Archive for August 26th, 2016

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

August 26, 2016

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.

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

August 26, 2016

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

August 26, 2016

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):


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