The illusion of precision with numbers and information

The world of macroeconomics has certain numbers which have, over time, come to become sacrosanct. The 2% inflation target, 3% budget deficit target, and 60% public debt to GDP ratio are the three most important. Each of these have limited substantive basis, but have become entrenched anchors in macroeconomic policy making.  

Jeff Sommer writes in NYT on how the 2% inflation target became universal.

The 2 percent inflation target is something of a historical accident. It has roots in New Zealand, which passed a law in 1989 establishing the independence of the country’s central bank, and, in addition, said the bank should target inflation. But what should the target be? Officials started with 0 to 1 percent, which seemed too low, and shifted to 2 percent. There was no particular magic or science to the 2 percent number, but it stuck, and it spread to other Anglophone countries in short order: Britain, Canada and Australia adopted it. So did Sweden.

Eventually, the Federal Reserve did, too, but with great reluctance. Mr. Volcker never embraced an inflation target. He wanted inflation to be as low as possible and saw no reason to restrict the Fed’s flexibility by indicating publicly what low meant at any specific time. And Alan Greenspan, who succeeded Mr. Volcker as Fed chair, resisted setting a target for years... Behind closed doors, in a pivotal 1996 Federal Open Market Committee meeting, Mr. Greenspan said the Fed’s goal was “price stability.” A transcript of the meeting shows that he defined that goal this way: “Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions,” he said... He’s saying it’s OK if prices rise a little. Only when those increases feel out of control — as they have over the last year or two, and as they did in the 1970s and early 1980s — has inflation mattered to me, as a citizen and as a consumer...

But economists, by their nature, like to put numbers on things. And in that crucial 1996 meeting, a distinguished economist and Fed official named Janet E. Yellen — now the Treasury secretary, and, before that, a Fed chair herself — pressed Mr. Greenspan to “please put a number on” his estimate of price stability... The transcript shows that he said “zero” was the proper target if “inflation was correctly measured.” But it is difficult to measure inflation accurately, as everyone in the room acknowledged. So Ms. Yellen said, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.” That, essentially, was that. Other Fed members agreed, and the 2 percent target became enshrined in Fed policy, though only in a clandestine way.

This about the evolution of Fed communication,

Mr. Greenspan and the Fed favored a style of communication that even he described as opaque. In testimony before Congress in 1987, he was droll but on the mark. “Since I’ve become a central banker, I’ve learned to mumble with great incoherence,” he said. “If I seem unduly clear to you, you must have misunderstood what I said.”

It wasn’t until 2000 that the Fed began issuing regular “forward guidance” after its meetings, projecting where it expected that the economy and inflation would be headed. By now, Mr. Powell’s news conferences have become routine. But it’s worth remembering that it wasn’t until 2011, well into Ben S. Bernanke’s tenure as Fed chair, that the central bank broke with the Volcker and Greenspan tradition of extreme circumspection and held its first regularly scheduled news conference. In 2012, it finally embraced the 2 percent target openly and formally, and made it part of the Fed’s practice of “forward guidance.” Come what may, over the long run, the Fed would veer toward its North Star, the 2 percent inflation target.

And its ongoing struggles with breaking away from the firm 2% target,

By August 2020, the Fed had revisited the 2 percent target and widened its range in subtle ways. Because of that adjustment, the Fed doesn’t need to hit 2 percent exactly. It can “average” 2 percent “over time.” The central bank “absolutely needs to move inflation toward 2 percent” but it has some flexibility, Bill Dudley, a former president of the Federal Reserve Bank of New York, told me. The Fed’s long-range policy statement says that it doesn’t need to get there immediately, and it has room for judgment in its timing.

This article flags some important insights for discussion. 

For long central banks grappled with monetary policy through a combination of managing money supply level, money supply growth, and interest rates. This was the period when non-academic technocrats presided over central banks. This was also a time when central banks were comfortable with pursuit of monetary policy amidst ambiguity. 

This is important since ambiguity is a constant in our lives. But human beings loath ambiguity and hanker for certitude. And in economics, as elsewhere, there's nothing more comforting than the certitude of numbers. And academic economists, whose job requires them to communicate ideas and concepts, naturally find it easier to do so if they are dealing with numbers. There is a misleading illusion of precision associated in communicating with numbers. 

I have written earlier on the problems with forward guidance and central bank communications. One of the important contributors to market discipline is the presence of risk. This in turn is determined by information, or more accurately, the lack of it. This ignorance makes market participants hedge for and price risks. Now central banks have stepped in with their forward guidance, which gives a false precision of risk mitigation, which in turn encourages market participants to assume greater risks. 

There is another aspect to the idea of forward guidance which contradicts Economics 101. Central bank forward guidance can be compared to a central planner having some superior capabilities to access information that the markets cannot. These capabilities then allow it to provide more credible and accurate assessment of the future than the markets as a collective. In simple terms, the central bank guides the market with some superior information, which can ostensibly de-risk the actions of market participants. 

Update 1 (7.4.2023)

Gillian Tett compares the current bank run with that in 2007-08 and 1997-98 in Japan. The big difference was the speed with which the information spread, depositors pulled out $42 billion, and the bank collapsed. And the contagion spread rapidly across others. As a metric, the share of US households using internet or mobile banking rose from 39% to 66% between 2013-21.

The point here is that information flows were so fast and unfiltered that the asymmetric ignorance which often allowed depositors to stay on had disappeared.

Until now, the models used in finance do not seem to have taken account of the fact that consumer behaviour online might be different from that in the old-fashioned, physical banking world. But one striking feature about American banks, even before the March panic, was that consumers were moving money out of low-paying deposit accounts into better-yielding money market funds at a dramatically faster pace than at similar points before in history.

That might imply that greater information transparency accelerates consumer reaction to news, even outside crises, increasing the risk of “herding”. Either way, we urgently need some behavioural finance analysis, since American banks will stay healthy only if they hang on to deposits — and digital herding could increase the risks of turmoil in other markets, such as Treasury bonds, if shocks emerge there too... The dangerous weakness of fractional banking is that if nobody has a reason to panic, banks are safe; but if everyone runs, a bank can collapse, even if it previously passed tests on issues such as capital adequacy — unless a government steps in. And while the government never used to worry about smaller banks collapsing, now they fear the digital domino effect.

This raises the issue of how fractional reserve banking can survive in the era of rapid and real-time information flows.

