Archive for January, 2015

Book Review: Children of Light ..How electricity changed Britain forever

January 21, 2015

This is an amazing historical account by Gavin Weightman. We take so many things for granted and forget how certain individuals and their struggles gave us things like electricity, automobile etc.

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Will e-commerce lead to sticky prices becoming extinct?

January 21, 2015

This idea did not strike me. With e-commerce getting a second life, one is seeing huge activity in this space. One also expects that prices change frequently on these sites as they monitor demand and supply on a more real time compared to online stores.

Much of macro revolves around sticky prices which means prices do not change immediately in case of a shock. This has huge ramifications for policy and research.

So, with e-com springing, should  we expect prices to become more flexible and sticky prices becoming extinct overtime?  Not really as suggested by Yuriy Gorodnichenko, Oleksandr Talavera, Slavik Sheremirov. They look at pricing behavior on certain e-com sites and say sticky prices are here to stay:

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What’s the most fiscally responsible country in the developed world? Italy!!

January 20, 2015

Laurence Kotlikoff says so.

The new PM is changing things big time:

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Can nudges help students?

January 20, 2015

Susan Dynarski of University of Michigan points to several nudges which are helping students in their own way. Right from basic school to college, nudges can be used to improve things a little.

But they don’t get the media hype and politician publicity, so are ignored:

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Will $20-$50 be the new price range for oil? Some insights from micro and game theory

January 20, 2015

Good piece by Anatole Kaletsky (Chief Economist and Co-Chairman of Gavekal Dragonomics and Chairman of the Institute for New Economic Thinking).

Even if his prediction of $20-$50 goes false, one can always apply micro concepts (and game theory) on oil industry as he has done:

Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil?

Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most Western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power.

Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation). Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis.

In other words, the trading range of the past ten years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

This record points to $50 as a possible demarcation line between the monopolistic and competitive regimes. And the economics of competitive markets versus monopoly pricing suggests why $50 will be a ceiling, not a floor.

Further:

In a competitive market, prices should equal marginal costs. Simply put, the price will reflect the costs that an efficient supplier must recoup in producing the last barrel of oil required to meet global demand. In a monopoly price regime, by contrast, the monopolist can choose a price well above marginal costs and then restrict production to ensure that supply does not exceed demand (which it otherwise would because of the artificially high price).

Until last summer, oil operated under a monopoly price regime, because Saudi Arabia became a “swing producer,” restricting supply whenever it exceeded demand. But this regime created powerful incentives for other oil producers, especially in the US and Canada, to expand output sharply. Despite facing much higher production costs, North American producers of shale oil and gas could make big profits, thanks to the Saudi price guarantee.

The Saudis, however, could maintain high prices only by reducing their own output to make room in the global market for ever-increasing US production. By last autumn, Saudi leaders apparently decided that this was a losing strategy – and they were right. Its logical conclusion would have been America’s emergence as the world’s top oil producer, while Saudi Arabia faded into insignificance, not only as an oil exporter but also perhaps as a country that the US felt obliged to defend.

The Middle East’s oil potentates are now determined to reverse this loss of status, as their recent behavior in OPEC makes clear. But the only way for OPEC to restore, or even preserve, its market share is by pushing prices down to the point that US producers drastically reduce their output to balance global supply and demand. In short, the Saudis must stop being a “swing producer” and instead force US frackers into this role.

Any economics textbook would recommend exactly this outcome. Shale oil is expensive to extract and should therefore remain in the ground until all of the world’s low-cost conventional oilfields are pumping at maximum output. Moreover, shale production can be cheaply turned on and off.

Competitive market conditions would therefore dictate that Saudi Arabia and other low-cost producers always operate at full capacity, while US frackers would experience the boom-bust cycles typical of commodity markets, shutting down when global demand is weak or new low-cost supplies come onstream from Iraq, Libya, Iran, or Russia, and ramping up production only during global booms when oil demand is at a peak.

Under this competitive logic, the marginal cost of US shale oil would become a ceiling for global oil prices, whereas the costs of relatively remote and marginal conventional oilfields in OPEC and Russia would set a floor. As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50.

Nice bit..

Only time will tell which predictions are right on oil..

How the SNB rollback has a historical precedent which ended dangerously..

January 20, 2015

Nice article by Markus Brunnermeier and Harold James.

They say sudden Swiss rollback of peg was due to political pressures. And this was nothing new. Similar pressures piled on Germany in 1971 too leading to breakdown of BW:

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From bartending to fancy bonds…economics in nutshell..

