Archive for September 1st, 2015

Political dynasties versus development

September 1, 2015

Jan Frederick P. Cruz and Ronald U Mendoza look at this phenomenon of rising political dynasties. Not just in emerging world but in US as well where Clintons and Bushes dynasties have been at the helm since 1990s:

The possibility of a showdown between Hillary Clinton and Jeb Bush in the US Presidential polls may have some political pundits salivating, but perhaps many more Americans wondering. Is political power becoming too concentrated in the US? A Bush or a Clinton was President or Vice President in the US for almost 30 years between 1981 and 2009, a dynastic run that may yet be extended by the 2016 elections.

Elected politicians related by blood or by marriage are considered part of political dynasties, and their relevance to democratisation and economic development applies to both developed and developing democracies. Recent efforts to estimate the share of dynasties in various democratic parliaments indicate that they may range from as low as 6% in the US, to as high as 75% Philippines (Figure 1).

Research shows places where dynasties rule, there is underdevelopment:

Recent research on dynasties in the parliaments of India and the Philippines turn to extensive data on political clans at the local government level, enabling an empirical analysis of the links across dynastic patterns on the one hand, and development indicators on the other.

First, the share of dynasties in the Indian Lok Sahba is around 24%, compared to 75% in the Philippine Congress. When one examines how dynastic incidence at the state level (for India) or provincial level (for the Philippines) is linked to socio-economic indicators, the results seem to confirm a negative correlation between political dynasties and economic development.

The dynastic share at the state level in India is negatively correlated with annualised state-level economic growth. Moreover, in India, the dynastic concentration is smaller in states where citizens are relatively better off and where the socio-economic standing of the average person is rising.

A similar analysis focused on political dynasties in the Philippines’ local government confirms similar patterns. There is also a negative correlation between Philippine provincial real per capita income and dynastic incidence among local government officials.

Hence, in both India and the Philippines the dynastic share indicator is positively correlated with a rising poor population. In other words, dynastic legislators persist in states where there is low human development and a large poor and vulnerable population.

There are various possible explanations here. Rising living standards could weaken patron-client relations that tend to sustain political dynasties. The more economically independent the typical voter is, the less reliant he or she might be to a local patron. Furthermore, rising incomes may also result in a growing middle class, more competitive options for candidates, and more resources that can be tapped for political campaigns by different groups.

In the end, political dynasties in today’s modern and developing democracies are a reminder of how personalities still dominate the political landscape, be it in Washington, DC or in Bombay and Manila. Democracies do not necessarily reflect a level playing field, when certain political clans wield disproportionately large influence and control over public resources. And in the worst cases, all that political power is not wielded to advance development or reduce poverty. They appear, instead, to be linked to underdevelopment and rising inequality, particularly in countries and regions with relatively weaker democratic institutions.

Whoever said that during elections is the only time the vote of the richest citizen is equivalent to that of the poorest needs to start rethinking whether this still holds true in many democracies.

Hmm. Something which has been known for a while. But power of politics is such that if dynasty politics is possible, they will not just be created but all efforts to sustain it shall remain too..

Cautionary histories of US monetary tightening

September 1, 2015

Brad Delong has a piece on the same.

He actually questions the famous Volcker episode which created its own problems:

The US Federal Reserve has embarked on an effort to tighten monetary policy four times in the past four decades. On every one of these occasions, the effort triggered processes that reduced employment and output far more than the Fed’s staff had anticipated. As the Fed prepares to tighten monetary policy once again, an examination of this history – and of the current state of the economy – suggests that the United States is about to enter dangerous territory.

Between 1979 and 1982, then-Fed Chair Paul Volcker changed the authorities’ approach to monetary policy. His expectation was that by controlling the amount of money in circulation, the Fed could bring about larger reductions in inflation with smaller increases in idle capacity and unemployment than what traditional Keynesian models predicted.

Unfortunately for the Fed – and for the American economy – the Keynesian models turned out to be accurate; their forecasts of the costs of disinflation were dead on. Furthermore, this period of monetary tightening had unexpected consequences; financial institutions like Citicorp found that only regulatory forbearance saved them from having to declare bankruptcy, and much of Latin America was plunged into a depression that lasted more than five years.

We are told of a very different version of Volcker history. It is easily one of the most celebrated (if not the most) episode of monetary history where a central bank curbed inflation due to tight policy. So much so, it has become the benchmark for anything in monetary policy. We are also told how Volcker episode was finally a victory of monetarism over years of evil Keynesian policies since 1945. But here Prof Delong says the final outcome of declining economic activity was a victory of Keynesian models! Economics is all over the place as so many interpretations are there. We need to know econ history and from many different perspective as there is no single narrative.

