Weekend reading links

1. More on China's EV market stranglehold. This dominance extends to the vehicles sales itself. 

The International Energy Agency forecasts that this year 10.1mn EVs will be sold in China, 3.4mn in Europe, 1.7mn in the US. Fewer than 1.5mn EVs will be sold everywhere else in the world. Yet the agency has forecast that the global EV fleet will grow eight-fold to about 240mn in 2030. This implies annual global EV sales of 20mn cars in 2025 and 40mn in 2030, or 30 per cent of all car sales. Moreover, an increasingly large share of that expansion is likely to come from new markets.

Most of China's new FDI in EVs is in battery production.

In some important developing economies, Chinese companies are investing in both production and processing raw materials. Nowhere is this more striking than China’s involvement in the EV ecosystem in Indonesia, home to the world’s largest reserves of nickel, a key component of EV batteries. Last year alone companies domiciled in China and Hong Kong invested $13.9bn in Indonesia, most of which is believed to have been in the metals and mining industry. Chinese companies account for more than 90 per cent of the nickel smelters in the country. Chinese banks have also been keen to provide financing for nickel plants when others have been hesitant, says Alexander Barus, chief executive of the Indonesia Morowali Industrial Park — the country’s largest nickel processing site, which was built by Tsingshan, a Chinese nickel producer, and a local partner... Having secured access to Indonesia’s key resources, Chinese companies have also been the first movers in setting up EV manufacturing plants, even as Indonesia — and President Joko Widodo personally — have courted other big names such as Tesla to set up EV manufacturing. BYD said early this year that it would invest $1.3bn in an EV factory in Indonesia. The story is similar in Brazil where BYD and compatriot group Great Wall Motor are about to commence local manufacturing that could also serve for exports to the wider region. Great Wall is investing about $1.9bn in Latin America’s largest economy with production expected to start this year at a former Mercedes-Benz factory in Iracemápolis, São Paulo state. As well as its investment in auto production at Camaçari, BYD is also on the lookout for lithium mining assets in Brazil, which is ramping up extraction of the key metal for EV batteries.

2. China's trade surplus touches a record $82.6 bn in May, up 25.6% from a year earlier, largest ever for May, and one of the highest for any month (except during the pandemic).

China is rapidly building new factories and expanding existing ones as part of a national strategy. But spending is weak by Chinese households, because of a long and increasingly steep slide in prices for their apartments. Much of the extra factory production is being exported. With fewer Chinese families buying new apartments, fewer household appliances are sold domestically, for example. The government said that the value of exports of appliances climbed 18.3 percent in May compared with the same month a year earlier. And because demand is so weak in China, appliance prices have tumbled. The actual number of appliances exported last month rose 27.8 percent...

China’s trade surplus has tended to be fairly low in May and much higher later in the year, when its exporters supply goods for the Christmas season. The quantity of many exports, not just household appliances, has been rising faster than their value. So many containers full of goods are leaving China, as fewer come back with imports, that shipping lines have been running short of containers in China... Increased tariffs do not appear to have done much harm yet to China’s exports, and might even help in the short term. Some Chinese companies have rushed to send goods to emerging markets in Latin America and elsewhere before tariffs can take effect. In the past year, China has stepped up exports to Vietnam and Mexico, where goods can be reprocessed and then shipped on to the United States or Europe with low or no tariffs. These more complicated trade routes, coupled with weakness in China’s currency exchange rate, may reduce tariffs’ effectiveness, said Capital Economics, a research firm.

3. Interesting snippet on the contrast between India and China on social welfare spending.

China’s development strategy has always prized jobs and infrastructure investment over handouts and social spending, especially when its poverty rate was over 10%. Its rural poverty plan in 2011 included “self-reliance and hard work” as one of its basic principles... Until 2013 its explicit anti-poverty policies were aimed predominantly at poor places, not people. Its plan in 1994 focused on 592 counties, many of them in the mountains. It then drilled down to about 148,000 villages after 2001. It did introduce dibao cash payments for the urban poor in 1997 and their counterparts in the countryside in 2007. But coverage was limited. One study found that it missed over 80% of the rural poor in 2013. Adding together cash transfers, in-kind transfers and fee waivers, China spent just 0.76% of its gdp on social-safety nets in 2014, according to a World Bank study. 

How does that compare with India’s welfare programmes? The same study reckons India spent over 1.5% of its gdp on them at that time, including public-works projects and school feeding schemes, as well as transfers and waivers. A more recent estimate puts India’s welfare spending at 1.8% of gdp, including direct cash payments to farmers and others, facilitated by the spread of no-frills bank accounts under one of Mr Modi’s signature schemes.

4. Janan Ganesh has an excellent article where he argues that a spell in power has the likelihood of both taming the populists and also reducing their credibility before the electorate. 

The last best hope against populism in Europe is to expose it to government. The pressure of office might force anti-establishment parties to moderate, as Giorgia Meloni has done somewhat in Italy. Or it might reveal their incompetence and turpitude, as happened to Boris Johnson in Britain. Sometimes, of course, it will do neither: power will neither tame nor shame. (See Viktor Orbán.)... Time spent in government is time spent alienating voters with tangible decisions. Right now, in much of Europe, populists have a goldilocks level of success: enough to foul the atmosphere, to spread the idea that simple answers to big problems exist if governments would but enact them, but not enough to have to prove this in office. The establishment has a record, and all records are flawed. Its enemies get to travel lighter. The contest between the two sides is, in Pentagon argot, asymmetric. 

Note how many of the hard right’s relative underperformers in the European parliament elections are incumbents at home (Orbán’s Fidesz) or proppers-up of governments (the Sweden Democrats). This is the gravitational force that drags mainstream politicians down. Government brings round-the-clock attention, not just the curated broadcast rounds at which Nigel Farage excels. Above all, it brings the burden of making decisions that cost voters money. I could cite tax rises here, to fund lavish promises. Or higher interest rates from overborrowing. But few things would harm the populist cause more than having to manage immigration. Their plausible-sounding alternative to foreign labour in low-wage sectors — pay domestic workers more — would be tested against the public’s price-sensitivity. Even if voters don’t balk at higher social care or retail costs, the trade-off would become apparent at last. Never having to be tested, populist ideas have a spurious credibility. Only a spell in government would change that...

A notion dear to the west is that progress is made, and the truth arrived at, through argument. (Socrates has a lot to answer for.) This underestimates the role of practical demonstration. The west didn’t experience a human lifetime of moderate politics after 1945 because it was talked into it. What counted was the folk memory, now almost extinct, of what happened when nations last voted for parties that defined themselves against the system. There might be no safe way of giving voters a controlled dose. But the status quo, in which populists are on television, on stage, but not on the hook for much, isn’t tenable.

