Matter of detail

Recently, I read reports of how the Insolvency and Bankrupty Resolution Process had helped better recovery from bank assets declared bad, compared to other resolution regimes. All the reports referred to a table from the RBI report. But, none of them referred to the report. It took a bit of digging out to find out which report of RBI, released in December, that the newspapers were referring to. It wa the report titled, ‘Trend and Progress of Banking in India’ released on 24th December 2019. The table that they had reprinted was Table IV.10. Forget about mentioning the Table number. They had not even mentioned the name of the report.

You can check out the three news-stories here, here and here.

In contrast, ‘The Economist’ had carried a story on the productivity slowdown in emerging economies. They cited a World Bank report but in the chart that they had reproduced, they had mentioned the name of the World Bank report, ‘Global Economic Prospects’ published in January 2020. You can access the story in ‘The Economist’ here.

It’s Mostly False

We have the January update of IMF (see the blog header) global macro economic growth forecasts. Amusing reading. No mention of financial market exuberance, financial stability risks and vulnerabilities.

Monetary policy can remain accommodative because inflation is quiescent. Yaah, right! That is what we learnt from the 2008 crisis. Macroprudential tools can help to mitigate financial stability risks. Again, yaah, right. Neat. They can sleep peacefully at night, having paid their homage to the risk factors.

Macroprudential works only in conjunction with interest rate policy. if interest rate and monetary policy settings are providing ample liquidity, macroprudential policies are dead on arrival. Worthless and useless.

Because It’s Mostly False, It’s Mostly Futile too.

Snoop to conquer

The following two articles should scare anyone using smart phones and want to stick to land lines.

One is about the Alexa and other smart devices that respond to voice commands by listening. Yes, they listen to stuff you don’t want them to listen to.

The other article is about location services that supposedly are the ones that make the apps and the phone smarter in ‘helping’ us find what we want, based on where we are. Well, the smarter ones are not the ones who hold the phone but who sell the services/devices to us. Check out this New York Times article.

Rana Foroohar offers the answer:

Only prohibiting the tracking and microtargeting of individuals will do that. I used to think such a prohibition was extreme. It may, at this stage, be impossible. But I’m also beginning to wonder whether it might be crucial, not only to restoring competition in the US, but to saving trust in liberal democracy throughout the world. [Link]

All this is leading to nice income and stock grants for employees of technology companies whose source of profits, income and wealth is our stupidity in relying far too much on smart phones and becoming addicted to it.

As if this was not enough, look at how Wall Street veterans looked the other way and showered Wework’s Adam Neumann with money.

It is just that we are the losers in the incestous game that the East and the West Coast cities of America play together and against us. The outcome is decided well in advance.

RCT related links

The first op.-ed., I wrote, after being appointed as a part-time member to the Economic Advisory Council to the Prime Minister (of India) on October 16 is this one.

Randomised Control Trials are not the panacea for development questions. But, they may be useful if they pose the right questions. The conclusions may still have to be tempered and tailored to suit different contexts.

Two well-written critiques of the RCT methodology to answer development questions are to be found here and here. (ht: Vijaya, my colleague at IFMR-GSB)

RCTs cannot reveal very much about causal processes since at their core they are designed to determine whether something has an effect, not how. The randomistas have attempted to deal with this charge by designing studies to interpret whether variations in the treatment have different effects, but this requires a prior conception of what the causal mechanisms are. The lack of understanding of causation can limit the value of any insights derived from RCTs in understanding economic life or in designing further policies and interventions. Ultimately, the randomistas tested what they thought was worth testing, and this revealed their own preoccupations and suppositions, contrary to the notion that they spent countless hours listening to and in close contact with the poor. It is not surprising that economists doing RCTs have therefore been centrally concerned with the effects of incentives on individual behavior—for instance, examining the idea that contract teachers who fear losing their jobs will be more effective than those with a guarantee of employment. [Link]

The long piece in has a wealth of links. These paragraphs are very good:

… the narrowness of the randomized trials is impractical for most forms of policies. While RCTs tend to test at most a couple of variations of a policy, in the real world of development, interventions are overlapping and synergistic. This reality recently led 15 leading economists to call to “evaluate whole public policies” rather than assess “short-term impacts of micro-projects,” given that what is needed is systems-level thinking to tackle the scale of overlapping crises. Furthermore, the value of experimentation in policy-making, rather than promoting pre-prescribed policies, should not be neglected.

