Weekend reading links

1. Sidharath Kapur has a very good oped which raises important issues relating to solar power procurement in India. In a rapidly evolving market with sharply declining cost, the developers and buyers face significant risks. The early moving developers face the risk of being left with higher cost power sources which will struggle to find buyers. And buyers entering into long-term PPAs will be left with buyer's remorse of high cost power they would want to replace.

He proposes some alternatives,

One option could be the long term PPA is at a de-escalating tariff. The bidding can be at a base tariff x which de-escalates at say 3-5% a year. This would mean that the starting tariff as a headline number being bid may be higher but the levelised cost of tariff would be lower. While the starting tariff may be a bit higher it will improve long term sustainability of the PPA in a downward sloping cost of power. Indian lenders would also like it given they lend for 10-15 years. The PPA can also be structured in a way which permits part of the committed capacity to be installed and sold in the open market. A base committed volume on long term PPA provides comfort to lenders while the market saleability reduces mutual obligation to buy and sell on producer and off taker. This will also bring more power to exchanges and deepen the market. This option can be strengthened by a contract of difference with the off taker underwriting to meet shortfall in revenue coupled with clawback of excess revenue on market power sales. This would bring PPA tariff down in case market is offering higher and vice versa. A 70/30-PPA/Non PPA mix will only impact the off-taker by 9p/unit in case the market price varies by 30p up or down over a PPA tariff of say Rs 2.50.

Another option would be to change the bidding criteria. Instead of bidding on lowest tariff the option can be to bid for the lowest project cost to be recovered at a target project IRR. Operating costs are very low at 5-10% of the overall cost. A cap can be imposed on operating cost recovery as part of bid criteria to avoid gaming. Upon meeting target project IRR, the obligation on off taker to purchase power drops off. The developer is freed from the obligation to supply power and can sell power to the market. An interesting twist would be to have a twin bid criterion with appropriate weightage spread between lowest project cost and a stipulated range of lower target project IRR. This will theoretically result in a lowest cost of power based on project cost and target project IRR which will drop off once the latter is met. This should occur much before a 25-year PPA period. While this would entail annual computation of the recovered IRR, this should be a fairly easy arithmetical calculation. Going ahead this will bring to the market projects with recovered capital and thus can supply power to the market at extremely low cost given that only operating costs are to be recovered. 

This again highlights the impossibility of trying to write complete long-term contracts, especially in a rapidly evolving area like renewables generation. Some form of revisit of the contract, within pre-defined boundaries and terms should be part of all such contracts. 

Couple of graphics from Max Roser on the decline in solar prices. This about the levellized cost of energy, which captures the cost of building and operating plants with fuel costs,

And this about trends in the cost of electricity from various sources over the 2010-19 period

Another option in addition to the two suggested by Kapoor is to adopt a regulated tariff approach. Instead of a 30 year PPA, like with utility contracts under the RPI-X regulation, there should be a mechanism to periodically revise the rates downward (X) once every 5-7 years, based on the trends associated with tariffs of new plants coming on line. Even though fixed costs are incurred upfront, this type of contracting can provide greater discipline and align incentives towards developers taking a life-cycle returns perspective.  

2. John Mauldin points to the Washington Post graphic about how large businesses cornered a disproportionate share of the Paycheck Protection Program (PPP) loans in the US.

He points to the unique confluence of favourable factors facing large companies - they have inherent economies of scale advantage (amplified by network effects in case of digital markets), low-cost Fed financing, and weakened competition because so many smaller companies are struggling. This opens the window for 'monopoly rents'. 

3. From The Economist on the spectacular drop in coal-based power generation,

In Britain the share of electricity generated by coal fell from 40% in 2013 to 2% in the first half of this year; the country now burns less coal than it did when the first coal-fired power station was built in 1882. In the EU coal-fired power generation nearly halved between 2012 and 2019.

And the impact of China,

Asia is currently home to nearly 80% of coal consumption. Most of that—52% of the global total—takes place in one country: China. India, Asia’s second-biggest market, consumes less than a quarter as much. The growth in China’s coal-fired generating capacity between 2000 and 2012 helped reshape the global economy and drive a 200% increase in Chinese GDP per person. It also nearly tripled the country’s carbon-dioxide emissions, making it the largest emitter in the world. Its effects on air quality hastened millions of deaths... Yet coal-plant construction shot up in 2019. And in the first five and a half months of 2020 provincial governments, keen to boost employment and economic growth, gave companies permission to add a further 17 GW of new coal capacity... Chinese-financed coal plants in other countries are on course to add 74 GW of coal capacity between 2000 and 2033, according to Kevin Gallagher and his colleagues at Boston University.

This about the country's cost curve for various energy sources

4. From Businessline on PSU dividends, value capture or asset stripping?

Over the years, PSUs have been among the Centre’s major benefactors, contributing a significant portion of non-tax revenue in the form of dividend payouts. Between FY15 and FY19, they collectively paid ₹2.04-lakh crore in the form of dividend and other investments. Of this, mega PSUs (Maharatnas and Navaratnas) alone contributed over ₹1.66-lakh crore, or 82 per cent of the total.

And from Business Standard,

Over the past five years, a sample of 55 listed PSUs in aggregate paid over 70 per cent of their profits as dividend. The pay-out ratio for PSUs was more than twice that of Nifty50 firms.

5. On intergenerational mobility in India from Mathieu Ferry,

See also this paper. 

6. Harish Damodaran points to Punjab farmers being stuck in a middle income trap.

The average monthly income of agricultural households, according to the NABARD’s All-India Rural Financial Survey in 2016-17, was the highest in Punjab. At Rs 23,133, it was more than 2.5 times the national average of Rs 8,931 and ahead of Haryana (Rs 18,496) and Kerala (16,927), with Uttar Pradesh (Rs 6,668) and Bihar (Rs 7,175) far behind.

