Alberto Alesina: In Memoriam

Alberto Alesina passed away a couple of days ago, while on a hike with his wife. This is his Wikipedia page, while here is his Harvard faculty page.

He is famous for a variety of reasons, but macroeconomics students of a particular vintage might remember him for advocating austerity in the aftermath of the 2008 crisis (remember when that was the biggest problem our world had seen?). Here is one paper he co-authored during that time.

There are many reasons to be a fan of Alesina’s work, as Larry Summers points out in this fine essay written in his honour. I think it a bit of a stretch to say that he invented the academic field of political economy, or even revived it, but he certainly did more to bring in front and centre than most other economists. In fact, for the last two years, he was my pick for getting the Nobel Prize, and it would certainly have been a well deserved honour.

I haven’t read all books written by him, but did read (and enjoyed) The Size of Nations, particularly because it helped me think through related aspects of the problem (Geoffrey West and Bob Mundell and their works come to mind – but that is another topic altogether). Here is a short review of that book by David Friedman, if you are interested in learning more.

A Fine Theorem (a blog you should subscribe to anyway) has a post written in his honor (along with O.E. Williamson’s, who also passed away recently) that is worth reading.

I’ll be walking through some of his work with the BSc students at the Institute, in order to familiarize them with it, and will be repeating the exercise in honour of O.E. Williamson on Thursday. This post is to help me get my thoughts in order before the talk – but I figured some of you might also enjoy learning more about Alesina’s work.

My favorite paper written by him is “Distributive Politics and Economic Growth” written with Dani Rodrik. That’ll be the focal point of my talk today – but I will address what little I know of his body of work as well.

Daaru in times of the lockdown

Simran, a student at the Gokhale Institute asks a series of question about the topic du jour:

I had a query in regard to the news that have been doing rounds  – “Why did government order opening of wine shops?”

She asks other, related questions further on in her email, and I’ll get to them, but let’s go with this first.

Now, I am not privy to the decision-making process of either the state or the central governments, but there are two immediate responses that come to mind about the why: one, there is certainly demand for it!

And two, revenues *should* go up with the sale of alcohol. The reason I say should is because there have been arguments made about how the tax that the state government collects is when the distributor sells to the retailer, rather than when the consumer buys from the retailer. I am unable to find a report online of this nature, but I have certainly heard that argument being made. And that as a consequence, opening up liquor shops won’t have that much of an impact on government coffers, because tax has already been collected.

Very briefly, this argument doesn’t hold for at least two reasons. First, because although it is true that part of the tax that is paid is in the nature of an excise duty (that is, taxable when it leaves the manufacturer’s location), there are a whole host of other duties, taxes and cesses that are charged in addition. For instance, did you know that if you raise a glass in Uttar Pradesh, you are doing your bit to take care of abandoned cattle? Other states also impose other taxes – demand, as we are seeing right now, is fairly inelastic, so of course you should expect governments to tax as much as possible.

Second, and to my mind more importantly, never confuse stocks with flows! Forgive the pun, but once alcohol sales start flowing, the chain of taxation will kick into gear at all points. As per this report, all states and union territories put together expected to earn INR 1,75,000 crores (or thereabouts) from the sale of alcohol last year. The flow (and forgive the pun again) is important!

So, simply put, it is about the money.

Simran further goes on to ask:

The Delhi government announced a 70% ‘special coronavirus tax’ on alcohol.

Charging such a huge tax from a daily wage earner does sound cruel. Government claims that the tax will dissuade the poor from drinking but past reports claim that habitual drinker will never quit and this will just shrink the quantity of food he and his family consumes.

I was wanting to delve deeper into this topic –
Alcohol and its effect on poverty or is it
Poverty and its effect on consumption of Alcohol.

A series of tricky questions indeed! Let’s get to them one by one:

