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.

Drama at G-7

At the outset, other members of the G-7 must be grateful to the American President for making their meeting memorable. Otherwise, it has been a long time since G-7 affairs have become big yawns. It is a forum for the Europeans and Canadians to bask in exaggerated self-importance. That gathering had become irrelevant and more so since the G-20 was formed. Not that it is much effective either. But, that it has made G-7 even more irrelevant than it has been is undisputed. The G-7 is a relic. Trump had breathed some ‘life’ into its proceedings. For that, they have to be grateful.

Developments in Italy have overwhelmingly vindicated the warnings of Yanis Varoufakis after the troika captured the young and inexperienced Alexis Tsipras and humilated Greece and the collective will of its people. To call them democratic is hilarious and risible. By all accounts, Ms. Merkel is an over-rated international leader. For a while, circumstances made her look effective in her country and only in her country.

All the commentators who are quite aghast at the way President Trump had dealt with the rest of the G-7 would have, in normal circumstances, written requiems to the gathering and the ‘institution’ of G-7. But, now that Trump had treated the gathering with disdain, they are very nostalgic about the mythical importance of the gathering.

After his shocking article in April on the machismo of politicians which included a gratuitous broadside characterised by an off-the-cuff partonising and insulting remark thrown at Professor Jordan Peterson, Mr. Buruma only partially redeemed himself with his next article on the anti-Semitism of the British Labour because, in the final portions of his article, he could not resist veering off track and dvelving into the historical anti-Semitism of the British Conservative Party, abandoning the core theme of the article. Now, he has another article titled, ‘Tweets of infamy’.

Mr. Buruma is entitled to his views as we are entitled to ours. Only history will determine later whether this President is acting impulsively, whimsically and unthinkingly. Clearly, much change is afoot and not all of it can be un-pre-meditated. What we do not understand does not become unacceptable. That is hubris.

That apart, I do admit to failure in fathoming what the American President is doing.  This little blurb on the long Anne Krueger article (behind paywall, depending on how many you had read already) might have come closer to the truth. Clearly, he is intent on bringing the existing structure down but that does not absolve the President of the responsibility of explaining his actions and pronuncements.

Anne Krueger blurb.png

I wonder if it makes sense for the American President to open multiple fronts. He has to battle China. I am not quite sure he is really following through. There is a supposed deal with ZTE. Cannot quite figure out why.

Also, I fail to understand how Canada and Europe slap so much tariffs on American goods. I do not think the tariff percentages he is touting – 270% and 300% – are correct.

It is hard to figure out quite what the game plan is.

Shouldn’t the President, at some point in time, explain and articulate his Grand Strategy, if he has one?

Italy, Europe, Pakistan and the rest

Been six days since I blogged. Was travelling again on May 30-31. Backlog of blogging builds up. So, this one is a potpourry.

Almost done with reading ‘Final hour’ Sir Martin Rees. Recommend it.

Of course, ‘Adults in the Room’ by Yanis Varoufakis remains the highlight of the year in terms of readings completed. He has a fairly sober piece on Germany (Merkel, in particular) being at the heart of the problems confronting Europe. In his attempt to be politically correct, I think, he has finessed his lines.

Paul Krugman has three tweets on the Italian President denying the Italian election winners the right to form the government by denying them their Finance Minister nominee.

But, Yanis makes this interesting point:

Trump understands one thing well: Germany and the eurozone are at his mercy, owing to their increasing dependence on large net exports to the US and the rest of the world. And this dependence has grown inexorably as a result of the austerity policies that were first tried out in Greece and then implemented in Italy and elsewhere.

Today, I heard Raghuram Rajan in Singapore saying that, one of the reasons behind the austerity policies in the UK was (or, could be) that their banks were too big relative to their economies and that the austerity was an accommodation of the demands of such a big banking sector on the government’s fiscal resources. Same goes for Europe. He was not defending this, however. Rajan was delivering the 9th MAS lecture today in Singapore.

Nonetheless, I am not advancing this either as an explanation or justification for the ‘Troika’ to impose austerity – and that too with utter hypocrisy (I am yet to write a full review of ‘Adults in the Room’) – on Greece. Simply recording something I heard today related to the word, ‘austerity’.

Inter alia, UK Government sold some of its stake in the Royal Bank of Scotland at a hefty loss today.