6. Sunita Narain's article on how widespread adulteration by large companies of honey with imported (and FSSAI test beating) Chinese sugar syrups was detected. 

7. Rana Kapoor should be the next in the Netflix series on Bad Boy Billionaires. 

8. Disturbing story about Big Tech spending large money in lobbying European legislators, raising fears of Washingtonization of Brussels. 

Meanwhile Rana Faroohar thinks that with the anti-trust action initiated against Facebook for buying WhatsApp and Instagram, the regulators in the US may have finally come to appreciate the dangers of network effects and resultant monopolies.

See also this by Jayati Ghosh.

9. On the Indian economy, Jahangir Aziz makes the point about demand destruction during Covid and the challenges it poses to recovery. This is an important point

If the level of GDP was 100 in 1Q, then it fell to 75 in 2Q and recovered to about 92 last quarter, it is still about 8 per cent lower than the level in 1Q20. In fact, we expect GDP growth in FY22 to recover to 12 per cent from -9 per cent in FY21, which implies that six quarters from now it will still be about 7 per cent below the pre-pandemic path, or roughly $300-billion-a-year of income losses across two years, compared to the pre-pandemic path. Imagine the havoc this can wreak to household and SME balance sheets, to income inequality, to poverty, and to women’s employment, since much of the economic shock has been borne by services, where female employment is much higher than in manufacturing.

Mahesh Vyas on the problems faced by women in the labour market

Although the labour force participation rate (LFPR) for women is very low, at less than 11 per cent compared to 71 per cent for men, they face a much higher unemployment rate of 17 per cent compared to 6 per cent for men. The much fewer women who seek work find it much harder to find work compared to men... Women accounted for 10.7 per cent of the workforce in 2019-20, but they suffered 13.9 per cent of the job losses in April 2020, the first month of the lockdown shock. By November 2020, men recovered most of their lost jobs, but women were less fortunate: 49 per cent of the job losses by November were of women. The recovery has benefited all, but it benefited women less than it did men.

He points to LFPR for urban women in 2019-20 being 9.7% as against 11.3% for rural women. A reason,

Given that men continue to be considered as the principal earning member of a household, women are unlikely to accept poor quality jobs. Household incomes have risen to a point where employment for women as a second earning member of a typical household is not as much of a necessity as it is a choice. Such a choice will be exercised only if the job on offer is of good quality without punishing working conditions or prohibitive transaction costs. But, good jobs are on the decline.

The Urban LFPR has fallen to 6.9% in November 2020. The article has some very interesting, and disturbing, trends on female LFPR.

10. A review of the new guidelines issued by Government of India on ride hailing services. State governments to make their respective regulations based on this.

11. AK Bhattacharya on India's problem of very high share of unrealised direct tax revenues,

The disputed amount under this head (direct tax raised but not realised) doubled to Rs 8 trillion at the end of March 2019, compared to Rs 4 trillion at the end of March 2014. In other words, the share of unrealised direct tax revenue in total direct taxes collected went up sharply from 64 per cent in 2013-14 to 71 per cent in 2018-19... These disputes have remained unresolved for a long period of time— from more than a year to about 10 years... The problem arose in the last five years of the Manmohan Singh government. The total amount of direct tax arrears because of disputes was just about Rs 54,000 crore in 2008-09, or 16 per cent of total direct tax collections that year. In the following five years, the arrears kept mounting and ended up at as high a level as 64 per cent of total direct tax collections of Rs 6.38 trillion in 2013-14.

12. The latest round of NFHS-5 survey results point to a stagnation and even decline in child nutrition levels measured in terms of proportion of underweight children and stunting. This is just one more signature of the increasingly evident problems with India's economic growth model. Unlike the East Asian economies, where growth was accompanied with dramatic improvements in human development indicators, India's does not seem to be doing so. The survey found that at least one aspect of child undernutrition - underweight, wasting, stunting - had gone up in 14 out of 17 states.

There are two particular disturbing features. One, it is not that the pace of improvement in human development indicators has decline, but they are reversing. Second, India's low baseline should have meant that these indicators should be improving at rapid pace. 

The survey's funding of increase in overweight children points to the importance of making the distinction between hunger and nutrition. While the former may be getting addressed, it is the later that is the concern. It appears that family incomes are not keeping pace with being able to afford basic nutritional food items like pulses, eggs, vegetables, fruits, and meat. It all then boils down to incomes. 

This is a vicious circle. The long-term consequences of these in terms of being able to support broad-based economic growth is deeply disturbing. 

13. New SEBI regulations opens the door for the likes of fintech companies to become asset management companies (AMCs) and offer mutual funds. In this context, it's important to keep in mind that fintech companies' expertise is on the transactions side (accessing customers and managing transactions), which is only a small and secondary part of the AMC's core activity of investing and managing the funds raised from its investors. Fintechs have no expertise whatsoever on the latter.

14. DK Srivastava analyses the budget prospects for the coming years and argues for favouring capital expenditure. His assessment of the gross tax revenues of the centre for 2020-21 to be Rs 17.2 trillion, exactly the same as that in 2016-17!

15. From a PRS report on state budgets,

During the period 2012-20, Centre’s cess and surcharge revenue nearly doubled from 0.9% of GDP to 1.7% of GDP. In comparison, GTR declined from 10.4% of GDP in 2012-13 to 9.9% of GDP in 2019-20.

16. Finally, an excellent graphical story highlighting how Delhi's air pollution differentially affects the rich and poor children.

