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

Much of economics is a sham science…

December 12, 2016

Prof. Julie Nelson  slams much of economics as a sham:

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What do the Different Measures of GDP Tell Us?

December 9, 2016

Nice paper by Philip Cross of CD Howe Institute.

GDP is key to macroeconomics, yet different ways of defining and measuring GDP have particular purposes. This paper examines how total GDP can be conceptualized, dissected and studied and how these improve our analysis and understanding of the sources of economic growth. While each approach is useful, macroeconomic analysis is shifting from a short-term, recession-driven focus on managing aggregate demand to a long-term, supply-side perspective on the determinants of economic growth. This shift is likely to accelerate in the current environment of concerns about a “new normal” of slow growth, with the debate framed by supply determinants such as an aging labour force and whether technological innovations have been mostly exhausted. How one views GDP has important implications for policymaking.

If today’s chronic slow growth is due to deficiency of demand, stimulative fiscal policies might be the proper response, depending on a country’s fiscal capacity to take on more debt. However, if the shortfall in growth is due to a lack of productivity growth, different policies might be appropriate that increase the efficiency of resource use or the rate of innovation. The point is that a more detailed understanding of each measure of GDP leads to better comprehension of why it behaves in a particular way in response to different economic circumstances. This knowledge will allow policymakers to make more informed decisions.

The author reviews each of the different ways of looking at GDP and how they evolved in response to the needs of analysts. He summarizes the strengths and weaknesses of each and what can be learned by contrasting and combining them in analysis. In order the six are:

• GDP by industry;
• GDP by expenditure;
• GDP by income;
• The quantity equation;
• GDP by input/output; and
• GDP by factor input.

For economists, the different optics for viewing economic activity lead to a more profound understanding of the process of economic growth. Good analysis and policy prescription often depend on finding the right optic to understand a particular problem.

It is always good to get back to basics:

Why President (elect) Trump needs to make girly jobs appeal to manly men..

December 8, 2016

Nice piece by Prof Betsey Stevenson.

She says Trump has got American men to revive old memories of working in the industry and with big machines etc. However, times have changed and these jobs just don’t exist:

Donald Trump wants America to make things. On the campaign trail, he promised to bring iPhone assembly to the U.S. More recently, he has threatened to retaliate against any company that moves jobs offshore. If he really wants to help his supporters, though, he should think twice about what kinds of jobs to promote.

…..Problem is, the new jobs are in occupations held disproportionately by women. As of 2015, men held just 23 percent of private-sector jobs in education and health services, compared with 73 percent in manufacturing. Lower-skilled men don’t seem to want service jobs. As the goods sector has declined, so has the labor-force participation of men without a college degree. Today only 83 percent of prime-age men with a high school degree or less are employed or actively seeking work. In 1964, 97 percent were.

Those who have adapted by seeking more education have done well. The unemployment rate of college graduates is a mere 2.3 percent, and 94 percent of college-educated prime age men are in the labor force. They also earn a lot more: The difference between the wages of college and high school graduates has never been larger.

Policy wonks like me have wondered why more lower-skilled men aren’t adapting. Why don’t they take care of their children when they are out of work? Why don’t they take jobs as home health aides? Or sign up for degrees in nursing? One problem is that these occupations conflict with traditional notions of masculinity. They require sitting, caring and communicating, as opposed to working with big machines.

Trump represents a vision of masculinity that those who embrace the modern economy have readily abandoned.

So his task is to make so called girly jobs appeal to manly men:

By encouraging men to cling to work that isn’t coming back, Trump is doing them a disservice. The more important and difficult task is figuring out how to change the culture in ways that will allow them to do the jobs of the future. In other words, if Trump really wants to get more Americans working, he’ll have to do something out of his comfort zone: make girly jobs appeal to manly men.

Hmm..

Impact of Demonetisation on Kerala’s financial institutions…

December 8, 2016

Kerala has a intriguing financial history of its own. The region has a long history of trade (rice and spices) and this has led its economy to be monetised much before we understood the term. This monetisation has led to the region looking for ways to mobilise and channelise finances. Thus, the region has been home to the oldest form of financial intermediation – chit funds. The chit funds soon spread across the region.

