Economists should stop defending Milton Friedman’s pseudo-science

Another hard hitting article questioning Milton Friedman and his blind followers. Noah Smith just questioned relevance of Friedman’s permanent income hypothesis

This one is on one of Friedman’s core ideas – assumptions don’t matter as long as predictions are in line with the model/theory:

How ECB monetary policy is leading to rise in demand for home safes in Germany..

Wow, this is some bit of development in Germany. Germans kept piling on savings in savings accounts till rates were zero. Now with negative rates, they say enough is enough. They are busy keeping cash in their homes and for this demand of homesafes are rising. I did not know Japan saw similar development just a while ago.

The higher you go in economics, the more the common sense rains out of you…

This is a hard hitting post on the economics profession by Bill Bronner. He has written a book recently called Hormegeddon: How Too Much of a Good Thing Leads to Disaster.

The post is based on his book.

How US created Liberty Bond to finance World War I

Nice piece of economic history by Richard Sutch of Richmond Fed.

See real democracy in action – how Chinese third-graders elect a class monitor?

This video has some really interesting lessons as well on politics and dance of democracy.  It is about how third graders of a Chinese school elect a class monitor based on democracy and elections.  It also is one of the cutest you would see where the innocence of children is mixed beautifully with this guile of trying to get elected.

‘What kind of thing is “Democracy”?’

Born into an authoritarian state that professes to value the greater good over individual expression, many Chinese children have little familiarity with Western ideals of democracy. Nevertheless, they prove themselves quick studies in Please Vote For Me, which chronicles China’s first ever modern classroom election, held among third-graders in the city of Wuhan. After the students learn the basic tenets of democracy, a campaign for the position of class monitor swiftly descends into an all too familiar jumble of campaign promises, back-room deals and dirty tricks. Funny, touching and full of small surprises, the Chinese director Weijun Chen’s documentary is a wry look at the democratic process and all its chaotic, imperfect promise.

This version of Please Vote For Me was excerpted for Wholphin from a feature-length documentary of the same name.

Must watch..

What is behind inter-state differences in inflation?

It wouldn’t require a lot of analysis to guess this question. It should be differences in food prices and indeed it is as per this analysis by Tadit Kundu.

In a very picturesque analysis, he shows how there are wide state-wise differences in inflation. Most of these differences are on account of food inflation:

How liberal constitutionalism was conceived and conceptualized in the first place

Benjamin Strumann has a nice post which looks at evolution of political order.

How did lessons from Roman Republic influence thinking on political institutions in US:

Whom do the Regional Fed boards serve?

It is interesting to see the rising debates over role of central banks in the society. The discussion is of course widely different from those going in India where asking such a question is akin to a crime.

Of all the discussions, it is those on Federal Reserve and its Regional arms that are by far the most. Federal Reserve established in 1913 amidst a lot of suspicions has come a full circle. It moved from a suspicious body to one of the most powerful bodies in the world and is now back on the suspicious block.

There are all kinds of issues being posed on Federal Reserve from policy impact to independence. Though, the one on its relevance in US economy is perhaps the most important. People have attacked Federal Reserve as an institution from all possible corners. Some say Fed only serves Wall street interests, others say it does not do enough for main street. Within Fed structure, the role of regional Feds is being questioned as their boards are elected by member banks.

This piece by Helen Fessenden and Gary Richardson gets to the Regional Fed debate from a wide historical lens:

House-hunting in Singapore: ‘Sorry, your wife is Indian, the landlord won’t rent to you’

Interesting (and disheartening) to see such things happening in Singapore of all places. These are seen as doyens of global centres where capital and labor move freely. We all want to emulate these centres be it a country or a city. However, all these global centres are increasingly sending opposite signals. Post-Brexit, we have signals from Singapore where it is becoming difficult for other Asians to get houses on rentals:

Last year, when Darius Cheung, co-founder of property search portal, wanted to rent a house in Singapore, he met with many reluctant real estate agents. Many of them seemed interested at first, but would turn him down later. He found out why when one realtor gave him a rather shocking response: “Sorry your wife is Indian, [the] landlord won’t rent to you.”

