Month: November 2016

India’s Demonetization–What is Next?

Devangshu Datta has a good run down of the basic facts of India’s demonetization of Rs 500 and Rs 1,000 notes:

About 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (which hundreds of millions don’t have) and the additional hardship of standing in many queues for many hours.

Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 130 million Indians have mobile wallets (about 25 million have credit cards) and there are maybe 550-600 million debit cards in circulation. So access to cash is very, very important for average Indians.

…India is a cash economy. Well over 90% of all transactions are done in cash.

So how is India responding? Lineups at banks and ATMs are long. Tourists at the Taj Mahal have had minor troubles because ticket collectors aren’t accepting the demonetized notes. Demand for gold is up giving some jewelers a temporary albeit welcome windfall. Perhaps most telling is that at Zaveri Bazaar in Mumbai old notes were going at a 60% discount–that is a very heavy discount and indicates that the demonetization is, as I argued earlier, working as a tax on the black market. Other sources, however, indicate that discounts can be had for as low as 20%. Discounting, however, is illegal and the government is cracking down.

What, however, is the point? As Amit Varma argues:

…most truly rich people don’t keep their wealth in the form of cash, but in the form of real estate, gold, deposits in foreign bank accounts and other benaami investments. They will be largely unhurt…it is the poor who will be hurt the most by this.

And Ajay Shah notes:

Controlling corruption is not about blocking access to a non-traceable store of value. There will always be precious metals, US dollars, bitcoin, and jars of Tide…. Solving the problem of corruption requires deeper changes to institutions.

I see this as the main point of the exercise (quoting Datta):

The Income Tax and Excise Departments’ ability to gather data will increase exponentially. So will their discretionary powers, when they can query people who pay large sums in cash into their accounts.

That is not necessarily a bad thing. A key point is that only 1% of India’s population pays income tax–India would be a libertarian paradise if it had a libertarian government but it doesn’t. As a result, what low income tax payments mean is that India is forced to raise money in less efficient ways and to govern through regulation. Some of the only people who pay tax, for example, are those working in large multinational corporations but those are precisely the high-productivity sectors that need to grow.

India’s dilemma is that its high productivity sectors are taxed while its low-productivity sectors aren’t, so valuable resources are trapped in low productivity sectors. Modi knows this and if he is serious then his surprise demonetization will be followed by more efforts to bring India’s informal sector into the formal sector, leveling the playing field, and increasing total wealth.

AddendumMostly Economics has a discussion of two early demonetization in India, one in 1946 and one in 1978, both were focused on the larger bills unlike the current demonetization.

The real life trolley problem

This is not from a philosophy article or a blog post, rather from Evansville, Indiana:

Deputies say the driver of a red Pontiac Grand Prix exited a curve and noticed the school bus stopped in the opposing lane when he veered into the front of the bus to avoid hitting the children crossing the street.

We’re told there were about 35 students on the bus at the time of the crash.

Thankfully, no one was reported hurt on the scene.

Here is the full story, and for the pointer I thank the excellent Mark Thorson.

Friday assorted links

Our new Coasian world?, with respect to China

I can therefore see the emergence of a grand bargain in which the US accepts China’s political and social structure and commits not to disrupt it in any way in exchange for China’s commitment not to challenge the status quo in Asia. It may not be a spoken agreement but a tacit understanding that guides the relations in the years to come.

James Woolsey Jnr is a senior adviser of US President-elect Donald Trump on national security, defence and intelligence

Here is the full piece, from the South China Morning Post.  But is such a deal time consistent?

Will the Trump administration repeal Dodd-Frank?

It seems so, based on the nature of the transition team, the stock market reaction to Trump’s election, what the Trump web site says they will do, and what they have the power to do.

Here is my recent piece on rethinking Dodd-Frank, which I think has been less than a success for the most part.  Here were my original comments on Dodd-Frank, piece by piece, which I think were mostly on the mark.  But overall Dodd-Frank ended up harming mortgage lending, and thus residential investment, more than I had been expecting.  Here is my earlier post “Is the Fed our savior in financial regulation?”  Overall, most of the gains from Dodd-Frank can be kept through adequate capital standards, and so there is a potential win from modifying the status quo.  I would stress the simple point that most people who favor (or oppose) Dodd-Frank could not explain what the bill actually does, but they simply choose their positions based on how anti-finance they think they should be.  That is a mistake.

I do plan to give you ongoing reports on economic policy changes as I see them developing.

