The 350th anniversary of East India Company taking control of Bombay

On 23 June 1661, it was decided that British King Charles II will be married to Portuguese princess Catherine of Braganza. This was part of the treaty between the two nations. On 31st May 1662, both were married and British Crown received a bunch of islands on Indian west coast as part of dowry. On 23 Mar 1668, East India Company was leased a bunch of islands by the British Crown. The EIC set foot on these islands 6 months later on 23 Sep 1668.

Benita Fernando looks at the 350th anniversary of the event:

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Major economic policy debates in India from 1950s to today…

Dr YV Reddy in this speech covers some of the key policy debates in India.

He divides each decade based on a dominant policy/debate theme:

• 1950s: Mahalanobis versus Vakil-Brahamanda Model
• 1960s: The Devaluation of 1966
• 1970s: Equity and Efficiency?
• 1980s: The IMF Loan
• 1990s: Growth and Poverty?
• 2000s: Opening Up the External Capital Account

Nice bit.  The speech is a useful way to start a discussion on economic policy in India. Should be made part of course curriculum.

Most of us are clueless about these battles of ideas. For instance, the Mahalanobis versus Vakil-Brahamanda Model was:

Book Review: How Economics Professors Can Stop Failing Us

Prof Samuel Bostaph (University of Dallas) reviews this hard-hitting book: How Economics Professors Can Stop Failing Us: The Discipline at a Crossroads by Steven Payson.

The book says:

10 years of Nudge: Interviews of Richard Thaler and Cass Sunstein

One never really tires reading about behavioral stuff.

As nudge the book completed 10 years, here are interviews of the authors: Prof Thaler’s and Cass Sunstein’s.

Sunstein on what kept the duo going? They just loved each other’s company and laughed together. As simple and effective as that:

Like Kahneman and Tversky, you and Richard Thaler have had a rich professional partnership and friendship. Why do you think you worked so well together? And what have been a couple of your favorite moments from your collaboration?

We had, and continue to have, a lot of fun! We laugh together a lot. That is maybe the secret sauce. We also have complementary backgrounds. My focus is on law and public policy, with a keen interest in behavioral economics. He’s the most important figure behind behavioral economics, with a keen interest in law and public policy. That’s a perfect mix, I think.

One favorite moment was a lunch in which Thaler arrived, all excited about an idea he had, called “choice architecture.” I was skeptical and asked a ton of questions. I worried: Our book is about libertarian paternalism, which is clear and crisp (I thought!)—what’s this choice architecture stuff? By the end of the lunch, he persuaded me, and we were off to the races. (I remember this as if it were yesterday.)

Another favorite moment was a workshop we did at the University of Chicago Law School, involving a paper we wrote together with Christine Jolls (now at Yale). Thaler was the main presenter. I have never seen such hostility in a workshop. People were very angry at us. It got ugly. No one who was there will ever forget it. But it’s a favorite moment, still, because Thaler kept his cool throughout, and keep asking, in response to rude questions, about what the evidence actually said.

In general: we had lunch together a lot, just the two of us, at a little Hyde Park restaurant. Even if we never produced anything, those would be precious memories. (We talked just last night, and that was great, too.)

🙂 More power to both of them…

Prof Thaler:

Learning economic history via business history: Case of how Ernesto Tornquist managed his empire in Argentina

Fascinating interview of Geoffrey Jones who is a business history professor at HBS. He has developed a case on Ernesto Tornquist who built an empire in Argentina. Apart from business history, the case also gives us insights into Argentina economy and political economy:

Professor Geoffrey Jones examines the career of Ernesto Tornquist, a cosmopolitan financier considered to be the most significant entrepreneur in Argentina at the end of the 19th century. He created a diversified business group, linked to the political elite, integrating Argentina into the trading and financial networks of the first global economy. The case, Ernesto Tornquist: Making a Fortune on the Pampas, provides an opportunity to understand why Argentina was such a successful economy at this time, and to debate whether its very success laid the basis for the country’s subsequent poor economic performance.

The case will resonate with quite a few similar empires in other emerging economies.

For instance, the case discusses that Argentina had a vibrant agri sector. But the problem was how to build a manufacturing sector?:

Three tariff lessons from US interwar history

Eric Bond, Mario Crucini, Tristan Potter and Joel Rodrigue in this research:

The Trump administration’s recent tariff increases have prompted comparisons to interwar tariff history. This column investigates tariffs during this period, drawing out lessons on their macroeconomic impacts for the US and its trade partners. The recessionary impact of recent tariffs is likely to be smaller and less widespread than those imposed during the interwar period, provided that tariff levels don’t escalate too dramatically through retaliation.

The hubris over Indian financial markets is getting a reality check…

Today early morning, RBI announced some measures to boost liquidity in the system.