5. EV industry job losses fact of the day

In Europe, a 2021 study for a supplier trade body by PwC estimated that a switch to EV production only in the region by 2035 would lead to the loss of some 500,000 jobs in power-train production for cars with internal combustion engines. This would be offset by 226,000 new jobs related to EV power-train production but there still would be less employment.

6. Some disturbing evidence about sample surveys globally

In a recent article published in the Journal of Development Economics, Dahyeon Jeong and co-authors found that in a long survey of consumption expenditure, there is a reduction in item nonresponse by 10 to 64 per cent. However, they also found that “an extra hour of survey time lowers (reported) food expenditures by 25 per cent”... In a paper published in the journal Review of Income and Wealth, Espen Beer Prydz and co-authors compiled a dataset of 2,095 household survey means from 166 countries, which they then matched with the means from national accounts aggregates. They found that across countries, the estimate of average per consumption from household surveys is 20 per cent lower than that in national accounts. The gross domestic product per capita was higher by 50 per cent.

7. The rise of the far-right in the elections to the European Parliament was also accompanied by losses to the Greens. It's a sobering reminder about the challenges with the Green Transition, especially when its costs start to become evident and when it competes with other social concerns. 

Five years after the euphoria the Greens experienced in 2019, when they increased their seats from 52 to 74, they slipped back to 53... The Greens’ performance in 2019 may prove a high-water mark. In the more benign, pre-pandemic and prewar economic environment, mass rallies inspired by green groups and activists such as Greta Thunberg helped to make climate concerns a central electoral issue... Unfortunately, voters began to feel the impact of green policies on their wallets and lifestyles just as post-pandemic inflation and the energy shock from the Ukraine war kicked in... Hard-right parties elsewhere made political capital out of promises to slow the transition, and centre-right parties adopted watered-down versions of the same rhetoric... green parties performed worst in France and Germany, where the far right did best. Greens fared better in Sweden, where the far right did not surge, and advanced in Denmark — while the Labour/Green alliance in the Netherlands narrowly overtook Geert Wilders’ far-right party. Where hard-right parties did well, polling suggests concern about migration — or its effects on, say, housing costs — was a bigger factor than the “greenlash”... Policymakers committed to the green transition need to learn lessons. They must be finely attuned to the impact on consumers, and ensure policies are well designed and communicated, with help for those most heavily affected. More targeted tax incentives to reduce the upfront costs of, say, installing solar panels or switching to electric vehicles could accelerate adoption by businesses and households alike.

Weekend reading links

1. Even after nearly a decade, Uber continues to lose money, $6.8 bn of net loss last year. It's also facing regulatory headwinds like higher payments and protections for drivers and caps on commissions charged on restaurants. Reflecting these troubles, its share price hovers at its 2019 listing price. 

2. India's market regulators are doing what has not been done by regulators elsewhere. First the SEBI delicensed Brickwork Ratings and barred two executives of CARE for ratings related malpractices. Now the RBI has barred Haribhakti & Co from undertaking any type of audit assignments in central bank regulated entities for two years. This is the fist such debarment under Section 45 MAA of the RBI Act of 1934. The auditor audited SREI Infrastructure Finance Ltd and SREI Equipment Leasing, the Boards of both which have been superseded by RBI on governance concerns, including insider trading, and defaults in meeting payment obligations. Both are being taken for insolvency proceedings. 

See this and this on the problems at SREI.

3. Interesting data on the profile of India's unicorns, of whom there have been 33 this year till date.

Underlining the plenitude of capital available in the market, there was just one unicorn with a revenue multiple of less than 10 out of the 25 startups which turned unicorn this year for which data are available.

In 19 of the unicorns of this year for which data is available, there were just 8 with founders equity more than 25%. In fact, for a group of 50 startups, including those from 2021, the medial holding of founders is just 15%. 

Finally, the roll call of foreign investors in these 2021 unicorns.

4. Fascinating account in FT of the  rise and fall of former Austrian Chancellor and People's Party leader  Sebastian Kurz. Kurz, 35 now, won one of Austria's biggest ever electoral victories in September 2019, with 37.5% of vote for People's Party. But a scandal involving use of tax payer money to bribe media organisations into providing positive coverage has forced him to quit as Chancellor. He's now facing the heat of an investigation which threatens to unveil other more damaging deeds. Prosecutors and opposition accuse him of a Kurz system, a network of patronage connecting the Chancellory to the country's economic, political, and media systems. 

5. Saudi Arabia labour market facts of the day,

In just four years, the participation of women in the labour force has almost doubled to 33 per cent... For five years after Prince Mohammed launched his Vision 2030 reform plan, unemployment hovered stubbornly above 12 per cent, with youth joblessness at more than 30 per cent... Almost 2m foreign workers have left the kingdom since 2017 as the government raised tariffs on them and their dependants... expatriates, which account for about a third of the kingdom’s 33m population...Foreigners still account for about 77 per cent of private sector jobs. In retail, for example, where nationals now dominate the customer-facing side of many outlets, Saudis still only represent 28 per cent of the total workforce of 640,000.

6. Tim Harford has a nice summary on the now abandoned Ease of Doing Business rankings,

Doing Business was a victim of its own success. There are two types of statistics in the world: the ones that politicians ignore and the ones that politicians want to manipulate. The demands for manipulation will never go away, but the answer is not to cancel the gathering of statistics. It is to defend the independence of the statisticians.

One could also add that the statistical method should undergo constant improvement to account for emergent deficiencies. 

7. Jens Wiedmann, the hawkish long-standing President of Bundesbank announced his resignation early this week. During his decade long career and the Bundesbank and in the ECB's Governing Council, Wiedmann had been the voice of dissent against ECB's extended monetary accommodation. He played the role of the orthodox central banker, cautioning against inflation and monetary profligacy, and also against central banks venturing into areas like preventing climate change. This FT editorial has a good summary

Weidmann’s hawkish views, in keeping with many in his country and the reputation of the Bundesbank, meant he was often in the minority and would be passed over to become the next ECB president in favour of Christine Lagarde, with no prior experience of central banking. Still, to his considerable credit, he was a team player, often defending the ECB against unreasoned criticism in his home country. Critically, he rejected the potentially explosive assertion of the constitutional court that the ECB’s quantitative easing programme represented monetary financing...

