What does economics have to say about (the emergence of) Mr. Trump?

It might seem like a rather weird topic for a blog called Economics for Everybody to think about, but what explains the rise, and the seemingly inevitable ascent to the Presidency of the USA, of Mr. Trump?

This blog post isn’t about the politics of Mr. Trump, endlessly fascinating a topic though it is. It is instead about an attempt at looking at the economic factors that caused this phenomenon to occur at all.

And one cause is related to this:

Of the jobs lost during the recession, about 60 percent of them were in what are called “mid-wage” occupations. What about the jobs added since the end of the recession? Seventy-three percent of them have been in lower-wage occupations, defined as $13.52 an hour or less.

That is pulled from a book written by Tyler Cowen, called Average is Over. Read the whole book, it is worth the price of admission. But the trend that is highlighted in this book is the trend that is causing the rise and rise of Mr. Trump.

One, there are likely to be fewer jobs for all of us in the future. Two, those jobs that do exist are not going to pay very well at the bottom of the pyramid. One shouldn’t describe a book in two sentences, but that’s the quick summary of Average is Over.

Here’s the thing, though: machines don’t vote. People do. And who do you think those seventy-three percent in the block-quote above are going to vote for? For the guy who promises to cure their problems by – well, by curing their problems.

Mr. Trump’s solutions might not win him an academic degree in economics, but that’s not the race he’s running. The race he’s running is being judged by the people who have mostly lost in this era of globalization, and according to some of them, he’s doing just fine. If this “disenchanted” group turns out to be large enough, and motivated enough, Mr. Trump stands a very real chance of becoming President Trump by year end.

The disenchanted workers of the globalization era is not a new idea, far from it. And there is a lot more to the idea than what has been written here. The reason I’m writing about it now, and the reason I’m highlighting this one factor above all else,  is because old theories are beginning to receive fresh validation,  and that makes it an exciting time to be an analyst.

Being a global citizen right now, on the other hand, might well raise the demand for blood pressure pills.

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Why do Bhai’s films never fail?

I haven’t seen Sultan yet, and I may end up not watching it, but I have seen my fair share of Bhai films (it’s only a matter of time before it becomes a genre by itself, capital B and all). And they’re entertaining, there’s no doubt about that.

As an economist who’s learnt about rational human beings though, there’s a lot that causes befuddlement where Bhai movies are concerned. In this post, though, I’m just focusing on one of these aspects: first weekend prices for Bhai movies.

Apparently, they’ve gone as high as 1200 per seat. Now, you might say, if you’re a Bhai acolyte, that it’s just because demand tends to be so high for His films. But it’s not just high demand (and this is what this post is all about), it’s also about inelastic demand.

Us economists are big on elasticity, and you’re about to find out why. Elasticity (or sensitivity) is simply the percentage by which demand goes down when prices go up. If, for a little change in price, there is a very large change in demand, we say a good is very price elastic. If, on the other hand, no matter what the change in price, demand stays the same, we say a good is very price inelastic.

Think cigarettes. Or Bhai films. Same story.

Now, demand can change because of a lot of things. It can change because income goes up or down, for example. A family that sees a drop in income might cut back on eating out (high income elasticity), but will not cut down on medicines (low income elasticity). It can change because the price of other goods goes up or down (drinking lesser chai because the prices of sugar have gone through the roof, or drinking more coffee because the prices of chai have gone through the roof).

All of these are examples of demand for a good changing (or not) because of a change in the price of that good, an associated good, or income. And that’s all elasticity is.

Of course, as recent events have proved, the demand for Bhai’s films is inelastic insensitive to what he says as well, but that’s a whole different story, okay?

Why selling anda bhurji will never make you the next Bill Gates

There’s this anda bhurji wala in Pune who I think makes the best bhurji going around.

 

That’s not true, of course, and I know that. Your run-of-the-mill eggs, same masalas, same dishes, nothing out of the ordinary. But hey, I’ve been eating there for over three years now, and there’s a level of familiarity that’s been built up over time.

 

But if he were to start charging double the rates overnight for his food – then no matter how good he is, and no matter how long I’ve been eating there, I’ll change shops. I’ll get more or less the same food, at almost the same level of quality and hygiene, and for half the price. What’s more, I won’t even have to look very far. Pretty much just stop at the next bhurji shop, and I’m set.

 

Of course, the bhurji wala knows this as well as I do, and therefore doesn’t raise prices at all over his competition, let alone double them. His regular customers love his food, but at that price. Charge more, and we’re going to move, because what have you got that others don’t?

 

And when you sell stuff that others do, and there are many “others”, and finding the “others” isn’t difficult at all, than you have it tough, because you’re selling in a competitive market. And let nobody tell you otherwise, selling in competitive markets is tough.

