Weekend reading links

1. It's hard not to argue that SoftBank, with its $100 bn Vision Fund, which is ten times bigger than the next biggest venture fund, has single-handedly distorted incentives big-time in the venture capital world,

“These start-ups try to get workers attracted to them and bring them within the fold,” said Uma Rani, a researcher at the International Labor Organization who is surveying start-up contractors in emerging economies. “When the workers attach to the whole thing and are highly dependent on it, then you slash it. This is something we are systematically seeing.” SoftBank’s Vision Fund is an emblem of a broader phenomenon known as “overcapitalization” — essentially, too much cash. Venture funds inundated start-ups with more than $207 billion last year, or almost twice the amount invested globally during the dot-com peak in 2000, according to CB Insights, a firm that tracks private companies. Flush with the cash, entrepreneurs operated with scant oversight and little regard for profit. All the while, SoftBank and other investors have valued these start-ups at inflated levels, leading to an overheated system filled with unsound businesses. When the companies try to cash out by going public, some have run into hurdles. At two of SoftBank’s biggest investments, WeWork and Uber, some of these issues have become public... “Since the money started pouring out of SoftBank, they have completely distorted the priorities and focus of young ventures around the world,” said Len Sherman, a Columbia Business School professor.

The consequences,

At Ola, where SoftBank was the largest shareholder, 62 percent of what drivers earned in 2016 came from investor money rather than fares, according to the data firm RedSeer. When some of the start-ups cut costs, often prodded by SoftBank, they reduced payments to workers. Many contractors said they wanted to stop working with the start-ups, but couldn’t because of upfront investments they had to pay off. 

2. On Oyo, it is very hard to believe that its aggressive growth will have a happy ending.

3. From Eduardo Porter in the Times on how the rich cities are becoming richer still, increasing the gap with their poorer cousins,

There are about a dozen industries at the frontier of innovation. They include software and pharmaceuticals, semiconductors and data processing. Most of their workers have science or tech degrees. They invest heavily in research and development... And if you don’t live in one of a handful of urban areas along the coasts, you are unlikely to get a job in one of them. Boston, Seattle, San Diego, San Francisco and Silicon Valley captured nine out of 10 jobs created in these industries from 2005 to 2017, according to a report released on Monday. By 2017, these five metropolitan regions had accumulated almost a quarter of these jobs, up from under 18 percent a dozen years earlier. On the other end, about half of America’s 382 metro areas — including big cities like Los Angeles, Chicago and Philadelphia — lost such jobs. And the concentration of prosperity does not appear to be slowing down.

But efforts like this from a Brookings study that seeks to help others emulate the successful cities by supporting them with resources and enabling policies to attract new businesses may not be effective,

Battling the forces driving concentration will be tough. Unlike the manufacturing industries of the 20th century, which competed largely on cost, the tech businesses compete on having the next best thing. Cheap labor, which can help attract manufacturers to depressed areas, doesn’t work as an incentive. Instead, innovation industries cluster in cities where there are lots of highly educated workers, sophisticated suppliers and research institutions. Unlike businesses in, say, retail or health care, innovation businesses experience a sharp rise in the productivity of their workers if they are in places with lots of other such workers, according to research by Enrico Moretti, who is an economist at the University of California, Berkeley, and others.

Other industries and workers are also better off if they have the good fortune of being near leading-edge companies... The cycle is hard to break: Young educated workers will flock to cities with large knowledge industries because that’s where they will find the best opportunities to earn and learn and have fun. And start-ups will go there to seek them out. Even skyrocketing housing costs have not stopped the concentration of talent in a few superstar cities.

4.  Abhijit Banerjee and Esther Duflo write about the futility of searching for big ideas that drive economic growth, and instead argues in favour of focusing on smaller ideas which have evidence of impact.

5. On the phased manufacturing policy (PMP) for mobile phones, here is the latest,

India has imported mobile phone components worth more than $1 billion from Vietnam — with which India has a free trade agreement (FTA) —in the first half of this fiscal alone, compared to $800 million in the whole of 2018-19 and just over $600 million in FY18.

Following demand from handset makers, three years back India had imposed basic customs duty of up to 15% on imports of more than half-dozen mobile phone components, including a 20% duty on fully made mobile phones. The objective of the PMP was to gradually move up the value-chain by targeting volumes which, it was hoped, would help pull in sub-assembly and component industry in due course.

