Like it or not, Trump Presidency is delivering on jobs!

Somewhat belatedly, I went through the U.S. non-farm payroll employment for April 2017.  It is simply amazing. Apart from the fact that it was a strong report in many dimensions, consider the following facts. Data comparison is between Dec. 2016 and April 2017 because that is how far back that the April 2017 Employment Situation Report goes.

  • The median duration of unemployment is down to 10.2 weeks
  • There is a remarkably sharp fall in the unemployment rates of those with High School Degrees and those who do not even have that. In contrast, those who have a Bachelor’s degree or some associate degree  below Bachelor’s, their unemployment rate has barely budged, since December 2016. Clearly, there is a correlation/association between the Trump Presidency and the falling unemployment rate for the constituencies that voted for him!
  • Between Dec.2016 and April 2017, White Labour Force is up by 300,000. Those not in the labour force has shrunk by nearly half a million.
  • White male unemployment rate is down big time from 4.1% in December to 3.4% April 2017. Black men unemployment rate has declined while that of women has ticked up by 0.1% from 6.8% to 6.9%
  • Asian unemployment rate has gone up from 2.6% in December to 3.2% in April 2017! Again, Trump Presidency is delivering jobs to those who voted for him!
  • Number of full-time employment has jumped 1.739 million from Dec. 2016 to April 2017
  • Number of part-time employed has declined from 27.9 million to 27.2 million
  • Number of multiple job holders has gone up from 7.554 million to 7.683 million but it has registered a big drop from March 2017 level of 7.96 million.

Overall, something for him to shout about even if causality is hard to establish. It may not be there. But, it is a safe bet that had the indicators deteriorated, it would have been pinned on him by our dear media colleagues on either side of the Atlantic.

On rupee strength

Let me state at the outset that I am all for a strong currency PROVIDED economic fundamentals back it up. Strong capital inflows do not constitute ‘sound economic fundamentals’. They are hardly mirrors to fundamentals but of perceptions and that too of the relative variety. So too is the exchange rate. India’s economic growth is middling. It is unbalanced. Private capital formation is still missing. Savings rates have not risen.

So, the currency strength seems to be driven more by perception of India’s strength especially in comparison to other emerging economies, including China, rather than due to intrinsic strengths. That is why, perhaps, RBI has been intervening and that India’s foreign exchange reserves are rising.

This comment is not to take exception to Mr. Ninan’s Op.-Ed today in Business Standard. But, to raise one minor quibble. He had written:

The solution, suggested in this column seven months ago, is to focus on the source of the dollar surpluses: capital inflows, and debt inflows in particular.

Data do not support him – except for the last few months – that India’s dollar debt and equity flows had gone up. If anything, up to December 2016, India’s external debt and Net International Investment Position (IIP) positions have only improved. More repayments (outflows) than borrowings (inflows). Since February this year, India has witnessed strong Foreign Portfolio Investment (FPI) – both debt and equity.

Therefore, the point remains and he is right that India has not earned the right to have a strong currency. Most important of all fundamentals for a strong currency is productivity. India does not have the data because the bulk of the employment in the country is informal. Whether it is 75% or 92%, it does not matter. It is too high.

India is currently not facing headwinds or competitive disadvantage in a big way because other countries, including China, are not actively seeking to depreciate their currencies. That is something to keep in mind and watch out for. Chief Economic Advisor has indeed produced a chart of rising Indian rupee versus the Chinese yuan in his recent VKRV Rao Memorial Lecture. India does have a big bilateral trade deficit with China.

A friend helpfully points out that the focus on the INR/CNY bilateral exchange rate might be a road or bridge to nowhere. He said,

Between 2005 and 2015 the INR depreciated almost 90% against the CNY on nominal basis and about 60% on real effective basis while the bilateral trade deficit went up 24 times from around USD2bn to USD48bn. Not saying currency does not matter but in such cases global supply chains and productivity differentials seem to matter much more than currency divergence.

It is an excellent point. He is very right. I am reminded of what BIS wrote in its 2016 Annual Report on the declining usefulness of exchange rate depreciation for export growth:

Recent studies generally suggest that trade exchange rate elasticities have
declined in response to changes in trade structures, including currency denomination, hedging and the increasing importance of global value chains. For instance, a World Bank study finds that manufacturing export exchange rate elasticities almost halved between 1996 and 2012, with almost half of this decrease due to the spreading of global supply chains. [page 53 – Link]

Second, India’s overall REER has appreciated by about 7% to 9% in the last one year, depending on the metric that one chooses, from among the several that RBI publishes on a monthly basis.

We must remember that REER adjusts for inflation in India relative to that of other countries (trading partners). Inflation is an indirect measure of productivity. Therefore, REER is productivity adjusted in that sense. Even so, the rupee has appreciated in the last one-year or so. That could be a concern for whom export quality or excellence is not a core strength.

But, it has not hurt India much because crude oil has not sustained its price recovery of last year into 2017. This might persist for quite some time. If anything, the risk of further downside for crude oil price is higher than upside for crude oil. That is a good news for India. That is one reason India’s current account is not showing any strain from the rupee strength. Of course, the strength has been somewhat recent only.

