Was NDA II an economic failure?

What follows below was written on 15th May 2019, eight days before the official declaration of election results in India, to the 17th Lok Sabha and four days before the exit polls. I wrote it for my own clarity. But, it might also turn out to be a response to this long piece by Maitreesh Ghatak and two co-authors. It is a different matter altogether that one must write a separate rebuttal for some of the ‘strange’ figures that the note features. I shall do so separately. This was written and published in March 2019. It did not swing the elections in favour of the Congress or the UPA or whatever else.

One must note, here, that he and two other co-authors tried to pass off, before the May 2014 elections, the UPA II economic record as a good one. That did not swing the elections in favour of UPA and the Congress.

Not only did the Congress Party lose the elections on both occasions, he lost quite a bit of his personal credibility too, in my view.

As you read the file below, pl. remember that it was written on 15th May 2019. You are welcome to quote from it. But, will be grateful for attribution.

VAN_Was the NDA II government an economic failure_15052019

Non-linearity and Asymmetry

In our Q&A, Lacy and Bill discussed how linear economic models are just not working and nonlinear  analysis is so critical. A lot of practical people are turned off by this, thinking it shouldn’t be so complex. But, these same people would never tell a physicist to avoid nonlinear concepts. [Link]

This is unsurprising to yours truly. I had written copiously on non-linearities and asymmetries in economics because human responses are anything but symmetric. Loss aversion is a classic example of asymmetry. The values we attach to what we already possess and what we crave for are asymmetric.

Relationships between economic variables are non-linear because economic agents (i.e., ordinary people) are asymmetric. It is as simple as that.

The two theorems of Lacy Hunt

First, federal debt acceleration leads to lower, not higher interest rates. This is because the economic stimulus effectiveness ends quickly, but the debt overhang causes weaker business conditions that reduce loan demand.

Similarly, monetary easing eventually leads to lower, not higher interest rates. Debt productivity falls, making the velocity of money decline so monetary policy becomes asymmetric and inefficient. [Link]

He has charts to show that. Notice that they are all ‘hard currency’ countries. Therein lies the clue to the relevance and applicability of his theorems:

Federal Debt and interest rates

Source: https://www.mauldineconomics.com/frontlinethoughts/why-debt-wont-spark-inflation

Ideas thrive on competition

I enjoyed writing this piece for Mint last Tuesday:

Why capitalism must allow competition for its own good

Capitalist America did a great disservice to itself when it ‘defeated’ the communist Soviet Union

Raghuram Rajan recently had an opinion piece titled, Why Capitalism Needs Populism. He is on to something with that title.

It becomes clearer when you see these lines from Samuel Huntington’s book, ‘The Clash Of Civilizations And The Remaking Of World Order‘: “It is human to hate. For self-definition and motivation people need enemies: Competitors in business, rivals in achievement, opponents in politics.” And, “there can be no true friends without true enemies. Unless we hate what we are not, we cannot love what we are.”

Samuel Huntington cites the second quote above from Michael Dibdin’s novel, ‘Dead Lagoon‘.

By that token, one can say that capitalist America did a great disservice to itself when it “defeated” the communist Soviet Union in 1990. The latter was needed to cushion, smoothen or even hide the rough edges of capitalism; to lend it a human face; to suffuse it with humane tendencies via welfare policies, via policies that seek to provide (if not succeed) a level playing field in terms of opportunities.

Without the “check and balance” that communism provided, the excesses of capitalism manifested themselves first in 2001 and then in a much bigger way in 2008. As a result, within a little over a quarter century of capitalism having triumphed over communism, America has a politician who has called for a 70% top marginal tax rate. So much for the end of history.

With victory over enemies and rivals, one loses a force that actually keeps one “battle fit”, intellectually or otherwise. So, we all need the “other” to remain fit ourselves. No point in becoming totalitarian. That is the short but definite first step towards decay, sloth and eventual extinction.

So, capitalism needs populism to redefine and reinvent itself for the better. But, that is only a necessary condition and not a sufficient condition. One may still read the wrong lessons from competition and make the wrong course corrections. I think that is what is happening to the so-called “liberals”.

They now face competition from those who espouse “populism-nationalism” as they pejoratively describe those who do not think like them. Going by Rajan’s thesis, the so-called “liberals” should welcome this competition as a tool or an opportunity to “up their game” intellectually. But quite the opposite is happening with the Democratic Party in the US and with several so-called “liberal intellectuals”.

One example of a counterproductive and delusional reaction is their characterization of the ongoing trade and intellectual disputes between the US and China. They characterise it as “Trump’s trade war”. One moment, they blame him for compromising with China, and the next moment, they blame him for triggering a trade war. All along, it has been about China not living by its own commitments when it signed up to join the World Trade Organization in 2001.