He points to further episodes:

Then, between 1988 and 1990, another round of monetary tightening under Alan Greenspan ravaged the balance sheets of the country’s savings and loan associations, which were overleveraged, undercapitalized, and already struggling to survive. To prevent the subsequent recession from worsening, the federal government was forced to bail out insolvent institutions. State governments were on the hook, too: Texas spent the equivalent of three months of total state income to rescue its S&Ls and their depositors.

Between 1993 and 1994, Greenspan once again reined in monetary policy, only to be surprised by the impact that small amounts of tightening could have on the prices of long-term assets and companies’ borrowing costs. Fortunately, he was willing to reverse his decision and cut the tightening cycle short (over the protests of many on the policy-setting Federal Open Markets Committee) – a move that prevented the US economy from slipping back into recession.

The most recent episode – between 2004 and 2007 – was the most devastating of the four. Neither Greenspan nor his successor, Ben Bernanke, understood how fragile the housing market and the financial system had become after a long period of under-regulation. These twin mistakes – deregulation, followed by misguided monetary-policy tightening – continue to gnaw at the US economy today. 

So, it seems most monetary tightening episodes since 1980s have had their undesired consequences as well.

The tightening cycle upon which the Fed now seems set to embark comes at a delicate time for the economy. The US unemployment rate may seem to hint at the risk of rising inflation, but the employment-to-population ratio continues to signal an economy in deep distress. Indeed, wage patterns suggest that this ratio, not the unemployment rate, is the better indicator of slack in the economy – and nobody ten years ago would have interpreted today’s employment-to-population ratio as a justification for monetary tightening.

Indeed, not even the Fed seems convinced that the economy faces imminent danger of overheating. Inflation in the US is not just lower than the Fed’s long-term target; it is expected to stay that way for at least the next three years. And the Fed’s change in policy comes at a time when its own economists believe that US fiscal policy is inappropriately restrictive.

Meanwhile, given the fragility – and interconnectedness – of the global economy, tightening monetary policy in the US could have negative impacts abroad (with consequent blowback at home), especially given the instability in China and economic malaise in Europe.

The author thinks one reason why Fed might be moving to rate hike is because of pressure of banks:

It is tempting to conclude that the Fed’s eagerness to tighten monetary policy – despite unfavorable historical precedents and ongoing economic uncertainty – is driven by commercial banks with excessive influence in official policymaking. After all, commercial banks’ business model works only when the banks can earn (via passive and relatively safe long-term investments) at least 3% a year more than they pay depositors. And that is possible only if US Treasury rates are higher than they are now.

If this is true, it would reflect a failure by bankers to understand their industry’s material interests. What would most benefit commercial banks is not an immediate increase in interest rates, but a monetary policy that contributes to ensuring that the economy is capable of supporting higher interest rates in the future. If history is any guide, tightening monetary policy in the near term will only lead to further economic turbulence, followed by a rapid retreat to low interest rates. Embarking on that path should be a cause of concern for everyone.

Not sure about this. Banks are made the scapegoats for thinking on both sides. Low rates also mean treasury profits continue for banks. This idea of higher rates imply banks keep treasuries till maturity which is not true. Higher rates are likely to hit banks portfolios..

Macro narratives all over the place..

Blanchard could have highlighted the role of knowing economic history..

September 1, 2015

Oliver Blanchard, the outgoing chief economist of IMF gives this interview on lessons learnt (both for himself and IMF) and way going forward.

He is joining the Peterson Institute for doing more serious research on the lessons he has learnt over these years. This is really interesting to see. How most US based economists actually look forward to doing more research after holding such high offices. They just join the thinktanks/univs and devote more time to research. In most other countries, we usually see such experts shuttling from one high office to the other. The econs in US wished to be known for their academic contribution and not just some policy hogwash.

Moving to the lessons learnt:

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Knowing about 2 factor authentication using tales from Ramayana, Aladdin and Alibaba

September 1, 2015

Prof JR Varma has a terrific post on the topic. I hardly had any idea about this 2 factor authentication model (didn’t care for it either) used for payments. This post not just helped clarify what 2FA is all about, but also connected it via stories which will be difficult to forget.

As the name suggests 2FA means you need two things (factors) to identify yourself:

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