As joint stock banks became popular, some of the chit funds evolved to large number of small community driven banks. Most of these banks were forced to close following failure of Palai Central Bank in 1960. There were some 100 plus banks in the State in 1959 which declined to 7 odd by the time of bank nationalisation in 1969.  The region also had a prominent State sponsored Bank of Travancore which was made part of SBI group. Then there are cooperatives which are spread across the State. The State historically has the lowest number of people per branch which (I think) continues till date.

So, impact of demonetisation can also be seen from its impact on various financial institutions in Kerala.

K Rajendran of Wire has a piece:

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This map shows how much each country spends on food

December 8, 2016

Alex Gray has a nice map and post on the food expendture trends around the world:

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How ancient wisdom can help us adapt to climate change

December 7, 2016

Coco Liu, an award-winning journalist who writes frequently about energy and climate change.

Here is a nice post from Liu on going back to ancient wisdom for managing the climate risks:

Extreme weather has become the norm across the globe, in large part thanks to climate change, and it’s playing havoc with farmers and ranchers who depend on predictable weather to grow our food. But while some growers are turning to new technology to adapt to this strange new weather, some farmers are looking backward, exploring old ideas that once worked and might again. As Keith Alverson, an expert at the United Nations Environment Programme, explains, there’s probably no “silver bullet that would solve everything,” but it’s important to look both forward and backward to develop a wide set of tools as we adapt. Below are four examples of old ideas — some going back 2,400 years — that are finding new relevance in the 21st century.

Rediscover ancient grains. Floods are a part of life in the Mekong Delta in Vietnam. But now they’re occurring with greater frequency and intensity, swamping and destroying rice and other essential crops. The conventional approach to floods has been to build dykes around rice paddies; instead, Nguyen Van Kien wants to remove such barriers altogether. Nguyen, a postdoctoral research fellow at the Australian National University, has been showing farmers in his country how to work with floods by planting a local rice variety called “floating rice.” It was widely grown in the region for years until it was replaced in the 20th century by high-yield rice (which produces four times the output).

“Floating rice is well adapted to floods,” Nguyen says. When heavy rains come, the plants grow at an accelerated rate so their foliage always remains above water — they can reach up to six meters (20 feet) in height. And since floodwaters can safely fill floating-rice paddies rather than swelling the river, the cities and villages downstream escape being submerged. “When we first reintroduced floating rice to the village of  Vinh Phuoc in 2013, nearby farmers wanted us to teach them as well,” Nguyen says. His team is running a pilot program in two provinces in the Mekong Delta, and they plan to launch field work in Cambodia and Myanmar next year.

There are other ancient techniques as well like using ducks instead of pesticides for managing insects etc.

Fascinating to read about lost ancient wisdom..

Was Volcker disinflation actually Burns disinflation?

December 6, 2016

The hype of any policy usually has its precedents elsewhere.

This is a terrific paper by Thomas A. Lubik, Christian Matthes and Tim Sablik. They say that disinflation in 1980s was not due to Paul Volcker but started in previous tenure of Arthur Burns:

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Globalization is a recent term, but internationalization of markets, people, ideas, and cultures is nothing new

December 6, 2016

Nice essay by Prof Harold James of Princeton Univ. on globalisation. 

He says the idea of international markets is really old.

Globalization triggers odd responses. Although almost everyone who thinks about it today agrees that a revolt against globalization is underway, many consider the fundamental process both inevitable and irreversible.

Is that true? A look back through history helps us understand the dynamics of revolts against globalization—the movement of money, goods, people, ideas, technologies, and cultures across frontiers.

The term globalization—in its modern meaning—was coined in the 1970s to describe the internationalization of markets, especially financial ones, after the oil price increases of the decade, but it reflects a much older reality. The recent period of globalization that seemed ascendant, at least until the global financial crisis, is but one of many such periods—and reversals—that dot human history.

The global financial crisis taught us that it is misleading—and dangerous—to rely on the analysis of economic “trends” derived simply by extrapolating a short data period. We don’t know how unusual or exceptional those data are. We’re also not aware of the complex nature of global interconnection. The shock of the unexpected crisis thus produced a new interest in looking at patterns derived from much longer time periods. Those older and longer patterns can highlight vulnerabilities that help us discover how we should adjust the institutional framework to make globalization more stable, less dangerous—and more just.

Why does globalisation reverse? He cites four factors – rise of protectionism, financial crisis, financial crisis leading to rethink over international monetary system and wars.

What are the lessons from glob?

At each stage in the globalization cycle, we tend to extrapolate from current developments and to think that this particular phase will last forever—whether it is the confident upswing or the stagnation and anger of the downward movement. A break in the upward trend then produces profound disorientation and disillusion.

