What the invention of the sewing machine tells us about automation, innovation, and jobs

August 17, 2016

James Pethokoukis of American Enterprise Institute points to benefits of sewing machine. It is true it helped lower the drudgery but it also unexpectedly led to the readymade garment revolution.

This is hardly something which the young generation will understand. Earlier, we were so much dependent on tailors but now it is a profession which has almost disappeared..

Designing a behaviourally informed banking market

August 17, 2016

BIT  blog has a post on the topic:

Last week the Competition and Markets Authority (CMA) published the final report of their retail banking market investigation. The CMA has identified that currently, only a tiny proportion of customers switch to a different bank in any year; despite the fact that many of them could save about £90 a year by switching. A quarter of people in the UK use an unauthorised overdraft each year, suggesting they do not have the best account for them: this earns the banks £1.2 billion a year from unauthorised overdraft charges.

The report proposed three foundation measures as the basis for their package of remedies. All three foundation measures have strong behavioural aspects:

  1. Requiring banks to implement Open Banking to help consumers share their data securely with other banks and third parties. This will help make it easier for consumers to shop around and compare banking products (making it easy).
  2. Requiring banks to prominently display a number of core indicators of service quality, including whether a personal customer or small business is willing to recommend their bank to friends, family and colleagues (making it attractive).
  3. Introducing routine and occasional prompts for personal and business customers to encourage them to consider their current banking arrangements and shop around for alternative banking services (making it timely).

Those of you who have read our recent report on applying behavioural insights to regulated markets will recognise that these remedies strongly echo the principles set down in that paper: we will now set out their behavioural underpinning in a bit more detail.

The post goes on to explain all the three making it easy. making it attractive and making it timely..

Adding “realism and a degree of modesty” to monetary policy framework?

August 16, 2016

Reserve Bank of Australia chief Glenn Stevens in a speech says:

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How to make GST a success by nudging people to go for pucca bills…

August 16, 2016

All kinds of ideas are emerging on how to make GST a success. Right from prescribing the right revenue neutral rate (why use such a complicated term) to state participation, all is being written and discussed.

Dhirendra Kumar of Value Research gets to the basics and looks at this issue of people preferring kaccha bills (fake) over pucca bills (authentic) to avoid taxes. After all, much of GST is around this idea of paying only value added tax across goods and services. This will require proper billing across the cycle for the tax to work.

How will the government ensure people will suddenly switch to a proper billing system and pay taxes? He points to this interesting solution – Taiwan Uniform Invoice Lottery:

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Why do economists fail? (EPW 1949 edition)

August 16, 2016

EPW has a piece from its archives (06 Aug, 1949) which remains relevant till date. Though, things have moved in terms of availability of data (lack of which leads to failure) etc but still we need a lot more as shocks keep coming from all kinds of sources.

 

Subramaniam vs Subramanian: Has profit taken precedence over people?

August 16, 2016

Saurabh Chandra former secretary, Ministry of Petroleum and Natural Gas goes beyond the sensational tweet two months ago.

He says there is a longtime strategy of US medicine companies to undermine efforts to make medicines cheaper in India:

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How Central banks moved from fiscal dominance to financial dominance..

August 16, 2016

Daniela Gabor of University of the West of England has a nice paper on political economy of repo markets.

The summary of the paper is here. She explains how we move from one crisis to another in macro/monetary policy. Emergence of Repo was seen as an end to fiscal dominance. But it triggered a new problem of financial dominance:

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Using prospect theory to figure today’s monetary policy and its impact on markets..

August 12, 2016

Prof Jayant Varma of IIM Ahmedabad has a nice post which gets to the crux of the negative interest rate issue.

He says as bonds have negative rates, the concept of yield/coupon etc is lost. So, investors are looking at bonds in terms of prices alone just like stocks. Whereas, investors are looking at stocks as bonds as they give dividends. So bonds are the new equities and equities are the new bonds.

