Archive for the ‘Economist’ Category

Ricardian equivalence and Fisher effect are actually misnomers..

March 28, 2016

This is a very important post  by Thorvaldur Gylfason, Helgi Tomasson and Gylfi Zoega. It is another strong reminder of what omitting history of economic thought has done to economics students. We are just being made to use certain terms without knowing whether they are actually true. Quite a few economics terms/relationships are actually weak when tested empirically. So, one should always be careful while stating them as some theory or facts which we often do.

The authors point to two such highly popular terms used by both econs and wannabe econs across the world- Ricardian equivalence and Fisher effect. In both these, even the authors on whom they are named had cautioned on the relationship. But, over time like we see in game of Chinese  whispers, these ideas have become distorted. The weak relationships showed by these two have become a matter of fact leading to all kinds of wrong policies:

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Modern misuses of Adam Smith with Laissez-Faire economics

March 23, 2016

Most of today’s economics students are victims of scrapping history of economic thought from our courses. Whatever little we know is just  picked from here and there. This just leads to incomplete and unbaked information which is even more dangerous as much of it is misconceptions.

Jag Bhalla has a reminder on associating Adam Smith with just Laissez-Faire economics. I mean this aspect is now much more of standard knowledge that Adam Smith was hardly just a free market enthusiast. He was more of a moral philosopher than really an economist. But then we continue to err and think Smith to be a Laissez-Faire economics man.

Bhalla points to a whole list of links where he points to these modern misuses..

Against public policy and why nobody should be making policies for your life…

March 22, 2016

Jeff Deist has a post on why we should be skeptical of public policy.

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Lies, damn lies, and European growth statistics

March 18, 2016

Yanis Varoufakis, a former finance minister of Greece writes on how the recent stats showing growth in Europe are all wrong.

What he shows is how people are getting even elementary macro wrong. There is confusion between nominal and real growth. In times of inflation, one looks at real growth but in times of deflation, one should look at nominal growth:

“Greece has at last returned to economic growth.” That was the official European Union storyline at the end of 2014. Alas, Greek voters, unimpressed by this rejoicing, ousted the incumbent government and, in January 2015, voted for a new administration in which I served as finance minister.

Last week, similarly celebratory reports emanated from Brussels heralding the “return to growth” in Cyprus, and contrasting this piece of “good” news to Greece’s “return to recession.” The message from the troika of European bailout lenders – the European Commission, the European Central Bank, and the International Monetary Fund – is loud and clear: “Do as we say, like Cyprus has done, and you will recover. Resist our policies, by electing people like Varoufakis, and you will suffer the consequences of further recession.”

This is a powerful story. Except that it is built on a disingenuous lie. Greece was not recovering in 2014, and Cyprus’s national income has not recovered yet. The EU’s claims to the contrary are based on an inappropriate focus on “real” national income, a metric bound to mislead during periods of falling prices.

If asked whether you are better off today compared to a year ago, you would answer in the affirmative if your money income (that is, its dollar, pound, euro, or yen value) rose during the previous 12 months. In the inflationary times of yore, you might have also accompanied your response with the (reasonable) complaint that increases in the cost of living eroded your increased money income.

To account for this gap between your money income and your capacity to buy things with it, economists focused on your purchasing power by adjusting your money income for average prices.

A country’s aggregate income is measured in a similar way. Economists begin by summing up everyone’s money incomes to derive nominal Gross Domestic Product – or, for the sake of simplicity, the country’s total money income (N). Then they adjust N for changes in average prices (P) by dividing N by P. This ratio is the country’s “real” income (R = N/P).

During inflationary times, the purpose of calculating the figure for real national income, R, was that it stopped us from becoming overexcited by reports that money income had increased substantially. For example, at a time when average prices were rising by, say, 8%, a 9% increase in money income translated into a mere 1% real growth rate in our capacity to buy stuff.