But apparently even as on the one hand India was imposing duties on components imports, on the other hand it was signing FTAs with Vietnam/ASEAN which ended up defeating the very purpose of the duties (which were aimed at China). A case of the two hands not co-ordinating?

Maybe I am missing something here. But if this is indeed a case of poor co-ordination and lack of active surveillance on a policy implementation, then we do have a big problem at hand.

6. This is interesting coming as it does from the Chairman of India's largest telecom operator, Mr Sunil Mittal,

We have gone through several crises before, but this probably is the most difficult time for the industry. We have seen brutal competition, an unprecedented competition, for the last two or three years. The result has broken balance sheets, eight companies have collapsed or folded up, gone bankrupt or were sold for nothing. What we have now must be protected. And for that, the government must do whatever they to support in whichever form they can, including the reduction in levies charged on us. They must have a sympathetic view towards the industry.  

He then goes ahead to suggest a new three-plus-one market structure for telecoms - three private operators and BSNL!

Left unsaid in this is an acknowledgement that the much hyped telecom story was largely about an industry being at an opportune moment in history with the market's evolution and the technological trends, and less about any inherent merits of unfettered market capitalism where governments get out of the way. The request for bailout by government would have appeared less hypocritical if this too was explicitly stated.

7. Good set of data on health expenditures from the NSS 2017-18 analysed in Livemint. Outpatient treatment expenses outstrip hospitalisation expenditures. While hospitalisation rate was 2.9% (2.9 out of 100 need hospitalisation, outside childbirth, in a year), non-hospitalisation treatment was 7.5% in the previous 15 days (to the survey). This makes average per capita expenditures on OP treatment to be double that of in-patient care. IP care in private hospitals is 6-8 times more costlier than in public hospitals. The share of OP care in total medical expenses is higher for the poor.

Medicines account for the major share of the out-of-pocket expenditures.

8. A measure of the extent of credit binge by Chinese companies,

The banking system more than quadrupled in size, from $9 trillion at the end of 2008 to $40 trillion today... While most of the lending comes from banks, Chinese borrowers have increasingly turned to the bond market to get money they need to run their businesses. Now the bill is coming due. According to S&P Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due. At home, Chinese companies will have to pay $694.6 billion to bondholders next year and $706 billion in 2021.

9. An interesting study from China about the value of collecting and disseminating information on air pollution which leads to behavioural adaptations that lower health costs,

During 2013-2014, China launched a nation-wide real-time air quality monitoring and disclosure program, a watershed moment in the history of its environmental regulations. We present the first empirical analysis of this natural experiment by exploiting its staggered introduction across cities. The program has transformed the landscape of China's environmental protection, substantially expanded public access to pollution information, and dramatically increased households' awareness about pollution issues. These transformations, in turn, triggered a cascade of behavioral changes in household activities such as online searches, day-to-day shopping, and housing demand when pollution was elevated. As a result, air pollution's mortality cost was reduced by nearly 7% post the program. A conservative estimate of the annual benefit is RMB 130 billion, which is at least one order of magnitude larger than the cost of the program and the associated avoidance behavior. Our findings highlight considerable benefits from improving access to pollution information in developing countries, many of which are experiencing the world's worst air pollution but do not systematically collect or disseminate pollution information.

10. Finally, Ed Luce shines light on the opacity surrounding financial market transactions in the US,

The US has 10 times more shell companies than the next 41 jurisdictions combined, according to the World Bank... America is the largest dirty money haven in the world. Its illicit money flows dwarf that of any other territory, unless you treat Britain and its offshore tax havens as one. The US Treasury estimates that $300bn is laundered annually in America. This is probably a fraction of the true number. Worse, the US government has no idea who controls the companies that channel the money because America lacks a corporate central registry. There is no law in America requiring disclosure of “beneficial ownership”. US banks must report suspicious activity. But law firms, real estate companies, art sellers, incorporated enterprises and non-bank financial institutions are exempt. Those hoping to clamp down on money laundering are thus heavily outgunned by lobbyists for the status quo... the US system offers a red carpet for dirty money. Furthermore, autocrats in Russia, China, Saudi Arabia and elsewhere could not thrive without the connivance of America’s suite of service providers.

This is a great primer on how the corrupt use legal structures to hide stolen wealth and what to do about it.