The UK Chancellor of the Exchequer George Osborne has such a massive conflict of interest with what he is doing at the ‘Evening Standard’ that I do not know where to begin. Read this to figure it out yourself. Equally, I am not surprised that Google took up his offer. They should be embarrassed but will they be?

The implications of this story are staggering and overwhelm me. How is India, for example, going to find employment for its youth with or without formal education? Is technology such a holy grail that it should be pursued, no matter what? That is where I find Sir Martin Rees thoughtful and humane. See the beginning of the post.

Prof. Atif Mian at Princeton has a series of fourteen tweets on development, the vicious poverty trap and how public policy and prejudices make it more vicious. First tweet here.

Australia charges Citi and Deutsche Bank for cartel-like behaviour in their underwriting of ANZ shares a decade ago. The authorities have made a criminal charge and that is serious stuff. Banks will be banks, I suppose.

A damning verdict on American universities by Rana Foroohar. They are now hedge funds, she says. Ed Luce wishes she were not right. He concurs.

A powerful way to understand what we (humans) have wrought to the climate. Found it via the twitter handle of Atif Mian.

Gulzar shared this pithy and perceptive blog post by Tyler Cowen on how Trump’s foreign policy might outlast him in America.

This should tell us why Europe has not earned Trump’s respect.

A good summary of Pakistan’s acute ‘Balance of Payments’ situation.

More later.

The Italian drama

The Italian President blocked the appointment of a Eurosceptic finance minister and the new government formation has stopped. The parties are preparing to go back to the voters again! These are my thoughts now on what the Italian President did.

These situations are difficult to analyse in real terms. There are no templates and no precedents. Clearly, the President has to choose, in his opinion, the option with lower risks of blowing up the Eurozone. Of course, I am assuming that that is his objective. The alternative is too difficult to grapple with for many in Europe. Ask Tsipras.

So, the Italian President has chosen to thwart the government formation. He might have calculated that the political parties would go to the people again and that the voters might blink, this time. Incidentally, this is the calculation of those in the ‘Remain’ camp in the UK too and that is why they want a referendum again, on Brexit. But, the contexts are different.

In Italy, the public may conclude that the parties it voted for have been robbed off the opportunity to form the government, even though the President is apparently well within his constitutional rights to reject appointments to the Cabinet.  So, that is the unknown risk.

The alternative would have been to let the government be formed even with the Eurosceptic Finance Minister, betting on two possibilities. One is that the realities and compulsions of office mellow him and the government and two, the ‘Troika’ (or the ‘Duet’ of the European Commission and the ECB) manage to browbeat and defeat the government in Italy, making them fall in line as they did to Greece. Quite what it would do to Italy’s growth and public debt is another matter.  Greece’s fundamentals cannot be said to have improved much in the three years since the Troika managed to eject Yanis Varoufakis and co-opt Tsipras.

In the end, the real issue is about the suitability (or, otherwise) of the single currency, in economic terms, for the current member countries. But, the single currency is a political project more than an economic project and hence, solutions have to be political.

In that sense, does it make sense to keep the political drama domestic or make it a continental affair as happened for five months between Greecea and the European Commission+ECB (and a reluctant IMF playing along)?

Viewed from this angle, the decision of the Italian President becomes somewhat easier to understand although someone else might have decided to trust the European ‘powers-that-be’ to exercise their ‘coercive charm’ on the new Italian government (without solving the underlying issues as in the case of Greece) rather than risk getting the Eurosceptic parties a bigger mandate.

If that outcome materialises, some would conclude that the Eurozone project was proceeding in the right direction, after all?!

Since, in real life, counterfactuals are impossible, debates, analyses and arguments will remain inconclusive and continue into eternity.

From a trade surplus and balance of payments perspective, the Euro might be undervalued (and that too for Germany, for sure) but from the perspective of the pricing of a risk of implosion, the currency is probably not done falling against the US dollar. That said, it might actually rebound this week as financial markets might wager that the Eurosceptics might not come back to office.

[Pl. note that this does not constitute any investment advice. Period]

At this stage, I can only hope that there is someone like Yanis Varoufakis in Italy who would capture the drama for the rest of the world like he did with his excellent book, ‘Adults in the Room’.