Is India creating jobs?

The controversy over how many formal sector jobs does India crate in a year will never die down or will never be allowed to die down because it is a useful political football. It is up to the rest of us to sift the facts from polemics.

In October 2017, Mahesh Nandurkar of CLSA wrote a good piece on corroborating the jobs number by analysing the job creation by the 900 Indian companies that CLSA tracks. The numbers were healthy and lent credence – at least partially – to official claims.

In April, the Employee Provident Funds Organisation began releasing monthly data on EPFO joiners and leavers, etc. In May 2018, Mahesh wrote this piece in ‘Business Standard’. He writes:

If one reasonably extrapolates the latest available i.e. 2012 NSSO data, India’s total working population would be 500 million; of which 220 million is farm sector and 280 million is non-farm. Of the non-farm population, 70 million is formal and the rest is informal. Assuming similar proportions, of the 10-11 million new jobs needed per year, the number of formal jobs needed would be about 2-3 million/year.

Interestingly, he lists the job-creation incentives that various State governments have provided. Actually, that is sensible. A.K. Bhattacharya had, recently, listed state governments’ reform measures on land and labour.

Recently, several Indian state governments, such as Jharkhand, Gujarat, Andhra Pradesh, Karnataka and Madhya Pradesh have announced significant employment-linked incentives for garment manufacturers, considering labour intensity associated with the segment. These states offer employee cost assistance, covering up to 75 per cent of labour costs for a garment unit for as long as seven years. Jharkhand government, for example, has introduced a policy to give wage compensation of Rs 7,000/month (vs minimum wage of about Rs 8,500/month) for a period of seven years for every new person employed by a garment firm. Besides, there is a one-time support of Rs 13,000/ person as cost of training an employee that is granted. Similarly, the Gujarat government has introduced a policy for garment firms whereby the state government would provide up to 50 per cent of wages for a period of five years as payroll assistance.

He says that these schemes would have had the effect of formalising informal jobs and, in that sense, they are not new jobs. Pulak Ghosh and Soumya Kanti-Ghosh had addressed this partially by omitting all new EPFO joiners above the age of 26, in their study. May be, that is not enough and that divining job creation from EPFO records might still overstate true job creation. So, Mahesh says that one has to wait for at least two more years before EPFO data become a reasonably stable and reliable source for new job creation.

We must remember that Ghosh and Ghosh have also excluded EPFO joiners based on amnesty schemes and have excluded all those who had a single break in contribution in the data. Yet, as Mahesh says, State governments’ special job creation incentives might be one-off or non-continuous sources of job creation. To that extent, EPFO data might overstate true job creation.

That said, he says he would end with his favourite anecdote. It is an important one:

Currently in India, about 22 million new cars and two wheelers are sold every year. About 40 per cent of these sales are replacement demand. After removing the replacement demand, about 13 million first time car/two wheeler buyers are entering the market. If employment creation is such a big issue, where are these 13 million people coming from?

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

Finance-neutral potential growth

There is a very interesting MINT Street Memo from the Reserve Bank of India which tries to estimate the ‘Finance-Neutral’ or ‘Credit-Neutral’ output gap whereas conventional analysis uses ‘Inflation’ as the basis to estimate the output gap or, by implication, potential growth.

Like the ‘Non-Accelerating Inflation Rate of Unemployment’ (NAIRU), this one is the Non-Exuberant Asset Prices Rate of Growth (NEAPRG) or Non-Excessive Credit Offtake Rate of Growth (NECROG). According to the authors, it is 7% in India. India’s economy has closed the output gap two or three quarters ago and the output gap may even be positive, according to the authors. On this basis, the Reserve Bank of India may be justified in raising the policy rate at its next meeting! Not that they are short of reasons for doing so.

Indirectly, this underscores the point that Gulzar Natarajan and I made in our book, ‘Can India grow?’ that India’s sustainable growth rate is far lower than most of us would like to believe.

When I shared the details of this Mint Street Memo with my friend Srinivas Thiruvadanthai, he said that the ‘Balance of Payments’ or ‘Current-Account Neutral’ potential growth could be closer to 6% in India! Sobering.

The Mint Street Memo No. 14 can be accessed here.

The hilarious paragraph of the year

Earlier this year, HMRC was embarrassed when it emerged that it had refused to assist a French investigation into suspected money-laundering and tax fraud by the UK telecoms giant Lycamobile, citing the fact that the company was the “biggest corporate donor to the Conservative Party”.

