Reflections on the 2022 Economics Nobel Memorial Prize: Based on obsolete ideas

Jens van ‘t Klooster of University of Amsterdam reflects on the 2022 Economics Nobel Prize on Banks and Bank runs: 

My reflections are structured as follows. First, I review the existing literature on the political role of the prize in promoting academics who favour market-based solutions to societal problems. Next, I turn to the Committee’s scientific background study to identify the vision of the fi-nancial system that informs the 2022 prize. As I illustrate, however, these ideas have become largely obsolete. This sets the stage for discussing how financial policy has also been shaped by a profound rethinking of human-nature relations in the ‘Anthropocene’. First, I set out how the academic disciplines of economics and finance continue to lag behind recent devel-opments in the broader social sciences. Then, I discuss how regulators have rethought their approach to the environment in recent years.

Is Electrification in India Fiscally Sustainable?

Prabhat Barnwal (Michigan State University) and Nicholas Ryan (Yale University) in this paper presented at NCAER’s India Policy Forum look at one of the perennial problems facing Indian economy that of Power Sector:

We study the fiscal health of state electricity distribution companies (discoms) in India and its bearing on the supply of electricity. India has, in a policy landmark, lately achieved near-universal household electrification, in large part through Central funding of infrastructure totaling Rs. 5 lakh crores as well as state bailouts totaling Rs. 35 lakh crores since 2001 (both figures in 2022 INR, totaling roughly USD 500 billion). Central and state transfers enable state distribution companies to run ongoing losses, which, in turn, threaten the supply of energy to agriculture and rural households.

We find that: (i) the fiscal health of state distribution companies remains concerning, with declared losses of only 2% in 2021-22, far lower than recent trends, rising to 22% when excluding central and state government subsidies; (ii) the proportional losses of the distribution companies, excluding subsidies from the central and state governments, have declined 6 percentage points (on
a base of 28%) in the last decade, but their aggregate yearly loss has increased by Rs. 77,000 Cr (43%) due to growth in subsidized consumption; (iii) most gains in reported discom finances are due to the increasing formalization of states bringing electricity subsidies onto their budgets; (iv) states that drew funds under the most recent Central bailout program (the UDAY scheme) have seen smaller gains in efficiency and reductions in losses in recent years than states that did not participate in the bailout. We conclude by discussing the promise of delivering subsidies via Direct Benefit Transfers for Electricity (DBTE) to give discoms incentives for both fiscal independence and more reliable supply and service.

How the RBI Shaped India’s Multi-Pronged Reforms (1997–2008): Book Review of RBI History 5th volume

RBI released the 5th Volume of its history last year in December. The refernce period of the volume was 1997-2008.

I review the volume at TheIndiaForum.

The fifth volume of the history of the Reserve Bank of India helps us understand how the economic reforms and policies during 1997-2008 were shaped in India’s complex political and social setting. This is more than a banking and monetary history, it covers the larger economic history of the period.

The European banking crisis that didn’t happen in 2023

Agnès Bénassy-Quéré in this article writes how Europe avoided a banking crisis in 2023:

After the pandemic, and the energy crisis, Europe could have faced a banking crisis in March. Indeed, the banking world was rocked by the successive failures of several US regional banks and the emergency takeover of Credit Suisse, a globally systemic bank, by UBS (Chart 1). Bank share prices were hit in both the euro area and the United States, but they quickly recovered, although without returning to pre-March levels. So how was it possible to prevent the domino effect so often observed during financial crises?

As the Banque de France’s latest report on Assessment of Risks to the French Financial System (June 2023) points out, contagion did not occur for two main reasons: (1) The crisis was addressed extremely quickly by the US and Swiss authorities, and (2) the European banking system was well prepared to withstand turbulence, following the major regulatory and supervisory reforms implemented in the wake of the global financial crisis.

Release of first Handbook of National Pension System Statistics (2023)

PFRDA has released Handbook of National Pension System Statistics (2023). This is the first such handbook.