The concept of “evidence-based policy” associated with the randomistas needs some unpacking. It is important to note that policies are informed by reflections on values and objectives, which economists are not necessarily well-suited to intervene in. Of course, evidence should be a part of a policy-making process, but the pursuit of ineffective policies is often driven by political priorities rather than lack of evidence…..

… While the Nobel Prize does leave those of us concerned with broader political economy challenges in the world anxious, not everything is doom and gloom. Firstly, the Nobel directs attention to the persistence of poverty in the world and the need to do something about it. What we as critical development economists now need to do is to challenge the fact that the Prize also legitimizes a prescriptive view of how to find solutions to global problems.

Secondly, the fact that a woman and a person of color were awarded a prize that is usually reserved for white men is a step forward for a more open and inclusive field. [Link]

Interesting that one of the links that Ingrid Harvold Kvangraven provides is an opinion-piece ‘written’ by fifteen economists last year. In that, they ‘anticipate’ the Swedish Riksbank Prize for RCT and ‘caution’ against it. Obviously, not directly.

Lastly, from Andrew Batson’s blog post on who should be awarded the Nobel Prize (Swedish Riksbank Prize) for Economic Development in China:

The contribution of randomized controlled trials to China’s poverty reduction has been, to a first approximation, zero. Yao Yang, the dean of the National School of Development at Peking University, wrote in an English-language op-ed that “Experiments might help policymakers improve existing welfare programs or lay the foundation for new ones, but they cannot tell a poor country how to achieve sustained growth.” In a similar vein, Harvard professor Dani Rodrik tweeted: “Remarkable how little today’s development economics has to say about the most impressive poverty reduction in history ever.” [Link]

My appointment to EAC-PM also reminded me of this column I wrote way back in May 2009: that op.-eds., did not bring change.

I was also reminded of this famous advice by Larry Summers to Yanis Varoufakis and quoted in his book, ‘Adults in the Room’:

‘There are two kinds of politicians,’ he said: ‘insiders and outsiders. The outsiders prioritize their freedom to speak their version of the truth. The price of their freedom is that they are ignored by the insiders, who make the important decisions. The insiders, for their part, follow a sacrosanct rule: never turn against other insiders and never talk to outsiders about what insiders say or do. Their reward? Access to inside information and a chance, though no guarantee, of influencing powerful people and outcomes.’ [Link]

Law of unintended consequences

A long New York Times article on the ‘chaos’ created by ordering from home which is about avoiding the chaos of shopping in real brick-and-mortar shops. Quite apart from the emptying out of High Streets in many cities, this has other costs too, as the article says. So, in the end, who bears the costs? Consumers actually pay less for their product. But, who pays for the associated costs. They are externalised. Neither party to the transaction bears it but the society. What is the answer? Collect more taxes from both?

Africa has lots of land and let us plant trees there. It will absorb global CO2. That is the thought process. Is that really correct? Another instance of unintended consequences or the road to hell being paved with good intentions. Article here (ht: my former student Arjun Aathish)

Swedish Riksbank and poverty

The 2019 Swedish Riksbank prize for three economists who have done extensive work on poverty and how to deliver poor out of poverty has attracted a lot of attention, pride and noise in India because one of them is an Indian-American. One understands from newspaper reports that he is an American citizen.

This blog has never really commented on the annual prizes awarded to economists every year. It is not mandatory. The only time I had a strong feeling against the award was when Eugene Fama was given the prize in 2013 for his work on (financial) market efficiency.

