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Economic Policy & Life





Updated: 2017-11-16T11:40:49.214+05:30

 



Why Mankiw is wrong, and so is Krugman…

2012-01-30T15:03:27.146+05:30

After a long period of letting things slide, this fascinating discussion on taxes compels me to get involved. Not for lack of quality contribution to the discussion – the best of the best have spoken, but because the discussion seems to be focused on the wrong problem.

A lot of comment has focused on tax on investment income vis-à-vis tax on ‘normal’ income and the reasons why it differs to the extent that it does. Investment income or ‘capital gains’ are typically taxed at a rate lower than that on ‘normal’ income. As a result, those who derive any part of their income from investments pay a lower average rate of tax on their total income than those who don’t. When seen alongside the fact that those deriving investment income are typically wealthier than those who don’t, and the share of investment income typically increases with income, this is easily seen as a regime that favours rich over poor. Those who oppose it, like Paul Krugman, claim it contributes to increasing inequality by allowing the rich to retain more of their income. Those who oppose it, like Greg Mankiw and Donald Boudreaux, claim that since investment income represents post tax corporate income, the proportion of tax paid by those who derive it should be seen as the sum of the corporate tax rate and the justifiably lower ‘capital gains’ tax rate, which is higher than the tax rate for ‘normal’ income. On the face of it, both positions seem intuitively correct.

However, the issue is not about rich and poor, investment income & normal income, corporate taxes & individual taxes or even about progressive taxation. Its about the distinction between income and savings.

Apart from wages, every other source of income is taxed on the savings it generates. Individual entrepreneurs, businesses and corporations pay tax only on the portion of their income that is saved after all expenses required to earn that income have been deducted. These savings are called profits. Wage earners, on the other hand are taxed on total income, at roughly the same rate paid by all other entities on profits, with a few deductions thrown in to give a semblance of equity to the regime.

Seen from another perspective, except for expenses incurred by wage earners, deductible expenses for one entity are revenues for another. Whether its a professional speaker paying for airfare and accommodation while on a speaking assignment, or a business paying rent for the property it occupies, or a corporation paying telephone bills, the recipient entity accounts for the inflow as a revenue. As mentioned above, it then deducts all expenses incurred by it and pays tax on what remains, while wage earners pay tax on all they receive. But more importantly, when wage earners spend money on food, healthcare, clothing and housing, recipient entities have to account for the inflow as a receipt and pay tax on the profit it generates despite the fact that the wage earner is incurring this expenditure from after-tax income.

The issue at hand is not about favouring the rich, its about disfavouring wage earners regardless of their level of income. This discussion has emotional appeal for the US and other developed nations since a sizeable proportion their population consists of wage earners. However, their angst is not because others gets to keep more of their income. Its because they get to keep so little.

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Why interest rates will rise... And inflation too.

2011-10-25T12:56:09.326+05:30

It's policy time again and as usual, speculation about the RBI's stance later today is more than rife. Some commentators feel that the RBI has hiked rates enough. Others feel that more hikes are warranted as inflation continues to remain at ridiculously high levels. Both sides, however, fail to provide for the anomalies of the Indian economy and suitability of traditional policy instruments to the task at hand.

Theoretically, when faced with high inflation, a central bank hikes interest rates which serves to reduce inflation in two ways. Firstly, higher interest rates suppress domestic demand which robs local businesses of pricing power. Reduced domestic demand also reduces the quantum of imports which results in improved balance of payments and currency appreciation. This, in turn, lowers the price of imported goods with it's consequent salutary impact on inflation.

Secondly, in an open economy, higher interest rates attract foreign capital which results in currency appreciation and hence, lower prices for imported goods which in turn serves to ease inflationary pressures. This impact, however, can manifest only when the country in question has an open capital account for debt flows.

When analyzing the applicability of these theoretical outcomes to India, one is immediately aware of a critical gap. India's capital account is completely open only for equity flows, not debt flows. As a result, higher interest rates are seldom accompanied by greater inflows of foreign capital. In fact, as higher interest rates squeeze domestic economic activity and corporate profitability, foreign equity flows reduce or even reverse. This worsens the balance of payments and can, and frequently does, result in currency depreciation at such times. As the currency depreciates, the prices of imported goods rise which adds to inflationary pressures rather than easing them. This makes it extremely likely that in India, with the existing framework, higher interest rates will cause higher inflation rather than combatting it.