Start-ups and "millennial lifestyle sponsorship"!

Derek Thompson (HT: Sandipan Deb) cuts to the chase with the start-up hype, describing it as a massive lifestyle subsidy to consumers,

Starting about a decade ago, a fleet of well-known start-ups promised to change the way we work, work out, eat, shop, cook, commute, and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with “Uber for X” pitches. But as their promises soared, their profits didn’t. It’s easy to spend all day riding unicorns whose most magical property is their ability to combine high valuations with persistently negative earnings—something I’ve pointed out before. If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent...

To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. With each Uber ride, WeWork membership, and hand-delivered dinner, the typical consumer has been getting a sweetheart deal. For consumers—if not for many beleaguered contract workers—the MLS is a magnificent deal, a capital-to-labor transfer of wealth in pursuit of long-term profit; the sort of thing that might simultaneously please Bernie Sanders and the ghost of Milton Friedman.

When this round of start-up bubble bursts, as it will in the foreseeable future, several narratives (the world abounds with spectacular innovations waiting to be harnessed, boot-strapped start-ups are best placed to harness them, VCs are good at spotting these innovators, there is a VC funnel with this investment approach, and so on) and reputations (among the big name investors, and the world of impact investing itself) will take big hits.

This is hardly a game about building sustainable businesses, but about growing at whatever cost and thereby keeping the valuations going up - about cheshire cats than unicorns! Unfortunately, it is also giving a bad name to those investors who are genuinely good at spotting good businesses. 

Sample this, this, this and this to know more about the realities of the start-up world.

What drives sub-way costs - imitate, don't innovate!

Alex Tabarrok has a very good post linking to the work of Alon Levy in compiling and analysing the data on construction costs of over 205 metro rail projects in 40 countries. The data set is very rich and impressive. Sample this,

New York is planning to have spent around $35 billion between 2005 and 2030 on subway and commuter rail expansion. But it’s only getting 15 km of new tunnel! Paris is spending a similar amount over the same period: Euro 40 billion, for a total of 228 km, 187 underground. Madrid, a much smaller city, spent Euro10 billion in 1995-2015 on 234 km, around 180 underground.

This is also perhaps a great example of how academic research can add significant value to real world issues. Levy's main point is that lack of awareness and siloed thinking in structuring contracts and choice of construction techniques is the main contributor to the exorbitantly high subway costs in New York compared to other countries. It is an example of how US can learn to imitate from Europeans and Koreans.

This is interesting,

Levy is to be lauded for his pioneering work on this issue yet isn’t it weird that a Patreon supported blogger has done the best work on comparative construction costs mostly using data from newspapers and trade publications? New York plans to spend billions on railway and subway expansion. If better research could cut construction costs by 1%, it would be worth spending tens of millions on that research. So why doesn’t the MTA embed accountants with every major project in the world and get to the bottom of this cost disease? (See previous point). Perhaps the greatest value of Levy’s work is in drawing attention to the issue so that the public gets mad enough about excess costs to get politicians to put pressure on agencies like the MTA.

This is something for perhaps the World Bank to take forward. In particular, comparing across emerging technologies, and also life-cycle costs of various systems can be very useful decision-support for governments planning new metro systems. 

The main takeaways from the study

1. Geographic and geological factors are not responsible for the wide variations in project costs of sub-way systems. 

2. Station costs are a big factor in the variations. 

3. In terms of total cost, cut-and-cover method is cheaper than bored tunnel with cut-and-cover stations, by a factor of 1.5 to 2, which in turn is cheaper than bored tunnel with mined stations. 

4. The cost of mined stations is often 4-8 times that of cut-and-cover stations. So the best approach is shallow cut-and-cover construction, disrupting the street for a period of time, and refrain from mining except at under-crossings. Further, avoid mezzanines, with all circulation, including fare barriers to be on the platform level or at street level. And have an island platform, ideally accessed from a street median, to avoid duplicating elevators, stairs etc. Finally standardised station designs.

5. City centre tunnels cost more because cut-and-cover is not possible and because of number of crossing of older lines.

6. Contracts should avoid design-build approach and should be flexible and strictly separate design and construction. They should also not be lump-sum construction contracts, and the bills should be itemised to limit litigation during renegotiations and changes. 