It might be then that the Indian interest rates are still too high, relative to that of other countries. Perhaps, RBI is too tight. But, then who knows if India’s inflation has become sustainably low? RBI has not lowered rates because liquidity is otherwise ample, both in domestic financial institutions and from overseas. Their monetary policy might be tight, temporarily, but it has to be shown over time that it has become unsustainably too tight for too long, before the blame can be fully laid at its doors for the strength of the currency.

In sum, the situation calls for observation. The traffic light is amber. It is not red, signalling danger. Those were the days when Germany and Japan could become export powerhouses despite currency strength. It is true that no country depreciates its way to economic prosperity.

In the days of financial globalisation, it is unfortunately and equally true that no country can appreciate its way to external sustainability.

Grouchy Gold Standard

Thanks to James Crabtree, I learnt a new word in English today.  He had called me ‘grouchy’. You can see his tweet here.

I googled ‘grouchy’ and it gave this as the top hit:

irritable and bad-tempered; grumpy; complaining

That seems like a disproportionately liberal compliment to my blog post. If I said more, James would tweet again saying, ‘QED’.

I am prepared to ‘forgive’ him for calling me ‘grouchy’ for the pointer to this article in this tweet. The two images of India in 2012 and in 2016 would be heartwarming both to the Indian Chief Economic Advisor and his employer!

So, James shall have the last word on being grouchy.

Tett, Trump and Comey

A disappointing piece by Ms. Tett.  As Senator Susan Collins said – and she is no admirer of President Trump – to put it mildly – the FBI Chief deserved to go. Further, she noted that Trump was not shutting down FBI. There are enough dirt diggers on Trump. One may not like him; one may even detest him for his values, for his policies and for his personality but President Trump is not a fool to walk into a suicidal trap. He would have known that he is handing a big stick for his detractors to beat him with.

Remember, he outsmarted the chattering classes to become the President. They guessed wrong and now all of them are trying to prove themselves right, by finding a reason to get rid of him.  To do so, they are perhaps barking up the wrong tree. The hyperventilation over Russia is a case of self-perpetuating logic.

Whether or not there was collusion with Russia that helped him win the Presidency – a very remote possibility –  there are serious conflicts of interest that are arising with China.

Kushner has almost single-handedly derailed the Trump agenda over China. From the aborted attempt on the part of Anbang insurance to bail out his failed real estate deals, to his children singing Mandarin songs for the visiting Chinese President and his wife to his family members selling U.S. Permanent Residency for real estate transactions claiming proximity with the highest office of the land, etc., there is plenty to worry about there.

China – with its unstable economy and its empire building – is a bigger threat to the global order than Russia. China ought to be a bigger worry for those who worry about the stability of markets.

Is it a sign of foolishly misplaced priorities that there is hyperventilation about Russia while China gets away with far less scrutiny or is it something more sinister?

In 2001, on the request of the Head of Citigroup Investment Banking Head, Robert Rubin, former U.S. Treasury Secretary telephoned a Treasury undersecretary in the new Republican Administration to ensure that Enron Debt was not downgraded. Citi was having a big exposure to Enron.

He could do so because Bill Clinton had rescinded a rule that barred Cabinet members from interceding with the Department that they had worked for.

Luigi Zingales, Professor at the University of Chicago, had recalled the incident in his book, ‘A Capitalism for the people’. That is the kind of ‘bipartisanship’ that America had witnessed in the last two or three decades in sinking the pillars of probity in governance.

Good journalists must know the issues that they ought to focus on.

Lessons in economic ideology from office room allocation in U. Chicago

This is coming from Luigi Zingales who wanted to save capitalism from capitalists!

When I visited Stanford Business School many years ago , I was surprised to see that all of the offices in its new building were identical — a result that had cost money , thanks to the structure of the building . Why should socialism prevail with respect to offices ? I was told that the dean , who had to assign the offices , wanted to avoid the headache of having to decide who would get the best ones.

At the time , I thought these concerns were exaggerated , until Chicago Booth also constructed a new building for itself but decided to differentiate offices . To minimize lobbying , the dean announced that each faculty member would be randomly assigned a number within categories — presumably assistant , associate , full , and chair professor ( though this was not explicit ) , and would choose an office sequentially . But when the selection order was announced , the most famous faculty members were first , suggesting that the process had not in fact been random . The school erupted . Emotions took over . One faculty member shouted “ I hate you ! ” at another who had received a better office , ruining their relationship for quite some time .

We might underestimate the cost of all this commotion because it was not easily measurable . But if you do factor in the time wasted in office – allocation simulations , along with the cost of tense relationships for years to come , you see that Stanford’s choice was the more efficient one. This point has been recognized by a few economists.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 205). Basic Books. Kindle Edition.

I shared this with my friend Gulzar Natarajan. We then had a couple of back and forth on it. He was wondering whether Communism and Socialism were ostracized because they were also tainted by association with totalitarian repression that some of the Communist leaders practiced.

