Thursday, October 22, 2015

Mid-week reading links

1. The most popular criticism of cash transfers has been that recipients will squander it away on alcohol and other temptation goods and services. In this context, Tim Harford points to a World Bank paper which reviewed 19 field experiments and 11 surveys across the world on the impact of cash transfers on temptation goods and found,
Almost without exception, studies find either no significant impact or a significant negative impact of transfers on temptation goods. In the only (two, non-experimental) studies with positive significant impacts, the magnitude is small. This result is supported by data from Latin America, Africa, and Asia. A growing number of studies from a range of contexts therefore indicate that concerns about the use of cash transfers for alcohol and tobacco consumption are unfounded... Thus, it seems that the flypaper effect and the effect of women controlling more resources (the household bargaining effect) likely compensate for the income effect, leading to no significant net change in alcohol and tobacco consumption. We see no difference between conditional and unconditional cash transfer programs, so this does not seem to be a function of conditions.
2. Coming on the back of this study on the large productivity differential across manufacturing firms, Jason Furman and Peter Orszag find equally large differential among listed non-financial firms' returns on capital invested. Peter Orszag writes,
Among the top nonfinancial U.S. companies that are publicly traded, capital return has shown a stunning rise over the past three decades. Excluding goodwill, for example, the 90th percentile of such returns has risen roughly fivefold, from about 20 percent in the mid-1980s to an eye-popping 100 percent in 2014. In other words, the top 10 percent of publicly traded nonfinancial firms earned 20 percent or more on their invested capital in the 1980s, and 100 percent or more in 2014. Two features of these high-return companies stand out: They are disproportionately in health care and information technology -- from 2010 to 2014, two-thirds were in these sectors. And they are persistent. Among companies that, in 2003, had a return on invested capital in excess of 25 percent, only 15 percent had a return below that threshold in 2013. The vast majority remained in the 25-percent-plus bucket.
Interestingly, a comparison of individual and firm-level income dispersion reveals that virtually all of the dispersion is due to inter-firm dispersion than intra-firm (or wages).
Their conclusion, 
All this could help explain why Americans' earnings are becoming more unequal. Some companies in, say, the technology or financial sectors could generate consistently supernormal returns. Their employees would share the wealth by earning higher wages. Consistent with this possibility, other research suggests that the rise in wage inequality is driven more by a widening gap in the average earnings of workers in different companies than by a widening gap between paychecks inside individual businesses.
3. I have blogged on several occasions that finance loses its disciplining powers and lenders supply credit without due diligence when the markets are riding a wave. Solar power in India looks increasingly frothy. The assumptions that underpin the commercials of recent bids may be untenable. Even assuming the country gets the regulatory and demand-side challenges addressed, itself debatable, the grid management (balancing solar with conventional power which can alternatively be made operational and backed-down based on demand) and evacuation capacity constraints are certain to bind beyond a few gigawatts of capacity addition. And disturbingly, alleviating them, even in the best of circumstances, is likely to take many years. So brace yourselves for post-bubble clean-ups in the coming 4-8 years in solar sector.

4. Arguably the digital sharing economy's greatest contribution is in reducing market frictions and enabling the most efficient match between buyers and sellers. Michael Spence has two recent articles where he highlights how the internet enable more efficient utilization of under-utilized assets (Uber, AirBnb), creates new businesses (sharing clothes, selling part-time work etc), increases transaction efficiency and lowers their costs (network effect, rating systems), and so on.

5. MR points to this tweet from Ian Bremmer which has a stunning graphic on the creeping dispossession of the Palestinians.
6. Nice MRU video on China's economic prospects.
I'll tend to agree with most of what Tyler Cowen says. The risks from real estate and equity market bubbles, large municipal debt, excess manufacturing capacity, and capital flows are indeed very high and atleast some of them are certain to materialize. 

But I am more optimistic than Tyler and not just because the Chinese have invested heavily and very well on human capital development. While 48% investment rate is simply unsustainable, 35% consumption share of GDP can only go up significantly. If that starts to happen the excess capacity in many areas will start to look less a problem. The balance sheets of the central and provincial governments and consumers are healthy enough to sustain policies that can enable such structural transformation. 

The challenge, as I have blogged earlier, is not so much the economic strategy, but the political willingness to loosen control over the polity and society, so essential to transition to the next stage in the country's development trajectory. It is here that my concerns are greater. In this context, a government in Beijing that feels most secure about itself is more likely to have the stomach and political capital required to deregulate and liberalize, if only gradually, the political and social order. It is this transition that is likely to be of the greatest relevance for the prospects of the Chinese economy and the biggest test yet of the Chinese strategy of "crossing the river by feeling the stones".

7. I agree with Luigi Zingales' disturbing assessment of the state of capitalism today,
The form of capitalism prevailing in most of the world is very distant from the ideal competitive and meritocratic system we economists theorise in our analyses and most of us aspire to. It is a corrupt form, in which incumbents and special-interest groups shape the rules of the game to their advantage, at the expense of everybody else: it is crony capitalism. The reason why a competitive capitalism is so difficult to achieve is that it requires an impartial arbiter to set the rules and enforce them. Markets work well only when the rules of the game are specified beforehand and are designed to level the playing field... While everybody benefits from a competitive market system, nobody benefits enough to spend resources to lobby for it. Business has very powerful lobbies; competitive markets do not. The diffused constituency that is in favour of competitive markets has few incentives to mobilise in its defence.
He argues that media, with its role of gathering and distributing information on the cronyism, has the power to "create the demand for competitive capitalism". But I do not share his belief in the ability of media today, constrained as they are by the same forces, to recalibrate capitalism. 

1 comment:

Unknown said...

You are right about point 7. Coming from Luigi Zingales, that was a disappointingly naive suggestion and hope!