Amusing and priceless

This is the amusing stuff:

“Juncker vows to turn euro into reserve currency to rival US dollar”

He must pay close attention at least the topline results of the PEW Survey I had blogged on earlier.

A quick recap:

Underneath Mr. Macron’s pro-European rhetoric, the French people are only closely behind Italy in their distaste for the European project. Politicians do not command much trust. The public is confused and worried on immigration. Distrust of media is rather high as it is the case with financial institutions.

(2) This is priceless stuff:

“Aung San Suu Kyi defends verdict against Reuters journalists”

This underscores the ‘free lunch’ of being a ‘Liberal’ outside the government and how difficult it is to govern as a ‘Liberal’. Indeed, there is an inherent contradiction being in government and being Liberal.

Summer of discontent in China and Europe

Nikkei Asia Review had some excellent articles on Xi Jinping’s political troubles this summer. He is not executing the trade war well. All the media pundits who ‘egged him on’ cannot really help. The simple math that Trump relied on – I import more from you than you import from me and therefore, I can hurt you more with my tariffs – seems to have eluded many complicated economists and pundits. The summer chastisement of Xi by party elders therefore makes for interesting read. You can read them here, here and here.

This captures a lot of things:

The revised regulations stipulate the importance of “resolutely upholding the core status of General Secretary Xi in the Chinese Communist Party Central Committee and the entire Party.” This sentence holds significant meaning and marks a step forward for Xi. Earlier, the party had only talked about “resolutely upholding the Central Committee with Xi Jinping at the core.” The revised disciplinary regulations strengthen the wording regarding “core,” giving the impression that Xi, not the party’s collective leadership, is being highlighted. Now anyone who makes light of Xi faces punitive action. [Link]

South China Morning Post has a story on how it is not just trade but even Chinese investments that are now threatened because the rest of the world has wisened up.

Some interesting and unresolved long-term dilemmas crop up in the tension between European Union and Hungary. The European Parliament has censured Hungary. The censure motion got the required two-thirds majority. But, does it smack of hypocrisy and inconsistency? Hungarian people had voted him back to office just few months ago with a bigger mandate. He is pursuing policies that he had done before and which the voters have approved. So, is the European Parliament censuring him for being faithful to his people’s preferences?

Interestingly, heard a talk by Dr. S. Jaishankar in Singapore last afternoon. He was India’s foreign secretary. He said that the alliance between Italian Deputy PM Matteo Salvini and Orban of Hungary was the talking point of his meetings in Europe two weeks ago.

A comprehensive survey of people’s attitudes towards public institutions like military, parliament, financial institutions and the media, towards immigrants, etc., was published by Pew just two months ago. Europe is conflicted. For example, majority in many countries say that immigrants contribute to economy. But, the vote for the question of whether immigrants increase terror risk runs very close. Germany, in fact, has a net positive score. That is, the proportion that says immigrants increase terror risk exceeds those that say that immigrants don’t increase terror risk by 9 percentage points, followed by 4% points in Italy. Surprisingly, of the other countries, Sweden has the lowest negative differential: -6%.

On immigration, one has to interpret positive sentiments with a bit of scepticism. Respondents want to project themselves as open-minded. But, the truth is that negative sentiments and scepticism run deeper. The proof of the pudding is in the way the vote has swung in Sweden and in the rising popularity of AfD in Germany. No wonder Europe experienced a heat wave this summer.

Attitudes towards the European Union’s dominance in national policy discourse – more power should be returned to national governments – is uniformly negative. Indeed, 73% in the UK feel that more power should be returned to national governments. Even more than in Italy. Those who want to put Brexit to a second vote should note.

Financial Institutions are not trusted (either not at all or not too much) by a substantial majority in Italy, Spain and France. It is 46% in Germany and in the UK. But, distrust of media is uniformly high in all countries (not trusted at all or somewhat not trusted) with the exception of the Netherlands, Sweden and Germany. In the trust quotient, media scores lower than financial institutions! That is some achievement.

The lesson is that the so-called centrist and mainstream politicians and elites are failing in walking the fine line between acknowledging as real people’s perceptions and grievances and in appearing to be legitimising extremist political parties. The challenge lies in doing the former without doing the latter. It takes a lot of hard work, deft communication and repetitive messaging along with tangible measures on the law and order front, etc. It is hard work and, out of laziness, many mainstream politicians are taking the easy out: lumping all sentiments as xenophobia. So, they turn it into a lose-lose situation. They lose their people and they lose to their more extreme alternatives.

Weekend Levity and Serious stuff

Volkswagen has a ‘Head of Integrity’ [Link]

Mr. Karan Thapar chides the Indian government for not accepting the offer of aid from the Government of the UAE. The newspaper that published his article has a good response.