In the aftermath of the recent global financial crisis, a logic similar to that of a century ago drove German and American bankers not only to want to reform their financial institutions, but to think about a new financial and economic shape for the world. The United States, although the original epicenter of the 2007–08 financial crisis, pulled through better than other advanced industrial areas because of the depth and sophistication of its financial system. The experience has prompted broad discussion in Europe and Asia of ways to emulate the sophistication and robustness of the American system, just as Germans and Americans sought to learn from the model of the city of London and the Bank of England after 1907.

As was true a century ago, different parts of the world focus on various lessons taught by instability. For Chinese policymakers, the central focus is on giving their country a much greater role in trade finance, with a rapidly increasing proportion of foreign trade denominated in renminbi. The Chinese are reproducing their version of the American debate at the turn of the last century about the use of New York rather than London trade acceptances.

One lesson for Europeans is the need for a more secure asset and a better market for government bonds, which would involve moving to a standardized European security that resembles the U.S. Treasury bill. This is the equivalent of the German discussion of a hundred years ago in the wake of 1907. Many European economists, as well as outsiders, see the virtue of the early American experience, when founding father Alexander Hamilton built the new republic around a consolidated national debt. But a standardized security demands internal political and constitutional changes in the European Union that may be difficult to contemplate—just as full development of Germany’s debt market in the early 20th century would have ultimately required much more extensive constitutionalization.

Nice bit..

Liquidity in government bonds – differences in sovereigns and colonies

December 2, 2016

This is a superb paper which looks at bond markets in colonies and sovereigns:

In a recent paper, we study the pricing of government debt in a setup that provides both insightful institutional parallels, and an empirically much friendlier environment (Chavaz and Flandreau 2015). During what some economists call the ‘first globalisation’ era (1870-1914), 68 countries raised funds in sterling on the London Stock Exchange (LSE). With good reason: London was home to the most astute sovereign underwriters, and an ample supply of capital. Countries on the gold standard would not have to worry about exchange rate risk when they borrowed in sterling. The London market had many liquid instruments. Among them, the British government’s quasi-perpetual ‘Consol’ reigned over the largest and most liquid secondary bond market worldwide.

One unique feature of the London government bond market of the time was that it was split roughly equally between truly sovereign countries – like Argentina or Greece – and colonies of the British Empire, such as Canada or Jamaica. As with pre-crisis Eurozone members, the fiscal sovereignty of colonies at that time is best described as ambiguous. By law, colonies ran their own budget with either a quasi-full autonomy (in the case of self-governing dominions such as Canada and the Australian colonies), or a limited one (for Crown Colonies such as Jamaica). In reality there was a widely-held perception that London would prevent default, maybe by doing ‘whatever it takes’. Bond prospectuses never explicitly stated this as policy but, as British parliamentarian (and future prime minister) Benjamin Disraeli emphasised after the 1857 Sepoy mutiny in India, it would be very difficult not to bail out, in some way, a colony that threatened to default.

The consequence at the time it was that credit risk was hardly priced for colonies. This was later confirmed by econometricians (Accominotti et al. 2011). Despite this, colonial spreads over the British Consol averaged about 1%, or 100 basis points. They also varied substantially across time, and between colonies.

When investigating liquidity, a convenient feature of LSE quotations is that they provided precise information on the range in which transactions were expected to take place for any given security – not a true bid-ask spread, but a kind of measure of liquidity. We discovered that this range is a solid proxy for measuring bid-ask spreads at that time.

Hmm..

The results just show this as well. Colonies did not face credit risk but faced illiquidity risk:

Our conclusion – backed by institutional analysis, historical evidence and econometric tests – is that colonies’ semi-sovereignty significantly decreased the severity of information asymmetries between issuers and primary market investors, and among secondary market investors. In turn, this resulted in two paradoxes of semi-sovereignty.