So, clearly, in inflationary times, the number for real national income, R, was the one to look at before rejoicing that the economy was growing. Only when R rose strongly did we have good cause to believe that economic activity was rising. But in periods of deflation (when prices are falling), like those encountered in Greece and in Cyprus today, R can be deeply misleading.

Well, anything can happen during these times..

Did Mr Ricardo consult Mrs Ricardo before coming out with the Ricardian equivalence idea?

March 9, 2016

Manasiecon blog is the go to blog on economics humor.

In her recent post on the International Women’s day, she takes a dig at the male dominated world of economic theories:

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If you are an economist working for a politician, don’t parade as an independent one..

March 9, 2016

It is such an irony really. One one hand, economists spend most of their time talking or training themselves about ills of government. But on the other, they just salvate on getting a position of government economic adviser/central banker etc. The power of being a government appointed economist suddenly catapults one to enormous fame. And if the person can build some image spin with the media, then one is assured of a position of a demi-god of sorts.

The run up to US Presidential elections is on. As expected, economists have jumped in the fray saying which Presidential candidate’s economic plan is superior to others. It is as chaotic as following the Presidential candidate debates.

Prof Laurence Kotlikoff has an apt warning for all such economists. They parade as economists but their advice is colored on the basis of the position of their political bosses or political favorites:

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What ails modern economics? Too much math and too little history..

February 22, 2016

Pramit Bhattacharya of Mint has this nice piece on state of modern economics. This word modern is problematic as it usually connotes anything modern is better than its past avatar. However, this may not be the case with most such modern things and surely not with modern economics.

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Blame the British for continued extensive state intervention in land and credit markets

February 15, 2016

Prof. Anand Swamy  of Williams College has a nice piece on knowing history.

We often lament that there is too much govt intervention in land and finance/credit markets. This is of course blamed on the government policies post independence. However, the intervention dates back to British:

It is usually thought that extensive State intervention in market transactions is a post-independence phenomenon in India. Such intervention is closely identified with import-substitution, which was a strategy to promote industrialisation. But as liberalisation has proceeded we are increasingly aware that the State also heavily intervenes in markets in land, and, relatedly, private (non-bank) credit. What are the roots of these interventions? Should these also be traced back to the days of Jawaharlal Nehru and Indira Gandhi? After all, wasn’t the British Raj largely laissez-faire 1? The short answer is No. Despite lip-service to laissez-faire, the British Raj intervened extensively in land markets, and particularly in the relationship between land and credit transactions. This goes back to the 19th century. Independence marked a break in policies pertaining to trade and industry, but on land and non-bank credit this is a story of continuity.
If we consider the land market in 1850 in (say) Bengal or the Bombay Deccan, there was little State intervention. The colonial State wanted its taxes and would seize the land if the owner did not pay. Barring this, owners were free to sell or mortgage their land. But this state of affairs did not last. When land is freely transferable, people will borrow against it. Some will default, and lose their land. Even when land has not been explicitly pledged as collateral, it may have to be sold to repay debt. This process is inevitable at least to some extent, and will occur in any market economy. But its social impact depends on the identities of borrowers and lenders. In a relatively rich region (say, much of Bengal), there was enough capital, so the lenders were local and long-standing members of agrarian society. If land went into their hands, this did not necessarily increase social tensions. However, in poor region (say, Bombay Deccan, or numerous tribal areas), many lenders were immigrants. They were often professional trader-lenders, with no connection to agriculture. When land was transferred to them on a significant scale, this led to social tension. In some instances violence broke out, as in the (tribal) Santhal areas in eastern India in 1855 or the Bombay Deccan in 1875. The colonial State then chose to intervene. They chose two main types of policies: regulating the moneylender; and directly banning land transfers.  
I would imagine this even predates British. A reading of political/economic history of most Indian kingdoms shows you that kings intervened excessively in both markets. Land was the real asset people had and finance/credit the pipeline to control the flows of money to people. SO keeping a tab on these two, and virtually all is managed and controlled by the empire..

When institutions are bad, how much do social networks really help?

