Weekend reading links

1. Fascinating work by Johnny Miller to highlight segregation in cities using birds-eye view photographs taken using drones.

Such photographs have a powerful way of shaking people out of their comfort zones and generating conversations on the issue of widening inequality and its manifestations.

2. On segregation, nice Citylab interview of Macarthur Prize winner Nikole Hannah-Jones about how racial preferences entrench de facto school segregation in the US. This is spot on,

What we see come immediately out of [Brown v. Board], when you can no longer explicitly use race to segregate schools, is a very adaptive strategy that white Americans have. Suddenly, you take up the banner of race-neutral language that you know will produce the same result. So it becomes about “local control”—saying “our tax dollars shouldn’t go to educate other children,” or “we want a small local school system that only serves our community.” Of course, that community is all white.

In a place like New York City, where you have a great deal of segregation, you have a neighborhood school system for elementary school, which means your kid will go to a neighborhood school. And since neighborhoods are highly segregated, that means your kid will likely go to a school that is also segregated. But then once you get to middle and high school, it is a “choice system” where white kids go to screened schools— schools that have these apparently race neutral screens, but where you have to have a portfolio, or where you have to take a test to get in. What remains the same is that white parents are going to get access to the best education in a public system. They’re going to get access to disproportionately white schools, and they will wield an array of tools to do that. So if the neighborhood that those white parents live in is white, they want neighborhood schools. If the neighborhood school that those parents are near is black, then they want choice. So people will say they don’t want bussing, if their neighborhood school is white. If the neighborhood school is not white, they’ll bus their kids an hour away to get to a white school.

At some level, the difference between Trump and the liberals are not as glaring as you think. Trump acts and does so with brazenness what most others secretly nurture inside or share across the dinner table.

3. I have blogged earlier about this, but worth repeating this time with Andy Mukherjee's graphic on the critical role of excise duty of petroleum products in India's fiscal consolidation.

The flip-side is that as global economy steams on, the only direction for oil prices may be upwards. This would set in motion the exact reverse dynamics - slowly roll-back the duties to absorb the price increases. With several elections round the corner in the lead-up to 2019, the political compulsions will be overwhelming.

One more reason to hold pause on any thoughts of a fiscal expansion.

4. Livemint editorial captures the wrinkles in India's mobile phone manufacturing surge,

India has also shown impressive growth in manufacturing smartphones, almost tripling the value of output from Rs18,900 crore in 2015-16 to Rs54,000 crore in 2016-17. This is expected to increase to Rs94,000 crore in 2016-17. But all these “Made In India” smartphones, including those from home-grown companies like Micromax and Karbonn, are only assembled in India. Smartphone companies import semi-knocked down (SKD) units, in which all the key high-value components are already soldered. The value addition happening in India was only 6.1% of the smartphone’s value in 2016... In the 2015-16 Union budget, the government increased the differential excise duty structure for mobile phones from the earlier 5% to 11%, which gave domestic manufacturers a benefit over imported phones. This move has managed to flip the share of imported mobile phones from 69% in 2015 to 33% in 2016.

5. FT points to an interesting October Curse with financial markets, captured by the graphic below.

6. I have never been a great admirer of corporate India's dynamism and claims that it can propel India to become an economic super-power. And it is not just because of the questionable corporate governance standards, but also because of its relative failure to produce truly world-class innovations despite numerous opportunities.

The telecoms sector always gets held up as the poster child of what unshackling India's corporate sector from the License Raj can yield. While the explosive growth of cellular telecoms over the past decade and half have been truly transformative, there is also a less gratifying side.

Here is Sundeep Khanna's lament in Livemint about the sorely deficient R&D spending of India's telecom companies,

It is safe to say that just as information technology (IT) services were the success story of the 1990s, telecom services have been the defining story of Indian business in the first decade of the 21st century. Sadly, for all its growth and penetration, the sector has thrown up little by way of research and development. Not a single breakthrough technology in telecom has come out of India, which should have served as the perfect crucible for experimentation... In the list of 50 top applicants that filed under the World Intellectual Property Organisation’s Patent Cooperation Treaty (PCT), a list dominated by telecom companies like ZTE Corp., Huawei Technologies and Qualcomm Inc., there isn’t a single Indian name. Even worse, a report by Thomson Reuters last year named Samsung, Huawei, LG, State Grid Corp. of China, ZTE, Qualcomm, Ericsson, Sony, NTT and Fujitsu as the top 10 global innovators in the telecommunications industry for 2015. No mention again of an Indian telco.

All the ingredients that experts say are needed to fuel research and development in the sector have been present in India, a large and rapidly growing market, demanding customers, profits aplenty, a phalanx of financing options and intense competition that should logically have spurred innovation. What’s more, it was evident to anyone who cared to look that in a business driven so much by technology, the barriers to entry could collapse overnight as it happened when Reliance Jio made its moves a year ago. The bloodbath that has ensued hardly comes as a surprise.

7. The use of satellite data on night lights in economic data analysis is on the rise. Two good articles - one on the use and limitations of the use of such data, and another on why the NASA data on India may not exactly represent what is being claimed.

