Archive for September, 2013

What is the core of Economics?

September 19, 2013

Prof Amit Bhaduri of JNU has this nice speech given at National Conference on Economics Education in Schools in 2010. Thanks to EPW’s recent edition for the pointer, which is a good read as well.

In this age of chronic mendacity in public life, where all of us are the victims of a propaganda-managed democracy, surely what students at the plus two level of education need is an economics that demystifies economics. The Indian public needs to know the “bad conscience and evil intent of apologetic” (this from Marx) that the pundits who disseminate free-market economics have committed themselves to. When they reduce “public finance to housekeeping in the name of ‘fiscal discipline’” (Bhaduri again) and thereby clandestinely make a case for “disciplining the poor to help the rich”, all the more we need open-minded, intellectually self-confident citizens to call their bluff. What then is the core of economics that will give “an intelligent and interested citizen the confidence to pose and raise relevant economic questions”, depending, of course, on the particular context? Bhaduri answers this question with reference to three areas – microeconomics, macroeconomics, and the Indian economy.

In the section on macroeconomics, he focuses upon the fallacy of composition, taking pains to explain the proposition that what is true for the individual is not true for society and that the whole is not equal to the sum of its parts, thereby debunking “methodological individualism”. Here he gets to the paradox of thrift and then to the basic difference between Keynesian and non-Keynesian macroeconomics, going on to explain how demand is generated by expenditure and illustrating the notion of the “multiplier”. He then debunks the quantity theory of money and links up money with deficit financing.

On the Indian economy, Bhaduri suggests that students need to know the sectoral structure of the gross domestic product (GDP) and employment, the class and regional distribution of income, and how these have evolved since Independence. Over the last 20 years, why has the rest of the world, whose real GDP has grown much slower than India’s, reduced poverty faster? How is it that India has such a large number of billionaires, second only after the US, and displays extremes of wealth and poverty, luxury and misery, and civilisation and degradation not found anywhere else in the world? In this context, what of the social choices made by a political system wherein to be a serious contender for a parliamentary seat in elections to the Lok Sabha the average amount that is spent is Rs 8 crore? Students then might ponder over “how much content is there to this form of democracy”. With so much unaccounted money flooding the Indian electoral system, does this not make a mockery of political equality at the polling booth?

In Micro, Prof Bhaduri says we need to learn just the following ideas:

The income and substitution effect is one thing and choice using soft information and hard information or exact information and inexact information is the second thing that is all I think which is really valuable in microeconomics.

He also takes a jibe at his fellow students in Cambridge who have forgotten economics (any guesses who??)..

In the end Prof Bhaduri says:

What I have said, I believe, with a little bit of thinking, you all can cut out those parts. (It is another matter what will come in examination. We will come to all that). Also I have outlined
what I think can be brought across to student much more easily than if you try to get all sorts of issues. Take Indian economics, it has all kind of information. You might choose not to
have this or something else, but some basic information which you think is important and why it is important. I said why I think this is important today. There is so much talk of
market, liberalisation and high growth. We should know the other side in that. To be a balanced citizen, you should know the two sides. In everything, you can choose something,
you can have your political bias and if you are intellectually honest, you can say, this is the bias I have. It is true that I am probably much more worried and interested about the poor
than most people who appear on the TV these days. But that is ones’ personal choice. You can certainly say, this is what I think. But certainly stock markets is not the main part of the
Indian economy.

Another attempt to question economics teaching particularly in Indian context..

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A short history of FOMC communication..

September 19, 2013

FOMC has set markets on fire. The pain continues to be postponed. One of the several instances showing irrationality of markets. Poor Chuck Prince is always criticised for his infamous quote regarding music and markets. But it mostly sums the mood of markets – dance till the music lasts.

Anyways, Mark A. Wynne of Dallas Fed writes a nice short history of FOMC communication.

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Why did the Fed and Treasury let Lehman fail?

September 18, 2013

It has been five years since the iconic Lehman failed. The above question will be asked for a long time to come as it became great recession post this event.

William R. Cline and Joseph E. Gagnon of PIIE make an attempt to answer the question. They say Fed simply followed the advice given by Bagehot nearly 150 years ago: Provide support to financial firms to only those which have adequate collateral:

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Did merger of two US beer companies (Miller and Coors) cause a price increase?

September 18, 2013

Nice research at voxeu looking at the evidence post merger of Miller and Coors. It is by Orley Ashenfelter, Daniel Hosken, Matthew Weinberg.

They show that impact of merger on prices depends on where you stay:

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Why do we worry over falling growth but not high inflation?

September 17, 2013

In the last 2-3 years or so, I have usually noted media cry over falling markets/slowing growth but not much worried over spiraling inflation. As IIP and CPI are released on the same day, the next day reports celebrate/cry over IIP trends but not much is written over CPI trends. Even analysts tend to focus more on IIP and not much worried about CPI.

This blog has always supported a quick regime shift to CPI for monetary policymaking. How many countries look at PPI/WPI kind of measures to assess inflation for policymaking?  How many people buy products based on WPI?

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Dr Rajan, please stop this practice of revealing outcome of mon policy upfront to FM/PM/whosoever…

September 17, 2013

There is huge hype around Dr. Raghuram Rajan’s first mon pol meeting on Sep 20. As always media is going crazy over expectations from Dr. Rajan. Despite macro fundamentals remaining weak, both media and markets have their own set of stories.

Anyways, this blog had hoped that Dr. Rajan had rightly set his contract with finmin before taking the job. But this story does not really suggest any improvement in the situation.  Once again, the policy seems to have been told upfront to PM/FM:

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Coase’s idea on monopolies..

September 17, 2013

Literature has poared post the sad demise of Prof Coase. Much is written about how his ideas about transaction costs and property rights transformed economic systems.

