Who will ‘burn the house down’?

My friend and co-author Gulzar Natarajan has a lengthy and detailed post on few very important and thoughtful articles and reports that have been doing the rounds in the last week or so. His post is  very comprehensive.

I have the following comments on his blog post. It is a slightly expanded version of the comment I left on his post.

I am pleased to see that you had linked to the perceptive essay by Jonathan Rothwell in NYT on the elite interests that have gamed the system and the rules in their favour. Rothwell may be making one mistake, however.

In his long essay and in his tweets, he is dismissing the role of technology and globalisation in the extremely distorted income distribution. But, they were the pursuits and priorities of elites who gamed the regulations (as per his own analysis) to pursue technological upgradation and globalisation that delivered profits. So, they did contribute to the problem of inequality because they were ‘elite’ projects. Some of the domestic factors he lists could be more important but it would be hard to dismiss technological progress and globalisation as inconsequential for in-country rise in inequality in the developed world. In this regard, the review of the book, ‘Captured Economy’ is worth a read. It is well written.

As we discussed bilaterally, to a degree, the recommendation of the Mckinsey Global Institute (MGI) on more digitisation and more technology to restore the ‘glory’ of U.S. manufacturing (mind you, the ostensible problem they were dealing with was the declining labour share of income) vindicates Rothwell above!

MGI report notes that the labour share of income in the U.S. had dropped from 59.8% in 1970 to 55.6% in 2015 and that manufacturing contributed 68% to this decline. But, the solutions they propose, even if they restore the glory of U.S. manufacturing somewhat, might actually further erode labour income share if machines and robots replace workers while only requiring and paying some highly skilled workers and fewer of them. On paper, that might boost labour share of income but the median worker pay will not have improved. Even now, the decline in the U.S. labour share of income will be far pronounced if financial services workers are excluded.

One does not identify the decline of the manufacturing as a principal contributor to the decline of labour share of income and proceed to give solutions that might worsen the situation further. At the very least, there should be a debate/discussion in the report on the consequences of their proposals for the labour share of income. But, I had not read the full MGI report but only the Executive Summary. May be, the full report has such a discussion. The full report and the Executive Summary can be found here.

Further, although Tony Rothman in ‘Project Syndicate’ focuses more on customer convenience and the ‘ends’ of technological upgrades being lost (motion is not progress) in the welter of mindless ‘improvements’ and ‘enhancements’, that too is part of the problem.

As you conclude, the solution is to ‘burn the house down’ completely. But, that leads us to a cul-de-sac. In the Seventies, the pendulum swung (the house was brought down, as it existed then) due to a combination of factors:

  • Excessive abuse of labour power;
  • Economic misery – stagflation
  • The turning of the intellectual tide in favour of rules over discretion, Disgust with politics as usual (Nixon’s impeachment, Ford’s pardon and Carter’s perceived or real ineffectiveness)
  • Rise of alternative leaders who were not exactly perceived ‘extreme’ like in the case of Donald Trump

May be, I am missing out some.

But, if we try to develop a comparable checklist now, we do have

  • Excessive abuse of the power of capital by capitalists
  • Instead of stagflation, we have extreme inequality
  • There was disgust with politics as usual – it is demonstrated in the multiple political election and referendum results across Europe and the United States

But, what is missing are these two,

– There is intellectual resistance to changing the status quo – many would lose out on their personal perks and influence. Notice how many are writing as boldly as Dani Rodrik is writing. Very few. Those who do are not deemed ‘mainstream’. For example, the monetary policy establishment has managed to brand even the BIS and folks like William White and Claudio Borio, et al, as ‘extreme’ or ‘fringes’.

The ‘99%’ is unable to mobilise and have a sane leadership with clarity of purpose and goals as capitalists on either side of the Atlantic were able to achieve in the Seventies.

Usually, crises help overcome all these drawbacks and throw up policy and personnel (leadership) alternatives. One thought that the 2008 crisis would do that. To a degree, it has. It has cracked open the door. But, the door is still being manned and protected well, despite cracks in the door and in the castle.

Perhaps, it needs another crisis to ‘burn the house down’ as you put it. Or, may be, somewhat less dramatically, as Mark Klieman had written (tweeted by Jonathan Rothwell),

a political strategy capable of mobilizing forces proportionate to the massive task at hand. [Link]


The travails and the triumph of Blackpool

This morning, as I was waiting for my turn in the Purohits’ house in Singapore to perform the rituals for one’s departed elders on the New Moon day, I caught up with Sarah O’ Connor’s piece in FT on the coastal town of Blackpool in UK Northwest.

