All About Taxation

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation1 And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran2:

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.


And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.
  1. do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.[]
  2. note that I am excerpting the outline of the argument, please visit the blog to read it in full[]

Macroeconomics: An Introduction, by Alex Thomas (Pt. 1)

About five years ago, I went on a rant on my other blog:

I have developed, over the last seven years or so, a visceral hatred for textbooks. Its not that textbooks are all that bad – they’re limited, they’re expensive and they’re straitjacketed in terms of content and structure, but all of this together isn’t why I hate textbooks.
Its because we have students who demand a textbook in every single course. Over time, we have reached a mentality that says that a course must have a recommended textbook. Instructor must assign chapters from said textbook. Students must read chapters and solve end-of-chapter problems. Instructor will design paper on basis of said textbooks, students will write exam having prepared accordingly, and all is right with the world.

https://thepuneri.wordpress.com/2016/03/28/textbooks-have-become-mostly-pointless/

I’m not going to excerpt the entire rant, but on reflection, it is certainly true that I was on a roll:

And it gets even worse with the “end of chapter problems”. The expectation that the examination will have the same “type” of problems as does the textbook might be convenient in the short run, but it doesn’t teach you how to adapt to problems as you might encounter them in real life. Worse, and this is a point I’m going to write about at length in my next post, this approach simply helps you solve problems, not identify them. And in my opinion, identifying problems is a far more important skill today than having the ability to solve them – but more about that in a later post.
In short, then: textbooks are static, limited and structured ways to learn about a subject, and it is entirely possible, and desirable, that we enrich students knowledge about subjects by giving them much, much more to learn than just a textbook.

https://thepuneri.wordpress.com/2016/03/28/textbooks-have-become-mostly-pointless/

Five years down the line, my opinion on textbooks haven’t changed all that much. I still cringe when students in courses I am teaching ask me for “a” recommended textbook to “prepare for the examination”.

They’re being quite rational from their perspective: they want to maximize marks while minimizing effort. Their microeconomics professor would be proud. My problem lies beyond their request, and beyond their rationality in having framed their request the way they have. They are simply responding to the environment we’ve placed them in, and it is the environment that I have (serious) issues with.

And the textbook authors are responding to their incentives, in turn. If we accept the educational system as it currently exists, then of course we should have chapters, and end-of-chapter problems, and question banks, and answer keys supplied to accredited professors. It has become an industrial complex, for all the participants respond, rationally, to the incentives the educational system has set up for them.

And so it goes, year after dreary year.


And then you see something like this in the introduction of a text:

I strongly recommend and encourage the use of various texts (books, journal articles, government reports, fiction, newspaper articles and textbooks) in the teaching of any course in economics. This stems from my rather modest experience of just over 15 years as a student and teacher of economics. While the use of varied texts is challenging for both the teacher and the student, I firmly believe that the long-term benefits far outweigh the short-term costs, and that it truly contributes to good learning as it enables the students to become better arbiters of knowledge. After all, we live in the age of information abundance, and perhaps the most valuable skills are the ability to identify credible sources of information and the ability to evaluate, with sufficient confidence, contending arguments, perspectives and standpoints.

Preface, Macroeconomics: An Introduction, by Alex M. Thomas

In other words, this is a textbook that is not looking to minimize the efforts of either the teacher or the student. The very opposite, in fact. As Alex says, he is looking to maximize the long term benefits (one might call this “learning”). Not the short term benefits, note (one might call this “marks”).

And it gets better!

Finally, this book adopts a problem-setting approach rather than a problem-solving one, as is the case with most economics textbooks. To put it more clearly, this text helps you to identify, conceptualise and discipline a macroeconomic problem. Therefore, this book does not contain exercises in problem solving, but it contains discussions and questions that make you think about the nature of assumptions, the logic of the theory, the limits of the theory, the interface between theory and policy, a little bit about the gaps between theory and data, and, occasionally, the nature of past and present economic thought. Therefore, this book aims to provide you with an introductory) immersive experience in macroeconomics.