Indians who have spent some time in the city-state know that they aren’t the first choice as tenants for many landlords. Chinese people from the mainland China have it even worse: they are said to be least preferred by Singapore’s property owners. That was evident from a quick search with the keywords “No Indians, no PRC [People’s Republic of China]” on two property websites. Gumtree.sgturned up 29 announcements with these words and PropertyGuru showed 63.

On the face of it, this would seem to be evidence of racial disharmony in a country where the government imposes harsh penalty on instances of racial prejudice. But many see the discrimination in the rental market as an expression of the clash between the old and the new – the discomfort of the country’s long-time citizens with the influx of foreigners in the multi-ethnic wealthy country.

“There is discrimination against all South Asians, even though the listings often specify ‘No Indians’” said Cheung, whose search engine 99.co in July introduced a new filter – All-Races-Welcome – as part of its Regardless of Race campaign. This drive aims to encourage agents and landlords in Singapore to indicate that their rental listings are open to all, regardless of the “ethnicity, background or nationality” of potential tenants.

In Singapore, “Indians” is a catch-all term for all those perceived to be of South Asian descent. For instance, a BBC report in May 2014 described how an immigrant of Sri Lankan descent was rejected outright by several landlords for being “Indian” during his search for a house in the city-state.

The prejudice against Indian tenants may spring from the stereotype that Indians are unsanitary and leave the rented properties in a poor state. For instance, in July, The Independent, an online news platform in Singapore, reported that a departing Indian family left behind a dirty home, besides defaulting on the rent and other bills.

How we keep moving from integrating forces to contradicting forces…

History of economic thought: Why Say’s law is always true?

I wonder how many economics students would have even heard of Say and his famous law simply said as” Supply creates its own demand”.

Alasdair Macleod has a piece on Say and how his ideas were misinterpreted to push government intervention:

The people behind the Great Men of 1991

This story by Ankit Mittal tells us about some unknown people the 1991 agenda. Before discussing this article, let me just discuss some things.

There is this saying in Hindi – “Jo dikhta hai wo hota nahi hai aur jo hota hai who dikta nahi hai”. In English it means what is visible is not true and what is true is not visible. Reality be damned.

In economics this is even truer as there is always this search for “the person” (mostly men) who led a country to this path of growth and development.  This is especially true in India where eons of writers/journalists spend times telling us how Indian economic progress is due to some selected people. This is especially true in terms of the year 1991 which changed course of Indian economy. This is the year of 25 years of 1991 and as expected there are quite a few articles/discussions on who dunnit and many others proclaiming  I dunnit. Some narratives are so artificial and hard to believe that it is not even funny.

If one digs a little deeper you see most of these “the people” were Prime Ministers, Finance Ministers, Govt Secretaries and so on. So there was huge agency and support. It is unlikely of all those stories where a person made things happen all by oneself as is seen in case of say enterprises or social ventures. It is even more unlikely that these senior persons did everything on their own. At most they would have espoused an idea and the conception and execution would be a huge team work. But the credit is given to just a handful.

In all this talk, we talk of rise of markets in India and quote Hayek and Friedman. But we forget those very words of Hayek who had warned against all this pretense of knowledge:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

All this stood exposed as the very people who were seen behind the miracle of 1991 were seen helpless during the breakout in 2013. It was just sch a turnaround and belief of 1991 was shattered. But it has again made a comeback due to the 25 year anniversary.

What should have instead been represented as how a collective thought and action plan led to the changes in 1991 has again gone to few individuals. The same institutions/agencies which were seen as rigid and closed were far more flexible than imagined. It is this collective spirit and enterprise which should be recognised than just a handful of individuals. We first undermine the institutions and then say our institutions are not working.

