Archive for the ‘Economics – macro, micro etc’ Category

The 500th anniversary of Martin Luther’s Protestant Reformation: What it tells us about history, memory and economics!

November 1, 2017

It was on 31st Oct 1517 that Martin Luther went to the door of the town’s Castle Church and nailed to it a sheet containing 95 Theses. This was the basis of Protestantism which broke away from the teaching of Catholicism.

In this piece, Prof. Peter Marshall of  University of Warwick says history hardly panned out the way we are made to believe:

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Zimbabwe’s financial system is living on borrowed time – and borrowed money

November 1, 2017

Prof Roger Southall of  University of the Witwatersrand in South Africa has a piece on Zimbabwean economy.

Much of it is known but still worth repeating as so called leaders do not just learn lessons from monetary history:

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How economic prosperity spared witches from being victims of all criticism…

November 1, 2017

Given the Halloween season (it is amazing how the western world has managed to sell Halloween across the world), one is getting to read articles on witches and their craft. For instance, Sri Lankan cricket captain Dinesh Chandimal recently seem to have said: Witchcraft Helped Us Win Test Series vs Pakistan!

In another piece , Chelsea Follett of Cato Institute writes on how economic prosperity implied people stopped blaming witches for all the ills:

Famously, America had its own smaller scale witch panic at the end of the 17th century, when its average income was roughly $900 by the same measure.

It seems that even in America, poverty was partly to blame for the killings. The majority of the charges in Salem were leveled by economically desperate farmers against more prosperous merchant families, according to the authors of Salem Possessed: the Social Origins of Witchcraft.

Unsurprisingly, the Salem madness was preceded by a series of unusually cold winters causing crop failures. Cold weather and subsequent deteriorating economic conditions also correlated with more witch killings in Europe, just as crop-ruining rainfall levels often precede witch hunts in Tanzania.

Poverty and ignorance do not always lead to witch hunts, but they seem to make violence more likely. For one 14th century site excavated in South Dakota, an astonishing 60% of the population died in conflict. Many of the bodies show not only signs of violent death but also extensive nutritional deficiencies, suggesting starvation-level poverty preceded deadly violence.

One reason for violence’s decline that Harvard University’s Steven Pinker identifies is capitalist peace theory: When it’s easier to buy things than steal, people don’t steal. Hence trade and commerce between countries reduce the exploitative incentives of military conquest.

Of course, trade doesn’t guarantee peace. Europe enjoyed abundant trade before World War I. But in general, as people move from subsistence to exchange and from poverty to prosperity, they become less desperate and violent. As prosperity enables education to spread, belief in witchcraft fades. After a poor harvest, instead of witch hunts energy is poured into innovative ways to ensure better crop yields next year.

If you see any witches this Halloween, take a moment to contemplate the incredible strides that humanity has made against poverty and violence. While progress can be uneven and there are still places where “witch” is a deadly accusation, declining poverty helps to end witch hunts and makes the world less violent.

Hmm..

Economics of prison in Australia…

October 31, 2017

This blog has written about economic of prison in US.

Here is a discussion and interview (mp3 format) on the economics of prison in Australia:

There are more than 41,000 daily full-time prisoners in Australia, according to the latest ABS data. Many of them are in private prisons – almost 20% of the prison population according to a 2014 Productivity Commission report.

But we don’t really know whether private prisons are more cost effective or produce better results. Private prison contracts are often “commercial in confidence”, and it’s hard to know what exactly we’ve paid for. All this means we have to rely on watchdogs to ensure taxpayers are getting value for money, and it’s tough for companies to really compete.

Prison job programs are often touted as a way to reduce prisoner recidivism, but again there is little evidence showing a positive impact. Joanne Wodak was a research assistant on a study in the Northern Territory. Despite positive feedback from both prisoners and employers, Wodak says these programs don’t address other, important factors affecting recidivism such as alcoholism and homelessness.

