# Correlation, Causation and Thinking Things Through

Us teaching type folks love to say that correlation isn’t causation. As with most things in life, the trouble starts when you try to decipher what this means, exactly. Wikipedia has an entire article devoted to the phrase, and it has occupied space in some of the most brilliant minds that have ever been around.

Simply put, here’s a way to think about it: not everything that is correlated is necessarily going to imply causation.

For example, this one chart from this magnificent website (and please, do take a look at all the charts):

But if there is causation involved, there will definitely be correlation. In academic speak, if x and y are correlated, we cannot necessarily say that x causes y. But if x does indeed cause y, x and y will definitely be correlated.

OK, you might be saying right now. So what?

Well, how about using this to figure out what ingredients were being used to make nuclear bombs? Say the government would like to keep the recipe (and the ingredients) for the nuclear bomb a secret. But what if you decide to take a look at the stock market data? What if you try to see if there is an increase in the stock price of firms that make the ingredients likely to be used in a nuclear bomb?

If the stuff that your firm produces (call this x) is in high demand, your firm’s stock price will go up (call this y). If y has gone up, it (almost certainly) will be because of x going up. So if I can check if y has gone up, I can assume that x will be up, and hey, I can figure out the ingredients for a nuclear bomb.

Sounds outlandish? Try this on for size:

Realizing that positive developments in the testing and mass production of the two-stage thermonuclear (hydrogen) bomb would boost future cash flows and thus market capitalizations of the relevant companies, Alchian used stock prices of publicly traded industrial corporations to infer the secret fuel component in the device in a paper titled “The Stock Market Speaks.” Alchian (2000) relates the story in an interview:
We knew they were developing this H-bomb, but we wanted to know, what’s in it? What’s the fissile material? Well there’s thorium, thallium, beryllium, and something else, and we asked Herman Kahn and he said, ‘Can’t tell you’… I said, ‘I’ll find out’, so I went down to the RAND library and had them get for me the US Government’s Dept. of Commerce Yearbook which has items on every industry by product, so I went through and looked up thorium, who makes it, looked up beryllium, who makes it, looked them all up, took me about 10 minutes to do it, and got them. There were about five companies, five of these things, and then I called Dean Witter… they had the names of the companies also making these things, ‘Look up for me the price of these companies…’ and here were these four or five stocks going like this, and then about, I think it was September, this was now around October, one of them started to go like that, from \$2 to around \$10, the rest were going like this, so I thought ‘Well, that’s interesting’… I wrote it up and distributed it around the social science group the next day. I got a phone call from the head of RAND calling me in, nice guy, knew him well, he said ‘Armen, we’ve got to suppress this’… I said ‘Yes, sir’, and I took it and put it away, and that was the first event study. Anyway, it made my reputation among a lot of the engineers at RAND.

https://www.sciencedirect.com/science/article/abs/pii/S0929119914000546

Do you know other, more recent examples of people deducing important information by guessing from correlated data?

… and I was reminded of this tweet:

Whether it is Neptune, the nuclear bomb or the under-reporting of Covid deaths, the lesson for you as a student of economics is this: when you marry the ability to connect the dots with the ability to understand and apply statistics, truly remarkable things can happen.

Of course, the reverse is equally true, and perhaps even more important. When you marry the ability to connect the dots with a misplaced ability to understand and apply statistics, truly horrific things can happen.

Tread carefully when it comes to statistics!

# Navin Kabra on the Power of Networking

Besides putting out super-awesome threads on Twitter, Navin Kabra also writes a newsletter. (He also runs a firm, and makes time for being interviewed for podcasts, and much else besides, but thinking about that will only depress the rest of us, so let’s stop)

So he sent out a post yesterday on that newsletter, which I found fascinating:

There are 3 kinds of power in an organization and most people focus on the wrong ones.
Jacob Kaplan-Moss has a great article about The Three Kinds of Organizational Power: role power, expertise power, and power through relationships. Most people focus on the less important ones. Understanding what these powers are and how to use them is key to becoming effective at your work.

https://futureiq.substack.com/p/understanding-organizational-power

First, if you haven’t already, please subscribe to his newsletter. It’s not just free, it ends up being worth more than the time you spend reading it, and if that is not a bargain, I don’t know what is. Second, maybe I’m guilty of over-fitting, but it was fascinating to me how role power is LinkedIn, expertise power is Coursera and networking power is Starbucks:

College is a bundle: education | credentialing | peer networks

https://econforeverybody.com/2020/03/12/signaling-bundling-and-college/

If I were to write that blog post again today, I would remove the word peer. That part, I really do think that role power is about signaling, expertise power is about learning, and relationship power is about networks (the last one is obviously true, it is the others that make me think I might be over-reaching).