At the same time, he noted that capitalism had adapted by embracing certain aspects of socialism:

“adaptability of capitalism to emergent threats – the welfare state, regulatory institutions, social democracy itself.”

This is what I wrote in response:

Several valid questions and interesting speculations in your email. Who knows the answers? In all these matters, all of us are like the blind men guessing the elephant. We are also influenced by the context and the times in the weights we assign to competing arguments.

I have always believed that a competitive market economy is about as egalitarian as one can get, in terms of opportunities. That is about the best one can hope to achieve in a society. Equality of outcomes, of course, takes away the incentives.

The best a government should aim for is a combination of competitive market economy with social safety and affirmative actions in the early phase of lives for the population – for health and education. Easier said than done.

In the concluding chapters, in ‘Faultlines’, Raghuram Rajan spends some time on these questions. They were practical and useful.

As for the current state of the world, humans are doomed to go through the cycles – swings between extremes with very brief (if lucky) interludes of stable equilibriums. Those of us who are lucky to find ourselves born and grow into adulthood in such stable equilibrium periods think that this steady state of affairs prevails permanently. We fail to grasp and remember our history lessons well.

In fact, that is the other lesson from this office room allocation episode. No matter how much of economics or anthropology or sociology these Professors have learnt, they had to fight for their office rooms with bitter name calling! We have too many flaws to create/achieve anything positive and stable on an enduring basis.

That enduring feature of humanity is what brings out and accentuates the drawbacks in these systems – capitalism or socialism or market economy.

We are capable of bringing out the worst in ourselves and in all things that we touch!

I am re-reading Yuval Harari’s Homo Sapiens. I read it too quickly the first time around. Sapiens are deadly!

Only one firm matters

An extraordinary proportion of people with training and experience in finance have worked at the highest levels of every recent presidential administration. Four of the last six secretaries of the Treasury fit this description. In fact , all four were directly or indirectly connected to one firm: Goldman Sachs. This is hardly the historical norm : of the previous six Treasury secretaries, only one had a finance background .

In 2001, following revelations of accounting irregularities, Enron verged on collapse, which meant that Citigroup, a major lender, would lose a significant amount of money. Fulfilling a request made by Michael Carpenter, head of Citigroup’s investment banking unit, Rubin called Peter R . Fisher, then undersecretary of the Treasury and asked him to consider advising the bond – rating agencies against an immediate downgrade of Enron’s debt. In other words , Rubin (a Democrat ) lobbied Fisher (a Republican ) to help bail out Enron. ( So much for Washington’s ideological divide.)

What Rubin did was technically legal, as The Economist explained, only because Bill Clinton , in his last days as president , had canceled an executive order that barred top officials from lobbying their old departments for five years after leaving office.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.

Today, of course, there is far more money riding on the models than in the 1980s – and when it comes to positive feedback, size matters. Indeed, another example of positive feedback is the relationship between the financial sector and regulators. As the sector increases in size, it gains more influence over the government; this allows it to change regulations in its favor, which allows it to grow even larger, and so on, until it becomes Goldman Sachs.

  • Sometimes called Government Sachs, because of the remarkable ability of its alumni to go straight into senior levels of government, perhaps related to the fact that the firm is a leading corporate donor to political campaigns (Baram, 2009). It is even better represented at central banks. Four of the Federal Reserve’s 12 regional banks  are currently headed by former Goldman Sachs executives. Only five banks have voting power, in a rotating fashion, and in 2017 ex-Goldmanites will hold four of these votes. Together with Mark Carney at the Bank of England and Mario Draghi at the European Central Bank, this means that interest rate decisions for much of the world’s economy are made by people who came from a single firm. Nothing to see here, move along.

Source: Wilmott, Paul; Orrell, David. The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets (Kindle Locations 4524-4527). Wiley. Kindle Edition.

The iron laws of public policy are…

… that the road to hell is paved with good intentions and that the law of unintended consequences always applies.

Read this:

April 20, 2005, President George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which reformed the rules overseeing bankruptcy , especially personal bankruptcy.

At its inception , the nation had to borrow heavily from England , and thus the protection of debtors was in the national interest.

The debate over the 2005 reform was completely dominated by the credit lobby and organized by the National Consumer Bankruptcy Coalition . In the words of one legal scholar : “ Never before in our history has such a well – organized , well – orchestrated , and well – financed campaign been run to change the balance of power between creditors and debtors.”

In the pre-bankruptcy – reform world , distressed homeowners would have filed for personal bankruptcy , which would have allowed them to discharge their credit – card debt , making it easier to hold on to their houses. Under the new law , this option was no longer open . According to calculations based on a recent study, the 2005 reform increased the number of people defaulting on their mortgages by almost half a million; and when a mortgage holder defaults and the house is auctioned off , on average it loses 27 percent in value.  If we apply this loss to the average price of a house sold in 2005 ( $ 290,000 ), we can estimate that the financial industry lost $ 39 billion as a result of bankruptcy reform.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.