Demography and inflation

Researchers from the Bank of Finland and the Bank for International Settlements have published a paper on the relationship between demography and inflation – that is a topic that Charles Goodhart and Manoj Pradhan have been at, in the last few years, through op.-eds., papers and a book too. BIS Working Paper No. 656, published in 2017, authored by them, is one of them.

The collaborative paper by economists at the Bank of Finland and BIS, ‘Demography and inflation through time’ arrives at the following conclusions:

we find a robust and stable relationship between demography and inflation. In terms of age structure, the dependents (the young and the old) are generally associated with higher, and the working age cohorts with lower inflation. In other words, a higher dependency ratio is associated with higher inflation. The only substantial exception to this pattern is the very old cohort (80 + year olds) that has a negative effect on inflation. Yet, this cohort is more heavily affected by longevity than the other cohorts. We also find significant positive association between population growth and inflation, and negative association between increasing longevity and inflation.

The authors concede the possibility that the effects could interact and that the combined effect on inflation would depend on which effect dominates:

One difficulty with this hypothesis is that the effects of (i) and (iii) can lead to ambiguous effect with respect to the share of old population. The reason is that increased longevity, which would have a negative effect according to (iii), also shows up in population data as an increase in the number of old individuals, which according to (i) should have a positive effect all else equal. Thus, the overall effect of the share of old population depends on which of these two effects dominate.

Other conclusions:

The demographic effects are economically significant for trend inflation, both in individual countries and at the global level. For example, demography accounts for around a seven percentage point increase in inflation from the 1950s to the mid-1970s in the United States, and a similar decline thereafter. In line with this finding, demography also matters for inflation persistence.

The demographic shifts are smaller in those countries, which have seen less strong demographic shifts. For instance, the baby boom was smaller in Germany, and so was correspondingly the demographic uptick in trend inflation. The deflationary pressures during the recent decades arise because the deflationary impact of the declining share of the young cohorts has dominated the inflationary impact of the increasing share of the old. But this balance is currently shifting.

reduction in the share of 20-25 year olds due to military deaths during the war leads to a reduction in the share of 40-45 years olds 20-years later. And since our previous results suggest that this category is significantly and negatively correlated with inflation, we should see an increase inflation 20 years after the war. This is indeed what we find. Furthermore, the finding remains robust even after controlling for other confounding factors and excluding the main participant countries in the wars. Similarly, we find that the lost birth rate is associated with lower inflation 10-15 years after the wars, again in line with our previous results.

Our findings are particularly relevant because the global population is set to age fast according to UN population projections. Over the next half-century, the share of the old will increase massively. According to the “interest rate misalignment”explanation, this will increase the natural rate and, if monetary policy does not adapt, will in turn lead to rising inflation. We estimate that in this case inflation would rise by approximately 3 percentage points on average. This is in sharp contrast to the past 50 years, where the increasing share of working age population lowered average inflation by around 3 percentage points. At the current juncture, the shrinking number of young cohorts largely offsets the effects of increasing number of old ones, keeping inflation low and stable.

The paper is available here.

Examples of intellectual brilliance and not

I just happened to read an amazingly brilliant review by Prof. Indira Rajaraman of Kaushik Basu’s autobiography. It was published on the 8th July 2021 in ‘The Wire’. It is a devastating review and it is so effective because it does so with minimal and deliberate effort. The reviewer simply draws upon all the hard work the author himself has put in and he certainly has worked hard. The analogy is that of batters using the bowler’s pace to get maximum runs. It is also a very important lesson in writing. In fact, in the process, we learn of what Dr. Indira Rajaraman thinks that CEAs should be doing:

The CEA is also head of the Indian Economic Service (IES), set up to generate a trained cadre of professional economists, with experience of the Indian system gained from working their way up the ladder. Basu found them a useful source for “so many tricky aspects of Indian policymaking that I still do not fully understand.  I have to keep calling them to explain things to me.” He is too modest to say what he did for them in return, by way of strengthening the service or enriching them intellectually. 

