Month: May 2012
Worry about India
Here is my NYT column from today, on the recent growth slowdown in India. Excerpt:
Why is India’s economic growth slowing? The causes are varied. They include a less than optimal attitude toward foreign business and investment: recall the Indian government’s reversal of its previous willingness to let Wal-Mart enter the retailing sector. The government also has been assessing retroactive taxation on foreign businesses years after incomes are earned and reported. Another problem is the country’s energy infrastructure, which has not geared up to meet industrial demand. Coal mining is dominated by an inefficient state-owned company and there are various price controls on both coal and natural gas. Over all, the country does not seem headed toward further liberalization and market-oriented reforms.
These problems can be solved. More troubling are the causes that have no easy fix.
Agriculture employs about half of India’s work force, for example, yet the agricultural revolution that flourished in the 1970s has slowed. Crop yields remain stubbornly low, transport and water infrastructure is poor, and the legal system is hostile to foreign investment in basic agriculture and to modern agribusiness. Note that the earlier general growth bursts of Japan, South Korea and Taiwan were all preceded by significant gains in agricultural productivity.
For all of India’s economic progress, it is hard to find comparable stirrings in Indian agriculture today. It is estimated that half of all Indian children under the age of 5 suffer from malnutrition.
Another worry is that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.
India also has one of the world’s most unwieldy legal systems, and one that seems particularly hard to reform. On the World Bank’s Doing Business Index, the country ranks 132 out of 183 listed countries and regions, behind Honduras and the West Bank and Gaza, and just ahead of Nigeria and Syria. One undercurrent of talk is that the days of “the license Raj” have returned, referring to the country’s earlier subpar economic performance under a regime of heavy government regulation.
Assorted links
1. The mathematics of bookbinding.
3. Resume padding among economists.
4. At around 2:45, Rush Limbaugh refers to Kevin Grier and me as a young liberal who writes for a tech blog.
5. Wealthy French looking to move to London at higher rates.
Sentences to ponder
Loveless has a very wide dynamic range– there’s no compression over the overall mixes. Because of that, it’s a very quiet record; most of it is about four or five dB below zero while most modern records are about six or seven above zero. That’s a huge difference in volume because every three dB is perceived as being twice as loud. But that’s not too important because people should just turn it up if they want to hear Loveless loud.
That is from Kevin Shields, much more here, all interesting to a fan or to an audiophile. The reissues are coming out, there is not much better in all of music than Loveless. By the way, don’t call it “popular music,” it isn’t popular!
For the pointer I thank James Murray.
*Living Economics*
That is the new book from my colleague Peter Boettke, and the subtitle is Economics Yesterday, Today, and Tomorrow. Of all of his books, it best captures what Peter is all about. He should now be considered the global leader of the Austrian School of Economics. Here is a Jeff Tucker review of the book.
Signaling credibility in Spain
A deal announced last week between the Spanish government and the soccer league (LFP) aims to force soccer clubs…to pay off the 752 million euros they owe in taxes, along with a further 600 million euros in social security payments by 2020. Those that fail to follow the guidelines face expulsion from competition, says the LFP.
José María Gay…says that the 20 clubs in Spain’s top division had total combined debts of about 3.53 billion euros at the end of the 2010-11 season, up from 3.48 billion euros the previous year. Much of the debt dates back to before the first of Spain’s most recent two recessions began in 2008, and is linked to disputes the clubs lost against tax authorities, he says.
Why monetary policy matters less every day
1. Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis. I also would argue that some of the long-term unemployed are revealed as having been “baked in in the first place,” once the boom demand for their labor ended and their marginal products were more closely scrutinized.
2. Many nominal values end up reset, more and more as time passes and as new projects replace the old.
3. As banking and finance heal, debt overhang is less of an AD problem. The debt repayments get rechanneled into investment, rather than falling into a black hole.
4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players. Bernanke leaves the scene in 2014 and is a lame duck at some point before then. Obama could be gone by the end of this year, and in any case is unlikely to be reelected with a thundering mandate. Romney’s actual views on monetary policy are a cipher. Either house of Congress could change hands. There is less public support for a consensus view of the Fed today than in a long time.
On this issue I feel Scott Sumner is insufficiently Sumnerian. He correctly stresses the role of expectations and credible commitments, but I still do not understand why he does not accept the implied pessimism in this, at least for May 2012. 2008-2009 was the time to act, in a Ludwig Erhard/Douglas MacArthur/Alexander Haig “I’m in charge now and we’re doing ngdp targeting try to challenge me in the chaos and confusion” sort of way.
