Imports, Exports and GDP

“The key is to understand that imports are also included in consumption, investment, and government spending. The real GDP breakdown looks like this:

  • GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

So you can see that while imports are subtracted from GDP at the end of this equation, they’re also added to the earlier parts of the equation. In other words, imports are first added to GDP and then subtracted out again. So the total contribution of imports on GDP is zero.”

That is an excerpt from a lovely little write-up by Noah Smith on his Substack, and one that I’ll be using whenever I teach macro. It’s lovely for many reasons, but most of all for the reason that the bullet point goes a very long way towards making the point that a lot of folks miss: you don’t get rich by importing less.

When I say “you”, I mean the country in question – and this equation, written out this way, helps us understand why. If you’re a student of macro, and are under the impression that India will get richer if only we imported lesser, think about the definition of GDP:

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

https://www.investopedia.com/terms/g/gdp.asp

If you think about it, how can imports possibly qualify as being produced within a country’s borders? As Noah says, the equation can also be written like this:

GDP = Domestically produced consumption + Domestically produced investment + Government spending on domestically produced stuff + Exports

https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r

Read the rest of Noah’s post, especially if you are a student of macroeconomics. It should help clear up a lot of basic, but important and often misunderstood ideas about GDP calculations.


https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.
On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Think about the previous section, and try and answer this question: is Russia poorer or richer or unchanged because Russia isn’t importing as much, as measured by GDP and changes in GDP?

Well, Russia may be worse off, and Russians may be worse off. It’s leader?

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The iif reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s gdp), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.
But such measures could take time to take effect. Even if the eu enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus (Emphasis added)

Macro is hard! But it also matters, especially at times such as these.

Critical Issues Confronting China Featuring Bert Hoffman

Via Noah Smith’s post on China’s growth prospects, which we covered this past Tuesday:

The Solow Model and China

If you don’t know what the Solow model is, here is a great place to get started:

There are 11 videos in that series, and if you can spare the time, please watch all of them. Just two a day (they’re not more than 5 minutes each), and you’ll be done come the weekend.

But in effect, here is what the Solow model says:

  1. Output for a nation is a function of three (actually four) things:
    1. Capital (K): Buidings, ports, dams… infrastructure, basically.
    2. Education Augmented Labor (eL): The amount of hours that a person is able to put in to their work, but with the built in assumption that an educated person is likely to be more productive than a person without education.
    3. Ideas: Read the paragraph below to get a sense of what this means in practice.

Think about this blogpost that you are reading. I wrote it using my laptop, which is my capital. I will spend about an hour (that’s my plan, I’ll update you towards the end of this post about how well it worked out) writing it, and that’s the labor that I’ll be putting into this post. The fact that I have been “educated” in economics should mean that this post will be easier to write for me than, say, a gardener. The gardener could have written this post as well, of course, but it’s safe to assume that she would first have had to learn about the Solow model, and that, presumably, would have taken longer.

So that’s K and eL where the output (this blogpost) is concerned. But now think about it this way: what if another person, with a similar level of economics education as mine were to write this blogpost instead of me? Would that person have chosen this video, and these paragraphs to explain the Solow model? Maybe they would have recommended some other video, or some other podcast, or chosen to share details of an online textbook in which the Solow model is explained. That’s one way to think about ideas.

And so when you combine the capital (the laptop), the labor (the time I spend on this blogpost, given my education levels) and the ideas (what I choose to put into this blog post, and how), you get the output you’re reading right now.

What if I double the capital? Will the blogpost be done in half the time? Say I have an external monitor attached to my laptop – will two screens mean finishing the blogpost in half the time? It will save some time, but not by a factor of two, surely. Trust me, I have tried.

What if I double the labor? Hire an assistant to write this blogpost with me? The way I work, trust me, it will probably take longer! What if I go get a post-doc, to augment my education? Will that save me time? The hysterical laughter you hear in the background is the response of any PhD/post-doc student anywhere in the world, and that sound means a loud and resounding no.

In a sense, the Solow model asks these and related questions, and answers them using some graphs and equations. Except, of course, the Solow model does it for not one guy writing one blog, but for an entire nation at a time. There is no sense in me explaining the whole model over here, for it would be a case of me reinventing what is already a very good wheel. Please watch the videos.


But the Solow model is a remarkably useful way to get a handle on the long run growth prospects of a country. Is India likely to grow in the future? Well, is it going to add to its capital stock? Yes. Is it going to augment it’s stock of education augmented labor? Yes. Is it likely to produce more ideas than it is right now? Yes. And so the growth prospects for India look reasonably good.

Of course, there is more to the Solow model. All of this holds true given a strong and stable political system, well established rules of law, and strong and capable institutions. But so long as you believe that these are likely to continue to be so in the Indian case, you should be bullish on India.

What about, say, Japan? It has a capital stock that is more in need of replacement than new construction ( a feature of the Solow model that we have not discussed here, called depreciation), so it is unlikely that it will grow its capital stock too much. Here’s an example of what I mean. What about it’s stock of education augmented labor? Well, the news ain’t very good. Ideas? Trending upwards, but not by much. So if I had to bet on which country would grow more over the next twenty years, I would bet on India, not Japan.

Bear in mind that this is a model, and like all models, it is an imprecise abstraction of reality. So it is possible that at the end of the twenty year period, we find out that I am completely wrong. But if you think the Solow Model is a reasonably good model, you ought to bet the way I did.


So what about China?

Well, now, that’s a whole different story, and one that Noah Smith talks about in a recent blog post. Long story short, he doesn’t think China’s growth prospects are that great.

But the story is a little more complicated than that. The Solow model is a good model, sure, but it’s not as if the Chinese authorities/experts aren’t aware of the problem. And in his blog post, Noah looks at arguments put forth by two people who know a thing or two about China, and analyzes them critically.

The first argument is that sure, China’s demographics are on a downward trend, but what if we raised the retirement age for Chinese workers? Would that not solve the problem? Noah says no, probably not, because firms made of exclusively old folks isn’t necessarily a good idea. I wholeheartedly agree.

What about adding to China’s urbanization, and therefore its infrastructure? After all, China’s urbanization rate is “only” 64%. The inverted quotes around only in the previous sentence is because we, in India, are officially at 31%, but as in the case of China, it very much is a function of how you define urbanization. But similarly, in China, the urbanization rate is actually way more than 64%, and the Lewis turning point has already taken place in China, or will do so any moment.

And about ideas, well, China is an even more complicated story. Noah makes the point that China’s industrial policy is essentially a one-man army that is trying something that has never been tried before, and Noah is betting on it not quite working out. And given the events of the last year and a half or so, it is hard to disagree.

And so the Solow Model would probably tell you that China is unlikely to grow as fast in the near future as it did in the recent past, and even if you take into account potential adjustments, it likely will still be the case that China’s growth rate will start to plateau.


Please, read the entire post by Noah. But if you are a student of economics who has not yet met the Solow Model, begin there, and then get on to Noah’s post – your mileage will increase considerably.

Have we become uniquely stupid?

For those of you who have read the essay, the title of today’s blogpost is a dead giveaway: I am referring to Jonathan Haidt’s essay in the Atlantic, titled “Why The Past 10 Years Of American Life Have Been Uniquely Stupid“. The subtitle is equally depressing: It’s Not Just a Phase.