8. FT documents the property market rebound in China,

Urged on by Beijing, 38 per cent of all bank loans issued in the 12 months to August were home mortgages, according to official data, and local governments purchased 18 per cent of all residential floor space sold last year as part of a drive to provide affordable housing, according to estimates by E-House China Research Institute. The result has been another heady boom in construction. Rome was not built in a day, but based on residential floor area completed last year, China built the equivalent of a new Rome about every six weeks... For China’s domestic economy, the world’s largest at purchasing-power parity, property investment directly contributed 10 per cent to GDP in 2016. When manufacturing sectors like steel, cement and glass and retail sectors like furniture and home appliances are included, the share is at least 20 per cent...

A survey by FT Confidential Research, an independent research service owned by the Financial Times, found that 32 per cent of families own at least one home that is vacant. An estimated 50m homes, or 22 per cent of the total urban housing stock, were vacant in 2013, according to the most recent data from the China Household Finance Survey led by Li Gan, economics professor at Texas A&M University.

9. Madhya Pradesh is experimenting with a new approach to Minimum Support Price (MSP). Instead, under the Bhavantar Bhugtan Yojana, of government itself making the purchases at the MSP, the farmers will be reimbursed the differential between the MSP and their sale price. The experiment is being tried out for a period of two months for eight crops. The sales will have to be done in registered agriculture markets and subsidy will be transferred to the farmer's bank account. To prevent traders from artificially suppressing the market, the government will determine an average sales prices, not only based on the prices in the State but also in two neighbouring states.

This is a likely more efficient approach. But like with all such reforms, given the several pathways to game the new system, the success lies in effective implementation.

10. Finally, the latest adventure in kritarchy comes by way of the Supreme Court's decision to ban the sale of fireworks in Delhi during the Diwali festival.

This is clearly grandstanding judicial activism since there is at least as much or more evidence that the important contributors to air pollution in Delhi lie elsewhere - burning of crop waste in Punjab and Haryana, construction activity and vehicle emissions.

Weekend visualisations - urban edition!

Very good video that explains the historical reasons for the high density urban cores in European cities as against the low density cores and sprawls in American cities. Despite its skyscrapers, the urban sprawl makes New York only half as dense as Paris! 

And this is a fascinating article on jobs accessibility maps, developed by the University of Minnesota's Accessibility Observatory, which chart how far you can travel on a transportation network in different times of the day from different locations in a city and the numbers of jobs within that travel zone. The map is constructed with three different datasets - public transit maps and timings, OpenStreetMap data on pedestrian routes and walking times, and census data on job counts in areas. 

The map below captures the change in accessibility to jobs, during the 7-9 AM peak morning commute window, between 2010 and 2013. The dark green areas have access to 100% more jobs in 2013 than 2010. The yellow arrow points to a region where bus frequency was significantly increased along a particular line. The red arrow highlights a corridor with a new BRT line, with major improvements to job access right around a single station.

This is an extremely powerful tool for decision-support on planning public transit routes and urban transport infrastructure. Unfortunately, for cities in developing countries, the challenge is with the availability of good underlying data. In this case, very few cities have information about area-wise jobs data or its changes. 

But the emergence of innovative business models that incentivise private entities to collect such data does not look a very unrealistic prospect. 

Weekend reading links

1. Fascinating illustration of perception of probabilities,

2. Nice overview of the Unified Payment Interface (UPI) inter-operable immediate digital payment system that has been launched in India.

3. The FT captures the irony of Trump's misguided embrace of Saudi Arabia and ostracism of Iran as a battle between "good and evil",

While Mr Trump unleashed a storm of anti-Iran rhetoric, millions of Iranians danced and sang in cities across the country celebrating Mr Rouhani’s victory — scenes that would have been anathema to Saudi Arabia and other Gulf monarchies. The crowds lauded the 2015 nuclear deal, while gushing about the potential for reform and their desires for Iran to engage with the outside world.

And what it means for Middle-Eastern geo-politics,

What he instead tore up in Riyadh was any attempt to pursue what Mr Obama hoped would flow from the deal: regional detente between Sunni and Shia in which their regional champions, in Riyadh and Tehran, “share the neighbourhood”

The emphatic victory of Hassan Rouhani over hardliners is a great opportunity to bring Iran on to the fold. But that is something which neither Israel nor Saudi Arabia would want. And Trump is playing into their hands.

4. Nice snapshot of India's port infrastructure,

5. In the context of China's ratings downgrade, Times captures the staggering scale of China's credit expansion and debt accumulation,

When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70 percent more money sloshing around its economy than the United States does, even though the American economy is bigger. China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2 percent of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.

And all this is excluding the shadow banking system as well as the off-balance sheet wealth management products of banks. Incidentally this is China's first ratings downgrade since 1989!