  1. I can think of at least two reasons behind the Delhi government’s decision. First, the high price might deter at least some folks from queuing up, and second, revenues will go up. Unfortunately, these reasons are contradictory! If crowds go down because of the high prices, surely revenue cannot go up at the same time? The answer, as any econ student will tell you, lies in computing the elasticity of demand for alcohol. See this video, for instance, on the topic.
    ..
    ..
    Will the habitual drinker quit with such high prices under these circumstances?
    ..
    ..
    Honest answer: who knows? You can spend the rest of your lives drawing diagrams and scribbling questions, but at the individual level, we simply don’t know. There are too many variables for us to get a reasonable answer (changes in income, length of the lockdown, the level of desperation for alcohol, the urge to stockpile in face of an uncertain future, for starters). The habitual drinker will certainly think twice, but beyond that nothing useful can, or should, be said. That is my opinion. It is not quite the same topic, but read this article, written by Banerjee and Duflo (and read both of their books!)
  2. I have only glanced through the two links I am sharing here, but hope to read them in more detail later. The first is an exercise in calculating the price elasticity of demand for households in India, and the second is a collation of a lot of studies done on the topic, but it deserves its own separate point…
  3. … not least because writing this blog post helped me learn about the existence of the Institute for Alcohol Studies! (Dear folks at the IAS, let me know if you are in need of test subjects). They have a page on the impact of price on alcohol, and worries about conflict of interest aside, the report that alcohol is relatively price inelastic.
  4. Both studies report much the same thing, although of course a whole host of other factors also come into play (level of education, extent of addiction being just two obvious ones). But long story short, for a one percent increase in price, you should expect demand to go down by less than one percent.
  5. But that still doesn’t answer Simran’s question: does poverty cause one to consume alcohol, or does the consumption of alcohol cause poverty? My honest answer is that we simply can never know for sure, and it is probably both, but hey, nothing should get between a tricky, potentially unanswerable question and econometrics! Knock yourself out!

 

Thank you for the questions, Simran! I enjoyed answering them 🙂

 

Postwar Economic Problems, The Book

Reading this blogpost helped me land upon this link. The book is titled Postwar Economic Problems, edited by Seymour E. Harris.

The introduction begins with the following sentence:

“Win the war first” is a sensible slogan. But all agree that if we do not also win the peace, we shall have lost the war.

It is hard not to be hooked!

From the same chapter, a little further down, a whiff of a familiar problem:

It will be necessary to stimulate consumer spending if a high income level is to be attained and maintained. Provision of security and an accompanying stimulation of spending; the further spread of education; an improved distribution of income; community spending for consumption—all these will be required.

The authors include, among others, Hansen, Samuelson, Haberler, Leontief, Schumpeter, Kindleberger and Lerner.

You could do a lot worse than skim through the book right now. The numbers aren’t relevant today, of course, but the line of thinking is bound to be.

Understanding interest rates

Simran, a first year BSc student at the Gokhale Institute writes in with this question:

Why is it that some developed countries have 0% interest rates? How are they sustained and is that a mark of a developed country? Is it good/ bad?

Is it related to their inflation rates? Because that’s the only thing I could think of.

They (the BSc students) will have macro only in the next semester, and I’m sure this question will be dealt with then. (I can’t resist adding that the question of how those classes will be conducted is topmost on my mind right now!)

But how would you go about answering this question when your audience has not been subjected to a semester’s worth of classes in macroeconomics?

The challenge I have set myself is that I will not refer to a single economist, or theory, while answering this question.

So: let’s think of it this way, Simran – you have a hundred rupee note with you, and I need a hundred rupees. So I approach you, and ask if you would be willing to give it to me. We’re both students of economics, you and I, so you quite reasonably ask what you will get in return.

Since I have nothing to give you right now, I say well, how about this: I’ll take a hundred rupees from you today, and give back an amount more than that a year from now.

That excess amount, obviously, is the rate of interest. But how much should it be? You would like two hundred rupees a year from now, and I might propose a hundred and one. Neither one of us is likely to accept the others proposal, and so we start looking for other people to cut a deal with.

You start to look for folks who are open to the idea of borrowing a hundred rupees from you, and returning two hundred (or thereabouts). I, on the other hand, start to look for folks who will lend me a hundred, and accept one hundred and one from me.

We, you and I, are now participants in the financial markets of our country. You are on the lender (or supply) side, and I on the borrower (or demand) side.

If there are a lot of people on Team Suppliers, you guys will find it difficult to find the same number of people willing to borrow. And so some of you might decide to cut the rate at which you are willing to lend. And if these financial markets are efficient – what that means is people are easily able to find out the rate/price at which transactions are taking place – then the rate of interest will come down.

Ask yourself what might happen if there are, instead, a lot of people on Team Borrowers.

Well, during these times, can you imagine a lot of people looking to borrow? I, for one, can’t imagine people wanting to set up factories, buy new TV’s, buy new houses etc. There’s hardly anybody playing on Team Borrowers!