Recent evidence supports this theory almost completely. For the second time in the last 4 years one can witness the currency collapsing and inflation increasing as interest rates rise. When inflation subsided somewhat in 2008/2009 as international commodity prices crashed it gave the RBI the unfortunate impression of a monetary policy success. With the RBI looking to replicate this 'success' once again, it is more than likely that interest rates will rise once again later today. And in the absence of a complete collapse in international commodity prices, so will inflation.

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An update and some links

2011-04-07T00:24:07.772+05:30

Hey all,

Its been a hell of a long time since I last wrote and that’s probably because its been a while since I actually read real world economics and not a text book.  And while I was tempted to write about what I was learning, it always turned out too bookish to be a blog post. So many posts were started and abandoned, some forever, and some which I may revive when the opportunity presents itself.

As things stand at the moment, I may be in a position to get back to reading up on real world economics and once I am up to steam on what I have missed, writing again. It shouldn’t take too long; not much has changed except for my perception. So to ease into it, I’ll be sharing the most interesting facts and perspectives I come across for the next few days. So here goes,

A market for everything – Meteorite fragments for sale!!

An experiment in parking charges – on the right track, but will it work?

How the world’s economic centre of gravity is shifting.

$1,700: The annual benefit the average American derives from personal computers – Just a thought on pricing, though. It seems Apple would like to corner most of this benefit, which makes the net benefit to a Mac owner much lower than that of an average PC owner… Hmmm…

Don Boudreaux; Trade & Borders – Just one of his endless rants… My comment is numbered 14th…

Don Boudreaux: Costs are not benefits – Of course they aren’t! My comment is numbered 12th… and for a more well thought out point of view, read this (pdf)

And finally, via Greg Mankiw

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Click on image to enlarge

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Rejoice for Egypt; Lament for India

2011-02-12T06:35:27.041+05:30

So after 18 days of protest, Egypt is free from a dictator who ruled for 30 years. Its time for Egypt to rejoice, despite the uncertainty of how the Army will behave in coming days. But this event only makes the situation in India worthier of a lament.

The current Prime Minister is an honest man. But his incompetence in managing government becomes clearer with every passing day. From the Commonwealth Games, the Telecom Scam to S- bandwidth for ISRO, he has the singular honor of heading a government which has cheated the people of India out of more than the year's fiscal deficit.  An amount roughly 5,500 times that involved in the infamous Bofors scam which, unfortunately, we still find time to discuss. An amount which could retire close to 10% of the government's outstanding liabilities.

He also has the honor of presiding over the sharpest increase in basic food prices in more than a decade; an increase that drove millions back into poverty as they realized that feeding a family took far more than just honest hard work. 

Of course, it isn't the Prime Minister's fault. He's an honest man forced to make compromises in managing a coalition government. So the telecom scam satisfies the lust of one ally and food price increases purify the cancerous blood of another. And while they were at it, one needed to be fair to one's own party as well, which was served well by the Commonwealth Games and S-Band allocation.

Yet it is Egypt which has the opportunity to protest & overthrow an entrenched dictator and rejoice when the will of the people prevails. We have been taught to believe that our government is the will of the people. but is it, really? 

Do we really elect governments with a mandate to loot the nation? To enrich themselves while millions suffer.  Is this what democracy is supposed to be? Is this the will of our nation?
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Apologies and an update...

2010-10-29T03:55:18.567+05:30

Firstly, my apologies for having been delinquent over the last couple of months... It wasn't intentional, but then again, that isn't an excuse.

The fact of the matter is, that after a lot of thinking, I reached a really difficult and in some ways, heart-rending decision. I decided to study further.

Of the many reasons behind this decision, one really stands out in importance. After having experienced economics as a practitioner, my lack of formal training and consequently, inability to pursue some thoughts to their logical conclusion was bothersome. Since this could only be corrected by training, I decided to look for an appropriate course.

Of the many options available nowadays, the one that really stood out was the MSc in Economic Management & Policy at the University of Strathclyde, Glasgow. It taught theory with a practical orientation, something I thought I would be better placed to cope with than a dedicatedly theoretical course. Entering the classroom as a student after 20 years was a scary thought, but it was worth a shot.