It is a great article in many respects. Some commentators in FT have identified the reasons. It is honest journalistic work; told with sensitivity and with no ideological baggage – one way or the other. There is no air of superiority; there are no lazy ‘I know it all’ prescriptions. The journalist lets the protagonists speak. It is their voices that come through. Ms. Sarah O’ Connor – take a bow!

Further, as several have written, these are the kinds of stories that keep the faith in FT hanging by a thread. They are the antidotes to having ‘free lunches’ and reading other worthies who forget what they themselves wrote earlier or have become so blatantly one-sided that they should add disclaimers about their ideological leanings and personal prejudices.

At least, the FT Editor cannot claim now not to know what clicks with its readers and what they expect of it.

There are many statements made in the article – either by the journalist or by the people of Blackpool – that are worthy of reflection. They make for ideal seminar topics as some of them are rich and are eternal public policy questions. I capture them below with some comments/thoughts preceding them, with the full realisation that opinions an interpretations of the quotes can and will be different.

This is a wonderful doctoral dissertation topic

Well there’s 5,000 new jobs in London every week, and people seem to find it perfectly easy to move 600 miles from rural Romania to take one of these jobs, so why can’t you move 200 miles from Blackpool?’ — it’s true but it sort of ignores the social context.

This lays out how difficult it is to address root causes and why GPs cannot be held responsible for addressing root causes. But, symptomatic treatment is supposed to help buy time for addressing the root causes.  An analogy is QE and zero or negative interest rates. But, they have become the only treatment and for ever!

 Well, yeah, that’s what medicine does, it treats symptoms. Setting a bone doesn’t get to the root cause of a broken leg — if you wanted to get to the root cause, your job would be to remove the slightly wonky paving stones that drunk people fall over on the way out of pubs on Friday night.” Rajpura argues that the ultimate answer is to tackle the mental health equivalent of the wonky paving stones. He believes that, in places such as Blackpool, we sometimes end up medicating economic and social problems.

This is the holistic understanding that policymakers should have. Indeed, even ordinary citizens should remember. The answer to health issues may lie in non-health aspects and medication may only be a part answer:

 [That’s because] 80 per cent of health is determined outside the health service; it’s things like whether you’ve got a job, whether you’ve got a decent home, whether you’ve got social connections and friends.

This is about synergy, information sharing, shedding egos and breaking down silos and it is about walking around and seeing what is there in one’s environment. Sometimes, answers are right under our noses but we become so engrossed in our own little world that we fail to notice the answers around us. Holistic thinking, approach – all those lessons are implicit in the statement below.

Last but not the least, it is about how various government welfare (or even private) initiatives must work together, learn to appreciate the inter-linkages and co-dependencies between each other.

 Rajpura wants to make all these social groups, charities, health services and council services aware of each other, so that GPs have more options when a patient such as Phillips sits down in their examination room.

WoW! Ronald Reagan and Margaret Thatcher (and even Ayn Rynd?) would feel vindicated. This is one of the many evidence of a non-doctrinaire and non-ideological reporting that Ms. Sarah O’ Connor has done in this piece. There is something to be said for taking charge and not depending on the welfare state to do its work for you. The question is about lending a helping hand without making the beneficiaries getting addicted to it. Addiction to welfare and doles is as harmful (to oneself and to the society and to the nation’s coffers) as addiction to drugs are. At least with the latter, the damage is somewhat confined to fewer set of people. The statement below goes to the heart of the challenge: how to help in need; for how long; how much; when to withdraw and how not to stifle humans’ innate survival and fighting instincts.

In any case, Dean Baker, Larry Summers and Paul Krugman should read this article.

“Places like Blackpool have suffered deep budget cuts since 2010, putting public services under pressure. But, says Tracy Hopkins, chief executive of Blackpool Citizens Advice, “It’s led us to be more creative about the solutions. There’s really positive things that have come out of — dare I say it — austerity.

What a brilliant articulation of a public policy goal?! Perhaps, it should be the only goal? Get out of the way; provide or enable the infrastructure to be provided and provide an insurance role – whether it is health or harvest or price realisation or access to credit – step in and provide insurance, when the so-called market mechanism is indifferent or insensitive or simply cannot provide it.

 The state’s “fundamental purpose” is to provide people with insurance against macroeconomic risks they can’t avoid, she says. “And it hasn’t been working since the early 1980s. 

As is evident from this long post, it is clear that Sarah O’ Connor has achieved the purpose of writing – making readers think or rise to the challenge of thinking! Congratulations and may we read more such stuff from her.