Food for thought, as they say.

Navin’s article speaks about the last bit, relationship power, as the most powerful/useful one. And anybody who is in any part of the higher education supply chain would likely agree: it is networks that get things done.

Now, as a student, what should you take away from this?

You need to consciously spend some time in developing your networks. And that means putting yourself out there as often as possible. Write blogposts. Make videos. Start podcasts. Make TikTok or Takatak (or whatever else we’re calling it these days) clips.

And once you do all of that, as often as possible, start sending those links to folks. Ask them for feedback, and ask them specifically for areas of improvement. Ask them for learning recommendations. The magic of the internet will mean that conversations, debates and opportunities will crop up on their own.

But networking does not mean sending people requests on LinkedIn. That just means you’re added to a person’s network. Networking matters, not the network itself. It is a garden that needs regular tending to. The bad news is that it is hard work, the good news is that there are surprisingly large payoffs, and over surprisingly large periods of time.

Make connections with your peers, your professors and your potential mentors. Use this network to share your thoughts, and put those thoughts out for public consumption. Optimize for quantity, and quality will be the eventual outcome. Respond to other people’s publicly available output.

Most importantly, do this for its own sake.

Job opportunities is one of the benefits of doing all this. It is not the only goal, and it is not the end-goal.

For you will change your job eventually, but your network will either shrivel or grow. Please, learn how to nurture it, and keep at it every day.

Navin promises towards the end of his post that he will share his own tips about networking. I’ll link to that post whenever it comes out, of course. But in the meantime, start learning, and help others learn, and build out your network.

Why would you want to not acquire a superpower, eh?

But it gets better!

Because the replies took me to this excellent essay on ergodicity:

In an ergodic scenario, the average outcome of the group is the same as the average outcome of the individual over time. An example of an ergodic systems would be the outcomes of a coin toss (heads/tails). If 100 people flip a coin once or 1 person flips a coin 100 times, you get the same outcome. (Though the consequences of those outcomes (e.g. win/lose money) are typically not ergodic)!
In a non-ergodic system, the individual, over time, does not get the average outcome of the group.

https://taylorpearson.me/ergodicity/

… And therefore this set of essays and this newsletter.

As the kids say these days: sorted.

# Learn Macro by Reading the Paper

Macro, and I’ve said this before, is hard.

But a useful way to start understanding it, at least in an Indian context, is by:

• carefully reading a well written article
• understanding and noting for oneself key concepts within that article
• recreating the charts from that article
• That includes figuring out the source of the data…
• … as well as acquiring the ability to build out these charts
• And most important of all, creating a piece of your own (could be a YouTube video/short, a blog, an Instagram story, a Twitter thread) that helps simplify the article you’ve read.1

Now, Arvind Subramanian and Josh Felman have generously obliged us by writing a well written article. I’ll oblige you by carefully reading it and annotating it, including pointing out key concepts, sources for data and recommendations for building out the charts.

That just leaves the last point for you, dear reader. We’ll call that homework.

For more than a decade, India’s fiscal problem has been on the back-burner, acknowledged as a concern, but excluded from the ranks of pressing issues. Now, however, the problem is back with a vengeance. COVID has upended the fiscal position, and fixing it will require considerable time and effort, even if the economy recovers. This worrisome prospect has prompted calls for the Fiscal Responsibility and Budget Management Act (FRBM) to be dusted off, reintroduced, and implemented — this time, strictly and faithfully. But before we heed them, we need to understand why the previous FRBM strategy failed and how to prevent a repeat. We argue below that the new strategy will look nothing like the current FRBM.

https://indianexpress.com/article/opinion/columns/coronanvirus-india-economy-gdp-growth-post-covid-7261915/

First things first, what is FRBM?

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

https://en.wikipedia.org/wiki/Fiscal_Responsibility_and_Budget_Management_Act,_2003

Think of it as a one-person Alcoholic’s Anonymous club. It is of the government, for the government and by the government, and the idea is to wean the government off a dangerous addiction that it is hopelessly affixed to: debt.

By the way, there are many reasons this is a good essay, not the least of which is how well structured it is. The first three sentences in the very first paragraph, excerpted above, point out the problem that is going to be addressed, without using any difficult words or jargon. Then they point out the tool that will be used to address the problem. Then they point out the tool itself has problems. Finally, the explain that the essay is about fixing those problems. And then the essay follows. You might want to keep this in mind when writing your own essays (or indeed creating your own podcasts/videos etc.)