  • Because of different information asymmetries, the two foreign debt markets (sovereigns and colonies) were characterised by different underwriting technologies. Sovereigns typically tried to buy the services of prestigious merchant banks to circumvent the pre-commitment problem inherent to sovereign borrowing (Flandreau and Flores 2009). Deep-pocketed bankers not only lent prestige at issuance, but also stood ready to promote liquidity in the secondary market. Given the absence of severe information asymmetries for investment in the colonies, this was a much less attractive business in the case of colonial debts, and merchant banks soon disappeared from colonial issuances. Instead, colonies used a variety of unusual intermediaries such as second-tier commercial banks or broker-underwriters, both with little means or interest in promoting liquidity. This is the first paradox of semi-sovereignty: it lowered credit risk, but at the price of higher illiquidity risk.
  • For related reasons, the two markets had different clienteles. The absence of asymmetries of information made colonial bonds a natural habitat for those in search of securities free from adverse selection, like insurance companies, commercial banks, and uninformed rentiers who were seeking to cash in coupon payments. This is the second paradox of semi-sovereignty: the lack of adverse selection further worsened bond liquidity by attracting investors that rarely traded.

The parallels between Eurozone and colonial bonds are important. They suggest that the pricing of liquidity and credit in government bond markets may be ‘always and everywhere an institutional phenomenon’. Our historical evidence suggests that investigating the microstructures of sovereign debt markets – their logic, operation, and segmentation – might help in interpreting bond price movements. For policymakers, our research may provide an encouragement to investigate which institutional features can explain the survival of the British imperial architecture, while that of Eurozone was deemed fragile enough to allow destructive liquidity-credit feedback loops.

Fascinating…

 

Why it is important to define money correctly..

December 2, 2016

An interesting and timely piece by Frank Shostak.

He says currently we are trying to take out new measures for money just to fit their correlation with economic indicators. This is no way to define money:

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Global war on cash: Switzerland bucks the global trend by maintaining a cash tradition

December 1, 2016

Anti-cash movement is all official and moving at a rapid pace.  There are rumors that Euroland is attempting tax on ATMS.

But then some countries are managing to maintain their sanity and believe in cash tradition. If the country happens to be Switzerland, it is a big setback for the anti-cash movement.

The Swiss are rarely late. But a new series of bank notes has been in the making since 2010. The new Swiss franc notes are finally being released, starting with the 50-franc bill rolled out earlier this year.

This latest series of Swiss banknotes arrives as alternative forms of payment are gaining popularity worldwide and cash, particularly in high-denomination notes, is being closely monitored to prevent counterfeiting and crime.

In Switzerland, however, tradition trumps trend. Cash remains the preferred method of payment and is unlikely to lose that position anytime soon. In fact, banknote circulation has increased from a nominal value of 40 billion francs in circulation in 2007 to more than 65 billion in 2015.

“Despite rapid technological developments in the payments arena, cash has yet to be superseded; indeed, it is still a widely used and popular option in Switzerland,” said Swiss National Bank Chairman Thomas Jordan earlier this year.

A recent study by the Bank for International Settlements confirms this trend: the ratio of credit card payments to GDP in Switzerland is only 10 percent, compared with 25 percent in Sweden and 34 percent in the United Kingdom.

The thinking is more on design of the currency:

The Swiss may not be in a rush to change the way they use banknotes, but it’s a different story when it comes to designing them. The new series has moved away from depicting well-known Swiss personalities in favor of more nuanced and abstract concepts.

Under the theme of “the many facets of Switzerland,” each note displays a different concept from a Swiss perspective. “Each characteristic is communicated via an action, a Swiss location, and various graphic elements,” according to the central bank.

The 50-franc note, which previously portrayed Dada artist Sophie Taeuber-Arp (the only woman in the old series of eight notes), now uses wind as the key motif to symbolize the wealth of experiences Switzerland has to offer, represented by a dandelion and a globe on the front and a paraglider traversing the Alps on the back. Other notes will embody time, water, matter, and language.

The new banknotes also include tactile features to help visually impaired people distinguish between the different denominations.

While the final design of the next banknote in the series remains to be seen—the 20-franc note is scheduled for release in 2017—it is safe to say that Switzerland will continue doing some things differently so that other traditions can be preserved.

Interesting.

I don’t know but we get too badly carried away by technology hype. I am sure there will be serious unintended (and intended) consequences of this digital drive. What should have moved as a gradual process has been made way too disruptive.

Infact, one big question is what prevents the governments from banning/restricting digital payments in future?

India’s Demonetisation: Seigniorage and Cantillon Effects

November 30, 2016

Larry White and Shruti Rajagopalan have a superb piece highlighting the Cantillon effects of demonetisation.