Little did I realise that it isn't the environment that matters. What does matter is one's attention span, which after having spent 15 years in the high intensity financial services industry, is slightly over 5 seconds per task.

In a nutshell, my absence was caused initially by the rush to get things ready and get here (it was all very last minute). But since I reached here just over a month ago, I have been completely overwhelmed by the workload, not because its too much, but because it needs the ability to focus for extended periods of time.

As things stand, I am in the process of learning.. I'm up to 25 minutes now and it looks as if the path from here on is easier... What this also means is that I will be able to write again

And that's something to look forward to.

PS: I discovered why everyone talks about the weather in the UK... Its the only way to cope with it!(image)



More links for August 18, 2010

2010-08-18T19:00:30.670+05:30

 

Ben Bernanke: Wall Street's Servant – Dean Baker, Huffington Post

A ‘Fat Cat’ Strikes Back – Newsweek: For someone who benefitted from a lower-than-lax regulatory environment under Republican rule, its not surprising that Steve Schwarzman has declared war on Obama.

Mel Brooks and the bankers – VoxEU: Its not funny.

Central Bank Autonomy: the real reasons – Mark Thoma, Fiscal Times

Capitalist Myopia – Maxine Udall: Is there any way of avoiding it?

US National Universities Rankings – US News: For those of you who like to know.

A history of how we have fallen

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Barry Ritholtz attributes the above to the industrial revolution. I attribute it to our inborn resistance to change. Coupled with high tolerance, its a killer…

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Is the RBI just another regulator?

2010-08-18T16:06:09.188+05:30

Following Dr. Subbarao’s speech which strove to position the RBI as the only choice for a coordinating regulator, comes this speech from Rakesh Mohan, a former Deputy Governor. Another memorial lecture was hijacked by a blatantly political agenda, and yet the case for RBI’s primacy amongst financial regulators was strengthened only marginally. Most central bankers, past & present, would agree with the two speeches, not only because they believe it in the underlying cause, but because their approach has been blinkered by their past. They believe that banks are special but the financial crisis of 2008 proved them wrong. Shadow banks emerged as the lead protagonists in the financial crisis of 2008 and central banks couldn’t do anything about it till it was too late. Whether central banks chose to look the other way or were completely ignorant of emerging risks is irrelevant. All that matters is that non-banks could contribute to financial instability in equal measure as banks. Lest you get me wrong, I agree that the monetary authority should be the coordinating regulator. But that the monetary authority should also be responsible for regulating a segment of the market is another matter altogether. In doing so, the monetary-regulatory body that emerges is powerful but with little responsibility and ownership of other market segments, prone to respond to demands of the segment they regulate even at the expense of other segments. Also, since this entity has very little control over other market segments, its prone to ignore developments that threaten market stability in these segments. Our current system looks more like the US system, with a central bank responsible for monetary policy and bank regulation and an independent regulator (in our case, multiple independent regulators) for the securities market. And this is the very system that failed. But is giving the RBI an exalted position a solution? Not if we are serious about reform. Rakesh Mohan uses the UK as an example, saying that their move to fold the FSA back into the Bank of England argues for RBI supremacy. Well, it doesn’t. What it does argue for is unification of all agencies under the monetary authority where a homogeneous regulatory framework treats all market segments with equal respect and seriousness. It makes the case for treating banks as just another market segment, and not a market segment deserving special treatment. On the other hand, if the RBI becomes the coordinating regulator, as these gentlemen desire, it grants the bank regulator an exalted status when compared to other regulators. This will only result in more mayhem rather than less. For a unified regulatory environment to work, it is essential that all regulations be accorded equal importance. Only then will it be possible for the regulator(s) to be in a position to recognize risks, no matter which segment of the financial sector they arise. And for that the RBI, in its current form, cannot survive. For the RBI Governor to be accepted as the head of a unified regulatory framework, this position needs to transform into one which carries direct responsibility only for the conduct of monetary policy. With bank regulation delegated to a Dy. Governor, it will be possible to merge other financial regulators with the RBI with the Chairperson/Head of these regulators as Dy. Governors. But this is just one way and experience indicates that it may not be the right one. The RBI has always been an excellent regulator. But as I have mentioned earlier, its conduct of monetary policy has been disastrous. It has worked hard to hide its monetary policy failures behind its regulatory successes. And its done so very well. But if one were to look at normal parameters for measuring the efficacy of monetary policy, like inflation, growth & domestic stability, the RBI has failed at every step. This experience suggests that the RBI would b[...]