PFRDA Chairperson Dr Deepak Mohanty writes the Foreword:

Currently, the PFRDA provides information on NPS and APY on regular basis in its Annual Report, Pension Bulletin, and through press releases. However, there is no comprehensive source on pension (NPS and APY) statistics.

With the objective of bridging this gap, I have the pleasure to release the first edition of Handbook of National Pension System (NPS) Statistics. It provides time-series and cross-sectional data at one place on various parameters such as scheme-wise number of subscribers and their demographic profile, asset under management, contributions, withdrawals, grievance resolutions, net asset values (NAVs) for the period 2008-09 to 2022-23. The information is provided on annual, monthly, and daily frequencies in an extractable mode. 

It will definitely help researchers..

Just one request from PFRDA. Release all the data files as both one excel and one pdf file. Easier to navigate and understand data in that manner.

Harmonising banking definitions is a key step to simplifying the regulatory system

RBI recently harmonised banking defintions.

My article in moneycontrol on the importance of this unstated reform.

Ambiguities can never be completely removed as there can never be a perfect system. As banking evolves, new regulations will be required, which in turn will lead to new types of complexity and ambiguities

Austrian Economics and the Knowledge Problem

Shruti Rajagopalan talks to Peter Boettke in her IdeasofIndia podcast:

In this episode, Shruti speaks with Peter J. Boettke about the writings of F.A. Hayek, why artificial intelligence will not solve the knowledge problem, what many economists throughout history misunderstood about the market process, mainline vs. mainstream economics and much more. Boettke is a Distinguished University Professor of Economics and Philosophy at George Mason University, the BB&T Professor for the Study of Capitalism and the director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University. He has written dozens of books, including “The Battle of Ideas: Economics and the Struggle for a Better World,” “The Economic Way of Thinking,” “Living Economics: Yesterday, Today and Tomorrow” and, most recently, “F.A. Hayek: Economics, Political Economy and Social Philosohpy.” 

Hayek and knowledge problem:

I want you to explain to most of our listeners, who may not know the main insights of Hayek’s 1937 paper—this is “Economics and Knowledge”—and Hayek’s 1945 paper, “The Use of Knowledge in Society,” and then we can go on to the rest of it.

BOETTKE: Sure. That’s great. Great context too.

‘Economics and Knowledge’

BOETTKE: I think the key insight in Hayek’s 1937 paper, “Economics and Knowledge,” is that the pure logic of choice is a necessary but not sufficient condition to explain the market order. In order to explain the market order, we have to also add in the various different institutional environments within which individuals interact with one another and which they interact with nature, and to see how it is they learn in these alternative environments, how best to coordinate their economic activity with others.

I think it’s a great thing to start with the ’37 paper because that’s where Hayek really starts to articulate his particular understanding of what it is that prices do in an economy. In my own book on Hayek, I try to tell the evolution of Hayekian ideas by an arc of his career. I start with his own beginning, which was on the imputation problem, but carry from that imputation problem, basically, how is it that I value a hog? How the value of a hog is derived from the value of the bacon that consumers use, and that spreads back through the structure of production such that farmers want to maintain the hog, and all those things like that.

That’s how you get the coordination of economic activities through time, and what is the role of prices in the coordination problem because prices are these guides to future action. What is the role of profit-and-loss accounting in being able to lure us into ventures and discipline us from the sad adventures, if we make mistakes or whatever, and that selection process of what’s going on. Hayek’s early part of his career, which includes not only his business cycle theory, which is important to stress—his business cycle theory is a relative price story of the business cycle. It’s a microfoundational story of the business cycle. It’s a price-theoretical rendering of the business cycle.

Then his critique of socialism, which he’s building on Mises, is again a price-theoretical explanation. I think if you look at his essay “A Trend of Economic Thinking” in 1931, you could infer from that that his argument is as follows: If you knew economics, you would know socialism doesn’t work because all good trained economists understand the role of property, prices and profit and loss. That’s 1931. At the same time, he’s very successful in communicating originally his business cycle to the young graduate students and great excitement to the community at the time in the 1930s and his move from Vienna to LSE.