January 20, 2015

Nice explanation of economics for the last 20 years or so.

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Planning by the people – Colombian urban experience

January 19, 2015

Aravind Unni an architect working with YUVA (Youth for Unity & Voluntary Action) in Mumbai has a superb article on this.

Colombia’s social urbanism and inclusive transportation projects have left a lasting impression on urban planning in the global south. The author explains how urban planning got democratised in Colombia and why India is still far behind.

It has some good pictures as well on how Colombia shaped its urban agenda without a lot of noise.  Countries after countries sort their policies and issues but none make the noise as we in India do. It is a different story that despite all the noise we are not able to do even half of what we set out to do..

Some answers on the Harvard 1953 economics exam..

January 19, 2015

This is by far the most read post on ME. The total visits to the blog in a month (0r more) were done in one day. Clearly, most people feel quite a bit about how econ education has changed over the years. On the twitter handle, there were comments like whether students can answer any of those questions, how economics has ignored what matters and so on.

Prof. Holt has written on the various questions posed to him regarding the q-paper:

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Of Indian Prime Ministers and their economic advisers..

January 19, 2015

India born economists (as most are not based here) perhaps lead their counterparts in their efforts to become advisers to the government. More importantly to the Prime Minister. The double standards are just all over the place. On one hand, they criticise the government for all ills of Indian economy and on the other just jump at the first opportunity to join the government as adviser adding brownie points on their CVs.

TCA Srinivasa Raghavan has a nice piece on Indian PMs and their pet economists. He goes into history and points to the various combos of PM and pet advisers.

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Example of an economics exam from Harvard University in 1953

January 16, 2015

Prof. Ric Holt (of South Oregon Univ) shares this interesting copy of the exam paper (via a group mail on history of economic thought).

Just take a look at the economics questions asked in Universities  during those times. Needless to say all this has changed dramatically. Earlier it required understanding of history and economics, now it is just about math.As these guys determine the standards elsewhere as well, the disease has caught onto most parts of the world  (if not all):

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How Andhra Pradesh’s new capital (around village Thullur) is becoming a real estate haven…

January 16, 2015

Picture is worth 1000 words and economists should use them to make a point as well.

S. Ananth, an independent researcher from Vijaywada has this superb pictorial article on the topic:

The announcement by the Andhra Pradesh Chief Minister Chandrababu Naidu that the new capital will be located in and around the village of Thullur, about 25 km from Vijayawada, has dramatically altered the socio-economic dynamics of these sleepy villages. Until the announcement these villages were considered to be little more than backwaters of the main city. The following photos attempt to highlight the rapid pace of change over the past five months.

The mainstay of these villages was agriculture and petty commodity production where they grow vegetables, fruits like guava and bananas, paddy, sugarcane, cotton and in a few cases flowers. In the more fertile villages, vegetables are the most important corps. Abundant supply of water is an added advantage: in certain areas, groundwater is available at about 50 feet. During monsoon, groundwater is available at about 30 feet. Earnings can be as high as Rs 1.5 lakhs per annum (in the case of those growing vegetables). High level of investment in education is a marked feature in all the villages.

In almost every village, a common way to bide time is to gather at a common point (usually near a temple or panchayat office) and “discuss” everything under the sun. One such gathering of elderly people in Thullur village.

Locals believe that the present village housing blocks will not be brought under land pooling for the new capital. Residents of Thullur village point out that the chief minister has promised to “develop” their common areas in a different way: regeneration of the lakes, addition of walking tracks around the lakes, development of parks, temples, etc. One of them was confident that each village will have an “outer perimeter” beyond which land and development of the capital will be taken up – creating pockets of the “old village” within the “modern” capital.

The announcement of the capital in the region has literally shaken the area from its stupor. The pickup in construction activity immediately catches a traveller’s eye. The road from Vijayawada to Thullur village indicates the rush to construct shops and apartments, especially among villages that are close to Vijayawada city. A large number of apartments are coming up on the road from Vijayawada to AP capital region villages. Almost all the apartments advertise their bank approval prominently. It is indicative of the manner in which information asymmetry works or is perceived to work. High cost of apartments means that buying agricultural land is still attractive. Unlike in other cities, a luxury apartment means one that has a large carpet area with a few fittings thrown in as a perk. Most of these apartments now cost three times the cost in early 2013.

Before any development, housing prices shoot through the roof.