Finally, if we are ready to criticise the newspaper (FT) for all the other stuff it has been peddling for the last several years (including its continued backing for ultra-loose monetary policies that is part of the problems faced by places like Blackpool), we should not hesitate to praise it for publishing pieces like this too.

FT too can and should take a bow! Congratulations.

Salvator Mundi and stock market bubbles

Before Leonardo da Vinci’s painting, ‘Salvator Mundi’ went up for sale, this is what the New York Times wrote:

This is your chance to buy a genuine Leonardo da Vinci painting. The last da Vinci painting in private hands, “Salvator Mundi” (Saviour of the World), is expected to fetch $100m at a Christies’ auction in New York. Sotheby’s sold the painting, unaware of its true provenance, in 1958 for £45. In 2011, the work was confirmed as a genuine Leonardo and unveiled publicly — the first discovery of a painting by the artist since 1909.  [Link]

Eventually, an unknown buyer paid USD450 million for it. This comes days after Christie’s sold some impressionist art works for USD479 million. [Link]

In the meantime, Greenlight’s David Einhorn thinks that most of the problems that caused or were raised by the crisis of 2008 have not been resolved. He is right.

Conor Sen, writes for Bloomberg that the big five technology companies could destroy the tech. ecosystem. He too is likely right.

On Monday evening, Venezuela missed a deadline to make an interest payment on its bonds and thus officially defaulted.

India’s Reliance Communications missed an interest payment to China Development Bank and thus has ended up in default. RCom’s Anil Ambani has managed to do what the Indian governments in the past could not do:  hurt China’s interests! Aircel may have defaulted too.

Ajit Ranade’s piece on coal shortages in power companies confirms that India is leader nonpareil in sub-optimal functioning and turning simplicity into complexity.

India’s DMart is more expensively valued than Walmart. Indian IPOs in general are too richly praised to be sustainably rewarding to investors. [Link]

Rakesh Jhunjhunwala says that there is lot of froth in Indian IPO market. He thinks that the Indian stock market may experience a sharp, swift correction and seems to be bearish on the rupee to boot, for 2018 although he presents it differently. [Link]

Andy Mukherjee has a lovely piece on how (Mukesh) Ambani is taking on Amazon in India. A great line:

The e-commerce industry, including online food delivery, is just $15 billion a year, or 40 percent less than Alibaba Group Holding Ltd.’s Singles’ Day sales in China. [Link]

Will be an invaluable case study for B-School students.

Nothing monetary about inflation

That was the provocative title of my piece in MINT for this week. So, when I saw stories in Bloomberg and Reuters with headlines that Federal Reserve officials urged a radical rethink of monetary policy framework, my heart jumped and even skipped a beat. When I read the stories in full, my heart sank. They do not seem to have learnt their lessons well.

The monetary policy framework rethink should focus on the following in my view:

(1) The usefulness of policy transparency, predictability, forward guidance, etc., for the real economy as opposed to financial market or the financial sector.

(2) Whether loose monetary policies, in the guise of helping the real economy, are only causing a divergence between asset markets and the real economy with the former soaring and the latter meandering along at best.

(3) Whether central banks have really any control over the inflation dynamics in the light of technological developments and the continued imbalance between labour and capital.

(4) Do central bankers have better success rate with causing asset price inflation rather than good and services price inflation?

After all, the monetary theory of inflation is a theory and not THE theory. Was it ever valid or, like all economic theories, it is valid under a given context or contexts?

Central bankers owe it to themselves, to their intellectual training and to future generations to ponder over the above and more rather than think of raising the inflation target or target nominal GDP or negative interest rates.

Not only should they remember that the road to hell is paved with good intentions and that the law of unintended consequences is an ever-present law in public policy but that many of us would be legitimate in questioning their intentions and their constituencies if they walk down such paths.

Credit where credit is due

The surprise news on Friday morning was that Moody’s Investor Services upgraded India’s credit rating to Baa2 from Baa3 and changed the outlook to ‘stable’ from ‘positive’. About a year ago, S&P had ruled out an upgrade to India’s sovereign rating for at least two years. Their rating is BBB-, similar to Moody’s pre-upgrade rating of Baa3.

The Government of India and its Chief Economic Advisor have, on several occasions, criticised the rating agencies for their slow response or non-response to India’s improving or sound fundamentals. They may have a point because for foreign investors, the ratings agencies’ decisions are useful signposts, whether correct or not, justified or not. They do not have the time to go into depth. They go by the so-called ‘due diligence’ done by the rating agencies.  To that extent, the optics of a good rating matters.