The Cantillon effects are named after 18th Century economist Richard Cantillon. But then who reads history or cares for it. Under this, monetary policy transfers the purchasing power from those having old notes to those who get the new notes. This will lead to disproportionate rise in prices among different goods in an economy:

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Saving the world from econocracy…

November 28, 2016

Three students Joe Earle, Cahal Moran and Zach Ward-Perkins have written this book – The Econocracy. They say we need to save the world from too much of economic advice and frameworks.

Mark Buchanan of Bloomberg endorses the book:

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India’s 2016 Demonetisation: Quoting John Stuart Mill and lessons from Milton Friedman….

November 25, 2016

Milton Friedman’s one of the most famous and widely read papers is – The Role of Monetray Policy , American Economic Review, March 1967. Each time you read it, you learn something new.

In the paper, he quotes John Stuart Mill (page 12):

My own studies of monetary history have made me extremely sympathetic to the oft-quoted, much reviled, and as widely misunderstood, comment by John Stuart Mill.

“There cannot . .. ,” he wrote, “be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labour. It is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order” [7, p. 488].

True, money is only a machine, but it is an extraordinarily efficient machine. Without it, we could not have begun to attain the astounding growth in output and level of living we have experienced in the past two centuries-any more than we could have done so without those other marvelous machines that dot our countryside and enable us, for the most part, simply to do more efficiently what could be done without them at much greater cost in labor.

But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines. The Great Contraction is the most dramatic example but not the only one. Every other major contraction in this country has been either produced by monetary disorder or greatly exacerbated by monetary disorder. Every major inflation has been produced by monetary expansion-mostly to meet the overriding demands of war which have forced the creation of money to supplement explicit taxation.

The first and most important lesson that history teaches about what monetary policy can do-and it is a lesson of the most profound importance-is that monetary policy can prevent money itself from being a major source of economic disturbance……

The words are just so profound. They sum up monetary history and experiments across world and across time in very few words.

There is a reason why history of India’s demonetisation tells us the reluctance of Indian central bank of going ahead with the move. There is a reason very few central banks and countries have gone ahead with the move at the first place.

Infact, why go far in monetary history. Just see today’s world economy. Its major source of instability is the monetary policy conducted by central banks which has made money a major source of economic disturbance.

The anti-cash movement rising across world and its unrealised wide implications..

November 25, 2016

Joseph Salerno of Mises Institute has been warning us against the rising anti cash movement across the world.

In an earlier talk Salerno tells us how these are just attempts by the State to ensure you are always under their radar.

Governments, at least modern western governments, have always hated cash transactions. Cash is private, and cash is hard to tax. So politicians trump up phony reasons like drug trafficking and money laundering to win support for bad laws like the Bank Secrecy Act of 1970, which makes even small cash transactions potentially reportable to the Feds.

Today cash is under attack like never before. Ultra low interest rates are the norm for commercial bank accounts. In Europe, as the ECB ventures into negative nominal interest rates, certain banks threaten to charge customers for depositing cash. Meanwhile, certain European bonds now pay negative yields, effectively turning them into insurance products rather than financial assets. And some economists now call for the outright abolition of cash, which shows just how far some will go in their crazed belief that economic prosperity can be commanded by forcing us to spend rather than save.

The War on Cash is real, and it will intensify. Here to explain is Dr. Joe Salerno, who spoke on the subject at our recent Mises Circle event in Stamford, Connecticut.

In this piece, Ryan McMaken sums up the talk:

As Joseph Salerno has observed, the elimination of physical cash makes it easier for the state to keep track of private persons, and it assists central banks in efforts to punish saving and expand the money supply by implementing negative interest rate schemes. 

A third advantage of the elimination of physical cash would be to more easily control people and potential dissidents through the freezing of their bank accounts.

Joseph Salerno further points that post-India, there is a similar movement in Australia as well:

The global war on cash is remarkably well coordinated. Less than a week after the Indian government announced it was withdrawing its two highest denomination currency notes (equivalent to about $15.00 and $7.50, respectively) from circulation, the Anti-Cash Axis, which comprises a witch’s brew of national governments, establishment media outlets, international bureaucracies and, especially, gigantic multinational banks, has launched a concerted attack on Australia. Two days ago, Citibank announced that it was going cashless at some of its Australian bank branches.