Links for August 18, 2010

2010-08-17T21:53:35.419+05:30

 

Ireland: A recession of the banks, by the banks, and for the banks – P O Neill

Can the Nation Stimulate Its Way to Prosperity? – Boston Fed: The other side of yesterday’s argument.

Monetary policy for the 21st century – interfluidity: Completely out of the box. In fact, there is no box…

The Global Cities Index 2010 – Foreign Policy: How does your city fare?

Safe drinking water for all? Now that’s real innovation!

World Population Graph

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Have interest rates peaked?

2010-08-17T21:34:09.735+05:30

So inflation is down to a single digit (barely) after a period of 6 months. Through this time, there has been a lot of discussion about monetary policy response to this phenomenon – one that seems to beset India every few years. And there will still be some hawks saying the RBI hasn’t done enough, but the fact remains, there wasn’t much the RBI could do in the situation. Inflation was, and still is, largely a supply side issue. And its retreat is a statistical event foretold by many, including me.

But its not as if lower inflation means lower prices. For the month of July 2010, prices have increased by 1.04% in absolute terms, an annualized increase of 12.41%. Inflation has decreased because prices had increased by 1.57% (annualized 18.89%) in July 2009. When Inflation for June 2010 was calculated it analyzed price changes in the period July 2009 – June 2010. This indicated an increase of 10.55%. When inflation for July 2010 is calculated, the relevant period is August 2009 – July 2010. Price changes in July 2009 were excluded from the period and those in July 2010 included. As mentioned earlier, since the rate of price increases was higher in July 2009 than experienced last month, the inflation rate reduced to 9.97%. This is normally termed the “base effect”.

But prices increasing at an annualized rate of 12.41% means that the possibility of inflation rearing up again is still high. Which brings us to the components of current inflation. Looking at last month, prices in the Primary Articles sub-group have increased by 1.85% (annualized 22.24%) and prices in the Fuel, Power, Light & Lubricant sub-group have increased by 3.21% (annualized 38.46%). For the last 12 months these increases are 14.94% and 14.29% respectively. Inflation in the Manufactured Products sub-group over the last one year is 6.15% and for last month, its negative 0.09%. And this would, beyond doubt, present the RBI with its latest challenge.

Falling prices are never good for economic growth. Monetary policy tries to control the rate of increase only and is seldom designed to achieve a decrease. When prices fall, consumption gets delayed, especially in durables, as consumers wait for prices to fall further. Coupled with high interest rates, deflation can stall an economy as consumers save to earn interest and benefit from price decreases. And while there are still some prices in this subgroup which have risen, this hasn’t been enough to stop the index from falling.

The possibility of inflation rising again always exists. But, the base effect in coming months is extremely sharp which reduces the probability significantly. If the index remains constant, meaning prices remain where they were at the end of July, inflation will drop sharply as seen in the table below.

Commodity Name July September November
ALL COMMODITIES 9.97% 8.20% 6.19%
I PRIMARY ARTICLE 14.94% 12.55% 7.63%
II FUEL POWER LIGHT & LUBRICANTS 14.29% 12.13% 11.87%
III MANUFACTURED PRODUCTS 6.15% 4.83% 3.49%

With Manufactured Products inflation at 6.15% and prices reducing, the situation has reversed. There is no justification for any more rate hikes. And if these prices continue falling, it would be time to cut rates before we know it.

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Links for August 17, 2010

2010-08-17T01:39:05.628+05:30

 

Robert Sloss predicted the iPhone in 1910 - Tyler Cowen

Want to bust the jargon? You need to Unsuck it.

The Fed uses research to justify stimulus. The Central-Bank Balance Sheet as an Instrument of Monetary Policy – New York Fed.