The French pension reform

France is roiled by massive protests against the pension reforms introduced by President Emmanuel Macron. The reforms propose gradually raising the retirement age from the current 62 years by three months a year until it reaches 64 years by 2030, increasing the number of years that contributions would need to be made from 41 to 43 by 2027 to qualify for full state pension, and an increase in the minimum state pension by 100 euros. 

The case for pension reform is unexceptionable. France has one of the lowest retirement wages, spends more on pensions, has one of the most generous pension schemes (a net pension replacement rate of 74%, a measure of how pensions replace prior earnings), declining dependency ratios etc. Accordingly, Macron had even promised the same in his April 2022 re-election campaign, and the issue was an important part of his campaign even in 2017. 

But the reform itself and, especially the manner in which it has been pushed through has raised deep discontent. After failing to mobilise a National Assembly majority among allies, including the pro-reform Republicans, President Macron decided to invoke the Article 49.3 of the Constitution which allows governments to bypass the National Assembly and force bills without a vote, but at the risk of a no-confidence motion (which historically French governments which invoked the Article 49.3 have rarely lost). The Article was invoked to pass the reform Bill and the no-confidence vote failed. 

The Economist has a nice summary of the reform and the context,

France’s new pension rules are at once bold, overdue and less radical than once planned. Bold, because the decision to go ahead at all comes in the middle of a cost-of-living squeeze, as part of the fallout from Russia’s invasion of Ukraine... The reform is bold politically too. Few outside Mr Macron’s party and his support base want it, though the employers’ federation applauded. Fully 68% of the French and 77% of 35- to 49-year-olds are against a rise in the pension age to 64. All the country’s trade unions are against any increase in the retirement age... Most opposition parties also oppose the reform... In any event, the reform is overdue. Mr Macron has been promising it since he was first elected, in 2017. Endless consultations, mixed messaging and a failure to build a consensus around a previous version, in 2019, led to the longest period of strikes in France since the uprising of 1968. This first attempt by Mr Macron was finally shelved when covid-19 struck in 2020. Yet France cannot afford to keep things as they are. At 60, the average age at which French men actually retire (for women it is 61) is the third-lowest in the OECD... Thanks to a high life expectancy, a retired man then spends an average of 23.5 years in his armchair (and a French woman 27 years), the second-longest. The share of 55- to 64-year-olds still at their desks is just 57%, compared with 74% in Germany and 65% in Britain... France spends 14% of GDP on public pensions, nearly double the OECD average.

This is a good example of the political economy challenges associated with reforms on issues where the need for change is obvious, public costs of reform very high, and the resolve negligible. 

The passage of the reform has escalated the public protests that have been on since January, with street demonstrations, localised violence, garbage piles in Paris and other cities, metro railways disruptions and so on. As sanitation workers have gone on strike, Parisian streets are overflowing with large piles of garbage. In that context, Bloomberg has an article on the history of garbage strikes,

Sanitation strikes are indeed remarkable in their power to bring social discord to the eyes and ears (and noses) of the wider world, and they can bring on lasting political changes... British Conservative politicians attacking Labour Party opponents still invoke the “Winter of Discontent” — a series of strikes in 1978 and 1979 that saw urban rubbish piles reach to the height of the buildings around them in London and other UK cities, not just helping to usher Margaret Thatcher to electoral victory but serving as a powerful visual representation of disorder in British culture thereafter. Such labor actions became fixtures of urban life in Europe and North America in the 20th century. They emerged, somewhat later than disputes in other areas of industrial society, as cities took over waste collection from private entrepreneurs... With a greater understanding of the importance of hygiene and a sharp increase in refuse from manufactured consumer goods, waste collection came to be acknowledged as a cornerstone of public health... New York City’s epic sanitation strike of 1911, for example, came about because workers were being forced to work not just for low pay, but during the dead of night in winter, usually alone. As France’s current example shows, uncollected trash can be a reliable signpost that a city or country is entering wider social flux. Garbage was piled high in Paris during political ferment in 1957 and 1968. Several of the most famous sanitation worker strikes in US history — in New York City, Memphis and St. Petersburg, Florida — also erupted in 1968, as America was rocked by protests against the Vietnam War, civil rights activism leading up to the signing of the Civil Rights Act of 1968, and urban unrest following the assassination of Dr. Martin Luther King, Jr.

In the context of the manner in which the French government has gone ahead with approving the pension reform without a National Assembly vote, Simon Kuper writes about the changing perceptions about the State among the French electorate,

French anger transcends pensions and Macron’s high-handedness. There’s a generalised, long-term rage against the state and its embodiment, the president. After 20 years living here, I’ve become used to the French presumption that whoever they elected president is a moronic villain, and that the state, instead of being their collective emanation, is their oppressor. But Macron’s unpopular ramming through of a higher retirement age without a vote increases the risk that the French will follow Americans, Britons and Italians and vote populist: President Marine Le Pen in 2027. The far-right’s vote in presidential run-offs has gradually risen this century, to 41 per cent last year. France can’t go on like this. It’s time to end the Fifth Republic, with its all-powerful presidency — the closest thing in the developed world to an elected dictator — and inaugurate a less autocratic Sixth Republic. Macron might just be the person to do it. 

This is a brilliant summary of the Fifth Republic

The Fifth Republic was declared in 1958, amid the chaos of the Algerian war and fears of a military coup. The constitution was written for and partly by Charles de Gaulle, the 6ft 5in tall war hero, the “man of providence” whose very name made him the embodiment of ancient France. He consented to return as leader if France muzzled political parties and parliamentarians. (He even disliked his own party, the RPF, the Rassemblement du peuple français.) So the constitution created a strong executive, albeit not centred on the president. Clause 49.3 allowed the executive to over-rule parliament, and pass laws without a vote... The pensions manoeuvre was the 11th time that Élisabeth Borne, Macron’s prime minister, had invoked 49.3 in 10 months in power. In the 1958 constitution, the president was still a relatively modest figure, elected by about 80,000 officials. But in 1962, de Gaulle enhanced the president’s status: he would be elected by universal suffrage. As de Gaulle later explained: “The indivisible authority of the state is entrusted entirely to the president.”