Now, back to the essay:

1. What is general government debt? Where can I access the data?
Note the second hyperlink above: I’ve linked to the Fred St Louis page about India’s debt, which itself gets the data from the IMF. Here is the page from the Ministry of Finance’s own website titled Public Finance Statistics. It has not been updated since September 2015. Here is a Motilal Oswal report on the subject that pegs general government debt at INR 157,227 billion. (Exhibit 1 in the report). If you read footnote 3 of that exhibit, two things happen. The first thing that happens is that you realize that tracking down general government debt might take a while. The second thing that happens is you feel a rather large twinge of sympathy for the folks who have tried to do this exercise.
Figure 1 in the well-written article that we are analyzing in today’s post doesn’t mention a source, unfortunately. So recreating that chart will involve a rather large part of our day – but I would strongly recommend that you do the exercise. If you want to analyze Indian macroeconomic data for a living, this will be a good initiation. And indeed, a write-up about this exercise alone is a worthy addition to your CV!
2. Second r-g: what is r, and what is g?
1. “r” is the policy rate, which in our case will be the repo rate. This is available on the homepage of the RBI, top-left, under current rates.
2. Time series data? Available on the DBIE page, under key rates.
3. “g” is the nominal growth rate of the economy, and can be found at MOSPI.
4. A useful thing to do as a student is to try and recreate the chart in the well-written article.
5. Pts 1 and 2 here will help you get most of the data, and try and use either Microsoft Excel or Datawrapper to recreate the chart.2
3. Next, what is primary balance?3 Where does one get that data in India?4
4. Next, this sentence from the article: “Simple fiscal arithmetic shows that debt does not explode when the former (primary balance) is greater than the latter (interest-growth differential)”. What is this “simple fiscal arithmetic”? They’ve explained it in equations 1 and 2 in this paper.5
5. The next three paragraphs after Figure 1 in the article point out how precarious India’s situation is when it comes to government debt, and why. It is one thing to read about the equation in a textbook, it is quite another to “run” the numbers in practice. Give it a shot, please, and see if it makes sense.
6. Next, this paragraph from the article:
“First, India should abandon multiple fiscal criteria for guiding fiscal policy. The current FRBM sets targets for the overall deficit, the revenue deficit and debt. This proliferation of targets impedes the objective of ensuring sustainability, since the targets can conflict with each other, creating confusion about which one to follow and thereby obfuscating accountability.”
This paragraph is a good way to understand the importance of reading In The Service of the Republic, by Kelkar and Shah (and also to read up about the Tinbergen Rule).
7. The next three paragraphs after that are a good way to understand what Goodhart’s Law means in practice.
8. And finally, see if you can explain to yourself why targeting the primary balance is better than other options. Personally, I agree that it is a better target, and I agree that rather than setting down a concrete number to reach, averaging out half a percentage point worth of reduction is better. In essence, what they’re saying is that you shouldn’t try to reach x kilos of weight on a diet, but lose x% body weight every month. As our ex-captain might have put it, process over results. One of our gods advocates this too, as Navin Kabra points out.
My reservation comes from the fact that sticking to a diet is hard, and that is true whether you’re targeting a process or a target. In other words, it is the ongoing implementation of the plan that is the challenge, not it’s design!
9. One last point: without creating something that you are willing to put up for public consumption, and highlighting on your CV as an exercise you have done – you haven’t really learnt. Reading either that article or this blog is the easy part – explaining it somebody else is the much more difficult (and causally speaking, therefore meaningful) bit.
1. Skipping this last point is missing the point altogether, rascalla![]
2. Document your learnings as you go along.[]
3. Read the whole article, please. It’s a good way to clear your understanding of this topic, and it is free[]
4. The Excel link under Deficit Statistics was down when I tried to access the data. Your mileage may vary.[]
5. Page 3[]

# Pre and Post Nuclear Bomb Steel

I had referred to Patrick Collison’s “Yes, and” rather than “No, But” approach to Twitter earlier this week.

In a world in which there was a “Yes, and” Society, and a Pune chapter for this hypothetical (but much needed) society, I’d have voted for Navin Kabra as Lifetime President. Today’s twitter thread of choice is one of many reasons why:

Recommended pairing: The Life and Times of the Thunderbolt Kid, by Bill Bryson. The whole book is a delightful read, but I have the pages where he speaks about America’s fascination with the atomic bomb in mind.