6. Predictably the Chinese officials have lashed out at the rating agencies. But, here the Indian government may have a much more compelling reason for nursing a grudge against them. Ananth points to this very good article and the graphic is pretty much self-explanatory,

Consider this,

The GDPs of Italy and Spain are projected to grow at much lower rates than India’s and Indonesia’s. The level of government, corporate and household indebtedness is significantly higher than India’s and Indonesia’s. Italy and Spain share India’s problem of a high level of bank non-performing loans (NPLs). The one metric in which the two countries outperform India and Indonesia is GDP per capita. Yet Fitch and S&P rate Spain two notches higher than India and Indonesia, while Moody’s has assigned a rating that is one notch higher. Further, S&P has assigned a positive outlook on Spain’s rating but a stable outlook on India’s rating. Similarly, Fitch and Moody’s have assigned ratings to Italy that are a notch higher than India’s sovereign rating, while S&P rates India and Italy on a par. This is despite Italy’s ratio of bank NPLs to total gross loans being more than twice India’s NPL ratio!

And the reason is the bucketing methodology that rating agencies follow,

The impediment to the rating agencies upgrading India’s sovereign ratings lies in their methodologies. The sovereign rating methodology factors economic strength, institutional strength, fiscal performance, and susceptibility to event risk to assign ratings. The rating agencies categorise countries into buckets based on their size (GDP), growth, volatility of growth and per capita income, among other factors. The emphasis on per capita income is because countries with higher per capita incomes are better equipped to withstand cyclical volatility and are endowed with higher debt servicing ability. India’s low per capita income has resulted in its sovereign rating being lower than countries with higher deficits and indebtedness and lower growth prospects.

7. A perspective on how much renewables are transforming global electricity markets,

Today, renewables account for an average 23 per cent of global power output. Denmark has breezy days when all its power comes from wind and Germany hit a record 85 per cent share from renewables one day last month.

8. Adam Gopnik draws an interesting conclusion from the contrasting responses of the conservative establishments in the US and France during their respective recent elections,

In France, as in America, the election pitted an extreme right-wing nationalist against a moderate technocratic liberal, but in France the leaders of the “Republican” right recognized the extreme nationalist right as a threat to democratic values and, after one round of voting, supported Macron, a man of the center-left who had served in a Socialist government. In this country, the leaders of the Republican Party made the opposite choice. 

That difference made all the difference. The space between François Fillon, the defeated right-wing candidate, and Macron is, in ideological terms, every bit as large as the space between, say, Marco Rubio and Hillary Clinton. But Fillon understood that a Marine Le Pen in power would be a threat to the nation’s constitutional structure. The irony was that the French, with their (mostly unearned) reputation for craven surrender and opportunism, held fast to their deepest principles, while mainstream American rightists discarded theirs.

9. India's job market is ringing alarm bells, loud and clear, with even the much vaunted IT sector jobs hiring on the decline,

The overall index for April 2017 was 10.9% lower than a year ago. That means new job creation in the month was 10.9% lower than April 2016. What’s more, the overall index for April 2017 was lower than where it was in July 2015. Compared to April 2015, the index is up a mere 1.8%, indicating the glacial pace of job creation. Among sectors, the worst hit was the information technology (IT)-software industry, which saw a 24% year-on-year drop in hiring. Apart from stricter employment norms abroad, automation too has impacted new job creation. Other key industries like construction and business process outsourcing/IT enabled services too saw a 10% and 12% decline in hiring, respectively, showed the index... Meanwhile, city-wise, six out of eight metros saw a decline in hiring activity in April compared to a year ago. The hiring index for Delhi/National Capital Region, Mumbai, Chennai and Bengaluru saw a dip of 28%, 18%, 29% and 28%, respectively.

Staying on the topic of India's labour market, Livemint raises doubts about the quality of the Quarterly Employment Survey (QES) of the Labour Bureau which captures data from establishments employing more than 10 workers. But the QES sample may be unrepresentative since more than 80% of its workers are regular and 96% are full-time, whereas the 2011 census data showed that 75% of workers nation-wide are employed for more than six months a year and the NSSO survey 2011-12 shows that only 18% of workers had regular wages or salaried employment.

10. Finally, on the new theory of financial markets by Andrew Lo, Adaptive Market hypothesis. Lo, one of the foremost critics of the efficient market hypothesis and its random-walk view of market movements, argues that the markets develop and adapt over time in an evolutionary manner. Lo calls human "rationalising beings" and not "rational beings". He writes,

The Adaptive Markets Hypothesis is based on the insight that investors and financial markets behave more like biology than physics, comprising a population of living organisms competing to survive, not a collection of inanimate objects subject to immutable laws of motion. This simple truth has far-reaching implications. For one thing, it implies that the principles of evolution—competition, innovation, reproduction, and adaptation—are more useful for understanding the inner workings of the nancial industry than the physics-like principles of rational economic analysis. It implies that market prices need not always reflect all available information, but can deviate from rational pricing relations from time to time because of strong emotional reactions like fear and greed. It implies that market risk isn’t always rewarded by market returns. It implies that investing in stocks in the long run may not always be a good idea, especially if your savings can be wiped out in the short run. And it implies that changing business conditions and adaptive responses are often more important drivers of investor behavior and market dynamics than enlightened self-interest—the wisdom of crowds is sometimes overwhelmed by the madness of mobs.

Weekend reading links

1. Excellent interactive in the Economist on incomes, annual economic growth, and inequality across several countries during the 1980-2015 period. China is already the second most unequal society in the world, after South Africa, even as its middle class has grown richer than Brazil's. In the 35 years, median income has growth at an annual average pace of nearly 12%, to just 3.5% in India. Assuming past growth rates, median incomes will catch up with the US in 10 years for South Korea, 25 years for China, 60 for Brazil, and 100 for India. 

