’s urban planning

October 25, 2012

A nice article mentioning state of urban planning in India. It starts mentioning the Bangalore’s grabage mess.

And then mentions Indus Valley urban planning towards the end:

Largely to circumvent this urban planning failure across the city geography, the special economic zones (SEZs) in India were conceptualised as engines of economic growth supported by quality infrastructure and complemented by an attractive fiscal package, both at the Centre and the state level. There is a single-window clearance in place to develop infrastructure expeditiously. Wherever SEZs have taken off, they have indeed contributed to growth. However, viewed from a pan-Indian perspective, it remains a serious question whether creation of such growth islands are the best public policy tool to promote inclusive growth. Robust principles of urban planning are a part of our very own history, going back to Harappan cities. Let’s not forget history, and suffer consequences that affects our and our children’s lives.

History? What is that?

How India’s politicians have been the main force behind economic reforms?

October 25, 2012

I was really surprised to read this note from John Echeverri-Gent of Univ of Virginia.

He says something surprising to most but not really to political economy/political science students. It is politicians/politics which matters for anything economic whether reforms or degeneration. So much so, the reforms in India under wither Rajeev Gandhi or 1991 reforms under PV Narasimha Rao etc came under some interesting political complusion/situation:


Lessons from China’s fiscal stimulus in 2008-09..

October 25, 2012

A nice paper on China’s fiscal stimulus in 2008-09 by Shahrokh Fardoust, Justin Yifu Lin and Xubei Luo.

They demystify China’s fiscal stimulus and point to several lessons from the stimulus. The Chinese stimulus had two main features. First large part of stimulus was into shovel ready infrastructure projects. This was unlike India which just boosted consumption and fueled subsidies.

Second, even the sub-national governments also did their bit by doing countercyclical fiscal policy. This was unlike US where states were seen as cutting budgets  leading to a lower impact of fiscal stimulus.


How Warren Buffet creates alpha?

October 23, 2012

The mystery over how Buffet creates alpha when most fund managers fail is an amazing one. It is the stupendous success of Buffet  which keeps active fund management going and stands against passive fund management/indexing etc.

Here is a paper which tries to figure where the gains come from? The authors shows that it is a simple strategy. First the fund has higher leverage which comes from stable sources (insurance premiums etc..). Then Buffet invests the leveraged proceeds into good quality stocks. The leverage magnifies the returns which generates higher alpha:

We estimate that  Berkshire’s average leverage is about 1.6-to-1 and that it relies on unusually low-cost and  stable sources of financing. Berkshire’s returns can thus largely be explained by the use  of leverage combined with a focus on cheap, safe, quality stocks. We find that  Berkshire’s portfolio of publicly-traded stocks outperform private companies, suggesting  that Buffett’s returns are more due to stock selection than to a direct effect on management.

Is it that simple? Conclusion nicely says it as Lessons from an Alpha Male…

Role of policy reforms in promoting groundwater conservation in India..

October 23, 2012

A superb paper by Sheetal Sekhri on what is going to be serious problem going ahead in India and even rest of the World.  It was presented at the India Policy Forum 2012.

In this paper she looks at two policy interventions to promote ground water conservation in Punjab and Gujarat. Both were not as effective.


Sorry, U.S. Recoveries Really Aren’t Different….

October 22, 2012

There was some recent discussion saying US recessions are different and US recovers faster from recessions. However, this is not the case with current recession. This was mostly suggested by econs supporting  Romney and thus arguing Obama’s policies were flawed. Krugman-Taylor debate here.

Rogoff-Reinhart in this nice column refute the findings. They say two main things:


  • US recoveries  are not different from recessions in other economies
  • However, compared to previous US recessions growth is faster this time.

They begin citing the people who have questioned the recovery:


Brief history of Bank of England

October 22, 2012

Superb account  by Andrew Haldane.

He discusses both history and recent changes in BoE post 2008 crisis.


Tiger Woods and Prospect theory…Do golfers also exhibit loss aversion?

October 22, 2012

An amazing paper by  Devin G. Pope and Maurice E. Schweitzer. Though, it is highly quant based but one does get some ideas.