Yesterday, Swiss giant UBS called for the elimination of the Australian $100 and $50 bills because it would be “good for the economy and good for the banks.” The Australian government in cahoots with the media prepared the way for these brazenly self-serving antics by two of the largest banks to have failed and been bailed our during the financial crisis. Back in February a leading Sydney newspaper published a series of articles, some authored by officials from Australia’s Treasury Department, suggesting that abolishing cash would “save billions” and that  “a cashless society is the next step for the Australian dollar.” 

I have a better proposal for our brothers and sisters Down Under: don’t acquiesce in the elimination of your cash; eliminate the banks by immediately reclaiming all your cash that is “on deposit” at these institutions that cannot exist without government guarantees and bailouts.  

What is interesting to see across are huge double standards across the globe. We are hardly seeing a natural evolution towards e-payments.

There is this supposed crony capitalism where these large banks/payment providers are using Governments to push people towards their products. Then these very large corporate/financial players along with these e-payment providers build a story that how these things are about development of markets and making them efficient!

Part of the blame is on economics education as well. Earlier history of money was known to most students. Now we hardly discuss about historic evolution of money and State’s deep interest and manipulation in the matters of money. The way we have moved from commodity money to fiat money and all fiat money declared as legal tender with very little State accountability is a fascinating tale untold. And now this jump towards plastic money which gives State powers to monitor you as well. What better?

It is shocking that earlier most economists would have raised questions on this State involvement in monetary matters. Now most are backing it!

The ocean transportation revolution in the North Atlantic during 1826 to 1914

November 24, 2016

Brandon Dupont and Thomas Weiss have an interesting paper telling you about history of many things:

 They basically build the data from advertised fares of passenger liners published in newspapers during those times:

We have therefore also made use of advertisements in a number of newspapers and magazines to construct a consistent long-term series on first cabin passenger fares from 1826 to 1914. This has proved to be an efficient method of collecting enough evidence on fares to be representative of the industry as a whole. The newspapers – a number of which are readily available online – reported ship movements, departure schedules, and contained shipping line advertisements of fares, often on a daily or nearly daily basis across the period. Compiling fares from standardised newspaper advertisements is more feasible than excavating heterogeneous data from the archives of multiple firms, and it also represents the price signals which passengers were likely to have considered when deciding to travel, even though it does not always measure how much was actually paid.

One limitation to the advertised fares is that they stopped appearing after 1896 for reasons that seem to be associated with the contemporaneous advancement of market-sharing and rate-setting by North Atlantic passenger shipping cartels or conferences. We were, however, able to extend the series up to 1914 using minimum fares established by the cartels. Although these cartel fares were not advertised in newspapers, they were public information, and were reported in news stories and in some shipping line brochures. These fares are those that would have been advertised, if the shipping lines had continued to include fare information in the ads they did run.

The evidence shows that fares declined over a period and then rose:

Since passenger volumes varied across shipping companies, we also constructed a weighted fares series using estimates of passenger volumes from a variety of sources including the New York Commissioner of Emigration, the New York Times and other newspapers, and, in later years, records of the Transatlantic Passenger Conferences. Both the weighted and unweighted fares are illustrated in Figure 1.

By 1870, the major UK lines were all providing at least weekly departures from New York, and the quality of travel was improving as well, with electric lighting and the first forms of refrigeration soon becoming standard. But as illustrated in Figure 1, first class travellers paid fares that were about 40% lower in 1890 than in 1870 even while there were considerable improvements in frequency of service, safety, and on-board amenities. The declining fares before 1890 contrasts noticeably with what took place in first class travel on the New York–UK corridor for the two and half decades after1890, during which first cabin fares increased while first cabin passenger traffic stagnated. This might reflect increased efforts to substantially improve travel amenities as suggested by Johnson and Huebner (1920), and made evident with Cunard’s launching of the Lusitania and Mauritania in 1907. Or it might have been more a matter of passenger lines using stronger cartel price support to collect some offsetting revenue – through fare increases – for the mild cost inflation incurred since the 1890s and for enhancements provided to passengers. What is consistent for both the decades before and the decades after the 1890s is the negative correlation of first cabin fares and passenger volumes, which was stronger than might be expected given that most pre-WWI first class transatlantic passengers were wealthy tourists not especially sensitive to the prices of tickets for the oceanic transit.

Many things are here. How people traveled, time taken, various passenger classes in ships and so on..

The Rebel Economist Who Blew Up Macroeconomics..Paul Romer

November 23, 2016

A nice profile of Paul Romer and his recent mission to blow up macroeconomics:

Paul Romer says he really hadn’t planned to trash macroeconomics as a math-obsessed pseudoscience. Or infuriate countless colleagues. It just sort of happened.