But, philosophically, the Government is better off doing its job and letting rating agencies arrive at their conclusions at their own will and pleasure. In the long-run, it is only a marginal factor. But, politicians in democracies with regular elections (with elections to States, it is worse, in India) are anything but long-term.

The timing of the Moody’s upgrade is a surprise because the day before, India’s Finance Minister, speaking at a Morgan Stanley forum, had said,

“No pause (on fiscal consolidation) but challenges arising from structural reforms…could change the glide path,” Jaitley said at the annual Asia Pacific meeting organised by Morgan Stanley in Singapore. [Link]

In plain English, the Government of India is all set to miss its fiscal deficit target for 2017-18 and there might well be a slippage in 2018-19 compared to the target set out earlier. Whether it is good or bad and whether it is for the right reasons or wrong reasons are separate debates. But, that is the truth and hence, Moody’s might be a bit embarrassed about its timing.

Further, the Government of India has sought a special dividend from the Reserve Bank of India to pay for its bank recapitalisation. All told, that may not be deemed a credit positive. Employees’ union in the central bank has opposed it.

All that being said, the Government of India deserves praise (I am not being cynical here) for managing the international optics better in recent times. It earned a 30-ranking jump in the ‘Ease of Doing Business’ ranking thanks to the implementation of the Goods and Services Tax (could have been done far better) and Insolvency and Bankruptcy laws. The latter, for all the gaming being attempted by borrowers, is somehow, going well and as one would expect. There is learning and there is a quiet determination on the part of the creditors to use it to bring wilful defaulters-debtors into line.

Whether we are government supporters or not, any observer has to acknowledge that India’s business environment is undergoing a structural transformation, for the better. The big boys are being dragged, ‘kicking and screaming’ into better behaviour and not rely on their connections. Well, some are above the fray, still. That has to wait for some more time, I guess.

So, the government deserves credit for improving the optics. They do matter. Further, India’s credit rating at Baa3 was a bit harsh compared to the single A rating that China enjoys with its own poor public debt and fiscal deficit dynamics. Ask the IMF or check out my brief for the Gateway House published in September.

The relevant tables are worth re-publishing. IMF, in its Article IV consultation report, generated the gross public debt and fiscal deficit dynamics for China up to 2022. Contrast that with what the IMF estimated for these two parameters one year ago. The two tables are reproduced below:

IMF_China public debt and deficit dynamics_2017

Source: * Projected figures | Source: People’s Republic of China 2017 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2017 (Table 1, page 43)

IMF_China public debt and deficit dynamics_2016.png

Source: * Projected figures | Source: People’s Republic of China 2016 Article IV consultation—press release; staff report; and statement by the executive director for the People’s Republic of China, International Monetary Fund, August 2016 (Table 1, page 39)

Fiscal deficit minus expected revenue from land sales equals net lending/borrowing in the above tables. In other words, properly accounted fiscal balance and public debt are worse than India’s general government (centre + states) fiscal balance and public debt.

The table below provides corresponding figures for India on general government deficit and debt to facilitate comparison.

IMF_India_public debt and deficit dynamics_2017

* Projected figures | Source: India 2017 Article IV consultation—press release; staff report; and statement by the executive director for India, International Monetary Fund, February 2017 (Table 7, page 62)

Despite the recent downgrade in May this year, China has an A1 credit rating from Moody’s.

As for India, whether it would result in enhanced foreign investor interest in Indian stocks and bonds, I am not so sure. Most of them would be inclined to look through the upgrade in the light of recent data in India. The Indian rupee has strengthened almost a full percentage on the news. It is trading below 65 to a (US) dollar. There is room to think that this is as good as it gets for the Indian rupee.

India’s October inflation and trade data were both disappointing and worrying.

India’s consumer price index (CPI) inflation and wholesale price index (WPI) came in higher than expected. At 3.6%, CPI inflation was slightly higher than  market expectation of 3.5% and vs. 3.3% in September. WPI inflation also recorded an annual percentage change of 3.6% but it was well above  market expectation of 3.0% and 2.6% in September.

India’s trade deficit for October was much higher than expected. Exports at USD233.6bn was 1.6% lower than the level in Oct. 2016. Imports were USD371.2bn in October, about 7.65 higher than it was in October 2016. Oil imports rose sharply in October 2017 over October last year (+27.9%) and oil imports were also higher in the period between April – Oct. 2017 compared to April – Oct. 2016 (+20.2%). It is mainly the oil price effect and there has been no big  change in the volume of import.

Non-oil imports were higher by 2.6% in Oct. 2017 vs. Oct. 2016. But, for the April – Oct. 2017 period, they were sharply higher (22.8%) over the same period last year.