This is like the prospect theory applying in monetary policy as risk averse bond investors are seeking risks in wake of losses:

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Making DSGE models less imperialistic

August 12, 2016

Mainlymacro blog has a post on DSGE models. He points to a recent short paper from Blanchard who questions the hype and imperialism of DSGE models. Blanchard has become really critical of current macro models which is kind of ironical. After all these are the econs who have made these ideas so popular and imperialistic.

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Figuring origins of our food and globalization in our food supply

August 12, 2016

This is a superb piece based on this research.

The authors track where most of our foods come from and how much of our food supply is globalised. On an average in most countries around 70% of food come from elsewhere. There are images and maps to figure all this interesting bit:

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What played a bigger role in selecting the 12 Regional Feds? Economics or Politics?

August 12, 2016

Three posts in St Louis Fed Blog look at the question.

There was a Regional Bank Organisation Committee which tried to ensure the selection is as much on economics:

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Building a balance sheet of a sandwich seller and then lending him a loan..

August 11, 2016

This is a superb tale from Kshama Fernandes of IFMR.

She narrates how an IFMR executive built a balance sheet of a sandwich seller and gave him a loan:

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Booking pandits online for Hindu rituals…

August 11, 2016

It is all happening. Just sit anywhere in the world and let the pandit in another part of the world conduct your hindu rituals..

 

1984: The year the Olympics were mostly privatized

August 11, 2016

Didn’t know this at all. Olympics in LA were mostly through private efforts:

 

Put off by the financial setbacks experienced by Montréal and still grappling with the turmoil and political unrest left by the Cold War, the 1984 Summer Games were not particularly popular when it came to attracting potential host cities. In fact, only two cities even officially bid to host the 1984 Olympic Games: New York City and Los Angeles.

Los Angeles won the bid in the end, but its residents were not enthusiastic about this decision nor were they willing to foot the bill. The people of Los Angeles were so adamant about protecting their tax dollars from wasteful spending that they proceeded to pass a city charter prohibiting the use of public funds to be used for Olympic facilities. The city now had the honor of hosting the Olympic Games, but no way to pay for it.

Fortunately, a local businessman with a reputation for being budget-conscious stepped up and spearheaded the Los Angeles Olympic Organizing Committee (LA84). Comprised of other successful entrepreneurs and business-savvy individuals, the Committee’s goal was simple: find private funding for the Olympic Games, a feat that had never been done before.

Through private fundraising, corporate sponsorships, and fiscal discipline, the Committee pulled off the unthinkable.

…..When all was said and done, the 1984 Los Angeles Summer Olympic Games cost a total of $546 million dollars. When compared to the $50 billion spent on the 2013 Sochi Winter Games, the amount spent by LA84 seems almost minuscule.

While it would be unfair to call the ’84 Games a purely “private” endeavor, as the Committee did still receive some federal funding, the 1984 Summer Games showed the world that when it came to hosting the Olympics, privatization was not only possible, it was also the most efficient way to get the job done.

There is a paper as well on this. Wonder where this idea got lost..

A short primer on behavioral economics..

August 11, 2016

Eyal Zamir of Hebrew University of Jerusalem (Faculty of Law) has a short piece on behavioral economics. Paper is titled as law and economics but much is on economics. After all economics is seen as much cooler than anything else.

The author discusses various heuristics and how that distorts the rational thinking. He also points to the criticism on the field.

A host of critiques have been leveled against JDM research, as well as its implications for economic analysis in general, and for economic analysis of law in particular. One critique is that the JDM research agenda has over-emphasized the instances in which heuristics lead people astray, when in fact heuristics are an excellent, fast, and frugal way of decision-making in most cases (Gigerenzer, Todd et al. 1999). While this contention may well be true, its implications appear to be limited—akin to asking whether the glass is half empty or half full. Some commentators, especially those concerned about the possible paternalistic implications of JDM studies, have questioned the external validity of JDM laboratory findings, arguing that they may disappear with monetary incentives, or that the market is expected to drive out bad judgment (see, e.g., Mitchell 2002). However, these claims run counter to the findings of thousands of empirical studies. These include studies attesting to the prevalence of cognitive biases in real-life behavior and studies demonstrating that incentives often do not eliminate biases, and sometimes even exacerbate them. Moreover, while market competition may possibly drive out firms whose managers fall prey to cognitive 9 biases, competition concomitantly strengthens the incentive for suppliers to exploit consumers’ biases.