So Ankit (who is writing a book on 1991 reforms which I hope is much more than the usual reality be damned stories) tells us about some more unsung people behind 1991:

Verma, a 1956 batch IAS officer from Uttar Pradesh, had become the industry secretary during the dying days of the Rajiv Gandhi government. Along with Rakesh Mohan, chief economic adviser at the ministry of industry, he had prepared the first draft of what became the New Industry Policy.

Industry minister Ajit Singh, backed by prime minister V.P. Singh, pushed that policy, only to be stymied in Parliament. In the short-lived Chandra Shekhar government that followed, Verma was made the member secretary of the Planning Commission. When the Rao government came to power, Verma was picked as the principal secretary to the prime minister, effectively becoming Rao’s chief enforcer.

As I have recounted previously, his being there played a critical role in putting industrial reforms at the top of the government’s agenda. The new industrial policy was such a huge and complicated reform, it is unlikely any other secretary would have touched it, or even dared to suggest it to the prime minister.

But his imprint went beyond just industrial reforms. From dealing with the nitty-gritty of policy to leading weekly committees and banging heads together for five straight years; from being the voice of the prime minister to strategically leaking policy briefs to the media; from managing advisers and ministers to serving as the government’s conduit to corporate India, Verma’s ruthless style of functioning and a genuine conviction in the reforms proved to be invaluable. Manmohan Singh would later remember him as the “power centre in reforms”.

Then there was cabinet secretary Naresh Chandra, the highest bureaucrat in the land from 1990 to 1992. In the dysfunctional days of the V.P. Singh and Chandra Shekhar governments, a lot of the decision-making had come to rest in the cabinet office by default. By the time the Chandra Shekhar government had resigned and was awaiting certain defeat in the May 1991 general election, economic fire-fighting was left to the cabinet office.

With ministers out campaigning, there weren’t any cabinet meetings and secretaries would dither at taking decisions. But thankfully, Chandra Shekhar’s focus remained on governance. So, Naresh Chandra and the principal secretary would run proposals by him and everything was being processed in the cabinet office. Despite his ideological apprehensions, Chandra Shekhar would agree with what was being proposed in almost all cases. Even the decision to physically export gold was taken in the cabinet office, along with the governor of the Reserve Bank of India.

When the reins of the government passed to Rao, Chandra prepared an eight-page memo of the proposed reforms for the incoming prime minister. A blueprint of what was needed to avert a default and open up the economy, it contained the basic elements of what was to eventually become government policy over the next few months.

While his civil service career ended in 1992, Rao retained Chandra as a special adviser for the next three years, when he played a crucial role in shaping India’s nuclear policy. He was one of the very few people in the know of the nuclear programme, taking regular clandestine flights from New Delhi to the nuclear sites to inspect the weapon silos.

After a brief interlude as the governor of Gujarat, he went on to serve as India’s ambassador to the US (1996-2001) during a period that saw the nuclear tests, economic sanctions on India and eventually Bill Clinton’s landmark visit to India. His Padma Vibhushan in 2007 was more than well deserved.

I am sure there are plenty such individuals, teams which were behind the change. But remain unsung and no one cares. They also do not wish to stay in the limelight as they say we were just doing our work. What is the big deal? These are actually the people who shaped and made things but don’t make a big deal of it.

As the story goes  – jo dikhta hai wo hota nahin, jo hota hai wo dikhta nahin…

What cricket can learn from poker?

The just concluded weekend was full of cricket. It makes sense to start the week by posting something on cricket.

This is a wonderful article by Amit Varma. He moved from being a cricket writer to a poker player (wow, though wonder how I managed). Now he is trying to link cricket decisions on the field using lenses from game of Poker:

Why gauging inflation is so hard: It is made up of several components..

Barry Ritholz tells us the obvious which alas is ignored. We treat inflation as one number which somehow could be controlled and managed by a central bank. However, inflation is made up of prices of several products and services. These prices in turn depend on the nature of industry of the product. If it is a monopoly, prices will remain sticky/unchanged and if more competitive, prices will change more often.

Inflation isn’t dead; it just might not be where you think it is.