These prizes are judgements of people in a committee. So, disagreements of outsiders with the committee’s judgement, on occasions, should not be a big surprise nor a source of disappointment or anger on the part of those who happen to agree with the Committee’s decisions.

Those who disagree have no reason, however, to conclude that the committee made incompetent decisions because the committee, arguably, pores over far greater information and spends a lot more time deliberating than those who take to twitter to vent their disagreement and even anger at the choices. That is unhelpful.

Much of the anger stems from the political stances taken by some of the recipients. But, the Riksbank Committee does not give them awards or deny them awards for their political views. So, questioning the decision because the recipients hold different political views is unreasonable. 

Some of the past awardees, on their part, have ‘monetised’ their award by espousing strong political views. The moment they enter the political boxing ring (or, the cesspool), then they should be willing to trade blows The discourse is not often civil in such spaces. But, they cannot complain because they chose to enter that arena.

As for the awardees this year, I have not followed their work that closely to make rigorous observations. Interested readers should refer to the ‘Urbanomics’ blog of my coauthor Gulzar Natarajan. You can sample this blog post of his. 

The quote attributed to Arvind Subramanian by Devesh Kapur (ht: Gulzar’s post above) in this article is worth recalling:

When asked how many of these expensive RCTs had moved the policy needle in India, Arvind Subramanian, Chief Economic Advisor, GOI, was hard pressed to find a single one that had been helpful to him in addressing the dozens of pressing policy questions that came across his table. By contrast, the compiling of just some key facts on learning outcomes by Indian NGO, Pratham, has had a big impact on policy discussions in education, because it is backed by a degree of specific knowledge and engagement that is more credible and persuasive. [Link]

On my part, I will simply use the occasion to highlight some other related issues which may or may not be directly relevant to their work.

At the core of the Randomised Controlled Trials (RCT) is the belief that, somehow, it is possible to make Economics a physical science by following the controlled experiments that are eminently doable in physical sciences. But, facts and behaviour in social science are embedded in contexts. They are inherently not falsifiable. Hence, not sure if RCT could capture all the nuances. Consequently, the reliability of the conclusions drawn from such experiments might be suspect.

The second point is that most economists do not keep in mind the asymmetric and non-linear nature of the relationships between economic variables and between causes and effects are asymmetric. That gives rise to the law of unintended consequences (=road to hell being paved with good intentions). For example, see this story on microlending in Sri Lanka gone awry. 

While the story of microlending in Sri Lanka need not be a case of the law of unintended consequences, it is a case of the gap that exists between goals/intentions and real-life outcomes.

It is useful to ask why economic relationships are asymmetric and non-linear? Because, humans are. Loss aversion is a classic example. We value what we don’t have and once we have it, its value goes down. That is asymmetry. This has implications for policymaking.

When folks tell surveyors that they value something and would be happy and better-off if provided, one can never be sure that they would value it as much if given and, hence,  the effect may not be what policymakers expected.

Reason why economic relationships are asymmetric and non-linear is that there are only few positive factors but several hygiene factors that influence human behaviour. Hygiene factors matter only in one direction. Positive factors do in both directions. But, hygiene factors far outnumber positive factors in our lives.

However, on balance, any research or methodology that challenges conventional wisdom on an important topic such as human impoverishment and raises fresh set of question must be deemed useful. The work of the three winners of the Swedish Riksbank prize for economics in 2019 passes that test.

Postscript: The World Bank published a report called ‘Voices of the Poor’ in 1999-2000 that simply listened to them. You can find it here.

The ‘talking oneself into a recession’ nonsense

This is another nonsense peddled by those who have no knowledge of either economics or history: that talk of recession will bring about a recession. Those who do not want a recession are in a majority, likely. They are the camp followers of the central bankers who sold the trope, ‘Great Moderation for eternity’. Why cannot they talk the world economy into one endless expansion, facilitated by negative rates, MMT and nominal GDP targeting?