The Fifth Republic’s governing philosophy became a sort of French-Confucian rule by the cleverest boys in the class, plucked from all ranks of the population. Prime Minister Pierre Mendès France’s father sold affordable ladieswear, President Georges Pompidou’s was a small-town schoolteacher, and President François Mitterrand’s the stationmaster of Angoulême. Typically at G7 summits, the leader with the highest IQ and broadest hinterland beyond politics is the French president. The republic’s technocrats gradually extended their writ to the most isolated villages. Almost everything that moved in western Europe’s largest country was administered from a few square kilometres in Paris. The various waves of “decentralisation” since 1982 never got far. The guiding belief of Parisian technocrats, says the liberal writer Gaspard Koenig, is “étatisme”, statism. He notes that they are typically described as “servants of the state”, rather than of the people. The deal became that the French would hand over a big chunk of their income to the state, and navigate an often nightmarish bureaucracy, in exchange for free education, healthcare, pensions and often even subsidised holidays.

As Kuper writes, the Fifth Republic experienced its “Trente Glorieuses” — 30 glorious years of economic growth, from 1945 until 1975. Apart from economic successes, the unitary and strong French Presidency enhanced the country's global standing. The oil shock of 1973, the long economic stagnation since eighties, and the procession of weak Presidents and scandals surrounding them since the millennium have hastened the debate on the relevance of the Fifth Republic. 

The disenchantment with the president showed in approval ratings. Mitterrand (president from 1981 to 1995) and Chirac (1995-2007) generally had ratings between 40 and 60 per cent, according to pollsters Kantar Sofres. But the last three presidents, Nicolas Sarkozy, François Hollande and Macron, have usually ranged between 20 and 40 per cent. Hollande’s rating in one poll hit 4 per cent (not a typo). These figures from the post-heroic age were too small for de Gaulle’s job. Few voters now even expect that the next president will be the national saviour. Although Marine Le Pen may become president, she too has lost her magic after years of scandals.

As Kuper writes, French Presidential elections have gone in 60 years from being a contest to choose the "man of providence" (De Gaulle) to the latest being to choose "not the devil" (Le Pen).  

This is an excellent description of the French ruling elites, 

But the technocrats look tarnished too, especially since they have congealed into a self-perpetuating caste. Today’s ruling class consists disproportionately of white sons of the book-owning high bourgeoisie, who travelled together from Parisian Left Bank nursery school to Left Bank école préparatoire, where they crammed for exams for the grandes écoles, before acquiring their own Left Bank apartment. If they didn’t come from Paris, they generally moved there as teenagers, like Hollande, a rich doctor’s son from Normandy, or Macron, a neurologist’s son from Picardy...  French technocrats spend their working lives in a few arrondissements inside the Périphérique, the ring road that encircles the Parisian court like a moat. They treat the rest of France almost like a colony, inhabited by smelly peasants who failed to absorb the Parisian culture they had been taught at school, and who vote far right or far left.

The fundamental facts of life outside Paris escape many decision makers. Jean-Pierre Jouyet, an École Nationale d’ Administration (ENA) classmate and right-hand man of Hollande, realised that large swaths of the countryside had no broadband internet only because he suffered the experience in his second home (his parents’ old house) in Normandy... When Macron decided to add a few cents to the fuel tax in 2018, he had no idea it would spark a months-long nationwide uprising by the gilets jaunes, the “yellow vests”, because he and the technocrats around him hadn’t grasped how much people beyond the Périphérique relied on their cars. When things go wrong, the French blame the technocrats — and above all the president, who decides without consulting them. Ordinary people’s lives feel determined, down to the day they can retire, by a Parisian pretend meritocracy from which they were excluded at birth. Three-quarters of people who identify as belonging to “popular classes” say they feel the object of social contempt and lack of recognition, reports Luc Rouban, an expert on politics at Sciences Po, an elite Paris university. This is particularly galling, given the country’s promise, proclaimed from the facades of every post office and primary school: “Liberté, égalité, fraternité”. France isn’t the UK or US, where the power of social class or money is frank.

And this is a great summary of Kuper's reading of the de facto political system in France, 

The state’s autocratic nature helps explain why the French are so angry despite living relatively well. You could describe the republic’s workings without mentioning the almost irrelevant parliament. France today has three branches of government: the presidency, the judiciary and the street. If the president decides to do something, only the street can stop him — by stopping the country through protests and strikes. Street and president rarely seek compromise. One wins, one loses. 

Historically, the trade unions control the street. But as they too lose relevance — Macron barely consulted them over pensions — the street has become increasingly violent and undirected, from the leaderless gilets jaunes to today’s burning dustbins.

Kuper points to liberal writer Gaspard Koenig, who urges revising the Constitution by scrapping de Gaulle's innovation of an elected president (which would boost Parliament's status) and devolving powers to the the country's 35,000 communes or local authorities (which would take power away from the central elites). 

Weekend reading links

1. Make in India and production linked incentives (PLIs) are not resulting in the emergence of Indian mobile manufacturers. From The Ken,

Mobile-phone production in India stood at 310 million units valued at over Rs 2.8 lakh crore ($33 billion) in the year ended March 2022, said Finance Minister Nirmala Sitharaman in the Union Budget 2023-24. Of that, domestic manufacturers are estimated to have a share of 5%... Dixon has exported a paltry Rs 657 crore (~$79 million) worth of mobile phones in the year ended March 2022 (2021-22 is the first full year of the PLI scheme)... Foxconn and Wistron have already received Rs 357 crore ($43 million) and Rs 601 crore ($73 million) for the year ended March 2022... They, along with Pegatron, are likely to receive incentives for the year ended March 2023 soon... Samsung has claimed incentives for the year ended March 2022... Bharat FIH, the fourth international company and a Foxconn group firm, has been unable to claim incentives... Padget Electronics, which is a Dixon subsidiary, and UTNPL—a newly incorporated joint venture between India’s UTL Group and Israel’s Neolync solutions—are the only two entities that have achieved the targets for domestic companies under the scheme... UTNPL makes JioPhones for conglomerate Reliance Industries.

This summary of PLI

The scheme extends a 4-6% cash benefit on incremental sales of electronics goods manufactured in the country to eligible companies for five years, with 2019-2020 as the base year... The scheme with an outlay of Rs 38,600 crore ($4.7 billion) is expected to boost mobile-phone exports at scale... The scheme offers incentives to two categories of companies: international ones, including Wistron, Pegatron, Foxconn, its subsidiary Rising Star, and Samsung, with revenues over Rs 1,000 crore ($121 million ), and “domestic champions” with revenues over Rs 100 crore ($12 million). The incremental investment and sales targets are relatively lower for domestic companies, with the former set at Rs 50 crore ($6 million) and the latter at Rs 500 crore ($60 million). In comparison, international companies are required to meet higher targets of Rs 250 crore ($30 million) and sales in the range of Rs 4,000-7,000 crore ($483-846 million) annually.

