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.

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Explicable silence

In this blog post, I had highlighted a forthcoming IMF working paper on global market power and its macroeconomic implications. That paper was flagged in a IMF blog post on the rise of the corporate giants. At the end of the blog post, there was a link to an enticing panel discussion at the IMF-World Bank Spring Meetings of April 2018. The title of the session was ‘Digitalisation and the new gilded age’. I was pleasantly surprised that IMF had arranged a panel discussion on a hot and crucial topic for our times.

This was the blurb for the session:

Are technological advances leading to greater market concentration in firms such as Google and Facebook and, in turn, creating what could be described as a New Gilded Age? [Link]

The blurb names two companies. Try catching their names in the panel discussion. I listened to the panel discussion which lasted a little over 70 minutes. To say that I was ‘underwhelmed’ would be an understatement.

More than that, I am trying to wrap my head around what the panel moderator was trying to achieve. The moderator was none other than Christine Lagarde, the President of the IMF!

The session was neither about technology and its enabling role (or not) in market concentration nor was it about market concentration in the technology sector itself and how both of them or either of them were leading to the new gilded age or not.

I still do not know what the session was about. There were a couple of leading questions to the panelist from IBM as to how good a work they were doing in Kenya enabling credit for small borrowers through Big Data and how ‘Watson’, their super-intelligent computer was helping with oncological treatment in India.

The moderator wanted all the panelists to answer the following question:

What one change would make the world competitive, equitable, inclusive and innovative?

The question pops up at 1h 05m 10s. Here is the video link.

//players.brightcove.net/45228659001/rkPdEdoaW_default/index.html?videoId=5772879577001

Listen to the answers and decide whether you wish to laugh or cry, be angry, be worried or simply throw up your hands.

When I mentioned this to a friend, he said that this was not a surprise and that there was a deliberate ‘conpsiracy of silence’ in liberal establishments on the key questions, challenges of the day and their perpetrators.

In February, there was this wonderful long-form essay in ‘The New York Times’ magazine titled, ‘The case against google’. That could well have been the specific case -study discussion for this topic.

There was a simple and well-written blog post at the Bank of France website in February on whether monopolies were a danger to the United States. That could have been discussed. Of course, that blog post does not mention technology as a factor in creating monopolies or market concentration but the panelists could have been asked to challenge it or defend it.

Somewhat more provocatively but importantly, the @facebookbreakup movement could have been discussed. The movement took out a full-page advt. in MIT student paper’s commencement edition with quotes from former Facebook employees – some of the founding ones. The quotes are worth reading.

Importantly and interestingly, the blog post cites Luigi Zingales to make the point that even if large firms with their rising monopoly power are not cutting back on investment spending, it is important to understand that these investments are about:

… investment can be misused to create barriers to entry, by using these resources to finance lobbying for example. The fact that the most profitable firms invest relatively little may corroborate this theory. Buying emerging startups to reduce competition is another example of the misuse of productive investment to maintain monopoly rents. [Link]

There are two brief but very useful blog posts in aei.org. They provide references that are staple for discussion for this session. The blog posts are here and here.

For those interested in digging deeper, two OECD papers mentioned in these posts are available here and here.

Also mentioned in these posts is a paper written by Nicolas Bloom paper for HBR titled, ‘Corporations in the age of inequality’. I just saw his policy prescriptions in the end.  Have not read the paper in full. He advocates use of tax policy to support those left behind:

Boost low incomes through tax policy. Governments should also consider measures that put more money into people’s pockets, such as negative income taxes — meaning that citizens earning below a certain threshold receive money directly from the government. For example, the U.S. should consider expanding the Earned Income Tax Credit, which is basically a negative income tax with a work requirement. Rather than constrain companies with more onerous rules around compensation, negative income taxes supplement the incomes for workers whose skills are in less demand while allowing economies to organize efficiently. [Link]

How will governments put more money into people’s pockets unless it takes money out of some people’s pockets?

Anyway, this blog post was supposed to be about the breathtaking obfuscation and dissembling that went on, in the name of discussing the new gilded age. Given that this is what liberal establishments and elites in poweful positions in such establishments do, we should not be surprised at all that populism is on the rise and that populists are popular and winning.

The important realisation for us, the ‘hoi polloi’ is that there is not much point in all of these discussions. They exist to keep up appearances. Power resides and rests with money. Those who have it want to have more and do not wish to part with it. They do so only reluctantly and only if there are no other options to avoid doing so. Democracy is a figleaf that pretends to give equal power to the ‘Have Nots’ as ‘Haves’. But, funding of candidates and political parties is in the hands of the money-ed. So, just a wee bit changes at the margin.

Those who are endowed start with an advantage and engage in expanding that advantage. They create systems that enable them to do so and hinder them only minimally, if at all.

The rest of us believe that we are working to make the world better. If we wake up from our denial, we will also wake up to realise that there is not much meaning left in our pursuits. Slumber is better.

Of conclusions and explanations

Financial Times has a series of stories/articles (actually, these days, newspapers mostly their stories with journalists as creative authors – you can interpret it whichever way you want) on the United States announcing tariffs on Chinese goods and on China’s retaliation. A quick glance at the headlines will tell you which way FT is leaning. Well, actually, you don’t even need to cast a sideways or a quick glance. By now, we should know. Let us set that aside for a moment.