Either way, Weidmann’s career showed that there was ultimately nothing for the eurozone’s institutions to fear from forceful dissent. Even while it annoyed Draghi, disagreement between members of the ECB’s governing board, which includes the head of the national central banks, did not prevent the ECB from acting decisively in moments of crisis. If anything, a loud voice reflecting the views of more hawkish member states, often in the north, helps build consensus and ensure that the institution — protected from political influence by international treaty — truly reflects the views of all it serves.

Wiedmann's role in the ECB is a great example of why strong and mature institutions need credible dissenting voices. 

It can be said that Weidmann's dissent contributed to keeping the ECB honest in its internal deliberations on continuing its monetary accommodation, and may even have enhanced the credibility of ECB's decisions than would otherwise have been. 

8. Justin Fox has a good article which examines the impact of Covid 19 in Sweden in light of the country's relatively relaxed pandemic policies. On both Covid 19 casualties and economic performance, the country appears to have done no better or worse than others, making it difficult to draw any definitive conclusions.

It's also a good pointer to the difficulty of drawing generalisable enough headline lessons about specific approaches on any such issue. As the article shows with several different statistics, it's always possible to selectively quote statistics to claim success or failure. 

9. Equity funding available for startups globally has soared this year.

Reflecting this, the number of unicorns too have risen.

This says it all,

There are now almost 850 unicorns — startups valued at more than $1 billion — more than 50% higher than this time a year ago.

10. Interesting McKinsey graphic which highlights the disconnect between employees and employers on labour market attrition - why employees leave and what employers think is the real reason.

11. The Economist has an article on Samsung as it grapples with its priorities in the rapidly changing market. Samsung's low valuation, apart from it being listed only in Korea, has to do with it not being a western firm. In terms of real value creation and long-term prospects, it's had to see how Apple can even compare with Samsung. 

12. Livemint reports on how Covid 19 has been a devastating blow for the Rs 1 trillion low-cost private schools in India. 

Of these 400,000-plus private schools, a bulk—over 320,000—are actually affordable private schools (those that charge a fee of less than ₹2,000 per month). School entrepreneurs claim that tens of thousands of these budget schools have now either permanently shut or are on the verge of shutting down... Contrary to the popular perception of a private school as an institution that’s all about high fees, swanky buildings and a ready physical-digital infrastructure that could take care of any eventuality, the low-cost budget school is often run with bare minimum facilities... According to Central Square Foundation, at least 90 million children—or 75% of all private school students—are enrolled in private unaided schools. And around 70% of the students in private schools pay less than ₹1,000 per month in fees and 45% pay less than ₹500 per month in India, according to the Union ministry of statistics... The National Independent Schools Alliance estimates that in the aftermath of the coronavirus outbreak, private budget schools will be facing an annual loss of ₹77,000 crore... low-cost private school teachers are now earning as little as ₹5,000-10,000 a month. Post pandemic, teacher salaries have dropped steeply—between 30-65%—and there is no surety that the salary will be credited by the end of the month.

Weekend reading links

1. Height (or panoramic view) premium associated with residential units overlooking Central Park in New York City,

A 95th floor condominium at 432 Park Avenue sold in December for $30.7 million, or about $7,592 a square foot. That same month, a unit about halfway down the building sold for $4,216 a square foot.

When such premiums exist, developers find a way, as with 432 Park Avenue,

The building and nearby towers are able to push high into the sky because of a loophole in the city’s labyrinthine zoning laws. Floors reserved for structural and mechanical equipment, no matter how much, do not count against a building’s maximum size under the laws, so developers explicitly use them to make buildings far higher than would otherwise be permitted. 

2. Some achievements of technology enabled transformations in service delivery in India,

Getting or renewing a passport used to be a total nightmare a decade back. Enter private sector plus technology and the average time it takes for the passport application process is 30 minutes to under 4 hours. The passport reaches home by courier in a couple of days. At every stage, you get an SMS informing you what will happen next. In a country this large, there will be anecdotes of mis-service, but the average experience is now ahead of global standards. Take another area full of rent-seeking, long waits, harassment and bribes—getting a driving licence. At least in Delhi, the process is mostly painless—online form filling, and 30 minutes to three hours of time in the local office. The licence reaches home in just a few days. Property registration used to be a nightmare. That again is a breeze. Again a mix of technology and processes has reduced transaction time and pain hugely.

And this in banking,

Mr Puri says HDFC can now process a personal loan and put money in an account in 11 seconds.

3. The much-awaited IPO season has kicked-off with a whimper, as Lyft has tanked nearly a quarter from its listing price. An even bigger story, one much more disturbing but perfectly in line with what to expect from Wall Street, is Lyft's accusation that the lead underwriter of its IPO, Morgan Stanley, supported short-selling of Lyft shares. Lyft has formally written to Morgan Stanley questioning it about sale of certain short-selling products to Lyft's pre-IPO investors which would allow them to hedge against price falls by short-selling Lyft shares in violation of lock-up agreements. 

If true, this may well turn out to be Morgan Stanley's Abacus moment!

4. A very detailed explanation of Modern Monetary Theory.

5. Pitfalls of relying excessively on experts in legal matters. Upshot writes,

Another prominent factor in wrongful convictions across the country was misleading forensic evidence. A close look at these cases reveals how experts in fields like hair analysis, bite marks and DNA analysis have used exaggerated statistical claims to bolster unscientific assertions... “A lot of the problem with forensic testimony is that the diagnosticity is overstated,” said Barbara O’Brien, a professor at the Michigan State University College of Law and author of the report. A hair sample at the crime scene that resembles a suspect’s hair “gets dressed up with this scientific certainty that isn’t justified,” she said.

6. Times points to a new study which highlights the striking concentration of land ownership in England,

Less than 1 percent of the population — including aristocrats, royals and wealthy investors — owns about half of the land, according to “Who Owns England,” a book that is to be published in May. And many of them inherited the property as members of families that have held it for generations — even centuries. In the book, the author, Guy Shrubsole, an environmental activist and writer, identifies many of the owners and compiles data gathered by peppering public bodies with freedom of information requests and combing through the 25 million title records in the government’s Land Registry. He reached a striking conclusion — that in England, home to about 56 million people, half the country belongs to just 25,000 landowners, some of them corporations... Real estate prices in England are among the highest in Europe and have soared over the last generation. Mr. Shrubsole’s book documents ownership, maps unregistered land and argues that the concentration of ownership helps keep available land scarce and expensive. Houses, stores, office buildings, schools and farms are often held under long-term leases, paying a steady stream of rents — directly or through intermediate leaseholders — to major landowners.