Cases of land grabbing and cheating have sprung up as well:

A visit to these villages seems to indicate that real estate and ancillary service industries are the only business that interests people – at least, those willing to venture into a business. Everything seemingly revolves around land: people are either keen to buy land, sell land, mediate between the buyers and sellers or offer some service to those trying to fix a deal. The attempt to make a quick buck from real-estate speculation seems to encompass all classes, castes and overshadows everything else. The urgency to close a deal is indicative of the thinking that the good times are unlikely to last long.

A discernible feature is that of roadside kiosks that have now taken to real estate broking because it is a more profitable occupation. These include kiosks that in the past served as a tailoring shop, dual-purpose units like a motorcycle repair kiosk that doubles as a real estate broking office, a bicycle repair kiosk to one that stored agricultural equipment.

The business logic is impeccable and incredibly simple: even if one land deal can be intermediated and the transaction completed, then the commission earned (about 1% of the deal value) is often more than the incomes earned by most over the past one year. In other cases, the obsession of the region’s middle classes for “extra-income” with little or no “investment” other than their labour is satiated. In most of cases, it only requires drawing on one’s social capital and social networks.  

The influx of brokers from outside the villages is easily discernible. A year ago, most of these villages had only the occasional visitor – mostly connected with the agricultural commodity trade. Most of these brokers are from neighbouring cities like Guntur and Vijayawada. Residents blame these outsiders for all the fraudulent land transactions in their villages

An abnormal rise in land prices have resulted in instances of land grabbing. Land grabbing or threats related to purchase and sale of land was unheard of in the region. There were the occasional civil disputes that would snake their way through the courts. A rare dispute related to completing a land transaction was usually “settled” through the informal arbitration mechanism, which usually consisted of the local elite presiding and mediating the two sides – the anthropological equivalent of the “big man” or the “elder”. However, the influx of outsiders means that the “local big men” or “elders” do not control the social levers that they did in the past and are helpless to arbitrate in any dispute.

The picture below is a flexi-banner notice issued by the Superintendent of Police at a bus shelter warning people about and against land grabbing. Of course, a real estate agent uses that as a good place to market himself and his business..

Hype and more hype..

 

Indore’s ‘moonwalking’ traffic cop is trying to discipline commuters..

January 16, 2015

An interesting story of an Indore traffic cop.

He moonwalks and amuses people and in the process nudges them to follow traffic rules:

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The Swiss shock…

January 16, 2015

There seems to be something brewing given two central banks made policy changes outside of their policy days. The disillusionment over growing powers of central banks is rising with every passing day. With governments in equal shambles, one does not know what really is the way out.

Swiss National Bank which had pegged its currency against expectations decided to remove the peg in a knee-jerk reaction. It also pushed the interst rates to a negative zone of -1.25% to -0,25%:

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Nine economics concepts that economists don’t understand and their explanations..

January 16, 2015

Matt Yglesias of Vox hasposted a list of “9 things only neoclassical economists will understand.” In other words, other economists either don’t understand or don’t make a big deal of it.

Noah Smith, the neighbourhood economist explains these 9 things..

 

How Rasna is trying to change its position in beverage market..

January 15, 2015

Someone who grew up to watching the really cute Rasna ads on Doordarshan, this is a sad development.

The company is struggling to find its position in the market it once innovated and dominated:

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Hero overtakes Honda in scooter exports

January 15, 2015

Nice to know of this development.

Hero Motors has replaced its erstwhile Japanese partner Honda motors from the position of top scooter exporting company.

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How an economist trains for a marathon?

January 15, 2015

Here is a funny cartoon strip on the topic.

Is US shale oil discovery the main reason for decline in global oil prices?

January 14, 2015

The decline in crude oil prices has once again humbled our forecasters. How quickly the prices have declined from $100 plus levels to $50 levels and continued to decline is amazing. There are many reasons suggested for the decline and major one being  US shale oil revolution. People say due to shale oil, US has become a net supplier of crude oil in the world and this has dampened prices.

Prof. Lutz Kilian of Michigan Univ, an oil expert has a different take on the shale story:

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Changing the default option of dividend reinvestment in ELSS Mutual Funds..

January 14, 2015

Nice bit on default choices.

Mutual Funds offer ELSS funds (Equity Linked Savings Schemes) which are a tax saving fund and imposes a three year lock-in on investors. The idea is to promote equity investment and give both the fund (who gets tax sops) and investor (who gets locked in money) incentives for the same. The problem is dividends which are to be paid to investors.

Now it so happens that there are two choices for investors – payout or reinvestment of dividend. The default is the second one. So as always investors forget to tick their choice and reinvestment becomes the default. This leads to irritation for the investors:

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