5. The Fed already has failed to act, for whatever reasons. That makes it all the harder to achieve the credible commitment now. The market expectation has become “the Fed can/will only do so much.” It’s like a guy hemming and hawing on the marriage proposal for three or four years, and then trying to suddenly set it right and show real commitment to the woman. That’s hard to do, even aside from the points in #4.
I still believe in a looser monetary policy, I just think that what we can get for that now is much much less (a fifth? a tenth?) of what we could have received in 2008-2009.
Scott Sumner believes that Jim Hamilton somehow has changed his mind (and is puzzled by my approving link to Hamilton), but I don’t see that. I simply believe Hamilton realizes he is now writing for a world where the credible commitment from the Fed mostly isn’t there. Angus understands this well.
This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.
Circa 2012, monetary policy matters less every day. You might feel outraged by that reality, and by the policy omissions from the past, but still monetary policy matters less every day. That point follows from basic insights from Milton Friedman and Irving Fisher, or for that matter modern most mainstream neo-Keynesian models. By the way the labor force participation rate declined in the latest round of data, and will likely remain low for a good while, so I am not convinced by graphs which beg the question about the size of the output gap.
I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp). Same views, but I do see the clock ticking on the wall.
This entire point is hardest to grasp in a mental framework of “accumulated blame,” easiest to grasp within a disciplined, non-moralizing look at marginal products.
You also could write a post “Fiscal policy matters less every day.” It’s not a message that a lot of people want to hear.
“A good start.”
The Southern District of New York recently became the nation’s first federal court to explicitly approve the use of predictive coding, a computer-assisted document review that turns much of the legal grunt work currently done by underemployed attorneys over to the machines. Last month, U.S. Magistrate Judge Andrew J. Peck endorsed a plan by the parties in Da Silva Moore v. Publicis Groupe — a sex discrimination case filed against the global communications agency by five former employees — to use predictive coding to review more than 3 million electronic documents in order to determine whether they should be produced in discovery, the process through which parties exchange relevant information before trial.
The task of combing through mountains of emails, spreadsheets, memos and other records in the discovery process currently falls on a legion of “contract attorneys” who jump from one project to another, employed by companies like Epiq Systems. Many are recent grads who are unable to find full-time employment, or lawyers laid off during the recent recession.
Here is more, and for the pointer I thank Fred Smalkin.
Assorted links
1. Elephant plays harmonica for fun (video).
2. “The bull market (heh) can be reduced to one key statistic, lifetime net merit…”, link here.
3. La Stampa interview with me, in Italian, on the eurozone.
4. Hospital appointment scalpers will face consequences (China story of the day, and you are not allowed to burn money in that hospital).
5. Scott Sumner on James Hamilton; I hope Milan allows me (does not allow me?) to return to this topic! And David Henderson on Paul vs. Paul.
Social Security, Savings and Stagnation
Here is Evans, Kotlikoff, and Phillips making the case that transfers to the elderly, such as Social Security and Medicare, have dramatically lowered the US savings rate, the investment rate and real wage growth:
In the lifecycle model, the young, because they have longer remaining lifespans than the old, have much lower propensities to consume out of their remaining lifetime resources. This prediction is strongly confirmed for the US by Gokhale et al (1996).
Hence, in taking from young savers and giving to old spenders, which Uncle Sam has spent six decades doing on a massive scale, the lifecycle model predicts a major decline in US net national saving associated with a major rise in the absolute and relative consumption of the elderly. This is precisely what the data show.
In 1965, the US net national saving was 15.6% of net national income. Last year, it was just 0.9%. And, according to Gokhale et al (1996) and Lee and Mason (2012), the secular demise in US saving has coincided with a spectacular rise in the consumption of older Americans relative to that of younger Americans.
As Feldstein and Horioka (1980) document, US net domestic saving tracks US net national saving. Hence, postwar intergenerational redistribution has not only lowered net national saving; it has also reduced net domestic investment, from 14.0% of national income in 1965 to just 3.6% in 2011. This decline in the rate of net domestic investment is, no doubt, playing a major role in the slow growth in US wages. Indeed, the level of private-sector average real earnings per hour, exclusive of fringe benefits, is lower today than it was 40 years ago.
We call this America’s “fiscal child abuse”. If it continues, it will no doubt shortly drive the national saving rate, which was negative 1.2% in 2009, into permanent negative territory and further reduce net domestic investment and prospects for real wage growth.
And yet there is no copyright for recipes (Singapore markets in everything)
How much is a recipe worth?