7. The scary world of facial recognition developers, who may well be unbeknownst to you scraping your images and building up databases to fine-tune facial recognition technology,

The biggest technical obstacle to achieving accurate facial recognition thus far has been the inability of machines to identify human faces when they are only partially visible, shrouded in shadow or covered by clothing, as opposed to the high-resolution, front-facing portrait photos the computers were trained on. To teach a machine how to better read and recognise a human face in these conditions, it has to be trained using hundreds of thousands of faces of all shapes, sizes, colours, ages and genders. The more natural, varied and unposed the faces are, the better they simulate real-life scenarios in which surveillance might take place, and the more accurate the resulting models for facial recognition. In order to feed this hungry system, a plethora of face repositories — such as IJB-C — have sprung up, containing images manually culled and bound together from sources as varied as university campuses, town squares, markets, cafés, mugshots and social-media sites such as Flickr, Instagram and YouTube... The images... are used to train and benchmark algorithms that serve a variety of biometric-related purposes — recognising faces at passport control, crowd surveillance, automated driving, robotics, even emotion analysis for advertising.

8. Finally, Ananth points to this interview of the outgoing French Ambassador in Washington, Gerard Araud. It has several refreshingly candid and insightful thoughts. Sample this on the Arab-Israel policy, 

The problem is that the disproportion of power is such between the two sides that the strongest may conclude that they have no interest to make concessions. And also the fact that the status quo is extremely comfortable for Israel. Because they [can] have the cake and eat it. They have the West Bank, but at the same time they don’t have to make the painful decision about the Palestinians, really making them really, totally stateless or making them citizens of Israel. They won’t make them citizens of Israel. So they will have to make it official, which is we know the situation, which is an apartheid. There will be officially an apartheid state. They are in fact already.

This on the China relationship and trade,

Let’s look at the dogma of the previous period. For instance, free trade. It’s over. Trump is doing it in his own way. Brutal, a bit primitive, but in a sense he’s right. What he’s doing with China should have been done, maybe in a different way, but should have been done before. Trump has felt Americans’ fatigue, but [Barack] Obama also did. The role of the United States as a policeman of the world, it’s over. Obama started, Trump really pursued it. You saw it in Ukraine. You are seeing it every day in Syria. People here faint when you discuss NATO, but when he said, “Why should we defend Montenegro?,” it’s a genuine question. I know that people at Brookings or the Atlantic Council will faint again, but really yes, why, why should you? These are the questions which are being put on the table in a brutal and a bit primitive way by Trump, but they are real questions.

This on the election of Trump and the attendant reactions is so spot on,

It was so shocking to have Trump elected that basically [Democrats’] conclusion was either the Russians are responsible or she was a very bad candidate. The case of Trump for me, it’s not so much Donald Trump, it’s not so much a person, but it’s a political phenomenon.

And the parallels with France,

The “yellow vest” demonstrations against Macron are basically the demonstrators who, more or less, voted for Trump here. It’s people coming from small cities, from rural areas, lower-middle-class, saying, “We have been left behind.” And, on the right, our conservative party is moving in the same direction as the Republicans are here. Suddenly this party which was traditionally conservative is becoming really protectionist, obsessed by immigration, and obsessed by questions of identity. You know: “France is a Judeo-Christian country,” which means basically anti-Muslim. There is a uniformity in the crisis, and you see it also in Brexit. It’s not by chance that your president has been elected by Pennsylvania, Wisconsin, and Michigan, while our Rust Belt, in the north of France, has elected five or six members of Parliament on the far-right.

This should count as the leader to be the interview of the year!!! 

Weekend readings

1. The story of Boeing and the apparent failings in the design of its flight-control software is yet another example of the limitations of outsourcing regulation. Sample this,

The FAA has let technical experts at aircraft makers act as its representatives to perform certain tests and approve some parts for decades. The FAA expanded the scope of that program in 2005 to address concerns about adequately keeping pace with its workload. Known as Organization Designation Authorization, or ODA, it let Boeing and other manufacturers choose the employees who approve design work on the agency’s behalf. Previously, the FAA approved each appointment. Under the new approach, which was fully implemented in 2009, the ODA representatives are still under U.S. legal requirements and the FAA has the authority to oversee them and request that their management be changed. In 2012, a special investigator of the Office of Inspector General at the Department of Transportation sent a memo to the FAA’s audit chief warning him of concerns voiced by agency employees about the new process. Some allegations were made in anonymous faxes sent to the inspector general’s office, and the office followed up by interviewing employees in the FAA’s Transport Airplane Directorate. “Our investigation substantiated employee allegations that TAD and FAA headquarters managers have not always supported TAD employee efforts to hold Boeing accountable and this has created a negative atmosphere within the TAD," according to the June 22, 2012, report sent to the FAA.

The employees told the investigators that managers had overturned a recommendation by staff to remove the administrator Boeing had chosen for the program and “had not adequately addressed employees’ concerns" about potential conflicts of interest, the memo said. The employees, it said, viewed this as evidence of management having “too close a relationship with Boeing officials." Despite those concerns, as well as others raised in a subsequent report by the inspector general, Congress has embraced the program as a way to improve the FAA’s efficiency. President Donald Trump signed into law a change on Oct. 5. It allows manufacturers to request that the FAA eliminate limitations on how company representatives certify “low and medium risk" items, giving them even more authority over their own products.

2. FT on the role of militias in Rio's favelas,

At first, militias offered protection to local businesses at a modest price many were willing to pay. From there to extortion was a short step, and soon militias were selling protection against themselves. They expanded into other services: informal public transport, distribution of cooking gas, pirate cable TV, the sale and rental of commercial and residential property, and more. The most lucrative line of business for the militias has been real estate. Investigators recently found documents at the residents’ association in Rio das Pedras showing that between 5 per cent and 10 per cent of the value of every property deal goes to the local militia. They were also involved in the hugely profitable business of land expropriation or grilagem — the fraudulent assignment of property and land deeds... militias dominated local politics in the areas they controlled... 

During the past 20 years, many new militias have been formed beyond Rio das Pedras. A study last year found they were present in 165 favelas and in 37 other city neighbourhoods in greater Rio, areas of the city that are home to a combined population of more than 2m people. They hand out often gruesome and lethal justice designed to set an example, sometimes for criminal behaviour, sometimes for acts of disobedience such as buying cooking gas from the wrong distributor. Their presence haunts the city

The hardline policies of the new President Jair Bolsonaro is apparently worsening the situation.