HMRC initially denied the Lycamobile story, saying: “This is the United Kingdom for God’s sake, not some Third World banana republic where the organs of state are in hock to some sort of kleptocracy.” It later conceded that the story was accurate. [Link]

India’s ‘perfect’ financial storm

Andy Mukherjee has been tracking IL&FS zealously and professionally. That the news of their financial distress broke out as the world was ‘celebrating’ the tenth anniversary of the collapse of Lehman Brothers is indeed a rather remarkably unfortunate coincidence.

Andy Mukherjee’s columns on their travails can be read here, here and here.

Andy’s piece on RBI’s five messages – including one message to itself – is an interesting piece. IL&FS’ distress again reflects poorly on RBI’s regulation because they are regulated by the central bank:

All of India’s finance industry ought now to feel the RBI’s regulatory heat, including Infrastructure Leasing & Financial Services Ltd. and its empire of 169 subsidiaries, associates and joint ventures. The IL&FS Group is systemically important, though it doesn’t take public deposits. Now that the infrastructure lender is defaulting on debt, it’s become painfully clear that the RBI hasn’t done enough to rein in that institution’s freewheeling ways. [Link]

However, his column was about the non-extension of the tenure of Rana Kapoor, YES Bank Chairman & Managing Director by RBI.

While many have applauded the RBI decision on YES Bank C&MD’s tenure being cut short, some have still questioned RBI’s terse communication on the matter, without explaining the decision. See Amol Agrawal’s blog post on that.

Back to IL&FS. Shankkar Aiyar wrote that fear has no bottom. Well, fear has. The worst that value can go to is zero. It is that exuberance has no ceiling! On Friday, 21st September, for a while, it did appear that fear had no bottom in Indian stocks. Intra-day drop was nearly 1500 points. Heavy buying by institutions stemmed the rot but that is no often good news. Indeed, the pressure is bottled up to be released later. On Monday, the Sensex Index shed 546 points (1.46%).

The shareholding of IL&FS should make us all worry about LIC. They have bailed out disinvestment from ONGC; IDBI Bank and they are now neck-deep at IL&FS. Who will shore up IL&FS Equity Capital? What is the true portfolio value at LIC?

ILFS shareholding

This is the source for the above chart. This story captures the importance of IL&FS to the Indian debt market.

Is the IL&FS situation a wake-up call for the Insurance Regulator? But, LIC is 100% government-owned. So, effectively, it is Government of India’s fiscal risk. To the extent that IMF re-calculates projected budget deficit for China to take into account the contingent liabilities of the Central Government in China, shouldn’t it be doing the same for the Indian government’s contingent fiscal liabilities? Of course, the topic of China, IMF and its Article IV report is the subject of a separate blog post. I am digressing.

Finally, I met Saurabh Mukherjea (ex-Ambit Capital) in August when we both were speakers at a conference in Coimbatore. We spoke that night by phone on the vulnerabilities of India’s shadow banks since they had become both aggressive lenders and borrowers in the wake of the torpor of public sector banks. He did warn me then India’s NBFC would be the next domino. He was prescient. Again, on September 8, he had written this post about India’s exposed financial system and it was published by moneycontrol on September 23.

The legend and the myth of Warren Buffett

Fans of Warren Buffett must read these two blog posts. The scales fell from my eyes a long time ago. I am glad that Michael Lebowitz captures the strengths and contradictions of Warren Buffett rather well. Eric Cinnamond is a blogger I like increasingly. It is instructive to read that value investors are tired, very tired. I don’t blame them too. This market cycle has tired me out too. Big time.

The oil price dynamics

I was in Dubai on Sept. 20-21, not to watch the Asia cup in the Dubai cauldron (temperature was reaching 41 degrees when I landed on the afternoon of the 20th) to give a speech at the Treasury and Money Managers’ offsite of the Aditya Birla Group. I listened to some excellent presentations by Mr. Bahram Vakil on the Insolvency and Bankruptcy Code, by Ms. Amrita Sen of ‘Energy Aspects’ on the oil price dynamics and by Rajdeep Sardesai on the 2019 elections.

The oil price supply situation remains tight. Saudi Arabia is not pumping as much as they claim that they could. It is only about 10.5 million barrels per day. They claim to have the ability to pump out 12 million barrels per day. But, they are not. There is a risk that oil price could temporarily spike to the three-figure mark in the fourth quarter.