7. Contract awards should be quality and cost-based, rather than purely cost-based ones, awarded to the lowest bidder. Madrid used technical score (50%), speed (20%) and cost (30%)

8. Finally, instead of relying on consultants, use an in-house team to oversee the design and project management. The in-house team costs 25-33% less than consultants and are also likely more effective and constructive. 

The Madrid metro is a good example of a project which incorporated these principles into its construction, and one of the cheapest in the world.

Weekend reading links

1. WSJ has an article which questions the widespread belief that failures help make a better entrepreneur.

Failed entrepreneurs were more likely to go bankrupt or dissolve their business than first-time entrepreneurs. In fact, even if an entrepreneur had run a business successfully before, they were just as likely to see their new business fail as a first-time entrepreneur. Other researchers have reached similar conclusions. A Harvard Business School study of venture-capital-backed firms in the U.S., published in the April 2010 Journal of Financial Economics, found that previously failed entrepreneurs were no more likely to succeed than first-time entrepreneurs. A study of German entrepreneurs by a researcher at KfW Bankengruppe found that entrepreneurs who started a company after a failure performed poorly compared with other founders. “Their probability of survival in general as well as their risk of failure in particular is worse than that of other startups,” according to the researcher, who added: On average, “there is no indication that business failure triggers a reflection process in which entrepreneurs look back on mistakes they have made and adapt their future behavior accordingly.”

2. An RCT evaluation shows that microfinance can indeed help certain types of entrepreneurs,

In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households... These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap... 

Essentially all of the benefits of credit access accrue by increasing entrepreneurship on the intensive margin: for those individuals with an existing business before the entry of microfinance (who we call gung-ho entrepreneurs or GEs), we find economically meaningful, positive effects on household businesses and consumption. Within this group, the bulk of effects come from households who escape from the fixed-cost-driven poverty trap and move into a more productive technology (with the remainder coming from already-productive businesses scaling up to exploit constant returns). The rest of the sample–those who start new businesses, or who never start a business at all–exhibit essentially zero impact of credit access. Notably, for this group the effect is a fairly precise zero throughout the distribution: while these reluctant entrepreneurs and consumption borrowers do not experience benefits from microcredit access, neither do they appear to experience harm.

The paper has several important academic insights. The big policy insight (one which the authors do not draw) is the reinforcement of the fact that SMEs in general are credit constrained, and, importantly, of them certain types of enterprises could benefit from even micro-finance. So add in the management practice support and with small amounts of credit, there can be out-sized productivity effects. The problem is how to identify them?

3. The lemon effect in used car markets can be very significant. Sample this from a Danish study,

We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

4. The work of folks at the BIS have demonstrated how globalisation has contributed to lowering and reducing domestic policy control over inflation dynamics. Kristin Forbes adds a nuance to that argument,

CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some “flattening” of this relationship, especially for CPI inflation. Although CPI inflation is increasingly “determined abroad”, core and wage inflation is still largely a domestic process.

5. The biggest obstacle to the emergence of Euro as a competitor to dollar,

A new study by economists Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff... argue that “a central reason is the scarcity of high-quality marketable euro-denominated assets, and the general lack of liquidity compared to dollar debt markets”. Because of credit downgrades in the previous crisis and a still-fragmented private securities market, the euro has too few of the reliable assets that global investors use as reserves: typically ultra-safe triple A-rated bonds issued by creditworthy governments or companies.

The European Central Bank agrees, according to Benoît Cœuré, a member of its executive board. “In our analysis, [the most important move] would be a deepening of European capital markets and the introduction of a safe asset. That would be a game-changer.” In fact, no currency has ever gained predominance without liquid markets in a benchmark asset, says Mr Eichengreen. “If [Europe] succeeds in significantly enhancing the international role of the euro without that step, it would be a first.” The lack of safe euro-denominated assets was aggravated by the 2010-12 eurozone sovereign debt crisis, when investors feared the single currency might fall apart. “It’s a perfectly fine idea to promote the euro in international markets,” says Gita Gopinath, IMF chief economist. “But the necessary condition for that is to improve the euro area architecture to strengthen resilience — centralised fiscal capacity, capital markets union, banking union.”

6. Jonathan Ford in FT has a nice article on how accounting practices can cover up for corporate failings, this time in the case of Thomas Cook - the art of paying out massive dividends through accounting tricks despite the company not having the wherewithal to pay out even a cent.