Technology could drastically change what a prison is and who is in them – through the use of algorithms that decide who gets bail, for instance. But as the University of Sydney’s Sandra Peter and Kai Riemer discuss, it’s unlikely to have an impact on the jobs prisoners themselves do. Low wages mean that prisoners provide an incredibly cheap source of labour, and the economics of this is unlikely to be drastically changed by technology.

So many different organisations and how economics differs across them…

Internal capital markets in times of crisis: the benefit of group affiliation in Italy

October 27, 2017

First research says raising capital frm internal sources like parent firms. group firms etc is bad and  firms should raise capital only from external sources. Then comes a crisis and it says internal capital markets are fine.

Raffaele Santioni, Fabio Schiantarelli and Philip E. Strahan look at Italian case:

Italy’s economic and banking systems have been under stress in the wake of the global financial crisis and the euro crisis. Our results suggest that firms in business groups have been more likely to survive in this challenging environment than unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow.

We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favourable investment opportunities. The ability to borrow externally provides the internal capital market with additional funds, but sharing external capital becomes less important during a crisis. Our overall results highlight the benefits of internal capital markets when external capital markets are tight or distressed.

 

Why is Austria not influenced by the Austrian School of Economics?

October 27, 2017

I am forgetting the name but someone did tell me this: That the famous Austrian school is perhaps least famous in Austria itself.

In this piece,  Mohammad J. Malayeri and Bill Wirtz look at recent evidence. They wonder why is Austria so un-Austrian?

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Is the so called new economic thinking, same old stale stuff?

October 25, 2017

Frances Coppola writes a scathing critique of recently held Festival for New Economic Thinking in Edinburgh by Institute for New Economic Thinking.

I’m sitting in a coffee shop opposite Haymarket Station in Edinburgh. Just up the road, the Institute for New Economic Thinking (INET) is holding its conference. I’m supposed to be there, as I was yesterday and the day before. But I am not at all sure I want to go. The last two days have left a very bitter taste.

This conference, grandly entitled “Reawakening”, is supposed to be a showcase for the “new economic thinking” of INET’s name. I hoped to hear new voices and exciting ideas. At the very least, I expected serious discussion of, inter alia, radical reform of the financial system, digital ledger technology and cryptocurrencies, universal basic income (recently cautiously endorsed by the IMF), wealth taxation (also recently endorsed by the IMF), robots and the future of work. And I looked forward to the contributions not only from the speakers, but from the young, intelligent and highly educated attendees.

Not a bit of it. In the last two days we have had panel after panel of old white men discussing economic theories developed by old white men, many of them dead. Economic beliefs that I thought had been comprehensively debunked have reappeared, dressed up as “new thinking”.

She revisits all the panels and in unimpressed by most.

In the end:

For me, the ultimate insult came in the form of an announcement yesterday. INET is creating an Independent Commission on Global Economic Transformation. “Call for New Thinking and New Rules for the New World Economy; Final Report will Outline Solutions for Emerging and Developed Countries”, says the announcement. Here’s the remit of the new commission:

And here are the members of the Commission, so far:

  • Robert Johnson, President of INET and Former Chief Economist of the U.S. Senate Banking Committee;
  • Lord Adair Turner, Chairman of INET and former chairman of the UK Financial Services Authority;
  • Kaushik Basu, Professor of Economics at Cornell University and former Senior Vice-President and Chief Economist of the World Bank;
  • Peter Bofinger, Professor of Monetary and International Economics at Würzburg University and a member of the German Council of Economic Experts;
  • Winnie Byanyima, Oxfam International executive director; former member of the Ugandan Parliament, African Commission and Director of Gender and Development at the United Nations Development Program;
  • Mohamed El-Erian, Chief Economic Advisor, Allianz, and former chair of U.S. President Obama’s Global Development Council;
  • Dr Gaël Giraud, Economist and senior researcher at C.N.R.S. (French national center for scientific research); 
  • James Manyika, Director of the McKinsey Global Institute;
  • Rohinton Medhora, President of the Centre for International Governance Innovation (CIGI);
  • Danny Quah, Professor of Economics at the Lee Kuan Yew School of Public Policy, National University of Singapore;
  • Dani Rodrik, Professor of International Political Economy at Harvard’s John F. Kennedy School of Government, and President-Elect of the International Economic Association;
  • Eisuke Sakakibara, Professor of Economics at Keio University and former Japanese Vice Minister of Finance for International Affairs;
  • Beatrice Weder di Mauro, Professor of Economics, Chair of Economic Policy and International Macroeconomics at the University of Mainz, Germany and former member of the German Council of Economic Experts;
  • Yu Yongding, former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences; former member of the Monetary Policy Committee of the People’s Bank of China.