2. While exports have in general been declining, an export success story has been that of sugar - its exports have soared from $810.9 m in 2017-18 to $4.6 bn in 2021-22 and could cross $5.5 bn this fiscal year. 

3. Praveen Chakravarthy points to a inter-state issue associated with the possible reversion to Old Pension Scheme by many Indian states.

Paradoxically, states that want to implement OPS have much higher debt levels (40 per cent of GDP) than the states that are reluctant to switch to OPS (22 per cent). That is, states that are in a financially worse condition want to burden their finances even more with OPS, while states that are slightly better off are more financially prudent by resisting OPS. Punjab has debt of a whopping 48 per cent of GDP and spends nearly one-fifth of its income on just pensions for government employees, who constitute a mere 6 per cent of the total families in the state. Similarly, Himachal’s debt levels are 42 per cent with a pension expenditure of 21 per cent for just one-fifth of the households... Just four large states – Maharashtra, Tamil Nadu, Karnataka and Gujarat — are net contributors to the Union government’s tax pool while most other states are net takers. For example, for every Rs 100 that an average Maharashtrian pays in all forms of taxes to the Union, nearly Rs 70 is sent to other states. But for every Rs 100 that the average Punjabi or Rajasthani pays to the Union government, they get back Rs 150. In a sense, when the Punjab or Himachal government claims it has the right to decide on OPS, it is actually paid for indirectly by the future generations of people in Maharashtra, Gujarat, Tamil Nadu and Karnataka through the Union government... Unfortunately, the gap between the “net giving” and the “net taking” states has only increased. For example, the gap between the debt levels of states that have implemented OPS (Bengal, Rajasthan, Punjab, Jharkhand, Chhattisgarh, Himachal) vis-à-vis the states that have resisted OPS (Maharashtra, Tamil Nadu, Gujarat, Karnataka) has increased from 13 per cent in 2003 to 20 per cent of GDP in 2023.

4. After the Swiss National Bank's $54 bn liquidity backstop to Credit Suisse failed to calm the markets, the Swiss authorities forced a merger of the 167-year old bank with its fierce rival UBS. 

On Wednesday, the so-called “trinity” of the Swiss National Bank, regulator Finma and minister of finance summoned Credit Suisse chair Axel Lehmann, who was in Saudi Arabia for a conference, and chief executive Ulrich Körner for a call. In the same meeting where they authorised the SFr50bn backstop, they also delivered another message: “You will merge with UBS and announce Sunday evening before Asia opens. This is not optional,” a person briefed on the conversation recalls... The trinity called UBS and ordered the group to find a solution to save its ailing peer from bankruptcy. “Resolution [a government-controlled wind-down] would have been a disaster for the financial system and introduced the threat of contagion around the world,” says another person involved on the UBS side. “Our interests were also aligned because a failure is not good for the Swiss wealth-management brand. So we said, on the right terms, we would help.”

The Bank's latest crisis was triggered by findings of "material weaknesses in internal control over financial reporting" for 2021 and 2022 in the Bank's annual financial report released on March 14. This follows a serious of governance issues and dodgy investment decisions over the last few years - Greensill, Archegos, Mozambique bribery scandal etc. The report also announced large losses for the year, and its release coincided with the SVB failure and heightened scrutiny of banking assets. The day after release of its annual report, CS's largest shareholder, Saudi National Bank disclosed that it would not step in with any more investment, thereby setting off fears in the market about the Bank not being able to absorb its losses. The Bank's CDS surged, its shares plunged 24%, and prices on its bonds fell to distressed levels. The Swiss authorities then stepped in.

The shotgun marriage creates the world's fourth largest bank by assets, with 120,000 staff and $5 trillion in assets. It would also be the second largest wealth manager, with $3.5 trillion assets, only behind Morgan Stanley. 

As per the merger, UBS agreed to pay CS shareholders $3.1 bn in an all-share deal, and the Swiss government agreed to provide second loss backstop for 9 billion francs of potential losses from CS assets, 100 bn franc liquidity lifeline from SNB, and allowed UBS to wipe out about $17.3 bn of CS's Additional Tier I bonds. The write down of AT1 bonds even as shareholders received $3.1 bn goes against the standard practice of equity holders being subordinate to bondholders, and spooked the $275 bn European market for these bonds. European authorities stepped in to reassure AT1 bond holders in the Eurozone and UK. An FT editorial writes,

The wipeout of AT1 bonds is the most controversial element of the deal. It cast doubt on the hierarchy of claims in the event of a bank failure: common equity is usually considered subordinate to these bonds in the capital structure, yet shareholders received a small sum at their expense. Finma cites a clause in the bond prospectus allowing this, but bondholders are now threatening a legal challenge... The payout to shareholders is regrettable, though this may have been an attempt by the Swiss authorities to extend an olive branch to international equity holders, particularly from the Middle East, which is an important location for the banks’ wealth management operations. Legal challenges could add to uncertainty around the deal: shareholders are already miffed they did not get a vote on it and Swiss politicians have complained that the hefty government backstop, risking taxpayers’ money once UBS bears initial losses, was not debated in parliament. The combined UBS-Credit Suisse will be a behemoth: its combined assets will be roughly twice the size of the Swiss economy. If Credit Suisse on its own was deemed too big too fail, the new entity will take on even greater global systemic importance — which makes its success crucial.

But Finma's argument goes as follows

The “AT1” bonds in question — a type of hybrid debt instrument created after the financial crash of 2008 to give banks greater capital flexibility in the event of crises — contained explicit contractual language that they would be “completely written down in a ‘viability event’ in particular if extraordinary government support is granted”, Finma said. This allowed the regulator to prioritise equity holders ahead of AT1 holders.