While electric vehicles are only making slow progress, the oil industry has not invested much in exploration or in distribution. At the same time, demand had almost touched 100 million barrels of crude oil per day in 2017 – some eight years ahead of earlier projections. Here is the latest IEA report that backs this up. Third and fourth quarter demand in 2018 is quite high, topping 100 mbpd in the fourth quarter.

With the American administration serious about its sanctions on Iran, there is the potential for a 2 mbpd shortfall in the fourth quarter. See Bloomberg story here.

This does not sound like good news for India.

“Dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones” and other links

On September 15, 2008, Lehman Brothers filed for bankruptcy. That marked neither the beginning nor the end of the financial and economic crisis of 2008. Yet, there has been such a deluge of coverage in the last one week of the crisis. That is part of the crisis. Excessive event-oriented attention that does little to improve the process.

Central bank hubris and complacency and the ‘Rise of Finance’ (the title of an upcoming book authored by Yours Truly and Gulzar Natarajan) played a part in the 2008 crisis. They are still around and alive. The world is unprepared because of the protagonists of the crisis of 2008 are unrepentant. That is the burden of my column in MINT on Tuesday.

Ben Bernanke summarises his own research published by the Brookings Institution (he is a Senior Fellow there) in this post. He is partly right. I have alluded to that in my column above. Why did the financial panic become global? The role and the rise of Finance have a lot to do with it. He does not go there. That is where my column went.

It is obligatory to refer to the piece that Paulson-Bernanke-Geithner wrote because it contains nothing of meaning except this passing ‘mea culpa’ reference:

Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. [Link]

It is instructive to see the links that come up below the article. They sum up the failure of their post-crisis efforts too:

NYT Headers.png

Staying with Ben Bernanke and his former colleagues, we note the speech by Peter Fisher (not to be confused with Richard Fisher, former President, FRB Dallas) at James Grant’s Symposium last year. Peter Fisher has served in the U.S. Treasury and in the Federal Reserve. See his profile here.

A key extract from his speech delivered in March 2017:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

The third claim, inviting us to imagine how much worse things would have been had the central banks not done exactly what they did, suggests exactly the opposite of the scientific method and a striking lack of imagination. It implies that the only other possible courses of history would have been worse. It leaves no room for perverse consequences or negative side effects. It claims the counterfactual all to itself, leaving no room for doubt….

… So, as I see it, forward guidance is the process through which the Fed – through its more explicit influence on the expected rate of interest – becomes the much more explicit owner of the “conventional valuation” of asset prices.

One person who referred to this speech is John Authers of FT. His remarks:

Ten years ago many of us, myself included, thought a rerun of the Great Depression was very likely, and some of the actions taken in desperation during the crisis hold up slightly better than might have been expected. But long waves of monetary ease, fiscal austerity, and legal leniency for the guilty did not need to follow from this, and have left the bulk of the populace angry and embittered. [Link]

What John Authers has done in the piece linked above is something similar to what I am attempting here. He has linked to several pieces of writing on the crisis. The good thing for you, dear reader, is that his coverage and mine have only few common elements. So, if you read this blog post and his column, you will have covered a pretty good range of the writings that marked the 10th anniversary of the global financial crisis.

But, pieces such as these were not very common. We have another one by Peter Doyle, former IMF staffer in FT Alphaville. A key extract from his post:

But these ex-firefighters cannot bring themselves to say — though let’s hope it hasn’t entirely escaped their attention — that: public debt has more than doubled, curbing critical fiscal capacity (even if only due to political constraints) to respond in future; that policy interest rates are barely off their floors and QE is barely off its ceiling, so they are not much in reserve for the future either; that banking concentration has increased since pre-crisis; that no-one has any idea if international bank resolution frameworks will actually work in the heat of battle; and that the whole policy response to the crisis has emphatically underscored to big institutions that they will collectively be bailed out — spurring herd, concentration, and moral hazard behavior further. Focussing only on policy actions taken (raising the flood barriers) and ignoring the increased moral hazard and other impairments arising from the crisis response itself (the higher tide), everyone wants to agree that things are “safer” now; but absolutely no-one wants to be asked if things are safe.

However, I believe that Peter Doyle lets bankers off too lightly. He does not ask the question that John Authers asks. He is dismissive of the fact that no real big cat banker went to jail.  Peter Doyle is happy with political accountability.