Saudi Arabia fact of the day

…the Saudi adult population will more than double in the next fifteen years, driving subsidies and other government payments to unsustainable levels. The creation of private-sector jobs is the obvious answer for a country whose government employs 70 percent of its working citizens, but the sheer numbers show the difficulty. Executing the National Transformation Plan would require the creation of six million new jobs by 2030 — more if women enter the workforce in larger numbers — and yet the 2003-13 oil boom created just one-third that many. The Kingdom’s currently aims to create 450,000 non-oil jobs before 2020, and yet it would need to create 226,000 jobs a year just to accommodate new entrants to the labor market.

Here is further discussion, via Bob Cottrell.

United States fact of the day

The Democrats alienated roughly 14 percent of their 2008 voting base.

That is from David French, via Arnold Kling.  David also states:

It turns out that the GOP is more functional and united than the Democrats.
Arnold makes some interesting points, including this:

I do not expect that the Republican establishment will unsay any words that they have spoken about Mr. Trump. But I expect all that will fade away once he is engaged in political combat with Democrats in Washington.

I also think that those progressives who are predicting that the election will have dire consequences for women, gays, and people of color are making a tactical error. They are setting a very low bar for Mr. Trump and the Republicans. When four years from now we still have civil rights laws in place, mostly-legal abortion, and widely-legal gay marriage, these putative victim communities will be wondering what all the fuss was about.

Both linked pieces are worth reading.

Addendum: Data are incomplete, here is French’s update.

How bad is it to hire an ex-con?

…individuals with criminal records have an involuntary separation rate that is no higher than that of other employees and a voluntary separation rate that is much lower. Employees with a criminal record do have a slightly higher overall rate of discharge for misconduct than do employees without a record, although we find increased misconduct only for sales positions. We also find that firms that do not use information about criminal backgrounds seem to compensate by placing more weight on qualifications that are correlated with a criminal record, such as low educational attainment.

That is from a new paper by Dylan Minor, Nicola Persico, and Deborah M. Weiss.

Sentences of the Day

538: Economic anxiety is about the future, not just the present. Trump beat Clinton in counties where more jobs are at risk because of technology or globalization. Specifically, counties with the most “routine” jobs — those in manufacturing, sales, clerical work and related occupations that are easier to automate or send offshore — were far more likely to vote for Trump.

I noticed something funny over red lentils

Earlier this week I was sitting in one of my favorite local Bangladeshi restaurants, enjoying the red lentils.  For whatever reason, when the talk switched to politics, the Bangladeshis on the adjacent table switched to English.  Five of them were debating heatedly, and with considerable sophistication, whether Donald Trump or Hillary Clinton was the better candidate.  From their dress, language, and accents, there was strong evidence they all were Muslim and recent arrivals to this country.  I didn’t come away with the feeling that a majority of them would vote for Trump, but not one of them seemed completely sold on Hillary Clinton as the superior choice.  At that moment I wondered what was going on.

Why was the fiscal multiplier so small in World War II?

That is the topic of a new and fascinating paper by Gillian Brunet, who is on the job market this year from UC Berkeley.  Here goes:

“Stimulus on the Home Front: The State-Level Effects of WWII Spending” (job market paper) 

World War II is often viewed as a quintessential example of government spending stimulating the economy.  In this paper I use war production spending to quantify the idiosyncratic factors affecting estimates of the fiscal multiplier during World War II.  Newly digitized war supply contract data allow me to construct state-level panel data on U.S. defense spending for 1940-45 and examine state-level outcomes.  Using within-state variation I estimate a multiplier of 0.25 to 0.3, depending on the estimation approach.  This implies an aggregate multiplier of roughly 0.3 to 0.4 given wartime economic conditions.  I also find small employment effects: an additional job-year is associated with $165,000 – $255,000 of spending (in 2015 dollars).  I find evidence that the effects of stimulus were systematically larger in states that had lower employment levels pre-war.  To explain why the stimulative effects of war spending were so small, I look for guidance from the historical narrative.  I show that unique features of the wartime economy significantly reduced the stimulative impact of wartime spending.  Conversion from civilian manufacturing to war production reduced the initial stimulus from war production.  At least 75 percent of the income generated by war spending went into increased saving and income taxes, implying that the add-on effects from increased consumption were minimal in the short run.

This seems exactly right to me.  When an economy is rationing-constrained and doing supply-side switching at such a rapid pace, I don’t think it is very easy to simply pull unemployed resources out of nowhere into new production.  This raises the bigger question, however, of what exactly did drive economic recovery.  I say don’t be fooled by wartime gdp figures, there was not a true wartime recovery in terms of consumption, quite the contrary.  But come the postwar era, so many of the right pieces seemed to be in place.  Dare I mention “increased saving”?  I know that is anathema to the usual Keynesian approach, at the very least this remains a mystery and the simple stories would seem to fail.