Preface, Macroeconomics: An Introduction, by Alex M. Thomas

Why do I say it gets better? From another of my blogposts, also written five years ago:

In examinations, teachers frame the questions, and students answer them.
So obvious, so matter of course, so banal is this statement that it takes a little time to realize how horrible a system this is. All we’re doing, when we ask students to do this, is learn the subject well enough to be able to answer whatever question we throw at them. And therefore, when they get out there in, y’know, the real world, they ask for a problem, so that they may solve it.
But in the real world, more often than not, you’re paid to frame the question.

https://thepuneri.wordpress.com/2016/03/30/the-growing-irrelevance-of-examinations/

I’m happy to spell this out as many times as it takes: you attend a course in order to learn. A way to check how much you’ve learnt is to write an examination.

Somewhere along the way, this has mutated into: you attend a course in order to score marks in an examination so that you get a job/get into a better college.

Jo kuch ratta maara tha, sab saala pel ke aa gaya, aur doosre din bhool gaya” is funny because it’s true.

So, in a standardized, run of the mill course, this textbook is a nightmare. No end of chapter problems, no question bank, and (the horror!) literary references and (shudder!) poems instead.


Which, of course, is exactly why I can’t wait to read it. I’m done with the first chapter, and will put up my thoughts about it soon. There’s a lot that I love about it, some things that I have questions about, and some areas of disagreements.

But if I’ve understood the spirit in which the book has been written, I think Alex M. Thomas will count my experience thus far as a success.

About Innovative Question Papers

The typical exams, at least in Indian universities, tend to be really dull, drab affairs. I cannot speak about how good (or bad) they are in other countries, but partly by design, partly due to inertia, they follow the same old template in most Indian universities.

You’ll get your fair share of “State briefly”, a sprinkling of “Explain why”, and the very occasional “In your opinion”. But for the most part, it needs rote memorization to respond and “do well” in these examinations. Take home essays, reflective essays and anything that is even remotely innovative are not welcome.

But in a world where such a thing was possible, what might question papers look like?

Tyler [Cowen] once walked into class the day of the final exam and he said. “Here is the exam. Write your own questions. Write your own answers. Harder questions and better answers get more points.” Then he walked out. The funniest thing was when a student came in late and I had to explain to him what the exam was and he didn’t believe me!

https://chrisblattman.com/2012/08/15/best-exam-question-ever/
https://chrisblattman.com/files/2013/01/1-Introduction.pdf

I can’t find it online right now, but I seem to remember that some of Prof. Blattman’s papers included the additional condition that you needed to submit the cheat sheet, and it too would be evaluated for what you chose to put in it (and implicitly, what you chose to leave out).


I had once asked a very small development economics class to teach some of their peers – those who hadn’t taken Dev Eco – the Solow Model. The non-math version, of course. And then those who had been taught had to take a small multiple choice question test. The marks they scored would become the grades for the “teachers”. Stuff like this will never work for a larger class, will never work for a semester end exam, but it still was a lot of fun to do!

The point is that it is all too possible to have examinations be fun, and be about learning. But so long as examinations are about signaling how much you’ve scored, rather than allowing you to reflect on how much you’ve learnt, they’ll have to be standardized, which means they’ll have to continue to be boring.

If you’d like them to be fun, you need to try and live in a world where examinations (and therefore colleges) aren’t about signaling.


But that is a tall order, no?

Economist Writing Everyday

That’s a blog I came across thanks to MR, and if you’re a student learning about economics, this is very much the kind of blog you should be reading.

Why?

  1. Updated regularly, which should serve as inspiration
  2. Written in an easy, conversational style (ditto)
  3. A lot of interesting blogposts that serve to help you think through concepts you may have learnt recently (students who’ve just embarked on macro might like reading this post, for example)
  4. And a meta point that I’m going to spend the rest of this blog post on, so please continue below the fold 🙂

One post that Tyler Cowen himself linked to in his post on MR was this one, about academic publishing:

There are a lot more people writing academic journal articles.
There is a lot more well-executed economic research.
The teams of co-authors on papers/projects have become much larger.
The number of journals whose prestige is commensurate with a tenured position at an elite school has grown slower than the total faculty employed by elite schools.
Economics research has become more expensive and labor intensive.