Also, I am not quite sure that China bailed out the world economy and that they did it out of their generosity or enlightened public interest. Of course, policymakers who were part of the G-20 deliberations at that time tell me that those who had the capacity to stimulate were asked to stimulate their economies (those with external surpluses). China had one of the largest external surplus.

But, central bankers have their defenders too. A prime example is Neil Irwin of NYT. The header of the article gives the story away:

The Policymakers Saved the Financial System. And America Never Forgave Them [Link]

It comes across as a pathetic attempt to paint policymakers as victims of irrational, ungrateful lynch mobs.

I think Peter Fisher demolishes the argument that they saved the world. Assuming that American policymakers did indeed save the world, the question that comes to mind is this:

If a firefighter puts out the fire dousing the house with water, one will be thankful. But, what if he continues to douse the house with water, long after the fire is put out?

Joseph Sternberg in Wall Street Journal asks the right questions:

After decades of financial transformation, globalization and policy experimentation, central banks know less than they used to about the effects they have on Main Street. It’s likely to be some time before we figure out what central banks actually did to the economy after the Lehman crisis, let alone whether it worked. [Link]

He says that central banks lost control of the transmission to the real economy after the 1970s. Quite true. They never admitted to it. The change happened with the Rise of Finance as banks created money (credit) plentifully since then.

Matt Stoller of the Open Markets Institute contrasts the Roosevelt bailouts with that of Geithner-Obama bailouts. He says that the Paulson-Geithner-Bernanke bailout eroded the social contract that lies behind the capitalist America – home-ownership. He has a pithy quote from Roosevelt:

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless ones.” Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you? [Link]

I have to agree with Franklin Roosevelt there. Obama administration is responsible, in more ways than one, for the economic and social polarisation of the American society.

Anand Giridhardas takes a different but related line about the elites (ht: Rohit Rajendran). The burden of his song is that philanthropy is a very poor (even morally wrong) substitute for self-aggrandisement of the elites in their normal lines of business or commerce. Quite true. Their true philanthropy will come through or should come through in the manner in which they run their businesses and treat their employees. You can read his interview and his article here and here.

But, the interesting thing – no fault of Giridhardas – is that he has very few cogent answers’ to elite aggrandisement. His ideas – assuming student loans and doing some affordable housing – sound too naive. I do not blame him. That is the nature of the world. Even democracy is only a symbolic fig leaf for the dominance of the elites. It gives the ordinary folks a belief (false) that they have a stake in the process and they shape it. It is far from the truth. They benefit when the tide is so big that it lifts all boats. But, they fail to notice that some of the boats are lifted higher and those are bigger and more powerful boats too. The second time their needs get some attention is when a crisis like the ‘Great Depression’ strikes.

In a way, by preventing the ‘Great Depression II’, the crisis managers – Paulson, Bernanke and Geithner – prevented meaningful benefits and better lives for the ordinary masses which Teddy Roosevelt managed to deliver using the Great Depression as the trigger.

Barry Ritholtz, a bear (Pre-2008) turned bull (post-2008) has a short and pithy column on ten things that people still get wrong about the crisis. One tends to agree with most of what he had written. Talking of Barry Ritholtz, one should read this column by Joshua Brown (ht: Rajeev Mantri) who had commented on how he met Barry and benefited. The column is about how intellectually open-minded Bary was (and, if I may add, lucky) after the crisis and turned bullish. That merits a separate blog post. I shall do it after this one.

Aaron Brown of AQR Investments wrote (ht Rajeev Mantri) in Bloomberg that crisis autopsies asked the wrong questions. He wonders why banks accumulated illiquid assets, cut loan-loss reserves and raised dividend payments after 2006 when the problems were beginning to manifest already. That could be due to poor risk management, complacency and indefinite extrapolation of near-term optimistic trends.

In India, Ila Patnaik could not resist taking potshots at RBI for claiming to have handled the crisis fallout far better than other countries did. But, that is true. Not only did RBI do well in the immediate aftermath but some of its pre-crisis measures are only now becoming de rigueur in the Western world.

This sentence is too clever by half:

It (India) was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. [Link]

It is too clever because ‘non-access to bank loans’ is a serious problem but not trading derivatives is not. It is gambling by another name. Putting both in the same sentence or mentioning them in the same breath is to draw an utterly false equivalence between the two.

If India had absorbed the lesson from the crisis that financial sector liberalisation had to be pursued even more deliberately than before, it was then a lesson well learnt, unlike what Ms. Patnaik thinks.