# CV’s are overrated

… as are examinations, marks, submissions, assignments and NAAC reports. I speak only of my current area of work, but this is true in all walks of life, of course.

There are two aspects to work: doing it, and showing that you have done it. A CV isn’t work, it is showing that you have done the work. So also the list above: none of it is work, it is showing that you have done the work. Meta-work, if you will.

Anybody who has conducted an interview has read the line “Proficient in MS-Office”. And each and every person who belongs to this tribe has rolled their eyes when asked about how many of the people who have written this line actually are proficient in MS-Office.

(My personal favorite among the variants of this line is “Intermediate level knowledge of MS Excel.” It signals to me that the writer is honest enough to acknowledge that they don’t know enough about Excel, but also can’t bring themselves to say that they don’t know enough.)

But ask yourself: what is a CV? It is a document that is supposed to showcase the work that you have done.

It is, as all of us know (but none among us would like to acknowledge) actually a document that showcases work that we hope will land us a job, no matter how tangentially true the content of the CV, and our association with said content.

This argument holds true for examinations as well! Examinations – and the marks you score in an examinations – are supposed to be a reflection of how well you know the subject.

It is, as all of us know (but none among us would like to acknowledge) a process in which we minimize our efforts to maximize our output. It’s even more problematic because the output isn’t learning, it’s marks.

NAAC reports that are submitted by colleges are in essence a manifestation of the many voodoo dolls that students have pricked at over the years, hoping to gain revenge for all the meaningless assignments/submissions/vivas that they have been subjected to while earning a degree. For colleges submit the NAAC reports using the same philosophy that students do while submitting their assignments:

“It doesn’t matter if it is a reflection of what reality is. It must be shown as a real thing on paper.”

We have created, as a society, a culture in which we measure the work that we do through these proxies, and collectively pretend that these proxies are a reflection of reality. Worse, we now spend a vast majority of our time on creating the proxies, rather than actually doing the work.

But to come back to my point (and yes, I do have one), the internet holds out the possibility to change this. At least where CV’s are concerned.

• Don’t say that you are proficient in MS-Excel. Create, instead, a YouTube channel, or a blog, or an Instagram post, or a Facebook page, or a podcast where you show that you are proficient in MS-Excel. That is your CV, or at least a part of it.
• Don’t say that you worked on project xyz with company abc. Write it up, and put it up on a blog. Writing’s not your thing? No worries, speak about it, and put it up as a podcast. Prefer video? YouTube!
• The fact that you are reading this on an electronic device, by the way, means you do not have an excuse to not do it.
• Worried about “how it will come out”? Do it ten times, and keep all ten up on the internet for people to see. Those ten variants of you describing your internship project is a much more powerful argument than a line that says “willing to work hard to improve myself”. And hey, if you do it ten times, it can only get better, not worse.

Showing that you have done the work tends to make you focus more on the showing, and less on the doing. Measuring work by analyzing what has been shown rather than what has been done is even more problematic, and that’s why firms tend to underrate grades (and increasingly, even CV’s).

Or, if you want to put it in economist-y terms, recruiters these days are like citizens of the Weimar republic. They know that the currency that is being issued is not worth the paper it is printed upon.

Any economist will tell you what happens next: a flight from currency, and into other assets.

That other asset in the context of the CV, is doing the work. Put it up for public consumption, and let the internet work its magic.

As a former India captain was very fond of saying, it’s all about the process. The results will take care of themselves. God, as Navin Kabra reminds us, says much the same thing!

Back in the day, when I had structure, regularity and a schedule here on EFE, Saturday used to be about five tweets that I enjoyed reading that week.

Which, on reflection (and some gentle prodding from Navin Kabra) wasn’t the brightest idea, because that’s what likes and RT’s are for on Twitter. So how about maybe a brief write-up based on a tweet that I read recently?

This week’s tweet that turns into a post is based on a variety of things. First, Nassim Nicholas Taleb.

The Black Swan is kind of like Thinking Fast and Slow, in the sense that everybody claims to have read it, and very few people actually have. If you haven’t read all of his books, please get started. The order doesn’t really matter, but if you’re asking, my favorite is Anti-Fragile.

There’s a lot to like about his books, his tweets and his outlook towards life, and this tweet is one example (note that I am talking about the pics in the reply, not the original tweet):

Now, the original tweet, reposted as a stand-alone:

So what is the company about?