 

Because you’ve only got to sell what others do as well as you. Because you can’t charge higher, because the minute you do, all you customers switch, the ungrateful so-and-so’s. And because you and everybody else sell stuff that can be easily found by everybody. How do you get out of the game? Well, sell products or services that nobody else can (or will) build – iPhones, for example. Or at least convince people that what you’re buying is fundamentally different [link to product diversification article here].

 

And the reason this is a tough business is two fold: one, since everybody is selling what everybody else is selling, this is a very, very thin margin business. You will make hardly any money on every unit sold. Second, because this is a low margin business, it will likely remain a low margin business – nobody is going to “revolutionize” the anda bhurji business because there ain’t much to revolutionize.

 

So think twice before entering a competitive market as a seller, because it’s a tough old world out there. On the other hand, don’t pay all that much for a product in a competitive market, because hey – why would you?

 

But do try the bhurji at the stall I was speaking about. It’s the Famous Bhurji Center, in the lane opposite E-square multiplex. It’s just, like, the best ever.

Where should you go to find out more about Indian inflation?

What is India’s current inflation rate?

Well, which India are you talking about? Are you talking about people like you and I, consumers? Or are you talking about big fat factories and how their costs are going up? Which kind of consumers? Those who live in the cities, or those who live in the villages? So complicated is our country, it turns out, that we don’t report just one inflation number. But the two that we tend to report and focus upon the most are the ones that I’ll be discussing here.

First: WPI, or the Wholesale Price Index. On the page that’ll open if you click on that link, click open the link for the WPI Press Release, and in the PDF, look out for the “annual rate of inflation”. At the time this post was written, inflation was at 0.79% for the month of May. In English, what that means is prices of commodities that are typically used in production were 0.79% more in May 2016 than they were in May 2015.

What about us consumers? Well in this case India reports the Consumer Price Index. On this website, on the left hand side, choose Annual Inflation Rates (Base: 2012, Current Series).

At the time of writing this post, information up to the month of May, 2016 was available. If you mirror on the website everything as shown above, you should get the lastest values for CPI in India.

So inflation in India for the month of May was at 5.76%. That is, prices for goods that consumers tend to purchase were 5.76% more in May 2016 than they were in May 2015. Urban consumers, as you can see, were slightly better off compared to rural consumers, in the sense that inflation was higher in the rural areas.

The idea was to show you where to go if you want to find out for yourself about how inflation in India is reported. We’d encourage you to play around with both of these websites, and try and make sense of the data, and get more familiar with it.

As we discussed in the previous post, though, always keep in mind that measuring inflation is a very complicated, and therefore very approximate task. Some things were way more expensive in May 2016 compared to May 2015 (think tomatoes) while some were actually a little cheaper (last year’s cellphones, for example). The reported number is an average.

And that’s inflation where India is concerned.

What, exactly, is inflation anyway?

How would you calculate how the cost of living has gone up for people who live in your family? Well, one way could be for you to keep an eye on everything that your household consumes, and track how the prices of all of those things change over time.

 

So, that would include food, clothing, fuel, electricity, medicines, medicines, household consumables, eating out, movies, electronic goods, cable bills, internet bills, toys… and you could go on and on and on.

 

Of course, each of those are categories. Within vegetables you’d have to measure the price of cabbages, potatoes, tomatoes, chilis, coriander, spinach, bhindi, and on and and on. Long story short, you’d have to measure a lot of things.

 

Oh but hey, if you’re measuring your cost of living as one number, it won’t do to just measure how the price of things have changed. For example, if the price of one lemon was 2 rupees in July, but is 4 rupees in August, that doesn’t mean your cost of living has doubled, now does it? Because lemons are a very small part of your family’s total monthly expenses. So it’s not just measuring price changes, but it also involves figuring out the size of the impact of these price changes on your total expenditure.

 

Now, assuming you could do that, try expanding your analysis to your family and your neighbour’s family. The grandfather in your neighbour’s house may be taking a medicine that none of you do, while there may also be a baby in that family and so you have to think about diapers and baby food and what not. In essence, double the work.

 

Now, assuming you could do that, try doing it for everybody in your neighbourhood. Remember, your neighbourhood will involve people such as a watchman, whose consumption basket is likely to be wildly different from yours. It’ll involve people with varied economic background, varied tastes and varied consumption patterns – and therefore many, many more goods need to analyzed minutely on a month-on-month basis. Now, assuming you could do that…

 

Your suburb.

Your city.

Your district.

Your state.

Your country.