To frame successful policy in India, one has to be a fiscal plumber by profession, know budget heads and how funds flow and the points at which they can be covertly or overtly obstructed. One has to know that legislated limits on fiscal deficits have led to a number of stratagems, like delaying expenditures in seemingly legitimate ways. (Basu comments sarcastically on his wife Alaka’s struggles to extract her delayed salary from a public university: “Hats off, India”). Those delays result among other things in the high working capital requirements of Indian business.  The CEA is actually well positioned to get that kind of grunt work done, but sadly, many of them, unfamiliar as they were with the Indian system, or not interested in anything other than themselves, did not even know such work needed to be done.

I have been wanting to post a review of his article published on the 1st of February in ‘Project Syndicate’. The article is an attempt to predict which Asian countries would perform well, economically, in the coming decade. You can read it here. In the view of the author, India cannot be a growth champion for this reason:

Yet, fundamentally, India is one of the strongest emerging economies. It has a world-class information-technology sector, a strong pharmaceutical industry, and a small segment of highly educated workers. The stumbling block is the country’s divisive politics, which have eroded trust and caused the investment rate to fall steadily over the last few years.

I have no problem with his observation, per se. My agreement or disagreement is immaterial. He is proposing a hypothesis here, mind you: that eroding trust and divisive politics have caused the investment rate to fall. It is not a conclusion. For his hypothesis to be accepted as a serious argument or conclusion, I would have expected any good economist, worth his salt, to do is the following:

To prove that ‘divisive politics’ will drive growth or has driven investment away, I would have liked him to set up a criteria to establish what ‘divisive politics’ is, how he would measure it (number of communal incidents, number died, cases filed by the government against members of other religions, number of newspaper articles, number of google searches, whatever), show that under such criteria, which countries in the world have been divisive in past and for how long; how, in such periods, those countries suffered low growth, low investment (capital formation) and much else, etc.; how India qualifies to be a country of ‘divisive politics’ under the criteria he had set up and, therefore, how India would suffer a growth setback as long as India scored high on his index of divisiveness.

That is what I would expect my students to do, if they were advancing a hypothesis as an argument.

Shareholder capitalism and consumer welfare

Dr. Sumita Kale drew my attention to the article on Big Tech and anti-trust in the Wall Street Journal by Greg Ip via the newsletter she gets from ‘’. The name rang a bell. I had met Charles Assissi in the annual Aavishkaar-Intellecap led Sankalp Forum in 2018 (I think). He was talking about it, then. Glad to see it up and running.

The article by Greg Ip was interesting. It is great discussion material in economics and in public policy classrooms. Perhaps, in business schools too.

I did not know that Robert Bork was the counterpart to Milton Friedman on shareholder capitalism. The latter argued that the mission of companies was only shareholder returns. Bork appeared to have argued that the only thing that would militate against size was consumer welfare. If that was not affected, then size did not matter. That is the view that most judges have taken since the 1980s. I am not convinced of that logic.

Equally, I am not convinced of Greg Ip’s argument that it is about democracy. Questioning bigness is not a political issue as he is making out to be. Stakeholders, if broadly defined, go beyond shareholders. Similarly, size goes beyond consumer welfare. Suppliers, workers, small entrepreneurs and start-ups are part of the economic system.

Andrew Haldane argued that ‘Theory of Moral sentiments’ was a book for the 21st century as much as ‘The Invisible Hand’ became a book for the 20th century.

This is part of the foreword he wrote for the report on economics education by the Post-Crash Economics Society at the University of Manchester:

It is time to rethink some of the basic building blocks of economics. And in this rethink we could do worse than return to Adam Smith. For just prior to the Wealth of Nations, Smith had produced a rather different book. It was called The Theory of Moral Sentiments and was published in 1759.
In it, Smith emphasizes cooperation, as distinct from competition, as a way of satisfying society’s needs. It places centre-stage concepts such as reciprocity and fairness, values rather than value.
If the Wealth of Nations was the book for the 20th century, the Theory of Moral Sentiments may be the book for the 21st.

Whether it is shareholder returns or stakeholder returns or small or big sizes, there is no capitalism without fairness. Every other argument is obfuscation.