2. Nice article on Venezuela. The decline has been stunning,

the government led first by Chavez and, since 2013, by Maduro, received over a trillion dollars in oil revenues over the last 17 years. It faced virtually no institutional constraints on how to spend that unprecedented bonanza... In the last two years Venezuela has experienced the kind of implosion that hardly ever occurs in a middle-income country like it outside of war.

3. Are debt-financed dividend payouts and share buybacks that boost stock prices a massive Ponzi scheme? Yes, says Rana Faroohar in her new book. ExxonMobil's ratings downgrade, first time since 1949 it is not AAA, has a lot to do with its stockpile of debt accumulated to finance share buybacks

4. More news of the damage from weak global economic prospects comes from the woes of container shipping liners,

The industry... is suffering what could well turn out to be the deepest and longest downturn in its 60-year history. Container shipping lines have made a series of investments in new, giant vessels, and this glut of capacity has sent freight rates tumbling. The Shanghai Containerised Freight Index — one of the few public sources of information on what lines are charging to ship a container — last month reached the lowest level since its inception in 1998... Amid a slowing world economy, 2016 could be the fifth straight year of subpar expansion in trade.

The industry which has expanded aggressively into larger sized ships is now undergoing a phase of consolidation,

In the first quarter of 2016, Maersk generated $1,857 of revenue for each 40ft container it carried on its ships, 25 per cent less than one year earlier, and $203 below the average cost of moving each box.

5. Fascinating pictorial essay chronicles life in the United States since 1870 as told in Robert Gordon's excellent new book. Here's a description of 1870s life,

They ate pork. Lots and lots of pork — 131 pounds of it per person per year in 1870 (that number was half as much by 1929 and is around 55 pounds today). Unlike other meat-producing animals, pigs could live almost anywhere and could survive largely on food scraps. Their meat, easily salted or smoked, could be preserved in an era without refrigeration. Fresh vegetables were scarce; farmers emphasized crops that could be stored or preserved, like turnips, pumpkins, beans and potatoes, instead of leafy greens that would deteriorate quickly... Instead of a toilet, you used a chamber pot or an open window in the city, an outhouse with an open pit underneath in the country... Boston had 700 horses per square mile. The average horse produced 40 to 50 pounds of manure and a gallon of urine daily, which made the streets of major cities no pleasant place to be.

By today’s standards, entertainment options were limited. Total circulation of newspapers was 2.6 million in a country of 40 million people. There was no telephone, record player, movie or radio. Men could go to the local saloon to drink; women generally couldn’t. Vacations and weekends were not really a thing.  

Childbirth usually took place at home, and deaths were common both at birth and during early years from diseases like yellow fever, cholera and many others. There was no licensing of doctors, so quacks were common.

And what changed in the 1870-1920 period,

The most fundamental shift over those decades was that the American home became, in Mr. Gordon’s word, “networked.” Houses that were once dark and isolated were becoming intertwined. They were starting to be connected to electric grids, providing clean, bright light without emitting smoke. Urban water networks supplied clean water, and sewer systems removed waste without the pungent odors of chamber pots and outhouses. Telephones allowed people to converse with distant friends. These advances were enabled not just by technological innovation in plumbing and electricity, but also by urbanization. In 1870, 23 percent of the United States population lived in cities, which rose to 51 percent by 1920.

6. The consortium hired to reconstruct and operate a new terminal at LaGuardia for 35 years secured $2.5 bn of financing through a municipal bond offering which attracted considerable interest. The Baa3 rated (one notch above junk) 30-year 2046 bond was priced with a yield of 3.27% and a 5% coupon. A Bank of America Merrill Lynch index of triple-B-rated munis across multiple maturity dates yielded 2.88%. This is against 2.6% yield for 30 year US Treasuries. The consortium, LaGuardia Gateway Partners, includes airport operator Vantage Airport Group, construction company Skanska, and Meridiam Infrastructure, an investor and asset manager of infrastructure projects.  

Two observations. One, the very low rates and spread between the Treasuries and risky bonds, despite the near-junk nature of the muni, underscores the point that this is a truly unprecedented opportunity for governments to borrow and invest in improving infrastructure. Two, the consortium presents the ideal mixture of contractor, operator, and financier, a partnership with clearly defined roles and risk allocation which allows for seamless changes in shareholding patterns. In contrast, in countries like India, the concessionaires are invariably construction contractors who develop and then try to either sub-contract maintenance or exit by selling stakes. Apart from creating perverse incentives, such arrangements may, ironically enough, end up increasing life-cycle costs.  

7. How can rising cash reserves and debt burden subsist together? A new Moody's report shows that the US corporate cash reserves rose to $.17 trillion by end-2015, with $1.2 trillion held overseas. For the first time ever, the top five cash hoarders with $504 bn were tech companies - Apple ($216 bn, 93% held overseas), Microsoft, Alphabet, Cisco, and Oracle. 

