This round goes to Krugman

Nocturnal catch-up with blogs in my IPAD led me to this post by Greg Mankiw. As David Demery mentions, it was a non-committal statement by Greg Mankiw. I checked out the Council of Foreign Relations (CFR) post and the comments on the post. It is rather obvious that, on this occasion, the score is Krugman 1 – CFR and Mankiw 0.

Even a non-economist would know that one does not measure the success of a policy (non) intervention by the recovery from the trough but also the gap that still remains to catch up with the pre-recession peak. If a price dropped from 100 to 20 units and recovered to 40, it is a 100% gain from the trough but one is still off 60% from the peak.

In contrast, another widget drops from 100 to 60 units and recovers to 90 units, it is only a 50% recovery (compared to 100% in case A above) from the trough but it is now only 10% away from the previous peak.

It is hard to make the case that policies pursued in case A have worked better or superior to case B. Of course, it does not necessarily mean that the opposite is true either.  More importantly, the measurement technique used to make the case is spurious and that is what makes one doubly suspect of the so-called conservatives’ claims.

Of course, this blog is no fan of Krugman’s prescription to keep raising the dosage of a medicine that does not seem to work. That is why TGS has stopped following Krugman, let alone comment on his blogs or articles.

What worked in Iceland might not have worked in Latvia. It may well be the wrong medicine for the U.S. too. Iceland could easily devalue the koruna because the Icelandic koruna is not the global reserve currency.

Latvia might have been worse off had it pursed Icelandic approach or Iceland might have fared worse had it followed Latvia or done better. We simply do not know. No one size fits all in economics. Yet, ideologues on both sides have only measurement and one shirt for all wardrobes.

More importantly, it is good to revisit the cases 10-years hence. Economic policies work with long and variable lags. There is no need to pass instant judgments and the urge to do so must be resisted. Of course, what we are witnessing is a battle of ideologues – a waste of time. This is not a debate between policy pragmatists who want to see what works in which context and over what time horizon.

If bankers and Wall Street have not learnt anything from the crisis, neither have economists.

India is better off with Khemka than without

Ashok Khemka reminds us of the noble purpose of education and public service. Also reminds us to be rather humble about what we do, in the so-called public space. This is about imparting meaning or generating meaning to one’s own existence. All strength to him.

Notwithstanding Khemka, T. N. Ninan reminds us of the long struggle lies ahead:

a backlash from the political system — to restrict the scope of the Right to Information (RTI) law, redefine corruption more narrowly so as to give more protection to ministers and officials, and to find ways to tar the private sector with the same brush (all three of which, please note, the prime minister has proposed!).

Hope this is really the answer for India’s corruption especially RTI is joining the list of India’s endangered species.

Good friend Anirudha Dutta responds objectively to Dinesh Narayan’s self-righteous piece in Forbes India on Gujarat under Narendra Modi.

International matters:

Reuters has an exclusive story on the preferred (by Party elders, that is) leadership line-up in China.

Moody’s warns of the fragility of the German banking system. Unlike America’s, I think it remains unreformed, post-crisis. Not that American banking system has reformed itself. But, American banks individually might have done more to shore up their balance-sheets than European banks have.

Staying with Germany, it is interesting to see the Bloomberg story on the discounts being offered by car manufacturers in Germany. Numbers talk of a 20-year low in vehicle sales, etc. Good for the global climate.

From Germany to China: Bloomberg headlines the scepticism of Standard Chartered economists on China’s GDP number for the third quarter, produced within a fortnight of the end of the quarter. It met consensus expectations bang on at 7.4% (y/y). Asianomics’ Jim Walker had a hard-hitting piece on it for clients (disclosure: I write for Asianomics). Interestingly, Bloomberg piece does not omit to cite the remarks of Chinese Premier-to-be on their GDP growth numbers. I came across this paper on manipulation of economic data in dictatorships in the Social Sciences Research Network (SSRN).

In fairness, one must record here many question the statistical seasonal adjustments carried out by the Bureau of the Labour Statistics of the US Government too. More recently, the non-seasonally adjusted retail sales figures for September contracted whereas the seasonally adjusted figure changed that to a solid m/m growth.  Again, Jim Walker of Asianomics, who is more positive on the U.S. economy than he is on the rest of the world – voiced his own surprise at the surprise dip in the U.S. Initial Jobless Claims between two Presidential debates and its climb-back to more normal levels after the debate ended.

While the Washington Post article chose to highlight companies that have reported good earnings in the third quarter and thus suggest good health for the U.S. economy, the Reuters news-story chose to focus on companies missing top line growth estimates (that have been lowered enough so that companies beat them – the oldest trick in the book that still remains fashionable).

Spanish Central Bank is attaching a 1% probability to an outcome (6+% contraction in real GDP between 2012 and 2014) that is fast becoming the baseline scenario for many economists.