It’s been clear for quite a while now that red America and blue America are becoming like two different countries claiming the same territory, with two different versions of the Constitution, economics, and American history. But Babel is not a story about tribalism; it’s a story about the fragmentation of everything. It’s about the shattering of all that had seemed solid, the scattering of people who had been a community. It’s a metaphor for what is happening not only between red and blue, but within the left and within the right, as well as within universities, companies, professional associations, museums, and even families.
Babel is a metaphor for what some forms of social media have done to nearly all of the groups and institutions most important to the country’s future—and to us as a people. How did this happen? And what does it portend for American life?

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

The essay is a lengthy read, but a rewarding one. Jonathan Haidt takes us through the evolution of the internet, with the emphasis on the social aspect really beginning to take off post 2010 or so, and gives us a book to read that goes on my to-read list: Nonzero: History, Evolution and Human Cooperation.

The next section is where the story really picks up, for we are introduced to the “villains” of the piece: the Like, Share and Retweet buttons. It’s not the buttons themselves that are to blame, of course, much like the atom not being at fault for the atom bomb. It’s what we have done with the Like, Share and Retweet buttons that is the problem:

By 2013, social media had become a new game, with dynamics unlike those in 2008. If you were skillful or lucky, you might create a post that would “go viral” and make you “internet famous” for a few days. If you blundered, you could find yourself buried in hateful comments. Your posts rode to fame or ignominy based on the clicks of thousands of strangers, and you in turn contributed thousands of clicks to the game.

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

Goodhart’s Law is massively underrated. Rather than optimizing for the quality of the content of one’s creation, we optimize for it’s virality. The virality ought to be a function of the quality, but we’ve skipped the intermediate step, with consequences that have become manifest and deep-rooted. Or as Jonathan Haidt puts it, “these platforms were almost perfectly designed to bring out our most moralistic and least reflective selves”.

He then goes on to quote from Madison’s Federalist No. 10 on the innate human proclivity towards “faction”.
I have watched “The Last Dance” on Netflix more times than I should have, but this reminds me of Michael Wilbon talking about how everybody in Chicago hated the Pistons (around the 28 minute mark in episode 4, if you’re interested). He repeatedly involves the phrase “this was personal”, and that’s one way to understand what factionalism means. Tribalism in sports, but elsewhere too, is the kind of factionalism you want to think about in this context, and you might also benefit from reading the transcript of Ezra Klein’s conversation with Tyler Cowen:

https://conversationswithtyler.com/episodes/ezra-klein-2/

Factionalism (or tribalism. I’m not sure if the two mean exactly the same thing in an academic sense, but I am using them interchangeably here) hasn’t necessarily gone down, but we seem to have found new things to be “tribal” about.

As I understand it, Haidt is making the point that our tribalism when it comes to politics is now more deep-rooted than ever, but is also more trivial than ever before. Which politician is wearing what kind of clothes for which occasion excites more debate online than substantive issues that warrant more debate. Or as I prefer to put it, our agreement with stated positions and policies is these days a function of who said it, rather than what has been said. Such tribal loyalty when it comes to close friends is one thing, although even that has its limits, but fealty of such an extreme nature when it comes to political discourse ought to worry most of us.

And as an aside, the last question that Tyler Cowen asks in that extract above is a question to which I don’t have a great answer. I agree with the point in his question, but like him, wonder about the underlying cause.


An extract twice removed now:

The digital revolution has shattered that mirror, and now the public inhabits those broken pieces of glass. So the public isn’t one thing; it’s highly fragmented, and it’s basically mutually hostile. It’s mostly people yelling at each other and living in bubbles of one sort or another.

https://www.vox.com/policy-and-politics/2019/12/26/21004797/2010s-review-a-decade-of-revolt-martin-gurri

Amit Varma made a very similar point in a recent podcast with Shruti Kapila recently, in which he pointed out that social media has, in effect, decentralized the news (I’m quoting from memory here, so please forgive me if I’ve got the exact wording wrong). Amit Varma says that this is on balance a good thing, but with some negative consequences. Jonathan Haidt disagrees:

Mark Zuckerberg may not have wished for any of that. But by rewiring everything in a headlong rush for growth—with a naïve conception of human psychology, little understanding of the intricacy of institutions, and no concern for external costs imposed on society—Facebook, Twitter, YouTube, and a few other large platforms unwittingly dissolved the mortar of trust, belief in institutions, and shared stories that had held a large and diverse secular democracy together.

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

Where do I fall on this Haidt-Verma spectrum? Closer towards the Haidt end, I’d say, but I do have to remind myself that I have written this and you are reading it, so maybe decentralization isn’t all that bad? But that’s as far as I’m willing to go – on balance, I find myself closer to Haidt’s position, at least for the moment.


But the enhanced virality of social media thereafter made it more hazardous to be seen fraternizing with the enemy or even failing to attack the enemy with sufficient vigor. On the right, the term RINO (Republican in Name Only) was superseded in 2015 by the more contemptuous term cuckservative, popularized on Twitter by Trump supporters. On the left, social media launched callout culture in the years after 2012, with transformative effects on university life and later on politics and culture throughout the English-speaking world.

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

Haidt is writing this from an American perspective, for an American audience. But we in India have our own share of names for The Other, don’t we? It’s not just the fact that we have relatively trivial tribalism in areas as important as political discourse, but the fact that the discourse itself is not just trivial, but downright nasty. And the nastier it gets, the higher the support from your own side!


I’ll skip talking about a couple of sections from Haidt’s essay, not because they’re not important, but because they aren’t directly relevant to us here in India. But the subtitle of his essay gets an entire section, where he speaks about how things are likely to get much worse in the years (months) to come:

in a 2018 interview, Steve Bannon, the former adviser to Donald Trump, said that the way to deal with the media is “to flood the zone with shit.” He was describing the “firehose of falsehood” tactic pioneered by Russian disinformation programs to keep Americans confused, disoriented, and angry. But back then, in 2018, there was an upper limit to the amount of shit available, because all of it had to be created by a person (other than some low-quality stuff produced by bots).
Now, however, artificial intelligence is close to enabling the limitless spread of highly believable disinformation. The AI program GPT-3 is already so good that you can give it a topic and a tone and it will spit out as many essays as you like, typically with perfect grammar and a surprising level of coherence. In a year or two, when the program is upgraded to GPT-4, it will become far more capable. In a 2020 essay titled “The Supply of Disinformation Will Soon Be Infinite,” Renée DiResta, the research manager at the Stanford Internet Observatory, explained that spreading falsehoods—whether through text, images, or deep-fake videos—will quickly become inconceivably easy. (She co-wrote the essay with GPT-3.)

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

Speaking of the amount of shit that had to be created by a person, read this article written by Samanth Subramanian in February 2017.


So what might be done? Jonathan Haidt has a three-pronged solution:

What changes are needed? Redesigning democracy for the digital age is far beyond my abilities, but I can suggest three categories of reforms––three goals that must be achieved if democracy is to remain viable in the post-Babel era. We must harden democratic institutions so that they can withstand chronic anger and mistrust, reform social media so that it becomes less socially corrosive, and better prepare the next generation for democratic citizenship in this new age.