7. Fascinating article about the use of back-channel diplomacy by American Presidents.

8. As the latest PISA results indicate, student learning outcomes is a problem in the US too.

9. Very good graphic explanation of the New York subway map here.

10. Finally, a new working paper comparing fiscal multipliers in developed and developing countries,

The clear theoretical implication that public investment multipliers should be higher (lower) the lower (higher) is the initial stock of public capital has not, to the best of our knowledge, been tested. This paper... finds robust evidence in favor of the above hypothesis: countries with a low initial stock of public capital (as a proportion of GDP) have significantly higher public investment multipliers than countries with a high initial stock of public capital... Our results thus suggest that public investment in developing countries would carry high returns.

Here is a good primer about fiscal multipliers from the IMF.

An slowdown caused by economic orthodoxy?

This is in continuation to earlier posts here, here, here, and here.

Harish Damodaran characterises the ongoing economic slowdown in India as a western style demand-side slowdown and blames it on commissions and omissions of policy. 

While we all agree that this is a demand-side slowdown, I think that is only a part of the picture. We may be missing the big picture necessary to address the underlying nature of the economic trends. Ashoka Mody got part of the remaining elements right, but not fully.

Here is my hypothesis. While we have an economic slow-down, from 8% to 4.5%, I feel that the 8-9% growth in the first place was itself built on shaky foundations. We therefore have a demand slow-down which has come on top of unsustainable booms. This makes the slow-down appear even more steep.

The capital foundations (human resource, physical infrastructure, financial capital, institutional strength, and market demand) required to sustain the high growth rates were never in place. This was outlined in Can India Grow. In the circumstances, the two spurts of growth – 2003-04 to 2007-08, and 2009-10 to 2010-11 – were built on two bubbles. The former was the capex and construction boom, especially driven by infrastructure companies, and the latter by the lagged effects of the transfers boom, especially driven by rises in MSP and NREGS spending and monetary accommodation. The former spawned a financial cycle, whose ruinous effects are seen in the banking and non-banking sector crises. The financial cycle was also associated with massive resource misallocation towards real-estate and construction (property prices went over the roof, and the pile up of massive real estate inventory has its origins in that cycle).

I am inclined to believe that in the absence of these two bubbles (excessive capex and construction investments, and excessive transfers), the economic growth would perhaps have been, in the range of 5-7%. 

While the signatures of decline in high-frequency indicators can be traced back to September-October 2018, it can be argued that the underlying drivers of growth had run out of steam much earlier. The euphoria surrounding the new government in 2014-15 provided tailwinds to sustain growth despite all the credit market and corporate balance sheet problems. This momentum was perhaps completely snuffed out by the triple shocks – demonetisation, GST, and regulatory over-kill and tight money policy by RBI – and the decline had started by early 2017. In other words, the triple-shocks were merely expediting and exposing the shaky foundations. 

Despite this ongoing economic weakness, the financial cycle appears to have remained buoyant and may be ebbing only now. This is borne out by the high FDI inflows, the vast majority of which went into finance, real-estate, renewables, and consumer technology services sectors. Less than 5% of FDI went into manufacturing. The solar investment bubble, where the chickens are now coming home to roost, was significantly inflated by private equity. Same with commercial real estate. In fact, PE has been consistently 40-60% of the total FDI, largely in the form of buyouts. QE and the global search for yields too were tailwinds sustaining this financial cycle, amidst the continuously weakening economy.

R Nagaraj has pointed to a financialisation dimension of FDI flows, highlighting the close correlation between inward and outward flows, and the possibility of tax arbitraging and treaty shopping. The IMF's latest Fiscal Monitor identifies almost 40% of global FDI as "phantom FDI" driven by tax avoidance.

The misleading economic data till recently gave the false impression to the government that everything was alright. It created a sense of complacency and came in the way of recognising the problems early on and taking measures to address them head-on. It also led to the Inflation Targeting regime and fiscal conservatism being pursued well beyond their limits.

Economists scorn at demonetisation. But ironically the remaining contributors to the mess were straight out of the orthodoxy - Inflation Targeting, Basel III adherence, fiscal conservatism, GST, RBI's slew of regulatory actions, IBC etc. For an economy struggling with the twin-balance sheet problem (corporates and banks), the combined squeeze due to all these, coming at more or less the same time, was understandably back-breaking. Complementing these was the enthusiastic embrace of cross-border capital flows and the crack-down on black money and shell companies. All these were best-in-class policies implemented at the behest of  technocrats with limited skin in the game. Why is no one discussing these? Where are the economists queuing up to study the effects of the sledgehammer shock from RBI?