This is a fascinating FT account of the five-days over which the deal was consummated. It shows how the entire transaction was done through zoom calls between third party advisors hired by both Banks (separately by both managements and Boards) and the government, SNB, and Finma officials, and with almost no direct contact between the two sides. The Swiss government was under intense pressure from the US and European governments to quickly address the problem so as to limit its contagion on the global banking system, which was already reeling due to implosion of SVB. The Swiss Finance Minister, Karin Keller-Sutter played the primary matchmaker, and the deal did not involve any shareholder approval process. The Swiss were also keen to keep Credit Suisse at home and prevent outsiders. BlackRock tried hard to takeover the ailing bank. 

This is a long read on the 167 year history of Schweizerische Kreditanstalt, later rebranded as Credit Suisse, established in 1856 by Alfred Escher to mobilise local finance for Switzerland's infrastructure investments and economic growth. It became the go-to bank for the Swiss. Its partnership with First Boston in 1978 (and subsequent takeover in 1990) introduced it to investment banking and the seeds of the current demise were sown. It escaped the 2008 crisis better than its rival UBS, since it had the backing of two Middle Eastern investors - Saudi Arabia and Qatar. 

In the wider context of global banking, Megan Greene describes it as a Schrodinger's Box. 

5. Deposit protection facts of the week

As per independent research estimates, smaller bank deposits in the US are insured in the range of 30-45 per cent only. In contrast, smaller bank deposits in India such as regional rural banks, cooperative banks and local area banks are better protected at 82.9 per cent, 66.5 per cent, and 76.4 per cent respectively, while public sector banks, which have a large proportion of customers from rural, urban and semi-urban areas have better customer deposits protection in comparison to private banks.

About 51% of deposits in India are not covered by deposit guarantee 

6. A new report by the consultancy London Economics has this to say about the economic impact of Cambridge University, 

The economic impact of the University of Cambridge is almost four times that of the English Premier League... London Economics calculated the impact of one of the UK’s most prestigious universities at almost £30bn a year and estimated it supported 86,000 jobs. Every £1 spent by Cambridge created £11.70 of economic value... More than £23bn of the economic impact came from commercialising university research, particularly through companies “spun out” from it, the study found. In contrast, the Premier League, regarded as one of the best UK cultural exports, added £7.6bn of value to the economy in 2019-20, according to professional services company EY. Notable Cambridge university spinouts include Nyobolt, a fast-charging battery solution, and Abcam, a leading supplier of protein research tools. 

The report was commissioned by the University itself.

7. Janan Ganesh has an excellent profile of Florida Governor Ron DeSantis, one which applies to several politicians elsewhere.

First, DeSantis is abler and more disciplined than Trump. Even if he believes in just three-quarters of the Maga creed, he can get a greater share of it enacted. Trump’s efforts to subvert the US system always hit against the limits of his own attention span and executive grip. That fail-safe won’t exist with DeSantis. Second, there is something of Theresa May about DeSantis: something of the try-hard. Precisely because he arouses mistrust among Trump voters, he is always striving to prove his populist credentials. Perhaps he seriously believes, for example, that Ukraine does not rank among America’s “vital national interests”. (Which would be troubling enough.) As likely, he is pandering to a crowd that views him with suspicion as an establishment Republican... There was always one benign feature of the Trump personality cult. Because millions of voters are unconditionally faithful to the 45th president, he doesn’t need to say or do anything in particular. His flock is there if he builds a wall against Mexico, and there if he doesn’t. It is there when he flatters the dictator of North Korea, and there when he threatens to crush him. It is there as he promises an infrastructure splurge, and there as his successor Joe Biden does much more to bring one about. It is even there when he recommends vaccines against Covid-19. Trump doesn’t live or die by his policies. That is the point of a personality cult. He has no incentive to become ever more extreme (though also no incentive not to). I suspect he could turn into a pro-trade liberal and China dove and keep the greater share of his following. DeSantis has no such license. What makes him so deceptively risky is that he must keep earning and retaining the trust of populist voters through his actions. His conventional Ivy League résumé, his photo-op with Biden during Hurricane Ian, even his personal stiffness: moderate Republicans hope that these are the marks of a pliable company man.

8. Isabelle Weber and Evan Wasner have a new paper where they find strong correlation between the rising share of corporate profits in GDP and the sharp price rises in US after the Covid pandemic. 

The dominant view of inflation holds that it is macroeconomic in origin and must always be tackled with macroeconomic tightening. In contrast, we argue that the US COVID-19 inflation is predominantly a sellers’ inflation that derives from microeconomic origins, namely the ability of firms with market power to hike prices. Such firms are price makers, but they only engage in price hikes if they expect their competitors to do the same. This requires an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks. We review the longstanding literature on price-setting in concentrated markets and survey earnings calls and compile firm-level data to derive a three-stage heuristic of the inflationary process: (1) Rising prices in systemically significant upstream sectors due to commodity market dynamics or bottlenecks create windfall profits and provide an impulse for further price hikes. (2) To protect profit margins from rising costs, downstream sectors propagate, or in cases of temporary monopolies due to bottlenecks, amplify price pressures. (3) Labor responds by trying to fend off real wage declines in the conflict stage. We argue that such sellers’ inflation generates a general price rise which may be transitory, but can also lead to self-sustaining inflationary spirals under certain conditions. Policy should aim to contain price hikes at the impulse stage to prevent inflation from the onset.

9. Natural gas price in India has since 2014 been linked to a basket of four gas prices through the Administered Price Mechanism (APM). From April 2023, the Government had proposed to shift the APM from basket of gas prices to international crude price. 

Kirit Parikh explains the new proposed Parikh Committee gas pricing formula for the gas covered under APM.

10. China's dominance of all stages of the solar supply chain

Europe was once the world’s largest solar power manufacturer, producing 30 per cent of all photovoltaic panels in 2007. But China's production today dwarfs that of other countries

While Europeans understand the problems with dependence on China, they also realise the benefits from cheap Chinese imports

This capacity growth has led to the cheap prices that enabled Europe’s record-breaking solar installations. According to the IEA, although Europe imported an unprecedented 26GW of photovoltaic modules in 2021, the bill was just a third the cost of 2010, when it imported only 15GW.