Here is an interesting header:

Header 1.png

So, what is this economic lever? You don’t have to wait too long. Another story and another header gives you the answer:

header 2

It was a fun exercise on a Sunday morning, alright.

Explaining charlatans with charlatanism

A good friend recommended that I read this piece by John Ganz on the ‘age of charlatans’ that are allegedly living in. I did so.

When people feel overwhelmed and disenfrachised, they fall for ‘snake oil’ solutions and false promises. They fall for charlatans. That is his simple message.

But, he sets it up somewhat too cleverly and in the process, practising a bit of charlatanism himself. He cites passages from his favourite author who wrote about this some sixty years ago and then writes about some contemporary politicians and scholars in the next pararaph, practising a bit of ‘post-hoc ergo procter hoc’ logic. No explanation as to why these characters exemplify the previous paragraph. Are we expected to accept that because he says so?

I suppose it is not entirely a coincidence that the characters he chooses to be critical of belong to the ‘Right’ in the United States. I had not read Jordan Peterson’s book but the way he handled a journalist in a TV interview without once losing patience with her aggressive questions was an abject lesson to many of us.

Critics usually don’t make a distinction between Trump’s personality and his policies. The latter to be called ‘charlatanism’ needs to be established. It will take time and outcomes could surprise or vindicate critics. Too early to say. Many in the West think globalisation and free trade were the false utopia promised by globalisers-charlatans and that is why they chose these ‘charlatans’ over them.

His last three sentences try to redeem the article but, by then, he had lost me.

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 sense of Trump and trade

The title of this post is misleading. It gives the impression that I have figured it out. No, I have not. I am still making sense of both. But, I can begin to see why President Trump is viewed either as too crazy or too much of a genius. These extreme characterisations seem more appropriate than middle ones.

The image of a relatively young and boyish looking Canadian Prime Minister being attacked by a much older person and the Head of State of a much bigger country appeared like an unfair game until you read this one. All the sky-high tariff rates that President Trump mentioned are true!

The article too provides a partial explanation for why the Canadian Prime Minister’s Liberal Party lost the Ontario provincial elections so badly. I did not know about it at all. This Wikipedia entry is good enough for us and the statistics are so clear that you do not have to worry about the commentary. You can figure out what happened yourself.

On ZTE, the President’s U-Turns have baffled and frustrated many, including me. But, it may be a much longer game of chickens and charade. You can figure it out yourself if you have subscription to ‘Wall Street Journal’ and can read this article. I won’t elaborate.

Jamil Anderlini wrote in FT this morning that President Trump seems to have conceded more than President Kim did in their summit meeting in Singapore yesterday. To a degree, Wall Street Journal agreed. The comments on Jamil’s article were strongly critical of him and his judgement. To be fair to him, he had sided with Trump on his trade battle with China but then we all thought that Trump had backtracked on ZTE (or, may be not). Second, we live in a world where analysts and commentators are required to make instant judgements on matters that are slow-moving. So, the comments might be a trifle too harsh.

May be, the header of his article on the Trump-Kim summit was too sweeping and too hasty. See below:

anderlini.png

This WSJ Opinion (‘Best of the web’) contrasts the reporting in New York Times now with its reporting in 1993 when a similar opening to North Korea was made under Bill Clinton.

FT readers too have commented that, had the meeting taken place between Obama and Kim, the FT would have reported it very differently. That should make some of these newspapers reflect as to what really are they achieving with their biases and how far their reputation for objectivity had sunk.

Why ‘they’ will never admit to ‘this’?

This ‘Wall Street Journal’ article is so familiar. As the Federal Reserve meets to raise interest rates, such a chorus always rises, no matter how ill-informed it is. Will the Federal Reserve trigger a recession becasue its rate hike will invert the yield curve? Will the Federal Reserve cause the stock market to crash?

It is all the Federal Reserve. There is one sliver of truth to that. It is and it has been the Federal Reserve. They set up the bubble with their extremely lax monetary policy – rates that remain too low for too long. Bubbles form and bubbles always burst. There has to be some trigger. The Federal Reserve’s belated tightening is the most obvious choice.

So, it is always the case that monetary policy normalisation causes the stock market to crash. Abnormal monetary policy – rates that are too low for long – causes bubbles to form and then they have to crash.

It is far easier to blame the Federal Reserve for causing asset prices to go down that make the wealthy feel poorer rather than blame oneself for ignoring risks and letting asset prices move too far ahead of and away from fundamental or blame fundamentals for keeping the punchbowl always topped up, no matter how ‘rowdy’ the party is.

This tweet captures the above well:

Let’s Be Clear. Many suggest recessions happen due to Fed tightening. Incorrect. Recessions happen AFTER bubbles created by extreme Fed loose policies are blown to be systemic. Recessions happen due to tightening TOO LATE. [Link]

Humans are reason-able. That is, we are capable of reason but as has been the case from the time we began to use ‘reason’, we have applied it to the cause of supporting our ‘un-reason’ or our prejudices.