https://economistwritingeveryday.com/2021/05/31/academic-publishing-how-i-think-we-got-here/
  1. I’ll get to my thoughts about this in just a bit, but I want to spend a little bit of time in helping you learn how to draw parallels.
    1. Those points noted above, they work just as well if you replace journals with universities, and faculty with applicants.
    2. Further reading, if you’re now suddenly interested in the topic. Also ask yourself if your answer changes depending upon whether you’re in Harvard or not (or have been published in a top-tier journal or not – same thing, for the purposes of this post)
    3. “Where else can this be applied?” is a question that should be front and center when you’re learning a new concept is the larger point I want to make.
    4. So when you learn about the pyramid in publishing, ask if it can be applied to the world of student applications. To, say, the IPL. To, say, becoming a “top lawyer”, or a “top doctor”…. you get the drift.
  2. The rest of the post is a wonderful explanation of how to build a simple model to help you arrive at the equilibrium. More people should learn this skill, and more universities should teach this skill!
  3. The author’s conclusion? More papers should be published by top journals, which is tantamount to saying more students should be accepted by Harvard. Who is right? Mike Makowsky or Tyler Cowen? Why? If your answer is both, what makes student applications different from paper submissions? What a wonderful set of questions to think about!
  4. This blog (not just the blogpost, the blog) gets better from here on in because they’ve published a follow-up post on this topic!
    1. It’s written in “yes, and” style, rather than a “no, but” style, which is a lovely thing to see
    2. It asks this question: “As an academician, what are you optimizing for?” And employing the concept of division of labor, Jeremy Horpedahl argues that if you’re the kind of academician who likes to teach, maybe it’s ok to not be published in a top 5 journal. If you’re the kind of academician who likes to research, on the other hand…
    3. Homework: how does this work in the case of student applications?
  5. And all this from just two posts on the blog! I’ve subscribed, of course, and I would strongly recommend you to do the same.
  6. I’m going to be a little greedy, and give one final recommendation. This post on Identifying Ideas That Motivate You is great reading for young would-be researchers.

What Have State Legislatures Been Up To Last Year?

First off, have you heard of PRS Legislative?

PRS tracks the functioning of the Indian Parliament and works with MPs from the Lok Sabha and Rajya Sabha across political parties and MLAs from various states. PRS provides a comprehensive and credible resource base to access Parliament-specific data, background information on Parliamentary and governance processes and analysis of key legislative and policy issues.

https://www.prsindia.org/aboutus/what-we-do

If you are a student of the social sciences in India (and who isn’t), this is a wonderful resource. It was started in the year 2005, and has provided stellar service to students of India for a very long time. See this, for example, if you are starting out in the study of public finances, or pretty much anything from this page.


But today’s post is about a specific report published by PRS recently: the Annual Review of State Laws 2020.

The Constitution of India provides for a legislature in each State and entrusts it with the responsibility to make laws for the state. They make laws related to subjects in the State List and the Concurrent List of the Seventh Schedule to the Constitution. These include subjects such as agriculture, health, education, and police. At present, there are 30 state legislatures in the country, including in the two union territories of Delhi and Puducherry.
State legislatures also determine the allocation of resources through their budgetary process. They collectively spend about 70% more than the centre. This implies that much of what affects citizens on a regular basis is decided at the level of the state. For a detailed discussion on the budgets of all states, please see our annual State of State Finances report.
This report focuses on the legislative work performed by states in the calendar year 2020. It is based on data compiled from state legislature websites and state gazettes. It covers 19 state legislatures, including the union territory of Delhi, which together account for 90% of the population of the country.

https://prsindia.org/policy/analytical-reports/annual-review-of-state-laws-2020

Tucked away under these paragraphs is a short one that will bring a wry smile to any Indian researcher’s face. It speaks about how information (and data) from India’s state legislature’s is hard to obtain. That, trust me, is putting it mildly.

Consider this:

The crowds that throng Mantralaya in Mumbai bear testimony to the fact that, apart from opacity in rules and processes which inhibit the common citizen getting her work done, there is still a lack of access to the right information and to the right persons in government who can and ought to meet the expectations of the common woman/man. The Maharashtra government website is woefully inadequate when it comes to informing the citizen about the procedures she should follow to get a particular work done. The website is focused more on putting forth not-so-useful information on departmental activities rather than on the steps needed to secure a particular benefit or license. Government departments need to focus on online processes for securing permissions, with human
interface being kept to a minimum.

https://puneinternationalcentre.org/wp-content/uploads/2019/10/Progressive-Maharashtra-Policy-Roadmap-2019-24-1.pdf


Please read the whole thing, pp 26-37 in this document, to get a sense of what needs to be done for a state like Maharashtra. Leave aside the question of the other states in the country!


But when a person who has definitely not left aside the question of the legislatures of the other states in the country takes note of the PRS’ annual review of state laws, it certainly behooves us to pay close and careful attention.

To return to PRS, the annual review has not been done in the best of times. After all, 2020 saw the first wave of the pandemic, though, in principle, meetings can also be virtual. As a benchmark, the Parliament met for 33 days in 2020. Pre-2020, these 19 states met for an average of 29 days a year. In 2020, they met for an average of 18 days. Before the pandemic, 29 days in a year? Had it not been for this report, I would have expected the number to be much higher.

https://indianexpress.com/article/opinion/columns/reforms-and-public-expenditures-lets-not-forget-to-scrutinise-states-7351650/

… and Bibek Debroy’s take on the report is not encouraging. Not, I hasten to add, a criticism of the report itself. Rather a criticism of the subject of the report: the state legislature and the job they’ve done this past year.

Source: https://prsindia.org/policy/analytical-reports/annual-review-of-state-laws-2020

Read the whole report, please, but this chart is perhaps the most instructive:

Source: https://prsindia.org/policy/analytical-reports/annual-review-of-state-laws-2020

3 out of every four bills that have been passed in state legislative assemblies were passed not more than one day after they were introduced. That, if you ask me, is too little debate.


There is a lot more at the link, of course – please do read the whole report. And if you’re looking for additional reading, this speech by Bibek Debroy would be a good place to start.

The Via Negativas of Public Policy

I learnt of the phrase by reading Taleb:

[I]n practice it is the negative that’s used by the pros, those selected by evolution: chess grandmasters usually win by not losing; people become rich by not going bust (particularly when others do); religions are mostly about interdicts; the learning of life is about what to avoid.

https://fs.blog/2014/01/a-wonderfully-simple-heuristic-to-recgonize-charlatans/

And it is wonderful advice of course, always worth keeping in mind: sometimes the best way to learn is by cutting out the bad parts, rather than trying to add in new good ones. There is merit to both, of course – cutting out the bad and adding in the good. But maybe cutting out the bad ideas first is a, er, good idea?

Losing fat before adding muscle is one way to think about it.1


And so also with public policy! Pranay Kotasthane, co-author of Anticipating the Unintended, has a lovely video out on this topic:

Definitely worth a watch, and while I am tempted to list out the eight, I won’t – for at the margin, some of you might be tempted to not watch the video 🙂

But I’ll militate against the spirit of this post, and add one of my own to the list that you’re about to learn: time.

I think a student of public policy ought to avoid short-termism. Fancy pants speak that simply means don’t just think about the short term benefits, but also worry about the long term consequences.

Unfortunately (public policy is hard!) policies have a way of sticking around for long after they’ve outlived their usefulness, but that’s a story for another day.

For the moment, please watch the video 🙂

  1. I’m good at spouting theory, not so good at the practice![]

Asking And Answering Important Questions

Shruti Rajagopalan asked a very important question on Twitter earlier this week:

I’m writing this post on Sunday evening, which is when Shruti asked this question (and you, of course, are reading it today) but so far, there haven’t been any encouraging responses to her query, save for this one:
That would be this report, and I don’t think it was recommending large purchase orders or calling out Prime Minister Modi’s incoherent vaccine policy. This is the entire paragraph on vaccination:

Vaccines: The Committee recommended that a vaccine should pass all phases of clinical trials before it is made public. Further, it recommended that the whole population should be vaccinated. In this regard, the Committee suggested that: (i) the cost of the vaccine should be subsidised for weaker sections of society, (ii) the cold-storage system across the country should be upgraded, and (iii) vaccines should be administered as per the World Health Organization’s strategic allocation approach or a multi-tiered risk-based approach.

https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/Report%20summary%20COVID.pdf

Long story short, the answer to Shruti’s question is: nobody. None of us were prescient enough in 2020, and that is a failure on our part.


What Shruti is really asking for is this: who is India’s Alex Tabbarok?

Why do I say this? Because Professor Tabarrok was recommending/demanding large purchase orders…

We don’t want to find ourselves with a working vaccine but too little manufacturing capacity. From an economic point of view, it would make sense to install enough capacity so that everyone in the U.S. who wanted could be vaccinated within a month. Normally, new vaccines cannot be produced so quickly and in sufficient supply. Each step of the manufacturing process must be verified and tested, and inputs to the process may face their own supply chain bottlenecks. Just as shortages of swabs and reagents delayed the rollout of testing, shortages of glass vials, bioreactors or adjuvants (a substance that increases immune stimulation) may delay vaccines. For want of a vial, the vaccine could be lost. To stand a reasonable chance of having a substantial supply of vaccines in 2021, we need to plan for capacity and reinforce supply chains now.

https://www.nytimes.com/2020/05/04/opinion/coronavirus-vaccine.html

…on the 4th of May. That is the 4th of May 2020.

He had a post praising the idea of advance market commitments (AMC’s) out in February. Again, 2020.


And while the first excerpt up above was a plan for the USA alone, he and his collaborators expanded upon this plan, outlining what a globally coordinated plan may have looked like:

I’ve been working with Michael Kremer, Susan Athey, Chris Snyder and others to design incentives to speed vaccines and other health technologies. AcceleratingHT is our website and now features a detailed set of slides which explain the calculations behind our global plan. The global plan is similar in style to the US plan although on a larger scale. The key idea is that the global economy is losing $350 billion a month so speed pays. One way to speed a vaccine is to invest in capacity for 15-20 vaccine candidates before any candidates are approved, so that the moment a candidate is approved we can begin production (one can store doses in advance of approval). Most of the capacity will be wasted but that is a price worth paying. As Larry Summer says if you will die of starvation if you don’t get a pizza in two hours, order 5 pizzas. Human challenge trials are another way to speed the process.
A global plan is ideal since there are significant benefits to coordination. If each country invests in vaccines independently they will each choose the vaccine candidates most likely to succeed but that means all our eggs are a few baskets. There are over 100 vaccine candidates and they have different scientific and production risks so you want to choose the 15-20 which maximize the probability of success for the portfolio as a whole. To do that efficiently you need countries to agree that ‘I will invest in lots of capacity (more than I need) in candidate X if you invest in lots of capacity (more than you need) for candidate Y’, even knowing that the probability that X succeeds may be less than that of Y.

https://marginalrevolution.com/marginalrevolution/2020/05/acceleratinght.html

The website AcceleratingHT provides many more instances that reinforce my point, and as a student, reading the material there is genuinely useful.


A while ago, I wrote a post for students who want to work in the field of public policy. Alex Tabbarok’s work this past year is a great example of what that advice might look like in practice.

I do not know who India’s Alex Tabbarok is in 2021 – there may not even be one. But as a student, the correct question to ask is this:

What do I need to do to acquire the ability to be ahead of the curve when the next crisis comes around?

Here is my list in response to that question:

  1. Read, and write. Everyday, read and write. If you are a student of the humanities (and if you think about it, who isn’t?), you should be reading and writing everyday. It compounds, trust me.Don’t be afraid
  2. Learn the art of working backwards from the solution you want to get to. In this specific case, if you want the world to be vaccinated by the end of 2021 (let’s say), then begin by asking yourself what needs to be done to get there, but in reverse.
    7 billion vaccines will be needed – which are the manufacturers that are most likely to supply them – what do they need to get the job done – how can we get them what we need – what are the regulatory, financial, supply-chain-related hurdles they will face – how can these be removed – and so on…
    My point here is not the specifics of the exercise, whether in the case of vaccines today or something else tomorrow. My point is to learn and apply the art of working backwards from where you want to eventually be. I don’t know what you’re supposed to call this in consultant/management speak, but for starters, read about the game 21 flags in The Art of Strategy.
  3. Learn the art of being unafraid to ask big picture questions. Whenever you get that feeling of “Surely somebody somewhere must have thought to ask this question already?” – especially if you have been serious about pt. 1 above – ask the question. Repeatedly, furiously and publicly.
  4. Consume as much content as you can about crisis management from the past. (I’m working on this for my own self, and recommendations are welcome)
  5. Do not be afraid of putting out your potential solution out there. Your worst case scenario is that it is a wrong solution. As a society, we’re still better off rejecting wrong solutions than waiting for the perfect one. For rejecting a solution as being the wrong one forces us to learn more about the problem at hand.
  6. Most difficult of all: once you have offered a solution, remember that your job is to solve the original problem. Your job is to not defend your solution at all costs. This is hard.

Understanding Fiscal Policy (3/3)

You might want to read Monday and Tuesday’s post before you begin in on this one.

In today’s post, we conclude by thinking through the section titled “Making Space While The Sun Shines

  1. I’ve used the analogy of a human body throughout this little series, and I’ll press the point a little further here.
    One major problem that crops up when treating a seriously ill patient is about both the strength and the duration of the dosage. How much should the dose be per day, and for how many days should the patient take the medicine?
  2. Similarly, when it comes to fiscal policy, how much is enough? What if you give too little of a push? Then the recovery is anemic. What if you nudge a little bit too much? We’re back in 2011-2014 territory – and please do read The Lost Decade!
  3. Which is where this section of the article becomes really important: there is no model, anywhere in the world, that tell you what to do now. That is a strong way to put it, but let me be clear: there is no model anywhere in the world that will tell you what to do now. The cause of this current crisis, the crossroads at which the Indian economy found itself before this crisis, the uncertainty about how this crisis will play out and eventually end, and the uncoordinated global response(s) to this crisis all put together mean that we economists don’t know for sure how much fiscal policy is too much. We don’t know for how long we should keep the fiscal stimulus going. We’re, as it were, flying blind.
  4. What Sajjid Chinoy is saying, however, is this: whenever you cross a certain threshold of the vaccination drive, you need to start the process of unwinding the stimulus. That is what this excerpt means:
    ..
    ..
    “Counter cyclicality must be symmetrical: supporting activity in times of a shock, but then quickly retreating to create space when vaccinations reach a critical mass and the recovery becomes more entrenched.”
    ..
    ..
    Will this actually happen? For India’s sake, let us hope so. Our track record is less than encouraging in this regard.
  5. Familiarize yourselves with the great r>g debates. In this decade, they’re going to matter.
  6. Familiarize yourselves with the meaning and the importance of the primary deficit.
  7. Familiarize yourselves with the what the phrase “dual mandate” means when it comes to monetary policy.
  8. Pts. 5 through 8 are hopefully going to be areas that you will cut your teeth on if you join the market as a macroeconomist over the next five years. Hopefully because if we are still on pts. 2-4 until that point of time, this pandemic will obviously still be with us.
  9. But if it has gone by then, (god, I hope so!), managing the recovery and its aftermath will the macroeconomic challenge of this decade.

Understanding Fiscal Policy (1/3)

I wrote this last week on the basis of this write-up by Sajjid Chinoy. The sequel came out last week, so let’s read through it together.

First things first:

  1. During times of a crisis, such as the one we are going through, it may be helpful to think of the economy as a sick person. That would make us economists and policymakers the diagnosticians and doctors respectively.
  2. Us diagnosticians often like to think about why the person got sick. Was it because of some previously administered medicine? Was it because of some external factor? Maybe both? That is, we identify the disease, and the cause of the disease.
    In this case, the economy is struggling because of the lockdowns and the uncertainty about (at least) the near future. Those are the symptoms. The cause is, of course, the virus.
  3. The doctors – that is, the policymakers – will want to remove the cause behind the economy’s illness first. That is what Sajjid Chinoy means when he says: “With a health crisis at the genesis of the current situation, it’s tautological to say that ramping up vaccinations is the “first-best” solution to tackling the crisis.” That is the cause of the crisis, and removing the thing that causes the crisis is of paramount importance.
    The “how to do this best” question has troubled all of us, and continues to trouble us, and it is worth your time to keep tracking this issue. And it is a great way to learn about how to think about public policy.
  4. But treating the symptoms (and the manifestations) of the cause is equally important. Job losses, reduced investment, reverse migration, subdued demand, rising inequality, reduced incomes, the exacerbated lack of social safety nets are all symptoms and manifestations of the crisis. How to treat the symptoms? That is where Sajjid Chinoy’s second article comes into play.

There are two courses of treatments available to us diagnosticians and doctors: fiscal policy and monetary policy. Sajjid Chinoy argues (and in my opinion, does so convincingly) that monetary policy has done all the heavy lifting it could in 2020, and there’s not much left in the RBI’s arsenal.

Monetary policy was the prime mover last year and markets will inevitably clamour for that pedal to be pressed even harder. But quite apart from the fact that monetary conditions are already very accommodative and core inflation has averaged 5 per cent since the start of 2020, what’s less appreciated is the reduced efficacy of monetary policy in periods of elevated uncertainty. That’s because monetary policy ultimately relies on economic agents (households, businesses, banks) to act on the impulses it imparts. But when agents are faced with acute health, income and macroeconomic uncertainty, they often freeze into inaction (“the paradox of thrift”). So households don’t borrow, businesses don’t invest and banks don’t lend. This is evident in the evolution of bank credit over the last year in India. Despite negative real policy rates and falling real bank lending rates, credit growth has continued to slow all year long, likely reflecting these uncertainties.

https://www.business-standard.com/article/opinion/fiscal-vs-monetary-policy-under-uncertainty-121052401432_1.html

Homework: What is core inflation? Where is this data to be gotten from? Where do we get data on the evolution of bank credit from? What are negative real policy rates? What are falling real bank lending rates? Where do we get that data from? What is credit growth? Where do we get that data from?1


Which means we must now think about how to best deploy fiscal policy.

The baton must, therefore, pass to fiscal policy. While fiscal policy cannot mitigate the health uncertainties it can help alleviate income and macroeconomic uncertainties. Stronger spending will not only boost activity but, in so doing, will reduce demand uncertainties for firms. Furthermore, income support (in cash or kind) along with public-investment-indu­ced-job-creation can alleviate income uncertainties for households and thereby help catalyse the private sector.

https://www.business-standard.com/article/opinion/fiscal-vs-monetary-policy-under-uncertainty-121052401432_1.html

Sajjid Chinoy highlights two broad areas to think about in his article:

  1. Recalibrating To New Realities
  2. Making Space While The Sun Shines

There is much to agree with (and add to) in each of these cases, and I’ll do so in the next two blogposts.


But the bottomline across both articles, for students of macroeconomics, is this:

  1. Think of the economy as a human body. Like the human body, the economy is impossibly complex, and all of its underlying connections, mechanisms and responses aren’t entirely clear.
  2. Like a good diagnostician, it is important to keep tabs on a variety of different metrics on an ongoing basis. That’s what Sajjid Chinoy’s first article should mean to you – and therefore this blogpost is homework you really should do.
  3. Once you have enough data about the patient, a good doctor should be able to recommend potential cures. As with the human body, so with the economy: different doctors will recommend different treatments, and for many (mostly good) reasons. This is the part that gets really tricky.
  4. Sajjid Chinoy’s recommended course of treatment is his second article. As a student, you must try and understand why he recommends this course of treatment and no other, and ask yourself to what extent you agree with him. If you disagree with him (which is fine!), you should be able to tell yourself why – from a theoretical viewpoint.
  5. For example, you may disagree with him and say that India can still effectively deploy monetary policy. Maybe so, but you must have theoretically valid reasons for saying so.
  6. In fact, as a student, my advice to you would be to read an article willing yourself to disagree with the author. “How might this person be wrong?” is a great way to learn while reading. It is also a great way to keep yourself awake in class, trust me.
  1. Not all of the links will give you the exact answers, and that is deliberate. The last two questions being “unlinked” is also deliberate. If you are a student looking to work or study further in areas relating to macroeconomics, start building out a file with your answers to these questions (and many more!), and update the data on a regular basis.[]

What Else Is There But Stories?

I have spent the day immersed in Leave it To Psmith, and what a magnificent day it was. And I have now purchased Summer Lightning, and I refuse to feel the least bit guilty about it, so there.

On a related note, I also happened to read a (mostly) lovely essay by Salman Rushdie titled “Ask Yourself Which Books You Truly Love“:

All human life is here, brave and cowardly, honorable and dishonorable, straight-talking and conniving, and the stories ask the greatest and most enduring question of literature: How do ordinary people respond to the arrival in their lives of the extraordinary? And they answer: Sometimes we don’t do so well, but at other times we find resources within ourselves we did not know we possessed, and so we rise to the challenge, we overcome the monster, Beowulf kills Grendel and Grendel’s more fearsome mother as well, Red Riding Hood kills the wolf, or Beauty finds the love within the beast and then he is beastly no more. And that is ordinary magic, human magic, the true wonder of the wonder tale.

https://www.nytimes.com/2021/05/24/opinion/sunday/salman-rushdie-world-literature.html

And (or should the word be but?) because us economists are always supposed to look at all ides of the issue, here’s the other side of the spectrum:

As a simple rule of thumb, just imagine every time you’re telling a good vs. evil story, you’re basically lowering your I.Q. by ten points or more.

https://fs.blog/2012/01/the-danger-of-storytelling/

Here’s the full talk.

(And finally, do remember that The Truth Always Lies Somewhere In The Middle)