Niranjan Rajadhyaksha (now with IDFC Institute) wonders if there is so much a need for a new economics as there is one for a dialogue between different schools of economics, in the wake of the 2008 crisis:

Too many critics have lazily equated modern economics with a certain style of macroeconomic thinking that was dominant in the financial markets as well as in central banks, especially the ability to forecast future outcomes. It is a bit like criticizing all of modern medicine because oncologists are not yet capable of predicting when cancer will strike. [Link]

He praises Olivier Blanchard for intellectual honesty. But, Blanchard has not deviated from the Washington – New York consensus as much as he made us believe that he has done so. Niranjan’s praise is not fully earned, yet.

Ira Dugal has a good conversation with Dr. Subbarao, who stepped into RBI and stepped into the crisis, into G-20, etc. His entire tenure was marked by a series of global and local crises. Her interview with Dr. Y.V. Reddy is here.

My favourite academic-politician Yanis Varoufakis was part of a panel of experts whose views ‘The Guardian’ newspaper sought. I had not read all their views. But, here are his proposals to make the world better:

What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.

Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world. [Link]

His ideas make sense to me. But, that also means that they won’t be taken up seriously. Comments by rest of the panel also, at the headline level, make sense. But, one has to dig deeper. I have not done that.

The panel by FT – a novel one – was not a panel. It simply asked seven people as to how their lives changed post-crisis. Each one was interesting and human in its one way. Comments by Nick Bayley, who was the Head of Regulation at the London Stock Exchange are appropriate in this context.

This episode alone would make for an interesting case-study:

I was on the Sunday night conference call on September 14 2008 when Paul Tucker from the Bank of England told representatives of all the big City firms and infrastructure that the Barclays acquisition of Lehman had failed, and Lehman was going to go down the pan the following morning.

It was just a monumental time. Lehman was a global titan. The idea that it would collapse was unthinkable. We knew there were issues in the market; prices were all over the shop. But we went into that weekend assuming that someone would step in and a deal would be done.

There must have been 30-odd institutions on that Sunday night call. When Paul told us that Lehman would go down the next day, nobody said anything. He said he wanted to go around the call and hear that we were ready and this wouldn’t cause a problem. He said he’d start with the London Stock Exchange, so I was the first person to speak.

When in doubt, keep it short. I made a few noises about Lehman’s important role in the equity markets and that we have default rules that come into play, and then I shut up. We went around the call and everybody said the same thing. Nobody told Paul Tucker, ”This is going to cause huge problems, and there will be a major domino effect.” [Link]

No one says what every one knows to be true because no one wants to be the bearer of bad tidings! Nor does Paul Tucker probe them (based on this recollection here, of course).

Andy Kessler (I have read one of his books but forgotten which one it is!) has a good piece on the politics of the collapse of Lehman Brothers. His concluding words:

There is more concentration in banks today than pre-Lehman. They’re better capitalized with better reserves, but it’s still fractional reserve banking. And the shadow banking business that got drenched in derivatives may be larger today than it was before the crisis. Leveraged loans are rampant. That doesn’t point to stability.

In downturns, equity hurts but debt kills. Like an electrode-implanted rat that can’t stop pushing a pleasure lever, banks will lend until they implode. A decade ago, the Fed failed as the lender of last resort. It’s still failing at preventing the next crisis. [Link]

This is the best quote (by Nick Bayley) to end this blog post:

We live in a bubble in financial services. Anyone who tells you otherwise is probably kidding you. We get paid more than most industries do. Do we deserve it? Not in my view. Are people much cleverer in financial services than in other industries? No, not in my view.

Kissinger on Artificial Intelligence

I am no fan of Henry Kissinger. One cannot be, after reading ‘The Blood Telegram’. But, his comments on Artificial Intelligence were very thoughtful. They were written in ‘The Atlantic’ three months ago. I do not know why I never got around to posting the extracts from that article here, although I had saved the extracts for posting as soon I had finished reading that piece. Today, when I read the well-written review of Yuval Harari’s latest book by Manu Joseph in MINT, I resolved to post it here today:

Inundated via social media with the opinions of multitudes, users are diverted from introspection; in truth many technophiles use the internet to avoid the solitude they dread. All of these pressures weaken the fortitude required to develop and sustain convictions that can be implemented only by traveling a lonely road, which is the essence of creativity. ….

