MADDER

If you are even an amateur fan of game theory, you must have come across the term “MAD”:

Mutual assured destruction (MAD) is a doctrine of military strategy and national security policy in which a full-scale use of nuclear weapons by two or more opposing sides would cause the complete annihilation of both the attacker and the defender (see pre-emptive nuclear strike and second strike). It is based on the theory of deterrence, which holds that the threat of using strong weapons against the enemy prevents the enemy’s use of those same weapons. The strategy is a form of Nash equilibrium in which, once armed, neither side has any incentive to initiate a conflict or to disarm.
The term “mutual assured destruction”, commonly abbreviated “MAD”, was coined by Donald Brennan, a strategist working in Herman Kahn’s Hudson Institute in 1962. However, Brennan came up with this acronym ironically, to argue that holding weapons capable of destroying society was irrational.

https://en.wikipedia.org/wiki/Mutual_assured_destruction

As with most theoretical concepts, it has its fair share of exceptions and limitations. Reading the Criticism section of the Wikipedia article is a great way to depress yourself, for example. But today, we depress ourselves a little bit more, by thinking about an article whose cheerful title is “The Math is Bad for MAD“:

Alarmingly, the current modernization of nuclear-missile arsenals by both Russia and China exposes a simple mathematical flaw in the assumptions underlying continued reliance on MAD. Despite our having ~1,400 deployed strategic nuclear warheads, they are postured such that a surprise attack by approximately 70 – 100 Russian or Chinese missiles—a fraction of their total nuclear forces—could soon undermine our “assured” retaliatory capability.

https://www.realcleardefense.com/articles/2021/11/08/the_math_is_bad_for_mad_802552.html

The rest of the article explains how China and Russia could, quite conceivably, undermine the US’ “assured” retaliatory capability. And when I say “quite conceivably”, I am not exaggerating. The authors, Norman Haller and Peter Pry lay out with implacable logic how China and Russia might think through all of the moves in this most dangerous of games, and reach the conclusion that America’s ability to “assure” retaliatory capability is not, in fact, assured. I will not excerpt anything to defend my argument, please read the entire article.

So what, one might ask, is to be done? The authors lay out seven things that America could conceivably do, and evaluate each of them in turn. Again, read the whole thing, it is in your interest to do so. I will, however, excerpt their concluding paragraph:

Finally, U.S. decision-makers should tune out minimalists who ignore the math and advocate replacing the Triad with either a Diad (bombers and submarines only) or, even worse, a Monad (submarines only). Tuned out as well should be MAD proponents who are inattentive to the math and insist that an undefended America is a positive asset.

https://www.realcleardefense.com/articles/2021/11/08/the_math_is_bad_for_mad_802552.html

You may agree with that paragraph, you may not. But you should, as a student of game theory, ask yourself if you can frame your agreement (or otherwise) in game theoretic terms. It is a useful (albeit depressing) exercise in your journey as a student of game theory.

And finally, for your reading pleasure, a further selection of cheer inducing books by one of the authors.

As my favorite bloggers like to say at the end of posts that are as optimistic as this one, have a nice day.

“What Are You Optimizing For?”, The International Macro Edition

It is one of my favorite questions to ask whenever students come to me with doubts about “what to do next” in terms of either further education or a job.

(Side note: asking me what to do next probably isn’t a good idea, because my career has been gloriously unplanned. But that’s a whole separate story)

But one should be clear about what one is optimizing for: is it income, or free time, or job satisfaction, or rapid career growth – or something else altogether? And whatever it may be, optimizing for one will quite probably mean having to give up on some or all of the others.

And this applies to many more things than just the What To Do Next question, of course. In fact, relentlessly asking this question in many different contexts can take you a very long way in terms of understanding what seem like really difficult and complex topics.

Such as, for example, what China has been up to in terms of international trade, and what went so gloriously wrong.


The simple story of international trade (or trade in general for that matter) isn’t difficult to grasp. Bear in mind that reality is a little more complex, but it really boils down to comparative advantage.

As Michael Pettis points out at the start of this excellent Twitter thread, the so-called “China shock” *is* a shock, but it is not an indictment of the basic concept of international trade. China, as we’re about to find out, was playing a zero-sum game.

One of the most glorious things about economics is the fact that trade is a non-zero sum game. Both parties that have voluntarily entered into a trade with one another benefit for the trade having gone through, and so nobody loses. This is as true at your local chai tapri (you give ten bucks for a cup of chai, and both you and the chaiwala are happy with the trade) as it is in the context of international trade between the United States of America and China.


But beware overly simplistic stories, for they can trip up many a happy ending:

Isabella Kaminska, in an old but excellent article on FT Alphaville made a very similar point. I’ll get to that point in a bit, but may I also use this opportunity to urge the good folks at FT to make FT Alphaville free again?

Here’s the point from that old article:

What those who accused China of using its exchange rate to gain advantage probably misunderstood was that it wasn’t the currency which was being undervalued, it was the people. Stephen Roach, then chief economist of Morgan Stanley, explained this point in the Financial Times in 2003 (our emphasis):
“The Chinese phenomenon hardly amounts to grabbing market share from the rest of the world. It is more a by-product of the struggle for competitive survival by high-cost producers in the industrial world. Last year, a record $53bn of foreign direct investment flowed into China, making the country the largest recipient of such funds in the world.
These investments did not occur under coercion. A high-cost industrial world has made a decision that it needs China-based outsourcing to ensure competitive survival. Dismantling China’s currency peg would destabilise the very supply chain that has become so integral to new globalised production models in Japan, the US and Europe.
There are several other reasons why China should leave its currency unchanged. Contrary to widespread perception, China does not compete on the basis of an undervalued currency. It competes mainly in terms of labour costs, technology, quality control, infrastructure and an unwavering commitment to reform.

https://www.ft.com/content/d11a4c5e-d5fb-32f4-a606-e64d1483cea1 (Emphasis added)

This article was written in 2015, but it holds up very well. In fact, it is instructive to see how, in addition to labour costs and infrastructure, China has now centralized under government authority technology as well. It is also instructive to think about how (and in what direction) the “unwavering commitment to reform” has evolved, but that is a separate story.

To come back to the common thread between the old FT Alphaville article and the Twitter thread by Michael Pettis:

Stephen Roach, in 2003, spoke about how China was undervaluing its people. Isabella Kaminska in 2015 spoke about China competes (at least in part) on labor. And Michael Pettis in 2021 is talking about China competing by suppressing its wages (relative to productivity levels). But they’re all making the same point, and it is a point that merits greater emphasis:

The China shock needn’t have been a shock, in the sense that it is not as if economic theory stopped working once China started trading more with the rest of the world.

China, as it turns out, wasn’t optimizing for international trade. China was – and is – optimizing for an increase in her exports, and that over time.


That problem manifests itself in many different ways: The USA’s persistent trade deficit with China is just one glaring example. The Belt and Road Initiative is another (what the hell do you do with all those forex reserves, dammit?). And there’s many, many more.

But as Michael Pettis reminds us in this thread, the “China Shock” phenomenon becomes way more comprehensible when you ask a deceptively simple question: what is China optimizing for?


What is India optimizing for when it comes to international trade? What should India be optimizing for? In both cases, whatever your answer, why?


Critique this blogpost, and write your responses to the questions above. It is a great way to test yourself if you think you’re good to go in open macroeconomics or international trade.

Say It Ain’t So, Fed, Say It Ain’t So

The Federal Reserve broke my heart recently.

Now you might think that today’s post is about something to do with monetary policy, or the taper, or something high falutin’ like that.

Nope. It’s about a game. The Fed Chairman game, to be specific. And I’m heartbroken because the Federal Reserve took it down:

Thank you for your interest in the monetary policy game, Chair the Fed. The game has been a useful and fun tool to learn more about monetary policy. However, the Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game. As of June 1, 2021, the game is no longer available.
You can learn more about the Fed’s policy updates here. Be sure to also check out FOMC Rewind, a texting video series that summarizes the FOMC’s meeting statements.
In the meantime, we encourage you to connect with us on Twitter, Instagram, LinkedIn, and Facebook.

https://www.sffed-education.org/chairthefed/default

So what was the game all about? Well, you got the chance to “be” the Fed Chairperson for sixteen quarters, or four years. You had to “react” to events that took place in the economy by raising or lowering interest rates, in order to meet two objectives. First, you had to make sure that inflation was as close to possible to 2% over the duration of your term, and second, you had to make sure that unemployment was as close as possible to 5% over the duration of your term.

The game was designed with some sort of a payoff between inflation and unemployment, and the reason I use the phrase “some sort of” is because I do not know quite what the functional form was. If you played the game long enough, you figured out pretty quickly that there would be a “crisis” at the end of your fourth quarter in charge. And the remaining 12 quarters were essentially an exercise in firefighting.

Inflation in the game had a way of getting out of hand pretty quickly, and unless you were quick enough to react and adjust real interest rates quickly enough, each successive quarter would have the economy spiraling quickly out of control. Of course, if you knew your monetary theory well enough you could figure out how to “win”.

Here’s a screenshot of the game layout:

Source: The Hill

And here’s an example of how quickly things could get out of hand:

Sourcehttps://i.ytimg.com/vi/5PAJtUjikis/maxresdefault.jpg

The last sentence from the previous version bears repetition: Of course, if you knew your monetary theory well enough you could figure out how to “win”.

That’s the point!

And that’s why I wish the Fed would reinstate the game. Because playing the game was a great way to get students to learn what monetary policy looks like in action. Sure, you can have students read Mishkin, or any other monetary text. And sure you can have them go through as many PDF’s released by both the Federal Reserve and the RBI. But nothing beats having the class split up into two teams, and playing three rounds each of this game.

After that, explaining the monetary transmission mechanism, or the Philips curve, or inflation expectations, or what “dovish/hawkish” means was child’s play. Because you see, they’d seen the effects for themselves.

So, dear whoever-is-in-charge-of-this-at-the-Federal-Reserve, I completely agree with you when you say that “the Fed has updated its approach to monetary policy, and the changes are not readily accommodated within the existing structure of the game”. No game could (or should) have envisioned the last eighteen months, and its ramifications on monetary policy.

But the game still served as such a magnificent jumping-off point for discussions about what transpired in the last eighteen months. “So now you’ve understood how monetary policy works under usual circumstances and most crises”, you could say at the end of the session. “But what about what the world went through in the last eighteen months? Would these tools be enough? Why or why not? What other tools does the Fed have in its arsenal? Which are most appropriate to use under these circumstances? Why?”

My point is that it was, and it still remains, a great way to introduce the subject to anybody, and especially those of us who’re learning about monetary policy for the first time. And there’s, in my case, about twelve years of students who I subjected to this game – and I’m pretty sure they would all agree with the request I’m about to make.

Please, dear ol’ Federal Reserve. Pretty please, with a cherry on top. Please bring the game back. It’s a great teaching tool, and classrooms are more boring without it.

The State of America, Circa 2021

Kevin Drum has an excellent article out on where the United States of America finds itself in the year 2021, in terms of both medium and long term trends along a variety of dimensions. Here are just the first three from “The Good” section:

  1. Income is up for everyone: men, women, Black, white, Hispanic, rich, poor, and middle class. Data from the CBO is here. UPDATE: Confused by this chart? Explanation here.
  2. Poverty is down by five percentage points since the ’70s.
  3. Federal income taxes are lower for practically everyone.

I found it instructive that he chose to go with 28 Things that he found to be Good, but only 5 that were Bad. That, in a meta-sense is worthy of being included as a 29th Good Thing!

Here are the five Bad Things:

  1. The worst trend of the past couple of decades has been a steady deterioration in average health outside of the upper middle class. Life expectancy has stopped increasing; obesity is up; opioid addiction is up; and deaths of despair are up.
  2. The labor force participation rate has been steadily dropping.
  3. The Black-white education gap has been stubbornly resistant to improvement.
  4. Climate change continues unabated.
  5. Political polarization has gotten worse, thanks mostly to Fox News and, more recently, the rise of Trumpism.

(I haven’t formatted both excerpts as quotes because the WordPress editor, best as I can tell, allows you to either format a piece of text as a numbered list, or as a quote, but not both at the same time. They call this the improved editor, and that makes me weep.)


What might India’s list look like? What do you choose to include and exclude in the good, the bad and the ugly, and what does that tell us about both the country we live in, and the biases that we reveal?

If any student reading this is looking to start a YouTube channel around a fun theme, I have, um, a suggestion for you 🙂

Housing in Singapore

“Solved” is, at the least, ambitious phrasing. But the video is well worth watching. Via Sahil Shaikh, a SYBSc student at GIPE

Lant Pritchett on Afghanistan

As we will learn in today’s post, the principles that we will learn from this marvelous essay are applicable in so many other contexts.


First, the title of his essay:

A Quickly Made Long Tragedy

Here’s one way to understand what this means in practice: the advantage of a top-down decision making system is that decisions can be made quickly. The opportunity cost of such a system is that buy-in from every person involved with the system is not only difficult to get – it is difficult to ascertain in the first place. As Akshay Alladi puts it over here:

What does Lant Pritchett mean when he says a “quickly” made “long” tragedy? The decision making was quick, sure – implementing said decisions on the ground proved to be rather more tricky. And it took twenty years to understand that in this case, more tricky was, in fact, a euphemism for “was never gonna happen”.


Second, talk about connecting the dots as a writer!

How can one not fall in love with an essay that:

  1. is written by an economist
  2. uses basic physics
  3. uses Shakespeare (!)…
  4. uses medicine
  5. … to explain how sociological concepts
  6. … can be used to understand how political goals
  7. were never going to be achieved
  8. … and all this using a diagram that absolutely anybody could understand?
https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

Third, this excerpt:

I am a very visual person so I propose this diagram as an aid to understanding the tragedy, for both the USA but much more so the people of Afghanistan, of the US engagement

https://lantpritchett.org/afghanistan-2021-a-quickly-made-long-tragedy/

If you’re a student, this is an important lesson. Figure out what type of learner you are, and that as quickly as possible. Do you prefer to understand a concept by drawing a diagram? Or by writing down an equation? Or by writing down your understanding in words? You’d be doing yourself a favor by trying to get better at all three, but any subject becomes easier when you try to figure out how you learn best. Double down on that method and get excellent at it. Try to get better at the other methods sure, but be unapologetic about the method that works best for you.


The entire essay is worth reading, and multiple times. But when you consume anything (a video, a movie, a podcast, a textbook – anything) always ask what else you can learn from it, apart from the intended lesson itself.

It is A Very Underrated Skill indeed!

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.

So You Want to Work in Public Policy…

If you’re between the age of 18-24, and aspire to work in the field of public policy, how should you prepare for such a career? Outside of the academic requirements and the network that you will build, reading about what public policy experts have done when on the “front-lines” is a useful exercise.

In today’s blogpost, I aim to get you started on this journey by referring to a book, an interview and an article.

The book? To Move the World, JFK’s Quest for Peace.

The book is about the lead-up to the Cuban Missile Crisis, the crisis itself, its succesful resolution, and the aftermath. It is a short book, and well worth your time if you are an aspiring public policy student.


At the very start of the ExComm process, Kennedy made the basic decision—one that was never second-guessed within the group—that the Soviet weapons must go. Either the weapons would be removed peacefully by the Soviets themselves, or they would become the cause of war.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 529)

Decide upon a goal. In this case, the goal was to get the Soviet weapons to go. Professor Sachs lays out the consultations that led to this goal being chosen in subsequent pages. But that is step 1. Without a clear goal, the rest of the process is meaningless.

Be crystal clear about the “What are we trying to do here?” question, first and foremost.


That brings you to step 2. And once step 1 has either been decided, don’t make your arguments from now on about step 1. The time for that is now gone. Step 2 is about clear-eyed assessments about what maximizes your chances of getting step 1 done.

The ExComm held divergent views on the substantive effect of the missiles on the East-West military balance. Secretary of Defense Robert McNamara held that the missiles had zero net effect, given that the Soviets had intercontinental ballistic missiles (ICBMs) that could target the United States from Soviet territory anyway. The military brass felt otherwise, that Soviet missiles just off the U.S. coast would substantially enhance Soviet military power, especially since the Soviet strategic forces at that point depended overwhelmingly on bombers with a long and difficult flight path to the United States. All agreed, however, that the missiles must go.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 548)

“How should we go about getting to our goal?” is the difficult, contentious issue. This is where your expertise is called upon as a public policy expert.

This forced a thorough review of options, and it allowed some time for communication between Kennedy and Khrushchev, albeit through a laborious and confused process of letters, public pronouncements, telegrams, and messengers. It gave time for heated emotions—panic, fear, and desire to lash out at the adversary—to be kept in check so that reason could be invoked. “Slow” rational thinking was given time to dominate the “quick” emotional thinking.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 558)

It sounds peaceful and professional – “a thorough review of options”. But this is where you have to:

  1. Really, really know your subject, or admit that you don’t and get out of the way.
  2. Have a strong point of view on the basis of your expertise, and defend it passionately. Arguing at this stage isn’t just fine, it is expected.
  3. The really, really difficult bit: figure out where your argument is weak, and listen to folks on the other side of this issue. What are they saying that is worth including in your recommendation? What are they saying that makes you want to refine/exclude parts of your proposal? Can a happy medium emerge? Remember, The Truth Always Lies Somewhere In The Middle.

Even if you think the article is mostly fluff, I found this excerpt relevant for this blogpost:

Before making up his mind, the president demands hours of detail-laden debate from scores of policy experts, taking everyone around him on what some in the West Wing refer to as his Socratic “journey” before arriving at a conclusion.
Those trips are often difficult for his advisers, who are peppered with sometimes obscure questions. Avoiding Mr. Biden’s ire during one of his decision-making seminars means not only going beyond the vague talking points that he will reject, but also steering clear of responses laced with acronyms or too much policy minutiae, which will prompt an outburst of frustration, often laced with profanity.

https://www.nytimes.com/2021/05/14/us/politics/joe-biden-policy-decisions.html

And finally, for those of you who are hoping to get into public policy and are currently studying economics:

I would like economists to be working with engineers, to be working with public health, to be working with the medical professionals so that we’re actually working on the real systems of our time and adding our pieces to that, understanding and studying that so that we have an answer to robotics, not a pure theoretical model, which is nice and fun, but something that can be helpful.

https://conversationswithtyler.com/episodes/jeffrey-sachs/

The point isn’t to build a theoretically correct model. The point is to build a model that maximizes the chances of getting to the goal we established in step 1: What are we trying to do here?

Or put another way, if you have to choose between being theoretically correct and doing whatever it takes to achieve step 1, choose the latter. If I had to choose between the two, that is what I would do.


There’s tons of other books, papers, blogs and newsletters to read on this topic, of course. If you asked me to pick just one, make it Anticipating the Unanticipated. Spend the summer reading every single one of their posts and taking (and then publishing!) notes. Better, if you ask me, than any other way to learn.


[Thank you to all those who reached out to check if I was ok. It means a lot. There’s been a covid death in the family, and a covid scare. We’re getting back to a semblance of a routine, but it has been tough and slow going. Please, stay safe, all. And again, thank you for your wishes.]

Taiwan, China and TSMC

Let’s say you knew nothing about Taiwan, China and TSMC. Where to start?

You don’t really hear about Taiwanese pop music, TV, or other pop culture. Taiwanese food exists, but except possibly for bubble tea, most Americans probably wouldn’t recognize it.
This seems like something that ought to change. Most importantly, because Taiwan seems really cool. But also because it’s geopolitically important, because it’s probably the most likely flashpoint for great-power war.

https://noahpinion.substack.com/p/taiwan-is-a-civilization

Flashpoint for a great power war? Unfortunately, yes:

Taiwanese President Tsai Ing-wen’s election in January 2016 upended Beijing’s plans for reconciliation with the Nationalists. Tsai, whose Democratic Progressive Party was founded on the promise of independence, refused to accept Ma’s position that both sides belong to “One China.” Beijing responded by cutting off communication, curbing travel and resuming efforts to lure away Taiwan’s few remaining diplomatic partners. Beijing has also withdrawn its support for Taipei’s participation in global bodies such as the World Health Assembly and pressured airlines, retailers and other multinationals to revise policies that treat Taiwan as a country. More recently, the People’s Liberation Army has stepped up exercises around the island, including “encirclement patrols” and incursions into Taiwan’s air defense identification zone.

https://www.bloomberg.com/news/articles/2021-01-27/why-taiwan-is-the-biggest-risk-for-a-u-s-china-clash-quicktake

Ok, so that would be worrying, but a great power war? Because of chips. Microchips, to be more precise. And manufactured by a firm that you may not have read of: TSMC. Don’t blame yourself if you haven’t heard of it – and even if you have heard of it, this chart will still be informative:

Original Article in The Economist is here.

I don’t know about you, but I was amazed by that chart.

From that same article, here is additional information about the firm:

The most important firm in this critical business is Taiwan Semiconductor Manufacturing Company (TSMC). It controls 84% of the market of chips with the smallest, most efficient circuits on which the world’s biggest technology brands, from Apple in America to Alibaba in China, rely to make their snazzy products and services possible. As demand for the most sophisticated chips surges thanks to the expansion of fast communication networks and cloud computing, TSMC is pouring vast additional sums of money into expanding its dominance of the cutting edge.

https://www.economist.com/business/2021/04/26/how-tsmc-has-mastered-the-geopolitics-of-chipmaking

By the way, the story of the founder is fascinating in its own right:

Read the whole thread, of course, but also note that you should also really read… and stop me if you have heard this from me before… How Asia Works by Joe Studwell.

Now, about China and the TSMC:

First, read this article for some useful background. Second:

Some experts claim that China now has the military capacity to quickly overwhelm Taiwan. Even if this is correct, invasion remains a high-risk endeavor that, even if successful, would still entail major negative ramifications for China. It can be expected only in conditions under which China’s leaders see the immediate political stakes outweighing the military risks, implying a narrow range of scenarios.

https://thediplomat.com/2020/12/would-china-invade-taiwan-for-tsmc/

The rest of the article goes on to explain the supply chain considerations in light of a war. And they’re very real indeed!

On January 13th Honda, a Japanese carmaker, said it had to shut its factory in Swindon, a town in southern England, for a while. Not because of Brexit, or workers sick with covid-19. The reason was a shortage of microchips. Other car firms are suffering, too. Volkswagen, which produces more vehicles than any other firm, has said it will make 100,000 fewer this quarter as a result. Like just about everything else these days—from banks to combine harvesters—cars cannot run without computers.

https://www.economist.com/business/2021/01/23/chipmaking-is-being-redesigned-effects-will-be-far-reaching

Finally, read this for further details. (Long, but very detailed, and therefore very interesting)

If you are a student of economics in 2021, this is one story you want to keep an eye on, apart from the other, obvious ones.

As Studwell Puts It, Chinese Medicine

I end every single class that I teach with a request to my students: ask me five random questions. The topic can be anything under the sun, but please get into the habit of asking me (and indeed everybody else!) questions.

One question that usually pops up in the course of a semester is this one: “If you could recommend only one book that all of us should read, which would it be?”

It is impossible to answer a question like this, of course. But still, it is a fun game to play. And if the class comprises of an Indian audience (which is usually the case), my answer almost always is How Asia Works, by Joe Studwell. It is an eye-opener of a book about growth in North-Eastern Asia (Japan, Taiwan and South Korea) during the latter half of the twentieth century, and I cannot recommend it strongly enough. I’m not the only one to be head over heels in love with that book – here’s exhibits A, B and C.

But the reason I bring up Joe Studwell today isn’t such a happy one. He also writes a blog1 – updated only sporadically, it is true – and the blog is full of useful articles to read about topics that he is interested in. And today’s post is about a New Yorker piece about Xingjiang that he shared the other day.

And it is not, to say the least, pleasant reading.

Usually, I would have excerpted from it and added my own takes, but not today. Please, go ahead and read the whole thing.

Speaking of those random questions, “Why can’t we be more like China?” is also usually one of them. My usual answer is to say “be careful what you wish for”. The New Yorker article only serves to reinforce that point.

Again, please. Read the whole thing.

  1. the intro to the blog is exemplary writing. And what is it with economists and homes in Italy? First Mundell, now Studwell.[]