Weekend reading links

1. The proposal in the Union Budget 2018-19 to impose tax on long term capital gains is a welcome development. This blog has been a long-term advocate of this move. 

With the Mauritius tax treaty and taxation on long-term capital gains out of the way, the next target should be on the tax deduction on interest expense, at least beyond a certain limit. The short story of India's infrastructure sector this millennium has been one of firms financing projects with excessive debt, thereby leaving them with limited skin in the game. The pile of stalled projects (and banking non-performing assets) with absconding developers is in no small measure due to this distortion. 

2. A minimum support price (MSP) may be scorned upon by orthodox economists and commentators on the right. But in the case of agriculture in developing countries like India, it may actually be among the least worse option among all the alternatives available. The budget proposal offering a 1.5X MSP on input cost is therefore understandable. The challenge is with getting the right implementation design - most cost-effective, least distortionary, most light-touch etc.  

3. Can Perovskites, a compound of calcium, titanium, and oxygen replace silicone in solar cells? The Economist has a feature on the latest research.

Today 10% is quite a modest efficiency (measured in terms of how well a cell converts light into electric current) for a perovskite cell in the coddling conditions of a laboratory. For lab cells values above 22% are now routine. That makes those cells comparable with ones made from silicon, as most of the cells in solar panels are—albeit that such silicon cells are commercial, not experimental. It did, however, take silicon cells more than 60 years to get as far as they have, and the element is probably close to its maximum practical level of efficiency. So, there may not be much more to squeeze from it, whereas perovskites could go much higher. Perovskite cells can also be made cheaply from commonly available industrial chemicals and metals, and they can be printed onto flexible films of plastic in roll-to-roll mass-production processes. Silicon cells, by contrast, are rigid. They are made from thinly sliced wafers of extremely pure silicon in a process that requires high temperature. That makes factories designed to produce them an expensive proposition... 

Eventually, Mr Averdung believes, perovskites will act as stand-alone cells—and not just in conventional panels. Because they are semi-transparent, perovskite films could also be used to turn windows into solar generators, by capturing part of the incoming sunlight while permitting the rest to pass through.

4. Tyler Cowen writes about the utility of land value capture to finance infrastructure projects. In this context, it is worth keeping in mind that India has a a Land Value Capture Policy.

5. Staying on land value capture, the Times has a very good article on how being near a metro station benefits a property.

In Manhattan’s main business corridors, from 60th Street south, the benefit of being near a subway adds $3.85 per square foot to the value of commercial property, according to calculations by two New York University economists... Gov. Andrew M. Cuomo, a Democrat, has made value capture a prominent part of his plan to salvage the subway system by proposing to give the Metropolitan Transportation Authority the power to designate “transit improvement subdistricts” and impose taxes... at a moment when the subway is facing its worst crisis in decades, there is a growing consensus that property owners should shoulder more of the cost of a subway system that has nourished their bottom lines... The governor’s proposal would allow the transit agency to establish districts around new projects for value capture that could extend as far as a mile from a station.

6. Nice column by Shankkar Aiyar that charts the chequered history of India's public sector assets disinvestments. Short story, a very large share of disinvestment has been about moving money from the right hand to the left hand of the government. Someone should do a graphic of the real disinvestment away from any kind of government ownership (including by LIC, that giant buyer of last resort) and plot against the estimates. That would be the real measure of disinvestment. 

7. A very good essay in The Economist on the proliferation of higher education and its questionable benefits. South Korea is the most stunning success,

Seventy per cent of pupils who graduate from the country’s secondary schools now go straight to university, and a similar share of 25- to 34-year-olds hold degrees, up from 37% in 2000. Students scramble to gain admittance to the most prestigious institutions, with exam preparation starting ever younger. Sought-after private nurseries in Seoul have long waiting lists.

Since 1970, the share of workers with university degrees has increased in all but nine of 265 occupation categories that make up US workforce.

Occupations with bigger increases in share of university education have seen higher wage increases, though the correlation is weak. 

The article questions the value of the graduate premium - the difference between the average earnings of those with a degree and those with secondary-school education or less, controlling for fees and income foregone while studying - which is regarded as a proxy for return on education. This metric is flawed on numerous considerations - it lumps together all kinds of degrees into one category, glosses over wage-inequality levels, does not account for those who have started university education by paying fees etc but not completed it, and most importantly does not account for the reality that  on average cleverer students would anyways earn more.

Including dropouts when calculating the returns to going to university makes a big difference. In a new book, “The Case Against Education”, Bryan Caplan of George Mason University argues that the low graduation rates of marginal students, and the fact that, for a given level of qualification, cleverer people tend to earn more, mean that the return on a four-year degree in America ranges from 6.5% for excellent students to just 1% for the weakest ones.

It writes about the pernicious effects of higher education in so far as its proliferation encourages employers to look for graduates for any job, even which require no such skills. Such crude screening is a penalty on non-graduates who get locked out of decent jobs. This has resonance in countries like India,

Across the rich world, a third of university entrants never graduate. It is the weakest students who are drawn in as higher education expands and who are most likely to drop out. They pay fees and sacrifice earnings to study, but see little boost in their future incomes. When dropouts are included, the expected financial return to starting a degree for the weakest students dwindles to almost nothing. Many school-leavers are being misled about the probable value of university.

It writes about a measure of the over-education problem,

The Economist has produced a measure of over-education by defining a graduate job as one which was staffed mostly by degree-holders in 1970. We find that just 35% of graduates work in such occupations today, down from 51% 45 years ago. Judging by job titles alone, 26.5m workers in America—two-thirds of those with degrees—are doing work that was mostly done by non-graduates a half-century ago.

This is a very important insight for policy makers and opinion leaders,

Earning a degree is partly about improving productivity, but it is also about getting ahead of your peers. Policy makers should focus on the public rather than the private economic benefits of higher education. 

Its suggestions to end the education arms race to the bottom,

Governments need to offer the young a wider range of options after school. They should start by rethinking their own hiring practices. Most insist on degrees for public-sector jobs that used to be done by non-graduates, including nursing, primary-school teaching and many civil-service posts. Instead they should seek other ways for non-graduates to prove they have the right skills and to get more on-the-job training. School-leavers should be given a wider variety of ways to gain vocational skills and to demonstrate their employability in the private sector. If school qualifications were made more rigorous, recruiters would be more likely to trust them as signals of ability, and less insistent on degrees. “Micro-credentials”—short, work-focused courses approved by big employers in fast-growing fields, such as IT—show promise. Universities should grant credits to dropouts for the parts of courses they have completed. They could also open their exams to anyone who wants to take them, and award degrees to those who succeed.

8. The Times has a story which highlights how the World Bank President Jim Kim may be embracing Wall Street and its capital as the Bank struggles to get its members to make their contributions. Kim has been courting private capital to invest alongside the World Bank.

He should remember this is what happened when state and local governments in the US embraced Wall Street.

9. Finally, Ananth has sent me the findings of Harvard-Harris poll. On immigration etc, Trump is merely channeling the overwhelming public sentiment. The liberals may feel they are representing the public mood. The only problem is that they clearly are not, and representing a small self-serving elite.