Rants of a nerd
Economics
Bombay election stories
0Size of BMC budget
Did you know the size of the BMC budget? It is ₹ 21,000 crores! That is larger than the combined budgets of Delhi, Calcutta and Madras. It is about three times the Delhi municipal budget!
Naturally all the politicians want a piece of the pie. This is an enormous pile of money that can be looted, spread around, and in general wasted. No wonder corporators are getting dramatically richer between polls. Indian Express reports a three-fold increase in corporators’ wealth since the last election. Feathering their nests indeed.
Value of the seat
With such value in each seat in the municipal corporation, it is no wonder that we get a report from DNA on vote buying ahead of the Thursday election. Apparently each vote is worth between ₹ 1,000 and 2,000, with the variation based on category of vote (1000 for common man, 1500 for senior citizen and 2000 for bogus voters). Sorry about the DNA link going to a small frame, I could not find the article on the main website.
Eco-War
0I’ve been following this economics war (argument may be more appropriate) between the usual Keynsian and Chicago schools. I have picked out some of the posts in this spat rather than collect all of them since many are just flanking in nature and weren’t advancing the debate.
John Cochrane (Univ of Chicago) makes the case that fiscal stimulus does not work as the fiscal multiplier is zero. The argument is simple: government can spend only out of taxes or borrowing. Higher taxes reduces consumption, higher borrowing can only be backed up by expected future taxes & therefore have the same impact as higher taxes (Ricardian equivalence). He raises Keynsian heckles by saying:
For these and other reasons, Keynesian ISLM models have not been taught in any serious graduate school since at least 1980, except as interesting fallacies or history of thought.
Simon Wren-Lewis gets worked up and calls out Cochrane (and Robert Lucas too) by saying that government spending works here and now, but any fall in consumption due to higher taxes is smoothed out over time, leading to fiscal stimulus. Wren-Lewis also cites a Brad de Long post arguing the same thing. This post seems to be just a commentary without any charts or equations to support his case. He ups the ante a bit on the spat with this line:
I prefer to just note that if any undergraduate or graduate student in the UK wrote this in an exam, they would lose marks.
Scott Sumner wades in saying that it is tough to argue against an identity. With the example of a closed economy, he breaks down in four steps why Cochrane is right and Wren-Lewis is not. Sumner’s quote I pick:
Undergraduate quiz? He’s going to bitterly regret that snide remark.
And then, the champion of Keynes, Paul Krugman wades in with a dismissive post on comparative statics. He makes the standard ISLM claims in what he calls a very wonkish post, but sadly seems to have missed most of Sumner’s argument. While Krugman is brilliant (I have been following his work my entire career going back to the Asian financial crisis), in recent years his Keynesian bias has gotten so bad that he is unwilling to give credence to any other point of view. He wasn’t always this way, but he says his earlier views were incorrect.
Sumner thinks we have made some kind of basic error, and ties himself into knots trying to set us straight. It’s really very sad.
I am going to give Sumner closing comments in this debate with his post where he says that by now “I should be used to Paul Krugman responding to arguments I never made.”
Thus they are forced to fall back on the argument that the basic Keynesian model is true because we assume it’s true. Fine, then say so.
Stay classy guys.
Post on account
0As the government introduces votes on account to keep from shutting down, today’s post is ‘on account’. I had set aside a bunch of stuff around David Hume and public credit in the context of the worldwide expansion of central bank balance sheets and fiscal deficits, but it will have to wait until later.
Flying Blind at the Fed
0The 2006 transcripts of the meetings of the Federal Open Market Committee (FOMC), the chief decision making body of the US Federal Reserve system has made good fodder for several economics and finance reporters since their release late last week. Several commentators have chosen to just pick up some choice quotes from the minutes including the Financial Times’ Alphaville blog. The best I have found so far is the Atlantic, from where I have taken the title to this post. It compares the Fed’s leaders to the pilots of Air France’s ill-fated AF447, which crashed into the ocean due to a combination of worsening flying conditions and the pilots not responding to incoming warnings.