Realising this structural dimension is important now as we pursue measures to revive the economy. The QE was pursued far beyond its relevance on the false assumption that economic growth (in the US etc) could be restored back to that of the Great Moderation era. Policy makers in the US were unwilling to accept the more realistic 2-3% growth rates. India’s policy makers too need to acknowledge the reality that a return to sustainable 8% growth rates is not possible without addressing fundamental capital accumulation deficiencies.

Demand-side measures are urgently required to ensure that the economy does not get entrapped in a vicious downward spiral and ends-up like the Latin American economies and gripped by the problems of the middle-income trap. But it will have to be accompanied by deep structural reforms on all the four fronts of capital accumulation – human (fixing education), physical (infrastructure investments), financial (intermediation, savings), and institutional (state capacity, management of cities). This will have to be accompanied by policies that address problems in agriculture and manufacturing.

We cannot afford a sequential path, get immediate demand-side measures and then tackle the other structural issues. In fact, all these should have been solved yesterday!

Weekend reading links

1. Amazon's Mechanical Turk is the latest in the cost-minimising innovations with massive negative externalities on society.

Employers, known as requesters, post batches of what are called Human Intelligence Tasks, or HITs, on Mechanical Turk’s website. A task could be transcribing an invoice, or taking part in a study, or labeling photographs to train an artificial intelligence program... Most tasks pay a dime or less, and there is a daily churn of tasks that pay only a penny... People turk to save for a motorcycle. They turk to buy insulin. They turk to pay off debt or pass the time profitably while on the clock at a boring job. Some do it because there are few decent-paying jobs that can be done at will. People who are confined to their homes by disability or social anxiety or who live where there are few jobs do it because, despite lousy wages, it seems like the best option. Plenty turk full time. In a 2016 Pew Research Center survey of nearly 3,000 American turkers, a quarter said they made most or all of their earned income on the platform. More than half the turkers surveyed said they earned under $5 an hour. 

As little as turking appears to pay on paper, in practice it often pays less because MTurk, as it is known, is a sloppy, shoddy free-for-all. Turkers spend their time fighting requesters over an unfair 10-cent rejection or a missing 60-cent payment. They waste minutes filling out bubbles on defective questionnaires that cannot be submitted. They abandon “10-minute” surveys after half an hour. They swap horror stories and warnings on turker message boards (“rejection on a $0.50 hit,” read one recent bulletin, “reason is ‘funds were not allocated’”). They leave scathing reviews on the turker-run site Turkopticon (“unfair and wild use of the rejection button”). Just how much turkers make is the subject of considerable scholarly debate, but one paper published last year analyzed millions of tasks done by thousands of turkers. Though they probably overrepresented novice turkers like me who do the lowest-paying tasks, the paper’s authors concluded that if you count time spent looking for tasks and working on tasks that came to nothing, the median turker’s hourly wage was $1.77... 

Presiding over this production is the world’s biggest tech company, feet firmly planted on the sidelines. Amazon usually declines to get involved when turkers say requesters rip them off, even as it lets requesters hide behind aliases that can make them impossible to track down... Amazon even finds ways to recoup some of the pennies turkers earn, a reminder of the days when miners were paid in scrip redeemable only at the company store. While American turkers can get their wages direct-deposited, thousands of turkers overseas have only one way to get paid without incurring third-party fees: on an Amazon gift card... Minimum-wage laws generally do not apply to piecework jobs like turking. Mechanical Turk is now one of a handful of big players in the field known as crowdwork or microwork. (One crowdwork company, Prolific, used by academic researchers, enforces a minimum wage: $6.50 an hour.)

Crowdwork’s proponents see a gleaming future — a borderless, no-overhead labor market where task-creator and task-doer meet at the intersection of supply and demand. Its critics see a throwback to something more Dickensian, where the lack of regulation and accountability keeps workers in the dark and on the defensive. Mechanical Turk, in particular, combines the inconsistency and precariousness of gig work with Big Tech’s tendency to dodge liability for the icky things that happen on its platforms. 