Breaking up monopolies

Two recent posts by Matt Stoller on the topic of breaking up the Tech. giants are important reads for those who are interested in this topic. The earlier of the two posts (dated June 25th) celebrated the bipartisan resolution in a House Committee that voted to pursue anti-Trust actions against the Big Tech:

Yesterday, the House Judiciary Committee, which is the body that has jurisdiction over antitrust law, wrote and voted on legislation to break up big tech firms Apple, Google, Amazon, and Facebook. There are problems with the bills, and I’ll get into them. But the underlying content is less important than the political message, which is that breaking up big tech is looking increasingly inevitable.

The House Judiciary Committee passed six bills. You can read about them in his post. He does a good job of explaining what each of these Bills aim to do.

An interesting observation in this post that set me thinking is this one:

to write a good law, you have to think like a criminal.

If one thought about it, most of us would agree but governments seldom consult/use criminals and other law-breakers to strengthen their law and their enforcement as well. This is what most information technology divisions do. They invite hackers to test the security of information systems in governments and in businesses.

One of my friends told me a month ago that the best way for the Government of India to arrest and plug tax evasion is to invite Chief Financial Officers of some of the companies that enjoy a very low effective tax rate and ask them for ideas on plugging tax evasion. It made a lot of sense.

In practice, governments must find ways to consult and reward such brains. The government must use these so-called ‘law breakers’ and ‘law evaders’ systematically to improve their legislation.

It is not enough or perhaps totally unnecessary to cut and paste from other countries’ legislation but far better to invite potential law-breakers to tell them how they would evade and avoid the proposed legislation once they become law.

The second issue that he covered and which I find interesting is how American judiciary interpreted monopoly behaviour:

Most of the things you and I would consider unfair, like paying kickbacks to someone to stop them from selling rival products, or selling below cost to drive your competitors out of business, or intentionally making your products incompatible to undermine smaller rivals, judges tend to see as ‘pro-competitive,’ which is to say, good and efficient. I’m not kidding. Yesterday, Obama-appointed judge Daniel Crabtree dismissed an antitrust case against Epipen maker Mylan, which was paying bribes to stop their competitor’s product from being available to consumers. To Crabtree, such bribes weren’t corrupt, they were efficient!

It’s not that judges are corrupt, it’s that there is now 40 years of case law saying that they must generally be hands-off and let firms do what they want. …. To put it differently, imagine if, say, you had to show in any robbery case not just that your money was stolen, but that you would spend your money more wisely than the person who took it. That’s basically what antitrust is like these days. This is called ‘consumer welfare’ but it is in fact just a corrupt and foolish way to understand law.

In a way, this is what happened the following week. In the second of his two posts that I wished to discuss dated 29th June, Matt Stoller discusses why a judge threw out the case against Facebook:

Today, Judge James Boasberg, an Obama-appointed district judge, dismissed the Federal Trade Commission’s complaint against Facebook, as well as a separate complaint filed by the by the state attorneys general led by New York’s Tish James. As if to offer a Dr. Evil-style metaphor on the event, Wall Street immediately bid up Facebook’s market capitalization to just above one trillion dollars.

The Congressional reaction was swift. Here’s Republican Ken Buck, agreeing with Democrat Amy Klobuchar on the the decision. [Link]

Clearly, it is not that Democrat-appointed judges are anti-business and that Republican-appointed judges are pro-business. That does not seem to matter. They all seem to matter that as long as consumer welfare is not harmed explicitly, businesses are free to pursue whatever tactics they wish to, no matter how fair or unfair, how ethical or unethical their practices are. That is weird but that is what it is.

The note on which Matt Stoller concludes his post is quite revealing:

Finally, both sides need to start making sure that their judicial appointees know something about market power. While conservative judges are generally pretty bad on antitrust, so are liberal ones. In fact, I appreciate that Boasberg is a Democrat, so we can dispense with the standard whiny schlock from center-left enforcer-types that it’s just the big mean Republican judges at fault. For too long, antitrust has been an after-thought for judicial nominations. This decision, while not terrible, doesn’t speak well of the clarity of thought by judges.

But it is clarifying for the rest of us.

With ‘both sides’, he is referring to Republicans and Democrats.

What is happening is educational and interesting.

Are you a capitalist or socialist?