Weekend reading links

1. As Beijing commits to eschewing the use of real estate market to stimulate the economy, its effects on the local government finances will be felt immediately. Land sales account for as much as 38% of local government financing. And this comes at a time when local government finances are deep in deficit.

2. Working hard does not translate into being effective. Counter-intuitive in the world where the amount of time worked is seen as a measure of your productivity and commitment. 

Sample this, 

Charles Darwin ambled into his study around 8am and worked a good hour and a half before taking a break to read the mail. He did another 90 minutes before noon and then, after a walk and an afternoon nap, another briefish stint before dinner. As Mr Pang writes, if Darwin had been working in a company today, “he would have been fired within a week”. Yet he still managed to write 19 books, including On the Origin of Species, one of the most famous books in the history of science. Henri Poincaré, the great French mathematician, wrote 30 books and 500 papers by following the less than blistering pace of a roughly four-hour day. The prolific Dickens wrote from 9am to 2pm, with a break for lunch.

This is a great essay that seeks to over-turn conventional wisdom on working long hours.

3. Nice tribute to Martin Weitzmann in The Economist. I am inclined to believe though having been passed over by the Nobel Committee in favour of William Nordhaus, he will have the last laugh in the most important environmental debate of our times,

In 1974, early in his career, he wrote a paper that became a foundation stone of every course on public economics. It posed the question: how should regulators rein in pollution? Should they issue (tradable) pollution permits to firms, thereby picking a quantity? Or should they tax polluters, thereby picking a price?... Mr Weitzman assumed that predicting the reaction of prices to a regulated quantity, and vice versa, is partly guesswork. Which you should regulate depends on the relative costs of mistakes. If getting the quantity of pollution slightly wrong would be costlier, then quantity should be pinned down, with prices allowed to work themselves out. If a slightly errant price can do more damage—say, because the need to buy expensive permits could put many firms out of business—then a tax, fixed at a safe level, is the way to go. Uncertainty was the theme that ran through Mr Weitzman’s career...

Perhaps the biggest debate in environmental economics in recent years has concerned discount rates. By how much should you mark down the environmental damage of pollution to take account of the fact that it comes mostly in the future? Mr Weitzman assumed that the correct discount rate is itself uncertain. He demonstrated mathematically that whatever rate is chosen, uncertainty means it should decline over time. The further you peer into the future, the lower your discount rate should be... William Nordhaus carefully prices the potential damage from global warming using an economic model, discounts it appropriately (he favours a relatively high rate) and compares the result to the costs of reducing emissions today. His models suggest that policymakers should implement a carbon tax starting at around $30-40 per tonne of carbon dioxide and tolerate warming this century of over 3°C, compared with temperatures in pre-industrial times. Mr Weitzman thought this approach problematic. Climate change, he argued, does not lend itself easily to cost-benefit analysis. Despite advances in climate science, the sensitivity of global surface temperature to atmospheric carbon dioxide remains uncertain. Even if the central case is that a given amount of pollution produces a manageable eventual rise in temperatures, a cataclysmic event, such as global warming of over 6°C, remains worryingly possible. Cost-benefit analysis, he showed, can break down in these conditions. His “dismal theorem” proved that with fat-tailed distributions, and under certain mathematical assumptions about people’s preferences, society should be willing to pay unlimited amounts today to avoid catastrophic risk.

4. The financialisation story marches on with Apple, sitting on over $200 bn worth surplus cash reserves, raising $7 bn in debt. It plans to use the money for general corporate purposes, a euphemism for share buybacks and dividends. 

5. Gillian Tett points to some interesting stats. On technology induced changes, 

Data from the Milken Institute, for example, suggests that while just 2 per cent of the US population lives on a farm today, that figure was 40 per cent in 1900 and 98 per cent in 1800.

And on labour mobility in the US,

While 6.1 per cent of Americans were moving between counties or states each year back in 1990 (and in previous decades, this was almost certainly far higher), in 2017, that figure dropped to 3.6 per cent. And when workers do leave depressed areas today, they typically relocate to places with a similar profile rather than to megacities or high-growth hubs.

Weekend research papers reading links

1. Erik Brynjolfsson, Chad Syverson, and Daniel Rock find a productivity J-curve as General Purpose Technologies (GPTs) evolve,

General purpose technologies (GPTs) such as AI enable and require significant complementary investments, including business process redesign, co-invention of new products and business models, and investments in human capital. These complementary investments are often intangible and poorly measured in the national accounts, even if they create valuable assets for the firm. We develop a model that shows how this leads to an underestimation of output and productivity in the early years of a new GPT, and how later, when the benefits of intangible investments are harvested, productivity will be overestimated... The error in measured total factor productivity therefore follows a J-curve shape, initially dipping while the investment rate in unmeasured capital is larger than the investment rate in other types of capital, then rising as growing intangible stocks begin to affect measured production...

This period can be of considerable length. For example, the technologies driving the British industrial revolution led to “Engels’ Pause,” a half-century-long period of capital accumulation, industrial innovation, and wage stagnation. In the later GPT case of electrification, it took a generation as the nature of factory layouts was re-invented.

2. Stephan Heblich, Daniel M Sturm, and Stephen J Redding seek to quantify the impact of transport technologies on the urban economy. Their model uses data for London from 1801-1921 and the introduction of steam railways and finds for the period,

... that removing the entire railway network reduces the population and the value of land and buildings in Greater London by 20 percent or more, and brings down commuting into the City of London from more than 370,000 to less than 60,000 workers.

3. Stephen Cecchetti and Enisse Kharroubi find evidence of the adverse impact of credit growth on productivity,

We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer, hence lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry-level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.

And their conclusions on financial sector growth are very important,

First, the growth of a country's financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth. Financial booms are not, in general, growth-enhancing. Second, using sectoral data, we examine the distributional nature of this effect and find that credit booms harm what we normally think of as the engines for growth – those industries that have either lower asset tangibility or high R&D-intensity. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems.