By 2006, it was apparent that the US housing market was coming apart. Evidence on the ground and through statistics was already telling a tale of slowdown. I remember being in a fixed income conference in Europe in 2005, where there was near unanimous view that the US economy would slow on the back of a housing slowdown.
The lack of appreciation for this in the corridors of economic power is what astonishes anyone reading these transcripts. FOMC chairman Bernanke seems to be the only one warning of a wider impact of the housing crash on the macro economic landscape. Others including then vice-chairman and now US Secretary of the Treasury Tim Geithner seemed to have had no sense of the impending doom. The fact that the same slate of people remain in charge today under a different President is a question mark on the state of political decision making in the United States.
The choicest quote goes to Geithner speaking to Greenspan on the maestro’s last meeting as chair: I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.
Should we start using the word maestro to mean something else? A Nero like behaviour of fiddling while Rome burnt?
Must read: mental substitution
0Bryan Caplan reads Kahneman; and David Henderson picks up on the same. Very good reading in full (links below).
The point being made (quote from Henderson) is: people answer the question they want to answer rather than the question that was asked. This is especially the case for left brain-right brain type of questions. It is easier to respond intuitively or emotively to a question rather than rationally. Structured, quantitative or rational questions are replaced by a near equivalent heuristic in one’s head. This applies to economics questions (Caplan’s post has several examples) or political ones (Henderson).
Henderson in particular points to how media uses the emotive equivalent (in the example he quotes, the question of profanity on television) and changes a first amendment freedom of press question into a personal values question. Of course that is the United States, where the first amendment has usually found strong support in the courts. He does cite John Roberts (chief justice of the US Supreme Court) similarly framing the question in a heuristic fashion that seems to suggest he is on the side of diluting freedom of speech.
Here in India though the government and the courts have generally never been shy in placing restrictions on free speech. Indeed the constitution itself has been amended (first1 and sixteenth amendments notably) to restrict free speech in the name of security, public order, decency or morality, defamation, etc. And who is to determine what is decency or morality? Where does restriction in the name of decency end and censorship of political speech start?
In the same context the ongoing dispute between the government and major websites including Google and Facebook is a case in point. The government wants these websites to censor their users’ posts. There are some lawsuits in Indian courts on the same subject. On the internet, no one forces you to read any website. There is an active participation by the viewer by clicking on web links to get to the content. If you do not like the article in question or the website in question browse away. No one forces you to go online. If you choose to go online and get offended, you have only yourself to blame.
The same applies to offline content. Don’t like a television channel? Stop watching it. Don’t like a newspaper? Stop your subscription. Choice is available and it is up to the user to decide what he consumes.
Democracy is hard won and liberty is an integral part of democracy. My freedom of speech and expression is as important to me as your freedom to take offense. As they say in a democracy every one is entitled to his or her opinion and is entitled to express it. However no one is forced to listen to another’s opinion. The road to fascism starts with abrogation of these basic democratic principles.
1Ironically our First Amendment placed restrictions on free speech while the US First Amendment was part of the Bill of Rights that guarantees certain freedom to US citizens.
P.S. This article started from mental substitution and ended up as a rant on liberal democracy. I don’t know how.
Austro-liquidationists are winning
0So says Ambrose Evans-Pritchard in The Telegraph. Evans-Pritchard is always fun to read and his 2012 outlook (mostly in jest / exaggerated style) is worth the time it takes to read it all. One paragraph though caught my eye in the sense that it seems to reflect the mainstream’s lack of appreciation for Austrian Economics.
Central banks have the means to prevent a 1930s outcome, even with rates at zero, if willing to deploy Fisher-Friedman monetary stimulus with conviction, buying assets from non-banks and targeting nominal GDP growth of 5pc. But policy defeatism is in the air, and Austro-liquidationists are winning the popular debate.
Is A E-P throwing his weight behind the NGDP crowd (nominal gross domestic product)? Has he been reading this Economist article on heterodox economics and fallen prey to its traps?