Price Discrimination Explains...Macro? Arnold Kling

There’s a real shortage of good stuff out there today. Happy reading! (image)




Ground Zero & the Mosque

2010-08-15T12:06:49.555+05:30

I don’t know if you’ve been following the debate summed up by this excellent piece in The Hindu.

I’ve thought really hard whether to comment on it. Most economists have, taking positions either in favor or against the construction of the mosque. And the debate has slowly degenerated into one that forces people to take sides for and against the rights of a religious community. Bog posts talk about “good” and “bad” followers of Islam, about the rights of a community which many believe, erroneously, to be characterized by its association with the perpetrators of the 9/11 attack and whether public sentiment will be hurt if the mosque is permitted. And the basic question is lost and remains unanswered.

The basic question is whether any religious monument should be permitted at a site where many people from many religions lost their lives. Should their falling be represented and remembered by religious monuments, when they fell in a war fought in the name of religion?

To my mind, the answer has little to do with which religious group wants to construct the monument and more to do with whether religious monuments are the right way to honor their passing. And the answer remains the same whether its a mosque, church, synagogue or temple.

To a certain extent, debates like these, are windows into the thought process of a people. And all that is visible here is confusion and misdirection.

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My column on VoxEU.org

2010-08-15T12:07:41.629+05:30

I recently wrote a column for VoxEU.org. It can be found here.

Honestly, the editing made it far better than it was originally, and for that I thank Dr. Richard Baldwin, Founder & Editor-in-Chief of Vox.

In its own words, VoxEU.org is “a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites. Vox aims to promote research-based policy analysis and commentary by leading scholars. The intended audience is economists in governments, international organisations, academia and the private sector as well as journalists specializing in economics, finance and business. Assistance for the Centre's work on Vox has been provided by the European Union, through its programme of support for bodies active at the European level in the field of active European citizenship.”

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Links for August 13, 2010

2010-08-13T20:30:40.395+05:30

 

Challenging Keynesianism: Greg Mankiw

Economy Lost Momentum While I Was Pulling Weeds: Caroline Baum – A must read, if only for sheer writing brilliance. Especially the second paragraph under “Speed & Steroids”

Animated map of nuclear explosions, 1945-1998: And they dare to tell us!!

The great false choice, stimulus or austerity: Food for thought

Cockroach Theory and Levy Flight: Sheer indulgence after food above…

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Is the CD Deshmukh Memorial Lecture a political event?

2010-08-13T20:14:31.614+05:30

Going by Dr. Subbarao’s contribution this year, it certainly seems to be. This speech, if one were to take it at face value, exhibited a complete lack of awareness regarding monetary matters which drew a sharp & detailed rebuttal from Ila Patnaik. However, I believe that the speech was made with a very specific intention. While a large chunk of the speech was dedicated to it directly, with the RBI Governor detailing the reasons why he believes that the RBI should be the coordinating regulator, the rest of the speech dealt with the proposed environment in which this should happen, albeit indirectly. Discussions concerning the RBI’s role in the economy came to a head recently with the government replacing the ULIP Ordinance with The Securities and Insurance Laws (Amendment and Validation) Bill, 2010 [PDF]. This Act provides for the establishment of a joint body to reconcile and rationalize jurisdiction disputes between the 4 regulators (RBI, SEBI, IRDA &  PFRDA) by a joint committee which apart from representation from these regulators, will have the Union Finance Minister, The Finance Secretary & The Secretary (Financial Services) in the Ministry of Finance as members with the Union Finance Minister chairing it. In a concession to the RBI, The RBI Governor will not just be an “ex-officio member”, as stated in the ordinance, but the “ex-officio Vice-Chairperson” of the Joint Committee. The Committee will then follow any procedure it considers suitable and inform the Central Government of its decision within three months. The decision will be binding on all regulators. The RBI has always believed that it is far more important than any of the other financial regulators, and with good reason. After all, RBI decisions touch far more lives, and exert greater influence over the economy, than those of other regulators. However, in expressing the underlying reason for this “seniority” the RBI often, intentionally, mixes its up. This was evident in Dr. Subbarao’s speech as well. He takes the RBI’s current responsibilities and builds a case for such seniority being formalized by law at a time when the scope of the RBI’s responsibilities is being intensely contested. To say that the monetary authority should also be the prudential regulator for banks as they are the primary channel for transmission of monetary policy is denying current reality. Financial system risk is no longer restricted to banks and non-banks, including Mutual Funds, play an important role as well. The monetary authority, therefore, needs to have authority over all forms of financial risk in the system. The RBI tries to achieve this by making a case for increased power. I think it is better achieved by reducing it. Let me explain. RBI’s role as a monetary authority would be enhanced if it were to delegate all prudential regulation, including that of banks, to other regulators, specializing in various types of financial risk. As a monetary authority, its role can then be strengthened by giving it the power to supervise the functioning of all regulators without undue favoritism. Currently, with bank & NBFC prudential regulation entrusted to the RBI, it has a tendency to favor these over other financial intermediaries, which in reality, works against efficient transmission of monetary policy as was evident in the events of late 2008. In this case, the RBI was very willing to look at the problems faced by banks, but agreed to assist the mutual fund industry only after intense discussion and convincing. The result was financial mayhem. The suspicion RBI harbors about the intentions & regulatory framework surrounding other financial intermediaries is an outcome of its regu[...]