They look at professional golfers’ behavior across various situations. And findings are in line with Prospect theory (PT). PT says people are risk averse while making gains and risk seekers while making losses. So when golfers are in a winning position they tend to become risk averse and while in a losing position take higher risks:


Political Logic of Disintegration of Euroarea: Seven Lessons from the Soviet Collapse

October 19, 2012

An intriguing historical essay by Ivan Krastev of the Centre for Liberal Strategies in Sofia. The more you read on history the more it amazes you. Krastev says one should not assume Euroarea cannot disintegrate because risks are high. USSR suffered from similar ideology and fate. When you read essays like these

Some bit on USSR collapse:


Who Needs the Nation State?..We all do

October 19, 2012

An amazing must read paper from Prof. Dani Rodrik which looks at so many interesting and interconnected areas..Most Prof Rodrik papers are amazing stuff. I just wish we could read more of such papers which dont have an iota of stats/math but give so many ideas..

He says one of the common arguements these days is how technology is leading to break down of economic barriers. So the idea of nation/states is outdated. We instead need international organisation structures, regulators etc:

The nation state has few friends these days. It is roundly viewed as an archaic construct that is at odds with 21st century realities. It has neither much relevance nor much power, analysts say. Increasingly, it is non-governmental organizations, global corporate social responsibility, or global governance on which pundits place their faith to achieve public purpose and social goals. It is common to portray national politicians as the sole beneficiary of the nation state, on which their privileges and lofty status depend.

The assault on the nation state transcends traditional political divisions, and is one of the few things that unite economic liberals and socialists. “How may the economic unity of Europe be guaranteed, while preserving complete freedom of cultural development to the peoples living there?” asked Leon Trotsky in 1934. The answer was to get rid of the nation state: “The solution to this question can be reached … by completely liberating productive forces from the fetters imposed upon them by the national state.”2 Trotsky’s answer sounds surprisingly modern in light of the euro zone’s current travails. It is one to which most neoclassical economists would subscribe.

The economics against nation states is that they lead to rise in transaction costs:

Meanwhile the economic case against the nation state is that it is itself the source of many of the transaction costs that block fuller global economic integration. This is not just because governments impose import tariffs, capital controls, visas, and other restrictions at the border that impede the global circulation of goods, money, and people. More fundamentally, it is because the multiplicity of sovereigns creates jurisdictional discontinuities and associated transaction costs. Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy. As overt trade barriers have come down, the relative importance of such transaction costs have grown. Import tariffs now constitute a tiny fraction of total trade costs. Anderson and van Wincoop (2004) estimate these costs to be a whopping 170 percent (in ad valorem terms) for advanced countries, an order of magnitude higher than import tariffs themselves..

To an economist, this is equivalent to leaving $100 bills on the sidewalk. Remove the jurisdictional discontinuities, the argument goes, and the world economy would reap large gains from trade, similar to the multilateral tariff liberalization experienced over the postwar period. So the global agenda is increasingly dominated by efforts to harmonize regulatory regimes, everything from sanitary and phytosanitary standards to financial regulations.

However Rodrik thinks we still need Nation states. The core logic is that given the heterogeneity around the world, nation states are the best way to govern as they understand local knowhow better:

Instead, I wish to develop a substantive argument for why robust nation states are actually beneficial, especially to the world economy. I want to show that the multiplicity of nation states adds rather than subtracts value. 

My starting point is that markets require rules, and that global markets would require  global rules. A truly borderless global economy, one in which economic activity is fully unmoored from its national base, would necessitate transnational rule-making institutions that match the global scale and scope of markets. But this would not be desirable, even if it were feasible. Market-supporting rules are non-unique. Experimentation and competition among diverse institutional arrangements therefore remain desirable. Moreover, communities differ in their needs and preferences with regard to institutional forms. And geography continues to limit the convergence in these needs and preferences.

He calls the pursuit of hyperglobalization as futile. Nation states have provided the institutions for the world economy to grow. And whenever we have pursued hyperglobaliation dreams, we have met with terrible accidents:

The nation state was the enabler of globalization, but also the ultimate obstacle to its deepening. Combining globalization with healthy domestic polities relied on managing this tension well. Veer too much in the direction of globalization, as in the 1920s, and we would erode the institutions underpinning markets. Veer too much in the direction of the state, as in the 1930s, and we would forfeit the benefits of international commerce. 