To find significant price increases, you need only look in the right places. There are many goods and services with rising prices, as well as those without. Together, they tell a fascinating tale about the modern global economy. Understanding the forces driving prices higher — or not — is crucial to investors and policy makers alike.

Given that the Federal Reserve has been trying to generate inflation for much of the past decade, the significance of the distribution is both important and telling. Why some prices are rising at twice the median rate of general inflation is worth delving into. 

Look at the chart below: it show specific categories of goods and services versus the entire basket of goods and services that makes up the consumer price index.

 Source: American Enterprise Institute

Let’s look a little more deeply at each category.

There are multiple factors responsible for such diverse break-up. Text-books and medical care remain monopolies, food and beverages due to dollar depreciation, software/toys/wireless due to competition and so on.

In the end:

So what might we conclude from looking at the chart’s component parts? Maybe only that it’s a little easier to see why the Fed has been having a hard time getting inflation to rise. While some prices are indeed up, many powerful forces have driven other prices lower — and these are forces that the Fed can’t easily influence. Until there is a substantial and sustained increase in wages (or a huge drop in the dollar), inflation may very well remain below the Fed’s 2 percent target for a long time to come. 

Not a lesson just for just Fed but all other central banks as well..

The US Federal Govt is ending its 30-year history with private prisons

Today is a prison day on this blog.  I just blogged about how noodles are replacing cigarettes as the preferred currency in US prisons.

Now this bit of news on US Federal Govt ending its experiment of private jails:

The US government said this week that it would reduce and eventually cease its use of private prisons.

“[Private prisons] compare poorly to our own Bureau facilities,” Deputy Attorney General Sally Yates wrote in a memo to US officials. “They simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs … they do not maintain the same level of safety and security.”

According to David C Fathi, director of the American Civil Liberties Union’s National Prison Project, this memo represents a sea change in the attitude of the US government towards privatised corrections.

“This really is a historic reversal of the last 30 years,” he says. “It’s even more significant as a signal that’s being sent and quite probably a harbinger of things to come.”

However, while the announcement will have a significant impact on certain prisoners overseen by the federal government, this will change nothing for the vast majority of the US prison populace.

This is because state governments run their own prisons and quite a few have contracted it to private players.

That 19 percent of federal prisoners are in private facilities may seem to imply a massive presence of corporations within U.S. corrections, but the federal government houses only 12.7 percent of U.S. inmates. As a result, even if the Justice Department went beyond its announced plans and immediately transferred all privately housed inmates to federally operated facilities, only 40,000 of the more than 1.5 million U.S. prisoners would be affected.

The American prison system is overwhelmingly operated by states, and state data underscores that incarceration is firmly under public-sector control. The governors of 20 states are surely not going to heed calls to close private prisons, because to do so they’d have to open one first. Among those states that do house inmates in private facilities, many do so sparingly. For example, at the end of 2014, Alaska, Maryland, North Carolina, South Carolina and South Dakota each held no more than 30 prisoners in private facilities. (That’s a number, not a percent.)

This para caught my eye:

,,,,Former presidential candidate Bernie Sanders, who campaigned for such a policy change, spoke for many liberal politicians when he praised the move as a major step toward reducing mass incarceration: “It is an international embarrassment that we put more people behind bars than any other country on earth. Due in large part to private prisons, incarceration has been a source of major profits to private corporations.” Yet despite the outsize attention they draw in some political quarters, private prisons are bit players in the sorry drama of mass incarceration.

This is crazy to think. You privatise/outsource the prison services to a private player. For the private player getting more inmates is linked to profitability. So you prison more and more people!

Here is a nice article how a private prison works:

A public prison is naturally non-profit. The end goal is to house prisoners in an attempt to rehab them or remove them from the streets. A private prison, on the other hand, is run by a corporation. That corporation’s end goal is to profit from anything they deal in.

In order to make money as a private prison, they receive a stipend from the government. This money from the government can be paid in a multitude of different ways. It can be based on the size of the prison, based on a monthly or yearly set amount, or in most cases it is paid based on the number of prisoners that the prison houses.

