Economic Policy Uncertainty Index

India’s Economic Policy Uncertainty Index has climbed for the second month in a row in September 2015. It is now at 85, having been at 50 in July. It was at 88.9 in May 2014. Indian journalists and intellectuals are ‘succeeding’ in their stellar efforts at ‘nation-building’.

This index was formulated by three professors from Northwestern, Stanford and Chicago. You can read it more about their work on this index and methodology here.


AFL-CIO gets Fed policy wrong

AFL-CIO gets it completely wrong when it cautions against the Federal Reserve raising interest rates as it would worsen inequality, according to them. They have got their logic messed up. It is the Fed’s policy of zero interest rates and QE that have messed up labour income, household savings, retired workers’ pensions, etc. Zero interest rates have boosted financial asset prices while doing far little of use to the real economy. After six years of ultra-loose monetary policy, if ‘household median income is flat in the 76th month of a recovery’, then AFL-CIO must reasonably wonder if the Fed policy of zero interest rates and QE had anything to do with it. Instead, they want it perpetuated.

Even if the Fed were to end it now, it might already be too late. But, nonetheless, without an exit – howsoever messy and howsoever long it might take – from this policy framework, workers of the United States and their families will not get much relief.

AFL-CIO must think this one through logically.

Paul Romer and Thiruvalluvar

Read in Martin Sandbu’s ‘Free Lunch’ that Paul Romer had written a seminal paper in 1990 that

because ideas are “non-rival” — one person’s use of an idea doesn’t leave any less over for others to use — discovery and innovation enables economies to achieve increasing returns to scale

In his Thirukkural No. 400, Thiruvalluvar said the following:

கேடு இல் விழுச் செல்வம் கல்வி ஒருவர்க்கு

மாடு அல்ல மற்றையவை
A loose translation is this:
One’s learning alone is one’s indestructible and outstanding wealth.
Nothing else possesses this special value.
The endowment of learning, knowledge and ideas does not shrink, when shared. So, the insight is more than a millennium old.
That said, I am at a loss to understand how that insight translates into this as Martin Sandbu expounds:
That, in turn, is what makes it possible for material living standards — the amount we produce per capita — to grow continuously. It is also why the dogma held by a certain tribe of environmentalists, which says it is logically impossible to perpetually increase living standards without destroying the planet, is wrong. [Link]

Some of these journalists appear very comfortable embracing extreme ideas from the Left (no crisis is too small for monetary or fiscal stimulus or both) and the Right (economic growth in perpetuity is costless and hence, the environment and resource constraints are not binding).

Twisted policy-making

China reported GDP growth of 6.9% y/y (real GDP growth) in 3Q 2015. It has been widely commented upon. I have blogged on it too. If the officials in China believe their numbers, then they shoudl not be cutting interest rates to boost economic growth further. As per their numbers, growth rate is slowing but is not too low. They want to restructure their economy. One cannot change the direction of a super-tanker without slowing it down considerably first. So, if one were serious about restructuring and if growth is slowing only gently, where was the need to cut interest rates and the Reserve Requirement Ratio?

Note too that loan growth still exceeds nominal GDP growth. Check out this piece from ‘Economist’. Rate cuts would worsen the problem of debt accumulation.

On top of that, the People’s Bank of China has confirmed that the economy could grow comfortably at 6-7% in the next 3-5 years. Quite clearly, China wants to have it both ways. This is the context in which the IMF is supposed to have assured China that the yuan would enter into the SDR basket. Law of unintended consequences very likely to play out next year.

The missing Pulse

I had immense respect and continue to have immense respect for Professor Ashok Gulati after he did a thorough research on the fiscal and agricultural implications of the Food Security Act in India in 2013.

He has been quite critical of the present government’s agricultural policies. His level of criticism has been rising. He had written two pieces recently on the rising prices of pulses. He faults the government for knee-jerk reactions – raiding hoarders, banning commodities futures and forwards, importing small quantities, failing to build up buffer stocks and also not incentivising production of pulses over grains, etc. Most of the criticism is well directed. However, there are some areas where he protests too much.

To an extent, agriculture falls under State governments. IT is a concurrent subject. So, States have to provide reliefs to farmers. Second, he also note that most of the policies have been in place since 1960. Clearly, bureaucracy has provided continuity. Hence, these policies – to the extent that they are backward looking – stem from bureaucratic resistance to new thinking and playing by the old rule book. He correctly points the finger at this problem here:

Interestingly, the bureaucracy, which should be accountable for tracking production and prices, and ensuring smooth inter-/ intra-year supplies, goes scot-free. [Link]

He is right that, to an extent, the signal value of prices from futures markets is lost when they are banned. I am not in favour of banning these markets too. But, it should be clear to him that, over time, they will lose their signal value and noise would increase, as speculators could amplify price movements disproportionately.