I mean how the game of building castles begins to fall everywhere is quite amazing. For very long time, Indian stock markets have moved in ways which defy all economic (and even non-economic) logic. Those who questioned were told they are being unnecessarily pessimistic and wanting to create panic.

Who would have imagined that the thunder would be stolen from the woes of banking sector by the exuberance and downfall of the of non-banking sector. People might deny that this is not India’s Lehman moment but there are just too many similarities. Not too long ago, non-banking sector was the cynosure of the market and now the same folks are worried about its downfall and probable impact.

Anantha who is always weary over financial excesses calls it India’s ‘perfect’ financial storm.

It is high time we begin to look at measures of economic development other than this non-stop watching of vagaries of financial markets. The trouble is that we have invested so much in this one activity that we just have nothing else to do..

Another Central Bank of Argentina Governor resigns

Argentina’s central bank Governors are as fickle as its economy.

In June-2018 Luis Caputo, former Finance Minister was made the Governor. Only to resign in September:

The governor of Argentina’s central bank, Luis Caputo resigned on Tuesday for personal reasons, the bank said in a statement, a surprise announcement in the midst of the country’s talks with the IMF that sent the peso tumbling.

Former finance minister Caputo has only held the role since June and is the second Argentine central bank president to resign this year. Argentina’s peso currency slid 4.65 percent to open at 39.15 per U.S. dollar after the announcement, traders said.

Former Economic Policy Secretary Guido Sandleris was named as Caputo’s replacement, a statement from the presidency said. “This resignation is due to personal reasons, with the conviction that a new agreement with the International Monetary Fund will reestablish confidence in the fiscal, financial, monetary and exchange rate situation,” said the central bank statement.

The news comes as Argentina is finalizing a deal to bolster a $50 billion credit line with the IMF in New York.

Argentina’s recession-hit economy is burdened by high interest rates and a currency that has lost around 50 percent of its value against the dollar this year.

Quite amazing saga of Argentine central bank Governors.

 

Egypt is building a new capital city from scratch – here’s how to avoid inequality and segregation

Nuno Pinto and Aya Badawy (both at University of Manchester) point that Egypt is building a new capital 45 kms outside Cairo.

Profile of Raj Chetty: Data evangelist

IMF’s F&D Sep-2018 issue profiles Raj Chetty.

In some cases, Chetty’s work strikes out in new and unexpected directions. In others, it confirms earlier studies by sociologists or specialists in early-childhood education. Either way, what gives it such impact is his innovative use of massive data sets, which has put him on the cutting edge of a trend that’s transforming the field.

“Big data has been revolutionary in applied microeconomics,” says Emmanuel Saez, a frequent collaborator who teaches at the University of California at Berkeley. “Raj has been in the vanguard of this movement.”

For Chetty, big data promises to bring economics closer to the certainties of the natural sciences. The hope is that economists will have a greater impact on public policy by presenting evidence that’s convincing enough to bridge the ideological divide, especially at the local government level, where partisan rancor is less intense.

“He zealously preserves his ideologically neutral stand,” says David Grusky, a Stanford sociology professor who has worked with Chetty. “He wants the data to speak, and let the chips fall where they may.”

Grusky describes Chetty as a relentless investigator who roams widely through relevant literature, regardless of the discipline, and tests every conceivable hypothesis as he works toward a conclusion. “He considers it an abject failure if there’s ever a question coming from an audience that entails an analysis he hasn’t already undertaken.”

Speaking to audiences, on campus and off, is something Chetty does frequently in his role as evangelist for big data. He cultivates contacts with journalists and makes his articles available online, along with easy-to-understand summaries, which has helped attract widespread coverage of his work in publications including the Atlantic, the Economist, and the New York Times.

“If what we’re doing is important for the world, we should make it accessible to the world,” Chetty explains.

Hmm..

History of macro models (and computing) at the Federal Reserve

Nice bit of history by David Price.

It starts with this fab story on how a physicist Frank Adelman got into macro modelling:

One evening in the fall of 1956, Frank Adelman, a physicist at the Berkeley Radiation Laboratory — now the Lawrence Livermore National Laboratory — came home from work with a question for his wife, Irma, a Berkeley economist. He wanted to try writing a program for the lab’s new IBM 650 vacuum-tube computer, but he had found that all of the physics problems he considered interesting were too complex. He asked Irma whether she thought there was an economic model that he could use instead.

“A few days later,” she remembered, “I presented him with a copy of the book by Laurie [Lawrence] Klein and Art Goldberger, An Econometric Model of the United States 1929-1952.”

Frank obtained approval from his boss for one free hour of central processor time, with the stipulation that they would have to reimburse the lab for any additional time at an hourly rate of $600, several times her monthly salary. The couple then set to work together on writing code for Klein and Goldberger’s 25-equation model of the U.S. economy. Their new side project was a journey into uncharted territory: Before then, the results of such models had been worked out by human assistants — known as “computers” or “computors” — wielding slide rules or mechanical calculators.