The rising hoard is a reflection of two trends - tax arbitrage and avoidance, and weak economic expectations and the consequent reluctance to invest. In fact, the report points out that expenditures on things like new equipment declined 3% to $885 bn on the face of lower commodity prices.  

Interestingly, the rising cash reserves have accompanied rising debt. Overall debt rose nearly $850 bn to $6.6 trillion by end-2015. In fact, over the past five years, while cash reserves increased by about $600 bn, debt obligations surged by $2.8 trillion. While the top tier firms too leveraged up, the increased indebtedness was concentrated in smaller and lower quality groups who took advantage of the record low borrowing costs.

8. Citylab points to stunning visualization of property price trends developed by Trulia of 100 largest US metros. The biggest increase was in San Francisco, where the percentage of million dollar homes rose by a staggering 37.8 percentage points from 19.6% to 57.4% of all houses in the 2012-16 period.

Some of the increases in the city neighborhoods have been jaw-dropping - in Westwood Park the percentage rose from 2.9% of homes to 96%!

9. Upshot puts New York's restrictive nature of zoning regulations in perspective by pointing to a study of 43000 buildings which found that 40% of buildings in Manhattan could not be built today. These restrictions include height, limits on residential and commercial space, limits on the number of dwelling units and parking lots, setback rule that mandates buildings to step back in order to rise (saw-tooth structure) etc.

Relaxation of zoning regulations is arguably one of the very few low hanging fruits in public policy space. It is also possibly the only way in which cities, especially in developing countries can avoid extreme gentrification and accommodate the millions of urban migrants.

10. Upshot reminds us about the critical role of luck in determining life outcomes,

According to a 2008 study, most children born in the summer tend to be among the youngest members of their class at school, which appears to explain why they are significantly less likely to hold leadership positions during high school and thus, another study indicates, less likely to land premium jobs later in life. Similarly, according to research published in the journal Economics Letters in 2012, the number of American chief executives who were born in June and July is almost one-third lower than would be expected on the basis of chance alone. Even the first letter of a person’s last name can explain significant achievement gaps. Assistant professors in the 10 top-ranked American economics departments, for instance, were more likely to be promoted to tenure the earlier the first letter of their last names fell in the alphabet, a 2006 study found. Researchers attributed this to the custom in economics of listing co-authors’ names alphabetically on papers, noting that no similar effect existed for professors in psychology, whose names are not listed alphabetically.

11. The growth dynamics of the newly constituted Bank Board Bureau (BBB) in India may be a teachable example of how institutions can go astray. The BBB was notified in February 2016 primarily to "recommend for selection of heads of financial institutions". The popular former Comptroller and Auditor General of India, Mr. Vinod Rai, was appointed its chairman.

After assuming charge, Mr. Rai has waxed on the bank bad assets resolution process, reassured that bank chiefs will not be questioned over the bad asset resolution decisions, and discussed consolidation of PSBs. I am confused. Is the BBB's mandate so wide enough to cover all these complex regulatory issues? If BBB, which advises on appointments, assumes a role in operational management, then isn't there a serious conflict of interest? If so, where do the BBB's role end and the banking regulator's begin?

Or is it a case of "Mission Creep" by BBB, a feature that, once the judiciary showed the way with its liberal interpretation of Public Interest Litigations (PILs), has come to characterize institutional development in India? The hyper-active media have obviously only been too eager to nudge a willing Mr. Rai into these transgressions.

12. Finally, Ananth links to Michael Lewis's review of Mervyn King's new book. Lewis describes the central idea of the book on regulation of banks, the King Rule,

Deposits and short-term loans to banks simply need to be separated from other bank assets. Against all of these boring assets, banks would be required to hold government bonds or reserves at the central bank in cash... The riskier assets from which banks stand most to gain (and lose) would then be vetted by the central bank, in advance of any crisis, to determine what it would be willing to lend against them in a pinch if posted as collateral... The banks would decide, before any crisis, which of their risky assets they would be willing to pledge to -- basically, pawn with -- the central bank. The riskier the asset, the less the central bank would be willing to lend against it. Any asset so complicated that it couldn’t be explained satisfactorily to the central bank in three 15-minute presentations wouldn’t be eligible as collateral. Everyone would know, if any given bank ever required a loan from the central bank, the size of the loan the central bank would be willing to extend. The central bank would go from being the lender of last resort to what King calls the pawnbroker for all seasons.

It would also have a handy, simple rule to determine if any given bank is solvent: the difference between its “effective liquid assets” and its “effective liquid liabilities.” The effective liquid assets would consist of the securities the bank held against its deposits (government bonds, cash), plus the collateral value of its riskier bets as judged by the central bank. The effective liquid liabilities would be the money that could run from the bank at short notice -- deposits and loans of less than one year made to the bank. The rule -- call it the King Rule -- would be that a bank’s effective liquid assets must exceed its effective liquid liabilities. If they don’t, the bank is insolvent, and its deposits would be moved without any panic or trouble to a bank that isn’t.