The second example is, as Robert Barro points out in another Project Syndicate piece (My Best Growth Forecast Ever), liberals wishing ill on the economy in America because it is doing well under a president they hate.

What happens if competition fails to hone and sharpen or if competition is removed? Crises emerge in short order. Having seen off competition from communism (or so they thought), capitalists have been behaving (enriching themselves) in a manner that has resulted in a crisis that threatens their very existence. The crisis of 2008 was a warning sign ignored.

Indeed, that is what has been happening to so-called Western liberal and democratic societies lately. They are blaming demagogues and politicians for the rise of protectionist sentiments with respect to trade and immigration. Perhaps, ageing societies are prone to such sentiments naturally and all the more so when an economic crisis has shrunk their savings pie and placed their social security, pensions and healthcare in jeopardy. Ageing individuals no longer welcome new ideas and strangers in their midst. Why should ageing societies be exceptions? If seen that way, the answer certainly does not lie in forcing further immigration upon them.

For societies and ideas, a failure to harness competition could mean a revolutionary overthrow and the emergence of a new order. This new order may not be for the good. Further, there could be a prolonged period of chaos and disorder before that new order emerges.

In recent times, 1914-45 and 1967-82 are examples of such “disorderly” and “chaotic” interregnums, although the latter far less so than the former. That is why the chaos, disorder and violence of 1914-45 produced two decades of order and prosperity all around.

The chaos and disorder of 1967-82 produced a new order that appeared to usher in an era of prosperity—globalization and all that. But, it has landed the world in a crisis of capitalism, for capitalism got rid of the “check and balance” of competition along the way.

Therefore, what awaits us is another prolonged (or, short, if we are lucky) period of uncertainty and turbulence, followed by a new social order that will not look like 1945-65, nor like 1982-2000, but a lot worse. Brace yourself.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are the author’s personal views

In general, you can save this URL to access my weekly MINT columns. They appear on Tuesdays.

Love of facts: 19th vs. 20th centuries

I just read another interesting and thought-provoking Andrew Batson blog post on the posthumously published collection of essays by Oliver Sacks titled, ‘The River of Consciousness’. It details the attention to facts (relative to theorising) and the documentation of facts regardless of whether they fitted a pre-existing theory or a body of knowledge. This comment about the field of psychiatry brought forth a smile in me as it reminded me of the state of much theorising in economics today (yes, even today, in my view):

Sacks found that those nineteenth-century writers, while often lacking a theoretical framework to interpret their observations, were meticulous recorders of what they observed. Twentieth-century psychiatry had a more developed theoretical system, but had little time for phenomena that did not easily fit into that system, and so ignored them. There is perhaps a parallel for this in anthropology, where the extremely detailed accounts of early fieldworkers can still be usefully mined for insights for decades afterward–something it is difficult to imagine happening with many contemporary works with a much more elaborate theoretical apparatus. A mindset that places value on facts is itself something of value.

I left the following comment on the post:

A great post, as usual:

I was mildly surprised by the last sentence: “With economics also having taken an empirical turn over the past couple of decades, perhaps there will be a swing back to appreciating some of those nineteenth-century virtues.”

My understanding is that the field, study or the body of knowledge in economics – especially with respect to (but not limited to) monetary policy and its impact on the real economy, asset markets, etc., – is more characterised by the description of the field of psychiatry earlier in the post:

“Twentieth-century psychiatry had a more developed theoretical system, but had little time for phenomena that did not easily fit into that system, and so ignored them.”

(Cross-posted at http://jeevatma.wordpress.com)

Is it a Japan tragedy?

Early on Tuesday morning, read this interesting (and sad, to an extent) piece in the Nikkei Asia Review on Japan’s scenic golf courses in rural parts. But, the story is interspersed with narratives of dwindling populations and innovation.

Sample this:

The town of Nemuro lost its only obstetrician last year since its birthrate had fallen so low. Its fishing industry may be strong — global tennis star Naomi Osaka’s grandfather once served as chairman of the cooperative — but nobody new is moving there.

The lament is not particularly constructive but I doubt if any reconstruction is possible:

Somehow Japan has lost its will to innovate, to develop new technologies and to compete with the rest of the world. A pervasive conservatism has infected much of working and social life, leaving regional Japan a museum-like landscape of rural beauty and Asian culture. Buddhist temples of astonishing grace, Shinto shrines of perfect simplicity, small fields of rice or vegetables, and orchards of flawless fruit decorate the countryside. Yet behind it all are dying towns, shuttered shops, and unending road projects or concrete barriers piled up along island shores to protect against typhoons.