Professor John Cochrane has an interesting post on how even the so-called Finance faculty in the United States lean left. The unstated null hypothesis or assumption is that they would lean Right/Capitalist given that most of them have cut their teeth and earned their stripes (doctorate) in the era of the primacy of shareholder capitalism. Nonetheless, the academic climate in the United States has changed. One has to survive. So, it is part of the survival strategy to state that one leans left/socialist or do so actually or both.

The comments on his post were interesting and educative. There was a very interesting discussion in the comments section on the attribution of the famous quote “If you are no socialist at 20, you have no heart and if you are still one at 40, you have no head”. This quote is not quite verbatim either – I made it up to capture the essence of it. Prof. Cochrane had attributed it to Winston Churchill. Turns out that it is not correct.

The blog post by Tim Taylor is worth a good read. The origin of this quote is not quite English but likely French. The quote attributed to Herbert Stein by Tim Taylor is very useful and offers the best perspective on the topic:

“An old saying goes that whoever is not a Socialist when young has no heart and whoever is still a Socialist when old has no head. I would say that whoever is not a liberal when young has no heart, whoever is not a conservative when middle-aged has no head, and whoever is still either a liberal or a conservative at age seventy-eight has no sense of humor. Obviously, orthodox certainty on matters about which there can be so little certitude must eventually be seen as only amusing.” [Link]

In short, does it matter or should it matter so much? Another friend in the US academia put it well. He asked me if it has to be 1/0 (‘Either/Or’). I agreed with him. It should not be. Labels – as I have said often enough – should describe us and not define us.

One more case study for unintended consequences

Coloradans Need Not Apply:

Big companies are hiring for remote workers all over the country except in one state: Colorado. That’s because Colorado has a new law that requires employers to disclose the expected salary or pay range for every open role they advertise, including remote positions, reports Chip Cutter. The law is aimed at reducing wage gaps and providing greater transparency. But employers are instead refusing to hire anybody in the state.

Source: Real Time Economics Daily email blast from WSJ, 18th June 2021

From the original WSJ article of which the posting above is a precis:

Aaron Batilo, a software engineer near Denver, began working remotely in August 2019, and said he has found both greater pay and opportunities by remaining in Colorado and working for companies headquartered outside the state. When a former colleague mentioned that some remote job listings stated the positions were unavailable to Coloradans, his initial reaction was disbelief. “That would be such a red flag,” he said.

But after spotting a discussion about more such postings on a Reddit forum last month, Mr. Batilo decided to act. He took a day off work and spent 12 hours building a site,, that tracks job listings that explicitly note they are not open to work in Colorado. He spends about five to 10 hours a week updating the site and manually verifying that listings exclude Colorado. As of Thursday, his list included 46 companies.

 “To see companies kind of just taking the stance where they’re like, ‘We’ll hire remotely but we don’t want to consider Colorado,’ it kind of bummed me out,” said Mr. Batilo, who said he supported Colorado’s law and greater salary transparency. “The fact that we need some kind of site to track this seems to me like there’s something wrong happening.” [Link]

Rethinking Marshmallow jars and Stanford prisons

After reading the article by Brian Resnick in, published in January 2019,  the exchange Mr. Resnick had with the Professor behind the ‘Stanford Prison Experiment’.

I found the exchange a little disappointing starting with the ‘fraud’ in the title although in the text, Brian Resnick concedes that some of the drawbacks or methods used in the original study did not necessarily invalidate it. Then, calling it a ‘fraud’ was decidedly unhelpful and unsurprisingly, puts the ‘accused’ in a defensive frame.

As he had written in the article published in Jan. 2019, the social culture has to foster a willingness for original proponents to become more open and more humble. As a reader sitting in Singapore, with absolutely no axe to grind, I felt that the exchange he had with Prof. Zimbardo did not come across as being conducive enough to encourage intellectual openness.

In passing, I must mention that in my own lectures to students, I do mention that the message of the ‘Stanford Prison Experiment’ is that humans could so easily let labels define them rather than describe them. That is, the moment someone is designated ‘prison guard’, he/she starts to behave as such, as do ‘prisoners’.

The moral of the experiment is that we should avoid being trapped by the labels that others assign to us or we ourselves chose (I am a liberal; I am a conservative; I am for markets; I am for socialism; I am a capitalist; I am a feminist, etc.). In doing so, we lock ourselves into positions that we find difficult to open and come out, even in situations that we feel we should. We become prisoners of our labels.