Working in the lab’s computer room at night, loading the code and data via punched IBM cards, the Adelmans had an initial version ready to present at an economics conference a little more than a year later. Frank’s boss, impressed, allowed them a second free hour, which they used to create a more elaborate version, the results of which appeared in 1959 in the journal Econometrica.

🙂 I wish econometrics classes started with such stories for motivation.

Then the note takes us through the development of macro modelling at Fed…

From this modest start, the science — and, some would say, the art — of computer modeling of the economy has become indispensable to policymakers and businesses seeking to forecast economic variables such as GDP and employment or to analyze the likely effects of policy changes. The Fed’s main computer model since the mid-1990s, known as FRB/US (commonly pronounced “ferbus”), has about 380 equations covering the behavior of households, firms, inflation, relative prices, numerous interest rates, and government taxes and spending (at the federal, state, and local levels), among other phenomena.

Yet even as large-scale macroeconomic models such as FRB/US have attained a role probably undreamed of by Irma and Frank Adelman, their usefulness is debated within economics circles — a reflection of a rift, starting in the 1970s, between many research economists in academia and their counterparts in policymaking institutions and businesses.

 

All India Radio’s Glory Days and Its Search for Autonomy

Coonoor Kripalani, an independent scholar revisits history and glory of All India Radio:

In the recent row over the “autonomous corporation” status of the Prasar Bharati, the fate of state broadcasters like All India Radio is in a deadlock. In the face of competition with private broadcasters, the corporation cannot exercise full autonomy in managing the state broadcaster, even though the Prasar Bharati (Broadcasting Corporation of India) Act, 1990 has been passed. Functional autonomy remains a far-fetched reality with the government of the day finding it difficult to cut the umbilical cord with the state broadcaster. As AIR is reeling under the pressure of this managerial conundrum, one should not lose sight of its historic role as a nation builder, as well as its contribution to the cultural landscape of India. Many of the towering intellectuals, musicians, writers and theatre personalities of mid to late 20th-century India were associated with this remarkable institution.

 

Economists (and Economics) in Tech Companies

Profs Susan Athey (of Satnford who once worked for Microsoft) and Michael Luca (HBS) in this paper look at role of economists in tech sector:

As technology platforms have created new markets and new ways of acquiring information,
economists have come to play an increasingly central role in tech companies – tackling problems
such as platform design, strategy, pricing, and policy. Over the past five years, hundreds of PhD
economists have accepted positions in the technology sector. In this paper, we explore the skills
that PhD economists apply in tech companies, the companies that hire them, the types of
problems that economists are currently working on, and the areas of academic research that have
emerged in relation to these problems.

 

How the Great Telegraph Breakthrough of 1866 shaped global markets and economies…

Superb short review by Helen Fessenden of Richmond Fed.

The article looks at how advent of telegraph technology in 1866 between US and UK shaped their markets and economies:

Economists have been increasingly studying the role of technology, in particular, as a way to break down information frictions and make markets more transparent. This field of inquiry applies not just to trade but to any kind of economic activity, especially when real-time information is critical but difficult to find. For example, economists have looked at the effect of Internet shopping on life insurance markets — cheaper on net for consumers, according to Jeffrey Brown of the University of Illinois at Urbana-Champaign and Austan Goolsbee of the University of Chicago. As these and other studies suggest, the speed and ease of online shopping can reduce these frictions for consumers.

To anyone who surfs websites to shop, these insights are intuitive. But as the case of the transatlantic telegraph cable shows, history is rich with examples of how earlier breakthroughs had similar effects. In a stroke, the cable helped reshape many U.S. industries, including one of the biggest exports, raw cotton, ultimately growing U.S. exports through increased efficiency.

This story has special resonance in the Fed’s Fifth District, especially in the Carolinas, where the cotton industry recovered with surprising speed in the years following the Civil War. Even though cotton production and exports sharply fell during the war, both rebounded to prewar levels by 1870. In particular, the communication revolution that the telegraph ushered in helped turn splintered local markets into a national network, leading to the 1871 founding of the New York Cotton Exchange.

Superb bit.

 

Why friends give but do not want to receive money

Laura Straeter and Jessica Exton get down to absolute origins of financial intermediation/banking:

Although money may be a taboo topic amongst friends, one’s social networks can offer help in times of personal financial straits. This column examines people’s willingness to borrow money from or lend to close friends for everyday purchases and finds that friends are much more willing to lend than to ask to borrow, and that this gap between borrower and lender widens as requests are repeated. Ensuring that there is occasion for reciprocation and using technological tools to regulate the peer-to-peer loan may help improve this suboptimal informal lending market.