Links for August 12, 2010

2010-08-13T00:27:40.757+05:30

 

Tell me once again, why are humans the superior species? Rational decision making, of course!

Renminbi-Yen-Dollar Collision Course – Tim Duy making a hell of a lot of sense

The Proud, The Rich, The Reserves: Worth watching…

Pushing on a string: The Fed’s new attempt at “stimulus”

US trade gap swells to 21-month high – FT.com & China trade surplus soars as domestic demand flags – Financial Post: What, me worried?

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Links for August 11, 2010

2010-08-12T14:11:43.659+05:30

I must admit this one shocked me. Dr. D. Subbarao, whose actions held promise spoke in Hyderabad recently and said all the wrong things. The speech is here. Ajay Shah’s brief reaction is here and Ila Patnaik’s critique, here. Will post a note on it soon, focusing on RBI’s ambition of becoming the co-ordinating regulator. The other points have been more than amply rebutted by Shah & Patnaik.

Get Rid of Them! Bill Black’s “alternative to the Rating Agencies: I cannot help but agree. Credit ratings give a false sense of security to lenders and discourage independent assessment. Regulatory support to this practice needs to be discontinued. And if it was the independence of the lender (from borrower influence) that concerns regulators, how can they believe that an agent of the borrower will represent associated risks better? Its a question all regulators, including SEBI, need to mull.

The next big thing – Structured Notes: What? you haven’t bought one yet!!

You just have to click this graphic… one of the coolest I’ve seen in days.

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And for the finale, something I never thought I would hear from a “developed” market maven

Time to regulate volatile food markets - Joachim von Braun

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Links for August 10, 2010

2010-08-11T02:00:01.167+05:30

Found a way to post links from my phone. It's slightly messy, but it works. So here goes...

Proved! Rubik Cube can be solved in a maximum of 20 moves. Imagine that...
http://www.cube20.org/

A long, long paper on what caused the crisis by Kevin Villani

Full paper [PDF, 1mb]: http://chicagoboyz.net/blogfiles/posting%2011.pdf
Summary: http://chicagoboyz.net/archives/14624.html

A clue to the Jobless Recovery? Maybe...
http://online.wsj.com/article_email/SB10001424052748704017904575409733776372738-lMyQjAxMTAwMDAwODEwNDgyWj.html

Micro houses in Japan; Should other cities learn?
http://www.npr.org/templates/story/story.php?storyId=128953596

40 economists agree on a subject! This has got to be a first... Reboot America; A manifesto arguing for more fiscal stimulus.
http://www.thedailybeast.com/blogs-and-stories/2010-07-19/save-the-economy-a-manifesto-by-harry-evans-joseph-stiglitz-alan-blinder-and-other-leaders/%5D(image)



Small mercies...

2010-08-11T00:33:09.266+05:30

So the Fed, moving into the second phase of Quantitative Easing or QE II, has finally succumbed to the pressure piling on it. But in the bad news, there's good. Though, it'll use maturity proceeds from Agency debt and MBSs to buy more assets from the market, it will "restrict" itself to buying long-term treasury debt.