3. Talk about regulatory arbitrage - social media platforms edition. How about reaping all the benefits of a publisher without legally being a publisher? This dichotomy is fast becoming apparent as Facebook faces increasing scrutiny over the content posted on its site,

Why on earth do we tolerate technology that can be used to inflame hatred and normalise violence at lightning speed and global scale? The answer lies largely in a 26-word sentence in Section 230 of the Communications Decency Act passed by the US Congress in 1996. “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider,” it states. So the likes of Facebook, Google and Twitter can play by different rules to traditional media companies, including the FT, which are legally responsible for all the content they publish. Jeff Kosseff, author of The Twenty-Six Words That Created the Internet, argues that Section 230 has proved an “awesome benefit” for the tech platforms. It has encouraged astonishing innovation and accelerated the growth of some of the richest companies on the planet. But it has also allowed billions of people to post anything they like online with almost no constraint. Some of that content is inspirational, much of it trivial, and a small sliver grotesque and harmful.

4. Amidst the Varsity Blues scandal of university admission frauds in the US, here comes more evidence of how skewed access to elite universities has become,

at the very best schools, more students come from the top 1 per cent of income distribution than come from the entire bottom 50 per cent.

 5. The latest issue of The American Statistician makes a strong plea in favour of revisiting the interpretation of 'statistical significance',

we should never conclude there is ‘no difference’ or ‘no association’ just because a P value is larger than a threshold such as 0.05 or, equivalently, because a confidence interval includes zero. Neither should we conclude that two studies conflict because one had a statistically significant result and the other did not. These errors waste research efforts and misinform policy decisions.

6. A data journalist at The Economist delves into a few graphs from the magazine and shows how they could be misleading or confusing or failing to make the point, and suggests some alternative illustrations.

7. Finally, US exports of LNG has surged spectacularly since the opening of the Sabine Pass terminal. With another three expected to come online soon, these exports are expected to keep rising and putting a downward pressure on global gas prices.

8. The Economist has this on Chinese locomotives and rolling stock manufacturer CRRC, 

CRRC now employs 180,000 people worldwide and posts annual revenues of $30.6bn, around a tenth of which comes from outside China. Between 2013 and 2017 crrc made 44% of the world’s electric trains and a whopping 71% of its high-speed ones, estimates Maria Leenen of sci Verkehr, a railways consultancy in Hamburg.

Weekend reading links

1. John Thornhill captures the age of "dataism",

Gartner, a tech research company, estimates that 5.5m connected devices a day came online in 2016. It forecasts that their total number will more than triple to 20.8bn by 2020 as the “ internet of things” becomes a reality. According to IBM, we already generate some 2.5 quintillion bytes of data every day, meaning that about 90 per cent of all data in the world has been created in the past two years. To see the effect that this data use can have, just take a look at the advertising industry. Facebook and Google sucked up an astonishing 85 cents of every new dollar spent on digital advertising in the US in the first quarter of 2016. Their success is based on their ability to use data to target advertising at the likeliest consumers.

2. Economist argues in favour of Vienna as the "city of the century", built on the fecundity of ideas and art that emerged in the late Hapsburg era of Franz Joseph I. Sample this,

Often the Viennese intellectuals leapt ahead by transferring knowledge gained in one discipline to others, gloriously indifferent to the mind-forged manacles that have come to stifle modern academia and research. In America, several Viennese-trained devotees of Freud used the tools of psychoanalysis to revolutionise business. Ernest Dichter, author of “The Strategy of Desire,” transformed the fortunes of companies through marketing that purposely tapped into consumers’ subliminal desires.  

Another example was Paul Lazarsfeld, the founder of modern American sociology. Born of Jewish parents, he studied maths in Vienna, completing his doctorate on Einstein’s gravitational theory, and thereafter applied his expertise in data and quantitative methods to what became known as opinion, or market research—finding out what people really feel about anything from television programmes to presidential candidates. In Vienna in 1931 he conducted the first scientific survey of radio listeners, and also co-wrote a revolutionary study of the devastating social and psychological impacts of unemployment. His team of investigators conducted what is now called “field research”, meticulously recording the results of face-to-face interviews with laid-off factory workers in the town of Marienthal. Moving to America in 1933, Lazarsfeld went on to found the Columbia University Bureau for Social Research. His team was the first to use focus groups, developed with Dichter, his one-time student, and statistical analysis to delve into the mysteries of voter and consumer preferences or the impact of the emerging mass media. Lazarsfeld and others thus helped revivify moribund, antiquarian modes of inquiry, and re-equip them with the latest Viennese techniques, often saving entire Western intellectual traditions from decrepitude, or possibly extinction.

3. Most, if not all of Donald Trump's bombast is plain disgusting. But his tweet campaign on automobile manufacturers operating plants in Mexico may be a not fully undesirable antidote for a business world where commercial considerations override all else. If initial signs are any indication, this could provide a tipping point in getting businesses to incorporate non-financial considerations in their investment decisions.

In recent days Trump has initiated a similar tirade against predatory pricing techniques of pharmaceutical companies. His comments that pharma companies were "getting away with murder" wiped off $24 bn from the value of Nasdaq listed biotech market capitalisation. Even if you do not agree with his approach, one cannot but feel like supporting Trump on this campaign. 

In other words, Trump would have turned back the remorseless march of the market's logic in economic decision making. A desirable outcome, though achieved through questionable means and with potential path dependent incentive distortions!

4. FT reports that China invested $103 bn on renewables in 2015, more than double next-placed America's $44 bn.

5. The cost of carrying cash in India, even without demonetisation, is very high!

6. One of the stories going on around demonetisation has been about the Jan Dhan bank account being used to launder black money. This, advocates argue, has been a major reason why the vast majority of black money has found its way back to the formal banking system, as reflected in the near complete return of 500 and 1000 rupee notes.

But a Livemint analysis appears to refute this. It finds that the Jan Dhan deposits rose from Rs 46,636 Cr on 09.11.2016 to Rs 74,322 Cr on 30th November and Rs 70,070 Cr on 4th January, 2017. To put this share in perspective, it increased from 0.05% to 0.45% of the aggregate deposits of schedule commercial banks between September 2014 and October 2016, reached a peak of 0.71% in November 2016 and declined to 0.68% again in December 2016. Rounding error!