From the 1980s on, the ideological balance took a decisive shift in favor of markets and against governments. The result internationally was an all-out push for what I have called “hyper-globalization” (Rodrik 2011) – the attempt to eliminate all transaction costs that hinder trade and capital flows. The World Trade Organization was the crowning achievement of this effort in the trade arena. Trade rules were now extended to services, agriculture, subsidies, intellectual property rights, sanitary and phyto-sanitary standards, and other types of what were previously considered to be domestic policies. In finance, freedom of capital mobility became the norm, rather than the exception, with regulators focusing on the global harmonization of financial regulations and standards. A majority of European Union members went the furthest of all, by first reducing exchange-rate movements amongst themselves, and ultimately adopting a single currency.

Hmmm.. Superb reasoning..

He says we need nation states for following four reasons:

It remains without saying that such emergent forms of global governance remain weak. But the real question is whether they can develop and become strong enough to sustain hyperglobalization and spur the emergence of truly global identities. I do not believe they can. I develop my argument in four steps: (1) market-supporting institutions are not unique; (2) communities differ in their needs and preferences with regard to institutional forms; (3) geographical distance limit the convergence in those needs and preferences; and (4) experimentation and competition among diverse institutional forms is desirable.

Read on..

Econs are always interested in unifying economic activity across the nation, globe etc. But they do not really take other  aspects into account. Economics badly needs doses of interdisciplinary research to give different perspectives..

Andrei Shleifer’s review of Daniel Kahneman’s Thinking, Fast and Slow

October 18, 2012

Who better than Shleifer to review Kahneman’s tome on psychology and economics.

In this review, I discuss some broad ideas and themes of the book. Although it would be  relatively easy to carry on in the spirit of the first paragraph, constrained only by my limited vocabulary of adjectives, I will seek to accomplish a bit more. First, because the book mentions few economic applications, I will describe some of the economic research that has been substantially influenced by this  work. My feeling is that the most profound influence of KT’s work on economics has been in finance, on  what has now become the field of behavioral finance taught in dozens of undergraduate and graduate  economics programs, as well as at business schools. I learned about KT’s work in the 1980s as a  graduate student, and it influenced my own work in behavioral finance enormously.

Second, I believe that while KT’s work has opened many doors for economic research, some of the fundamental issues it raised remain work in progress. I will thus discuss what Kahneman’s work  suggests for decision theory, primarily as I see it through the lens of my recent work with Nicola  Gennaioli and Pedro Bordalo (Gennaioli and Shleifer 2010, Bordalo, Gennaioli, and Shleifer 2012a,b,c)

He says there are two things he wants to clear two objectives  on beh eco:

The  first objection holds that, while psychological quirks may influence individual decisions at the boundary,  the standard economic model describes first order aspects of human behavior adequately, and  economists should focus on “first order things” rather than quirks. Contrary to this objection, Della Vigna (2010) summarizes a great deal of evidence of large and costly errors people make in important  choices…

The second objection holds that market forces eliminate the influence of psychological factors on prices and allocations. One version of this argument, made forcefully by Milton Friedman (1953) in the  context of financial markets, holds that arbitrage bring prices and therefore resource allocation to efficient levels. Subsequent research has shown, however, that Friedman’s argument – while elegant – is theoretically (and practically) incorrect. Real-world arbitrage is costly and risky, and hence limited  (see, e.g., Grossman and Miller 1988, DeLong et al 1990, Shleifer and Vishny 1997). Dozens of empirical studies confirm that, even in markets with relatively inexpensive arbitrage, identical, or nearly identical, securities trade at different prices. With costlier arbitrage, pricing is even less efficient. 

A second version of the “forces of rationality” objection holds that participants in real markets are specialists invulnerable to psychological quirks. John List’s (2003) finding that professional baseball card  traders do not exhibit the so-called endowment effect is supportive of this objection. The problem with  taking this too far is that individuals make lots of critical decisions – how much to save, how to invest,  what to buy – on their own, without experts. Even when people receive expert help, the incentives of  experts are often to take advantage of psychological biases of their customers. Financial advisors direct savers to expensive, and often inappropriate, products, rather than telling them to invest in index funds (Chalmers and Reuter 2012, Gennaioli et al. 2012). Market forces often work to strengthen, rather than  to eliminate, the influence of psychology.

Great read..