About $1.8 million, according to the owner of Kay Lee Roast Meat Joint, who boosted the sale price of her Singapore eatery by that amount when she put it on the market this year.
Betty Kong and her husband want S$3.5 million ($2.8 million) for their 60-plastic-stool establishment, a premium over the S$1.25 million assessed value of the site. The price includes the property, their recipe for roasting duck, pork ribs and crispy pig skin as well as other Cantonese-style classics, plus three months of cooking lessons — and, presumably, the loyal clientele that lines up outside, sometimes for more than an hour.
The article is interesting throughout. How about this bit?:
The Roast Meat Joint generates sales of around S$2,000 a day, she said, or S$620,000 annually, assuming it’s shut one day a week and three days for Lunar New Year holidays. Profit margin is 60 percent, according to her broker Raymond Lo at Knight Frank LLP. The asking price is 5.6 times annual sales, compared with the 1.1 multiple for the Singapore benchmark Straits Times Index. (FSSTI) It would take six years to recoup the recipe premium.
How about this paragraph, from a critic:
“Two million dollars for a recipe? Too much,” said Leong, known by patrons as Grandma or ‘Poh Poh,’ shaking her head in disbelief and counseling against giving up a line of work she herself has been doing for 53 years. “You will start developing dementia if you stop working.”
And this, from the woman selling the recipe:
Her knees are giving out, she said, and she can’t have replacement surgery because it takes four months to recover. Instead, she plans to start closing for two days a week, Mondays and Tuesdays. And to keep dreaming of an easy retirement — visiting her son in Australia, and eating someone else’s food for a change.
“Fish and chips in London, Kentucky Fried Chicken in America,” she mused, insisting on maintaining the fortitude that has helped her build her business. “I won’t haggle over the price. I will stick to it.”
The full article is here, and for the pointer I thank Alex Kowalski.
Double-talk on the Irish referendum
And yet I think they are wise:
Take the the following quote from Karl Whelan, professor of economics at UCD. It is a prime example. The fragment used by Sinn Féin is in italics.
“All that said, although I think the economics of this treaty are pretty terrible, on balance, the arguments favour Ireland’s signing up to it.”
Similarly Colm McCarthy, also of UCD and one of the most influential of the economic rock stars, was quoted by Sinn Féin as saying the following: “As an exercise in addressing the euro zone’s twin banking and sovereign debt crisis, the fiscal compact makes no worthwhile contribution”. But in the same article – and overlooked by Sinn Féin – he states: “If there has to be a referendum, the electorate would be well advised to swallow hard and vote Yes, notwithstanding the inadequacies of the proposed treaty.”
The story is here.
Why wise? Under one reading, Ireland needs to stake out its alliance with the European Union at all costs, and let other nations be the ones to strike down bad treaties and silly ideas. Under another reading, Ireland should to some extent defect, but they will get the best “defection deal” if they wait until Greece, Italy, and Spain are to some extent settled. Both mean voting “yes” on the treaty referendum, even though the arguments for the treaty are weak.
Assorted links
1. More on Milton Friedman and the Great Depression.
3. I actually want one of these.
4. Most consecutive yoga positions on a motorcycle.
5. Daytime raves, the culture that is Sweden, hat tip Caleb.
What percentage of 7-footers are in the NBA?
An actual accounting of 7-footers, domestic or global, does not exist in any reliable form. National surveys by the Center for Disease Control list no head count or percentile at that height. (Only 5% of adult American males are 6’3″ or taller.)…
The curve shaped by the CDC’s available statistics, however, does allow one to estimate the number of American men between the ages of 20 and 40 who are 7 feet or taller: fewer than 70 in all. Which indicates, by further extrapolation, that while the probability of, say, an American between 6’6″ and 6’8″ being an NBA player today stands at a mere 0.07%, it’s a staggering 17% for someone 7 feet or taller.
There is much further discussion at the link, and many more ins and outs to ponder.
Me on Twitter
Recently accepted wage cut for new project, ngdp will go up not down. I am helping to manufacture ngdp, people get with the program.
What did *you* do for nominal gdp today? Just asking.
Non-Twitter note: If my action contributes to a downward spiral of ngdp, wages, and prices, I will be deeply sorry. Apologies in advance.
Raghu Rajan nails it
The industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities. For better or worse, the narrative that persuades these countries’ governments and publics will determine their futures—and that of the global economy.
Every paragraph of his piece is excellent, and as I like to say “We are all stagnationists now.” Hat tip goes to The Browser.