Let’s suppose that it costs $100 per day to house a prisoner (assuming full capacity, including all administration costs), and the prison building can hold 1,000 inmates. A private prison can offer their services to the government and charge $150 per day per prisoner. Generally speaking, the government will agree to these terms if the $150 is less than if the prison was publicly run. That spread is where the private prison makes their money.

As in any business, saving money wherever possible increases the bottom line. Expanding also allows the business to bring in more money, but it needs capital to do that……this means if they can cut services from their list, then they save money. Suppose a prison cuts out the cleaning services and the cost per prisoner drops to $90 per day. They instantly earn an additional $10 per day; a number that can add up quickly if there are 1,000 prisoners in the facility. Cutting cleaning makes the company more money: but provides unhealthy and inhumane living conditions for the inmates. Cutting costs ultimately affects the prisoners and diminishes the quality of their living quarters.

Finally, the law needs to be structured in such a way that allows a steady stream of new inmates. This ties back to that lobbying aspect: stricter laws mean more people in the system. More people in the system means more money for the prison. Many have argued that this is the entire reason that the war on drugs was started: another set of laws that could incarcerate thousands of people every single year.

Hmmm. This is what has happened in US as well. Keep the inmates coming so cash flow of the private company remains steady

This issue of prison organisation is divided into two categories. First, who should run the prisons? Centre govt or State Govts or both? IN US it is both. In India it is the responsibility of State as per the India Constitution. The centre broadly supports the state in financing and management of the jail system. In India, we have many types of jails run by different states ( see this more detailed publication, fascinating, to know all this).

The second categorization is of course whether the public sector should run the jails or should let private sector do the job? Based on US experience, perhaps giving the entire project to private sector is problematic. It is difficult to imagine that the private sector actually messed up so much. This should have worked as a better model as it is difficult to imagine the govt running the prison any better.

This discussion on prisons is really exciting to think about. There are so many issues here which make it a great case to explain economics and its dilemmas as well…

Ramen noodles are replacing tobacco/cigarettes as preferred currency in prisons

Literature on various types of money points how tobacco/cigarettes are used as currency especially in war camps and prisons.

Cigarettes are now being replaced by Ramen noodles in prisons as the most precious commodity (HT: MR blog):

Does negative marking impact exam writing?

Really interesting research findings by Pelin Akyol, James Key, Kala Krishna.

They use a Turkish data on an exam where there was negative marking. Did the marking effect student’s choice of whether to skip the question or guess the same? What about gender differences given girls are seen as more risk averse.

Lehman and Fed: Mystery deepens..

Prof. Laurence Ball’s paper has been making news. The US officials let Lehman go in really adverse  times. They have told us the i-bank could not be saved as it did not have any collateral. Though, few doubted this narrative.

In this shorter post, he explains that this narrative is wrong. Lehman could have been saved and it was just a political decision to let it go. They also underestimated the costs of the blowup:

Doing economic history in Africa: experiences from the archives in Uganda

Nice post by Michiel de Haas, Felix Meier zu Selhausen and Kate Frederick. Two of them are economic historians in Africa.

They point to their experiences in building archives and connecting dots in Uganda:

The field of African Economic History is flourishing. The rising number of participants at the annual meeting of the AEHN, the increasing flow of articles in mainstream economic history journals and thriving research groups in Lund, Wageningen and Stellenbosch, just to name some of the larger research clusters, testify to this. The ‘new economic history of Africa’ is strongly data driven, with researchers using published and unpublished sources to create datasets, establish and compare trends, and conduct statistical analysis to tease out causality (for discussion and an overview, see the recent paper by Johan Fourie (2016)

To further expand our empirical knowledge of long-term African development, the potential of colonial archives in Europe is hardly exhausted, with researchers using trade, tax, wage, price, climatological, and criminal statistics to make a wide range of new and compelling contributions. However, there is much scope to venture beyond Europe’s missionary and government archives, which tend to focus on key administrative matters and provide only limited information on the seemingly mundane and practical intricacies of colonial rule. Previously neglected, individual-level data sources have already shown to harbour great potential to advance our knowledge of long-term African development. Recent contributions have utilized sources preserved in archives on African soil, including military recruit records, the performance files of police officers, hospital registries, and the marriage records of Anglican Africans.  