By the mid-1930s, there starts to be rumbling that people are saying, “Oh, I can use the very same neoclassical tools to prove that I could plan the economy.” I think Hayek starts thinking to himself after the “Collectivist Economic Planning” book, which is 1935, “What’s going on here?” These are brilliant people like Abba Lerner, his student, and he’s like, “What’s going on? Why is this happening?” He comes up in the second arc of his career, which is a twofold move, I argue.

One is, is that he thinks there’s some deep philosophical mistake that economists have made, which misconstrues the nature of their science. Then there’s also, because they misconstrued their science, there’s a loss of the institutional foundations. If you go all the way back to Hume, Hume’s argument was that society, to get off the ground, needed to have stability of possession, transference by consent and the keeping of promises. You needed to have property, contract and consent, which is an institutional foundation.

Hmm..

Lots of stuff to think about in the podcast..

The benefits of working for a victorious political campaign

Samuel Bazzi and Claudio Labanca in this voxeu article track careers of volunteers working for political campaigns:

In democracies around the world, elections mobilise thousands of campaign workers who play an integral role in shaping candidates’ electoral performance. Yet, little is known about these workers and how working in a campaign shapes their professional lives. This column explores the career trajectories of campaign labour in Brazil. The connections forged on a campaign provide qualified young workers with better employment and earnings opportunities.

Caste, Cricket and Classical Economics

Fantastic Ashish Kulkarni picks this very interesting article by Shruti Sharma on what it means to make a cricket ball in Meerut. Shruti is working towards a PhD on the social history of sports goods manufacturing in India, at the Centre for Studies in Social Sciences, Calcutta. Wow!

Ashish has several takeaways from the article. The one connecting ball making to Smith’s pin making is amazing:

• Move aside, pin factories: “Line se kaam hove hai aur ek karigar ek hi kaam kare hai [The tasks are sequential and a craftsperson specialises only in one task],” he explains.

 

Constitutions and Order: A Theory and Evidence from Colombia and the United States

Leopoldo Fergusson, Javier Mejia, James A. Robinson& Santiago Torres in this new NBER paper compare constitutions of US and Colombia:

The Past and Future of Indian Finance

Prof Ruchir Agarwal of Harvard Kennedy School presented this paper on India’s financial sector at India Policy Forum:

India’s growth story depends on the vitality of its financial system. Within the span of five years, the Indian economy has endured two unprecedented shocks: the 2019 economic slowdown triggered by a financial crisis, and the COVID-19 pandemic. As we navigate the aftermath of these episodes, one vital question emerges: how resilient will India’s financial system be in the face of future challenges? This paper embarks on three missions.

First, it dissects the origins and aftermath of the Indian Financial Crisis of 2018-20, sparked by a run on the shadow banks.

Second, it examines how India fortified its financial system in the wake of this financial crisis and the pandemic, consequently shielding itself from the global banking disruptions of 2023.

Finally, it gazes ahead at potential challenges and opportunities, sketching a blueprint for key reforms.

Overall, the future trajectory of India’s economic growth, whether a modest 5.5% or a bold 7.5%, rests significantly on the progress of ongoing financial sector reforms.

Inflating away the debt: The debt-inflation channel of German hyperinflation

A team of economists (Markus Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner and Tom Zimmermann) in this voxeu research analyse the impact of Gemany hyperinflaiton of 1920s on debt of German firms:

Harmonising Definitions on Banking

RBI has harmonised definitions of banking and banking related activities.

Today, the Reserve Bank updated the glossary on ‘Banking Statistics – Harmonised Definitions of Data Elements’ for regulatory reporting (weblink: https://rbi.org.in/scripts/DataDefinition.aspx) by including definitions of 101 additional data items. This glossary will be kept updated as and when new data items are prescribed for regulatory reporting or clarification/modification is required for any existing data item/s.

Background

2. In its report of June 2022, the Reserve Bank’s Regulations Review Authority 2.0 (RRA 2.0) made a comprehensive review of regulatory reporting prescriptions and made several recommendations on ease of compliance, reduction in regulatory burden, streamlining of reporting mechanism and dissemination and ease of accessibility of regulatory instructions. These inter alia included placing a single updated master file containing definitions of data items on the newly created “Regulatory Reporting” link on the RBI website, where consolidated information relating to regulatory reporting and submission of returns by regulated entities (REs) are made available at a single place.