This is certainly going to generate much discussion in the days ahead. A few quick observations. Clearly, depositors are ring-fenced off and that takes bank runs off the table. Fundamentally, this is substantively the same as directly mandating higher capital reserves, though framed very differently. Is the framing, in terms of informing the creditors and shareholders their 'haircuts' upfront, likely to be more acceptable? Most importantly, the critical issue here would be the normal time price-discovery with riskier assets. It assumes that central banks can more accurately assess the real value, especially when they become stressed, of these assets than the financial institutions themselves. Further, it also assumes that the central banks can avoid the cognitive bias and environmental pressures that force banks to systematically under-estimate and underprice risks during good times. In fact, it assumes that the 'pawnbroking price' would be a more accurate signal than even those of rating agencies. 

Weekend reading links

1. An ADB study tries to estimate the impact of a slowdown in China on global commodity prices. The impact varies across commodities and there is apprently more to the decline in commodity prices than China.

2. The major argument supporting the wide pay disparity across occupations revolves around a "skill premium" in sectors like finance and law. A Brookings paper by Jonathan Rothwell points to a paper by John Abowd and four others which examined administrative records of millions of Americans from the 1990-2011 period and finds high levels of "rents" or "gratuitous pay" - pay in excess of skills - in these sectors. They find that people working in finance and law earn 26% and 23% more, regardless of skill, whereas those in eating and drinking establishments earn 40% below their skill level. 

What's more, Rothwell finds that the rents have increased dramatically in certain industries in the 1980-2013 period, with that for workers in securities and investment industry rising from 41% to 60%, legal services from 27% to 37%, and hospitals from 21% to 39%, while those in eating and drinking establishments stayed stagnant at about minus 20%.

Rothwell finds that income from financial market investments like hedge funds and large entry barriers (pervasive among lawyers, doctors, and dentists, the three highest represented occupation groups among the top 1 per cent) are far bigger contributors to widening inequality than increasing share of capital income, technology, and superior skills.

3. Illuminating Citi report on the pension fund financing deficit facing the world economy. It estimates that "the total value of unfunded or underfunded government pension liabilities for 20 OECD countries is a staggering $78 trillion, or almost double the $44 trillion publicshed national debt number". The demographic shifts expected across the world are immense.

And the recommendations,

4. Fascinating graphic that captures the dominant revealed preferences of the counties that provide the biggest support base for Donald Trump.

5. The denser the area, less happy people are. But people still prefer to live in denser areas!

It is called the "urban-rural happiness gradient".

6. City Lab points to a fascinating study that captures the sounds (yes!) of localities in a very innovative and stunning visualization. A team of map, social science, data science, and acoustic researchers used public Flickr photos, their geo-location, tagged the photos with sound-related words, categorized the words into six categories (transport, nature, human, music, mechanical, and indoor sounds), and finally mapped the correlation between each category and the emotion it evokes! The maps are available for 12 cities across the world. 

Weekend visualization and other links

1. Very cool data visualization of the respective sizes (nominal) of major world economies. The ball constitutes the world economy and the shares of each country are proportionately distributed, and within each of them the respective shares of manufacturing, services, and agriculture.

2. Another one, which puts in perspective America's military might, in terms of defense spending.

3. Japan faces a problem of housing in plenty outside of its largest cities - declining population and vacant houses, with no buyers and owners (more specifically, their children) unwilling to tend for them. "We have too much infrastructure. We can't maintain it all," says Takashi Onishi, an urban planning professor and the president of the Science Council of Japan, as large numbers of towns surrounding Tokyo depopulate.

4. FT captures China's importance for the world economy in four graphics,

5. FT has a nice article highlighting the resurgence of conflicts of interest in the large audit firms as their consulting practices race ahead of their staple audit and tax advisory services. While the consulting wing offers everything from legal services and insolvency procedures to capital markets advisory and advise on cyber security, their audit wing offers verification and certification services on the same areas, raising serious conflicts of interests which cannot be mitigated.

Though in 2002 the Sarbanes-Oxley Act prohibited auditors from offering non-audit services, forcing the Big Four to divest their consulting arms, they have found ways since mid-2000s to build back their empires. Now, through aggressive acquisitions, non-audit work makes up about 60% of the Big Four's total global revenues and is the fastest growing and most profitable practice division.

6. Gillian Tett highlights the growing importance (they form more than half all US stock trades) and risks posed by high-frequency trading,

These machines are being programmed to link numerous market segments together into trading strategies. So when computer programs cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity. Since their algorithms are often similar (or created by computer scientists with the same training) this pattern tends to create a “herding” effect. If a circuit breaks in one market segment, it can ripple across the system faster than the human mind can process. This is a world prone to computer stampedes.

On the scale of technology sophistication, sample this from Alvin Roth's new book on market design,

Before 2010, market news between Chicago and New York was transmitted fastest on cables that ran along the rights-of-way of roads and railways. But that year, a company called Spread Networks spent hundreds of millions of dollars to build a high-speed fiber-optic cable that went in a much straighter line and cut round-trip transmission of information and orders from 16 milliseconds to just 13. That 3 millisecond differential basically meant that only traders who used the new cable could make a profit by trading on momentary price differences between Chicago and New York. 