This graphic on the R&D intensity of various manufacturing industries is interesting

4. Falk Brauning and Victoria Ivashina find significant spillovers from US monetary policy on emerging market economies through the foreign banks' lending channel.

Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars... Outstanding shares of foreign banks’ dollar credit for African, American, and Asian emerging economies are over 90 percent. Even for emerging Europe, this number is 60 percent... This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.

In case of EM's loans are the dominant form of external liability compared with bonds for developed markets, and foreign banks share of all external liability is for EMs is double that of developed countries.

 5. Raj Chetty et al map children's adult life outcomes based on their childhood circumstances. 

We construct a publicly available atlas of children's outcomes in adulthood by Census tract using anonymized longitudinal data covering nearly the entire U.S. population. For each tract, we estimate children's earnings distributions, incarceration rates, and other outcomes in adulthood by parental income, race, and gender. These estimates allow us to trace the roots of outcomes such as poverty and incarceration back to the neighborhoods in which children grew up. We find that children's outcomes vary sharply across nearby areas: for children of parents at the 25th percentile of the income distribution, the standard deviation of mean household income at age 35 is $5,000 across tracts within counties. We illustrate how these tract-level data can provide insight into how neighborhoods shape the development of human capital and support local economic policy using two applications. First, the estimates permit precise targeting of policies to improve economic opportunity by uncovering specific neighborhoods where certain subgroups of children grow up to have poor outcomes. Neighborhoods matter at a very granular level: conditional on characteristics such as poverty rates in a child's own Census tract, characteristics of tracts that are one mile away have little predictive power for a child's outcomes. Our historical estimates are informative predictors of outcomes even for children growing up today because neighborhood conditions are relatively stable over time. Second, we show that the observational estimates are highly predictive of neighborhoods' causal effects, based on a comparison to data from the Moving to Opportunity experiment and a quasi-experimental research design analyzing movers' outcomes. We then identify high-opportunity neighborhoods that are affordable to low- income families, providing an input into the design of affordable housing policies. Our measures of children's long-term outcomes are only weakly correlated with traditional proxies for local economic success such as rates of job growth, showing that the conditions that create greater upward mobility are not necessarily the same as those that lead to productive labor markets.

6. Finally, Tyler Watts, Greg Duncan, and Haonan Quan, have a 900 student sample study which questions the findings of the famous Marshmallow test which appeared to show that children who were able to exercise self-control and resist marshmallows placed before them did better in life. They find limited support for delayed gratification leading to better outcomes and claims that circumstances matter more,

Instead, it suggests that the capacity to hold out for a second marshmallow is shaped in large part by a child’s social and economic background—and, in turn, that that background, not the ability to delay gratification, is what’s behind kids’ long-term success... This new paper found that among kids whose mothers had a college degree, those who waited for a second marshmallow did no better in the long run—in terms of standardized test scores and mothers’ reports of their children’s behavior—than those who dug right in. Similarly, among kids whose mothers did not have college degrees, those who waited did no better than those who gave in to temptation, once other factors like household income and the child’s home environment at age 3 (evaluated according to a standard research measure that notes, for instance, the number of books that researchers observed in the home and how responsive mothers were to their children in the researchers’ presence) were taken into account. For those kids, self-control alone couldn’t overcome economic and social disadvantages.

The failed replication of the marshmallow test does more than just debunk the earlier notion; it suggests other possible explanations for why poorer kids would be less motivated to wait for that second marshmallow. For them, daily life holds fewer guarantees: There might be food in the pantry today, but there might not be tomorrow, so there is a risk that comes with waiting. And even if their parents promise to buy more of a certain food, sometimes that promise gets broken out of financial necessity. Meanwhile, for kids who come from households headed by parents who are better educated and earn more money, it’s typically easier to delay gratification: Experience tends to tell them that adults have the resources and financial stability to keep the pantry well stocked. And even if these children don’t delay gratification, they can trust that things will all work out in the end—that even if they don’t get the second marshmallow, they can probably count on their parents to take them out for ice cream instead.

Capitalism and Mathew effect

One of the characteristic features of modern capitalism is a Mathew Effect or a form of accumulative advantage. In simple terms, this translates everywhere to a trend where the rich and powerful become ever more so and the poor and weak become more diminished. 

This is pervasive across both the market for businesses and labor, across sectors. Large firms get larger by getting cheaper credit, recruiting better employees, capturing a far greater share of consumers who are also likely to spend more,  generating more surpluses, attracting more investors, and benefiting more from regulatory regimes. Citizens who strike gold with the ovarian lottery get richer by accessing better education, acquiring superior non-cognitive skills, getting higher-paying jobs, being more successful professionally, assortative mating within social cohorts, and so on.

In both cases, the opposite set of trends apply with even greater force to smaller businesses and less fortunate people. Furthermore, the proportion of beneficiaries among both businesses and labor across sectors has been shrinking rapidly over time, leading to egregious concentration of market power and incomes at the top of the respective ladders. Amplifying these trends is the capture of political institutions and control over the process of laying down the rules of the game in all spheres public life by the same set of small group of beneficiaries. Worse still, this control over political institutions leads willy-nilly to the erection of entry barriers that add more layers to an already inhospitable environment for vertical mobility for firms and labor. The financial market regulation in the US may be one of the best examples of "extractive institutions" in our modern economy. There is an inexorable dynamic to to these rapidly widening inequalities. 

The combination of technological advances, globalisation, and financialization over the past quarter century or so that may have hastened this trend. 