While I have very little faith in the efficacy of this quasi-Keynesian intervention, it will at least result in a better balance sheet for the Fed. That is, if one considers US treasury debt to be better than the maturing MBSs.

But this, only time will tell...

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A word on links

2010-08-10T17:59:42.495+05:30

Another day without internet connectivity means another day without me posting links. I can post text from my phone but I can't post links. And just when I had promised myself that I would post them everyday... It figures.

A word on the links I post. I don't always post links that I agree with, or those that agree with me. I have, and will, post links which take an opposing stand on issues. Most often, I will not qualify these links with my own comments; I believe it will cause prejudice in readers' minds. If I want to react to them, and some of them are worth the effort, I will do it in a separate post. Hence, a link posted here does not mean I agree with it. Just that it's worth reading. That's what I'd like to ensure.

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Am I a socialist?

2010-08-10T17:44:50.996+05:30

A reader, frustrated by my apparent duplicity, asked me how I can possibly say that RTE & Right to Food are worthwhile programs when my writings are predominantly libertarian in nature. I can only thank my reader, who goes by the name Dyslexic, for questioning the consistency of my beliefs. Without it, I would probably never have the opportunity of clarifying why I believe in what I do. I do now, and this is it.Human beings are capital. A government’s basic duty is to maximize productivity of this capital, even at the cost of all other forms of capital like land and money. All schools of economic thought agree on this basic principle, but each goes about it in a different way. Libertarians believe in liberty and freedom of choice to be the foundation of human welfare. Keynesians believe in value maximization through government intervention where required, and Communists believe that human choice has no role to play at all. Here’s what I believe in, 1) The government should not limit industry and enterprise. 2) It should not own or manipulate the currency. 3) It should stay out of business. 4) It should do everything required to protect property and life from domestic and foreign aggression and finance it from tax receipts. 5) It should develop infrastructure, both physical & social, and finance it from tax receipts.I know the social infrastructure part of 5 seems at odds with the first 4, but is it really? Physical infrastructure cannot be more important than social infrastructure like education and healthcare. Especially when inequality has reached frightening proportions and very little of it can be blamed on lack of initiative from the poor. In parts of the country which have been ignored, access to physical and social infrastructure is non-existent. The only thing one can find in abundance here is poverty. In these places, as in some developed parts of the nation as well, parents don’t send their children to school because 1) there are no schools and 2) even if there are, they need another earning member in the house. In this environment, making education a right is probably the only way to encourage parents to do the “right” thing. With poverty as widespread as in our nation, parents need all the encouragement they can get to send children to school. Rather than look at Right to Education as only a child’s right to be educated, I look at it as also the government’s right to demand that every child be educated.The Right to Food has other roots. Have we ever wondered how we can have deaths due to, and suicides because of the fear of, starvation when every needy person has access to heavily subsidized food through the Public Distribution System(PDS)? Well, the answer lies in the unique way loans are structured in rural areas. When marginal farmers, farm workers or migrant workers take a loan from moneylenders, they are required to deposit their Ration Card & entitlement booklet with the lender. The money lender then draws food from the PDS using these cards and sells them in the open market, with the difference being treated as interest payment. When the loan is repaid, the Ration Card & booklet is returned. If the borrower cannot repay the loan, he/she literally starves to death or commits suicide to hasten the process. Right to Food proposes to tackle this menace by terming demand for such collateral as depriving the borrower of his/her Right to Food, making it a criminal offense. At the moment, its a civil matter. Laws in India are seldom what they seem to be. To judge their [...]



No links for August 9, 2010

2010-08-10T00:32:07.036+05:30

Can’t post any links for today. My internet connection has slowed to a crawl (I’m getting 20th century (dial-up) download speeds measured in bytes/sec) and have had a hell of a time trying to read even my basic fare. My apologies.

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Links for August 7-8, 2010

2010-08-08T23:06:26.879+05:30

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The world’s smallest monkey, the Pygmy Marmoset – New Scientist

Economics Is A "Science" Part One & Two– Sauvik Chakraverti

BlackBerry irritates spy masters – FT.com

What collapsing empire looks like – Glenn Grenwald

Penis can only take so much electricity, surgeons warn – News.com.au: Looks like Ranchhoddas Chanchad could have been guilty of forcible birth control.

