Weekend reading links

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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