The latest data point in this comes from the market for academic instructors in higher education institutions in the US (HT: Ananth). In this fantastic Truman Capote award acceptance speech, Kevin Birmingham highlights a sobering picture of the scale of 'adjunctification' of faculty positions in US universities, 

Tenured faculty represent only 17 percent of college instructors. Part-time adjuncts are now the majority of the professoriate and its fastest-growing segment... A 2014 congressional report suggests that 89 percent of adjuncts work at more than one institution; 13 percent work at four or more... An English-department adjunct at Berkeley, for example, received $6,500 to teach a full-semester course... According to the 2014 congressional report, adjuncts’ median pay per course is $2,700... Thirty-one percent of part-time faculty members live near or below the poverty line. Twenty-five percent receive public assistance, like Medicaid or food stamps... We cannot blame this professional anemia on scarce funding. The largest adjunct-faculty increases have taken place during periods of economic growth, and high university endowments do not diminish adjunctification. Harvard has steadily increased its adjunct faculty over the past four decades, and its endowment is $35.7 billion. This is larger than the GDP of a majority of the world’s countries.

He points to a market failure which is a feature in most labor markets,

The key feature of adjunctification is a form of labor-market polarization. The desirability of elite faculty positions doesn’t just correlate with worsening adjunct conditions; it helps create the worsening conditions. The prospect of intellectual freedom, job security, and a life devoted to literature, combined with the urge to recoup a doctoral degree’s investment of time, gives young scholars a strong incentive to continue pursuing tenure-track jobs while selling their plasma on Tuesdays and Thursdays. This incentive generates a labor surplus that depresses wages. Yet academia is uniquely culpable... New faculty come from a pool of candidates that the academy itself creates, and that pool is overflowing. According to the most recent MLA jobs report, there were only 361 assistant professor tenure-track job openings in all fields of English literature in 2014-15. The number of Ph.D. recipients in English that year was 1,183. Many rejected candidates return to the job market year after year and compound the surplus... From 2008 to 2014, tenure-track English-department jobs declined 43 percent. This year there are, by my count, only 173 entry-level tenure-track job openings — fewer than half of the opportunities just two years ago. If history is any guide, there will be about nine times as many new Ph.D.s this year as there are jobs.

And this is telling,

Universities rely upon a revolving door of new Ph.D.s who work temporarily for unsustainable wages before giving up and being replaced by next year’s surplus doctorates. Adjuncts now do most university teaching and grading at a fraction of the price, so that the ladder faculty have the time and resources to write. We take the love that young people have for literature and use it to support the research of a tiny elite... If you are a tenured (or tenure-track) faculty member teaching in a humanities department with Ph.D. candidates, you are both the instrument and the direct beneficiary of exploitation. Your roles as teacher, adviser, and committee member generate, cultivate, and exploit young people’s devotion to literature.

Yes, while things may not be as dismal across departments, the broad trends are similar, not just in academia but everywhere in the labor market. Mathew Effect dominates. 

We live in the age of "winner takes all" capitalism and with a declining share of winners.  In Rawlsian terms, it is minimax capitalism. This is arguably capitalism's biggest market failure. Its implications include declining business dynamism, shrinking labor market diversity, and erosion of the credibility of institutions that underpin modern economies.

And it may well carry the "seeds" of capitalism's own decline. Marx may well have been right, albeit with a delay of nearly two centuries! We need a version of "maximin capitalism", one where the rules of the game positively favour the less advantaged so as to counterbalance the inevitable Mathew Effect.

What is the most effective anti-poverty program?

Two graphs from Max Roser that convey why removing barriers to labor mobility is, by orders of magnitude, the most effective anti-poverty program.

The first graph compares the total net present value of all benefits from multi-faceted graduation programs and annual increase in wages of low-skilled labor migration to the US.

The second compares the relative gains from removal of barriers to trade, capital, and labor respectively. 

The case rests!

Weekend Reading Links

1. The property price story in China is more nuanced now, with surging prices in certain areas of the Southern Coast and other major cities, and stagnating or declining prices elsewhere. There is a shortage in the former and excess supply among the latter. A Bloomberg news report summed it up,

At the heart of China’s property malaise is an imbalance between supply and demand -- the new building is taking place where there’s less demand, while supply is short in the most popular, largest cities. Last year, 61 percent of new-home building starts were in third- and four-tier regions, while only 5 percent were in first-tier hubs

The parallels with India's housing market are striking. Here, 95% of the supply is for the 5% of the market at the top, with acute scarcity in the affordable housing space and negligible supply in the LIG and MIG. 

Such market failures demand differentiated policy responses, instead of one-size-fits-all prudential ratios for all housing. In China's case, it would need to be geographically focused, whereas it has to be unit-size focused in India. 

2. From a Bloomberg report on India's limited success with promoting exploration and mining of gold, whose imports stood at $35 bn in 2015 and formed 43% of the current account deficit for the last quarter of the year,

Deccan Gold Mines, which hasn't dug up an ounce in 13 years because of the difficulty of obtaining permits from state governments... has no incentive to explore for gold after laws passed last year forced miners to bid for the right to mine the deposits they find. Finding mineral deposits is risky, cost-intensive business. As with pharmaceuticals, movies or venture capital, there are a long tail of failed investments behind every blockbuster... The only reason companies risk this capital is because they hope to get first refusal on the right to dig up what they've found.

India has long-standing problems with corruption around the free allocation of mining leases, which helps explain the desire to change the law. But doctors need to be careful they don't administer medicine that's more harmful than the disease itself. If a country can only stop corruption in mining by removing the industry's incentive to develop new mines, it's guaranteeing a future of rising import dependence.

The backlash from the spate of resource allocation scandals and the activism around it by various agencies of the state have left governments with limited space to manoeuvre. They are forced to view any resource allocation through the lens of public revenues maximization through auctions. This, as we know, is not always the right strategy. 