Amrit Dhillon in ‘Business Standard’ on the ‘End of #metoo’ [Link]

Recycling India’s floral waste. It will be very good if it happens. [Link]

Rujuta Diwekar wonders why chocolates, potato chips and cola have not been called ‘pure poison’ while coconut oil has been? Valid point.

Liked or eyebrows raised

(1) Last six words of this article are unfortunate. No reasonable person has said that the payroll data released by EPFO in India has settled the jobs debate. Those data are only the beginning of the journey to get to reasonably reliable formal job creation data sometime in the future.

It is a lesson for all writers, including me. We want to end with a flourish. Therefore, we tend to resort to hyperboles. Better to end on a sober and mature note.

(2) No comments required:

Foreign direct investment is usually perceived as long-term strategic and stable investment reflecting fundamental location decisions of multinational firms. Such investment is often thought to bring job creation, production, construction of new factories, and transfer of technology. However, a new study (Damgaard and Elkjaer 2017) combines detailed statistics on foreign direct investment published by the OECD with the broad coverage of the IMF’s Coordinated Direct Investment Survey and finds that a stunning $12 trillion—almost 40 percent of all foreign direct investment positions globally—is completely artificial: it consists of financial investment passing through empty corporate shells with no real activity. [Link]

(3) Unlike in the case of Brexit, the force behind Italian parties that have come to power are the youth of Italy because they felt betrayed by the traditional parties. Could be behind paywall.

(4) India’s Chief Economic Advisor is leaving in two months’ time. Didn’t know that he is expecting a grandchild in September. On the whole, he has every reason to be satisfied with the job he did. He did make the annual Economic Survey a lot more interesting and readable. I am glad that I had a discussion with him in February for the Chennai International Centre and that it went down very well with the audience that day.

(5) Arvind Subramanian and his colleague from the Ministry of Finance wrote about revenue collection under India’s Goods and Services Tax and States’s share for ‘Indian Express’. They are happy with what they see. Chances are high that it gets only better. They are right to suggest that the cesses should go; excluded commodities be brought under the tax and that the rates can be lowered too. They don’t say so directly, however (‘scope for revisiting rates and cesses’ is what they write).

(6) Just saw the breaking news in FT that Atul Gawande has been appointed to chief executive of a venture between Amazon, JPMorgan and Warren Buffett’s Berkshire Hathaway to tackle US employee healthcare. Good choice.

(7) Sathya Nadella, CEO of Microsoft has sent a mail to his employees about the American immigration policy that is separating children from the adults who cross into the United States illegally. It has stoked a fierce backlash. I also happened to see this blog post last night. For some context, see this.

(8) IMF had a working paper published in March 2018 on the distribution of gains from globalisation. Some important conclusions:

The regulatory and economic dimensions of economic globalization contribute to increasing inequality.

Increases in foreign direct investments are significantly associated with rising inequality. For other globalization indicators, notably trade, there is no significant evidence for such an association. This supports the view that it is capital flows rather than trade flows that tend to drive the inequality-increasing effect of globalization.

These studies suggest that greater openness to foreign capital flows may exacerbate unequal financial access and can increase the likelihood of financial crises that raise income inequality. [Link]

Finally, the authors point out the impact of globalisation is non-linear. It is substantial and more positive if existing levels of globalisation are low; not if they are already high.

That is a favourite of mine. Relationships in economics are both asymmetric and non-linear. ‘Asymmetry’ (positive but not negative and vice-versa) and ‘non-linearity’ (like the example given above) are two different things.

Market Concentration, markups and profits

Srinivas Thiruvadanthai had queried in his Twitter handle if one could have good data on the distribution of US corporate profits between companies. I would be interested in that question too. So, I went looking. This is what I found:

slightly more than 100 firms earned about half of the total profit made by US public firms in 1975. By 2015, just 30 did. Zoom out a little and the trend is even more astonishing. The top 200 companies by earnings raked in more than all listed firms, combined. Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative. [Link]

The article above has some nice charts and links to this paper too about the decline of the number of listed firms in the US.

Chicago Booth School’s promarket.org blog has a post on the 70-year history of corporate profits. It is a summary of a long paper:

Two notable policy changes point to the early 1980s as a possible break in the trends in competition. First, there was an increase in antitrust enforcement from the mid-1940s to the early 1980s, followed by a decline from the early 1980s to the present.3) Second, the Department of Justice adopted a more lenient merger guideline in 1982. As Peltzman (2014) shows, industry concentration began rising after this change to the merger guideline. [Link]

The promarket.org blog post links to some very interesting NBER papers:

(i) Labor Market Concentration [Link]

(ii) Declining Competition and Investment in the U.S. [Link]

(iii) Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages? [Link]

(iv) Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents? [Link]

(v) Are U.S. Industries Becoming More Concentrated? [Link] – this one is from 2015 and above others are more recent

Consistent with rising product and labour market concentration, the IMF Blog has an interesting chart on rising markups in advanced economies (not just in the USA) and its conclusion too is very instructive:

The paper also finds a negative association in firms between labor shares and markups, implying that the labor share of income declines in industries where market power rises. In other words, with higher market power, the share of firms’ revenue going to workers decreases, while the share of revenue going to profits increases. [Link]

The blog post is based on a working paper that is yet to be released.