February 11, 2016

Fascinating bit of research by trio of Ulrik Beck, Benedikte Bjerge, Marcel Fafchamps.

Ever since the seminal paper of Coase (1937), economists have known that transactions costs can hinder the efficiency of exchange. If transaction costs are present, some mutually beneficent transactions may not take place.

In developing countries, poor institutions mean that many such transactions are left on the table since transaction costs are too high. For example, property rights are often vaguely defined and contracts hard to enforce legally. Well-functioning institutions support well-functioning markets through low transaction costs. In these contexts, there is increasing evidence that households instead rely on their social networks. One example is how social ties play an important role in informal insurance schemes (Fafchamps and Lund 2003, Mazzocco and Saini 2012). In fact, the importance of social ties shows up in very diverse contexts where they can help to decrease transaction costs; other examples from the economics literature are in the selection of an international trading partner (Granovetter 1995, Topa 2001) and in labour markets where seeking and getting a job is affected by social networks (Rauch 2001, Chaney 2014).

There are good reasons to think that social networks can also reduce barriers to the exchange of production factors. Social connections can increase trust between individuals and important information can be exchanged. Social ties can also reduce the risk of violation of agreements, since the violator risks losing not only the contract but also the social connection. These are some of the ways in which social ties are thought to lower transaction costs. However, the extent to which social ties can offset the negative impacts of high transaction costs for exchange of production factors is an open research question. Earlier papers provide indirect evidence that this may be the case (Sadoulet et al. 1997, Holden and Ghebru 2005, Macours et al. 2010).

So what does their analysis show? Do networks help? Somewhat…

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A tale of Chilean social security system and how Lewinsky prevented reform of the same in US….

February 5, 2016

José Piñera was Chile’s secretary of Labor and Social Security and architect of the country’s successful reform of its pension system (now at Cato).

In this speech, he speaks on how the social security system was revamped in Chile but failed in US (due to the famous Clinton-Lewinsky scandal):

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How Milton Friedman and Anna Schwartz became monetarists?

February 4, 2016

A superb paper by George S. Tavlas of Bank of Greece. Far more useful than several of those macro/monetary policy papers.

He tracks what led the Friedman/Schwartz duo to become monetarists. Friedman actually favored use of fiscal policy for stabilisation till 1940s. Then in the 1950s role of monetary factors started to make sense. There was also a huge role played by a FDIC economist Clark Warburton who has of course been forgotten. In many ways, Friedman’s core ideas came from Warburton:

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Greek Business confidence decline in 2015: Varoufakis effect or Troika effect?

January 28, 2016

Yanis Varoufakis, the former and regular blog writing finance minister of Greece defends himself in this piece.

In his end-of-2015 missive, Holger Schmieding of the Hamburg investment bank Berenberg warned his firm’s clients that what they should be worrying about now is political risk. To illustrate, he posted the diagram below, showing how business confidence collapsed in Greece during the late spring of 2015, and picked up again only after my resignation from the finance ministry. Schmieding chose to call this the “Varoufakis effect.”

There is no doubt that investors should be worried – very worried – about political risk nowadays, including the capacity of politicians and bureaucrats to do untold damage to an economy. But they must also be wary of analysts who are either incapable of, or uninterested in, distinguishing between causality and correlation, and between insolvency and illiquidity. In other words, they must be wary of analysts like Schmieding.

Business confidence in Greece did indeed plummet a few months after I became Finance Minister. And it did pick up a month after my resignation. The correlation is palpable. But is the causality?

It was actually the Troika effect:

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How temple cuisine helped enrich Indian food culture?

January 18, 2016

Madhulika Dash has a nice food for thought piece in Swarajya.

She says it is interesting how temples have enriched our cuisines:

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Money, banking, and monetary policy from the formation of the Federal Reserve until today..

January 13, 2016

A nice paper which sums up quite a bit of US monetary history since formation of the Fed. It is written by monetary historians Robert Hetzel and Gary Richardson.