3. Highlighting the difficulties of protectionist policies like raising tariffs on Chinese imports in a world with globally integrated supply chains, Upshot writes,

A study by the Federal Reserve Bank of San Francisco figured that 55 cents of every $1 spent by an American shopper on a “Made in China” product goes to the Americans selling, transporting and marketing that product. Suppressing Chinese imports would harm shopkeepers and truck drivers. In fact, making Chinese-made goods more expensive would ripple through American shopping malls. An extra $20 for, say, children’s clothing from China is $20 not spent on a new baseball glove for a child, or a birthday gift for a grandmother. A tariff on China would dent the sales of all kinds of products, even those made in the United States. It seems likely that such a tariff would burden American consumers while doing little to create jobs for them. Gary Clyde Hufbauer and Sean Lowry at the Peterson Institute for International Economics, studying the impact of a 35 percent tariff imposed on Chinese tire imports by Washington in 2009, found that American consumers had to spend an extra $1.1 billion on tires, while the tariff protected no more than 1,200 jobs. About $900,000 for every job saved, in other words.

4. Livemint points to India's poor performance in inter-generational mobility, even compared to its neighbours, with education attainment of children being more dependent on that of their parents (higher score indicates lower inter-generational mobility). 

The causal chains may be running in all directions - poor people are more likely to suffer from poor quality schooling (in public schools) and/or unaffordable good quality schooling; are more likely to drop out of school for financial reasons; face far less domestic pressures to learn and stay enrolled; and good quality schooling is an increasingly important determinant of life incomes. 

5. Germany is the latest to suffer from the slowdown in China, with nine of the country's top 10 exports to China declining in 2015. 

6. Interesting findings from a very exhaustive JETRO survey in 2015 of 4635 Japanese affiliated (with Japanese investment of atleast 10%) manufacturing sector firms across 20 countries in Asia. Indian firms are among those with the most optimistic business expectations in terms of expansion and profitability. Indian firms do not enjoy much competitive advantage in terms of local production costs (as compared to their Japanese counterparts) among its main export competitors. 

Indian firms no longer have a competitive advantage with labor costs when compared to its direct competitors like Vietnam and Bangladesh, or even Indonesia.  

Indian firms are the least export-focused among all countries.

7. On the issue of manufacturing, NYT points to a BCG study which finds that Indian firms' manufacturing costs have remained the same in real terms between 2004-14. Note the contrasting fortunes of Mexico and Brazil, with the latter's cost competiveness taking a massive hit. Australia is another country which suffered, a possible reflection of the Dutch disease. 

More fascinatingly, the cost of making a pound of yarn is lower in the US than in India or China. Its success has been in controlling input costs. And this has lessons for other areas of manufacturing. 

8. Very informative slide deck on the Chinese economy from RBS Research. For an economy whose engine has been construction and infrastructure investments, the declining electricity, steel, and cement production is stark.

Investments as a share of GDP may have peaked and may be on its downward path.

Economic rebalancing between consumption and investment is happening at a very slow pace.

The biggest immediate worry is the massive pile of accumulated public (especially local governments) and corporate debt, which has risen at a staggering $6.5 bn a day since the 2008 crisis broke out. 

The high rural-urban wage gap in India

Kaivan Munshi and Mark Rosenzweig examined the low rate of rural-to-urban migration in India and find rural insurance markets as responsible for keeping adult males in villages. They point to the significantly slower growth of urbanization in India compared to countries like China, Indonesia, and Nigeria. In fact, India's urbanization rate is about 15% lower than countries with similar GDP per capita.

Focusing on workers with less than primary education (who are likely to perform similar menial tasks in both rural and urban areas) to avoid confounding effects of returns to education, they find,

The wage gap for India, at over 45%, is actually much higher than the corresponding gap for the other two countries, which is about 10%. One reason why urban wages are higher than rural wages is because the cost of living is higher in urban areas. When we account for these differences in the cost of living, the Indian wage gap declines to 27%. Although the Chinese and Indonesian data do not allow us to make the same adjustment, the nominal wage gap in these countries serves as an upper bound for the real wage gap because urban prices will always be higher than rural prices. It follows that the real wage gap in India is at least 16 percentage points larger than it is in China and Indonesia. There is evidently some friction that prevents rural Indian workers from taking advantage of more remunerative job opportunities in the city

The authors attribute the friction to informal rural insurance networks which draw strength from social capital and threats of social sanctions in tightly knit rural communities, 

The explanation that we propose for India’s low mobility is based on a combination of well-functioning rural insurance networks and the absence of formal insurance, which includes government safety nets and private credit. When an insurance network is active, households that receive a positive income shock provide a transfer (in cash or kind) to one or more households in the network that receive a negative shock. This smooths the consumption of each household over time, making risk-averse households better off. In rural India, informal insurance networks are organized along caste lines...  Frequent social interactions and close ties within the caste, which consists of thousands of households clustered in widely dispersed villages, support very connected and exceptionally extensive insurance networks.

An undoubted role for social insurance in mobility frictions apart, there are at least a few confounding factors and (not water-tight) assumptions that come in the way of identifying causal mechanisms. For example, the higher income families, independent of caste, are more likely to be socially aspirational and, therefore, more likely to migrate, irrespective of the strength of caste links or the marginal utility of attendant social insurance. 