Raids on hoarders need not be mutually exclusive to building buffer stock. The government can do both. His disappointment appears to stem from the fact that the government did not wake up and build buffer stock after the production shortfall in 2014-15. The government has announced now that it would build a buffer stock of around 500,000 tonnes of pulses. It seems to fall short of what he thinks is the desirable level by about 5 to 6 times.

While, for the most part, he is right to insist that the government take some measures that are within its remit, two back-to-back monsoon failures inevitably lead to higher prices. The Union Government should, in fact, allow farmers to benefit from rising prices. That is when the supply next year would increase. The price signal should not be suppressed in the spot market. People can substitute for a while.

Are there adults in the room?

Read the European Central Bank (ECB) press statement after their monetary policy council meeting and the Q&A that followed. Not very impressed with the logic for reviewing the situation in December with a view to acting further. IF things are going along swimmingly, what is the need to buttress the QE effort with further easing in December? No one from the media asked about the downside of allowing asset prices to reach bubble proportions while there is no impact on the real economy.

So, when I saw Bloomberg Views Edit lauding Draghi for keeping an open mind on further monetary stimulus in December and chiding him and his council for not acting in October itself, I was compelled to leave the following comment on their site:

Before a particular course of action is recommended or applauded, it is elementary common sense to evaluate the effectiveness of the action taken so far. If the effects are disappointing and if they had not met expectations, human beings (who happen to believe that they are rational) have two courses of action open to them: (a) One is to abandon the action and try other alternatives or (b) do more of the same.

Central Banks have been only following the second course of action, with little to show for their repeated ‘rinse and lather’ attempts. If they do more of the same without the beneficial impacts, then it makes sense to ask whether unintended consequences and costs are piling up.

Ordinary members of the public would not know to ask these questions. An editorial desk that does not ask these questions is not doing its job. It is not helping the public or public policy-making.

Evidently, you had not read the speech by Graeme Wheeler, the Governor of the Reserve Bank of New Zealand on the world of central banking. It is still not too late. You can read it before you write the next editorial applauding the next round of QE. Many more will come, doubtless.

Tyranny of SMALL in India

Ever since I began documenting (with data) the fragmented nature of India’s farms and factories that militate against scale, efficiency and productivity, I had tried to understand its origins. Doubtless, it will have several. I am still in the search mode. One of the answers I found was inspired by Andrew Batson. But, these are all hypotheses. Learned and sober comments most welcome.

So, when does someone turn into a capitalist? When he employs eight or more workers! That was Karl Marx’ insight. I stumbled upon it in Andrew Batson’s blog. Interestingly, I discovered his blog because good friend Niranjan Rajadhyaksha sent me a link to his post on the death of a 102-year old Chinese economist, Du Runsheng.

So, perhaps, this helps explain India’s fixation with seven workers. That is why the Trade Unions Act 1926 prescribed this:

4. Mode of registration.-

(1) Any seven or more members of a Trade Union may, by subscribing their names to the rules of the Trade Union and by otherwise complying with the provisions of this Act with respect to registration, apply for registration of the Trade Union under this Act. [Link]

Important amendment in 2001:

However, the Trade Unions Act 1926 has been amended from time to time and the most important being the Trade Unions (Amendment) Act, 2001. This Act has been enacted in order to bring more transparency and to provide greater support to trade unionism in India. Some of the salient features of the Trade Unions (Amendment) Act, 2001 are:-

No trade union of workmen shall be registered unless at least 10% or 100, whichever is less, subject to a minimum of 7 workmen engaged or employed in the establishment or industry with which it is connected are the members of such trade union on the date of making of application for registration.

A registered trade union of workmen shall at all times continue to have not less than 10% or 100 of the workmen, whichever is less, subject to a minimum of 7 persons engaged or employed in the establishment or industry with which it is connected, as its members. [Link]

So, Indian capitalists generate production in units that have six or less workers, except where size is inevitable. It is not a small mind that has generated this outcome. Or, perhaps, it is.  It is the small capitalist mind that has sought to circumvent the Government of India’s Marx-inspired Trade Unions Act by opting for small size.

Clearly, our laws are incompatible with our capitalist instincts.