7. Sundeep Khanna has a nice article which argues that instead of courting Apple, the Government of India should be trying to attract Tesla to invest in the country. I had blogged earlier about the futility of trying to attract Apple. But this is a teachable point about the problems with industrial policy. It is deeply vulnerable to ongoing fads, which leads to governments backing the wrong horses,

If concessions have to be given to persuade global companies to set up manufacturing in India, they are better off given to those at the forefront of technologies that will drive the future... There are many... companies pushing the boundaries of technology, which may be both easier to woo and whose multiplier effect may be far greater in the long term. As an example there is Cortex Composites, the Draper Associates-funded California-based developer of a new type of cement called Cortex which has uses like canal lining, ditch lining, slope protection, erosion control and lining ponds. It replaces expensive mixing trucks in places that need just thin layers of cement. There is also a clutch of innovative 3D printing companies like 3D Hubs, Carbon, Made in Space or Voxel8. For hardcore manufacturing there is Daijiang Innovations (DJI), the world’s most successful consumer drone-maker based in China. Country strategies have to be based on a long-term vision. The smartest countries are now looking at building ecosystems around artificial intelligence (AI), which is expected to have the same impact on the world as the internet or electricity before that.

8. Mint examines the case for a Universal Basic Income (UBI) guarantee for India. The different scenarios are captured below.

I have been coming to the view that a UBI may be worth considering in countries or areas where state is virtually absent or so weak as to be missing. This would not apply to India. Apart from the numerous very compelling substantive arguments against UBI and the politics surrounding the substitution of existing in-kind subsidies, some of these numbers being estimated (including in the Economic Survey) are like the optimistic "expectations-stretching" that happens when you are pushed against the wall and have no other hope.

For example, consider the math surrounding the 5.2%. The assumption is that you would squeeze out all those increments to the tax-to-GDP ratio (itself questionable) and then divert them all to a UBI, over-riding other far more important claims like increasing the share of GDP spend on health care, infrastructure spending etc. It is not only snake-oil policy prescription, it is also plain bad economics. 

9. FT has an excellent investigation on the maritime ambitions of China. The importance of China in the global maritime market is stunning,

Investments into a vast network of harbours across the globe have made Chinese port operators the world leaders. Its shipping companies carry more cargo than those of any other nation — five of the top 10 container ports in the world are in mainland China with another in Hong Kong. Its coastguard has the globe’s largest maritime law enforcement fleet, its navy is the world’s fastest growing among major powers and its fishing armada numbers some 200,000 seagoing vessels...

Beijing’s shipping lines deliver more containers than those from any other country, according to data from Drewry, the shipping consultancy. The five big Chinese carriers together controlled 18 per cent of all container shipping handled by the world’s top 20 companies in 2015, higher than the next country, Denmark, the home nation of Maersk Line, the world’s biggest container shipping group. In terms of container ports, China already rules the waves. Nearly two-thirds of the world’s top 50 had some degree of Chinese investment by 2015, up from about one-fifth in 2010... And those ports handled 67 per cent of global container volumes, up from 42 per cent in 2010, according to Lloyd’s List Intelligence, the maritime and trade data specialists. If only containers directly handled by Chinese port operators are measured, the level of dominance is reduced but still emphatic. Of the top 10 port operators worldwide, Chinese companies handled 39 per cent of all volumes, almost double the second largest nation group... since 2010, Chinese and Hong Kong companies have completed or announced deals involving at least 40 port projects worth a total of about $45.6bn

The modus operandi is simple - give loans and construct ports in developing countries, invoking some commercial interests. But its military and political dimensions are undeniable,

“There is an inherent duality in the facilities that China is establishing in foreign ports, which are ostensibly commercial but quickly upgradeable to carry out essential military missions,” says Abhijit Singh, senior fellow at the Observer Research Foundation in New Delhi. “They are great for the soft projection of hard power.”...

China’s naval strategy is aimed primarily at denying US aircraft carrier battle groups access to a string of archipelagos from Russia’s peninsula of Kamchatka to the Malay Peninsula in the south, a natural maritime barrier called the “first island chain” within which China identifies its strategic sphere of influence. Another focus is the string of artificial islands that Beijing has dredged out of coral reefs and rocks to help reinforce China’s claim to most of the South China Sea, putting it on a collision course with neighbours from Vietnam to the Philippines, as well as the US. The artificial islands have been equipped with landing strips and a US think-tank recently said, after analysis of satellite images, that Beijing appeared to have installed anti-aircraft guns, anti-missile systems and radar facilities on them.

India, in particular should be concerned at the Chinese built ports in Gawdar (Pakistan) and Hambantota (Sri Lanka), both of which have undeniable security and force projection dimensions. Forget a "string of pearls" around India, China appears to be a stringing one to encircle the globe itself!

10. Even as MS Dhoni relinquished captaincy, I came across this Mark Nicholas article,

He talked about chasing as if he were a Roman imperator waiting upon Nearer Gaul. Take it to the point where they are more scared than you, was his theme. ... the power of his personality... imposes himself upon you. It is an intimidation of sorts, a sense of ownership of the moment that creates doubt, fear and awe in the opponent. If you are left bowling to Dhoni at the death, you are not - consciously or subconsciously - backing yourself. Worse still, you are probably backing him.

11. Finally, Virat Kohli is the flavour of the cricket season. I've been reluctant to bracket him with Tendulkar for a reason. If you watch Virat close enough, apart from admiring his breathtaking stroke play, you could also come away with the feeling that those strokes are born out of a talent for exceptional hand-eye co-ordination. I can think of only Brian Lara and Virender Sehwag with comparable talent. But such talent based skills atrophy far quickly with age than a more learned technique. Just watch Virat execute the cover drive (especially on spinners) with quick-silver reflexes and compare it with the same stroke of say, Tendulkar, which is simpler (and graceful) and has fewer moving parts. 

To put Kohli in perspective, Sehwag was no less influential and feared, and arguably more destructive, in the 2008-10 period.  Sehwag was aged 30-32 in this period. To be fair to Kohli, he appears to have realised his potential earlier than Sehwag, at the age of 27. So, maybe he will have a longer period of dominance. But contrast this with Tendulkar's last period of influence, 2007-10, when he was 34-37. 

The one area where he seems to clearly score over even Tendulkar is, surprisingly, his temperament and his ability to play the percentage game in the shorter and far riskier formats of the game. This graphic of T20 performance (as well as his average in successful one day chases) is no less stunning than Bradman's average.

Price variations in US healthcare market and the power of data visualization

Competitive markets deliver cost-effective health care? No, if evidence presented in the graphic from New Jersey on treatment of chronic obstructive pulmonary disease is to be believed.

In the same New York city area, a joint replacement surgery costs anywhere between $15000 and $155000! The variation in prices, over such a small area, is truly stunning. This variation is equally stark when procedure rates in the US are compared with those in other countries. A few weeks back Time carried a well researched story on the high health care costs in the US, which had this graphic.