There are potentially other compelling hypotheses about such frictions. Fundamentally, it may not be unreasonable to argue that there are social/behavioural and economic factors that contribute to the friction. Apart from the loss of social insurance, the former may include a high level of social inertia, by itself - people just prefer to stay in the comfort zones of their community. There may be differences in the nature and conditions of similarly placed jobs in rural and urban areas (rural jobs of the same kind may be less demanding and, therefore, less productive) and in the general quality of life for those with similar incomes. The latter may include the lack of affordable housing, loss of welfare benefits, and so on. It is most likely that all these factors interact in a complex manner, with wide variations in their dynamics based on the socio-economic contexts, to generate the frictions that retard migration to urban areas. 

We need to examine interventions that can potentially relax these factors. For example, better transportation networks may lower the social inertia and encourage migration. Similarly, a portable social insurance mechanism (through Aadhaar) may lower the economic cost of migration. In any case, policies to bridge the high rural-urban wage gap documented in the paper can be very powerful income growth-boosters. 

Weekend reading links

1. The banking sector and corporate balance sheets constitute the Indian economy's two biggest immediate problems. The ebitda-to-interest ratio of the median company with market capitalization of more than $100 m four years ago is lowest for Indian corporates.

2. This blog has held the view that Indian economy is currently investment demand constrained, and, therefore, unlikely to respond to supply-side measures. In this context, Jahangir Aziz highlights the challenge,

Ask any corporate (entity), and in private they will all tell you the reason to have shelved their expansion plans is not because they can’t get land, or that labour reforms have not been implemented or that cost of capital is high—instead, they will all say there is no visibility of demand, and until there is visibility of sustained demand over the medium term, regardless of reforms on the cost side, it is very difficult for them to invest.

About the priorities for public policy to re-ignite demand,

You will need to now start spending on restructuring and reforming the areas where Indians save the most—for their children’s education, housing, daughter’s wedding and healthcare. If you look at out-of-pocket expenses on health and education, they are astronomically high in India. The government needs to start attacking the areas where precautionary savings are the highest. Education and health are readily and easily observable areas where people put in massive amounts of savings and, therefore, the government should be putting in money here, rather than infrastructure. We need a better balance between infrastructure and pushing money into education and health. The biggest expenses are for higher education and not for 12 years of schooling—where you spend ridiculous amounts for private colleges and universities. This is because the centre has not met its responsibilities of building places of higher education.

And why the current priorities, even in infrastructure may be off the mark,

If you look at infrastructure design in India, we are expanding ports and connecting them to hinterlands, we are expanding airports, we are connecting the metros by expanding the Golden Quadrilateral. But no one talks about, say a 10-lane highway from Kanpur to Coimbatore. There is no way I can go from Kanpur to Coimbatore without going through either East Coast or West Coast. These large investments make sense only if we believe that the export-led model of growth that we had in the early part of 2000s will come back. But if exports won’t come back, why are we even bothering with new ports.? From infrastructure design to mindsets, all has to be changed if we need to find new sources of demand, and this new source is domestic consumption. This new demand will get me the corpus to start investing, and that will generate growth.

3. A fascinating feature on how baseball has become the ultimate socio-economic mobility ladder in the Dominican Republic. As of opening day 2015, Dominicans made up 83 of US major league baseball’s 868 players.

4. Thanks to tax inversions, the Tiebout theory would bind even more strongly for corporate tax in the years ahead. Nice article in the Times on the recent spate of tax inversions in the US. Addressing the issue of tax arbitraging should top any multilateral agenda. By the way, it is surprising why the beggar-thy-neighbor, low-tax policies of countries like Ireland does not attract the same level of indignation that currency manipulation does. 

5. Martin Wolf analyzes Japan's problem as fundamentally one of weak demand - an aging population and declining demand shrinks investment opportunities, leaving corporates with growing surpluses. In this, as has often been said, Japan may be a portend for many developed economies in the years ahead. But despite this serious headwind, the Japanese economy has done remarkably well, having the highest growth rate of GDP per working person for the 2000-15 period among all G-7 economies.

Martin Wolf's prescription is for policies to slash corporate surpluses by encouraging them to raise wages (to boost demand) and impose taxes. I am not sure. This works under the presumption that demand is currently suppressed. A country with worsening demographic balance needs a little less of everything each passing year. Higher wages are therefore only likely to be saved. A more compelling suggestion would be to ease immigration and activate that demand channel.

6. Japan may also be in the vanguard of secular stagnation trends, of which Larry Summers is ever more convinced,

With appropriate caveats about the complexities of drawing inferences from indexed bond markets, it is fair to say that inflation for the entire industrial world is expected to be close to one percent for another decade and that real interest rates are expected to be around zero over that time frame. In other words, nearly seven years into the U.S. recovery, markets are not expecting “normal” conditions to return anytime soon.

Apart from cheap capital goods, this explanation for investment demand being constrained is interesting,

The new economy tends to conserve capital. Apple and Google, for example, are the two largest U.S. companies and are eager to push the frontiers of technology forward, yet both are awash in cash and are under pressure to distribute more of it to their shareholders. Think about Airbnb’s impact on hotel construction, Uber’s impact on automobile demand, Amazon’s impact on the construction of malls, or the more general impact of information technology on the demand for copiers, printers, and office space. And in a period of rapid technological change, it can make sense to defer investment lest new technology soon make the old obsolete.

Having said all this, Summers appears to refute his original assertion and claim that it is, after all, possible to get back on the previous growth path,

Although developments in China and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track... An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth.

This argument is surprising and runs contrary to his own argument about investment demand being constrained. How would fiscal policy address the headwinds of technology and capital conservation? As Japan has been finding out over nearly a quarter century, public investments in infrastructure can only get you so far. It can, at best, ameliorate some of the pains of a secular stagnation.

7. A very good exploration of the divide in the Keynesian camp between those advocating continuation of monetary accommodation (Krugman, Summers, De Long) and those (Fed insiders) preferring to proceed with raising rates.  