Finally, an important critique commonly leveled against behavioral studies is that they produce a long list of heuristics and biases, rather than a unifying, simple model of judgment and decision-making of the sort provided by RCT. In response, considerable progress has been made in recent years in systematization and theorization of JDM. However, ultimately one must concede that there is an inevitable tradeoff between descriptive validity and simplicity. As Kahneman has put it, “life is more complex for behavioral economists than for true believers in human rationality” (Kahneman 2011, p. 412). Disregarding this complexity and pretending that people are rational maximizers is not a compelling strategy for legal theoreticians and policymakers, since the law has a powerful impact on the real lives of real people.

Behavioral thinking is just one of the ways to provide alternative thinking to the rational school. Neither it is “the framework” nor the researchers should push it on those lines.

It has been known that  people are not rational and assuming the same is oversimplification. But due to lack of ideas on the same, the assumption continued. This was challenged by psychologists like Kahneman and Tversky who provided with frameworks to think through how behavior influences economic decisions.

The problem is rational school remains the dominant way of teaching in economics. Beh eco remains in the fringes and at best offered as an elective in few places. So it does not help students appreciate an alternative framework. This is where bulk of the trouble has always been. Let students figure which framework suits them rather than just fight amidst each other for superiority.

There is space for everyone in the game..

Museum economics: how the contemporary art boom is hurting the bottom line

August 11, 2016

Superb piece by Prof. Robert Ekelund of Auburn University (HT: MR blog). The popularity of museums in US is shocking to most Indians who rarely visit museums.

Prof Ekelund says it is economics which should drive working of museums. They are like any other orgainsation. Currently. three factors are affecting museum economics: fashion, demographics and billionaires.

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Does inflation targeting represent a vested interest capture by bond markets?

August 10, 2016

This is a strong piece by Prof Pulapre Balaksrishnan who once worked at Indian central bank. Now he teaches at Ashoka University.

He says inflation targeting has hardly served the common man. It is more in the interest of the bond market which likes such frameworks. RBI has been captured by the same vested interests it has avoided all this while:

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Bollywood style robbery of RBI cash…

August 10, 2016

This was really interesting to read.

How a train was robbed which was carrying RBI cash from Salem to Chennai. Railways/Police etc are clueless on how this happened.

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Lacking ethnic and gender diversity in Federal Reserve (what about India?)..

August 10, 2016

This blog had earlier argued that firstly having a monetary policy committee hardly changes anything in central banking. So we in India should not be much excited about the same. MPC is one of those several pre-crisis fads which like all fads has been found wanting. Eventually central banks do what the boss says and it remains at that. MPC just makes the whole process fancier with few priests trying to figure the mantra and then eventually agreeing to what the head priest says. We keep saying results matter but have failed to see that MPCs have hardly changed anything much other than becoming an additional place for recruitment for economists.

Second, as we will copy whatever happens elsewhere so MPC has to be floated. So what should be done? Well atleast try and make it more regional representative. Instead of just having MPC members with similar education backgrounds and based in US/Delhi/Mumbai, we should get members which represent different regions. This will atleast get diverse views from different parts of the country. Monetary conditions differ widely across and having regular research, feedback and action is essential.  But it is all missing. We talk so much of Federalism but do we have any idea about what is happening at regional level/state level economies? Having all states on board is obviously difficult but experts from different regions can be surely done.

However, it is unlikely this will happen. Our obsession is only to talk about economics which no one understands especially when it comes to monetary economics. One person reacted to the post saying won’t this politicise matters. Well, isn’t it highly politicised already?  We will only learn more about different regions which is far richer than the usual noise about growth-inflation trade-off.

Given this, came across this post in Brookings which goes even further. It says regional Feds are not ethnically and gender diverse!

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Debate between efficient finance school and behavioral finance school…

August 9, 2016

The two leaders of both the schools – Profs. Eugene Fama and Richard Thaler – debate over financial markets (HT MR blog) .

Nice bit..


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