Central bankers have been teaching us to accept inflation in our lives. After all the product they sell is little pieces of paper which are notionally demand promissory notes, but in practice are nothing like promissory notes. These pieces of paper – called currency notes – may be exchanged only for other pieces of paper. For a central banker to “sell” more of the paper, they need to convince the public that inflation (price inflation through an expansion of the monetary base) is good.
Expansion in nominal GDP brings some good feelings. As long as inflation is somewhat contained the masses will not rise in rebellion against the central banks, the politicians can keep spending without paying for it, and the people can be happy. But eventually real output should pick up so that the inflation adjusted GDP (real GDP) also grows. It is this last bit that the fiat monetarists forget.
Austrians are keenly focussed on real GDP. They would rather the monetary base remain constant, and real growth is truly reflected in our feeling of well-being. Price adjustments should be relative. Of course the nominal rigidities of some prices notably labour is a key reason why fiat money is such an easy choice for policy makers.
Expansion of the monetary base leading to inflation is a genie that cannot be bottled once it is let out. In India for example the price rise over a period of time has been scary. Forty years ago (my mother tells me), you could buy 30 bananas for one rupee. Today it takes between three and five rupees to buy one banana. A devaluation by a factor of 90-120. The same can be seen in other prices (land / real estate, gold, etc.)
At the start of my working career over a decade ago, I made the mistake of not saving enough. In hindsight that looks like a great decision. Any savings from then in fixed income instruments would have devalued in real terms. Investments in equities have hardly fared better.
What I should have done is leverage myself. Since debt has been devalued so much, I should have borrowed and bought real assets (maybe a house). In hindsight the decision not to save was right, but not implemented in full. I should have dis-saved.
The lesson of devaluation is that the population will tolerate some inflation for some time. But there will come a time when the people will rise in anger at the sharp fall in their savings. I fear that the outcome would be similar to other recent hyperinflations in history – Zimbabwe or Weimar Germany.
Much as the Reserve Bank of India has failed to keep up the purchasing power of the rupee, I fear that other central banks around the world are now engaged in a full fledged beggar-thy-neighbour devaluatation spree. This is not going to end well.
North Korea economy growth
0Today’s Economic Times has this helpful chart comparing North and South Korea economies. Sadly they got the labels done incorrectly. Hilarious for us!

Euro Titanic
0Brilliant quote from FT’s Alphaville blog
Within minutes, confusion was worse confounded by a Barroso bomb. The latest wheeze from the president of the European Commission has a splendidly Titanic-like quality. As the good ship euro lists alarmingly in heavy seas, the captain’s contribution is a proposal to design another boat.
Read the article, it is full of win. I guess Itanic now refers to Italy-Titanic and Intel may finally get to set that ghost to rest! Another quote below
UK gilts are obligations on the British government, which has the longest record in the world of meeting them, albeit in devalued pounds. The euro depends on a disparate collection of highly variable European countries, some of which are clearly in no state to honour any obligation.
German bond auction fails to cover!
0This is not my usual forte, but a German bond failed to cover. Against a €6 billion offer, the bids aggregated to just under €3.9 billion. FT’s Alphaville blog has a complicated explanation that makes no sense to me. Even if the Bundesbank bought the rest, the fact that the market did not bid enough to cover the offered amount is simply astounding. It appears the European financial crisis has just entered a new terrible phase.
Gott in Himmel!
India does Italy
0Playing around with Google Docs. Really powerful stuff there!
Sovereign funding issues comes to India as yields spike by 70 basis points in about a month following the announcement of an increase of INR 530 billion in borrowing programme for the October to March half-year. What is interesting is that two rate hikes of 25 basis points each had no impact. In fact the announcement of a likely pause in the rate hike cycle led to a small drop in yields on October 25. Clearly the bond markets had priced in the rate actions, but were blindsided by the funding announcement.
By the way, if the chart looks all wonky, I am trying to fix it. It is my first experiment with Google Docs. Perhaps there is a setting I am missing here.
