Month: July 2016

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.

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.

 

What You Need to Know About the 7th Pay Commission

The government has recently decided to go ahead with the recommendations of the Seventh Pay Commission. So far, so familiar. But what exactly does it mean for all of us? How many people does it impact, and in what fashion? If you had questions of this sort and didn’t know whom to ask, well, read on!

7th Pay Commission FAQ

 

  1. What is the VIIth Pay Commission?
    It’s a body appointed by the Finance Ministry, under the Department of Expenditure, and this has been happening since independence, at a 10 year interval, give or take a few years.

    This commission has the responsibility of taking a look at the payments, allowances and pensions made to government employees (or to call it by the all too cute name our government chooses to give it, PAP) and figuring out how much of revisions need to happen, and why. It’s also supposed to tell us about whether the recommendations are actually possible or not.
  2. So what are these guys saying this time around?
    That beginning this year, we need to dole out ₹1,02,000,00,00,000 in extra payments, out of which roughly 40% will be an increase in pay, 30% will be an increase in allowances, and the rest will be an increase in pension payouts. (Source)
  3. That sounds like a lot. Do we have that kind of cash lying around?
    Short answer, no.

    To finance the Indian government’s expenditure this year, it was slated to borrow ₹533,904,00,00,000 (source)*. Technically, this includes provisioning for implementing the 7th Pay Commission recommendations, but that’s a lot of borrowing (about 3.5% of our nominal GDP for this year).

    On the other hand, the answer to question 2 is built on an annual appreciation of 3% per year in PAP, and that’s hardly an unfairly large amount. Plus, the report mentions that if India grows at around 7.5% per year, the additional burden on the government won’t be all that much.
  4. By the way, how many people does the Government of India employ in the first place?
    If you define an employee of the Indian government as being a person who holds a civilian position with the GoI, and whose salary is paid out under the Consolidated Fund of India, then there are almost 40,00,000 employees of the Indian government.

    Roughly half of India’s population is of working age, for a rough and ready benchmark.
  5. Will inflation increase in India as a consequence of the 7th Pay Commission being implemented?
    From the point of view of theory, yes, it should. It probably won’t be dramatic or backbreaking, but yes, it will have an impact. How much will be the rise is the million dollar question, but here’s the thing – we’ll never know. You can’t say, “Well, check how much inflation was before, and how much it is after, and attribute the difference to the 7th Pay Commission”. And the reason you can’t say that is because too many other things are changing in the economy at the same time. So we’ll never know the actual impact it had on inflation in India, and we must make our peace with that fact.

 

Got other questions? Want more data? Shout out to us in the comments below!

*Update: For reasons we honestly can’t figure out, the INR symbol doesn’t show up the way it should on certain browsers. Our apologies.

 

Why We Shouldn’t Be All That Worried About Rexit

It’s number three on the list now of exits that world can’t stop talking about, behind the two exits that Britain managed from one kind of Euro or the other, but it still is big news here in India: Is Raghuram Rajan leaving the RBI in September the end of civilization as we know it?

 

Short answer: no.

 

Having never met Mr. Rajan, we can’t be sure about this, but we’d bet on he being horrified at the very idea of any single person (including himself) being the sole reason behind an institution’s efficient functioning. The Reserve Bank of India is the apex body when it comes to monetary policy in India, and has been ably served by many individuals in the past and the present, and that is only likely to continue in the future. So no, he leaving the RBI is not the end of civilization as we know it. It’ll be kind of like MS Dhoni leaving the Indian cricket team. Not great news, but not a disaster either.

 

On the other hand (I love counting the number of times we economists use that phrase. You should try it sometime – fun game), that does not mean that Raghuram Rajan leaving the RBI is good news. Especially if there is some truth to the rumour that he had to go because he was not afraid to speak his mind. He, and anybody else, ought to be judged for what they do in their job, and anybody who argues that Mr. Rajan was not good at his job is also likely to think that Grand Masti is good wholesome cinema.

 

On the parameter of doing his job well, Mr. Rajan excelled himself.

Rajan

He was appointed to tame the beast called inflation, and he has managed that in style. This is not the place to go into the details, but whatever steps he took clearly worked. And as he himself mentioned in his statement regarding his decision to not continue as RBI governor, he would have liked to finish working on the agendas he had initiated. From that perspective, he not being around to see the job through is bad news for both the RBI and for India.

 

But it’s not as if we don’t have other people eminently capable of doing the job of being the Governor of the RBI.

 

To go back to the MS Dhoni analogy, sure he can’t be replaced, and it’ll be a sad day when he hangs up his boots. The new keeper (and the new captain) will take a while to kick rear ends as expertly as Dhoni used to, but they have the ability.

 

And that’s our point: it’s bad news, but it ain’t the end of the world.

Five things Udta Punjab teaches you about economics

First things first: if you haven’t seen the movie yet, you should really go this weekend. Really good performances all round, and Alia Bhatt in particular is in a not-to-be-missed role.

Now, you might think that Udta Punjab is about one thing, and one thing only.

Charlie Sheen Drugs
Source: giphy

But for folks like us, we couldn’t help but take a look at an alternate angle: economics!

Source: giphy
Source: giphy

Here are five ways in which you could try and claim that watching the movie was like learning economics in college.

  1.  If you want to build a business empire, choosing a product that has massively inelastic demand really, really helps
    source: giphy
    Source: giphy

     

  2. A high volume, high margin business necessarily involves a monopoly. Competition will likely be, well, eliminated.
    Source: giphy
    Source: giphy

     

  3. Politicians know. And they’ll want their cut. Money talks.*

    politics
    Source: giphy
  4. Truly effective reform of anything, anywhere can’t happen unless it begins from within. That applies to this movie, to people’s movements, or to countrywide reforms. Top down approaches tend to not work.

    inner peace
    Source: giphy
  5. And finally, you’d think people would have figured this out by now, but if it needs to be said, we’ll say it: suppressing censorship never works.

    obviously
    Source: giphy

*Yeah, ok, you didn’t need to watch this movie to know that.