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

He outlines the steps involved in each of these, and if you haven’t already, I would encourage you to go read the entire essay, and these outlines in particular. I find myself to be in broad agreement with both the suggestions as well as how they might be implemented, but also worry about whether we have the political and social will to actually do so.


Finally, a coda of sorts:

The most pervasive obstacle to good thinking is confirmation bias, which refers to the human tendency to search only for evidence that confirms our preferred beliefs. Even before the advent of social media, search engines were supercharging confirmation bias, making it far easier for people to find evidence for absurd beliefs and conspiracy theories, such as that the Earth is flat and that the U.S. government staged the 9/11 attacks. But social media made things much worse.

https://www.theatlantic.com/magazine/archive/2022/05/social-media-democracy-trust-babel/629369/

And I would feel very bad if you, the reader, were to read either my post or Haidt’s essay in order to confirm your already existing fears about the ill-effects of social media. And so I urge you to read this column by Tyler Cowen next:

Calling something “extremist” is not an effective critique. It’s a sign that the speaker or writer either doesn’t want to take the trouble to make a real argument, or is hoping to win the debate through rhetoric or Twitter pressure rather than logic. It’s also a bad sign when critics stress how social media have fed and encouraged “extremism.”


What the U.S. needs is more consideration of more extreme ideas. If you see someone inveighing against “extremism” or “extremist ideas,” beware: That is itself an extreme position. True moderation lies in calm and reasoned debate.

https://www.bloomberg.com/opinion/articles/2022-05-06/extremist-ideas-are-not-always-bad-and-are-often-popular

My take on this essay? I think Tyler is saying that we shouldn’t be throwing the baby out with the bathwater. Social media has done two things: made it easier to spread “extreme” ideas, and made it much more likely that we will react with extreme prejudice and nastiness to these ideas.

The first of these is A Very Good Thing and the second of these is a Very Bad Thing. But we would do well to hold on to the first, rather than abandon both.

How? Ah, now if only we had some extreme ideas about that.

The Case For Doubling Spending on R&D

Timothy Taylor, author of the blog The Conversable Economist, has a nice post out on the case for doubling R&D spending. He speaks of doubling spending on R&D by the US government, but the point is equally applicable to all governments, including India’s.

The post is a reflection on a chapter in an e-book published by the Aspen Group. The chapter has been written by Benjamin F. Jones, and is titled “Science and Innovation: The Under-Fueled Engine of Prosperity.” (pp. 272 in the PDF that has been linked to above). Timothy Taylor shares an extract that ought to familiar to us in terms of the direction in which scientific progress has been headed, and perhaps even the magnitude – but every now and then, it helps to remind ourselves how far we’ve come:

Real income per-capita in the United States is 18 times larger today than it was in 1870 (Jones 2016). These gains follow from massive increases in productivity. For example, U.S. corn farmers produce 12 times the farm output per hour since just 1950 (Fuglie et al. 2007; USDA 2020). Better biology (seeds, genetic engineering), chemistry (fertilizers, pesticides), and machinery (tractors, combine harvesters) have revolutionized agricultural productivity (Alston and Pardey 2021), to the point that in 2018 a single combine harvester, operating on a farm in Illinois, harvested 3.5 million pounds of corn in just 12 hours (CLASS, n.d.). In 1850, it took five months in a covered wagon to travel west from Missouri to Oregon and California, but today it can be done in five hours—traveling seven miles up in the sky. Today, people carry smartphones that are computationally more powerful than a 1980s-era Cray II supercomputer, allowing an array of previously hard-to-imagine things—such as conducting a video call with distant family members while riding in the back of a car that was hailed using GPS satellites overhead.

https://conversableeconomist.com/2022/04/19/the-case-for-doubling-us-rd-spending/

The latter part of the extract, which I’ve not quoted here, is about the increase in life expectancy, and is also worth reading. Post the extract, Timothy Taylor goes on to speak about how it is important to celebrate the fact that we were able to push out vaccines in the space of a little less than a year, which is a stellar achievement. And indeed it is! You might have differing opinions about the efficacy of these vaccines, and you might even be of the opinion that the firms doth profit too much from their creation, but I hope you agree that the fact that we were able to do this at all, and as rapidly as we did, is testimony to have far we have come as a civilization.

As an aside, read also this Washington Post editorial about the discovery of the virus, and how the message didn’t get out nearly quickly enough (duh.)

Both points are important to understand as students. Which two points, you ask? That progress as a civilization depends on two things: the rate of technological progress, and the underlying culture that enables it, embraces it and uses it properly. For reading the editorial, I came away with the opinion that China had the technology, but lacked the culture.

I would urge you to think about how this might resonate with each of us as individuals: we have the technology to be ever more productive, and the technology improves every year. But have we built for ourselves a culture of allowing ourselves to use this technology as efficiently as we should? What about the institutions that each of us work for or study in? What about the countries we stay in? Technological progress without an enabling culture doesn’t work, and as students of productivity (that’s one way to think about studying economics), you need to be students of both aspects.


Anyway, back to scientific progress. One of the points that Jones makes in his chapter is that the US has been lagging behind the current leaders on two different metrics: total R&D expenditure as a percentage of GDP, and public R&D expenditure as a share of GDP. China’s R&D expenditure has seen an annual increase of 16% since the year 2000, while the US is at 3% annual growth.

What about India, you ask? Here’s a chart from an Indian Express article about the topic:

https://indianexpress.com/article/opinion/columns/unesco-stats-on-global-expenditure-on-r-d-7775626/

As the article points out, let alone trying to compute the rate of increase, we actually seem to be on a downward trajectory for a metric called GERD, which stands for Gross Domestic Expenditure on Research and Development. Here’s the link to the data from the World Bank.

https://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS?end=2018&locations=IN&start=2000&view=chart

We clearly need to do better. That article in the Indian Express ends with this paragraph:

A commitment from the Centre to raise GERD to 1 per cent of the GDP in the next three years could be one of the most consequential decisions taken in the 75th year of India’s independence.

https://indianexpress.com/article/opinion/columns/unesco-stats-on-global-expenditure-on-r-d-7775626/

And that is a nice segue back to the blog post that we started today’s post with. If you’re asking (and I hope you are!) questions along the lines of why it should be the government and not the private sector, I have two answers for you. One, the truth always lies somewhere in the middle, and so you need both private and government spending. And two, there is an economic argument for your consideration:

Jones’s essay reviews the argument, fairly standard among economists, that a pure free market will tend to underinvest in new technologies, because in a pure free market the innovator will not capture the full value of an innovation. Indeed, if firms face a situation where unsuccessful attempts at innovation just lose money, while successful innovations are readily copied by others, or the underlying ideas of the innovation just lead to related breakthroughs for others, then the incentives to innovate can become rather thin, indeed. This is the economic rationale for government policies to support research and development: direct support of basic research (where the commercial applications can be quite unclear), protection of intellectual property like patents and trade secrets, tax breaks for companies that spend money on R&D, and so on.

https://conversableeconomist.com/2022/04/19/the-case-for-doubling-us-rd-spending/

Now, how much of the lifting should be done by government, and how much should be done by the private sector is a debate that will never end, but here is an EFE post that might help you start to think through the process.


Timothy Taylor and Benjamin F. Jones argue that the US needs to spend more on R&D, and that the U.S. government should do more in this regard.