On the 35th anniversary of the 1987 Stock Market Crash, Floyd Norris writes a somewhat hurried piece on the (rising) perils of (increasing) dependence on computers to generate stock market trades.

Finally, Andrew Sheng’s co-authored piece in ‘Project Syndicate’ is a good response to the Nobel Committee decision on the winners of the Economics Nobel this year (and last). Incidentally, just finished reading his Foreword to Dr. Reddy’s book on the Global Crisis released in 2010. Very well-written and disarming. Those who have not followed Dr. Reddy’s thoughts on many matters concerning the financial sector and its linkages with the broader economy and his thoughts on Indian economy and the Indian financial sector should buy the book without delay.

How to lose friends and turn people away – the IE way

Well, the title of the post says it all. That seems to be the objective of this IE editorial that seeks to advice the Reserve Bank of India on monetary policy. It starts off alright with the plight of the SME sector on credit availability. That is a problem that has continued to exist over time, over many governments and over many interest rate cycles. The problems and the remedies lie elsewhere. Not just in interest rate setting. They do not have access to credit at any price. Period.

The second paragraph talks of the pricey credit even for large borrowers.

The third paragraph then dives into a question which does not have a simple answer. But, the edit is brave enough to hypothesize (conclude, rather) that the high domestic cost of funds has made many corporations go overseas to borrow from foreign creditors. High cost of domestic funds is one reason but even if India brings down the interest rate to 6%, cost of funds in zero interest rate countries would still be lower for good Indian corporate borrowers. That would always be tempting for them. Therefore, that is no reason for the RBI to lower interest rates in India. Those who opt for overseas loans should take into account their present and future repayment capacity in foreign currencies. After all, the exchange rate risk has hurt them. Suzlon is a case in point. Of course, the exchange rate is not the only factor at work here.

Then, the last two sentences are pretty much disastrous:

The gainers are, of course, the arrangers for foreign loans, mostly foreign banks. Is it a coincidence that many of them have urged the RBI to hold its rates? The mid-term policy review on October 30 would be a good time to take a call.

Most of the economists covering India for foreign banks sit in India. The loans are perhaps agreed upon and signed off somewhere in Europe or in North America. When they extend these loans to Indian corporations, they have to factor in a whole lot of risks. It is not a risk-free arbitrage business vs. interest rates in India.

Moreover, what does the edit wish to convey to its readers about the intellectual calibre at RBI? That they dance to the tune of economists from foreign banks? So, on October 30th, if the RBI were to leave interest rates on hold, is the IE hinting that it could be due to the influence of foreign banks and not because the Government of India has talked a lot but delivered little (so far) on fiscal consolidation and that inflation is still around 8% (wholesale) and 10% (retail)?

Reasonable people can disagree on whether the Reserve Bank of India should cut rates on October 30th. But, to peg the argument for an economic policy and, that too, a monetary policy decision, on dark, conspiracy theories is sub-standard journalism.

(p.s: It is on par with their edit published in September on the detox treatment that Shri. Anna Hazare chose to go through. There is no public interest involved in that. Yet, the IE wasted an editorial on Anna Hazare’s detox treatment).

The politics of crisis-recoveries

A former colleague of mine had sent the latest and short update by Reinhart and Rogoff to their work (a continuing one) on debt crises, recoveries, etc. Their update seems to be a reaction to the comments made by Romney advisors – Hubbard, Hassett, John Taylor – that the US has had rapid recoveries from crises in the past and that this time it has been sluggish and different. In other words, blame Obama. That, in my mind, is silly. See this Bloomberg article.

But, I am not convinced by the ‘rebuttal’ put out by R&R. One, I do not know if the unemployment rates are comparable across different time periods. I am not saying they are not. I would like to be doubly sure since BLS methodologies changed over time. What is currently put out as the U6 measure of un/under employment used to be the original unemployment rate. Perhaps, BLS does revise the entire time-series when they make methodological changes.

Second, the recovery per dollar of stimulus – fiscal and monetary – must be taken into consideration – when one compares this recovery to the past. This recovery has seen massive stimulus – unprecedented. For that, it has very little to show. Costs will be harvested by the next incumbent – Obama or Romney.

In other words,  both camps have not got it right, in my view.

What am I missing?

A slightly edited version of an email written by Yours Truly to friends who research Indian macro for a sell-side house:

Dear Gentlemen,

Surjit Bhalla castigates himself for having written off this government. Newspapers are breathless about a reform a day. Even the sceptics have become a lot more understanding of the UPA.

I am seeing a largely ‘smoke and mirrors’ exercise. An effective one, surely. So, I am curious to know if I am missing anything substantive here.