To me, that was the message of the Stanford Prison Experiment.

The ‘repudiation’ of the original ‘Marshmallows experiment’ comes under the same category. This is Brian Resnick’s article (2018) on that one.

In social sciences, it is well known that controlled experiments are almost impossible. Randomised Control Trials (RCT) came up as a plausible alternative. But, we – humans – can game RCTs too. In the end, all of us have biases and we just want the veneer of scholarship or respectable data to buttress what we already believe (for whatever reason) to be true.

We all know context matters and that other things – such as parents’ incomes, educational backgrounds, the example they set with their own behaviour – matter too.

That does not make delayed gratification, grit and belief in growth and intellectual malleability are undesirable or cannot be pursued or should not be pursued.

It is a good thing that the original author of the original Marshmallows experiment, Walter Mischel, did not make extravagant claims about the predictive power of the Marshmallows test to the exclusion of other factors.

In another article published in 2016, Brian Resnick had cited Prof. Ingrid Haas and I felt that he had the right explanation for replication studies to fail to replicate:

Replication is often more complicated in psychology [than other sciences] because we tend to study things that are not always directly observable,” Ingrid Haas, a professor of psychology and political science, writes me in an email. Behaviors like love, friendship, bravery, and trust often have to be coaxed out of psychology experiment participants through role playing. Those scenarios are extremely sensitive to changes in culture and context, and are difficult to recreate.

Then, there is also the question of ensuring that the replication studies do not suffer from the same methodological deficiencies or the intellectual deficiencies or both, of the original.

As Brian Resnick wrote elsewhere, publishers are also not interested in publishing studies that do not have anything dramatic to say. That works in two ways:

(a) Original studies that do not report anything unusual are self-censored and kept in the draw, as you write.

(b) Replication studies that appear to ‘demolish’ the original could perhaps be less scrutinised because it is ‘news-worthy’ – the equivalent of chasing TRP ratings.

This paragraph is very important:

The truest thing written about psychology’s crisis was in the conclusion of the August report in Science. “Humans desire certainty, and science infrequently provides it,” it stated. “As much as we might wish it to be otherwise, a single study almost never provides definitive resolution for or against an effect and its explanation.”

That is true of replication studies that challenge the original too.

We are truly in an intellectual cul-de-sac. The more we begin to acknowledge humility and limitations, the more it looks like we cannot be sure of anything, including that very statement itself!

Therefore, I wonder if it is the least inefficient or the least infeasible of all worlds to go back to the world of some people stating their convictions (with relatively less humility) and others challenging them rather than expecting one individual to display both qualities with the right balance?

That makes for a somewhat polarising and contentious world but humans seldom find the balance on their own and in themselves.

Economists and their cashew nuts

(Richard) Thaler began to keep a list. On the list were a lot of irrational things people do that economists claim that they don’t do, because economists presume that people are rational. At the top of the list was their willingness to pay 100 times more to avoid a one-in-a-thousand chance of being infected with an incurable disease than they were for the cure for that same disease, after they already had a one-in-a-thousand chance of having it. ….

….. And he noticed that when he had his fellow economists to dinner, they filled up on cashews, which meant they had less appetite for the meal. More to the point, he noticed that they tended to be relieved when he removed the cashew nuts, so they didn’t ruin their dinners. “The idea that it could make you better off to reduce your choices—that idea was alien to economics,” he said.

Source: Lewis, Michael. The Undoing Project: A Friendship that Changed the World (p. 282). Penguin Books Ltd. Kindle Edition.

It is amusing to note here that economists whose neo-classical theories rested on the foundation of ‘more is preferred to less’ and that includes choice, actually welcomed someone making the decision for them and, two, the reduction in the choice available to them (enjoying cashews and enjoying dinner). As rational human beings, they should have felt confident about making that decision on their own.

Just as science and scientists are different, so is economics different from economists.