Now, there are some wonderful people on this list. But collectively, they represent the elite establishment that I mentioned before: senior academics, rich businessmen, former and current public servants and policymakers. There are no new voices here, no-one from the heterodox economic community, no-one who has their feet in the real world. Everyone is at the top of an establishment hierarchy. How dare these people presume to take to themselves the responsibility for creating a radically new economic paradigm, when they have benefited so enormously from the existing one?

This is not “new economic thinking”. This is the establishment, reasserting itself at the behest of the elite, which fears the loss of its status and its privileges as the threat of populist revolt rises. The young crowd round the elite, hoping to be picked as their proteges: and the old scan the young to pick out the ones most like them. So the system perpetuates itself.  
And I, like the rest of the creatures outside, look “from pig to man, and from man to pig, and from pig to man again.” But already it is hard to say which is which. 

I had similar reactions on seeing the panel members. It looked quite similar to the Growth Commission floated a decade ago.

Don’t fall for anything called Tax Reform….

October 24, 2017

Jeff Deist of Mises Institute has a piece. It applies to India which is struggling with its GST which ironically was billed as the biggest economic reform of the country:

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Do we understand comparative advantage?

October 24, 2017

Cafe Hayek Blog points to this interesting article by Prof Deirdre McCloskey.

Prof McC makes two major points. One Comparative advantage is not about competition but cooperation. Two, we often confuse between absolute and comparative advantage.

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How perverse incentives led to a soccer match teams scored self-goals in order to qualify!

October 24, 2017

Superb post in Managerial Econ blog:

Presumably, the primary goal of any sport governing body is to provide adequate incentive for competitors to do battle on the field (court, pitch, etc.), each striving for victory. Things don’t always turn out that way. 

My all time favorite example of the strangest (incentive-driven) spectacle in sport is from the 1994 Shell Caribbean Cup involving a match between Barbados and Grenada. 

A very poorly-conceived (though well-intentioned) tournament rule stipulated that any goals scored in overtime (and, by virtue of a sudden-death rule, there could only be one) would count double, as if the team scored two goals. The idea was to reward teams in close matches. This simple rule led to a very strange match.

Read the post in details…

Making globalisation more inclusive: Really?

October 17, 2017

Earlier we were told how globalisation will be this inclusive force which will help one and all. As evidence against this is growing, there is worry that globalisation itself will be thrown off the track. Thus there is discussion on how to make globalisation inclusive.

Sergei Guriev, Danny Leipziger and Jonathan D. Ostry have a piece:

 When some people highlighted these earlier, they were shut off. Now we are again having the suggestions people gave earlier…

Neymar Case: The value of top footballers, bubbles, and pitfalls of the free market

October 13, 2017

Eran Yashiv of Tel Aviv Univ has a piece:

The €222 million transfer of Neymar to PSG calls into question whether football superstars are a good investment. Using the financial details of the transfer, this column argues that, at the price paid, Neymar has a negative net present value. While there are other explanations for PSG’s willingness to pay, in purely economic terms his contract seems a bad investment. Policymakers might use this type of calculation to justify intervening in the transfer market through regulation and taxation.

 Hmm..

Zimbabwe’s several currencies: Dollars, Bollars and Zollars…

October 9, 2017

The ever alert JP Koning points to this Reuters article.