The United States Congress created the Federal Reserve System in 1913. The System consists of the Federal Reserve Board in Washington, D.C.; 12 Federal Reserve Banks; and thousands of member commercial banks. This entry describes the evolution of the System and of monetary policy from its foundation through 2013.

 

Where’s the inflation in developed world?

January 13, 2016

This question is actually posed to BIS’s Mr Hyun Song Shin. The interview reminds you of this post on death of economics. I mean such is the chaos in thinking and explanation. No one has a clue really.

He says based on the traditional economic story we should have had some inflation. But we don’t:

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Why is there no creative destruction in economic ideas and economists’ ranking?

January 5, 2016

Federico Fubini (a financial columnist) hits out at the murky world of economists (read economists based at US Ivy league).

He starts with this idea that say you sleep in 2006 and wake up in 2016, you see a very different world. Based on how much economic world has changed, one would imagine status of economists changing as well. But nothing happens here. People who called shots in 2006 remain as powerful in 2016 as well:

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History of US debt limits..

December 30, 2015

An insightful interview of Prof Thomas Sargent. He recently discussed his new paper on US debt limits at one of the IMF lectures.

In the interview, he further distils the lessons:

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Finally, Fednesday is over..what next?

December 17, 2015

I remember writing on Fed exit policy way back in 2009-10. Fed chair Bernanke had listed several ways for the exit way ahead of its time. It has taken nearly five years for atleast some type of exit to happen. And even now one does not know how far the exit will go.

So, finally it raised policy rates by 25 bps to 0.50% on what is nicely called as a Fednesday. WSJ discusses the day and here are reaction of the priests..

Liberal arts macroeconomists are becoming an endangered species

December 9, 2015

Liberal arts macroeconomists? What the hell is that?

David Colander one of the few economists who is really worried about the decline of quality in economics teaching, has a piece here.

He says there are not enough people who can teach macro at undergrad level. At undergrad level, one needs people who can connect the various dots and generate interest in aggregate econ issues. The macro at grad level is the specialist DSGE type which remains the focus for most macro people:

Liberal arts macro professors have not always been endangered. Thirty or forty years ago, standard macro theory blended pedagogical, methodological, and historical issues into macro theory, making macroeconomics more undergraduate professor research friendly. Then standard macroeconomic theoretical research was based on IS/LM analysis, as was pedagogy. Standard macro econometric research still included activities such as estimating consumption functions and money demand functions — activities that one could have an honors students do. Undergraduate macro professors could be active participants in the standard macroeconomic theoretical and policy debates.

That has changed. Standard macro is now dynamic stochastic general equilibrium (DSGE) analysis. Theoretical and applied macro econometric research has become so technical and specialized that it is beyond what can reasonably teach in an undergraduate liberal arts school. For macroeconomic theory, this is a gain; macro theory is beginning to come to grips with the complexity of the macro economy. But it is not a gain for undergraduate teaching of macro.

The problem is exacerbated by the fact that graduate training in macro is not designed to prepare graduate students to become undergraduate professors of economics who combine both research and undergraduate teaching. Graduate economics training in macro is designed to prepare students for full-time research positions at a graduate university or a Central Bank. The result is a very small pool of highly qualified macro-research-focused candidates from standard programs whose goal is to teach macro at a liberal arts school. While the pool is small, it is not zero. There are always a few graduate students who want to teach at a liberal arts program where they can integrate undergraduate liberal arts teaching with their research. So they accept jobs at liberal arts schools. Unfortunately few of them survive to tenure.

Given how much messed up so called modern macro is, one should atleast appreciate and encourage liberal arts macro. Even that is not happening.

Differing IMF forecasts of Gross Planet Product..

December 8, 2015

Well, I didn’t know there is an economic term like Gross Planet Product.

Prof. Peter A.G. van Bergeijk of Erasmus University brings this term in this article. Basically, it is GDP of the entire world. Prof. says that there is a difference in GPP at current prices and GPP at constant prices + inflation. The first one shows a decline and latter shows a rise!:

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