The data on the variations in prices for the 100 commonest diagnosis related groups (DRGs), spanning 163,065 patients, charged by 3337 hospitals in 306 metropolitan areas in 2011 was recently released by the US Government's Centers for Medicare and Medicaid. The data is available here. Is there any more compelling evidence of a market failure? Health care is clearly not broccoli.

The Times has rendered the database in a superbly informative interactive infographic. Its cognitive appeal and user-friendliness is striking. It is also an excellent example of how appropriate rendition of "big data" can be transformational in bridging the "last mile gap" in awareness creation efforts. Such graphics present critical decision-support information (here, a very good representative metric, fee charged by the hospital for each DRG for both Medicare and non-Medicare patients, both compared with respective national averages) in a manner that resonates cognitively (it is mentally easier to compare hospitals when information is so presented, on a geographical plane) with its audience.

In this context, considerable academic research has been done in recent years on the impact of information dissemination on increasing the responsiveness of elected representatives, quality of learning outcomes in primary schools, girl child literacy, prices of farm products, and so on. In many respects, all these studies are merely regurgitating conventional wisdom. At a conceptual level, even before any such research, people at the cutting edge in each of these areas already knew that bridging information asymmetry can be transformative. But the challenge, and they also knew it all along, is in presenting it in a manner that would facilitate easy use by its targeted audience. The academic research, beyond validating conventional wisdom, does nothing to address that challenge.

Imagine having similar visualization in developing countries to help people shop for school admissions or buy insurance policies and savings instruments, parents know the learning trajectory of their child, farmers know the optimal farm-gate price for their produce, and so on. And also if this information can be made available on a mobile phone interface.

I strongly believe that the search for such solutions require a smart intersection of statistical analysis, data visualization techniques, communication technologies, and behavioral psychology. Given the inherently complex nature of these issues and co-ordination problems, the market is not likely to resolve this challenge. It requires a partnership between governments, large private foundations, non-government organizations, and private service providers. But governments have to take the lead in facilitating this partnership.

PS: In the US, even with the available information, in the absence of some form of regulation, the local market power of hospitals, the presence of an insurance intermediary, and the very nature of demand for health care services, will conspire to maintain the diverse price distribution. 

Measuring teacher quality - adjusted "value addition"

Nobody disputes that teacher quality is central to improving student learning outcomes. But there is limited agreement on how teacher quality should be measured. The simplest and commonplace method has been to use standardized test scores to assess teacher quality. But its flaws are all too obvious - grade inflation, does not control for socio-economic backgrounds of children etc.

In this context, there has been considerable interest and debate surrounding the use of teacher "value addition" (VA) - by using their students’ test score gains - as the preferred metric to measure teacher quality. A teacher's VA is defined as average test-score gain for his or her students, adjusted for differences across classrooms in student characteristics (such as their previous scores). However, its critics have raised the same questions arguing that students are not randmoly assigned to teachers and therefore VA measures have the same flaws as standardized test scores.

A newly released longitudinal research study that tracked 2.5 million students in the US over 20 years by Raj Chetty, John N. Friedman, and Jonah E. Rockoff (presentation slide here) and assessed the value addition of teachers over the long term. Controlling for numerous factors, including student socio-economic backgrounds, they found that value-added scores consistently identified some teachers as better than others. They write,

"Are teachers’ impacts on students’ test scores ("value-added") a good measure of their quality? This question has sparked debate largely because of disagreement about (1) whether value-added (VA) provides unbiased estimates of teachers’ impacts on student achievement and (2) whether high-VA teachers improve students’ long-term outcomes. We address these two issues by analyzing school district data from grades 3-8 for 2.5 million children linked to tax records on parent characteristics and adult outcomes. We find no evidence of bias in VA estimates using previously unobserved parent characteristics and a quasi-experimental research design based on changes in teaching staff. Students assigned to high-VA teachers are more likely to attend college, attend higher-ranked colleges, earn higher salaries, live in higher SES neighborhoods, and save more for retirement. They are also less likely to have children as teenagers. Teachers have large impacts in all grades from 4 to 8. On average, a one standard deviation improvment in teacher VA in a single grade raises earnings by about 1% at age 28. Replacing a teacher whose VA is in the bottom 5% with an average teacher would increase students’ lifetime income by more than $250,000 for the average classroom in our sample. We conclude that good teachers create substantial economic value and that test score impacts are helpful in identifying such teachers."

Translated into English, as NYT writes, it appears staggering,

"Replacing a poor teacher with an average one would raise a single classroom’s lifetime earnings by about $266,000, the economists estimate. Multiply that by a career’s worth of classrooms. If you leave a low value-added teacher in your school for 10 years, rather than replacing him with an average teacher, you are hypothetically talking about $2.5 million in lost income."

As the graphic below shows, when a high value-added (top 5%) teacher enters a school, end-of-school-year test scores in the grade he or she teaches rise immediately.



A few observations

1. There cannot be any denying the fact that quantitative measures of student performance have to be at the center of any meaningful attempt to measure student learning outcomes and bring in accountability in teachers. Data analytics that mine this database can help draw decision-support inferences.

2. Even with all its flaws of cheating in tests, teachers cherry-picking students, and some good teachers taking the fall, VA measure may be, atleast for now, least worse among all bad frameworks to measure teacher quality.

3. The effectiveness and credibility of teacher VA measures can be improved by adding a qualitative dimension to assessment. Such assessments can take care of the several intangible factors that while critical to moulding students are not often captured in test scores.

4. Such assessment measures should not be used for high-stakes decisions. It should be used to identify deficiencies and put in place mechanisms to address them, through, for example, more focussed and targeted trainings for teachers etc.

5. Counter-intuitively, teacher VA measures may be more reliable and credible measure of teacher quality in government schools in countries like India because the socio-economic backgrounds of children are more or less similar. It is also much easier to capture major differences in social categories - religion, caste etc - and control for them in the VA measures.

6. Finally, such measures become more accurate as it accumulates years of data and larger sample sizes, which enable drawing more credible longer-term conclusions. In this context, it becomes possible to kick-in high-stakes decisions like say salary increments to senior teachers.

Update 1 (17/1/2012)

NYT Room for Debate on measuring teacher effectiveness using student examination results.

Update 2 (28/2/2012)

The New York City makes public value added ratings of 18,000 city school teachers amidst strong opposition from unions who lost the court battle to stop its release. The ratings, known as teacher data reports, covered three school years ending in 2010, and are intended to show how much value individual teachers add by measuring how much their students’ test scores exceeded or fell short of expectations based on demographics and prior performance. In 2010, The Los Angeles Times had hired a statistician and published its own set of ratings.