  • FDI in retail – very little near-term impact; long-term could go either way
  • FDI in aviation – is any one bothered now? too little too late
  • FDI in pension and insurance – Parliament in the way still
  • FDI in power exchange – no one bothered
  • Aadhaar and cash transfer for fertiliser subsidy – pilot study launched and might take two years to become national policy, if at all it does
  •  Bank bad loans to Discoms – explicit fiscalisation and restructuring; underlying causes of DISCOM problem loans remain unaddressed
  •  Diesel prices raised by the GoI and not by OMCs and excise duty reduced. Should have been done six months ago. Brent crude still at 115 dollars er barrel. Can go a lot higher. Lot more might have to be done. Most Congress governments increased LPG cylinders to 9 from 6.
  • MSP for wheat, etc., were raised in July.
So, what exactly has been addressed? Fiscal deficit? End to RBI monetisation? So, how would inflation drop?
There are 12 hour power cuts pretty much throughout Tamil Nadu, including in Coimbatore, an industrial town. I do not know the situation in other parts of India. How is stagflation being addressed, really?
Governance deficit: RTI requests on Rahul Gandhi’s travel not responded to. The entire Congress Party raises in defence of a private individual who is exempt from airport security checks. Kalmadi and Raja included in Parliamentary panels.
There is lot of talk, hand-waving and nothing substantive on the key deficits in the country: probity in public life; governance and fiscal deficit.
These headlines are substituting for substantive decisions. Many are ecstatic. The only good news in recent times has been that monsoon was not as much deficient as originally feared.
Am I missing something?

A seminar course in economic policy

National Council of Applied Economic Research (NCAER) has uploaded the videos and papers from various sessions at their Annual India Policy Forum, 2012. Most of them sound interesting. I have gone though the IPF 2012 lecture by Dr. Y. V. Reddy and the Q&A that followed it. Extremely stimulating and educative. Worth almost ten hours of classroom lectures on public policy-making in India, especially given the current global context.

You need a paper and pen and the willingness to pause, rewind and take notes.

His comments on the following need to be pondered over, a great deal:

(1) Why States need room for policy-making and the rationale that he offers are profoundly important.

(2) Subsidies vs. Incentives and tying both to outcomes cannot be faulted. The discussion in India has been overwhelmingly on subsidies. I,too,am guilty of that.

(3) Taxation of financial sector and/or transactions – well, I have always been a votary.

(4) Ending the high pre-emption of banking resources by the State (financial repression) – in fact, he makes the point that the sequencing of financial sector reforms – the opening of the financial sector for foreign capital should be the last.

I would say that the opening of the financial sector for more players – foreign or domestic – should come after the various existing dysfunctionalities are fixed. I mention them in my MINT column today.

(5) 8-9% growth is not possible unless policy decisions are made. It is not automatic. It has to be earned. It is this hubristic thinking that has got us into stagflation. Dr. Reddy cites I.G. Patel’s observations on this more than once. Worth pondering over.

(6) Finally, on the point of the zero current account deficit over the medium-term, I am able to see the logic rather clearly. In the final analysis, it is about the sustainable level of current account deficit and the sustainable level of growth that go with it. Realism about the latter (economic growth) that would also induce realism on the former (CA deficit).

Alternatively, problems in funding the CA deficit would bring about realism on the achievable and sustainable level of economic growth. 2012 has been a warning shot and I doubt if it has been heeded. The government has tried to make external debt financing more attractive. That is dangerous.

If there is something to ‘complain’ about his speech,

(a) The question of allocating responsibility on local and global factors for the slowdown was not discussed, although he mentions the issue upfront.

(b) This is related to (a) above. If he had done (a) above, perhaps he could or would have at least obliquely covered the factors that led to the deterioration in the fiscal situation in the last several years. The preemption of resources by the government and financial repression that followed from have contributed to the decline/stagnation in the savings rate, the investment rate and hence the economic growth rate.

The link to the speech and the Q&A session are here and here, respectively.

Poor advice

An example of muddled thinking and writing is this paragraph in an edit in ‘Financial Express’ newspaper that appeared on Saturday:

Though headline inflation numbers suggest RBI shouldn’t cut rates this time around, it’s not clear what it’s strategy is since progress on cutting the deficit is going to be weak—the government has made a start with a 30% cut in diesel under-recoveries and a cap on LPG subsidies, but lower economic growth means there will be large undershooting of the tax target. Other reforms steps have been initiated even if Parliament may not pass all of them. And the moves on GAAR, on retrospective taxation, on retail-FDI among others have excited investors—the National Investment Board is another such, but has to demonstrate its effectiveness. In which case, RBI can’t take refuge in the old argument that the government wasn’t doing its fair share of the heavy lifting.

What should the RBI do really? What does the writer think? Has the government done anything worthwhile on fiscal deficit or not?

The reason why this has come out like this is that the writers are struggling to make a case where none exists. The lack of conviction comes through in such shoddy logic.