Zimbabwe has three types of currencies running as of now. There is Dollar (normal paper note), Zollar (Dollars stored in bank accounts) and Bollars (Bond notes  backed by a reserve). None seem to be working!:

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Merchants and the Origins of Capitalism

October 6, 2017

Fascinating paper by Sophus A. Reinert and Robert Fredona. They point how the history of capitalism is defined by a sedentary merchants who managed businesses from their homes:

N.S.B. Gras, the father of Business History in the United States, argued that the era of mercantile capitalism was defined by the figure of the “sedentary merchant,” who managed his business from home, using correspondence and intermediaries, in contrast to the earlier “traveling merchant,” who accompanied his own goods to trade fairs. Taking this concept as its point of departure, this essay focuses on the predominantly Italian merchants who controlled the long‐distance East‐West trade of the Mediterranean during the Middle Ages and Renaissance.  

Until the opening of the Atlantic trade, the Mediterranean was Europe’s most important commercial zone and its trade enriched European civilization and its merchants developed the most important premodern mercantile innovations, from maritime insurance contracts and partnership agreements to the bill of exchange and double‐entry bookkeeping.

Emerging from literate and numerate cultures, these merchants left behind an abundance of records that allows us to understand how their companies, especially the largest of them, were organized and managed. These techniques can also be put in the context of premodern attitudes toward commerce and the era’s commercial‐political relations. The Commercial Revolution anticipated the Industrial Revolution by over half a millennium and laid the groundwork for today’s world of global business.  

Hmm…

Missed Opportunities: The Economic History of Latin America

October 6, 2017

There is a new book on Latin America by Beatriz Armendáriz and Felipe Larraín.

IMF interviews Prof Larrain. What sums up the missed opportunities in the region?

Latin America has vast natural resources and a talented population. Why has the region remained so poor compared with its northern neighbors?

Our book highlights five theories of why Latin America has lagged behind, some of which date back to the region’s colonial origins.

The first is geography. Over 70 percent of Latin America is in the tropics, which makes everything more difficult. The region is more exposed to disease—malaria, yellow fever, dengue, cholera, and others—and it is far from key markets.

Second, Latin America was exposed to civil law tradition after independence, as opposed to common law. A common law system—where judges have a more active role—is more conducive to economic growth and development.

Third is large-scale agricultural plantations in Latin America. In the North, there was more mixed farming centered on grains and livestock, and smaller units, which led to more democratic political institutions, a more robust protection of property rights, and a larger middle class.

Fourth, the region’s institutional legacy is a part of the story too, where institutional arrangements in the South are weaker as opposed to the North.

And finally, ethno-linguistic and cultural fragmentation in Latin America, which goes back to the colonial periods, have also held back the region, although the influence of this factor is much less important than in Africa, for example.

Hmm… How these factors continue to impact the region..

 

Housefull Economics: Trapped in Scarcity

October 4, 2017

Here is my contribution to the highly entertaining Housefull Economics column in Pragati Magazine.

In the spirit of the column, I use the Rajkumar Rao starrer Trapped to explain the concept of scarcity. Hence the title of the post: Trapped in Scarcity.

I thank the editor Amit Varma for his useful inputs and edit help..

Lessons from the Old Masters on Assessing Equity and Efficiency: A Primer for Fiscal Policymakers

October 4, 2017

IMF Working paper by Vitor Gaspar,  Paolo Mauro and Tigran Poghosyan:

How can a society’s well-being be measured to include not only average incomes but also their distribution? How can the effects of policies be assessed by considering both equity and efficiency? This primer outlines the seminal contributions of influential economists of the past, including Arthur Okun, who developed a simple method to elicit people’s preferences regarding redistribution, and Anthony Atkinson, who showed how equity and efficiency can be measured simultaneously and summarized in a single, intuitive index expressed in monetary units (such as dollars). These methods are applied to recent data to gauge how countries fare when both mean incomes and their distribution are considered together, and to a hypothetical tax-and-transfer scheme assessed through a general equilibrium model for household-level data.