2. The Economist has a nice article on the $3.5 trillion US healthcare industry, perhaps the most famous example of why unfettered markets do not work. Sample this,

The merger wave has increased concentration and pricing power. Brent Fulton of the University of California, Berkeley, found that 90% of America’s hospital markets, representing a population of over 200m, were highly concentrated. Zack Cooper of Yale University, whose team looked at insurance claims covering over a quarter of Americans with employer-provided health insurance, discovered that prices at hospitals with a local monopoly were 12% higher than in markets with four or more rivals. A study by an insurance-industry body concluded that consolidation cut costs by 15-30% at acquired hospitals, but average prices for hospital services still rose by between 6% and 18%.

According to the American Hospital Association, a lobby group, operating margins in the industry rose from 4.4% in 2007 to 6.4% in 2017. But many hospitals in rural areas, which suffer from undercapacity, and in poor urban areas, which have lots of uninsured patients, barely break even or lose money. Big for-profit chains like hca Healthcare, with around 180 hospitals, can enjoy high (if volatile) margins. Non-profit institutions often plough those gains into expansion or salaries.

And the incentives facing the different participants,

Patients are often not price-sensitive. They are either in need of urgent care, with no time to shop around, or have insurance, and so pay a fraction of the full cost (often nothing beyond an annual out-of-pocket limit). Insurers, for their part, care less about prices because they now make more money by managing health plans for self-insured employers than by managing risk. They may even like to see inflation rise, since they can take a bigger cut from a bigger base. A well-intentioned Obamacare rule forces insurers to pay out at least 80% of their revenue from premiums. But by capping margins, it encourages raising revenue, not efficiency—and higher costs can be used to justify higher premiums.

3. Excellent essay by Paul Graham on what goes behind the creation of a genius (HT: Rajeev Mantri),

An obsessive interest in a topic is both a proxy for ability and a substitute for determination. Unless you have sufficient mathematical aptitude, you won't find series interesting. And when you're obsessively interested in something, you don't need as much determination: you don't need to push yourself as hard when curiosity is pulling you. An obsessive interest will even bring you luck, to the extent anything can. Chance, as Pasteur said, favors the prepared mind, and if there's one thing an obsessed mind is, it's prepared. The disinterestedness of this kind of obsession is its most important feature. Not just because it's a filter for earnestness, but because it helps you discover new ideas... The popular story is that they simply have better vision: because they're so talented, they see paths that others miss. But if you look at the way great discoveries are made, that's not what happens. Darwin didn't pay closer attention to individual species than other people because he saw that this would lead to great discoveries, and they didn't. He was just really, really interested in such things. Darwin couldn't turn it off. Neither could Ramanujan. They didn't discover the hidden paths that they did because they seemed promising, but because they couldn't help it. That's what allowed them to follow paths that someone who was merely ambitious would have ignored.

The important thing is to cultivate disinterested obsessive interest in something which matters!

4. Livemint points to the tanking of one of the last remaining drivers of economic growth, the state governments capital investments. 

The value of new state government projects fell 75% over last year, and is the lowest in 15 years. This, at a time when across states, government funded capex has overtaken private capex as the major source of investment. 

The article also points to how UDAY, without the complementary power sectors reforms to lower losses and raise tariffs, has both weakened state government and discom finances and lowered investments in the power sector. 

5. A stunning snippet capturing the demographic shifts taking place,

Harvard has more students at its Division for Continuing Education (for mature and retired students) than it does at the university itself.

6. Much gloss has been applied on the recent Business Roundtable Declaration by over 180 leading US corporate executives pledging their allegiance to beyond shareholders to cover employees and customers.  Sample some of the reality behind it,

Most of the CEOs who pledge to fight climate change do not run firms that are responsible for it. Take the biggest 200 Western firms that disclose emission figures. Of these, the top 20 are responsible for 70% of all emissions: the other 180 don’t matter much... the accusations of hypocrisy: it is not hard to find. Nike, which has pushed virtuous branding, has been embroiled in a doping scandal. BlackRock, a fund manager that pushes other firms to invest more, spent over 100% of its own cashflow on buybacks in the past 12 months. Visa signed the Roundtable letter championing customers, but is part of a payments oligopoly. 