Humility over hubris

I woke up this morning and checked my in-box. The usual ‘Business Standard’ daily morning briefing was there. I saw an article with a brief description about hubris and humility. These issues fascinate me. Human frailty, fragility and behavioural quirks and features greatly fascinate me. In another setting, I might have avoided doing a Management Degree, a Ph.D in Exchange Rates, etc and become a psychologist, perhaps! Who knows? Anyway, ‘what if’ questions are always interesting.

But, the funny part of it was that while I scrolled the mail for other headlines, I missed seeing this one again. I searched frantically and I could not locate it. It is not possible. So, I thought I would search in the internet and I found several other articles.

In the meantime, I did find the article that emphasised humility over hubris. It is written by my friend R. Jagannathan (‘Jaggi’). It is well written. In fact, it is top-drawer stuff for many of its ‘tongue-in-cheek’ elements. His main subject matter, the Finance Minister of Tamil Nadu, has indeed been talking too much and talking a little too abrasively. Not necessary.

That said, I did like his prepared remarks made (or was not made) at the GST Council Meeting on the 28th May 2021. They were substantive. My personal view is that he should let his work and intellect speak for themselves.

My friend Harikiran Vadlamani (HKV), the man and the brain behind Indic Academy (check it out) shared this once:

Humility is a strange thing – the moment you think you have it, you’ve lost it! – Swami Chinmayananda

Hubris is even stranger – the moment you think you don’t have it, you have gained it ! – HKV

They are cute and, yes, they are simplistic. But, yes, they are also exaggerations that make a point. That is what exaggerations are for.

If we think about it, we often say accusingly or disapprovingly, that someone is so full of himself or herself. But, there is a flip side and a positive one at that. Only those who have an irrational self-belief or self-confidence will defy odds, will do and achieve things that reasonable people won’t or won’t even try. They are the disruptors and change agents – for the better or for the worse. What is funny or sad – depending on the effect on the world – is that those who do such odds-defying feats eventually end up being change agents for the worse. They continue to disrupt all right but the larger good suffers.

So, for the rest of us, it is important to remember that people who are full of themselves are the ones who change the paradigm (sorry for the cliched expression) and who achieve things beyond the three-sigma range. Most of us will be calculating odds and will never even attempt them.  But, at some stage, the self-belief become delusional and the decline begins. But, they are too proud and too consumed by their self-belief to notice it even. That is how the cookie crumbles or has crumbled in history.

It would all be nice if they know when to switch from being disruptors to being ‘maintainers’. The latter requires reasonable, risk-averse behaviour.  But, that is as rare as it is desirable and admirable. 

We can start with a definition of hubris:

The simplest definition for the word “hubris” is dangerous overconfidence. But the word has additional nuanced complexities. It’s an ancient Greek word that also included taking pleasure out of humiliating others and even encompassed a connotation of sexual conquest and exploitation. Hubris, according to the Greeks, is an insult to humility and epitomizes insolence to the gods. [Link]

Christopher Bergland writes:

Believing that you possess both the power of Atlas and are as insignificance as an Ant is a difficult paradox for the human ego to navigate, but it is the key to being extraordinary. A lot of athletes are incapable of doing this. I’ve struggled with it myself over the years. [Link]

These brief lines from Scott Miller (part of the blog of Franklin Covey) were interesting:

As you’re climbing up, throw a rope down and lift them up with you. Encourage them to climb above you. If you’re confident in both your character and competence, your shoulders can handle some weight….. Remember, humble leaders are more concerned with what is right than being right. [Link]

Dr. Steven Berglas of the Harvard Medical School wrote this in 2014 for the Harvard Business Review:

Hubris, … is a reactive disorder: Either the unfortunate consequence of endless laudatory press clippings leading to supreme over-confidence, or the culmination of a winning streak that causes a person to suffer the transient delusion that he is bullet-proof. Many good people will, under bad circumstances, suffer from hubris— but they tend to recover after toppling from their pedestals shrinks their egos back down to size.

Of course, one way for hubris to be reined in is for leaders to create and institutionalise mechanisms for someone to play the devil’s advocate, communicate freely and challenge the established view in a group setting. It is not without its pitfalls. Some may take advantage of it and may think that the leader is weak. Alternatively, some may try to poison the leader’s mind about the ‘naysayer’ (even if the leader had appointed him or her to be a naysayer). It is not easy.