Abenomics works to preserve the tranquil beauty of rural Japan and sustain its culture. but what is going to save rural Japan from the hollowing out that you can see, hear and feel? The digital economy is barely discernible here, stunted by too many large corporations whose overweening presence in national policymaking makes the startup sector a minor sideshow instead of a pathway to the future.

Demographics are long-term and slow-moving trends in motion. They have impact on innovation and investments, etc.

Somehow, I feel that Buddhist Japan will and is handling its aging better than the Christian West would do or is doing. The swing towards relative and growing intolerance of strangers amidst dwindling economic prospects could be traced not just to a financial crisis but also due to demographic transition towards a greying population in the West.

The crisis pulled the economic rug from under the feet of millennials. More debt in America and youth unemployment in Europe. The older generation is reacting to the economic loss (networth wiped out by the decline in asset prices and having to work into old age) and the social aspects of globalisation.

Each and everyone of us who have crossed 50 can reflect on how their own attitudes towards many things have shifted and are shifting with age, slowly, imperceptibly but surely.

At a policy level, to counter this with even more forced immigration is a policy disaster which is what ‘liberals’ would want governments to do. One has to accept the costs of the economic crisis and demographic trends and work with them rather than seek to overturn the consequences forcefully. That ends up feeding the resentment.

STCMA – 06 May 2019

(1) An empirical essay on the non-causal (or, non-correlation) link between money supply measures and consumer price inflation. Some of the comments below the essay are unfair. The paper reinforces the argument that the evidence of consequences of loose monetary policy are to be found elsewhere and that inflation dynamics remains the least understood phenomenon by economists, among others. By sheer elimination, the only thing that seems to be explaining inflatin dynamics is the wage dynamics. As long as workers’ anxieties are high and wage growth low, we should expect conventionally measured consumer price inflation to remain low in the developed world.

(2) Following deregulation, bank credit flows more to non-productive investments, says this brief based on an empirical work published in November 2018. At the same, credit guidance, with political economy, leads to inefficient credit allocation. That is the evidence from developing economies. Where is the golden mean and how to find it?

(3) Four decades after Washington and Beijing re-established diplomatic ties, the doors on scientific and technological engagement appear to be closing fast. A wary US has accused its biggest trading partner of getting ahead by unfair means, from forced technology transfers to intellectual property theft and industrial espionage. …. Since last summer, Chinese students involved in robotics, aviation, engineering and hi-tech manufacturing – priority areas in Beijing’s “Made in China 2025” industrial policy – faced tighter visa controls. [Link]

(4) China is encouraging consumer credit loans now. Doesn’t sound like the right thing to do and sounds more like desperation, especially if you read this news in conjunction with this story too, on tighter foreign exchange approvals for Chinese residents, taking money out. Does not sound like a healthy economy.

(5) This BBC story presents a more balanced picture, than stories that appeared elsewhere, of the election results in Spain. Socialists did surprisingly well but so did the so-called ‘Far Right’ Vox party.

(6) Hong Kong’s extradition laws – deporting people to the mainland to face trial – are drawing protests. I guess, one would say, that is unsurprising. The laws supposedly contain safeguards against people charged with political and commercial crimes from being sent to the mainland. But, not many are convinced that they would be honoured.

(7) One more example of technology running amok – cashless and till-free shopping at a Sainsbury pilot in the UK. Just as backlash over social media platforms are rising, this too would face a backlash:

Last year’s Access to Cash study, commissioned by Link, found 8m people would struggle to exist in a cashless society, noting that those with a heavy reliance on cash tend to be older and poorer. Most basic bank accounts, designed for those with a poor credit history, do not come with contactless cards. [Link]

(8) Jamil Anderlini’s short piece in FT on the Islamic world’s mostly silent indifference (read, ‘acquiescence’ in reality) to China’s treatment of Uighur Muslims is a good read. Two important quotes:

In the aftermath of the horrific mosque shootings in Christchurch in March, Jacinda Ardern, New Zealand’s prime minister, earned great praise throughout the Islamic world for her sensitive and empathetic response to the tragedy. But on a trip to Beijing barely two weeks later, Ms Ardern refused to mention the situation in Xinjiang, despite public calls from Muslim and human rights groups to do so. [Link]

The New Zealand Prime Minister’s non-reaction is rather typical of the so-called Liberals. Their selective outrage is what has lost them trust, goodwill and credibility among voters and alienated most of them towards other relatively more outspoken outfits in their own countries. They continue to refuse to heed the lessons. That is irrational. Does that go together with the tag of ‘liberal’?


Put it this way: mocking Donald Trump and his administration or criticising American policy will not trigger US sanctions. Countries, companies or, indeed, newspapers that attempt the same with Xi Jinping and China do so at their peril. [Link]

(9) As a former Australian Prime Minister, would Kevin Rudd not be embarrassed by what Paul Keating has to say on China? [Link]