However, I was unaware of his work on monopolies. Kevin Bryan Doctoral student at Kellogg School of Management points to his work on monopolies. Prof Coase said monopolist is unable to earn rents as suggested my micro-1:

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Does voting rights lead to financial development…

September 17, 2013

A really interesting paper connecting political systems to financial systems. It is written by Hans Degryse (KU Leuven, Tilburg University and CEPR), Thomas Lambert (Université catholique de Louvain and Université Lille 2 ) and Armin Schwienbacher (Université Lille Nord de France – SKEMA Business School).

They say countries which get voting rights also end up banking systems before other countries. Countries which delay voting rights lead to development of capital markets:

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India embraces the welfare state..(for whose welfare??)

September 16, 2013

Another Dr Shashi Tharoor’s column and yet another disappointment. It is fine to be optimistic but one cannot be ignorant to the reality.

Dr Tharoor says India is becoming a welfare state and being a developing country, this is a huge achievement:

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Did Capitalism Fail?

September 16, 2013

 (of NYU) and  (University of New Hampshire) make another of those several attempts to change the way we teach/approach economics:

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Why do people pet cows/buffaloes despite negative returns on them?

September 16, 2013

Nice to be back after a break.

Let me start the blogging by this interesting paper by Dean Karlan et al. They first show that returns on investing in cows etc is negative and then ask why people keep them despite such low returns:

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Blogging is going to be weak in next few days..

September 10, 2013

Blogging is going to be weak in the next few days. Will try and post a few things but not sure. Will try and write on weekend or perhaps next week. Till then, keep posting your comments and suggestions.

Interestingly, only today the blogger realised that ME ranked in top 100 most influential economics blogs last year (an amazing achievement for the blog and its visitors, given the high profile list). But it is not in the list anymore. The blogger has been unable to blog as vigorously compared to earlier months due to shift of base.  But has always tried to put an  effort. The focus has also moved to Indian economy drama and not much research related stuff. The drama was too interesting to miss. Though,  will surely try and up the research ante in next few months.

So as the blog goes on a break, i would be grateful if you could send your suggestions to improve things here at ME…Thanks a ton as always for your comments and inputs..

RBI’s forex market intervention strategy in recent months is perplexing

September 10, 2013

RBI’s forex reserves has declined by USD 18 bn from USD 293 bn in Apr-13 to USD 275 bn in last week.

In all this, it is interesting to observe RBI’s strategy in forex markets. I have looked at data from Nov-11 onwards when troubles started brewing for Indian economy. Before Nov-11 RBI barely intervened in markets.

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Mr CM please do not ignore our Bangalore…

September 10, 2013

I am unable to get an online version of this article. It appeared in ToI Banaglore edition on 9-Sep-13. It is here in this e-paper edition but not sure whether it will open. I was so amused to read it.

One thought the new CM of Karnataka is taking stock of Bangalore and trying to resurrect the image of Bangalore. Thanks to ToI for upping its ante against the wide decline in life in Bangalore. So, one did get to read how the new CM has taken a tour of Bangalore and was fuming to see states of things around the city.   But then on the other hand (apologies to bring this infamous econ phrase), we have such statements where the CM says there is too much attention on Bangalore and we need to look at other places.

First, why are our politicians surprised by state if decline in their own capital cities? Aren’t they aware of what is going on? Is it that they are brought from some other state/country that they are unaware of things?

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How Chhattisgarh managed to achieve and look beyond roti, kapda and makaan…

September 10, 2013

An interesting article from Dr Raman Singh, CM of Chattisgarh.

The state has been in news for successfully implementing its version of food security bill. Dr Singh (nice to hear another Dr. Singh, though he is a ayurveda doctor) says first they got the fiscal house in shape and then looked at transfers:

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Building a cadre of young economists for public sector…

September 9, 2013

The Rajnikant Rajan effect has not just shaken the markets but media articles too. Suddenly all the woes of Indian economy look to go away. The senior corporates who were worried till y’day say worst is over ( have been hearing this for 2 years now). Prof. Michael Woodford (of Columbia) who famously said that all that matters is expectations and nothing else (no output, no inflation, no deficit etc), must be really impressed…

In all this spirit it was interesting to read AK Bhattacharya’s piece on the need to build and support young econs in Indian govt.:

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Short primers on Coase’s works…

September 5, 2013

Prof. Herbert  Hovencamp of (University of Iowa – College of Law) has this nice short article on Coase’s key works.

Prof Vivek Dehejia of Carleton University in Ottawa also chips in and pays his tribute..

3 factors that sum up emerging market growth and crash…

September 5, 2013

A brilliant piece by Prof. Ricardo Hausmann of Harvard Univ.

It is amazing to see all these pieces on downfall of emerging econs.  Not evry long ago they were the eyes of cynosure and have now become sore. What a volatile environment are we in.

Prof Hausmann points how emerging market econs grew in the last years and led to surge in demand. But was all this based on real factors? He says much of the growth was basically because of exchange rate appreciation, capital inflows and rise in relative price of exports:

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How can RBI ban the “Other 80-20/75-25” housing finance schemes?

September 5, 2013

RBI recently banned certain innovative housing schemes called 80:20 , 75:25.  One would always like to ask how about the other finance scheme of similar name. Here one is forced to cough huge cash as black  amount as the token amount to get the house. The home loan things start much later. Even here the % of black is around 20-15% easily going upto as much as % as possible.

Under these schemes banks pay a certain % say 80% upfront to the builder. This creates several kinds of risks:

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Whose Central Bank? For Bankers or for macro stability?

September 4, 2013

A super column by Brad Delong (most must have read it but anyways)..

He says central banks are broadly deemed for two kinds of people:

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