Such ratings have been gaining currency, in part because they are favored by the Obama administration’s Race to the Top initiative, which makes adoption of such measures a precondition for receipt of federal funds. New York City principals have made them a part of tenure decisions. Houston gave bonuses based in part on value-added measures, though that program was reorganized. In Washington, poorly rated teachers have lost their jobs.

On trade numbers and statistical illusions

The Economist has an interesting debate on whether persistent trade deficits are a bad thing. Hal Varian makes an important point about the fallacy of paying too much importance to headline trade deficit figures.

According to research by Ken Kraemer at UC Irvine, the component parts of the iPad are imported to China from South Korea, Japan, Taiwan, the European Union, the US and other places for final assembly. None of the component parts are made in China: it's only role is assembly. The value added by the final assembly in China is about $10. Nevertheless, each iPad exported from China to the US increases the US trade deficit with China by $275.

The same misleading accounting holds for other products. If China buys steel, aluminum, and machine tools from Australia and uses these parts to build a ship which they then export to the US, the total value of the ship is counted as an export for China.

Laurence Kotlikoff and Scott Sumner argue that the most important metric should be the national savings rate, since it determines not only the sustainability of a trade deficit but also whether the deficit is financing productive investments.

On the same subject of statistical illusions, Paul Krugman posts that Ireland's reported recovery in competitiveness may not be a reflection of the true story.

Ireland is an economy that generates a lot of GDP — but not much GNP — out of capital-intensive, foreign-owned export sectors, such as pharma. And what has happened in the austerity era is that these sectors, which aren’t selling to the domestic market, have held up much better than labor-intensive sectors serving that domestic market. And this causes a spurious increase in labor productivity: if you lay off a construction worker but don’t lay off a pharma worker who basically watches over very expensive machines that produce a lot of output, it looks as if productivity has gone up, but in any individual sector nothing has happened.

In other words, the numerator (GDP) falls by a far smaller number than the denominator (workers) when a less productive domestic worker is displaced.

Update 1 (26/1/2012)

The Economist points to a study about iPad's production supply chain and writes about how trade statistics overstate trade figures

"According to a study by the Personal Computing Industry Centre, each iPad sold in America adds $275, the total production cost, to America’s trade deficit with China, yet the value of the actual work performed in China accounts for only $10. Using these numbers, The Economist estimates that iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011; but if China’s exports were measured on a value-added basis, the deficit was only $150m."

China’s small contribution to total costs suggests that a yuan appreciation would have little impact on its exports. A 20% rise in the yuan would add less than 1% to the import price of an iPad. For imports such as clothing and toys the Chinese value added is much higher. But electrical machinery and equipment, with more complex cross-border supply chains, make up one-quarter of China’s exports to America.

Fiscal Policy Matters - Big Time?

Christina Romer is anguished about the fiscal policy debate,

"Policymakers and far too many economists seem to be arguing from ideology rather than evidence... the evidence is stronger than it has ever been that fiscal policy matters — that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems."

She writes about the inherent difficulty of estimating the impact of fiscal policy on people's consumption decisions because there are other things happening in the economy and other unanticipated factors which might influence the policy. She points to the omitted variable bias while illustrating the case with the early 2008 Bush tax cut. The contribution of this tax rebate to holding up household consumption spending was offset by the tumbling houseprices and resultant lowering of household wealth which in turn squeezed disposable incomes. In other words, the omitted variable bias skews our understanding of important relationships, nowhere more so than in our assessment of fiscal policy.

Prof Romer also points to tax cuts made when the economy is slipping into recession and tax increases in response to increased spending needs (like, say, war). In the former, unless tax cut was very large and for a sustained period, the outcome would still be weak growth - the tax cut would have only mitigated the adversity. In the later case, there is a behavioural sleight of hand - the impression gains ground that the tax increase caused increase in spending, whereas it was only a small contributor to an already rising spending.

In order to address the omitted variable bias, she and husband David Romer excluded from their empirical analysis the tax changes taken in response to economic conditions and confined their dataset to tax changes made for ideological reasons (Reagan tax cut, Clinton tax increase etc). The graphic below shows two estimates of the impact of a tax cut of 1% of GDP on real output. The red line shows the result using the conventional measure of tax changes — the change in cyclically-adjusted revenues. The blue line shows the estimates based only on the relatively exogenous tax changes we identified from the narrative analysis.



The graphic shows that limiting omitted variable bias results in larger and more statistically significant estimated impacts of tax changes. Prof Romer also argues that nobody has done a similar study (one that controls for motivation) to assess the true impact (on output) of a government spending increase. In its absence, there is no way to derive more definitive conclusions about the real impact of direct government spending increases nor adjudicate beween the relative superiority of tax cuts and spending increases.

She highlights the counterfactual problem of what would have happened without the ARRA in the US,

"The metaphor I find helpful is to a patient who has been in a terrible accident and has massive internal bleeding. After life-saving surgery to stop the bleeding, the patient is likely to still feel pretty awful and will have a long way to go before he is fully healed. But that doesn’t mean the surgery didn’t work. You have to judge the effect of the surgery relative to what otherwise would have happened. Without surgery, the patient would have died."

She points to three studies which, albeit incomplete, point to the ARRA playing an important role in propping up demand and ensuring that the economy did not get any worse.

She also points to similar omitted variable bias in the study of Alberto Alesina and Silvia Ardagna which has become the touchstone for advocates of expansionary contraction to argue that fiscal austerity is generally expansionary. They mined budget data for a large number of advanced countries over the past 35 years and identified large fiscal consolidations by looking for times when the cyclically-adjusted budget deficit fell sharply. They find that output tended to rise on average after these consolidations, especially those focused on reductions in government spending. She writes about the omitted variable bias in their analysis,

"Some of their fiscal consolidations weren’t deliberate attempts to get the deficit down at all. Rather, they were times when the budget deficit fell because stock price booms were pushing up tax revenues. Stock prices were a big omitted variable. They were driving the deficit reduction and were likely correlated with rapid output growth. This omitted variable made it look as though deficit reduction was expansionary, when it really wasn’t."

An IMF working paper, about which I blogged earlier, sought to address the deficiencies of the Alesina-Ardagna study and found that austerity programs hurt. Their dataset was limited to deliberate fiscal consolidation - for reasons unrelated to short-run macroeconomic developments - moves in 15 advanced countries over the last 30 years. They find that unemployment typically rose and output fell following such austerity programs.