Merchandise trade deficit was USD86.1bn for April – October 2017 vs. USD54.4bn in the same period last year. Including services, the deficit was USD52.6bn vs. USD22.1bn in the same period last year. Source: See the press release from the Ministry of Commerce.

In sum, the quick and sharp jump in WPI and CPI and the Oct. trade numbers show how weak the foundations of the Indian economy are, in terms of productivity. It is an economy that is hemmed in from many sides – production, distribution, infrastructure and governance. Long way to go.

Neelkanth Mishra of Credit Suisse wrote, after seeing the October trade numbers, that, “the fog on the economy now extends to the currency as well.” Oh, well.

So, the Government of India should count November 16 as a lucky day.

Dani Rodrik speaks from my heart

Finally, someone from the ‘mainstream’ dares to speak the truth about how and why populists arise. I put ‘mainstream’ in quotes as a tribute to Dani Rodrik because he had always dared to differ from the ‘mainstream’ and yet is able to speak from the hallowed mainstream portals. A great art, that is.

IN calling attention to the hypocrisy of the so-called mainstream politicians and technocrats, Dani Rodrik is speaking from my heart. I have always maintained in my weekly columns in India’s MINT and in this blog that the real reason for the emergence of Trump or for the manner in which the Brits (outside of London and Scotland) voted for Brexit has to lie in the extremely self-centred behaviour of the elites cloaked in lofty rhetoric of free trade, free movement of labour, etc. The Panama and Paradise papers are proofs of that. In the process, they lost touch with their own people. We seem to have already forgotten that mainstream parties were badly mauled both in France and in Germany.

It is the breathtaking hypocrisy and the ‘holier than thou’ attitude of the so-called Liberals that awaken the contrarian in me, with respect to the so-called populists-nationalists.

Recently in Poland, even ordinary people felt compelled to join the rally of ‘Poland for Poles’. Read the story in Wall Street Journal carefully. Not all who joined the rally were white supremacists.

Rubbishing and dismissing those who do not serve our interests are supposed to be traits of intolerant demagogue-populist leaders?!

Professor Rodrik wants mainstream politicians to walk a fine path between eschewing/r rolling back

the free rein given to financial institutions, the bias toward austerity policies, the jaundiced view of government’s role in the economy, the unhindered movement of capital around the world, and the fetishization of international trade” and sticking to the inclusive path while keeping their politics “squarely within liberal democratic norms.”

The latter is do-able and should be pursued. But, there is plenty of room for debate on quite what an ‘inclusive’ path means as opposed to the conception of national identity.

Despite how far Professor Dani Rodrik has stuck his neck out in calling a spade a spade, even he is still stopping short of smashing all the holy policy cows that have either failed or been misdirected or have been abused. I will leave it at that. You can have your own guesses as to what that is. The hint is there in this post itself.

There is a second omission in his piece. He has not called out the central bankers and their role as policymakers in giving rise to inequality and alienation and hence the rise of populist-nationalists.

The third omission is about how central bankers and ex-Presidents continue to remain cosy or become cosier with Wall Street with their speaking engagements and fees. It is more than about the money they receive. It is a symptom of a malady – the complete capture of the political and policy decision-making arms of the government by a special interest group – the financial sector.

However, I must admit that he has partially addressed this by suggesting, for example, that Hillary Clinton could have signalled something like “I shall never again take a dime from Wall Street.” That is the right advice for Presidential contestants but what about ex-Presidents and ex-Central Bank Chairpersons, Governors and voting members?

Indeed, along with the things that he has called upon to be put on the table, even the pejorative tone with which the phrase, ‘populist-nationalists’ is used should be on the table for such an expression only further serves to alienate.

Since the U.S. Presidential elections, ‘the other side’ has done nothing like what Rodrik has advocated: ‘putting everything on the table’. Instead, they have doubled down further on their failed policies and rhetoric – both economic and social policies included. In doing so, they are doing the best possible service for the popularity of the causes espoused by the populists and for the appeal of the populists too.

That is why, Professor Rodrik’s piece is a much needed op.-ed. in calling out the hypocrites and that is where the solutions must start.

An unreasonable assumption

In reviewing two important books that are making the case for incorporating moral considerations into economics turning it from ‘dismal science’ into ‘distinguished science’, Ricardo Hausmann writes,

But with a few reasonable assumptions, such as the idea that more is better than less, you can make many predictions about how people will behave.

The more I think about it, the more I feel that it is not a reasonable assumption at all because if, at any given point in time, more is preferred to less (or, what you have – because what you have can always be less than what you imagine you should have), it is both socially, economically and morally hugely problematic because the answer to that desire is unbounded.