The blog post has a link to the session on ‘Digitisation and the new gilded age’ held as part of the Spring IMF-World Bank meetings in April. Should be interesting.

What these posts and news make clear is that it is not just competition from Chinese imports, globalisation of work (outsourcing and offshoring of services)  and higher immigration that had reduced labour share of income in advanced economies but also higher market concentration that has increased profit share of income. Clearly, these are inter-dependent and inter-connected phenomenon. For example, to ward off external competition, firms merge and smaller firms disappear, leading to increased concentration. That leads to other consequences.

But, policymakers, commentators and journalists have been asleep at the wheel even though some of these papers had begun to appear from 2010 onwards. Now, they look askance at public rage and spout venom at populists who have tapped into this rage.

Making it easy does not work

ECB Economic Bulletin 03/2016-Article 2 says the following (ht: twitter handle of :

Many euro area countries did not take advantage of the favourable economic
conditions prior to the crisis to build up fiscal buffers for future downturns. [Link]

IMF Euroarea Article IV Consultation Report last year said this:

Most high-debt countries have so far not saved the windfall interest reductions from monetary accommodation (text figure). It is important to make decisive progress on fiscal adjustment before monetary accommodation is reduced. [Link]

I had blogged on the IMF Article IV Report earlier – few months ago – because, in the same breath, IMF advised the European Central Bank to maintain monetary accommodation. In the same report, the Fund had also noted the following:

Contrary to staff’s advice, however, most of the more highly indebted countries are expected to ease in 2017, including France, Italy and Portugal. [Link]

So, the ECB concedes that, prior to the crisis of 2008, European countries did not take advantage of favourable economic conditions – which was chiefly about low bond yields. Post-crisis, IMF observes that debtor nations had not saved the windfall interest deductions. So, the message is simple: benefits from low interest rate are always squandered.

Clearly, both of them are not getting it and that is why one is continuing to advice and the other is continuing to stick to easy money policies. Individuals and institutions do not reform with easy money. The opposite happens. In  tough times, they reform. Only when the status quo is made untenable, do people change. So do institutions, companies, sovereigns.

Wrong thought process; flawed understanding of human behaviour; wrong policy prescription and then a warning that is too late as the Fund issued in April 2018 warning of excessive borrowing!

IMF warns on debt.png

That was from ‘Financial Times’ dated April 18, 2018.

Can it get sillier than this?

… and we wonder why people ‘stupidly’ keep voting the populists to office

Comments I left on the FT article by Wolfgang Muenchau on the lies and arrogance at teh heart of the Eurozone politics

Hear, hear, Mr. Muenchau:

What is particularly shocking about these spurious narratives is not only the contempt and ignorance they reflect, but the casual way in which they are cobbled together. They are part of common folklore and judged to be true because everybody has been saying the same kind of stuff for years….

…. Italy’s populist government is not an electoral accident, as moderate Italian political commentators want us to believe. It is what happens when a prolonged economic downturn drives the electorate against the establishment.

In the second set of lines cited above, Mr. Muenchau, pulls his punches. It is not just the prolonged economic downturn that drives the electorate against the establishment. It is much more than that. His article provides examples of that – the commentator who called Italians, ‘beggars’. Not to mention the German politician who told a television interviewer that the markets will teach Italians a lesson.

It is a combination of insouciance, arrogance, intolerance and hubris – essentially, all ‘illiberal’ stuff in the garb of liberalism. Actually, who has been taught a lesson? The Germans. They ‘screwed’ Greece. In return, they have got  Hungary, Italy, Austria and Poland, etc. France was close. Yet, Ms. Merkel is still the ultimate visonary for many commentators.

Lessons remain repeatedly unlearnt, no matter how many times the Universe keeps sending reminders. That steadfast commitment and refusal to learn from the errors of one’s ego and intolerance strikes at the very foundations of neo-classical economics: human rationality.

Behavioural scientists knew that humans were reason-able. But, they almost always deploy it to rationalise their unreason-able positions.

Mr. Muenchau’s article is a reminder not just for politicians in Berlin, central bankers in Frankfurt and for bureaucrats in Brussels but also for some FT journalists that they may be wrong in their steadfast refusal to think, even once, that they could be getting it all wrong and that, may be, the other side knows what it is dong, even if we don’t agree with it. The hubris in some FT commentators is as breathtaking as it is in Brussels and Berlin.