Should read this carefully..

Islam and Economic Performance: Historical and Contemporary Links

October 3, 2017

Timur Kuran of Duke Univ has a research paper  (HT: MR blog):

This essay critically evaluates the analytic literature concerned with causal connections between Islam and economic performance. It focuses on works since 1997, when this literature was last surveyed. Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance hardly affects Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law.

Weak property rights reinforced the private sector’s stagnation by driving capital out of commerce and into rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by restraining the development of civil society. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions, including slave-based armies, were particularly critical to the persistence of authoritarian patterns of governance. States have contributed themselves to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.

Hmm.. A very long paper (95 pages)..

Bitcoin vs Dollars: Which One is a Fraud? Which One is a Ponzi Scheme?

September 29, 2017

Mistalk blog reflects on Jamie Dimon calling Bitcoin a fraud:

Dimon’s statement on Bitcoin represents the irony of the year. Euros, dollars, etc. are precisely fabricated out of thin air.

That was not always the case for dollars. They were once exchangeable for gold. But euros right from the start were a complete fabrication.

The Eurozone problems we see today are a direct result of the fraudulent nature of Target2 guarantees on top of the fraudulent nature of the euro itself.

🙂 Even if thin air is not fully right, all these currencies are just based on government order. One can increase and decrease the currency at govt will and create mega monetary theories to justiify whatever they do: inflation target, Taylor rules and so on.

He says things like modern finance are a bigger fraud:

In an article that I wish I had written myself, Viktor Shvets, head of Macquarie’s AsiaPac equity strategy, accurately explains “Modern Finance”, Not Bitcoin, Is The Real Fraud.

If one describes Bitcoin as a fraud, how would one describe a ‘financial cloud’ that is at least 4x-5x larger than the underlying economies? It is unlikely that US$400 trillion+ of financial instruments circulating around the world would ever be repaid and most are now backed by assets that are already either worthless or are diminishing in value. How does one describe rates and the yield curve that are either directly determined by Central Banks (BoJ or PBoC) or heavily influenced by them (Fed or ECB)?

While we maintain that despite the presence of US$7.5 trillion of excess reserves (amongst G4+Swiss central banks), global deflationary pressures are so strong that break-out of inflationary pressures is unlikely. However, if public sectors continue to insist on suppressing business/capital market cycles, then some form of full credit market nationalization and/or currency debasement becomes inevitable.

Even fractional reserve lending:

If someone had a Yap Island stone and wanted to lend out three of them, that would not be possible. Nor can one have $100,000 worth of gold or Bitcoin and legally lend out $1,000,000 of it.

If someone tried to do so they would be convicted of fraud. Yet, via fractional reserve lending, banks can lend out money they do not have, and few think anything of it.

There are two distinct problems with fractional reserve lending as it exists today.

  1. Duration Mismatches
  2. Money Creation Out of Thin Air

CDs provide an easy to understand example duration mismatches. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. Bank can and do lend out such money for 20 years.

Historically, borrowing short and lending long caused numerous bank runs and financial crises. Note that there are no reserves on savings accounts. Banks can lend that money out while guaranteeing you availability. If everyone tried to get their money at once, the system would implode. We have seen numerous examples in Europe recently.

It is a pity that much of this so called modern finance tools have become so ingrained in our textbooks and thinking, that we hardly question them. Infact these are the most admired jobs and calling anything which challenges the status quo is called as fraud. But then those whose houses are made of glass should not throw stones at others..

 

Given the technology at hand, why don’t the equity markets move to a T+0 settlement cycle?

September 28, 2017

This blog pointed earlier to how US is moving to a T+2 settlement in equity markets whereas India had it more than a decade ago.

JP Koning asks why don’t we move to a T+0 settlement cycle given we have the technology now? He says there is a reason why these systems are slower. The idea is to settle and net transactions at the end of the day rather than immediate to avoid repitition:

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