11. Simon Kuper makes the point about regulating the SUV's from out of the market so as to reduce carbon emissions

SUVs last year accounted for a record 46 per cent of the world’s car sales, according to the International Energy Agency (IEA). If we’re serious about keeping the planet liveable, we have to regulate and tax huge cars out of existence... huge cars are mostly driven by the rich. In the UK, for instance, the average SUV costs more than the median full-time pre-tax salary of about £33,000 — leaving aside petrol. Generally, it’s the rich who emit most CO₂. Getting rid of huge cars is about reducing emissions first and road accidents second. SUVs evolved from the second world war jeep, but their worldwide numbers have jumped nearly sevenfold since 2010, to about 330 million. Given that SUVs consume one-fifth more oil than medium-sized cars, they now emit about three times more carbon than the UK, per the IEA, which also says that they “have helped keep transport emissions rising “at an annual average rate of nearly 1.7 per cent from 1990 to 2021, faster than any other end-use sector”. Passenger vehicles already account for about 9 per cent of all global emissions... In short, we need to legislate away huge cars such as the Ford F-series truck, the US’s bestselling passenger vehicle for 41 years running. After all, we ban other dangerous substances, and sometimes even not very dangerous substances, such as marijuana. We already regulate cars themselves in all sorts of ways.

12. Tim Harford on economic forecasting,

But many economic pundits seem to have been taking lessons from astrologers. Consider this horoscope: “The balance of risks remains tilted to the downside, but adverse risks have moderated . . . On the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in inflation are plausible. On the downside, severe health outcomes in China could hold back the recovery . . . ” That pretty much covers everything: good news, bad news, more inflation, disinflation. In case you’re wondering, it’s the latest World Economic Outlook from the IMF. But that sort of “rainbow forecast” is typical of the genre...

Walter Friedman’s history of economic forecasting, Fortune Tellers, explains that clairvoyants and economic forecasters started from a similar place. Evangeline Adams and Roger Babson were near contemporaries, born in the US in 1868 and 1875 respectively. Both offered investment advice in general and stock market forecasts in particular. Both were in high demand, and both died rich. The chief difference was that Adams was an astrologer, while Babson offered data-driven forecasts inspired by ideas from physics.

The case for windfall taxes on Serum Institute of India

Business Standard reports that Serum Institute of India (SII), the maker of the popular Covishield vaccine for Sars Cov 2 pandemic, has booked windfall profits during the last two years. While the company's revenues have gone up 4.7 times in the last two years, its profits are up 4.9 times, making it the most profitable Pharma company in the country by a big margin. 

The company’s net profit was up 186 per cent YoY to Rs 11,116 crore in FY22, higher than any other pharma firm in the country. In comparison, Zydus Lifesciences was at number two in the league table with a net profit of Rs 4,487 crore in FY22, followed by Sun Pharmaceuticals at Rs 3,272.7 crore. Similarly, SII’s net sales were up 256 per cent YoY to Rs 25,645 crore in FY22, putting it in second place, behind Sun Pharmaceuticals, which reported Rs 38,654 crore... In all, SII’s net sales are up nearly five times since the outbreak of the pandemic — from Rs 5,446 crore in FY20 to Rs 25,645 crore in FY22. In the same period, its net profit was up in equal proportion — from Rs 2,251 crore in FY20 to Rs 11,116 crore in FY22.

In contrast, in five years from FY15 to FY20, SII’s net sales had clocked a compound annual growth rate (CAGR) of 7.8 per cent, from Rs 3,737 crore in FY15 to Rs 5,446 crore in FY20. In the same period, its net profit had grown at a CAGR of just 2.8 per cent from Rs 1,964 crore in FY15 to Rs 2,251 crore in FY20... However, unlike in the past, SII’s top line growth in FY21 and FY22 was driven by sales in the domestic market rather than exports. In fact, for the first time in FY22 sales in the domestic market accounted for the majority of its revenues. Exports accounted for only around a fifth (19.7 per cent) of SII’s revenues in FY22, down from 77.7 per cent in FY20 and the 10-year average of around 75 per cent... The combined net sales of 274 listed and unlisted pharma companies whose FY22 finances are available were up 15.8 per cent in FY22 to Rs 4.55 trillion and increased 28.5 per cent cumulatively since FY20. In the same period, the industry’s combined net profit was up 9.7 per cent YoY to Rs 63,674.5 crore in FY22 and cumulatively up 74 per cent since FY20.

This is my summary of the numbers

Consider this. SII is a contract manufacturer of commoditised vaccines largely used in developing countries. By nature these products are inelastic, giving the makers significant pricing power even in normal times. A major share of its buyers even in normal times are governments, multilateral and bilateral agencies. Therefore, it cannot even make the (itself questionable) standard justification that a global Pharma company may have made in terms of recovering large R&D investment made.

This bounty has come from being lucky enough to having been the manufacturer of the Covid 19 vaccine developed by AstraZeneca Plc at a time when the pandemic struck. There is also no export story here, since nearly all the surge has come from the domestic market. And the buyer has not been private individuals, but the Government of India. The windfall profits are therefore financed directly from the taxpayer.

It's hard to not get the impression that SII has indulged in price gouging, and that too from the Government. This allegation was strong during the peak of the pandemic. The Indian Express had a series some time back which appeared to point to excessive pricing.

At the least, given the taxpayer financing involved, the government should set its agencies to examine the accounts of the company (and its promoters) to get an idea of its investments, its margins, and use of profits. The philanthropic funders like the Gates Foundation too should insist on the same. In fact, BMGF appears to have had some advance commitment contract with SII. Is a payout happening on that?

If ever there was a strong prima facie case for taxes on fortuitous windfall profits, this is it. 

Working papers compilation - I

1. Outsourcing creates a trade-off - outsourced workers experience large wage declines while domestic outsourcing may raise aggregate productivity. This paper finds, 

Three implications arise. First, more productive firms are more likely to outsource to save on higher wage premia. Second, outsourcing raises output at the firm level. Third, contractors endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we find that the rise in outsourcing in France between 1996 and 2007 raised aggregate output by 3% and reduced the labor share by 0.7 percentage points. A 9% minimum wage increase stabilizes the labor share and maintains two thirds of the output gains.

The point is then about an appropriate minimum wage that can stabilise labor share without significantly denting output gains.   

2. Another paper discusses the economic, social and development impact of Covid 19 by summarising the findings of various studies done so far. It has a nice summary of all the various kinds of micro-impacts, especially across low and middle income countries (LMICs). 