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Just what kind of money is this?

2010-08-08T16:09:58.888+05:30

Is this a strange question? Think about it… Just what kind of money is this, when the only way to preserve its value is to lend it? If you hold it idle, it loses value. If you invest it in anything other than debt you may beat inflation, but then again, you may not. So the only way to preserve its purchasing power with any certainty is to lend it, and lend it to someone who is sure to pay you back. Which in most cases is the government, because regardless of how badly they mess up, they can always create more money to pay you back. But this means modern currency serves only as a “medium of exchange” outsourcing the “store of value” function to debt. And if one of money’s primary functions is assigned to debt, is it any surprise that debt has become the foundation for our economies? But is that all our money is meant to be? Something that has “value in exchange” but no “value in use”? And if it doesn’t have value in use, how can it have value in exchange and/or be an effective store of value? On the hope that this mysterious “value in exchange” would persist tomorrow, next month and next year? From the time Richard Nixon decided to default on the US Dollar's obligatory link to gold, mankind has wondered what money had become. But Milton Freidman, with glib tongue and circular reasoning, convinced all who needed to be convinced that this was everything money was ever meant to be. I believe he exhausted people into accepting his theories, though the only proof I can offer for this belief is experiential. Argue with a modern monetary theorist, and I can guarantee you a headache, even if you are Arnold Kling. Politicians in the 1970s didn’t stand a chance. It was either accept or suffer. They, being politicians, chose to accept. Circularity characterizes every chartalist currency argument, not just those connected with the importance of central banks, as Arnold mentions in his post. Imagine this conversation, Me: Modern money has no value in use, so how can it have value in exchange? Demented Chartalist (DC): As long as it can be exchanged for something valuable, it has value. Me: But how can something without value be exchanged for something valuable? DC: I never said it didn’t have value. In fact, I remember telling you that it did. Me: So tell me once again, why does it have value? DC(rolling his eyes): Because it can be exchanged for valuable things! Me: But how can it be exchanged for valuable things when it doesn’t have value? DC(smiling benignly): But it can be, so it does. Me: So if it can’t be, then it won’t? DC: Precisely! But that’s not going to happen. The government won’t allow it. Me: Aah! So it has value because the government says so? DC: Don’t be obtuse. It has value because it does, and the government likes it that way. Me: But why does the government like it? DC: Well, because the government can make all it needs without spending any of it to do so. And even if it did have to spend some of it, it could always make more. Me(kneading my temples): But if the government can make all it wants without spending any of it, then how does it have value? DC(smiling tolerantly): Didn’t we get past that? Me(in pain): No, we did not! If the government can get it without exchanging anything valuable for it, then how can it have value? DC(slowly): Because the government can exchange it for valuable things. Me(with quivering lower lip): But how can the government not e[...]



Links for August 6, 2010

2010-08-06T23:16:19.181+05:30

 

New post on my Business Standard Blog – Just what kind of money is this?

AMF Paper on Reserve Accumulation and International Monetary Stability (PDF): Suggesting a new global currency and a path to its birth.

How Much Debt Should Households Have? – Economix Blog, NYTimes

Some inflation is good – AV Rajwade, Business Standard

The Road to Serfdom Is Lawlessness: Inside Goldman Sachs – Jesse’s Cafe Americain

Yen has edge over gold in battle for supremacy – Peter Tasker, Financial Times

The money-inflation connection: It's baaaack! – FRB Atlanta

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From sense to nonsense in just a few words…

2010-08-06T14:56:53.680+05:30

Steven Kopits of Douglas-Westwood has taken it upon himself to list Do’s & Don’ts emerging from an analysis of the Gulf of Mexico oil leak and its aftermath. And what starts off as perfectly reasonable, well thought out advice ends with a ridiculous assertion worthy only of an oil industry insider desperate to protect his company’s interests.

The last in the list of do’s and don’ts in this post (via Econbrowser’s James Hamilton) is “Don’t permit unlimited liability”. And apart from the usual threat of how this would spell disaster for the US economy as offshore oil companies will just up and leave for friendlier jurisdictions, is this gem

“Liability needs to consider not only the damage inflicted, but also the ability of a given company to pay”

There is nothing more to say.

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