His intention actually had been to write a paper that would celebrate advances in the understanding of what drives economic growth. But when he sat down to write it in the months before taking over as the World Bank’s chief economist, Romer quickly found his heart wasn’t in it. The world economy wasn’t growing much anyway; and the math that many colleagues were using to model it seemed unrealistic. He watched a documentary about the Church of Scientology, and was struck by how groupthink can operate.

So, Romer said in an interview at the Bank’s Washington headquarters, “I just thought, OK, I’m going to say what I think. I don’t know if I’m the right person, but no one else is going to say it. So I said it.”

The upshot was “The Trouble With Macroeconomics,” a scathing critique that landed among Romer’s peers like a grenade. In a time of febrile politics, with anti-establishment revolts breaking out everywhere, faith in economists was already ebbing: They got blamed for failing to see the Great Recession coming and, later, to suggest effective remedies. Then, along came one of the leading practitioners of his generation, to say that the skeptics were onto something.

Econometrics and its consequences for human beings..

November 22, 2016

Marco Fioramanti and Robert Waldmann have a timely post cautioning on the huge usage of econometrics in policy. If one is not careful, then chances of being conned and taking bad policy decisions could be huge.

The post is technical and authors could have simplified the post for a better reading:

The basic idea is how different econometric models produce different results. They show analysis for Italy:

The difference in the structural balance calculated by the European Commission and the Italian authority can easily be produced by tweaking the second or third decimal point of variance bounds imposed on the stochastic processes driving the NAWRU. Do we really want these technical aspects of an estimation procedure – the uncertainty of which is huge and cannot be removed given the unobservability of the underlying phenomenon – to be the key element on which we base our decision on Italy’s fiscal strategy in a time when a still high unemployment rate and humanitarian emergencies require the support of government’s actions?

One should be very careful with usage of econometrics and even more while giving policy reccomendations based on the models. The assumptions and limitations should be clearly specified.

Many mistrust banks, but why you mistrust banks says a lot

November 15, 2016

Erica Vause, Assistant Professor of history at Florida Southern College writes on this dilemma on banking. Banks run on trust but remain on of the mistrusted organisations. Why is this so?

Since the early 19th century, banks have thrived, and are foundational to modern economic life. Yet the ambivalence surrounding them has not dissipated. Over the course of the 19th century, the ideal of the independent property-owner, upheld by the classical republicans, gradually faded. Instead, factory labour became the ideal form of ‘real’ value, beside which finance seemed dubious and fictional. The heroes of many 19th-century novels, such as Elizabeth Gaskell’s North and South (1855) and Anthony Trollope’s The Way We Live Now (1875), preferred the ‘real’ work done in factories to the ‘fictional’ and often dangerous fortunes to be reaped from financial speculation.

Viewed in light of this long history, present-day distrust of banks, so salient since 2008, appear less as novel reactions to our changing times than as the latest chapter in the long-running paradox of trust and credit. On a day-to-day basis, most of us trust banks well enough. We’d prefer to deposit our money in a bank account than, say, stuff it in a mattress. Yet no single capitalist institution compares with the bank in terms of the sheer amount of unease and antipathy it engenders. Polls show that a mere 18 per cent of Americans trusted banks in 2010. The 2015 Edelman Trust Barometer, a yearly survey of attitudes across 27 industrialised nations, indicated that, among major industries, only the media is less trusted than banking and finance.

Suspicion of banks today traverses the political spectrum. Different political viewpoints tend to linger on different aspects of the original critiques of the banks. The Left sees finance as integrally connected with a parasitic elite of largely idle profiteers. Much like the classical republicans of yesterday, they see banks as guilty of fabricating fictitious value and avoiding ‘real’ work. The Right portrays banking as a threat to personal or national sovereignty. They evoke the classical republicans’ anxiety about banking and despotism. In the United States, for example, conservative commentators such as Glenn Beck and Ron Paul have not only charged the Federal Reserve with causing inflations and depressions, but denounced it as an instrument of tyranny. Outside mainstream discourse, conspiracy theories about the banks are often tinged with anti-Semitism. Try searching for ‘banking’ on YouTube. In these conspiracy theories, rumours such as the one about the Rothschilds and Waterloo thrive.