 

Here’s the point. Whatever inflation number is being reported right now is an educated guess, and nothing more. That’s not a criticism of the people who are involved in putting that number out there – I doubt a better job can be done. It simply is a statement of fact. So complicated is our world, and so many, many hajjar things are being produced in it every day, that using one number to track how prices in the economy are changing just doesn’t make sense.

 

But when we say we measure inflation in India (or any country) for that matter, that is what we essentially do: we say that prices have (on average) changed by x% over a particular time period. In the next post, we’ll find out where inflation is reported, and what to make of it.

 

Why 1978 and 1991 will likely be the most important years of the 20th century

If you had to pick just one year from the 21st century and say that this was the year that mattered the most, which year would you pick? Some might pick 1939 and the start of WWII. Others, for the same reason, might pick 1945, as the year it finally ended. Others more in tune with the long run forces of history might pick 1914 because that’s when the whole thing really started.

 

But that’s answering the question from a European perspective. Closer to home, you might want to pick 1947, and our neighbours to the east might pick 1949 for broadly similar reasons. But as an economist from these parts, my choice would by 1978 from a broader perspective, or 1991 from a purely Indian one.

 

Because 1978 was the year in which Deng Xiaoping famously said “Let some people get rich first” and kickstarted the process of market reform in China. Xiaogang is a village that almost nobody outside of China has heard of, but if you’re interested in the question of how nations get richer over time, you should take the time out and click on that link. There’s a lot else that Chinese economic history has to teach us, but we’ll get to it over time.

 

Let’s move on to the other date that we think is important from the 20th century: 1991.

 

“A moment comes,which comes but rarely in history,when we step out from the old to new,when an age ends,and when the soul of a nation,long suppressed,finds utterance.” Famous words, uttered by a famous politician, and possibly the most famous speech by an Indian politician. We’d argue that these apply in almost equal measure to the year 1991, because that is when the entrepreneurial spirit of India, long suppressed, finally found utterance.

 

It is when business stopped being a bad word in Indian parlance, and getting (and staying!) rich was seen not as a dubious achievement but an everyday event. Indians going to movie houses post 1991 admired the Mercedes that Amir Khan drove to Goa in Dil Chahta Hai, and not the smoudering angst that Amitabh Bachchan harboured against the system in Deewar. Aspirations were a good thing, and it was ok to say that publicly after 1991.

 

The Liberalized Exchange Rate Management System (LERMS), the New Economic Policy (NEP) of 1991  and the other economic policies of that era were remarkable, and are rightly being celebrated today as the cornerstones of the remarkable change that has been wrought in India since. And we’ll talk about the impact that these policies had in the posts to follow.

 

But they are, in a sense, merely the tools that allowed P Chidambaram, Montek Singh Ahluwalia, PV Narasimha Rao and above all, Manmohan Singh to say what Deng Xiaoping had said all those many years ago in China.

 

1991 was about letting Indians get rich.

10 links to awesome sauce sources about GDP

  1. For a truly fun, positively mind boggling application of GDP, try the Gapminder website. It is a LOT of fun, and a truly useful way to make sense of the world around you.
  2. The Marginal Revolution University is the place to go to for engaging videos on hajjar topics in economics. Over time, they’ve built up a truly useful repository, and you really should check it out. We’ll be giving multiple links over time, but to begin with, try this video about GDP.
  3. Need data on GDP for various countries but not sure about where to get it? The World Bank World Development Indicators are your friend in need. Click here to visit the page for GDP in particular, and if you are a data nerd, you’ll have a lot of fun.
  4. Another source would be the IMF database, or the World Economic Outlook database.
  5. If you want in depth data about Indian GDP in particular, you should visit the RBI database on the Indian economy. It won’t win any awards for user-friendly design, but it gets the job done.
  6. If reading really isn’t your thing, you might want to listen to an interview of Diane Coyle, by Russ Roberts on his podcast, EconTalk. Simply download the mp3 file, and listen at your leisure.
  7. If you really want to learn about GDP and India, there are two must read PDF’s. The bad news is, there is no TL;DR and they’re really long, and not exactly entertaining. Still, if you want to think through all of the issues that are involved in counting out India’s GDP, then reading the Sources and Methods and Changes in Methodology and Data Sources in the New Series of National Accounts are must reads. Not page turners, you understand, but must reads.
  8. If you haven’t had your fill of thrillers based on GDP, take a look at the guidelines set up for countries who want to report their national accounts.
  9. If reading long boring documents, published by the Indian government or otherwise, is not your thing, then you might want to read a book written by  Diane Coyle. It’s called  “GDP: A Brief but Affectionate History” and it really is worth your while.
  10. If you’ve stuck around till now (we hereby declare you an honorary nerd) you deserve to be rewarded. The Angus Maddison database, ladies and gentlemen, if ye olde GDP be your thing.