7. A crime-infested Mexican slum, Las Palmitas, has sought to graffitize itself out of neglect and despair with bright paints for its houses and public landmarks, as part of a $300,000 federal government crime and violence prevention program,

Las Palmitas, now an abstract and beautiful 20,000 sq metre mural that bursts out of the browny-grey landscape, marks “a new stage in Mexican muralism”... the mural, which covers 209 houses and which used 20,000 litres of paint in 190 colours... Painting houses cheerful colours is only part of the programme to revitalise a community rife with drug and alcohol abuse, violence and scant prospects. Las Palmitas, which had no electricity until about seven years ago and still has no internet access, now has video surveillance cameras. Police officers include the neighbourhood in their rounds; the government is working with residents to help them develop businesses; and high school dropouts now have access to scholarships funded by a major Mexican university... In Las Palmitas, officials say the programme, of which the mega-mural is part, led to a 79 per cent drop in the crime rate in the first half of this year, compared with levels in 2012. They see such grassroots campaigns as vital in a country struggling with rampant drug cartel-related violence and crime. 

8. From Martin Sandbu's myth-busting piece in the FT on the Eurozone, this graphic appears to over-turn the conventional wisdom that a sovereign debt default would have devastating consequences and would confine the country to a long period of ostracism.

The graphic shows that both credit worthiness and economic growth improved after the sovereign debt restructuring. The former would reflect the easing of uncertainty after the restructuring.

9. Finally, the age of million dollar parking spots in apartment complexts has arrived! I had written earlier about how a melange of policies, including higher parking charges or scarcer parking slots are necessary to addressing urban traffic problems. 

Weekend reading links

1. The mezzogiorno, the southern part of Italy, has long been considered a poor cousin of the prosperous north. But the extent of economic divide is truly stunning,

While Italy’s economic output as a whole contracted by 0.4 per cent in 2014, it fell by 1.3 per cent in the south. Before the crisis, in 2009, the gross domestic product per capita of residents of Italy’s southern regions was 56.2 per cent of that of Italians elsewhere. By 2014, that share had dropped to 53.7 per cent, its lowest level in 15 years. More than 60 per cent of southerners lived off less than €12,000 a year in 2014, against 28.5 per cent in the rest of Italy.

2. San Francisco has borrowed a unique nudge experiment from Hamburg to stop urination at public places. It has covered nine public walls with repellent paint which makes pee spray back on the person's shoes and pant!

Public urination on city walls by night revellers is a big problem in the city and has not been controlled despite a legislation banning it as well as fines of upto $500.

3. Fabulous taxonomy of logical fallacies (via @Noahpinion)

4. As it seeks to advance its soft-power, China is doing it the only way it can, spreading wealth around to "buy respect",

And it is backing up its soft-power ventures with serious money: $50 billion for the Asian Infrastructure Investment Bank, $41 billion for the New Development Bank, $40 billion for the Silk Road Economic Belt, and $25 billion for the Maritime Silk Road. Beijing has also pledged to invest $1.25 trillion worldwide by 2025. This scale of investment is unprecedented: even during the Cold War, the United States and the Soviet Union did not spend anywhere near as much as China is spending today. Together, these recent pledges by Beijing add up to $1.41 trillion; in contrast, the Marshall Plan cost the equivalent of $103 billion in today’s dollars.

5. Bill Easterly links to this evocative photo of volleyball being played with the US-Mexico border as the net.

6. Robert Solow describes the failure of real wages to keep up with productivity in terms of 'monopoly rents', a third component to return to labor and return to capital,

There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally... It is essential to understand that what we measure as wages and profits both contain an element of rent...

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

And he feels that the growth of casual labor is amplifying the trend,

This shift toward more casual labor interacts with the issue of the division of rents. Casual workers have little or no effective claim to the rent component of any firm’s value added. They have little identification with the firm, and they have correspondingly little bargaining power. Unions find them difficult to organize, for obvious reasons. If the division of corporate rents has indeed been shifting against labor, an increasingly casual work force will find it very hard to reverse that trend.

7. Brilliant essay in the Times on the punishing work culture at Amazon, the place "where overachievers go to feel bad about themselves" and one "which is running a continual performance management algorithm on its staff". 

8. Finally, a very interesting graphical representation of the quality of football matches in various European football leagues using the dynamic ELO rating data for football clubs. It maps the top 50 highest quality matches based on average quality (average of the ELO rating of the two clubs) and well-matched opponents (lowest difference in their ELO ratings)

The graphic clearly shows why the Spanish Primera League trumps all others in terms of both quality and intensity of matches. 

Office in a laptop!

Andrew McAfee points to this fantastic Harvard Innovation Lab video which shows how the office table from 1981 would fit into a laptop and phone in 2014.

the evolution of the desk by the harvard innovation lab from designboom on Vimeo.

Weekend visualization and links

1. The most popular example of capitalism with Chinese characteristics has been the crawling renminbi peg. Since 2005, the currency has appreciated 30%. As FT reported, while the direction of currency movement was clear, the pace and timing of changes not.

2. As Africa has weaned away in recent years from brutal dictators and internecine civil conflicts, a new scourge threatens to engulf large parts of the continent - extremist Islamism. As the graphic below shows, more than a dozen northern and sub-Saharan African countries are fighting the menace of Jihadism. Such Jihadism in turn forms the ideological breeding ground and recruitment centers for extremist groups like Al-Qaeda and ISIL.