No institution more clearly relies on trust than the bank. That is precisely what makes banks a lightning rod for suspicion. From the time modern banking emerged, it has been the subject of intense misgivings. Many of these suspicions are with us still. How and why one mistrusts banks, however, tells us a lot about the way one sees the world politically.

This is all very interesting aspects of banking and finance.

Given what is going on in India at the moment, it is not difficult to see rise in mistrust in banks.  Earlier they impacted lives of the big and mighty, now they impact life of one and all.

The history of student loans goes back to the Middle Ages

November 10, 2016

Superb piece by Jenny Adams, Associate Professor of English at University of Massachusetts Amherst.

He points how people could take student loans bu givings books as collateral:

Prompted by my own anxiety about educational debt, an anxiety that intensified several years ago with the birth of my own prospective college students, I have been researching the long history of educational loans in order to get a better context for the current student debt crisis. With student loan growth rates spiraling out of control, it behooves us to think through the ways other time periods and cultures have monetized, funded or not funded student labor. 

The history of student loans starts with the establishment of institutions of higher learning in medieval Europe from the late 11th century.

The University of Bologna, considered the first official university, was quickly followed by the University of Paris, Oxford University and Cambridge University. All of these places offered degrees to young men, training them for positions in the Catholic Church and, later, in government.

At first, scholars who needed money did not differ from other borrowers: everyone took loans from the same lenders. But in 1240, Robert Grosseteste, the bishop of Lincoln, used Oxford University money to launch the first documented student loan system. He named it St. Frideswide’s Chest.

St. Frideswide’s Chest was literally a chest. Bound by two different locks, with each key held by a different college magister, or faculty member, it resided at St. Frideswide’s Priory, a religious house in central Oxford, amid the city’s colleges, academic halls and student apartments.

To get a loan from St. Frideswide’s, a borrower had to be a scholar of modest means – and likely took an oath for proving so. He also had to have something of value to deposit in the chest as collateral. From the pledge notes I’ve seen in roughly 100 manuscripts and descriptions of manuscripts, it’s clear that scholars hocked everything from silver spoons to gold plates.

But the most commonly collateralized items were books. Not fancy, illuminated books. Just textbooks. In the late Middle Ages, this included works by Aristotle, the Bible, law codes and medical tracts. Here’s a link to a manuscript at Balliol College that was used as collateral. The lines on the final page record two loans taken out by a scholar, Thomas Chace, in 1423 and 1424. The Merton College manuscript (pictured) contains eight pledge notes from the same century.

Then advent of printing machine made books cheaper and books no more worked as collateral.

Overtime loans were given on future incomes and not collaterals:

Yet even before this, the loan system had started to decline. Although the arrival of the printing press in the late 15th century didn’t have an immediate effect on manuscript production, it would eventually make books cheap and thus no longer worth collateralizing. Even in the chests’ final century of use, the use of gold plate and jewelry was increasing and by 1500 had surpassed the use of books.

Around the same time, bankers began to make loans on the premise of future returns rather than in exchange for real property. The shift toward anticipated future earnings soon came with the England’s 1624 legalization of interest-bearing loans, which pushed even more people into this model of lending.

With their loan chests gone, students again became just like other borrowers. And just like other borrowers, they, too, could end up the notorious debtors’ prisons that began to swell with inmates as early as the 17th century.

Student loans arrived in the United States in the mid-19th century. Like the medieval loan chests at Oxford, these loans started through a singular university, in this case Harvard, which administered them.  This localized system changed in the mid-20th century with the creation by the Department of Education in 1965 of federally guaranteed student loans made by private lenders and available to students across the country.

Students were once again put into a special category. But in this case, this meant they could now collateralize their estimated future incomes (without even knowing what those incomes might be) in order to obtain a degree.

No one is suggesting to go back to middle ages. But we should think why educ has become so expensive? Moreover educ is jeopardizing the very future it is expected to brighten:

I would never advocate a return to the Middle Ages. Yet as we consider the current morass of educational debt, we need to think harder about historical precedent.

True, medieval universities excluded many groups – religious minorities, feudal villeins (a commoner legally tied to a feudal lord in the Middle Ages) and women were barred from entry. Yet poor young men with talent had a chance. Fees were not high. Patrons helped out. And if one needed money, one might be able to pledge a book – not a future.

Fascinating.

India was once the hub of education for not just scholars in India but outside as well. How were students financed back then? I am sure some form of student loan existed even back then. It could be pretty thriving one as well..