But practically everybody in these financial markets is on Team Lenders! And so rates are going to come down:

Headline from Business Today

In fact, right now, there are so many people on Team Lenders right now, that interest rates are not just down to zero, they may well end up being negative! That’s right, you will have to pay to put money in the bank in some of these economies, and you will be paid if you borrow. Boggles the mind, but true!

And kudos for asking if interest rates are linked to inflation – yes, absolutely. But I’ll take a rain check on answering this question right now, simply because it takes us into really deep waters. Macroeconomists are prone to start squawking indignantly whenever they start thinking about inflation and interest rates (myself included), so this is best left for another day.

But for the moment, here’s the key takeaway: there are far too many people on the lending side, and nowhere near enough folks on the borrowing side, and so the price of this market – interest rates – will fall. More so in developed countries than in developing, perhaps, but they’ll fall the world over.

You’ll be able to power through the videos in this section of the macro class on MRU easily enough.

If you, or anybody else who has seen these videos, has any questions, shoot away!

 

The Worst Economist of the 20th Century

I got pinged a while ago by an old student of mine, Karan Khilwani. He had a fairly interesting question to ask: who, in my opinion, would qualify as the worst economist of the 20th century?

I have, on reflection, a clear pick, whom I’ll get to in a bit.

But here’s my thinking behind my pick: economics is (to me) useless unless it is applied. I haven’t gone for bad economic theory per se, but bad outcomes as a result of some policy being implemented.

What I am trying to say is, economics as practiced is what I have judged, not economics as theorized.

With that caveat, I have a clear winner: Chairman Mao.

From the Wikipedia article on the Great Leap Forward:

“The Great Leap Forward (Chinese: 大跃进; pinyin: Dà Yuèjìn) of the People’s Republic of China (PRC) was an economic and social campaign by the Communist Party of China (CPC) from 1958 to 1962. The campaign was led by Chairman Mao Zedong and aimed to rapidly transform the country from an agrarian economy into a socialist society through rapid industrialization and collectivization. These policies led to social and economic disaster, but these failures were hidden by widespread exaggeration and deceitful reports. In short order, large internal resources were diverted to use on expensive new industrial operations, which, in turn, failed to produce much, and deprived the agricultural sector of urgently needed resources. A significant result was a drastic decline in food output, which caused millions of deaths in the Great Chinese Famine.”

As an economic experiment, it is hard to argue with the notion that this was pretty catastrophic for pretty much everybody.

From further on in the same article:

“The exact number of famine deaths is difficult to determine, and estimates range from upwards of 30 million, to 55 million people. Because of the uncertainties involved in estimating famine deaths caused by the Great Leap Forward or any famine, it is difficult to compare the severity of different famines. However, if a mid-estimate of 30 million deaths is accepted, the Great Leap Forward was the deadliest famine in the history of China and in the history of the world.”

As a consequence, for me, it is hard to look beyond Chairman Mao for the title of the worst economist of the 20th century.

Which, of course, begs the question: does that make Deng Xiaoping the best economist of the 20th century?

 

Update, via Marginal Revolutions: “One of the best books on the beginnings of the reform era, with a special focus on whether the Soviets could have chosen a Chinese path (no, too many embedded interest groups, so does that mean Mao is underrated?).”

A Short Explanation About Yesterday’s Video

Economists, and students of economics, are fond of using the quote “In the long run, we’re all dead”, attributed to John Maynard Keynes.

Except, the quote wasn’t used (at all) by Keynes in the spirit in which it is often quoted by folks today – the exact opposite, in fact.

But when we do talk about the long run, we economists (or students of economics) would do well to understand that there are many definitions of the long run. And in the longest run of all, yes, we are all well and truly dead.

And that’s one of the reasons behind choosing that video yesterday. Also, a tip that I myself learned only recently: tapping on the right of the screen on your phone in the YouTube app fast forwards the video by ten seconds, and pressing “L” on the keyboard has the same effect on your computer.

Thanks to the reader who pinged asking about it!

A Promise, An Update, and A Request

Exactly one year ago, this blog came out of hibernation.

I had started EFE in June 2016, with an aim of popularizing economics. The blog, back then, was about writing simple, easy to understand articles about economics. The idea was to write stuff so that folks would have an easier experience navigating this often complex subject.

As with most things I have tried to start in life, it started well enough, but petered out fairly quickly. I wrote on the blog off and on, but without either a plan or a commitment. The biggest problem was that I was trying to substitute for some really good stuff already out there. Going up against the best – substituting for them –  is difficult. And so the blog lay (mostly) dormant.

The Promise

But on the 13th of June, 2018, I put up five links that I thought were worth reading. And, I am proud to say, from that day on until today, I have been putting up a post a day (at least). Rather than trying to go up against the best in the business, I have simply tried to link to them – complement them.

It’s ironic. One of the most popular posts on this blog is an article about substitutes and complements.

But for the past year, all I’ve done is read, and share some of what I read. There hasn’t been too much method or thought applied to the sharing – if I liked reading it, I shared it. The one thing that I did change was that February of 2019 onwards, I started adding some context to each link, and tagging each post with the topics discussed therein.

The Update

Beginning this week, though, in celebration of it being one year of getting off my posterior and showing up everyday, there is a change to this blog. Long overdue, but some housekeeping, and a semblance of order.

From here on in, Monday will be links about India. Tuesday will be links about technology. Wednesday will be articles from other parts of the world, while Thursday will be about economic theory. Friday will be assorted stuff (keep an eye out for an article about poop tomorrow, for example). Saturday will be tweets I found interesting, while Sunday will be a link to a video I found interesting.

If you want to read a collection of articles related to each topic listed above, simply click on Links, in Categories on the right, and take your pick (Monday through Friday). Alternatively, search for a word and see if I have linked to an article about that topic. Heard of chaebols, for example?

Each article will help you learn a little bit more about the world, and therefore about economics (or is it the other way around?). Keep at it for a while – a week, a month, a year – and you’ll find that you know more than you did before. Learning compounds, and it truly is a miracle.

There will also be a weekly (at least) article on a book I have enjoyed reading, or a podcast episode I would like to recommend to you. These are separate categories in their own right in the Category drop-down menu.

The Request

Please subscribe, if you haven’t already. Subscribing is very easy: simply click on “follow blog via email” at the top right of this page. Alternatively, read this article about what Feedly is, and consider reading more than just this blog. I’d recommend the latter, if you’re asking.

Also, please help spread the word? The blog is free, and will be updated daily, and if you think anybody might benefit by reading five handpicked articles daily, please point them in the direction of this blog by sharing this post.

And lastly, please do not hesitate to send interesting links, videos and tweets my way. My email address is ashish at econforeverybody dot com, and this is my twitter handle.

Thank you

Finally, thank you for reading this far, and (hopefully) for reading the blog in general. It means a lot.

 

 

Links for 22nd March, 2019

You might have been hearing/reading about MMT recently. Today’s set of links is really one place to read a lot of back and forth between two economists about what MMT means in practice – plus an additional bonus link, and a Twitter thread.

You absolutely should read each of these links if you are a student of macro. You probably should read these links if you are interested in the economy – but in this case, feel free to skip some of them. I leave it to your judgment.

  1. “OK, Lerner: His argument was that countries that (a) rely on fiat money they control and (b) don’t borrow in someone else’s currency don’t face any debt constraints, because they can always print money to service their debt. What they face, instead, is an inflation constraint: too much fiscal stimulus will cause an overheating economy. So their budget policies should be entirely focused on getting the level of aggregate demand right: the budget deficit should be big enough to produce full employment, but no so big as to produce inflationary overheating.”
    Paul Krugman gets the ball rolling by explaining what Abba Lerner’s work was all about, why it made sense then, and perhaps doesn’t now.
  2. “Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.”
    Stephanie Kelton responds by pointing out what she sees as the flaws in Krugman’s argument. I have had difficulty in understanding this part myself, which is why I have highlighted it.
  3. “So let’s be clear here: Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong. No more Calvinball.”
    Of the questions that Krugman raises by way of response, it is the second one that strikes me as being at the heart of the issue. Expansionary fiscal policy reducing interest rates boggles the mind – well, my mind, at any rate.
  4. “#3: Does expansionary fiscal policy reduce interest rates? Answer: Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.”
    I have read Stephanie Kelton’s response, and re-read it, and I find myself confused even then. Expansionary fiscal policy, she says, does reduce the federal funds rate. I found this confusing…
  5. Until I read this twitter thread by Paul Krugman…

    As it turns out, the route taken by the government to conduct expansionary fiscal policy matters. You learn a little more macro every time you read about it.