Nasser Jaber is cofounder of the Migrant Kitchen, a catering company and social impact organization that hires immigrants, migrants, and undocumented workers to both train them in commercial cooking as well as help gain their cuisines more exposure in the marketplace.

https://stories.zagat.com/posts/nasser-jaber-on-creating-jobs-through-immigrant-cuisine

Read the whole article! I got to learn about quipe (kibbeh, apparently), and esfiha (the spelling differs based on context, so my apologies if I got it “wrong”), among other things.

Twitter is a wonderful, wonderful way to learn more about the world, but it is like a garden, in the sense that constant weeding is required. But when you tend to it just so, it is completely worth the effort!

Thanks, and enjoy the weekend 🙂

# Agriculture in England and India, Immigration, Water and Healthcare

Five articles I enjoyed reading this week – and hopefully you will as well

The change that is coming over farming can be summarised in simple economic terms. Intensive agriculture prioritises a bumper harvest – the annual dividend – while the new approach emphasises the preservation of the initial capital – the land itself. For a glimpse of how this new investment priority will affect British farming, it suffices to visit those progressives who have already, to varying degrees, made it their own.

The Guardian Long Read on agriculture (in England). Horizons (one out of choices, horizons, incentives and costs) remain underrated in economics classes, as this article points out. But there is much more to read here: recommended!

It developed an app-based platform that registers orders directly from buyers, analyses category-wise demand, fixes dynamic prices depending on daily demand, and transfers the orders to its network of 1,000+ farmers. Farmpal’s price comparison feature ensures that farmers can sell their produce at rates higher by 20 to 30 percent than what they would normally get in the mandis.
“This is one of our main promises to the farming community. We are able to offer them premium prices because technology eliminates at least four to seven middlemen from farm to fork,” the founder explains.

While on the topic of agriculture, this from Maharashtra, India: Farmpal.

Caplan’s case isn’t entirely about economics: he also makes a moral appeal. Consider the case of “Starving Marvin,” who needs food and is prepared to purchase it legally. On his way to the market, he is turned away by an armed guard. If Marvin subsequently dies of starvation, Caplan asks, is the guard guilty of murder? The philosopher Michael Huemer, who first introduced this hypothetical, in 2012, concluded that the answer was yes. He writes, “If a person is starving, and you refuse to give him food, then you allow him to starve, but if you take the extra step of coercively interfering with his obtaining food from someone else, then you do not merely allow him to starve; you starve him.” Caplan doesn’t go that far, but he does argue that the guard is wrong to prevent Marvin from feeding himself.

Read the paper, read the book, read this profile of Bryan Caplan, and his quixotic quest to get all of us to accept a world without borders.

Geologists and hydrologists, who worked on implementing the project, shared similar views and hailed Jalyukta Shivar. This was mainly due to the interventions undertaken in the existing water reserves, planned de-silting activities, among many others. However, experts agreed that the scheme was not appropriately implemented. Now with Jalyukta Shivar no longer in existence, focused efforts of the past five years, in most likelihood, will go down the drain unless a similar scheme is introduced. With rainfall variations getting more pronounced, in addition to depleting groundwater reserves, the state will need concrete interventions to tackle future water requirements, experts recommended.

As Tyler Cowen is fond of saying, solve for the equilibrium. On the politics of water conservation in Maharashtra.

America’s mediocre health outcomes can be explained by rapidly diminishing returns to spending and behavioral (lifestyle) risk factors, especially obesity, car accidents, homicide, and (most recently) drug overdose deaths. [Please read this post for the full explanation]

The diminishing returns are evident in cross-sectional analysis. Higher-income countries like Norway and Luxembourg spend twice as much as the likes of Spain and Italy and probably experience worse average outcomes.

Via the excellent Navin Kabra, a very, very long article on healthcare in America. Excellent if you are a student of America, healthcare or microeconomics. At the intersection of the three, it becomes mandatory reading. Pair up with Baumol’s Cost Disease (although the name is misleading, it is the most popular way to this phenomenon is referenced)

# Etc: Links for 10th January, 2019

1. Russia plans to have the ability to cut itself off from “the” internet, but keep “its” internet running.
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2. One of my students might be embarking on a PhD in neuroeconomics, and reading up about the topic got me here. Interesting videos, and a neat set of publications.
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3. Spinach is, is not, no is, no is not, never was, always was, is, isn’t a good source of iron. Via the excellent Navin Kabra.
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4. A profile of Qassem Suleimani in the New Yorker, from almost seven years ago.
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5. Learn SQL by solving a murder mystery.
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6. The last link this Monday was about NIP. Rathin Roy is doubtful about the Indian government’s ability to execute on the plan.