My contention is two-fold: that this point applies with even more urgency in the Indian context, and that an enabling culture is an equally important concept, but an underrated one the world over.

On Xi Jinping’s Stubborn Attachment(s)

These are not good times for the credibility of China’s GDP growth targets. Just weeks after unveiling an ambitious target of 5.5% real GDP growth for 2022, the central government effectively ensured that target will not be met by requiring local governments to impose strict lockdowns to contain the spread of Covid-19. The restrictions cover most of China’s major cities, have had a clear negative impact on economic activity in March that will only worsen in April.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

So begins a thought provoking blog post on China’s growth prospects for this year, written by Andrew Batson. I’m a very (very!) amateur student of China, and follow a more or less random group of people on topics related to China – but Andrew Batson’s blog, I think, should definitely be on everybody’s list.

This one speaks about growth prospects in China this year, but so much else besides. Let’s learn a little bit about China by parsing through it.


The first point that he makes is that growth targets this year are all but likely to be missed. This, of course, is because of the lockdowns in Shanghai and other parts, and pretty much everybody knows that they’re not going well – and that’s putting it mildly. Targets were missed last year, and the year before – so why, one might be entitled to ask, should one have them at all in the first place?

There’s shades of Goodhart’s Law in the paragraphs that follow, and when I read the piece the first time, my blogging antennae were up. Aha, I thought to myself, one more post in an ever increasing canon. But the post then moves in (for me) an entirely unexpected direction, and in a way that makes it even more interesting.

Targeting GDP growth, Batson says, is not A Perfect Thing, but is, all things considered, Still A Good Thing Given The Alternatives.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

One way to understand Batson’s defense of GDP growth targets is by internalizing what I think is his key point: giving up on a GDP growth target doesn’t mean there will be no targets – it simply means there won’t be economic growth targets.

That is to say (and this is my understanding of his point), it’s not as if giving up on GDP growth targets will mean a very laissez faire approach to the economy. Instead, China will be set other, non-economic targets. Such as what, you ask?

…“regulatory storm” of 2021 with its multitude of highly interventionist policies aiming to reshape entire industries. Limiting the power of large private companies was even a fairly explicit goal: it’s probably not a coincidence that the main targets of last year’s political-regulatory campaigns were real estate and the internet, the two economic sectors that have created the biggest private-sector fortunes. All of this was certainly enabled by Xi’s dictum that there are more important things than GDP growth. The costs and economic downsides of the regulatory storm were put aside in favor of other goals.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

Regular listeners of Amit Varma’s excellent podcast, TSATU will no doubt be aware of the line “Politics is downstream from culture”. The quote is originally by Breitbart, of course, as Amit always points out. The reason I bring it up over here is because economic growth, if you ask me, is downstream of politics. In this framing, economic growth serves political needs, and those political needs are downstream of culture.

Rarely does one get to quote Brietbart in one paragraph and then follow it up with a supporting quote that references Lenin, but hey, welcome to 2022:

…China’s Leninist political system, which is organized around mobilizing officials to direct social transformation. As Ken Jowitt put it: “The definitional tendency of Leninist regimes [is] their attempts to control and specify the substantive dimensions of social developments, not merely the framework within which such developments occur.”

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

As Andrew Batson goes on to argue in the following paragraphs, de-emphasizing growth targets in a liberal political framework is very different from de-emphasizing them in a Chinese set-up. The focus on growth for its own sake is very different from the focus on growth to serve other aims. Batson argues that Deng Xiaoping was optimizing for economic growth, and that Xi Jingping is optimizing for national greatness. National greatness includes, but never as a primary target, economic growth.

But that pursuit of national greatness, perhaps, has been taken too far in Chin’s case:

In December, when when Xi chaired the annual Central Economic Work Conference, the signal was clear: the priority is now the “stability” of the economy.
Since then, various political slogans and campaigns have been much less in evidence and the focus has been on more practical short-term measures. Senior officials have even promised not to introduce policies that “adversely affect market expectations”–effectively admitting that they had been doing just that in the recent past.

https://andrewbatson.com/2022/04/18/why-gdp-growth-targets-are-underrated/

I’ve said it before, and I’ll say it again, and this is applicable to individuals as much as it is to nations. Be very clear about the answer to that irritatingly simple question:

What are you optimizing for?

About This Measurement Business

(C) GDP figures are “man-made” and therefore unreliable, Li said. When evaluating Liaoning’s economy, he focuses on three figures: 1) electricity consumption, which was up 10 percent in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged. By looking at
these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are “for reference only,” he said smiling.

https://wikileaks.org/plusd/cables/07BEIJING1760_a.html

This is an excerpt from the Wikileaks archive, and people familiar with modern economic history will know it all too well. This is, of course, the famous Li Keqiang index. If you prefer, you can read the original Economist article about it, although for once, the trademark Economist pun in the headline falls short of their typically high quality.

GDP measurements have always been tricky, and reading about GDP – it’s evolution, the data collection, the computation and the hajjar problems that arise from there – should be mandatory for any student aspiring to learn economics. Here’s a post from six years ago about some sources, if you’re interested.


But back to that excerpt above. What Li Keqiang was saying was that GDP statistics in China would often give a misleading picture, and he preferred to reach his own conclusions on the basis of other economic data. His preferred metrics were the ones mentioned in the abstract above: electricity consumption, volume of rail cargo and loans disbursed. Think of it this way: he’s really asking three questions. Is stuff being produced? Is stuff being moved around? Is stuff being purchased?

But what about covid times? Do these measures stand up, or do we need new proxies for GDP?

The variant’s speed also means that China’s economic prospects are unusually hard to track. A lot can happen in the time between a data point’s release and its reference period. The most recent hard numbers on China’s economy refer to the two months of January and February. Those (surprisingly good) figures already look dated, even quaint. For much of that period, there was no war in Europe. And new covid-19 cases in mainland China averaged fewer than 200 per day, compared with the 13,267 infections reported on April 4th. Relying on these official economic figures is like using a rear-view mirror to steer through a chicane.
For a more timely take on China’s fast-deteriorating economy, some analysts are turning to less conventional indicators. For example, Baidu, a popular search engine and mapping tool, provides a daily mobility index, based on tracking the movement of smartphones. Over the seven days to April 3rd, this index was more than 48% below its level a year ago.

https://www.economist.com/finance-and-economics/omicron-is-dealing-a-big-blow-to-chinas-economy/21808576

But as the article goes on to say, this metric will tell you about movement across cities. But metro traffic gives you an idea of intra-city mobility, as do courier company express deliveries (and we did some very similar exercises in India during the lockdowns, of course. Here’s one example for Pune district.)


But the point isn’t just to come up with what else might be useful as GDP proxies. A follow-up question becomes equally important: do the GDP statistics make sense? As the Economist articles says, good numbers for metrics such as investment in fixed assets are hard to square with declines in steel output. The article contains many other such examples, and what you should take away as a student is your ability to develop a “smell” test for a given economy. Don’t take the reported numbers at face value, but “see” if they seem to be in line with other statistics about that economy.

I really like this article as an introduction to this topic because it also hints at how statisticians need to be especially careful about comparing data over time. Weekly declines might happen because of festivals, bad weather or a thousand other things, which may of course be going on along with pandemic induced lockdowns. Teasing out the effects of just one aspect isn’t an easy thing to do.

And finally, think about how you can apply this lesson in other domains! Should an interviewer look only at marks, or try and figure out other correlates. Or, as Mr. Keqiang puts it, are marks “for reference only”? What about quarterly earnings reports? Press releases? Smell tests matter, and the earlier you start developing them, the better you get at detecting, and calling bullshit.


And finally, the concluding paragraph from the article we’ve discussed today:


To help avoid some of the traps lurking in these unconventional indicators, Mr Lu and his team watch “a bunch of numbers, instead of just one”. In a recent report he highlighted 20 indicators, ranging from asphalt production to movie-ticket sales. “If seven or eight out of ten indicators are worsening, then we can be confident that GDP growth is getting worse,” he says. Right now, he thinks, the direction is clear. “Something must be going very wrong.”

https://www.economist.com/finance-and-economics/omicron-is-dealing-a-big-blow-to-chinas-economy/21808576

Indeed.

On Sri Lanka

Back in 2014, out of the blue, I got the chance to travel to Sri Lanka thrice in the space of two months for work. It was my first visit to the country, and I haven’t been back since. I spent time in Galle, Colombo and a place called Puttalam. As with most other people who have been to the country, I found it to be a beautiful place with fabulous food. Oh, the food. What food it was.

And the deep irony, of course, is that the current tragedy revolves so much around the same word: food. Only now, there simply isn’t enough of it.

But what happened, exactly? How did Sri Lanka get to where it is today?


The answer to that question must necessarily be another one: how far back do you wish to go? To borrow an analogy from another field, where should you begin if you want to explain the 2008 Great Financial Crisis? Should you begin with Bear Sterns going belly up in March 2008? Or should you begin with low interest rates in the early 2000’s? Maybe 9/11 and the lowering of interest rates immediately after? The S&L crisis of 1984? How about tulips in the 16th century?

In Sri Lanka’s case, thanks to the excellent Amol Agarwal, let’s begin with a book written by the son of the guy who founded Bata shoes:

At that time, the only oasis of peace in the area was Sri Lanka, or Ceylon as it was called before decolonization. When I first went there in the late 1940s, it was a Shangri- la full of smiling people, ambling elephants and king coconuts with delicious milk to quench one’s thirst. Almost in defiance of the horrors that were raging all around it, Ceylon was an island of tranquility and racial tolerance. Forty years later the Indian subcontinent, along with Singapore, Malaysia, Thailand and Indonesia all enjoy peace and varying degrees of prosperity, and our enterprises in these countries are among the strongest pillars of the Bata organization.

https://www.amazon.com/Bata-Shoemaker-World-Thomas-J/dp/0773724168

But then things started to go wrong in 1948, and who better than Samanth Subramanian to make a complicated history simple to understand? Read the entire book, but the introduction is a good way to come to grips with how things started tear apart at the seams:

It is curious to locate the proximate cause of a war in something as noble as a desire for education. When Sri Lanka broke free of British rule in 1948, the seats in its universities were occupied to disproportionately high levels by the minority Tamils, who through quirks of colonial history spoke better English and were better educated than the majority Sinhalese. The Tamils then went on, after university, to fill the civil service, the country’s most reliable provider of employment at the time. To the country’s Sinhalese who suddenly found themselves empowered with a vote, and therefore to the government, this state
of affairs appeared too lopsided and unfair to continue. When laws and quotas were enacted to protect the interests of the Sinhalese, the Tamils felt they were being discriminated against. The frictions between the two communities erupted repeatedly into ghastly riots; in the worst of them, the Black July riot in 1983, roughly 3,000 people were killed, many of them burned alive. Tamil houses and shops were looted and burned, and 150,000 Tamils were rendered homeless.
When a clutch of Tamil militant groups had begun to emerge in the 1970s, to agitate for a free Tamil state, they found only a trickle of willing recruits; after Black July, though, they were flooded by young
men and women wanting to fight, and none more so than the Tigers. Starting as a ragtag outfit carrying out the odd guerrilla attack, the Tigers grew into a fearsome terrorist organization. They ran arms and drugs, pulled in funds from a Tamil diaspora scattered across the planet, killed thousands of civilians, assassinated presidents and prime ministers, and perfected the art of the suicide bomber. They kept their own people, the Tamils, in line by intimidation and murder. In their full pomp, the Tigers controlled vast wedges of territory in the north and east of Sri Lanka, where flat, hot, sandy coasts meld gradually into jungle. Here they ran their own country in all but name, collecting taxes and policing the streets and adjudicating disputes. But the Sri Lankan state was always just outside the door, impatient to snatch back its land, working itself up into a state of angry nationalism.
Buddhism, the religion of most Sinhalese, developed a vocal right wing; its monks entered politics, pressed for a more merciless war, and dreamed of a purely Buddhist island.

Introduction, This Divided Island (Life, Death and The Sri Lankan War) by Samanth Subramanian

Even by my usual standards, this is a bit of a whopper, this extract, but I hope it nudges you into reading the entire book. (Actually, given that it is Samanth Subramanian we’re talking about, pick up anything written by him. It’s guaranteed value for money.)

The war ended, finally, in the year 2009, but it ended with a very high cost. The Wikipedia article serves as an introduction to the war, and Samanth’s book is a deep, thought-provoking reflection on the aftermath.


That’s a ridiculously brief background, and now let’s get down to the economy. The Sri Lankan economy, much like the Indian economy, is mostly a service based economy. Around sixty percent of their GDP comprises of services today, but that’s where the similarity with the Indian economy ends. A large chunk of this sixty percent, as you might imagine, is down to the tourism sector. And the pandemic has devastated this segment – not just in Sri Lanka, of course, but the effects are felt with much more severity in a nation that is so very dependent on it.

But it gets worse!

The economy is highly-dependent on imports for essential items such as food, and oil. The economy finances these imports mainly via agricultural exports (tea, rubber, and coconut), industrial products (textiles), and remittances from abroad. The revenues from exports, and remittances have not covered the cost of imports, and Sri Lanka has always been in a current account deficit (CAD). The average CAD in 2010-19 was around 1.2 percent of GDP.
The CAD has been met mainly by the government borrowing from abroad. As the government borrowing from abroad has been larger than the CAD, the balance has been pegged to the foreign exchange reserves. What can one make of an economy where the forex reserves consist of mainly borrowings from abroad!

https://www.moneycontrol.com/news/opinion/how-sri-lanka-reached-this-economic-precipice-8314151.html

So an economy that was, at best, precariously placed during the Covid-19 pandemic. And then, of course, going 100% organic.

Here’s a part of the conclusion from Seeing Like a State, by James C. Scott:

Take small steps: In an experimental approach to social change, presume that we cannot know the consequences of our interventions in advance. Given this postulate of ignorance, prefer wherever possible to take a small step, stand back, observe, and then plan the next small move. As the biologist J. B. S. Haldane metaphorically described the advantages of smallness: “You can drop a mouse down a thousand-yard mineshaft; and on arriving at the bottom, it gets a slight shock and walks away. A rat is killed, a man broken, a horse splashes.”

Seeing Like a State: How Certain Schemes to Improve The Human Condition Have Failed, by James C Scott

Or, if you prefer pithier statements, Deng Xiaoping’s famous dictum about crossing the river by feeling the stones comes to mind (although the quote isn’t originally by him). But Sri Lanka, of course, went straight to 100% organic farming, and well, if you’ve read even a single newspaper in the last two months or so, you know how that turned out.

The rest of the story is predictably depressing, and depressingly predictable. Rapidly depleting forex reserves, a drying up of foreign investment, stratospheric inflation, a weakened currency and all the rest of it.

And the knock-on effects of each of these on the ordinary person on the street are equally horrible. We’ve all heard about postponement of exams because of a lack of ink, long lines at petrol pumps, rising protests, people fleeing the country and so on.

And most tragic of all perhaps, is the ostrich-like approach of the government, which insists on coming up with ridiculous (there really is no other word) responses in terms of policy making. Long story short, this is a problem that is going to get much, much worse before it gets better.


I’ve tried to keep the story as simple as possible, but if you’re looking for a good in-depth read about this, here are some recommendations:

  1. Via Splainer.in (which you really should subscribe to!), an excellent in-depth macro analysis of the crisis, but in English (with jargon explained at the end, imagine!)
  2. The political fallout, which is rapidly evolving, and may well be out of date by the time you read this.
  3. Best of all, try and play around with the data if you happen to be a student of macroeconomics. What charts and tables would you create using this data, for example, and why? Best of all, pick an article such as the first one here, and try and see how many of these charts you can recreate in Excel. Trust me, ’tis the best way to learn.

Stephen Kotkin on Putin, Russia and the West

That title is partially borrowed from the subtitle of the New Yorker piece, and I’d strongly urge all of you to read it in its entirety.

I know next to nothing about geopolitics (which is one reason why I enjoyed reading the interview so much), and my notes that follow below aren’t so much about my take on the geopolitical aspects. Rather, they’re about reading this interview as a student of economics, and asking how much of what I know helps me understand the points being made. Simply put, what economic principles are helpful in understanding this interview? And as always, how can I apply these lessons and realizations while reading about geopolitics in general?


  1. “Was Iraq the way it was because of Saddam, or was Saddam the way he was because of Iraq? In other words, there’s the personality, which can’t be denied, but there are also structural factors that shape the personality. One of the arguments I made in my Stalin book was that being the dictator, being in charge of Russian power in the world in those circumstances and in that time period, made Stalin who he was and not the other way around.”
    ..
    ..
    Is there causality, and which way does it run, is a question that seemingly occupies the minds of most economists today. But as you can see from this excerpt, the question matters in other contexts too. And in these other contexts, you don’t have access to “data” that you can use to run a model that “establishes” causality one way or the other. Think long and hard about causality, and across multiple contexts, and revel in the confusion that it causes in your mind. If thinking about causality does not confuse you, you aren’t thinking hard enough!
    ..
    ..
  2. “Instead of getting the strong state that they want, to manage the gulf with the West and push and force Russia up to the highest level, they instead get a personalist regime. They get a dictatorship, which usually becomes a despotism. They’ve been in this bind for a while because they cannot relinquish that sense of exceptionalism, that aspiration to be the greatest power, but they cannot match that in reality. Eurasia is just much weaker than the Anglo-American model of power. Iran, Russia, and China, with very similar models, are all trying to catch the West, trying to manage the West and this differential in power.”
    ..
    What are you optimizing for? Growth for it’s own sake, because it is fundamentally a good thing, or growth in order to achieve another end (whatever that end may be)? Does the answer matter in terms of how you’ll achieve said growth, and if so, with what consequences? Is there a stable way to grow, as opposed to potentially unstable ways? How should one, as an Indian, think about the answers to these questions?
    ..
    ..
  3. “And so we think, but we don’t know, that he is not getting the full gamut of information. He’s getting what he wants to hear. In any case, he believes that he’s superior and smarter. This is the problem of despotism. It’s why despotism, or even just authoritarianism, is all-powerful and brittle at the same time. Despotism creates the circumstances of its own undermining. The information gets worse. The sycophants get greater in number. The corrective mechanisms become fewer. And the mistakes become much more consequential.”
    ..
    ..
    Does information matter? We teach, in economics, that prices are a way of communicating information. Need prices always be thought of as being pecuniary in nature? And if not, how does the stymieing of information flows affect the entity being analyzed? How should one use this thought exercise to think about setting up organizations?
    ..
    ..
  4. “But it turned out that “the television President,” Zelensky, who had a twenty-five-per-cent approval rating before the war—which was fully deserved, because he couldn’t govern—now it turns out that he has a ninety-one-per-cent approval rating. It turned out that he’s got cojones. He’s unbelievably brave. Moreover, having a TV-production company run a country is not a good idea in peacetime, but in wartime, when information war is one of your goals, it’s a fabulous thing to have in place.”
    ..
    ..
    This reminds me of Churchill during the second world war, but I mention that only in passing. But there’s that question again: what are you optimizing for? I don’t know enough about Ukrainian politics to even try and guess what the Ukrainian population was optimizing for when they elected Zelensky into power, but the broader take-away for me is that human resources are multi-dimensional. If person x turns out to not be good at task y, it’s not necessarily the end of the road for person x in your organization. This seems like an obvious statement to make, but the longer you work in an organization, the more you realize that this seemingly obvious lesson is often ignored.
    ..
    ..
  5. “The West is a series of institutions and values. The West is not a geographical place. Russia is European, but not Western. Japan is Western, but not European. “Western” means rule of law, democracy, private property, open markets, respect for the individual, diversity, pluralism of opinion, and all the other freedoms that we enjoy, which we sometimes take for granted.”
    ..
    ..
    What are the opportunity costs of being the west? What are the opportunity costs of trying to be like the west? What are the opportunity costs of deciding to not be like the west? These are surprisingly deep questions!
    ..
    ..
  6. “It’s a military-police dictatorship. Those are the people who are in power. In addition, it has a brilliant coterie of people who run macroeconomics. The central bank, the finance ministry, are all run on the highest professional level. That’s why Russia has this macroeconomic fortress, these foreign-currency reserves, the “rainy day” fund. It has reasonable inflation, a very balanced budget, very low state debt—twenty per cent of G.D.P., the lowest of any major economy. It had the best macroeconomic management.”
    ..
    ..
    Amit Varma is fond of reminding his listeners that politics is downstream of culture. Well, economics is downstream of politics. Us economists, we tend to forget this. We should try not to, and that comes with (at least) two implications. Any economist who chooses to not study politics or culture is short-changing themselves. And any economist who makes recommendations while ignoring the cultural milieu and political context is always going to be sorely disappointed with the eventual outcome.
    Students who encounter econometrics for the first time are wont to forget the “econo” bit and focus on the “metrics” bit. If only I had a penny for the number of times I’ve been asked a variant of the following question: I have an econometric method I want to use – can you recommend a good dataset? Similarly, I think we are wont to forget the “social” bit in the phrase “social science”. We do so at our own peril.
    ..
    ..
  7. When asked about China, Chinese growth over the last three decades, and the Chinese Communist Party taking credit for it, this was Professor Kotkin’s response: “Who did that? Did the Chinese regime do that? Or Chinese society? Let’s be careful not to allow the Chinese Communists to expropriate, as it were, the hard labor, the entrepreneurialism, the dynamism of millions and millions of people in that society.”
    ..
    ..
    Sure, each of these are a factor – of that there is no doubt. But is it the case that the Chinese Communist Party had no role to play at all? And if it had some role to play, what was the extent? Is it replicable, this role, in other countries in other contexts? Is this a desirable role? Or do “better” alternatives exist? If so, what are they? Development economics is a very hard, and therefore a very fascinating subject.
    ..
    ..
  8. “There’s never a social contract in an authoritarian regime, whereby the people say, O.K., we’ll take economic growth and a higher standard of living, and we’ll give up our freedom to you. There is no contract. The regime doesn’t provide the economic growth, and it doesn’t say, Oh, you know, we’re in violation of our promise. We promised economic growth in exchange for freedom, so we’re going to resign now because we didn’t fulfill the contract.”
    ..
    ..
    Are there countries that have such a social contract? Read more about Singapore! (To be clear, I am not endorsing the Singaporean model, or any other model.) Here is a good book to get started.
    ..
    ..
  9. “They [Russia] have stories to tell. And, as you know, stories are always more powerful than secret police. Yes, they have secret police and regular police, too, and, yes, they’re serious people and they’re terrible in what they’re doing to those who are protesting the war, putting them in solitary confinement. This is a serious regime, not to be taken lightly. But they have stories. Stories about Russian greatness, about the revival of Russian greatness, about enemies at home and enemies abroad who are trying to hold Russia down. And they might be Jews or George Soros or the I.M.F. and Nato.”
    ..
    ..
    Stories matter, but beware of stories. Humanity is all about stories, including the idea of the existence of nations (think about it). Stories, when they work well, are all about uniting folks behind a story. Stories, when they don’t work well, are all about an idea being pushed too far. The truth lies somewhere in the middle, and figuring out exactly where is a Sisyphean task that humanity is perennially engaged with.
    ..
    ..
  10. “The biggest and most important sanctions are always about technology transfer. It’s a matter of starving them of high tech. If, over time, through the Commerce Department, you deny them American-made software, equipment, and products, which affects just about every important technology in the world, and you have a target and an enforceable mechanism for doing that, you can hurt this regime and create a technology desert.”
    ..
    ..
    Here’s the flipside of that question: why is it the case that the “West/America” has all this awesome technology and the rest of the world does not? Ask yourself this question: the next Elon Musk, wherever they may be in this world today – are they likely to migrate to Russia, or to America? Think through this question, and then think about cultural, political and economic aspects of a free society that is open to migration. Go back to pt. 5 and think about it once again.
    ..
    ..
  11. “What are the dynamics there with the regime? You have to remember that these regimes practice something called “negative selection.” You’re going to promote people to be editors, and you’re going to hire writers, because they’re talented; you’re not afraid if they’re geniuses. But, in an authoritarian regime, that’s not what they do. They hire people who are a little bit, as they say in Russian, tupoi, not very bright. They hire them precisely because they won’t be too competent, too clever, to organize a coup against them. Putin surrounds himself with people who are maybe not the sharpest tools in the drawer on purpose.”
    ..
    ..
    This excerpt helps us understand what Putin is optimizing for, to the extent that you agree with it. What are the opportunity costs of this optimization? Does this organizational set-up help the long term growth prospects of Russia? How should you think about the nature of organizational set-ups in other nations, in governments, firms and institutions? How should you think about building up your team, in your line of work? Read The Hard Thing About Hard Things, chapter 5 in particular.
    ..
    ..
  12. When asked about Putin and the nuclear option, this was the response: “I think there’s no doubt that this is what he’s trying to do. The problem is, we can’t assume it’s a bluff. We can’t assume it’s a pose of being crazy, because he has the capability; he can push the button.”
    ..
    ..
    It’s painfully hard, thinking through this!
    ..
    ..
  13. “Steve, Sun Tzu, the Chinese theorist of war, wrote that you must always build your opponent a “golden bridge” so that he can find a way to retreat. Can the United States and nato help build a way for Russia to end this horrific and murderous invasion before it grows even worse?”
    ..
    ..
    This is an important lesson, particularly for students. You’ll meet folks in a professional context who you do not like, do not enjoy working with, and have frequent quarrels with. You’ll meet folks who are at the opposite end of this spectrum, and most will lie in the middle of this spectrumThis is a guarantee, because that how statistics works.
    Your job is not to defeat the folks in the first set, but to work with them. The sooner you learn this lesson, the better your work and career will be.
    ..
    ..
  14. When asked about the Biden administration: “They’ve done much better than we anticipated based upon what we saw in Afghanistan and the botched run-up on the deal to sell nuclear submarines to the Australians. They’ve learned from their mistakes. That’s the thing about the United States. We have corrective mechanisms. We can learn from our mistakes. We have a political system that punishes mistakes. We have strong institutions. We have a powerful society, a powerful and free media. Administrations that perform badly can learn and get better, which is not the case in Russia or in China. It’s an advantage that we can’t forget.”
    ..
    ..
    Competition matters. Insulating oneself from competition is the surest path to slow but guaranteed institutional decay. Individuals, institutions and nations tend to not like this lesson, but it is an unavoidable truth.

Game Theory and Nuclear War

What a wonderfully cheerful topic with which to get back to work, eh?

But then again, we’ve to live up to our billing of being the dismal science, and what could be more fitting than trying to analyze the chances of nukes going off sometime this year?


Timothy Taylor kicks things off, by reminding us of the canoe and the rowboat:

For those of you who have not experienced the pleasure of gliding across a northwoods lake or river in a canoe, I’ll just note that a canoe has a point at both ends, which make it maneuverable but also potentially tippy. In contrast, a rowboat has a point at one end but is flat on the other end, which makes it more stable. From this standpoint, are small conflicts between great powers “better” in some sense than larger ones? Yes. But if there is too great a willingness to engage in many smaller conflicts, then the chance that one of them will escalate in the tippy canoe to a larger conflict is worrisome. Is a fight more likely to dump you into the water in a canoe or a rowboat? Once the fight starts, a canoe is tippier. But if neither party wants to end up in the water (in this case, a metaphor for a much broader war or a nuclear exchange), then they might be less likely to start a fight in a canoe than in a rowboat in the first place.

https://conversableeconomist.com/2022/03/06/fighting-in-a-canoe-thomas-schelling-redux/

Read, as always, the entire post. But one point in particular stood out in that post:

There are too many imponderables that could be affecting Vladimir Putin’s decision process to make any definite claims, but one wonders if his decision to invade Ukraine might have been affected by earlier western actions. For example, what if there had been a stronger western reaction when Soviet troops essentially levelled the city of Grozny in Chechnya about 20 years ago? What if the countries of western Europe had been more willing to keep their promises to commit 2% of GDP to military spending over the last two decades? What if Germany had not been so extraordinarily eager to become dependent on inflows of Russian-exported oil and gas? What if various assassinations that appeared to be engineered by Russia had been met with greater pushback? What if the Winter Olympics in 2014 had not been held in Sochi? What if the Russia-Ukraine conflict of 2014, which ended with Russia annexing Crimea and other areas, had received greater pushback when Joe Biden was vice-president?

https://conversableeconomist.com/2022/03/06/fighting-in-a-canoe-thomas-schelling-redux/

Timothy Taylor’s point in the excerpt above is that “saving face” isn’t so much about pride and honor in the present instance (whatever that instance may be), but rather about sending a message about our likely actions in the future. And that the west, because of their earlier actions and decisions, may well have signaled to Putin that they weren’t quite as decisive as they would have been in the past.

Which is a useful segue into reading an NYT profile of Putin:

An important moment in this development appears to have come with Mr. Obama’s last-minute decision in 2013 not to bomb Syria after Bashar al-Assad, the Syrian president, crossed an American “red line” against using chemical weapons. Mr. Obama took the case for war to a reluctant Congress instead, and under the lingering American threat and pressure from Moscow, Mr. al-Assad agreed to the destruction of the weapons.
The hesitation appears to have left an impression on Mr. Putin. “It was decisive, I think,” said Mr. Hollande, the former French president, who had readied warplanes to take part in the planned military strike. “Decisive for American credibility, and that had consequences. After that, I believe, Mr. Putin considered Mr. Obama weak.”

https://www.nytimes.com/2022/03/26/world/europe/vladimir-putin-russia.html

Basic game theory is actually – to use a strong word – useless. And the reason it is useless is because basic game theory assumes two things:

  1. Rationality on part of the actors
  2. Some prior knowledge about the payoffs associated with a game.

But as Noah Smith points out on his substack (the post, alas, is paywalled):

The first is that game theory fundamentally assumes that the players are rational. You have to be a cold calculating machine to think through all the strategies and pick the one that yields the greatest payoff. But it’s not clear that real actors are always rational. Putin might simply be nuts.
In fact, there’s a whole theory called “madman theory”, in which it makes sense to try to fool your opponent into thinking you’re crazier than you really are. If your opponent thinks you’re a madman, they are likely to give you more concessions than if you were rational, simply because they’re less sure about what would push you over the edge into a mutually destructive war. Nixon is said to have used this strategy intentionally by acting unhinged in order to scare the USSR, and Putin might be using it right now.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations

Is Putin rational? Who knows? Does Putin? Authors have been trying to figure out Vladimir Putin for a very long time, says The Economist:

In “The Man Without a Face” (2012), for instance, Masha Gessen characterised Mr Putin, then set to reclaim the presidency after a pro-forma stint as prime minister, as a killer and extortionist. This version of him—a kgb thug turned mafia godfather—had been “hidden in plain sight”, but obscured by wishful thinking and that grey veneer. Death and terror were politically useful to Mr Putin, the author wrote. He made no distinction between the state’s interests and his own.

https://www.economist.com/culture/writers-have-grappled-with-vladimir-putin-for-two-decades/21808311

Does that sound rational to you? And regardless of your answer, how does it help one think of what Putin will do when it comes to deploying a nuke?

By the way, speaking of Masha Gessen, listen to or read her conversation with Tyler Cowen. Here’s a cheerful tidbit about Russia:

I think that there’s a kind of grumpy and dark culture in Russia. Russians certainly have a lot of discernment in the fine shades of misery. If you ask a Russian how they are, they will not cheerfully respond by saying they’re great. If they’re miserable, they might actually share that with you in some detail.
There’s no shame in being miserable in Russia. There’s, in fact, a lot of validation. Read a Russian novel. You’ll find it all in there. We really are connoisseurs of depression.

https://conversationswithtyler.com/episodes/masha-gessen/

But back to game theory and nukes.

The Economist tells us that using game theory to study the topic isn’t all that simple:

As a showdown between nuclear powers becomes more intense, Schelling observed, the risk that unexpected and perhaps undesired developments cause the situation to spiral out of control rises. (When nuclear forces are on high alert, for instance, false alarms become far more dangerous.) The upper hand, in such a situation, is thus maintained by the side that is more willing to tolerate this heightened risk of all-out nuclear war.
This is the essence of brinkmanship. It is not merely a matter of ratcheting up the tension in the hope of outbluffing the other side. It is also a test of resolve—where resolve is defined as a willingness to bear the risk of a catastrophe. Mr Putin’s move to increase the readiness of his nuclear forces may represent an attempt to demonstrate such resolve (over and above the message sent by the invasion itself). President Joe Biden’s refusal to escalate in kind could be seen as an acknowledgment of the conspicuous fact that an autocrat embroiled in a pointless war has less to lose than the rich democracy to which Mr Biden is accountable.

https://www.economist.com/finance-and-economics/2022/03/19/the-disturbing-new-relevance-of-theories-of-nuclear-deterrence

So is Putin, bizzare though it may sound, being rational by getting some folks to think that he is a madman? That is, if he anticipates that Biden is thinking along the lines outlined in this excerpt above, does it actually make sense for Putin to push this line of thinking in a calculated manner, increasing the chances that Biden will blink first.

Ah, but should Biden see through this and therefore discount the whole thing?

Of course you could model trickery attempts as their own strategies, with some (unknown) probability of success. But when you start introducing more and more options like this, you run into the second limitation of game theory — real-life strategic interactions are hellishly complex. This puts them beyond the modeling power of human theorists — perhaps the A.I. from War Games could handle this, but not even the most piteously overworked grad student is going to draw you a game tree that incorporates every possible feint and misdirection and signal. There are whole scholarly books that try to think about every possible nuclear move and countermove; they’re intellectually interesting, but they end up giving you a near-infinite menu of models to choose from, and thus they’re not very useful in real life.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations?s=r

Here’s where we are then, after reading all those excerpts:

  1. There is (and there is no sugarcoating this) an increased chance that a nuke will be launched this year.
  2. It helps to try and think through this problem, because the phrase “skin in the game” is applicable for all humanity where this problem is concerned
  3. Game theory is a good place to start, because it seems to be the best, most appropriate tool in our toolkit
  4. Who better to tell us how to think about the game theoretic aspects of a nuclear war than Thomas Schelling? He won a Nobel Prize for it, and his book is the book to read about the topic!

… except it ain’t really about game theory!

But as subsequent writers have pointed out, Schelling’s work wasn’t really a work of game theory. Game theory, as an economist knows it, is an exercise in pure rationality — two rational actors, each knowing that the other knows they’re rational (and knowing that the other knows, and so on) think through the possible set of strategies that they and their opponent(s) might take. This process of thinking through all of the possible moves causes them to arrive at some kind of strategic equilibrium (usually some kind of Nash equilibrium, although there are other kinds that people think about). At that point, playing out the moves of the game is simply pro forma; what people will do is either predetermined, or randomized.
Schelling’s concept of deterrence, in contrast, is full of signaling, misdirection, and guesswork about the opponent’s motives and thoughts. It’s the kind of thing that could only be rationally calculated in its entirety by a supercomputer like the one in War Games. Schelling’s ideas are more like the way real people play most games — feints, blunders, deception, and looking for tells.

https://noahpinion.substack.com/p/nuclear-game-theory-and-its-limitations?s=r

But if you ask me, that is exactly why you should read Schelling about this topic! Precisely because it isn’t just about basic game theory, and because it takes into account signaling, misdirection and guesswork.

Or, if you’d like the same thought expressed in more popular, and less highfalutin’ words, this is a game in which you have to play the man and the cards. And the stakes are ridiculously, scarily high.

As my favorite blogger sometimes says, have a nice day.