Archival documents in Uganda are in a state of flux after having been largely neglected or even destroyed during Uganda’s troubled post-colonial history. In recent years, things have been changing for the better. Social, cultural and political historians such as Derek Peterson (Michigan), Holly Hanson (Mount Holyoke) and Shane Doyle (Leeds) – just to name a few internationally renowned scholars – have been producing work that is firmly based on local source materials found in Uganda’s national, district and missionary archives.

Michiel de Haas and Felix Meier zu Selhausen share some of their experiences exploring a variety of source materials in Uganda. Michiel has been affiliated with the Makerere Institute of Social Research (MISR) in Kampala and visited the National Archives in Entebbe and five district archives. He has also conducted oral history interviews with cotton farmers in Eastern Uganda. Felix lived in Fort Portal for three years where he taught at Mountains of the Moon University. He has digitized marriage records from Anglican churches all over Uganda and in-patient registers from Western Uganda’s Kabarole Hospital.

Wow. This must be one of its kind experience. Church or any centre of religion archive is such a crucial place to understand initial development.

Are Public sector bankers underpaid or private/foreign ones overpaid?

We are highly  highly biased against the public sector especially the banks. It is as if these banks are govt owned and remain inefficient by choice. These banks at one time were private and run pretty much like other private banks of today and were highly efficient and dynamic minus all the technologies of today. It is a pity that they all were nationalised and things changed dramatically for them in future years. Less credit is also given to public sector as it provided most of the talent which shaped private banks later. But that is another story for another post.

One perennial issue since coming of private sector banks in 1994 is the disparity in pay scales. Actually, these differences would have existed even between 1969-94 as foreign banks and remaining private sector bank etc must have paid higher salaries than nationalised banks. But as nationalised bank jobs carried element of prestige as well, these differences would not have mattered. Now, there is not much prestige left and pay scales were low anyways. It has turned out to be a worst of both the worlds – low pay and low job status. This status bit matters as one continues to see talented people taking up central bank jobs which has similar low salary base but not in public sector banks.

We usually put the answer as salaries of public sector banks are too low. Another way is to question the high salaries of private sector/foreign banks.

Capping price of movie tickets in multiplexes…a good idea?

There is little doubt that movie going has become a thing for the haves. There was a time that most people could afford going to cinema halls. There was just one screen and tickets were priced across income levels. There was dress circle for the lower income groups and balcony for the higher income ones. Dress circle seats were pretty much at level with the screen. Balcony seats like its name were much higher than dress circle seats and you actually had an ascending stair case with seats at the top being most preferred just like today as well. Some had box too appealing to even higher income groups than balcony ones.

Due to just one screen there were several seats and there was space for everybody. Then came this multiplex idea where one movie hall was broken into several ones and multiple screens were introduced. These screens were much smaller and so were number of seats in one hall. Unfortunately, the earlier policy of pricing tickets for all was done away with. The pricing was done keeping interests only of balcony and box goers. The prices were kept way too high and the dress circle audience has been mostly ignored. The older version of cinema is barely functional now and multiplexes run the show.

Infact, the prices continued to increase despite being already on the high side and it is now difficult for even balcony goers. This has caused resentment. Now there is little doubt that experiencing movies in today’s halls is much better than the past. But there is still a market for people which just want to see the movie and do not want to pay for the experience.

Ideally cinema industry should have figured this bit and tried to have cinemas for other income groups as well. This is especially true for the student community who just don’t have enough money to pay for movies but is a huge market. After all one tries to release movies after board exams knowing students will miss movies during this time. Likewise there are other low income groups as well.

But as industry has not figured this bit, govt is intervening and capping prices. First Tamil Nadu capped prices to 120 and now Karnataka is thinking of the same: