Meanwhile, In India…

Yesterday’s post was about taxation (or the lack of it) in the United States of America. Today’s post is about the composition of tax revenues in India (along with some questions to which I would love some answers).

So the Hindu came up with a very interesting analysis on the composition of India’s taxation revenues over the past couple of years:

In FY21, despite a stringent lockdown and a raging COVID-19 first wave, the gross tax revenue collected by the Centre increased over FY20. However, the increase was made possible by a sharp rise in contributions from union excise duties. This compensated for the sharp drop in the share of corporate tax collection. The shift in tax burden from the corporates to the masses has come at a time when the pandemic has led to many job losses and reduced income levels thereby pushing more people into poverty.

https://www.thehindu.com/data/data-centres-tax-revenues-grew-despite-stringent-lockdown-on-the-back-of-excise-duties/article34850754.ece

This is the first chart in their article:

Source: https://www.thehindu.com/data/data-centres-tax-revenues-grew-despite-stringent-lockdown-on-the-back-of-excise-duties/article34850754.ece

I tend to take chart design a little seriously, so before we proceed, a laundry list of ways in which I wish this chart was better:

  • Source! What is the source of your data? As we will see later on in this blogpost, that really matters
  • Dump the y-axes (or at least one of them) and label the series instead. I’d prefer to do this for both series
  • This is especially important because you’ve got “base” numbers on the LHS y-axis and percentage change on the right, and visually, it is very non-intuitive. Especially because the RHS y-axis has zero at a different level when compared to the LHS.
  • A horizontal line next to 0% on the RHS would help provide clarity.
  • Any charting ninjas out there, please let me know where I’m wrong, and what you would do instead 🙂

Now, about the source of the data:

The article mentions that about “about 20.24 lakh crore was collected in FY21”. Since I don’t know which source was used, I’ve gone with the receipts statement from the Budget at a Glance section of the Union Budget website.

https://www.indiabudget.gov.in/doc/Budget_at_Glance/bag5.pdf

Gross tax revenue for 2020-21 (Revised Estimates) is Rs. 1900280. That’s… close enough, I suppose, to 20.24 lakh crores? Not really, if you ask me, but we’ll make do. By the way, to be clear, none of this is intended as a “hah, gotcha!” exercise. If there is a better data source that I should be using, please do let me know.

The excerpt above notes that gross tax revenue went up in FY 21 compared to FY 20. That’s not what this table shows, and I would love to learn more about which data source was used by The Hindu’s data team. That being said, their larger point is valid, and worth thinking about: in a year in which India’s GDP contracted, by around 7% or so, tax collections have been remarkably resilient. Going by the dataset I am using, they haven’t actually increased, but it is a close run thing, and that is remarkable.

[Professor Sabyasachi Kar was kind enough to point out a rather elementary error on my part: what matters is nominal GDP growth rate, not the real GDP growth rate. And nominal GDP contracted by around 3%, not 7% – that does explain a lot about the change in gross tax revenue we are seeing in this blogpost. Thank you, Professor 🙂 ]


Which means, of course, that we should be taking a look at which specific line items are responsible for this increase. And even a cursory glance at the table tells us that the impressive performance is almost single-handedly due to excise taxes. They’ve gone up from a base of Rs. 240615 crores in 2019-2020 to Rs. 361000 crores in 2020-21. That’s some growth!

If you are a student of the Indian economy, you might want to read this article, an excerpt from which is below:

The interesting thing is that the excise duty earned from the petroleum sector has jumped from Rs 99,068 crore in 2014-15 to Rs 2.23 lakh crore in 2019-20. The government has become addicted to easy revenue from taxing petrol and diesel. This year its earnings will be even higher than in 2019-20.

https://vivekkaul.com/2021/02/22/why-the-price-of-petrol-is-racing-towards-rs-100-per-litre/

As a student, never take numbers you read in an article as given. Not, to be clear, because you don’t trust the author, but because you should always go to the source of the data. Here’s one potential answer:

Source: https://www.indiabudget.gov.in/receipt_budget.php

I personally want to learn more about 5.02, 5.03, 5.05, 5.07.10 and the “total” row. That’d be a great masterclass, if you ask me


The bottomline: it is a great time to be a student of the Indian economy. All of what your textbooks tell you, both in terms of theory and in terms of data, is being stress-tested in ways that really test your knowledge of the Indian economy – so long as you look hard enough, and don’t stop asking the right questions.

So please: look, and ask. 🙂

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

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

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

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

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

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

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

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

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

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

And so it goes, year after dreary year.


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

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

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

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

And it gets better!

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

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

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

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

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

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

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

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

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


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

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

Books about Macro

Praneet asked me this on the basis of yesterday’s post:

And so here we go:
  1. I and my batchmates spent hours reading Snowdown and Vane. Like any good book on macroeconomics, we were more confused for having read it, and I mean that as a compliment. (As an aside, I loved the bit in Amit Varma’s conversation with Karthik Muralidharan where they spoke about N Gregory Mankiw’s quip about being confused about economics. Don’t ask me what it was about, this is me trying to incentivize you to listen to the conversation!)
    But this really is an excellent book to read. It is mostly accessible, contains very very good explanatory diagram, and best of all, each chapter concludes with an interview with an economist who was most representative of that particular field of thought. If I remember correctly, the last question always used to be about whether Keynes would have won the Nobel prize had he been alive then. Fun book, and it would still be my top pick. (The listed prize on Amazon is barking mad, please note)
  2. I think I came across this paper via Marginal Revolution, but am not sure. It’s a pretty good paper to read as a macro student today, because it gives you a very good idea about what folks in the field have been up to in the last four decades or so. I personally think DSGE models are a little bit overrated, but you can’t ignore it if you want to build a career in academia as a macroeconomist. Most of all, though, as a student, you really want to understand the difference between description, pure theory, falsification, and model fitting papers. But on all accounts, if you want to read just one survey paper, this would be a good pick.
  3. Speaking of Marginal Revolution, this blogpost is a wonderful read, in the sense that it is full of wonderful reading references. By the way, I’ve been promising myself for well over a decade now that I will read more about Henry Thornton, but have never gotten around to actually doing so. As Professor Cowen says, please do read the second comment (the one by Kurt Schuler).
  4. Brad DeLong lists out books you should read on the Classical Economists over on FiveBooks.com, and that should serve you well. I have not read all of them, I should say. One book that I would add to the list (because the concept was so interesting) is Linda Yueh’s “The Great Economists: How Their Ideas Can Help Us Today”.
    Well, ok, another book: PJ O’Rourke On The Wealth of Nations. Easily the most fun book of the lot.
  5. Raffaele Rossi picks the five best macro textbooks here, and alas, DBF doesn’t make the cut. It was my first macro text, and I still remember working through IS-LM for the first time. I’m still working through it, because I still don’t understand it, but that is another story. Arnold Kling put up his own list, and I would personally prefer his list, especially Leamer’s book. And psst, Kling’s own book is very, very underrated.
  6. Now, India secific macro books: Joshi and Little’s book about post-91 reforms deserves mention, as does Macroeconomics of post-reform India. Joshi’s Long Road is also worth reading, as is The Turn of the Tortoise, by TN Ninan. TCA Srinvasa Raghavan had recommended an excellent collection of essays called Towards Development Economics, if you want to understand what India’s earliest modern (poor phrasing, I know) economists were up to. The festschrifts honoring Montek Singh Ahluwalia, and Manmohan Singh are also very good, as was Bibek Debroy’s book about getting India back on track. Bhagwati and Panagariya’s Tryst with Destiny also!
  7. Finally, a book I am really looking forward to reading is Alex Thomas’ book on macro. I’m a GIPE student, so heterodox is a good wonderful thing. But that is a whole different blogpost in its own right!
  8. Lists like these can never be comprehensive, and I’m sure there will be people reading this who will be chomping at the bit to add to this list. Please, have at it, and share. That’s the point of the internet, no?

A Summer Spent Doing Macroeconomics

Say you’re a student, and you’ve just finished learning a fair bit about macroeconomics. You’ve read and not understood Keynes, you’ve read and think you’ve understood Friedman, and you don’t have the faintest idea what folks in macro have been up to since Robert Lucas.

OK, all that is fine, but how should a budding macroeconomist spend her summer this year?

You could do a lot worse than reading this article, and asking yourself some simple questions.

Such as, do I hear you say? Read on!


Google mobility, for instance, is down more than 40 per cent since the start of April and currently at levels seen a year ago, when the national lockdown was in effect. This dynamic is also visible in the cross-section: states that forced down mobility more strongly have, in general, also seen a larger drop in positivity rates.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is Google Mobility? What does the data for India look like? How does this data correlate with statewise Covid-19 numbers? Can I create simple tables and charts in, say, Google Sheets that show a link between the two? And write up a blog about how I did it? Or maybe create YouTube tutorials that show how I did it?


That said, there’s growing evidence the impact will not be trivial even if not of the same scale as the first wave. By the middle of May, power demand was down 13 per cent and vehicle registrations were down 70 per cent compared to the start of the quarter, while e-way bills in the first half of the month were at 40 per cent of where they should be. A broader composite index would suggest activity is tracking a 6-7 per cent sequential decline this quarter and, while this is much shallower than the 25 per cent sequential contraction witnessed last year this time, the fact that it comes on the heels of the first shock, and can potentially trigger more hysteresis, remains a source of concern.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where does the data for power demand come from? Where does the data for vehicle registration come from? Where does GST data come from? What does the phrase “tracking a 6-7 percent sequential decline” mean? What is hysteresis?


Household income uncertainty and precautionary savings can be expected to rise. Even before the second wave, households had signalled caution about future spending (manifested in the RBI Consumer Confidence Survey) likely reflecting both an income hit and a precautionary savings motive. This behaviour is consistent with labour market dynamics wherein the unemployment rate, once adjusted for reduced labour force participation, had increased meaningfully even before the second wave.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the RBI Consumer Confidence Survey? How is it calculated (see Annexure A in this document)? Where do we get unemployment data from?


Private investment could also take time to pick up. Even before the second wave, utilisation rates were in the mid-60 per cent range, much lower than needed to jumpstart investment.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is OBICUS? It stands for Order Book, Inventory and Capacity Utilization Survey. How else do we track capacity utilization?


We have previously found a strong elasticity of India’s exports to global growth and, if that holds, this should drive a strong export rebound in India. Some of this is already visible in the data with manufacturing exports surging in recent months, and currently 18 per cent (in nominal dollar terms) above pre-pandemic levels.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where might that paper/research be, the one that talks about the strong elasticity of India’s exports to global growth? What does it tell us? What is different between the time that paper was written and today? Is that to India’s advantage or not? How do we tell?


If crude prices average close to $70 this fiscal year, as is expected, that would constitute a 50 per cent increase over last year and serve as a negative terms of trade shock that impinges on household purchasing power and firm margins — a process already underway.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

EIA? Or something else? Should we take lagged data? If yes, with what lag? If no, why not? Where do we get information on firm margins? Bloomberg/Reuters? If yes, do we have access to a terminal? If no, whom do we ask for a favor?


When all is said and done, the completeness of an economy’s recovery from Covid-19 — and therefore the level of scarring — is assessed by comparing its post-Covid-19 path of the level of GDP with the path forecasted pre-Covid-19. If the aforementioned forecasts fructify, the level of quarterly GDP at the end of this year would be about almost 8 per cent below the level forecasted pre-pandemic. To be sure, India will not be the only emerging market to be below its pre-pandemic path. In fact, among the large economies, only the US and China will surpass it. But that said, an 8 per cent shortfall is meaningful.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the level of GDP, and how is it different from the growth rate of GDP? Which should one use, and how does the answer change depending on the context? Where do we get data on GDP of all countries at one time? Which one of these measures should we use for comparison, and why?


Macro is hard, and in many different ways. Understanding the theory is hard, but piecing together parts of the puzzle from disparate (and at lest in India, gloriously unfriendly) data sources is perhaps harder still. But if you want to “do” macro for a living, being familiar with the answers to these questions is table stakes.

That is, getting familiar with the answers to the questions I have asked here gets you the right to sit at the table. Playing the game better than the others once you’re in is a whole different story. And playing the game means using this data with your knowledge of theory to try and take a stab at the really important questions:

The question, therefore, is how should economic policy respond to this second shock? With fiscal and monetary policy already quite expansive, is there space to respond further? We assess policy options and tradeoffs in a companion piece tomorrow.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Trust me, macro is hard.

So You Think You’ve Understood Macro…

Warning: this post actually isn’t “for everybody”.

Teaching macro is hard enough. Teaching macro to non-economists is all but impossible, because things get really messy really quickly – and I cannot emphasize how messy, and how quickly. The simplest way to teach macro to non-economists is to say that macroeconomics attempts the impossible – it tries to analyze too many variables at the same time in a gloriously inadequate framework, with not enough attention being given to how to understand, measure and forecast risk uncertainty.

And that’s before we’ve even touched the concept of time and inherent unknowability!1

Shackle went on to write that what the market equilibrium conception showed was a world of perfect knowledge frozen in time. It thereby negated itself as being of any use in a world where knowledge of the future is impossible and time moves in one direction. In such a world the action of human beings must be in part based on reason and in part on imagination—specifically, imagination with respect to what various individuals imagine the future might be or even should be. Shackle wrote that neoclassical economics rested on a teleological or pre-determined future and thus left no space for human choice which was inherently tied up with a human being’s capacity to freely imagine what might be in store in the future.

https://en.wikipedia.org/wiki/G._L._S._Shackle#Equilibrium_versus_time

I’m going to sound very woo-woo when I say this, but if at the end of your macro semester you think you’ve understood the subject, then both you and your prof haven’t done a very good job. Macro is hard, and the macroeconomy is inherently unknowable, and yes, I’m willing to die on this hill.

But that does not mean it is not worth studying! Quite the contrary, in fact: it is precisely this reason – the inherent unknowable nature of macro – that makes it so fascinating to study.2

And if you are somewhat familiar with macro – say you’ve spent a semester or so studying it, maybe a bit more – then a good way to check if you have “understood” the subject is to read this lovely little essay by Trevor Chow. (Please, be warned, if you have not had a course in theoretical macro, this essay will make very little sense, and you absolutely should not read it. )

Description: The goal is to bring you up to speed from knowing nothing about business cycle macroeconomics till you know everything you want to know about it at an intermediate macro level within a single post. We’ll mess around with the notion of goods and money market equilibrium to see where it takes us, though if you want to get to the interesting stuff and already know enough about IS-LM etc, feel free to skip to Part 4 and onwards. This is probably, even more than my growth series, the hardest I’ve tried at making things accessible and clear, so please do get in touch if you think there are things which are underexplained or could be rewritten. And check out Miles Kimball and Nick Rowe, whose ideas I borrow very generously from in this post.

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

It’s very simply written, and is easily understandable – and trust me, that is hard to do when it comes to macro. It covers a lot of useful concepts, and there is a lot of back and forth between various schools of thought in macroeconomics.

My favorite excerpt was this one:

Macroeconomics is itself quite difficult, because even in the simplest business cycle models we are interested in all sorts of things: output, consumption, investment, the real interest rate, the nominal interest rate, prices, the money supply and inflation. Squeezing all of this into a static model is nigh impossible. Although I do think the canonical IS-LM model can be a bit deceptive with respect to interest rates, the idea of reconciling the goods and money markets is a useful approach. And by putting the IS-LM model through its paces, we’ve already illustrated some important ideas:

That the short run is a monetary question and not one of price adjustment
That there can be indeterminacy or unstable equilibria with bad monetary regimes
That liquidity traps and debt deflation can cause problems, but liquidity traps are really expectations traps
That there are good reasons for the Taylor rule and the Taylor principle

https://tmychow.com/blog/2021/03/29/the-fallacy-of-composition

Again, let me reiterate my basic point: if you are left with the feeling that you “get” macro, beware. Read more, and keep asking how you might be wrong in your understanding of the subject. And excellent places to begin would be Frank Knight and GLS Shackle – even the Wikipedia articles are more than enough to get started!

Bonus reading material: Snowdown and Vane.3

I’ve said it before, and I’ll say it again: macro is hard!

  1. I’m genuinely curious: if you’ve been taught a course in theoretical macro, did G.L.S. Shackle ever come up for discussion?[]
  2. Quite like studying theology, no?[]
  3. These prices make no sense whatsoever. Pah.[]

Economics and the Antikythera Mechanism

This video has been doing the rounds recently, and deservedly so:

If you aren’t aware of the Antikythera mechanism, here’s Wikipedia:

The Antikythera mechanism (/ˌæntɪkɪˈθɪərə/ AN-tih-kih-THEER-ə) is an ancient Greek hand-powered orrery, described as the oldest example of an analogue computer,[1] used to predict astronomical positions and eclipses decades in advance.[2][3][4] It could also be used to track the four-year cycle of athletic games which was similar to an Olympiad, the cycle of the ancient Olympic Games.[5][6][7]
This artefact was among wreckage retrieved from a shipwreck off the coast of the Greek island Antikythera in 1901.

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

The video is a fascinating walk through very modern attempts at recreating the Antikythera mechanism – although the recreation does raise a fascinating question, as the video mentions. How the hell could the ancient Greeks have possibly got this thing going back then? Watch the video to understand how complex this thing is!

And while watching the video was endlessly fascinating, I couldn’t help but thing of one little thing: the model is wrong.

Please, don’t misunderstand me. If, like me, you are a fan of learning about new things, and are fond of spending half your day staring out the window thinking about how they could have possibly done this back then, then you will know that I’m not trying to run the mechanism down. All I’m saying is that the model is wrong in the sense that we now know that the Earth is not at the centre of the solar system. The sun is.

That, in fact, is what makes the mechanism even more awesome. In spite of a wrong assumption, they had a working model of the solar system in the sense that they could predict a variety of astronomical events with near perfect accuracy.

The thing is, I think you could say the same thing about a lot of economic models. In spite of wrong assumptions, we economists too have working models of the economy in the sense that we can predict a variety of economic events with near perfect accuracy, until one day, suddenly, we can’t.

And when models don’t work, we take a look at the specifications of the model, we collect better data and we wonder if there’s something wrong with the world. All of which helps, but every now and then, perhaps it makes sense to ask if our core assumptions could be wrong.

A useful thing (for me, at any rate) to think about the next time I teach, say, the IS-LM model.

Macroeconomics and Arguments

The best way to learn is by arguing with somebody.

Classes are boring, reading is passive, and videos are both of these things. But when you meet somebody who is well informed, thoughtful, respectful of your viewpoint but is willing to argue with you, well: Merry Christmas.

I’m well aware that social media leaves one with the impression that none of these things are true these days, but that is just our tendency to search out the bad, rather than the good.

When I teach courses in behavioral finance, for example, I often show a discussion between Richard Thaler and Eugene Fama:

That is not the point of today’s blogpost, but it is still a video worthy of your time, whether you’re interested in the topic or not. These two gentlemen (Nobel Prize winners both of them) hold diametrically opposite views when it comes to the efficiency of markets. But they spend a little over forty minutes here, engaged in perfectly civil conversation with each other, without once ceding an inch to the other’s viewpoint. The point isn’t the fact that we’re left without a clear understanding of who is right and who is wrong. The takeaway is that it is entirely possible to argue without turning the argument into a shouting match.

It is, as nine pm teaches us every night in India, a vanishing art.

Macroeconomics is a subject that lends itself to vigorous debate for a variety of reasons. One, and let us be clear about this, nobody has the slightest idea about what works and what doesn’t when it comes to macroeconomics. Yes, really.

Two, counterfactuals are impossible to come by, and so you can engage in endless games of but-have-you-considered.

Three, every macroeconomic crisis that I have had the opportunity to study as it has unfolded has led to all of what is listed below:

  1. Some old theories have been vindicated
  2. Some old theories have been falsified
  3. All theories have been updated
  4. We still don’t know quite what is going on

What’s worse is that the first two points depend almost entirely upon one’s point of view. And again, no, I am not making this up.

But I am not saying that this makes macroeconomics “bad”. This is precisely what makes it fascinating!

And the example du jour comes from two economists who love arguing with each other: Noah Smith and Tyler Cowen. The topic? President Biden’s proposed stimulus.

Blanchard’s argument that Biden’s bill is too large rests on the idea that this amount of spending will cause the economy to “overheat” — in other words, that inflation will rise. To prevent this, he suggests shrinking the size of the bill and financing more of it with taxes.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

This is a point made by Larry Summers as well, by the way. For a good summary, see this Vox article.

Noah Smith’s point, and it one worth considering, is that this recession isn’t like the others. We say that every time there is a recession, by the way, but Smith’s point this time around is that the spending shouldn’t really be thought of as a stimulus, it should be thought of as social insurance:

If you get a check during a pandemic, you’re not going to go out and spend it at restaurants and bars, because…well, there’s a pandemic. Instead, you’re more likely to stick it in the bank, pay down debt, or pay the back rent that you owe.
In a normal recession, this is exactly what we don’t want people to do. We want them to take their government checks and go out and spend them, to restart the virtuous cycle of economic activity! But in a pandemic, it’s fine.
It’s fine because what we’re trying to do with COVID relief isn’t actually pump-priming — it’s retroactive social insurance. Some people, through no fault of their own, took a big hit from a risk that only a few people were paying attention to. In order to relieve those people’s suffering, we are giving them money that they can use to pay rent and buy necessities, as well as money to pay down debts so they have a bit more financial security.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

The rest of the post is worth reading, because it identifies potential flaws in the argument he is making, and provides reasoned counter arguments. So well is this done that you begin to side with him…

…until you read Professor Cowen:

Leave aside the political question of how aggressively to pursue an agenda of a larger, more activist government (and keep in mind that I am more libertarian than many of the participants in this debate). Take a Big Government as a given. History shows that consumption still ought not be the priority.

It’s not as if there aren’t obvious candidates for alternative investment: green energy, broadband and public-health infrastructure for the next pandemic, to name a few. Yes, I am familiar with the argument that spending the extra trillion or so now will make it possible to spend more trillions later, including on such policies. But whatever kind of complicated political story you might tell, the basic laws of economics have not been repealed. Increasing current expenditures does, in fact, involve foregone future opportunities.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

And his concluding paragraph is an excellent teacher at work, because he goes back to the Principles of Economics:

I say you can divide the commenters here into two groups.  Those who produce complicated arguments about why opportunity cost reasoning does not apply here, and those who stress the relevance of the opportunity cost of allocating another trillion dollars or two.  I believe that once you recognize that distinction, you know what to do with it next.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

To which a pro-stimulus (or pro social insurance) person might say, “But people first!” Does that argument hold true? If this stimulus results in runaway inflation a couple of years down the line (students of the Indian economy might recall the years 2009-2013, so we’re not talking hypotheticals here), then was the stimulus in fact worth it? How do we balance this argument against the very real need to provide a stimulus today?

I am completely unsure about what the correct answer is – and that is my point in today’s post.

How can one not be fascinated by macroeconomics?

Inflation: Oh ’tis problematic. Or is it?

A student messaged last week, asking some questions about inflation and its measurement in India. In particular, they wanted to know about food and its impact on inflation right now.

Well, outsourcing is always and everywhere a good idea, and Vivek Kaul had already answered the question at great length:

What this means is that, despite the end consumers of food paying a higher price, the farmers are largely not benefitting from this rise in food prices, given that they sell their produce at the wholesale level.
This difference can be because of a few reasons.

a) A collapse in supply chains has led to what is being sold at the wholesale level not reaching the consumers at the retail level, thus, leading to higher prices for the consumer.

b) This could also mean those running the supply chains hoarding stuff, in order to increase their profit.

Having said that, the former reason makes more sense given that stuff like vegetables, egg, fish and meat, etc., cannot really be hoarded. Also, hoarding stuff like pulses, needs a specialized storage environment which India largely lacks.

https://vivekkaul.com/2020/10/13/10-things-you-need-to-know-about-indias-high-inflation/

The entire article is worth reading (and so is subscribing to Vivek’s blog, so please do so!). And if you think 2020 isn’t depressing enough already, do read this article, also written by him. A short excerpt follows:

To conclude, the Indian economy will contract during the second half of the financial year. There is a slim chance of growth being flat for the period January to March 2021. Inflation, even though it might come down a little, is likely to remain high due to the spread of the covid pandemic. Hence, India will see conflation through 2020-21.

https://vivekkaul.com/2020/09/15/conflation-contraction-inflation-is-here-and-it-will-stay-this-year/

From a reading-the-tea-leaves perspective, it would seem the RBI actually isn’t that worried about inflation right now (and rightly so!). Here’s an excerpt from an excellent newsletter, Anticipating the Unanticipated that makes this point:

But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

https://publicpolicy.substack.com/p/77-the-inflation-conundrum-

… and here is Anantha Nageswaran making the same point, but by utilizing a different analysis:

This exercise generates the hypothesis that there is little or no intersection of the household inflation expectations formation and the monetary policy regime. Two, high inflation expectations peaked in September 2014. Similarly, the current high inflation expectations should peak as supply disruptions ease. So, in my view, RBI is betting correctly that the rate of inflation would ease and project policy on hold for the next few quarters. Three, inflation generation process should matter only to the extent that it affects medium-term output and employment generation. For now, other indicators suggest that it is not as disruptive as it was in 2011-13. Therefore, there is no need to turn it into a fetish. The new MPC and the central bank have done well and done good. They should be pleased.

https://thegoldstandardsite.wordpress.com/2020/10/14/the-inexplicable-16-inflation-rate/

And for the data nerds among you, here is the Inflation Expectations Survey of Households by the RBI (do keep in mind the point Ananta Nageswaran makes about trimmed means in his article). Note that currently at least, not too many people seem to be too worried about persistently high food inflation.

Side note: Jason Furman’s podcast with Tyler Cowen contained this interesting snippet:

FURMAN: GDP could be more meaningful if we measured it better. The inflation rate gets harder and harder to measure over time. So I think the one that probably has deteriorated in meaningfulness is the measure of inflation. Number one, we don’t measure it well, and number two, it’s low enough that it’s hard to get that excited about it.

COWEN: Is that a quality-of-goods problem? Or how we do chaining over time? Where are we going wrong in measuring inflation?

FURMAN: Just more and more of the economy is in areas that are harder to measure the quality of, healthcare being the most notorious.

https://medium.com/conversations-with-tyler/jason-furman-tyler-cowen-economics-b3e6d73dfd0f

I’ve said it before, and I’ll say it again: macro is hard.

Finally, here are past EFE articles on inflation.

So what does stimulus actually mean?

A reader sends in this question:

“What do governments actually mean when they say that we’re going to announce a 1 trillion dollar economic stimulus package? Does it mean that they’re going to spend that much money? Or they’re just going to give it to the industries? (if so what does that entail?)”

Keep the following in mind:

  • I’m going to assume that the person who asked the question hasn’t learnt macroeconomics in a formal setting just yet, and will therefore answer the question accordingly
  • I will describe a macroeconomic model using words, and keep it fairly simple
  • I will use examples from earlier crises
  • Let’s get started!

 

  • Think of the Indian economy as a patient, and think of monetary and fiscal policies as medicines that are going to be administered by doctors. The RBI governor is a doctor to this patient, as is the Finance Minister.
  • Any move pertaining to regulation of banks (allowing banks to ask for EMI’s later, reduction of interest rates, forbearance of loans) is medicine administered by the RBI.
  • Any move pertaining to reduction of taxes, introduction of subsidies, amnesty schemes for taxes due in the past, spending on specific projects (construction of roads bridges etc), changes to government employees salaries/pensions, payouts to firms or individuals (literally giving them money) is medicine administered by the finance minister.
  • Under normal circumstances, one doctor is plenty enough. In fact, macroeconomists often end up saying that if fiscal policy is going to provide the medicine, monetary policy should stand ready to counteract any excesses.

    There is a dilemma as to whether these two policies are complementary, or act as substitutes to each other for achieving macroeconomic goals. Policy makers are viewed as interacting as strategic substitutes when one policy maker’s expansionary (contractionary) policies are countered by another policy maker’s contractionary (expansionary) policies. For example: if the fiscal authority raises taxes or cuts spending, then the monetary authority reacts to it by lowering the policy rates and vice versa. If they behave as strategic complements, then an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of the other.

  • But when the patient is as ill as is the case now (and is going to get sicker in the days to come!), well then monetary and fiscal policy are not substitutes: both need to be at play at the same time.
  • For example, in the 2008 recession, American policymakers resorted to both monetary and fiscal policy measures (all countries did, to be clear. I’m just using the American example because its data is easier to find and present)
  • The monetary policymakers announced, among other things, TARP. By the way, astute readers might want to point out that this seems to have been run by the Treasury Department, not the Federal Reserve. True, not arguing with that. It’s complicated! Also, watch this movie.
  • And, among other things, the American government also announced ARRA. The original website is no longer up, but you can see this, or read this.

 

Now, all that being said, we’re going to take a look at fiscal policy alone from here on in. It is not that monetary policy isn’t important (oh dear lord, it is!) but the question is more focused on fiscal policies.

To understand the answer to this question, let’s go back to an earlier post of mine, and quote from it:

Let’s break this tweet by Paul Krugman down.

  • The government has decided that it will give away money. Ergo, fiscal policy.
  • To whom should it give the money? It can give the money to firms, or to households.
  • If it gives the money to households (in India for example, this would have been through Direct Benefits Transfer), might that help people more?
  • Or should it give the money to firms instead?
  • Payroll taxes, which is what is being spoken about in the tweet, is tax paid on behalf of employees to the government, by firms. Here’s Wikipedia:

    Payroll taxes are taxes imposed on employers or employees, and are usually calculated as a percentage of the salaries that employers pay their staff.[1] Payroll taxes generally fall into two categories: deductions from an employee’s wages, and taxes paid by the employer based on the employee’s wages. The first kind are taxes that employers are required to withhold from employees’ wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG) and often covering advance payment of income tax, social security contributions, and various insurances (e.g., unemployment and disability). The second kind is a tax that is paid from the employer’s own funds and that is directly related to employing a worker. These can consist of fixed charges or be proportionally linked to an employee’s pay. The charges paid by the employer usually cover the employer’s funding of the social security system, Medicare, and other insurance programs. It is sometimes claimed that the economic burden of the payroll tax falls almost entirely on the worker, regardless of whether the tax is remitted by the employer or the employee, as the employers’ share of payroll taxes is passed on to employees in the form of lower wages that would otherwise be paid.

  • So when there is a payroll tax holiday, firms no longer have to pay these taxes. So who is benefiting here? Firms or the employees of firms? To the extent that the firm no longer has to pay these taxes, it has more money with itself. It can either keep this money and use it for other things, or it can pass on this money to the employees. What will actually happen is tricky to predict, and trickier still to measure!
  • For example, imagine the Indian government says to the Gokhale Institute of Politics and Economics (GIPE) that the Tax Deducted at Source (TDS) from the professors salaries need no longer be given over to the government. (To people who know their macro, I know it is not the same thing. Treat this as an illustrative example)
    • If GIPE was due to pay me a 100 rupees every month, it would deduct 10 (that’s the TDS) and pass it on to the government. That need be done no longer.
    • But the government doesn’t say that this money should be given to the professors instead – GIPE can do with it whatever it wishes.
    • Will (should) GIPE pass on this money to the professors? Or use this to pay other people employed by GIPE? Or just keep it with GIPE (who knows when the college will reopen, hoarding cash may be a good idea). Or… anything else you can think of, really!
  • So “giving” to industries really can mean a variety of things. And it really depends on what industry chooses to do with this money. You could apply conditionalities and say you will only get the money if:
    • It’s passed on to employees
    • You qualify because your firm falls in an important sector (employs a lot of people, is important from a social viewpoint, is critical to combat the virus etc)
    • Anything else you can think of
  • Or the government could spend the money itself! Build roads, bridges, dams, employ thousands more teachers, temporary employees – but all of this is assuming we can control the spread of the virus, of course. Without that, all of this is difficult, if not impossible to achieve.

 


So the correct answer to the question that the reader asks is: all of the above. At this point in time, a good fiscal policy move will be to spend, and give tax benefits to firms and households. This is roll out the big guns territory, no half measures will do.

Homework:

A useful exercise to do: go through the fiscal stimulus announced by our government, and try and pinpoint which parts are directly in the hands of the people, which in the hands of the firms, and which is spending by government on building out infrastructure etc. Here’s one article to help you along.

Homework Part Deux:

Are we Rawlsian?

Homework Part Trois:

Are we Rawlsian enough?

 

In Conversation with Professor Parchure: Macro in the times of corona

Speed was key, and Prof. Parchure found talking on the phone (an actual, honest to god conversation over the phone, imagine!) the easiest.

It took me the better part of a day to figure out how to upload it on YouTube. Shows how old I am getting, no doubt.

Still, here you go. Talking with Parchure Sir is always enlightening, as is listening to him – as you are about to find out.

We’ll be doing a follow-up sometime soon, no doubt, so send in your questions, and I’ll try and include them in that conversation.