3. One more paper highlighting the importance of access to opportunities in the form of big push like investments to help people break out of the poverty traps. The paper studies a 11 year panel in rural Bangladesh on the impact of an asset transfer and finds,

People stay poor because they lack opportunity. It is not their intrinsic characteristics that trap people in poverty but rather their circumstances. This has three implications for how we think about development policy. The first is that big pushes that enable occupational change can play a role in alleviating the global poverty problem. Small pushes will work to elevate consumption but will not free people from the poverty trap. The magnitude of the transfer needed to achieve occupational change may be much larger than is typical with current interventions, though importantly it can be time-limited. The fiscal cost of permanently getting people out of poverty through a large, time-limited transfer might therefore actually be lower than relying on continual transfers that raise consumption but have no effect on the occupations of the poor.

The second is that big push policies can have long-lasting effects. Our analysis of long-run dynamics indicates that the asset, occupation and consumption trajectories of above-threshold beneficiaries diverge from those of below-threshold beneficiaries over time. This finding is important as it indicates that, by engendering occupational change, one-time pushes can have permanent effects.

The third is that poverty traps create mismatches between talent and jobs. We have shown that misallocation of labor is rife among the poor in rural Bangladesh. Indeed, we show that the vast majority of the poor in rural Bangladesh are not engaged in the occupations where they would be most productive. They are perfectly capable of taking on the occupations of richer women but are constrained from doing so by a lack of resources. The value of eliminating misallocation is an order of magnitude larger than the cost of moving all the beneficiaries past the threshold. This is important as it implies that poverty traps are preventing people from making full use of their abilities and indeed it is the mass squandering of people’s abilities that is the key tragedy of poverty.

Its empirical findings comparing across programs,

Assuming the household works each of the 100 days they are entitled to, the value of NREGA is 0.13 of annual per-capita expenditure. BRAC typically offers entry microloans between 100 USD and 200 USD, which correspond to 0.18 and 0.3 of average annual per-capita expenditure. Thus, two of the main programs designed to tackle poverty are too small-scale to make a long-term difference for the majority: our simulation suggests that they would allow fewer than 20% of households to escape poverty... In a first set of simulations, we resimulate the model under the assumption that all households are given a transfer equal to an increasing percentage of annual per capita consumption expenditure, until the point at which misallocation equals zero. This exercise suggests that the value of misallocation — measured as before against the maximum payoff available at the upper mode of the distribution of productive assets excluding land — would be zero if all ultra-poor households were given a transfer equal to 3.95 times the average level of baseline per capita consumption expenditure among ultra-poor households.

It's headline policy finding,

Our results point to the existence of a poverty threshold such that households with a starting level of productive assets below that threshold are trapped in poverty while households who are able to get past the threshold accumulate capital and approach the asset level of the richer classes. This allows them to switch occupations from casual laborers to the more productive business activity of livestock rearing, which in turn facilitates further asset accumulation. The existence of such a poverty threshold has important implications for policy design. Transfer programs that bring a large share of households above the threshold will see large effects on average, while transfers that fall short of this might have small effects in the long run.

The takeaway is that a large enough cash or asset transfer can provide the big push to get people over the threshold and into an enabling path to access different livelihood opportunities. There are at least two problems. One, the fiscal cost of such transfers (3.95/0.13 = 30 times the NREGS transfer) is prohibitive and clearly off the table. Two, more importantly, the economic system's ability to absorb such large shocks (even if staggered in a reasonable manner) by providing the requisite economic opportunities in a sustainable manner is deeply questionable. 

And I am not even talking about the numerous and unanticipatable second and further order consequences of such large asset or cash transfers. 

The point is that cash or asset transfer based pathways out of poverty are at best marginal and unscalable interventions and there is no substitute to sustained economic growth and broad-based development for poverty elimination. 

4. This paper examines the impact of distortions in land rental markets across Indian states on their agriculture productivity. In 2010, the real-value added per Indian worker in non-Agriculture activities was 32% of that in the US, whereas the ratio was just 5% in use of agriculture workers. Besides, the variation in GDP per workers in agriculture across states in 2011-12 is a factor of 13.5. The paper's findings,

First, we show that an efficient reallocation of land can substantially increase agricultural productivity in all states, even relative to Punjab, the state with the least distorted land market in our sample. On average, an efficient reallocation of land increases agricultural productivity by 33 percent (15 percent relative to Punjab). In Tamil Nadu and Karnataka, the increase in agricultural productivity is 89 and 49 percent (63 and 34 percent relative to Punjab)... Such an increase in agricultural TFP would have a much larger effect on agricultural labor productivity because of the reallocation of labor away from agriculture and other productivity enhancing effects such as better selection into agriculture, investment in productivity, the adoption of modern technologies, among others... Second, we decompose the contribution between farm-and state-specific distortions and find that farm distortions contribute to about one-third of the reallocation gains, whereas state-level land wedges contribute the remaining two-thirds. We also show that an efficient reallocation of land would involve substantial increases in both the share of farmers renting (participation in the rental market) as well as the share of land operated by the most productive farms... The largest TFP gains are in states with the least active rental markets.

The paper has an informative table summarising the status of tenancy reforms in various Indian states, including the nature of restrictions on leasing land.

5. How does going public impact the performance of companies?

Public attention to a firm may provide valuable monitoring, but it may also have a dark side by constraining management’s decisions and distracting it. We use inclusion in the S&P 500 index as a positive shock to public attention. Media coverage, Google searches, SEC downloads, SEC comment letters, shareholder proposals, analyst coverage, and lawsuits increase following inclusion. Post-inclusion performance falls and is negatively related to the increase in attention. Included firms’ investment and payout policies become more similar to those of index peers and the increase in similarity is positively related to the size of the attention increase.

6. The moral hazard from seat belt use is more than offset by its safety benefits, 

Using data from the Fatality Analysis Reporting System for the period 1983-1997, Cohen and Einav (2003) found that mandatory seatbelt laws were associated with a 4 to 6 percent reduction in traffic fatalities among motor vehicle occupants. After successfully replicating their two-way fixed effects estimates, we (1) add 22 years of data (1998-2019) to capture additional seatbelt policy variation and observe a longer post-treatment period... investigate pre-treatment trends and explore lagged post-treatment effects. Consistent with Cohen and Einav (2003), our updated estimates show that primary seatbelt laws are associated with a 5 to 9 percent reduction in fatalities among motor vehicle occupants.