Hmm..

Is Cash Still King? Case of US Dollar

Tim Sablik of Richmond Fed shows that demand for US Dollar as cash remains strong.

The policymakers in US and UK economy should focus on underemployment and not unemployment

There was a time when underemployment was essentially seen as a developing country phenomenon. Not anymore.

David Bell and David Balnchflower in this piece:

The failure of wages to recover to their pre-recession growth rates in the developed world has been a continuing puzzle for economists.  Although output has grown significantly in most of these countries, real wages have recovered much more slowly (e.g. Jowett et al. 2014).  Nominal wage growth has been weak so that real wages have hardly risen even though price inflation has also been sluggish.  In this column, we summarise the importance of underemployment in explaining this low wage growth based on work in a recent paper (Bell and Blanchflower 2019).¹  

The traditional explanation would be that wage growth was held back by high levels of unemployment. But this explanation is not consistent with the facts.  Unemployment rates are low especially in the US (3.9% in August 2018) and the UK (4.2% in May 2018) and Germany (3.4% in July 2018).  However, they remain in double digits in Italy (10.4%), Spain (15.1%) and Greece (19.5%) and average 8.2% in the euro area.  The search for alternative explanations of weak wage growth has focused attention on underemployment, as measured by the willingness of current workers to increase their working time without increasing their wage rate.  In contrast to unemployment, the underemployment rate has not returned to pre-recession levels in the US and the UK in particular.

In our interpretation of the concept, underemployment implies workers are off their labour supply curves, in contrast to the so-called canonical model which suggests workers are free to choose their hours of work, given the wage rate, and so are on their labour supply curves.  This model assumes that workers select from a continuum of hours, while treating the wage rate as exogenous, continues to dominate research and teaching.  This approach persists, even though aggregate hours fluctuate in response to changes in demand and the organization of production requires employers to place some restrictions on working time, for example, to ensure that a production line is fully staffed.

Hmm..

 

Britannia Industries celebrates 100 years

2018 is quite an year for anniversaries. Latest to the list is Britannia Industries which completes its 100 years in 2018.

• Twitter handle
• Lowe Lintas ads has made ads for the anniversary. (more here)
• BWorld article
• Shonali Muthalaly tries to figure what goes in Britannia’s MilkBikis, a type of biscuit really famous in Southern India.

Nice links but we clearly want more. The company should commission a team to document its 100 year history/journey.

Indian banking troubles: A case of activist regulators vs quiescent shareholders

Prof JR Varma of IIMA who regularly treats us with food for thought posts, has another such post.

How come the regulators have become so active but shareholders remain so passive in Indian banking cleanup:

The Indian central bank or other government agencies have been instrumental in effecting a change of management in three under-performing private sector banks (ICICI Bank, Axis Bank and Yes Bank) in recent months. While much has been written about the functioning of the boards and of the central bank, the more fascinating question is about the dog that did not bark: the quiescent shareholders of these banks. They have suffered in silence as these banks have surrendered the enviable position that they once had in India’s financial system. The void created by the wounded banking system in India is being filled by non bank finance companies. So much so that one of these non banks (Bajaj Finance) trades at a Price/Book ratio 3-4 times that of the above mentioned three banks and now boasts of a market capitalization roughly equal to the average of these three banks.

The question is why has this not attracted the attention of activist investors. One looks in vain for a Third Point, Elliott or TCI writing acerbic letters to the management seeking change. The Indian regulatory regime of voting right caps and fit and proper criteria has ensured that such players can never threaten the career of non performing incumbent management in Indian banks. The regulators have entrenched incumbent managements and so the regulators have to step in to remove them.

Incidentally, the securities regulator in India has been no better. It too has ensured that the big exchanges and other financial market infrastructure in India are immune to shareholder discipline, and over the last several years many of these too have performed far below their potential.

Indian regulators do not seem to understand that capitalism requires brutal investors and not just nice investors talking pleasantly to the management. Capitalism at its best is red in the tooth and claw.

This is so true. It does not just apply here but is a global problem. One barely sees shareholders holding the top management to be more accountable. But yes far more subdued in India.

Part of the problem is everyone is involved in keeping things pleasant for common gains. See Stock Analysis for instance. How many analysts care to write sell reports? Very few and that is a huge problem by itself….

Gradually, we are admitting that banks create money by giving loans and not accepting deposits…

After the storm created by Bank of England questioning the inter-mediation role played by banks, other central banks are also waking up. We are usually taught that banks first accept deposits and then lend this money and via the multiplier money is created. But this is wrong. Banks actually first give loans and then this money comes back to the banking system as deposit.

Chris Kent, Assistant Governor of Reserve Bank of Australia also says banks create money via credit and not deposits: