Category: Macro

Argue More!

Ashish2 Comments

Argue More!

The point of arguing with an author is not to “win” the argument. 

Quite the opposite. The point of arguing with the author is to work with the author.

Mihir Mahajan, regular reader of EFE, raised some questions about my post the other day on middle income traps.

It might help to take a look at the chart from the earlier post before you go through his questions.

https://www.economist.com/finance-and-economics/2023/03/30/which-countries-have-escaped-the-middle-income-trap

Here are his questions:

  1. “The 1960 vs. 2022 nature of graph and the 1-6 ratings of income are quite confusing”
  2. “The “middle income trap” is too dense and you pointing to Nicaragua shows that the journeys of different countries could be going in different directions within that group”
  3. “The range of 1.75-3.75 on both axes is deceptive though. While the higher scales 4+ is rich in general, the relative gap between India/Nigeria and China is very high — not sufficient distinction there.”
  4. “Putting China in “middle income trap” is odd because it has gone from below 2 in 1960 to above 3 in 2022 (based on the axes).”

Before I get around to answering his questions, I have a question for you. 

Do you have any questions of your own, for having read his questions? Go read my post again, stare at the chart, go over Mihir’s questions, and then think about whether you have any questions of your own.

I’ll answer each of Mihir’s questions below, but the point of this post is really what follows after, so please do stick around until the end!

  1. “The 1960 vs. 2022 nature of graph and the 1-6 ratings of income are quite confusing”

    Yup, absolutely. It takes a while to figure out what is going on in an Economist chart, and while that is a problem, I’d argue that the rewards are usually worth it. By the way, if you are an Economist subscriber, you absolutely should read their newsletter on visualization and charts.

    A useful principle to keep in mind is that when you look at a chart, train yourself to not look at the data first. First be clear about what is on the axes (all of them). Then be clear about the title of the chart. It helps to take a look at the source of the data. Then start taking a look at the chart itself.

    Homework: what does “income per person, relative to the United States, log of %” mean? Can you explain this phrase to somebody else? If you can’t, you haven’t understood it well enough!
  2. “The “middle income trap” is too dense and you pointing to Nicaragua shows that the journeys of different countries could be going in different directions within that group”

    The central square in the chart is too dense, but that’s just fine by me. Why? Because the outliers are then even more worthy of analysis. If you cannot “make it” into the central square, then you’re even more special relative to that crowded space.
    Botswana is special because it was poor in 1960, and is not just middle-income today, but on the verge of breaking into the high-income space. That’s a special story!

    Argentina, on the other hand, is special for the wrong reason. It was a high-income country back in 1960, but has since slid down into a middle-income country grouping.
    Both of these countries, within the context of this chart, also help you understand Mihir’s second comment here. Because this is a static image, and because we’re comparing two different points in time, we don’t get a sense of the trajectory of a country. Botswana is on the way up, and Argentina has slid down – but you need to know this separately. This isn’t clear from looking at the chart.

    To be clear, this isn’t a criticism of the chart, but rather a way of recognizing that your work as a student doesn’t stop for having studied the chart. Au contraire, this chart should spur you to read more about whichever country seems interesting to you.

    “Tell me more about Botswana’s growth story over the last sixty years or so. Assume I know very little about Africa in general, and Botswana in particular. Your answer should include Botswana’s internal politics, key leaders, relationship with her neighbors and with the superpowers during the cold war, her natural resources and some background on major ethnic and religious groups in Botswana”

  3. “The range of 1.75-3.75 on both axes is deceptive though. While the higher scales 4+ is rich in general, the relative gap between India/Nigeria and China is very high — not sufficient distinction there.”

    Log scales can be tricky, and the best way to understand this is by thinking about how earthquakes are measured. And yes, Mihir is spot on about how you need to keep this in mind. The lower ends of the middle income square (left to right and bottom to top) actually cover very large ground, and countries in the left-bottom corner are very different from countries in the right-top corner of the middle square. Dividing the middle square into a 3×3 grid would be a great idea. (Hi, The Economist. Hint, hint)
  4. “Putting China in “middle income trap” is odd because it has gone from below 2 in 1960 to above 3 in 2022 (based on the axes).”

    It’s their chart to make, and ours to interpret as we see fit, so while I get where Mihir is coming from, I’m fine with both the boundaries of the middle square, and with the framing that The Economist has used. China’s growth trajectory over these past sixty years or so has been fantastic, but the question is about whether it can keep that break-neck growth rate up going ahead. A very wise economist won a Nobel Prize for coming up with a simple model that says “Nah, probably not”. So while I understand Mihir’s point, I can see the logic used by The Economist as well. Stop me if you’ve heard this before, but macro is hard.

But now that I’ve replied to his comments, let me come to the main point of today’s post.

What stops us from asking questions as we read? Why, that is, do we read unquestioningly?

Maybe that’s too specific a question, so let me step back and frame it more generally. 

Why don’t you argue more often with whatever you’re reading?

Make sure you understand where they’re coming from, and that you understand their line of reasoning, to the extent possible. And also that you understand how and why they reached the conclusions they did. You don’t have to agree with either the line of reasoning or the conclusion, to be clear.

But asking smart, probing questions about both the premises and the conclusions can help you become a much  more engaged reader. This, in turn, can help you to both understand what you’re reading, and to decide whether you agree with the author.

It’s a rare old skill, and I’d encourage you to apply it, always, while you’re reading.

So please, disagree more with what you read on my blog, and let me know of your disagreements.

Help me learn better!

Everywhere But In The Statistics

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That is, of course, part of a very famous quote by Robert Solow:

You can see the computer age everywhere but in the productivity statistics

http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf

And in a recent newsletter, Paul Krugman agrees:

…have the past few decades generally vindicated visionaries who asserted that information technology would change everything? Or have they vindicated techno-skeptics like the economist Robert Gordon, who argued in a 2016 book that the innovations of the late 20th and early 21st century were far less fundamental than those between 1870 and 1940?
Well, by the numbers, the skeptics have won the argument, hands down.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Paul Krugman goes on to show this chart:

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

I’ll tell you how to read this chart, but back up for a moment and learn about total factor productivity first:

Total Factor Productivity (TFP) is a measure of how much output an economy can produce using the same amount of inputs, like labor and capital.
In simpler terms, TFP is like a measure of how smartly an economy is using its resources to make things. It tells us how efficiently a country is using its workers, machines, and materials to create products and services.
TFP is important because it can help explain why some countries are richer than others. When a country can produce more with the same amount of inputs, it can grow faster and become richer over time.
Measuring TFP is tricky because it’s hard to tell how much of a country’s output is due to factors like capital and labor, and how much is due to other things like technology and innovation. To measure TFP, economists use complex models that take into account all the different factors that could be affecting a country’s productivity.
In the context of development economics and growth theory, TFP matters because it can help explain why some countries are able to grow faster and become richer than others. Countries that are able to improve their TFP can create more goods and services with the same amount of resources, which can lead to faster economic growth and higher living standards for their citizens.
To improve TFP, countries can invest in education and research, create better infrastructure, and implement policies that encourage innovation and entrepreneurship. By doing so, they can create a more productive and efficient economy that can grow and thrive over time.

chat.openai.com

So here’s the question to ask: did the advent of the internet allow us, as an economy, to get smarter at using our resources to make things? Paul Krugman’s chart answer this question by showing how TFP growth changed over the next twenty five years from each given date on the x-axis. So if in 1948, TFP growth was just below 2, what that means is that TFP growth over the period 1948-1973 was just below 2. So did TFP growth go up in a twenty-five year period following 1996? The chart clearly says no, it didn’t, and Paul Krugman says “Ha!“:

See the great productivity boom that followed the rise of the internet? Neither do I.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Here’s the paragraph that really stuck out for me, though, from Paul Krugman’s column:

For the fact is that while moving information around is important, we’re still living in a material world: Most of what we consume is physical stuff or in-person services, which haven’t been drastically affected by the internet.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Huh. Let’s try to think this through:

  1. Use your own example, as I am about to do below.
  2. Do you use online services, even when it comes to consuming physical stuff or in-person services? In my case, Amazon is where I buy most of my physical stuff from, or from Amazon’s competitors. But they all have an online presence, and that is my preferred mode of shopping.
  3. I much prefer to have my food delivered home via Zomato or its competitors. My consumption of music is via online streaming services, my consumption of video is via YouTube or via OTT, I don’t even have a cable connection at home. My consumption (and creation) of the written word is almost entirely online (blogs, Kindle, Twitter, newsletters in my inbox). A fair few chunk of my classes at various colleges are online every now and then.
  4. Calling a plumber home, or an electrician, is via Urban Company, or one of its competitors. Booking flight/train tickets, booking movie tickets, paying my daughter’s school fees, transacting with my bank – I can go on, but it’s mostly online.
  5. Software has eaten, I would say, most of my world.
  6. But I should ask if I am falling prey to confirmation bias. What is decidedly offline, for me, as a consumer?
  7. I should also be asking if I am truly representative of the average Punekar, let alone the average Maharashtrian, let alone the average Indian, and still lesser an average citizen of the world.

I would say this much: I’m fairly confident that the Internet has enabled more consumption of goods and services than was the case twenty-five years ago. As a sixteen year old in 1998, I can guarantee you that reading what Paul Krugman wrote a couple of days ago would have been a very hard thing to do! And I feel fairly safe in saying that at varying margins, this is true for a lot of people in Pune, in Maharashtra, in India, and indeed in the whole world. Those margins will likely be influenced by per capita income in each country, by whether you stay in a more (or less) urbanized part of the world, and by a whole host of other factors. But as a species, a lot of our consumption of even physical goods or in-person services has been impacted by the advent of the internet.

I’m very curious to hear from you, especially if you disagree. Please tell me what I’m missing out on!

But that makes Paul Krugman’s chart even more puzzling! I’m tempted to disagree with him based on what I’ve written above, but I’m not sure how to disagree with the chart.
What about you?

Measuring GDP is hard.

Paul Krugman’s post ends with a few cool references, and since it’s behind a paywall, I’m listing them over here:

First, a nice YouTube video on washing machines and the internet:

Second, a simple explainer on TFP.

Third, a lovely book by Robert Gordon which you absolutely must read.

Final point: how to get better at measuring GDP is (and will likely continue to be for a very long time) a fascinating problem, and I will definitely write more about it in future posts. But in the meantime, if you have any recommendations about what to read/listen/view, please do share!

Microeconomics and Credit Card Reward Points

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A lovely little article in the New York Times is worth a ponder, especially if you are a student of microeconomics:

There’s an undeniable feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a weekend jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound.
Something for nothing, right?
Not exactly nothing. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

https://www.nytimes.com/2023/03/04/opinion/credit-card-rewards-points-poor-interchange-fees.html

As you probably already know, one can “earn” reward points for spends on your credit card. You can then use these points to buy stuff, or earn cashbacks on these points, or spend them at partner stores. And there are other perks and benefits too. If you’ve travelled through an Indian airport, you might have seen the crowd waiting to get into an airport lounge – more often than not, access is tied to the kind of credit card you have in your wallet.

But remember, there is no such thing as a free lunch. You may not be paying for these perks as a credit card holder, but one of the first lessons of economics is that somebody, somewhere, is paying for it. So who is paying, in this case? As the last sentence in the excerpt makes clear, according to the article, that someone is the group of poor consumers.

Some background, based partially on the article in question, and partially on my own understanding of this space:

  1. Richer consumers are likely to spend more, but tend to not revolve much, if at all. To this group of consumers, a credit card is a way to get a (up to) 45 day interest free loan, with the added bonus of these reward points to boot. Remember, incentives matter – and these reward points are the carrot that is offered to people in order to get them to sign up.
  2. Dangling these reward points as a carrot makes business sense, for that allows a credit card company to sign up folks who will spend more via these credit cards. Credit card companies make money when people “revolve” – that is, when they spend using their credit cards, but do not pay up the entirety of their credit card bill on time. How much money do these companies make? Here, take a look.
  3. So consumers who take a credit card, spend a lot on it, and pay back the entirety of their credit card bill – these kinds of customers are actually a loss-making proposition for the credit card company.
  4. Consumers who spend a fair bit, find themselves unable to repay the entirety on time, and end up paying over months (if not years) – these customers are where the credit card companies earn their bread and butter (and jam and peanut butter, while they’re at it).
  5. Consumers who borrow a lot using their credit cards, and default on these loans – these are the very worst type of consumers for credit card companies. Risk departments in such firms exist to predict which consumers should be denied access to credit cards, and which of the existing customers are likely to default on their credit card loans.
  6. But broadly speaking, the NY Times article says that it is pt. 4 consumers (and pt. 5 consumers) who end up paying for the freebies that pt. 3 consumers enjoy. (but also see below, after this section)
  7. In addition, another way to make money for these credit card companies is to charge higher credit card processing charges to all consumers. This fee changes from country to country, but as a thumb-rule, assume it to be around 1-2% of each transaction. That’s not an exact estimate, but good enough for us over here. Rewards to specific folks, to be offset by diffusing the costs of offering these rewards across a much wider group, in other words. And note that merchants (who are charged these fees) will usually pass these fees on to the consumers. See here, for example.
  8. A 1-2% increase in price may not be the end of the world if your income is high enough – it is an inconvenience, not a crisis. But for low income earners, already on a tight budget, this price increase across all transactions can bite a fair bit.
  9. An out and out free market economist might say that this is fine, the market will work itself out. That is, if this 1-2% charge is an act of rent collection, new entrants in such a market will end up charging lower to no fees, and incumbents will be forced to respond by lowering their own fees. That’s econ 101, but life is more complicated than that.
  10. And that is a good first-pass answer, but as many people will tell you, markets don’t always work as designed or intended. Incumbents will go out of their way to prevent new entrants (through lobbying, through pricing, through R&D, and through a dozen different ways), which is why regulation is important.
  11. But will regulators do what they’re supposed to? What are their incentives? How can we make sure that regulation will be balanced between the interests of the incumbents, the new entrants, the potential entrants, and the customers? Hello, industrial organization, and hello, public choice.
  12. What is the role for government in all of this? In terms of participation (think UPI, for example, but note that this is a complicated story in its own right), in terms of regulation (both from a domestic and international financial markets perspective) and in terms of oversight?

All these points (and I hope you come up with more) are worth thinking about as a student. Remember, these points aren’t proven facts – they are a summary in part of the article an in part of my own reflections for having read the article. Discussions such as these are a great way to outline a research agenda – but that is when the job of a researcher begins. Can we convert these points into testable hypotheses? Can we get data to prove/disprove these hypotheses? Can that data then be used to reach a definitive conclusion? Can that conclusion be used to formulate policy, or start a business?

In terms of research about this topic, sample this from the conclusion of a paper on the topic: “While credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich, our results show that this explanation is at best incomplete.”

But also from the very last paragraph of the same paper:

We conclude by documenting that the costs and benefits of credit card rewards are unequally distributed across geographies in the United States. Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.

https://www.federalreserve.gov/econres/feds/files/2023007pap.pdf

And here’s the link to a directive from the RBI about the issuance of and conduct regarding credit and debit cards in India.

Homework: who (ultimately) pays for CRED from a distributional perspective? Whatever your answer, explain your reasoning, and either provide data to back up your arguments, or explain what kind of data you would need to research this question further.

Try discussing this question with your friends and your professors (including ChatGPT, and yes, you should be thinking of it as one of your professors) – it will be a great way to learn the nuances of microeconomics!

My thanks to Mihir Mahajan for suggesting this topic.

All About GDP

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If you are a student of economics in India, you should set up a calendar for yourself. This calendar should include the date of the release of important information about the Indian economy – and the 28th of February is one such day. Why? Because that is when we get to know what went on in the third quarter when it comes to India’s GDP (and more GDP related information besides).

In today’s blogpost, I want to ask you ten questions. If you are a student of the Indian economy, you should try and figure out the answers to these questions. The act of researching the answers to these questions will tell you a lot more about GDP in India than any column praising or defending these numbers will.

Why ten questions? Nice round number, and a good place for me to stop, that’s all. I hope you come up with even more questions!

Here goes:

  1. What is the “second advance estimate”? And while you’re at it, what is the first advanced estimate?
  2. And if you are a glutton for punishment, what are the first, second and third revised estimates? When are they typically released?
  3. When have they been released this year? Why the difference?
  4. Has the data for previous years been revised? Why? How? What does that tell you about how to interpret the current quarter’s data?
  5. Take a look at the first table on pp. 7 of the PDF. What is up with manufacturing? This is an oh-so-important question. Think about it everyday if you are a student of macroeconomics and development in India. Every single day.
  6. Take a look at Private Final Consumption Expenditure (PFCE) (Tables 6A and 8A). What is up with consumption? This is also an oh-so-important question. Also think about it everyday. Every single day.
  7. What, in your opinion, are the drivers of growth right now? Whatever your answer, why? (Hint: what do you think about capital expenditure in India today? How do you think about it at the central government level and at the level of the states?)
  8. Where, in your opinion, will interest rates be going this year? How will this impact your assessment of GDP growth estimates this year? Why?
  9. What is your assessment of this year’s monsoon? Why do you think this question matters in the context of India’s GDP, especially this year?
  10. What is your assessment of where oil prices are going to go this year? How do you think the answer to this question will impact India’s GDP, especially this year?

How should you go about answering these questions?

  1. Take a printout of the press note, and annotate it to your heart’s content. Come up with questions about your annotations, and don’t worry about how many questions you come up with. The more the merrier!
  2. Go ask your batchmates (and also your seniors) about their answers to these questions. Don’t worry (yet) about whether you agree with the answers you get – listen, imbibe and check whatever sources you get to learn about.
  3. Once you do this, go ask your professor(s) about their answers to some of these questions. Feel free to ask them about what you should be reading to learn more.
  4. Reach out to people on Twitter or LinkedIn who you think might be able to answer some of your questions. Don’t be afraid of asking pretty much whoever you like, but do not think you are entitled to a response. You aren’t – but if your question is a well-thought out one, not only will you likely get a response, but it will most likely be a considered, detailed response. People are helpful that way, especially if they see that you’re making a serious effort to learn. The emphasis is on the word serious!
  5. Write. Once you do all of this, pen down your learnings, and the questions that still remain. Share it with the world. Make sure you do all this before 5.30 pm on the 31st of May, 2023. If you want to ask why, go reread the first sentence of today’s blogpost.

See you then!

Pranay Kotasthane on the defence budget

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… which, of course, makes it self-recommending:

Reflections on Neelkanth Mishra’s Column on the Budget

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Most of what you see written about the budget is honestly not worth reading, but there are some folks whose musings ought to be mandatory reading. And if you are going to ask me for my recommendations along these lines, Neelkanth Mishra is certainly among the top three.

What follows is a style of note-taking that I used to post a lot of a couple of years ago or so. I will share those parts of his write-up that I chose to highlight, and also explain why I highlighted them. Here goes:

  1. “As the state’s footprint on the economy has shrunk over the past three decades, the relevance of the annual Union budget for the economy has contracted accordingly.”
    ..
    This point is a fairly obvious ones to professional economists, but it bears repetition. Especially because this day is treated with such importance by the media. Panel discussions, full page articles, Twitter-aflutter – although that last one doesn’t take much, so I suppose a budget day might actually be understandable! But we’re talking about roughly a tenth or so of India’s GDP where the budget is concerned, and if you take into account the fact that GST is now a reality, the centrality of the budget is reduced even further.
    Don’t misunderstand me – it is an important event, it’s not as big a deal as it once used to be.

  2. With reference to the government’s fiscal conservatism: “This seems prudent, given the limited tolerance of financial markets globally to policy errors, and the economic damage market turbulence can cause.”
    ..
    Remember Liz Truss? Things could have been far worse, and they aren’t, and that’s worth remembering.

  3. “The Union government’s commitment to the medium-term fiscal consolidation path was reiterated: A fiscal deficit of less than 4.5 per cent of GDP in fiscal year 2026.”
    ..
    I’m not sure if I should be doing a Straussian reading here in terms of what has been left unsaid, but I’m tempted to disagree with what has been written. I’m done reading about glide paths and medium term projections of the fiscal deficit. It is enough to get a sense of where it will be next year, and the data over the last twenty years or so shows us that planning for beyond that horizon is a pointless exercise. Plus, the uncertainty in the global economy is such that any number for the year 2026 is a guess. Nothing more.

  4. “Given the strong tax buoyancy this year, the government could have taken a slightly lower tax-to-GDP ratio next year than the unchanged number it has assumed, but the benefits of greater digitisation and formalisation may continue, and lower tax rates often help tax compliance.”
    ..
    I agree with the first half of the sentence, and I hope the second half turns out to be true, but I’ll want to bet against it. I would be very glad to be wrong.

  5. “Perhaps more importantly, the government chose to redeploy its savings from the fiscal support it had to provide during Covid and then in the aftermath of the Russia-Ukraine conflict to capital expenditure”
    ..
    We need to do more of capital expenditure, there is no getting around this point. Therefore agreed.

  6. “The general government debt to GDP ratio (which includes central and state debt) has fallen from 90 per cent in FY2021 to 83 per cent now, as nominal GDP growth has picked up, but it is still well above the 73 per cent seen pre-Covid, and the 60 per cent recommended by the FRBM Review Committee. For it to fall back to those levels, the primary deficit (fiscal deficit minus the interest payments) needs to fall to nearly zero. However, it is still near 3 per cent of GDP, and even at 4.5 per cent fiscal deficit in FY2026, the primary deficit would still be nearly 1 per cent of GDP.”
    ..
    See this for a relatively simple explainer of not just the theory around deficits, but also said theory’s evolution over time. Be source agnostic – by which I mean don’t depend on any one resource in particular. But this is something you should be very familiar with if you are a student of macro.

  7. “Economies like India need to grow out of their fiscal problems and cannot shrink into them.”
    ..
    I hope you don’t understand this sentence, and I hope you think about it, and then read the next sentence from the write-up.

  8. “This is where the nature of government expenditure makes a difference. Allocations to railways and roads, as well as to schemes like Pradhan Mantri Awas Yojana and for energy transition should support growth both over the near term (via expenditure) as well as the medium-term (through cheaper logistics and greater energy self-sufficiency).”
    ..
    Yup, but always beware the limitations of state capacity.

  9. “In this regard, the demand to switch back to the old pension scheme for government employees, where taxpayer funds are used to guarantee benefits to a select group, is a risky one.”
    ..
    An understatement if ever there was one.

  10. “That state governments this year may end up with an aggregate fiscal deficit of just 2.4 per cent of GDP versus the 3.4 per cent budgeted, given the surge in tax inflows and an inability to quickly ramp up spending, is also helping. The decline in bond yields on budget day is a sign, in our view.”
    ..
    In my experience, bond market dynamics remain poorly understood among both undergrad and post-grad students of economics. That’s a broad characterization, and as with all such broad characterizations, there are significant exceptions. But I still maintain that the bond markets don’t get enough importance in the teaching of macro at an introductory level.

  11. “In turbulent times like these, a good budget is just a starting point. The turmoil in the global economy is likely to continue, as the impact of higher interest rates shows up in weaker demand for consumption and investment, and geopolitical tensions continue to disrupt energy supplies and trade. As the resilience of the domestic economy gets tested by global headwinds, deft fiscal manoeuvres may be necessary, like they were this year.”
    ..
    With this budget, we’ve left ourselves some wriggle room if things go south really badly really quickly this year – and they well might do so.


Your mileage may vary, but the meta-point of this post (and all such posts by me) is not just to show you which parts of an article I found worth highlighting. It is also to tell you that note-taking is an underrated activity. Get into the habit of taking notes for the good stuff that you read. You don’t need to make your notes public like I just did (although skin in the game remains an underrated concept). But the more you take notes, the more you’ll begin to connect the dots across different stuff you’ve read, and then you’re off to the races.

Build the habit of taking notes and trust me, it is very much a superpower.

The Budget At A Glance Document

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Regardless of whether you are a formal student of economics or otherwise, here’s how I would recommend you start today.

  1. Visit this website.
  2. Go to the Budget at a Glance section. Search for it on Google, if you like, but make sure you open the 2023-24 document!
  3. Open up either the MS-Excel file or the PDF of the document titled Budget at a Glance. If you don’t plan on copying any data, I would recommend the PDF. It is marginally easier to read.
  4. Scroll down to the table, which is usually on page 3
  5. Remember that this is the government’s budget. Don’t confuse this with India’s GDP! But more about India’s GDP and how it relates to this document below
  6. Understand the structure of the document:
    • Note that the numbers are in Rs. crores
    • Understand the layout of the four columns:
      • The first will be the ‘actuals’ for the year 2021-22.
      • The second will be the ‘budget estimates’ for the year 2022-23 (note that this was the fourth column exactly one year ago)
      • The third will be the ‘revised estimates’ for the year 2022-23
      • And the fourth column will be the budget estimates for the year 2023-24
    • Understand the layout of the rows:
      • Line item no.8 and line item no. 9 will be exactly equal. This is not a coincidence. Our government’s ‘income’ (no. 8) must match it’s ‘expenditure’ (no. 9).
      • Both line item no. 8 and line item no.9 further decompose into revenue and capital ‘streams’. What are revenue and capital ‘streams’?
        • A one time income (or expenditure) can be thought of as a capital stream. You enrolling in a college degree is a one time expenditure, for example. But you paying your hostel mess bill is a recurring expenditure. Which do you think ought to come under the capital ‘stream’? Which do you think ought to come under the revenue ‘stream’? Why? Use your answers here to understand the structures of the rows numbered 1,4 and therefore 8. Also 10,13 and therefore 9.
      • Now let’s take a look at just line item no. 1 and its constituents:
        • How much growth has the government pencilled in for tax revenue (line item no. 2) between the third and the fourth column? Between the second and the fourth column? Scroll down to the bottom of this page and take a look at note (i). How much is nominal GDP – in one sense the income of the country as a whole – going to grow by? How much is the growth rate of tax collections? Why do you think this difference exists?
        • What are non-tax revenue receipts? They usually comprise of interest receipts, dividends and profits (whose?), external grants, other non-tax revenue and receipts of Union Territories. You can find more information about this in the Receipt Statement document on the Budget at a Glance web-page (bag5, usually).
      • Under Capital Receipts (4 and its constituents), pay close and loving attention to line item no. 6. This will disappoint all of us this year, which unfortunately has been a trend for a very, very long time. This is proceeds from disinvestment (3.A.(ii) in bag5), and now ask yourself why the second column is so very different from the third. Ask yourself how you should therefore interpret the value in the fourth column. Go back and take a look at the corresponding entry in previous Budget at a Glance documents. Ponder this issue, and read more about it. To me, it is the most crucial part of the income part of this document.
      • Line item no. 7 is the outcome of the following equation. Pay attention now! 9-1-5-6=7.
        In English: the government first figures out how much it needs to spend (9). It then subtracts from it all possible sources of income: all of revenue receipts (1), then recovery of loans (5) and then disinvestment proceeds (6). What remains needs must be borrowed. We call this the fiscal deficit. Line item no. 7 will be exactly equal to line item no. 17, and that’s not a coincidence.
      • Under line item no. 9 and its constituents, first check how large 10 is as a percentage of 9. Then check how small 13 is as a percentage of 10.
        • How much of 10 can the government afford to change? (More details in bag6)
        • How much of 13 does the government need to change? (ditto)
        • With regard to both of these points, go through the ‘expenditure of major items’ and ‘composition of expenditure’ sections of bag 6 (usually pages 10 and 11).
        • How large is line item 11? How to interpret 11? Is the government borrowing (7) to repay the interest on old loans (11)? What is the meaning of line item 18?
  7. Go over the rest of the document as well, but this will now fill in the details. Note that some of what I have mentioned is in bag5 and bag 6 can also be found over here, but it is worth your while to be aware of those documents as well.

Please, spend an hour going over this blogpost and the budget at a glance documents.

Then, if you so desire, start listening to the talking heads on your channel of choice. Then read what everybody has to say about the budget.

The first year you do this, it will seem like a lot of work. But as the structure of the document becomes clearer and more familiar, you will find it relatively easier to begin making sense of the budget on your own – at least a respectable top-level analysis. Then, depending on your political views, sectoral exposure and appetite to learn, you can choose to consume any amount of analysis on the budget. But bring to that experience your own independent analysis, and see how what you’re consuming resonates with what you think you know.

And if you ask me, everybody who has gone through a class on economics (and correct me if I’m wrong, but that ought to be everybody who has gone through school) should have undergone a session like this.

It does not necessarily happen, more’s the pity.

And of course, don’t stop here! As a serious student of economics, there is much more to do. But this? Difficult, tedious and time-consuming though it may seem, these ought to be table stakes to formulate (let alone give) an opinion about the budget.

Sharmaji ka beta, the global edition

Ashish2 Comments

ChatGPT on Why It Is Bad to be Rich

Ashish2 Comments

What if we asked Navin’s question to ChatGPT?

This post is as much an attempt to think more about Navin’s question as it is an attempt to show you, concretely, how you might want to use ChatGPT.

Complements over substitutes, always remember. By which I mean that you should use ChatGPT as a tool (complement) to make your thinking better. You should not use it as a replacement (substitute) for your own thinking.

Say you’re at a dinner party, and somebody brings up this question: why is it bad to be rich?

How should you go about thinking about this question? Me, I would want to ask two extremely basic questions first:

  1. Bad for whom?
  2. Relative to what?

The first question is about asking whose perspective one is going to try and answer the question from. Is it bad to be rich if you are the person getting rich? Or is it bad to be rich from the perspective of somebody else? That somebody else – if that’s the answer – is who, exactly? Somebody who didn’t get rich as a consequence of you getting rich? Somebody who will also get rich as a consequence of you getting rich? A bit of both, maybe (by which we mean we are analyzing the question from the point of view of society)?

So rather than ask the question directly to ChatGPT (“Why is it bad to be rich?”), it might help if you thought about the question yourself, and then asked a better question to ChatGPT (“If a person were to be rich, is that good or bad for that person?”):

You and I might have a difference of opinion about which answer is better, and that’s fine. The point is that phrasing the question differently evokes different responses, and that phrasing the question the right way matters as much when you’re chatting with AI as it does when you’re chatting with human beings. If, at the first attempt, the answer isn’t along “expected” lines, don’t fall prey to confirmation bias, but rather ask yourself if ChatGPT has understood you well enough to be able to answer. Consider this version, for example:

All right, enough gyaan, you might say. Let’s see what the econ literature has to say about this last question:

I ran the first sentence of ChatGPT’s answer through elicit.org, and this is what turned up:

Not only does phrasing matter, but don’t end up depending on just one AI assistant – that’s the lesson from this exercise. Broaden your search (and this should go without saying, but please do also check if the papers cited by ChatGPT also exist!) If you’re as lazy as I am, you might want to meta-outsource – but even if you, do still verify the whole thing independently!

And now on to the second question (relative to what?). Is it bad being rich relative to other people/regions/countries being poor? We’re talking about inequality now, and the relationship between inequality and economic growth has a long and rich history.

This rabbit-hole can keep you occupied for hours. You can dig further by asking ChatGPT what it means when it says “structure of the economy”, for example. You could ask it to elaborate on ways in which the labor market might not function to full efficiency, and how that impacts the evolution of both poverty reduction and inequality. You could ask it what it means by “full efficiency”, if you want to go hyper-meta.

Depending on your research interests, you could ask for a literature review for any one of those questions, and drill further down still.

This, so far, has been a sojourn into the world of economic literature. But we would be remiss to stop there! What does the field of philosophy have to say about this question? What about sociology? What about psychology? Here’s the first of these:

Again, note that you will have to verify that each of these exist! The more you play around with ChatGPT, the more you should try and build a model in your own head about questions for which it is likely to ‘hallucinate’. It’s a little like conducting a viva voce for a student. Play the game often enough, and you develop a sense for when a student is winging it, and when a student isn’t. It is a much more difficult game – detecting bullshit on part of ChatGPT – but you can get better at it, and it is a useful skill to possess, no matter how rudimentary.

There is now, in all probability, nobody else left at the dinner table, and you’re not about to be invited back anytime soon. But on the other hand, you’re much richer in your knowledge about how to think about this issue and about how to work better with ChatGPT. Those who left that hypothetical dinner party are, along this dimension, poorer.

Is it bad to be rich?

Why is it bad to be rich?

AshishLeave a comment

Navin asked this question on Twitter recently:

(My thanks to Mihir Mahajan for pointing the tweet out to me, and for requesting for a post on this topic)

My current plan is to answer this question over three posts. In today’s post, I’ll try and answer this question using a first principles approach. That is, without using Google, or ChatGPT3, or my notes and references, I’ll answer this question using nothing more than what I think are the basic, foundational principles of economics.

In tomorrow’s post, I’ll trawl through the internet (and make use of ChatGPT3), and throw in articles/blog posts I’ve bookmarked over the years that speak to this point. And finally, in the post the day after tomorrow, I’ll speak about books you might want to read about this topic.

But even before having written down a single word re: my first principles argument, here is my answer in short: it is wonderful to be rich.

Six principles, if you ask me, that you absolutely must learn if you are a student of economics (and note that whether you like it or not, everybody is a student of economics):

  1. Incentives Matter
  2. TINSTAAFL
  3. Trade Matters
  4. Costs Matter
  5. Prices Matter
  6. Externalities Matter

As I was telling somebody the other day, most – if not all – problems in economics can be thought of using these six principles. If you truly understand these six principles and all of what they imply, you will be able to reduce every economic problem you meet down to the application of these six principles. The applications may be nuanced, there may be more than one principle applicable, and you may have to supply a lot of caveats. But you’ll go a very long way towards tackling your problem of choice by starting with these six principles.

And I’ll fire my first salvo at Navin’s question by deploying the third principle in the list: trade matters.

People get rich by trading with other people. Sure, people have gotten rich in the past (and in some cases, even today) by expropriating property, through loot and through dacoity. But I hope you don’t think I’m ducking the issue by saying that’s not the focus of today’s post. My focus in today’s post is about people who get rich through peaceful, voluntary trade. This particular process of getting rich focuses on offering you, through entirely peaceful, non-coercive means, a trade.

You are free to evaluate the terms of this trade, and if they seem agreeable to you, you enter into this trade. Note that the only reason you do is because you think that doing so is to your advantage. You are better off for having done this trade, relative to the option of not doing so. And the person who offered this trade to you is presumably better off for you taking the other end of it, for why else would she have offered you this trade instead?

That’s a non zero sum game, and the more we play such games with each other, the better off we are. That’s what the principle of “Trade Matters” means, and that is what it entails: peaceful, voluntary trade leaves both parties better off, and the world is therefore better off for this trade having gone through. If, as a consequence, both parties get richer, that’s A Very Good Thing, and it is therefore good to be rich.

But remember that for some problems, the applications of these principles may be nuanced, and that there may be more than one principle applicable.

First, opportunity costs. TINSTAAFL stands for There Is No Such Thing As A Free Lunch, and even to a non-zero sum game, opportunity costs are very much applicable. In the context of international trade, your level of analysis matters. Trade might make sense at the level of the parties involved in the trade, but that doesn’t necessarily mean that everybody else is better off as a consequence:

Because in the case of trade between countries, as opposed to trade between individuals, there are people who will lose out. If a university in the United States of America hires me to teach online classes to the students over there, there isn’t a hypothetical amateur cook who is losing out. There is an actual person in that country who could have taught this course, but is no longer able to because of me.
The university that hired me is better off, because it is able to hire the services of a teacher for less money. To the extent that I do about as good a job as the person I replaced, the students are (at least) indifferent. And given how strong the dollar is, I am certainly better off!
But it is not enough to say that both parties in this trade are better off (I and the university). A complete economic analysis should also include the person in the USA who is out of a job, and I would argue that one should also include what I find myself unable to do here in India as a consequence of teaching that course abroad. Both of these are the opportunity costs of this trade, and a complete economic analysis should include these aspects as well

.https://econforeverybody.com/2023/01/10/so-no-one-loses-when-it-comes-to-trade-rightright-part-ii/

Trade might then, at the margin, cause an increase in inequality. You’d be surprised at how old (but still somewhat underrated) an idea this is, but the opportunity cost of more trade might well imply an increase in inequality. So you might well say that it is bad to be rich because the opportunity cost of you being rich is that somebody else is (comparatively) poor.

But be careful with how you proceed with this! It cuts both ways, this analysis. Is the opportunity cost of reducing inequality a reduction in the creation of wealth? When you attempt to reduce inequality by taxing the rich, you reduce their incentive to trade. And remember, they get rich by voluntarily trading with you, and if that trade leaves you better off, you’ve made yourself poorer in the bargain.

If you tax Amazon so much that Amazon decides it is better for them to shutter up altogether, have you made the world better off or worse off? I’d urge you to ignore your first, visceral take, and take a look at your Amazon app to find out how often you’ve ordered from Amazon in the past month before answering this question.

So I’d argue that it still is good to be rich – but it ain’t for free. But in my opinion, the price is worth it. One can, and one should, argue about what the appropriate level of taxation should be. One can, and one should, worry about tactics used by Amazon to make sure that they remain a monopoly provider of certain goods and services. One can, and one should, worry about whether Amazon pushes its employees a little bit too much. I’m not defending Amazon as a perfect company without flaws. But I very much am saying that the world is a better place because Amazon exists. There are costs that we bear for having Amazon in our midst, but those costs are worth it.

And I picked Amazon as a stereotypical example here, but the argument is about the underlying idea, not about the specific organization. Trade matters, even after acknowledging that there are opportunity costs involved with trade.

We’re trading right now, you and I. You’re paying me with that most precious of all commodities in the year 2023: attention. And I can’t begin to thank you enough for having given me your attention so far, because I know that reading this ain’t easy. Pleasurable, hopefully, and worth your while – but not easy. And you’ve chosen to continue to pay me with your attention because what you’re getting in return – the pleasure you feel in tackling my arguments – is worth your while.

But how do you know that it is worth your while? You could have been doing something else with this time. You could have been learning how to code. You could have finished at least part of some project or an assignment. You could have picked strawberries. You could have milked a cow.

The point is that you could have been doing something that actually earns you cold hard cash, instead of reading this article. And it is your assessment of your own opportunity costs that allow you to continue reading this article. You know that you can ‘afford’ to spare the time required to read this article.

But how do you know this? You know it because you are part of a national (and global) economic system that depends upon the principle that ‘prices matter’.You have at least an implicit valuation of how much a minute of your time is worth, and you have made the rational decision to ‘spend’ this time reading this blog.

What is my point? My point is that we know how much it costs to enter into a trade only if we know how much that trade is worth to us, and we only know how much a trade is worth to us by having a sense of what we’re worth to society. Trade matters is a principle that works only if we know the price of a good or a service, and we know the price of a good or a service best in a free market economy. Deciding how much to produce something, and deciding at what price to sell it is a truly difficult problem to solve in an economy that is not based on markets.

So yes, trade matters, but so do prices.

But speaking of prices, it gets trickier still.

  1. What if you set prices to not just lure the buyer into buying your product, but at a price which is so attractive to buyers that your competitors cannot afford to match it? What if they go out of business as a consequence, leaving you as the only game in town? What if you then raise prices?
  2. What if you use patents to make sure that others cannot sell the same goods that you are selling? What if you abuse the patenting process to stymie the competition? What if you then become the only game in town, and raise prices to eye-watering levels?
  3. What if the price at which you sell the product you are selling does not take into account the damage done to the environment?
  4. What if the buyer isn’t aware of further purchases she might need to make for having bought your goods? What if she realizes later that the true price of the good in question is much higher?
  5. What if the buyer is tempted into buying the product because of shady marketing techniques?
  6. What if you lobby with the government to make sure that nobody else but you can sell the product that you’re selling? Will you then be able to charge a higher price?

Each of these questions merits a much deeper exploration than is possible in this blogpost (for those who are interested, or wondering, here are the topics you want to think about in the case of those six questions: monopoly | propoerty rights and patents | externalities | asymmetry of information | microeconomics/ behavioral economics | public economics). These topics would just be the start, there are many nuances to consider in each of the six questions. But for having raised these six questions, and the two separate arguments I’ve made in the last two sections above, here is my answer to Navin’s question about why it is bad to be rich:

It is bad to be rich if you live in a world without a fully operative price system, and/or a world in which non-voluntary trades can take place.

Interpret that sentence however you like, but begin to worry if you are convinced that there is only one interpretation, or if you are convinced that your interpretation is the only correct one!

I write on this blog for many reasons, but chief among them is a very personal reason. I would like my thinking, and my writing, to be become clearer and better over time. I’ll be the first to put my hand up and say that there are days on which I think I succeed in this endeavor, and there are days on which I don’t. But taken as a whole, I am convinced that I am a better thinker and writer than I was in 2016, which is when I started this blog.

Far from perfect, in case it needs to be said, but the benchmark isn’t perfection, the benchmark is Ashish of 2016. And on any given day, it is the Ashish of the previous day. One day at a time, as it were.

And one thing that has happened over these past six years is that I have become better at distilling in my own head what economics ultimately comes down to. Six microeconomic principles, and three big picture questions. I have outlined the six principles above, and I have written about the three big picture questions before, but here they are once again:

  1. What does the world look like?
  2. Why does it look the way it does?
  3. What can we do to make the world a better place?

Students who have learnt from me these past six years will be familiar with this list. But there is a crucial component that is missing in this list of six principles and three big picture questions: time. On my blog, I have attempted to get around this problem by speaking of an alternative framework, which I have shortened in my head to the CHIC acronym: Choices, Horizons, Incentives and Costs:

The trouble is, our brain isn’t always the best at interpreting incentives correctly, which brings us to the third key concept in economics: horizons. Or, if you have had enough nerd talk for one day, we could also call it the instant gratification monkey problem. Call it what you will, the problem is that we tend to prioritize choices that payoff in the short run, but create problems in the long run. If you’ve ever had that last “one for the road” drink, or ended up actually eating that second dessert (and who hasn’t?), you don’t really need an explanation for this. We tend to choose those options that payoff over the short horizon, and ignore the long term consequences.

https://econforeverybody.com/2018/05/03/choices-costs-horizons-and-incentives/

I have also written about time, and how it is ever-so-confusing to think about it in the context of economics. In my classes, I show students the circular flow of income diagram, and once they’ve understood it, I ask them to think of it as a video, rather than a still picture. That is to say, time matters.

Time matters.

Go and read the responses that Navin got on his original question on Twitter. I sent this essay that you are reading right not to some people, and they highlighted this same problem – they thought of intergenerational problems about being rich. Inheritance and the perpetuation of inequality across time, for example. Almost the entirety of my blogpost tomorrow, where I will share many articles that answer Navin’s question, focusses on this issue.

So here’s a question I have been grappling with for a while: should I update my list of six principles (Incentives matter | TINSTAAFL | Trade Matters | Costs Matter | Prices Matter | Externalities Matter) to also include Time Matters? And if yes, how do I expound upon this principle?

Here’s another way of thinking about this issue – one of my objectives on this blog is to teach economics to anybody and everybody. So ask yourself this question – what do we need to do to simplify economics down to its absolute bare minimum? Will somebody who has learnt about economics by attending my classes, or reading my blog, be able to answer Navin’s question? And the short answer to this question is yes, they will. But in an incomplete fashion, because in the context of this question (and many others besides), time matters.

Time, as it turns out, really and truly matters. And for me to teach this principles, I need to try and understand it better myself.

Onwards!