Links for 12th February, 2019

  1. “Each of these imbalances is important and needs to be rectified. One has to do with the differing levels of per-capita consumption of basic public goods and services. The other has to do with the differing levels of stock of infrastructure leading the differential growth accelerating potential development. These are two distinct  policy goals and following Tinbergen Principle warrants two distinct policy instruments. Eliminating the Planning Commission and replacing this with NITI Aayog merely as a think tank leaves us with only one instrument; namely Finance Commission. This approach if not reviewed can lead to a serious problem of increasing regional and sub-regional inequities.
    Who better than Dr. Vijay Kelkar to tell us more about Niti Aayog 2.0? You might want to look up the Tinbergen Principle if you do not know about it already. (Via Mostly Economics)
  2. “Last year, at the end of the summer melting season, the team drew lines on the stakes marking the height of the ice, as researchers have done here for decades. Now, looking at a stake nearly a year later, Nikolay Kasatkin, one of the institute researchers, and Dr. Shahgedanova saw that more of the wood was visible. With the end of melting still a couple of months off, parts of the Tuyuksu were already about three feet thinner.”
    The NYT does excellent work tracking climate change, and this article is only the latest in a long string of articles entirely worth reading. Best viewed on a desktop.
  3. “ICICI directors shouldn’t get a free pass from regulators. Otherwise, they’ll just show up at other boards, perpetuating a culture of CEO worship that’s at odds with their role as stewards of public shareholders. Indian investors deserve better.”
    Andy Mukherjee doesn’t mince words while talking about the lack of oversight at the board level in ICICI Bank. What might the situation be like at other banks in India?
  4. “It can be easy to think of a calendar as a scientific given, or a reflection of the laws of the universe. In fact, as these holidays remind us, there are as many ways to track time as there are cultures and languages. Each calendar reveals something about how the people who created it relate to the world around them while also preserving rich cultural identities and memories.”
    A nice read from the NYT about the way different cultures track time – as it turns out, there are many ways to measure it – the lunar and the solar calendars happen to be just two of them.
  5. “India’s first education policy was framed in 1968 based on the famed Kothari Commission report, the second in 1986 and the third—a revision of the 1986 policy—in 1992.The official cited above said it’s not as if the previous policies were implemented quickly. In fact, making eight years of education compulsory was part of the 1968 policy but it was implemented only in 2009 through the Right to Education Act.”
    A depressing read, particularly for me, but the state of India’s NEP today mirrors much of India’s inaction on this in the past.

Links for 11th February, 2019

  1. “We probably would not have planes, trains, or automobiles if we had insisted on today’s safety levels during the early days of those technologies’ development—likewise, we should have laxer safety standards for new emerging technologies.”
    Worth reading this for many reasons. Don’t miss the bit about the need to change ideological commitments on the basis of rationally-arrived-at conclusions, for example. But that excerpt above is a great way to understand the concept of, and the importance of, opportunity cost.
  2. “I want to make it clear that although enriched environment dominated the 20th century, IQ gains are not destined to persist like the law of gravity. Factors that were immediate triggers of IQ gains included more adults per child in the home, more and better schooling, more people at university, more cognitively demanding jobs, and better health and conditions of the aged. There are signs that these are beginning to show diminishing returns.”
    The Flynn effect is one of the more interesting things you can learn about – and having learnt about it, it might interest you to know that the Flynn Effect may now be reversing.
  3. “They’re having a fight about the wall except the wall is the English Channel: half of these people want to turn the English Channel into a wall to keep out their version of the Mexicans.”
    An interview with Anand Giridharadas about the perils of philanthropy. Worth reading, not necessarily to agree with everything he has to say, but to think about was in which he may be right.
  4. “So, for example, if people don’t take into account the macro consequences of their borrowing, then they could borrow collectively at the same time, which might be rational from an individual perspective but that collective borrowing leads to future problems such as a foreclosure problem that has spillovers for everyone in the economy. When people borrow individually, they may not take into account those spillovers. And so, again, from a macro perspective, people might over-borrow.For all of these reasons, a possible result conceptually is that if and when credit expands, it is possible for households to over-borrow, to overstretch from a macro kind of social perspective. And that over-borrowing, that overstretching during the boom phase of the credit cycle, can then come back to hurt on the downside and lead to a deeper recession than it would otherwise have been.”
    This much is straightforward for a student of macroeconomics – but the rest of the interview with Atif Mian is worth reading for how he teases out the mechanisms of thinking about the follow-up questions in the context of today’s economy. If you want to learn how to think like a macro-economist, this interview will help.