Also, conformity is hard-coded in  us as this book extract says. It is from ‘Meltdown: why our systems fail and what we can do about it?’:

“We show that a deviation from the group opinion is regarded by the brain as a punishment,” said the study’s lead author, Vasily Klucharev. And the error message combined with a dampened reward signal produces a brain impulse indicating that we should adjust our opinion to match the consensus. Interestingly, this process occurs even if there is no reason for us to expect any punishment from the group. As Klucharev put it, “This is likely an automatic process in which people form their own opinion, hear the group view, and then quickly shift their opinion to make it more compliant with the group view.”…. Our tendency for conformity can literally change what we see…. 

….And when people went against the group, there was a surge in activity in brain regions involved in the processing of emotionally charged events. This was the emotional cost of standing up for one’s beliefs; the researchers called it “the pain of independence.”

When we shift our opinions to conform, we’re not lying. We may not even be conscious that we’re giving in to others. What’s happening is something much deeper, something unconscious and uncalculated: our brain lets us avoid the pain of standing alone. [Link]

In other words, it is not just the hubristic person but even people around him or her are hard-wired to encourage hubristic tendencies.

They add:

And listening to a dissenting voice can be as hard as speaking up….

It turns out that the effect of being challenged — of having your opinions rejected or questioned — isn’t just psychological. Research shows that there is a real, physical impact on the body. Your heart beats faster and your blood pressure rises. Your blood vessels narrow as if to limit the bleeding that might result from an injury in an impending fight. Your skin turns pale, and your stress level skyrockets. It’s the same reaction you would have if you were walking in the jungle and suddenly spotted a tiger.

This primal fight-or-flight response makes it hard to listen. And, according to an experiment conducted at the University of Wisconsin–Madison, things get even worse when we are in a position of authority….

….that even the faintest sense of power — being in charge of something clearly inconsequential — can corrupt. And it’s just one of many studies drawing the same conclusion. Research shows that when people are in a position of power, or even just have a sense of power, they are more likely to misunderstand and dismiss others’ opinions, more likely to interrupt others and speak out of turn during discussions, and less willing to accept advice — even from experts.

In fact, having power is a bit like having brain damage. As Keltner put it, “people with power tend to behave like patients who have damaged their brain’s orbitofrontal lobes,” a condition that can cause insensitive and overly impulsive behaviour. [Link]

The extract then goes on to give two examples. One is the case of a dentist where he had empowered the receptionist to challenge him and direct him to take a look at a patient. He does so and sends him for treatment immediately to a heart centre because the man was experiencing symptoms of an ongoing heart attack and his family had a history of heart attacks. 

The second example is that of cockpit authority and airline crashes. Passengers were safer when the less experienced pilot was flying the plane:

Of course, it’s not that captains were poor pilots. But when the captain was the flying pilot, he (and most often it was a “he”) was harder to challenge. His mistakes went unchecked. In fact, the report found that the most common error during major accidents was the failure of first officers to question the captain’s poor decisions. In the reverse situation, when the first officer was flying the plane, the system worked well. The captain raised concerns and pointed out mistakes and helped the flying pilot understand complex situations. But this dynamic worked only in one direction.

This is indeed an apt conclusion:

But learning to embrace dissent is hard. When Crew Resource Management was introduced, many pilots thought it was useless psychobabble. They called it “charm school” and felt it was an absurd attempt to teach them how to be warm and fuzzy. But as more and more accident investigations revealed how failures to speak up and listen led to disasters, attitudes began to shift. Charm school for pilots has become one of the most powerful safety interventions ever designed.

A paper written by Nassim N. Taleb, Daniel G. Goldstein, and Mark W. Spitznagel in the Harvard Business Review in 2009 on the six mistakes in risk management is related to listening and speaking up, in a way.

The six mistakes are:

(1) We think we can manage risk by predicting extreme events

(2) We are convinced that studying the past will help us manage risk

(3) We don’t listen to advice about what we shouldn’t do

(4) We assume that risk can be measured by standard deviation

(5) We don’t appreciate that what’s mathematically equivalent isn’t psychologically so

(6) We are taught that efficiency and maximizing shareholder value don’t tolerate redundancy

I like (3) followed by (5). The whole article is here.