Mobility and access to better opportunities

The debate on capitalism and widening inequality is far more complex than appears at first sight. For example, consider this from a review of Caroline Freund's new book,

At the World Economic Forum in Davos this year, Winnie Byanyima, executive director of Oxfam International, referred to the relief charity’s findings that the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016. In response, Sir Martin Sorrell, chief executive of WPP, the advertising group, said: “I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.”

Ms Freund's taxonomy of the super-rich in the emerging world shows that such wealth is largely self-made, and the share of inherited wealth is continuously declining. Obviously, I do not imagine that she is trying to justify widening inequality on this ground, though many others argue vehemently that if anybody can become super-rich, then what is wrong with the dynamics whose one consequence is widening inequality. What gives?

Rationalization of widening inequality on grounds of self-made wealth (as against inherited wealth) overlooks the important point that even access to the opportunity to create self-made wealth is increasingly an ovarian lottery - function of where (country, city/region, locality, and family) you are born. When all is said and done, you are, largely (because of), where are you are born!

Malcolm Gladwell, chronicler par excellence of the less-discussed, has a fascinating essay in New Yorker where he explores the unintended positive consequence of the dislocation caused by Hurricane Katrina on the black population of New Orleans. He argues that by being forced out from the excruciating poverty and blight of pre-Katrina New Orleans black neighborhoods, the nearly 80,000 black population which moved out of the city in its aftermath were presented with an opportunity for social and economic mobility they would otherwise have not had. 

In this context, he writes about the acclaimed work of Raj Chetty, Nathaniel Hendren, and others which documented economic mobility across the US and found the dominant influence of people's immediate socio-economic environment in their life outcomes. He writes,

Moving matters: going to a neighborhood that scores high on those characteristics from one that does not can make a big difference to a family’s prospects... Suppose you look at parents who earn in the first quintile—that is, the bottom fifth of the U.S. income distribution. What are the odds that one of their children will—by the time that child reaches adulthood—make it into the top fifth of the income distribution? Those odds, they found, vary dramatically from one city to the next. In San Jose, for example, the probability is 12.9 per cent... At the other end of the spectrum is Charlotte, North Carolina, where the probability is 4.4 per cent: a poor child is almost three times more likely to reach the top in San Jose than he or she is in Charlotte.

In a second analysis, Chetty and Hendren assigned a value to every major metro area in the country, according to how much more (or less) a child can expect to earn depending on the city where he or she grew up. The No. 1 urban area, by this measure, is Seattle, at 11.6 per cent: by the age of twenty-six, the child of a family in Seattle earning just above the poverty line will make 11.6 per cent more than would otherwise have been expected. The place bonus for Minneapolis is 9.7 per cent; in Salt Lake City, it is 9.2 per cent. Coming in last on the list of the hundred largest commuting zones in the country, by contrast, is Fayetteville, North Carolina, which has a place penalty of negative 17.8 per cent: the child of a poor person in that city will end up earning substantially less than he or she would otherwise have earned, simply by having been raised in Fayetteville.

So how did moving out of New Orleans improve access to opportunities and likelihood of better life outcomes?

In the Chetty-Hendren-Kline-Saez analysis, New Orleans has a bottom-to-the-top probability of 5.1 per cent, which is half a percentage point behind Detroit. And the place bonus / penalty for New Orleans? Minus 14.8 per cent, which puts it ninety-ninth out of the top hundred biggest urban areas in the country, ahead of only Fayetteville.

So is moving poor people out of their existing neighborhoods the best poverty reduction strategy? Unfortunately, as with everything in life, there are no such neat and simple solutions. The problems starts when the partial equilibrium findings of Chetty, Hendren et al intersects with the general equilibrium dynamics that are triggered by such mass movements,

If too many poor African-Americans move into a middle-class neighborhood, then the middle class leaves—robbing the community of many of the things that the movers came in search of.

This is apart from the other major consequences of inequality, on which I have blogged repeatedly - the capture of political decision making and the inhibition of economic growth itself. 

India's urbanization trends

Excellent graphics from the recently released IIHS report (pdf here) on Urban India 2011. If we take into account larger villages, half of India's population is already living in urban areas or in areas with similar conditions.

Contrary to conventional wisdom, natural urban gorwth and not migration from rural areas is the major cause of urban population growth.

Despite the increasing importance of cities, urban development remains someway off from the mainstream development radar. The graphic below accurately captures the development priorities of governments in India. The Eleventh Plan (2007-12) allocation to various sectors reveals the low priority for urban development.

Cars and two-wheelers constitute 86% of all vehicles on the road, while accounting for just 29% of all trips. Walks and public transport together form 54% of all trips made. The case for massive investments in public transport is most compelling.

The High Powered Expert Committee (HPEC) appointed by the Planning Commission to estimate the financial requirements of cities has estimated that transportation requirements would form the major share of funds requirement for our cities in the 2012-31 period. However, the major focus of JNNURM has been on water supply and urban housing. In some sense, this is encouraging since it means that the funds requirement for providing the basic non-transport urban infrastructure - sewerage and water supply, solid waste management, and storm water drains - is a small share of the total estimated requirement.

Excellent snapshot (click to enlarge) of the cornucopia of urban social safety programs.

 

Despite the increased pace of urbanization over the past two decades, the share of informal employment as a share of total urban employment has remained stable in the 80% range. Jobs in trade and surprisingly, manufacturing, have been largely confined to the informal sector. 

Spatial clustering is defined as the ratio of the share of employment of a sector in an area divided by the national share of employment of that sector. Values greater than one signifies a relative clustering of that particular sector's employment in the particular region. The graphic below reveals a spatial clustering in the metros and million-plus cities for ICT services, high-tech industries, and fast-growing export sectors.