3. Earlier, the Reserve Bank had issued a Technical Guidance Note vide the press release dated March 30, 2017 to complement the instructions issued by means of various circulars, for ensuring uniformity in reporting and thereby improving data quality. The glossary was updated with harmonised definitions of 83 additional data items vide the circular DBR.No.BP.BC.99/08.13.100/2017-18 dated January 4, 2018.

Unstated but really important reforms.

A Teacher Writes to Students Series (X): Whatever Happened to Democracy?

This is part (X) of A Teacher Writes to Students Series.

Whatever Happened to  Democracy?
By Annavajhula J C Bose, PhD
Department of Economics, SRCC

A Teacher Writes to Students Series (IX): Neoliberalism and New Economics

This is part IX of A Teacher Writes to Students Series

Neoliberalism and New Economics
By Annavajhula J C Bose, PhD
Department of Economics, SRCC

A Teacher Writes to Students Series (VIII): Grassroots Development

This is Part VII of the A Teacher Writes to Students Series

Grassroots Development
By Annavajhula J C Bose, PhD
Department of Economics, SRCC

Cancellation of Public Holiday in Denmark to increase labor supply, GDP, and fiscal revenues!

Denmark government has decided to cancel a public holiday from 2024 onwards to improve macroeconomic outcomes. This IMF paper reviews the probable impact of the policy:

The Danish government decided to cancel Store Bededag (Great Prayer Day) as a public holiday. The decision was approved by parliament in February 2023 and will become effective in 2024. Store Bededag is celebrated on the third Friday after Easter, i.e. always on a weekday; therefore, it’s cancellation implies an increase in annual statutory working hours by 0.45 percent3. The tripartite agreement among the government, the employers, and the unions stipulates that employees with monthly salary contracts will get a 0.45 percent increase in their annual salary, while those with hourly contracts (accounting for about 20 percent of employment) will be compensated according to hours worked on the new working day.

Cancellation of a public holiday is a rare policy experiment. Historically, the trend has been one of more leisure and less work: shorter hours, more annual paid leave, and more holidays. Some exceptions to this trend include declaring Pentecost Monday a “solidarity day” in France in 2004 and canceling four public holidays in Portugal in 2012 (that were reinstated in 2016). In both cases, the policy changes were undertaken as part of a comprehensive package of measures, making it difficult to isolate the effects of the holiday cancellations. As countries try to find new ways to boost labor supply, GDP, and fiscal revenues in the face of declining working-age populations, Denmark’s initiative offers an interesting case study

Probable impact:

The cancellation of the public holiday is expected to have a small positive impact on labor supply. It is a rare policy initiative, making it difficult to estimate its expected economic implications. Nevertheless, based on recent cross-country empirical analysis on the causal effects of public holidays on economic growth as well as the historical correlation between statutory and actual work hours in Denmark, labor supply can be expected to increase by about 0.14–0.34 percent. In terms of magnitude, this effect is comparable to reducing the ratio of people using early retirement schemes by 2 percentage points or increasing the employment rates of different categories of immigrants and descendants by 1.15 percentage points each. A similar labor supply impact should also be possible to achieve through a revenue–neutral tax and benefit system reform.

Efforts to explore alternative measures to increase labor supply should continue. Thanks to its successful flexicurity model, Denmark has been able to achieve a well-functioning labor market characterized by high labor market participation and low structural unemployment. This implies that further efforts to sustainably increase employment may involve some policy tradeoffs that need to be carefully considered. In particular, reforming the tax and benefit system, tightening conditions for early retirement, and efforts to close the employment gaps of immigrants could be considered in terms of equity considerations, fiscal costs, impact on productivity, and ease of implementation, including political economy considerations.

India-UAE Currency Deal: Internationalising the rupee, one step at a time

RBI and Central Bank of UAE signed two MoU to promote local currencies and payment systems.

My article in moneycontrol analyses the move.