7. Finally a call for industrial policy to recover America's lost manufacturing competitiveness,

This national effort—call it Industrial Policy 2.0—should focus on ensuring that hardware innovations are manufactured in this country. The idea is not to recover lost industries but to rebuild lost capabilities. The U.S. needs to leverage its dominance in science and technology to create future industries, to provide us with first-mover advantages and reclaim American leadership in manufacturing. The first step would be to create a new federal agency responsible for the health of U.S. manufacturing. A number of agencies currently have manufacturing-related programs, but there is little or no coordination or strategy. Defense alone cannot solve this challenge because defense procurement needs are dwarfed by commercial markets, and defense-specific technologies may have few commercial applications. A new agency is needed to signal new priorities. This National Manufacturing Foundation, as it could be called, would be a cabinet-level agency focused on rebuilding America’s industrial commons and translating our scientific knowledge into new products and processes.

How much efficiency is too much efficiency?

One of the salient markers of progress and development is efficiency and cost-effectiveness - is the work being done more efficiently and cost-effectively than earlier? So formal markets are more efficient than informal ones, technology enhances efficiency, machines make people more efficient, and so on.

So theoretically, a large share of the work in today's world could be parcelled out to be done either completely by machines or farmed out to a waiting army of low-paid and unprotected virtual workers. Amazon's Mechanical Turk is an illustration of this. This is efficiency enhancing. But what about its costs?

This view of the world overlooks two factors.

1. Efficiency from whose perspective? What is efficient from the perspective of the business need not be efficient (much less desirable) from the perspective of the economy or society as a whole.

For a business, the most efficient path is to reduce its costs and maximise its revenues and profits, return money to the shareholders, and make good quality products available to its customers at the lowest price possible. In the process, it can outsource activities to other countries, squeeze more out of workers, even parcel out work to the likes of Mechanical Turks. It can squeeze on wages, minimise its tax outgo (tax avoidance planning), and avoid paying workers benefits. It can seek to externalise all costs and appropriate all gains.

This can look efficient in the aggregate (profits go up, consumers are happy, share prices rises, and animal spirits become active). But do we care that these gains come with a social cost (welfare of the workers) and tax payer subsidy (social security, tax revenues foregone etc)?

2. The social contract. This search for efficiency creates its set of externalities. All economic activities come with costs and benefits. Businesses have always sought to internalise the benefits and externalise the costs of any activity. Governments and regulations exist to mitigate this risk and make businesses internalise at least some part of the costs.

With any innovation once it becomes commercial, it takes time for the externalities to get recognised and internalised. After that regulations kick-in to address the market failures. Indeed this initial run-way which allows the first-movers to internalise and appropriate gains and externalise costs is the incentive for innovation itself, the first-mover's advantage.

The regulatory arbitrage associated with e-commerce and aggregators is an example of this process at play. The Ubers, Lyfts, AirBnBs, Facebooks and Amazons are currently reaping the fruits of this run-way. It is only a matter of time before the costs are recognised and regulations put in place to internalise some of those costs. That has always been the case and will be this time too (Do valuations take this into account?)?

Any society, democratic or authoritarian, is built on a social contract among different socio-economic groups. The rich need the poor, owners need workers, lenders need borrowers, rural needs urban, shareholders need executives, landlords need tenants, sellers need buyers, and so on. The exact vice-versa holds in equal measure. The relationships are symbiotic.

Accordingly, its richer people agree to pay more taxes; poor people agree to live in less attractive areas; savers lend their money at cheap rates to borrowers who in turn make very high returns; shareholders allow their executives to payout exorbitant salaries, far disconnected from their inherent worth; workers agree to workplace conditions and benefits that are far less comfortable than their managers and executives; farmers agree to policies that lead to terms of trade that favours consumers; residents of rural areas (and slums) allow a higher absolute and per-capita investment and better infrastructure in urban areas (and posh colonies) and so on.

There is no iron law which states this should always be the case. We've had societies in not too distant past where these were not true. After all the majority could turn around and say why should these be the case?

It has generally been the case that the power relationships between these groups have been skewed in favour of one side. And ironically, the relationship has always been in favour of the few and against the many. But this dynamic of relationship has held for centuries. But this dynamic was generally tempered by the social contract.

In a world of brute force majority, the powerless many would always question and upend the powerful few. Indeed revolutions have been built on the back of this inequity in relationships, especially when the inequity exceeds reasonable proportions.