………….  Before AI began to play Go, the game had varied, layered purposes: A player sought not only to win, but also to learn new strategies potentially applicable to other of life’s dimensions. For its part, by contrast, AI knows only one purpose: to win. It “learns” not conceptually but mathematically, by marginal adjustments to its algorithms. So in learning to win Go by playing it differently than humans do, AI has changed both the game’s nature and its impact. Does this single-minded insistence on prevailing characterize all AI?…

…….  Through all human history, civilizations have created ways to explain the world around them—in the Middle Ages, religion; in the Enlightenment, reason; in the 19th century, history; in the 20th century, ideology. The most difficult yet important question about the world into which we are headed is this: What will become of human consciousness if its own explanatory power is surpassed by AI, and societies are no longer able to interpret the world they inhabit in terms that are meaningful to them?

…………  Ultimately, the term artificial intelligence may be a misnomer. To be sure, these machines can solve complex, seemingly abstract problems that had previously yielded only to human cognition. But what they do uniquely is not thinking as heretofore conceived and experienced. Rather, it is unprecedented memorization and computation. Because of its inherent superiority in these fields, AI is likely to win any game assigned to it. But for our purposes as humans, the games are not only about winning; they are about thinking. By treating a mathematical process as if it were a thought process, and either trying to mimic that process ourselves or merely accepting the results, we are in danger of losing the capacity that has been the essence of human cognition….

….. the scientific world is impelled to explore the technical possibilities of its achievements, and the technological world is preoccupied with commercial vistas of fabulous scale. The incentive of both these worlds is to push the limits of discoveries rather than to comprehend them. [Link]

So, what did Manu Joseph write about Artificial Intelligence that triggered this post?

To draw our attention to the impending darkness, Harari mentions a chess contest that was held in December last year. One of the contenders was known to chess players around the world. Stockfish, believed to be the world’s most powerful chess engine, is a computer program that has been designed to analyse chess moves. No human has a chance to beat it. Stockfish played AlphaZero, Google’s machine-learning program. The two programs played a hundred games.

AlphaZero won 28, drew 72 and lost none. The programmers of AlphaZero had not taught it chess; it learned on its own—in 4 hours.

Google’s claim of “4 hours” is actually a bit dramatic and opaque.

Also, AlphaZero has been training through such powerful devices that we should not try to comprehend “4 hours” in human terms. Harari, despite being a historian, is not concerned with the nuances of it all. He wants us to be scared. All things considered, it still is extraordinary that AlphaZero could teach itself chess and become the best chess player in the universe known to us. Harari uses such events to point to the future when machines will do almost all human tasks.

It is fitting (in many ways) to end this post with a link to the article by Nicolas Carr published in 2008 on whether Google was making us stupid. Now, we know the answer or do we?

Employment creation in India

Apparently, Surjit Bhalla and his co-author (Tirthatanmoy Das) have put up a paper on the website of the Economic Advisory Council of the Government of India on job creation in India in 2017. They estimate it to be 22 million jobs. That seems to be on the high side. Commentators have their knives out to attack the estimates. The protagonists and the antagonists are politically motivated. I am yet to read their paper. But, I have seen two critiques. One by Professor R. Nagaraj and the other in Hindustan Times which was supposedly second of a five-part serial on Indian labour market.

Professor Nagaraj analyses the claims of Bhalla and Das in four dimensions. The third dimension is that of generating formal employment estimates from the data provided by the Employee Provident Funds Organisation (EPFO). Prof. Nagaraj’ critique is stale and wrong because of the work of Pulak Ghosh and Soumya Kanti Ghosh had taken them into consideration in coming up with their conservative estimates of formal job creation from EPFO data. They have excluded EPFO enrolment through amnesty. They have excluded those who were above 25 years of age. They have dropped those where even one contribution was missed. I have written about their work here and here. That Prof. Nagaraj rehashes the same critique is a reflection of both sloppiness and bias.

Key sentences in this piece tell me that the authors are offering opinion and not analysis. Pulak Ghosh & Soumya Kanti Ghosh’ estimates based on EPFO were conservative and passed the test of rigour. These authors, when discussing their work, say that Ghosh & Ghosh were criticised. They leave it at that. Criticised by whom? For what? and how rigorously? Were the criticisms correct and reasonable?

That throwaway line dilutes the seriousness with which one should take the entire piece although one cannot and does not rule out political and, otherwise,upward bias in the work of Bhalla +1.

The first part is here (can be safely skipped) and the third part is by Manish Sabharwal. Those who have not read Manish’s articles on Indian labour market before can find them all neatly recapitulated in that piece.