Reading Smith Through the Conceptual Lenses of Game Theory: a Reconstruction of Smith’s Way of Thinking, Inspired by His Lectures on Rhetoric and Languages

Andreas Ortmann (UNSW Australia Business School, School of Economics) and Benoit Walraevens (University of Caen Normandy) in this new paper:

Game theory is a branch of social sciences that formalizes decision-making in situations where two or more individuals or groups interact, possibly having conflicting interests. In Ortmann & Walraevens (2022) we have reconstructed Smith’s ways of thinking about the social world by analyzing his early work on rhetoric and languages. We document that Smith had an astute understanding of interactive decision-making in all walks of life and of the role persuasion plays in it.

Game theory is a natural way to capture this understanding and we showed that Smith used, from the LBRL over the TMS to the WN, what we called reasoning routines that map tightly into eductive and evolutive game theory.

The present manuscript is a primer of sorts on our book and the insights that we establish through it. We argue that understanding Smith’s reasoning routines, or conceptual lenses, is a major step towards understanding the deep structure of his oeuvre, and for that matter his universal teachings.

 

India@100

Harendra Behera, Dhanya V, Kunal Priyadarshi and Sapna Goel in this RBI Bulletin article project what it means for India to be a developed country in 2047:

This article provides an indicative roadmap for India to become a developed (high-income) country by 2047-48.

Highlights:

• • India’s real GDP needs to grow at 7.6 per cent annually over the next 25 years to achieve the per capita income level to become a developed economy.
  • India must rebalance its economic structure by strengthening its industrial sector so that its share in GDP rises from the current level of 25.6 per cent to 35 per cent by 2047-48. Agriculture and services activity would have to grow at 4.9 per cent and 13 per cent per annum, respectively, in the coming 25 years with their sectoral shares in GDP at 5 per cent and 60 per cent, respectively, in 2047-48.
  • India needs to follow a multipronged approach for absorbing the large pool of labour force productively and harnessing growth opportunities in knowledge-oriented sectors, through sustained policy focus on structural reforms, infrastructure, logistics, digitalisation of the economy and upskilling the labour force.

The paper cites experiences from economic history:

Achieving high growth over a long time is not a rarity in economic history; the episodes of sustained high growth phases are more recent and highlight the importance of technology and globalised markets in sustaining high growth. It may be stated that India must surpass its preceding record to achieve the nominal per capita GDP of 9.1 per cent growth target.

The growth record of our neighbouring countries which managed to achieve this target during their respective high growth phases over a period of 25 consecutive years suggests that most of these countries had started from a low level of income. The highest CAGR was registered by South Korea – 17.9 per cent during 1966-1990, starting from a low per capita GDP of US$ 109 in 1965 to reach US$ 6,610 in 1990.

China, though not an AE or high-income country yet, grew robustly at 10.9 per cent during 1983-2007 from a level of US$ 203 in 1982 to US$ 2,694 by 2007.

The growth trajectories experienced by other countries during their respective take-off phases, thus, show that India’s prospects of becoming a developed nation by 2047 are feasible.

The discussed takeoffs are at a much lower per capita income. India’s per capita income is much higher at $2450. The global growth environment was also much more conducive.

Further:

Two common characteristics that marked the transition towards the high income status in these countries are the conscious decision to industrialise and focus on external trade. South Korea, Singapore and China placed special emphasis on industry – especially manufacturing – to propel their growth.

Further, the development requirement for the manufacturing sector was met by quality infrastructure and a low cost and trained labour force. A corollary to the conscious decision to promote manufacturing sector was the export orientation which provided markets and helped in improving the efficiency of firms. Their targeted measures include: (i) exchange-rate depreciation; (ii) export promotion via preferential credit allocation, tax exemptions, and other direct measures favouring export promotion; (iii) harnessing comparative advantage in labourintensive manufacturing and, later, increasing capitalintensive or skill-intensive products; and (iv) policies that favoured new industries with export potential. Furthermore, they were helped by the rapid growth of world income during the 1960s and the beginning of the 1970s which increased demand for exports.

Hmm.

The authors then look at five growth drivers and suggest way forward.