In conclusion, let us spare a thought for our hubristic leaders. Conformity is easy. Speaking up is hard. Listening is harder. We are wired to conform. We are not wired to speak up nor to listen. So, hubris has to be the default! Worse, we don’t even know if, on many occasions, the shoe is on the other foot!

Reviewing Tooze review of Krugman

Just read Adam Tooze’ 6561 word long review of Krugman’s new book.  If one accepted that Paul Krugman was a political hack, then all his so-called ‘intellectual’ twists and turns would make sense. As an economist, he deserves to be taken far less seriously.

Japan credibly committed to irresponsibility as Mr. Krugman and some other jokers (including Mr. Bernanke in a famous speech he gave in Tokyo) wanted, under the current BoJ Governor. What have they got to show for it?

Krugman, in his own words, missed the 2008 crisis. After berating himself for it, he did not blame banks for it. Convenient. Speaking fees come from banks and not from bankrupt subprime lenders. Prescribing higher capital requirements for  banks after the crisis of 2008 had happened is the equivalent of bolting the barn door after the horse had fled. That did not prevent Greensill nor Archegos.

Minsky did warn that stability bred complacency. Mr. Krugman never paid heed to Minsky. The people in BIS were warning about financial stability from 2003 onwards. Mr. Krugman did not take BIS seriously either. BIS had been warning of the risks of the lack of inclusion of financial cycles in macro models.

According to Willem Buiter,

Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability. [Link]

According to Adam Tooze, Krugman was one of the flag-bearers of DSGE models.

It is not a slam dunk argument to make that America, Britain and Germany tightened fiscal policy too early after 2010 and hence the recovery was lacklustre. Monetary policymakers had pressed their foot all the way down and what did they have to show for it? Asset bubbles and inequality. What happened to the credible commitment to irresponsibility? What did it have to show for it in the UK or in the USA?

Recovery was held back, among other things, by the rise in market concentration and executive compensation structures that disincentivised real investment spending in favour of stock buybacks. Mr. Krugman should read Charles Goodhart if not ‘Nageswaran and Natarajan’s ‘The Rise of Finance’.

Paul Krugman and Alan Blinder were free trade hypocrites. Once it began to hurt white collar workers in the services sector, they abandoned their free trade commitment.

Now that a combination of China and a so-called unwavering and concerted commitment to full employment from monetary and fiscal authorities is in place – the equivalent of the Martian invasion, as Krugman wanted and as Tooze points out – but without the minimum wage, let us see what it delivers. If it delivered good old-fashioned inflation, at least it would be a partial success for it would at least whittle down the debt accumulated. That is the secret agenda, as far as I am concerned, and I am happy to find endorsement for that from Charles Goodhart in his book, ‘The Great Demographic Reversal’.

But, without labour bargaining power restored and without minimum wages, even that agenda would not succeed and the economy would generate full employment but not commensurate increase in the labour share of income.

Krugman has not only not acknowledged Minsky or BIS nor political economy before but he has also not recognised, even now, the following:

(a) The law of unintended consequences in public policy;
(b) that economic laws are asymmetric in operation – they do not work in both directions and linearly, even in the direction in which they are operational.

Krugman had nothing to say on the inflation targeting framework of central banks because that would mean that he has to take exception to the monetary policy framework of his Princeton colleague pre and post-2008 crisis. In any case, inflation targeting and underplaying of fiscal policy were political economy projects. They were meant to keep wages low, interest rates low and boost returns to capital.

I doubt if Krugman has any critique of them. I could be wrong and happy to be corrected.

As the Chinese proverb says, ‘be sure of what you want; you may get it’. Krugman will live long enough to see what he gets, at the end of this decade, if not earlier.

In sum, Paul Krugman is an overrated economist and a columnist. He is also intellectually inconsistent which, surprisingly, Summers is not. I admire his principled opposition to the USD1.9trn if the administration was enacting another one for USD2.5trn. Also, Steven Rattner’s critique of the Biden stimulus in NYT is worth reading. Ignore the header. The critique is about wasteful dollars in the stimulus.

As for Adam Tooze, this review is a far better read than many of his pieces in ‘Foreign Policy’ that I read last year. They left me underwhelmed.