And where do these groups draw their strength,

Although the extremist groups are backed by well-financed elites, they could not survive without popular support. Every one of them taps into well-known local grievances. From Mali and Nigeria to Kenya and Tanzania the story is the same: extremists emerge from and woo Muslim populations on the national periphery who are fed up with decades of neglect, discrimination and mistreatment by their rulers. Jihadists are able to exploit existing religious tensions and latch on to disgruntled Muslim communities. In addition, the conflicts they stir up have created ever bigger populations of refugees, who are either vulnerable to radicalization or likely to cause the sort of resentment that fuels it. Increasingly what drives African extremism is not just opportunity or firepower but ideology. No grand caliphate stretching from Mosul in norther Iraq to Maiduguri in north-eastern Nigeria is likely to emerge. Yet a distinct flavour of poisonous thinking has spread across thousands of miles. Islamism is the continent's new ideology of protest.

3. China has rapidly displaced the US and Europe as the largest investment partner across the developing world. As this NYT article and the interactive graphic shows, China has shown an amazing appetite to invest in some of the most difficult regions of the world, especially in Middle East, Africa, and parts of Latin America, which are largely avoided by western businesses and development finance institutions for both economic and political reasons.

For Beijing, these investments, mainly in the form of loans by state-owned banks, form part of its efforts to "win diplomatic allies, invest its vast wealth, promote its currency and secure much-needed natural resources". In countries which are starved of foreign funding, the Chinese readily offer financing, albeit at steep interest rates, most often in return for securing access to their natural resources and the expertise of their construction and mining companies. Consider this,

China has a lock on close to 90 percent of Ecuador’s oil exports, which mostly goes to paying off its loans... The Chinese money, though, comes with its own conditions. Along with steep interest payments, Ecuador is largely required to use Chinese companies and technologies on the projects... Energy projects and stakes have accounted for two-fifths of China’s $630 billion of overseas investments in the last decade, according to Derek Scissors, an analyst at the American Enterprise Institute... Chinese mining and manufacturing operations, like many American and European companies in previous decades, have been accused of abusing workers overseas. China’s coal-fired power plants and industrial factories are adding to pollution problems in developing nations...Chinese companies are at the center of a worldwide construction boom, mostly financed by Chinese banks. They are building power plants in Serbia, glass and cement factories in Ethiopia, low-income housing in Venezuela and natural gas pipelines in Uzbekistan.

The graphic below captures the $11 bn China has loaned Ecuador, mostly to finance hydro and wind power, transportation, mining, oil drilling, and river water linking. This is broadly representative of the country's investments elsewhere.

4. Stunning map that contrasts the daytime and night time population of New York City.

The daytime map reflects the population that commute to NYC for work, tourism, and other purposes, whereas the night time population captures the actual city residents. As this graphic shows, the hollowing out of the city center during night times is representative of other US cities and a reflection of the countries suburban growth. It drives home the importance of mixed-use urban planning in ensuring the vibrancy of cities. It also serves as a striking reminder to urban planners that estimations of work commuters and tourists are probably as much or more important than that of residents in planning infrastructure facilities for large cities.

5. As the US economic productivity has dipped to below 1% since 2010, Robert Solow's famous quip that "you can see the computer age everywhere but in the productivity statistics" has been much highlighted. WSJ has a nice article on this debate.

However, as a counter-point, Google's Chief Economist Hal Varian has claimed that US doesn't have a productivity problem, but it has a measurement problem. Pointing to the improvements in the quality of life brought about by the digital economy and time-saving apps, he argues that it is very difficult to capture the impact of quality improvements. Critics though claim that such measurement problems have always been there, understating the productivity measurements.

6. Fantastic visualization of the income levels along New York metro lines from this New Yorker project.

Similar maps of Washington and a few other cities by MIT Media Lab are here. 

Weekend links

1. The AEA has a blog post which highlights the potential benefits from liberalizing labor migration, which far outweigh the benefits from any trade liberalization. This graphic from the famous Michael Clemens paper of 2011 is instructive.

The lion's share of these benefits will accrue to the migrants themselves. However the political economy associated with this would be its biggest impediment.

2. As the credit glut plays itself out, wise words from Scott Minerd of Guggenheim Partners,

This year likely will witness record US stock buybacks; the second biggest year for mergers and acquisitions; the highest percentage of non-investment grade borrowers among new issuers of corporate debt; and a record for covenant-light loan issuance... We are not back in the frothy days of 2007, but we are leaving the realm of smart investment decisions and moving into the “silly season” when investors become convinced that recession is nowhere on the horizon and market downside is limited. It is a world where asset prices continue to appreciate and confidence remains strong, while capital chases a shrinking pool of productive investment opportunities. Similar to the run-up to 2007, rising asset prices and malinvestments today may be sowing the seeds of the next financial crisis.

3. Livemint has a graphic from the IMF's April Financial Stability report which finds that India has the second most stressed banking system in terms of corporate debt at risk (interest coverage ratio below two).

4. Fascinating graphic that captures the advance of democracy

5. Excellent graphic that highlights how the ISIS's recent successes involved maneuvering along the Tigris and Euphrates rivers. This visual guide in the Times captures the rise of ISIS.