7. Gabriel Kreindler has a paper examining the likely impact of congestion pricing on traffic congestion in Bangalore,

I study the peak-hour traffic congestion equilibrium in Bangalore. To measure travel preferences, I use a model of departure time choice to design a field experiment with congestion pricing policies and implement it using precise GPS data. Commuter responses in the experiment reveal moderate schedule inflexibility and a high value of time. I then show that in Bangalore, traffic density has a moderate and linear impact on travel delay. My policy simulations with endogenous congestion indicate that optimal congestion charges would lead to a small reduction in travel times, and small commuter welfare gains. This result is driven primarily by the shape of the congestion externality. Overall, these results suggest limited commuter welfare benefits from peak-spreading traffic policies in cities like Bangalore.

The relative lack of impact from congestion pricing in Bangalore is understandable and important to be borne in mind. In most developing country contexts, infrastructure augmentation by way of new roads, widenings etc continue to remain relevant and higher priority than ideas like traffic congestion. This however does not mean that traffic congestion policies are not important. In specific areas, where the demand elasticity of response is likely higher, congestion pricing can have significant impacts. 

8. A new working paper finds that Amazon systematically manipulates its algorithms to favour its private label brands in its search results.

We study whether Amazon engages in self-preferencing on its marketplace by favoring its own brands (e.g., Amazon Basics) in search. To address this question, we collect new micro-level consumer search data using a custom browser extension installed by a panel of study participants. Using this methodology, we observe search positions, search behavior, and product characteristics. We find that Amazon branded products are indeed ranked higher than observably similar products in consumer search results... All specifications shown, as well as a number of additional checks, including specifications with interaction terms and machine learning approaches, indicate that carrying an Amazon brand is a meaningful predictor of greater prominence in search. The effect of Amazon brands tends to be 30% to 60% as large as the effect of sponsoring.

Crony capitalism and hypocrisy in Silicon Valley

Peter Thiel is a supporter of libertarian causes and of the Republican Party's extreme right-wing. Individual rights and liberties, and limiting the role of government are at the centre of libertarian ideology. It's therefore ironical that Silicon Valley's pre-eminent libertarian, described as one of the leading public intellectuals by his boosters in the academia, is the promoter of a start-up which engages in surveillance activities which intrudes into individual privacy and contracts primarily with governments. 

Thiel is a promoter of Palantir, a $17 bn data analytics firm whose primary business includes capturing and analysing individual data for national security and law enforcement organisations. Helping the state on citizen surveillance, which infringes on individual privacy, is central to its work. Palantir is heavily reliant on government contracts which make up more than half of its revenues. Its contracts in the US with CIA and local police departments have courted controversies and allegations of preferential treatment. Now the same is happening in Europe. 

Palantir has positioned itself as a uber-nationalist company, declaring its commitment to national security issues and avoid business with China and others not allied with US interests. Thiel being one of the biggest Republican donors and a big Trump supporter, there have been several allegations that Palantir has benefited preferentially from US government contracts. 

To the extent crony capitalism is the existence of mutually beneficial relationship between business and government, Peter Thiel and Palantir should count as its totemic example in the world of Big Tech.

On a related note, and in the context of the failure of the Silicon Valley Bank, Thiel's Founders Fund advised its portfolio companies to move deposits to other lenders amidst concerns about SVB's health, thereby amplifying the run on the Bank. 

In the 48 hours before the Fed stepped in, almost 500 VCs signed a statement saying they would encourage portfolio companies to keep using SVB if it were recapitalised — though two of the biggest, Andreessen Horowitz and Founders Fund, were both absent from that list.

Scott Galloway described Thiel and Co's actions during the SVB crisis as that of "venture catastrophists"  

Several hundred VC firms signed a letter committing to keeping their business with SVB, intended to make the asset more attractive to an acquirer. More interesting than who signed the letter was who didn’t. In sum, venture capital firms that have a vested interest in destabilizing the banking system and the dollar, via crypto investments, have morphed from Americans to agents of chaos. I believe Marc Andreessen or Peter Thiel could have stopped the run with one tweet. They chose not to.

This is what an FT article wrote in the context of the role played by some venture capitalists during the SVB crisis,

When concerns about SVB’s balance sheet rose last week, VC firms including Peter Thiel’s Founders Fund urged portfolio companies to act in their own best interests and remove funds. This helped to trigger a run on the bank. There is a broader charge of hypocrisy towards some of the venture capitalists who chafe against government regulation of tech but demanded regulators step in to help SVB depositors. Going online to plead for support “was an ‘atheist in a foxhole’ moment”, says one executive at a venture capital fund who was derisive of his peers’ conversion.

So what do you call libertarians who are self-styled public intellectuals, whose businesses make majority of their money out of government contracts, are crony capitalists, and who lose no opportunity to appropriate gains but socialise losses?

I have written earlier about the hypocrisy of Silicon Valley's Tech entrepreneurs and on the giant hypocrisy in the bailout of Silicon Valley Bank. 

Weekend reading links

1. China has brokered a landmark peace deal between Iran and Saudi Arabia. The deal will lead to the two countries reopening their embassies in each other (which has been closed since 2016) and activating security co-operation arrangements. It was sealed by President X Jinping with Iranian President Ibrahim Raisi during the latter's recent visit to China. Iran agreed to stop further attacks on Saudi Arabia and curtail support for militant groups targeting the Saudi government. This should count as a major coup for China in its efforts to exert influence in the region. It also throws a challenge to the US, the traditional power broker in the region. 

But for the region too it has great significance. In recent times, Bahrain and UAE have established diplomatic relations with Israel (Abraham Accords mediated by Trump administration) and Saudi Arabia and UAE have restored ties with Qatar. This is a boost also for Iran which has now built alliances with Russia (supporting it with drones during the ongoing Ukraine war) and China, thereby raising concerns in Washington. The latest deal will put pressure on Israel, which had been harbouring plans of a grand alliance with Saudi Arabia against Iran, to start re-evaluating its position vis-a-vis Iran. The Israel-Saudi relationship is the only other remaining conflict. 

Iran and Saudi Arabia have been fighting proxy wars in Yemen and Syria. However, in recent days, Saudi Arabia seems to have also turned its tracks on Syria, and has called for rehabilitation of the pro-Iran Assad regime. 

2. Disturbing slowdown, even reversal, of structural transformation in the Indian economy from the annual Periodic Labour Force Survey (PLFS) data

The absolute number of workers in agriculture declined by 33 million between 2004-05 and 2011-12. Almost a matching decline was observed between 2011-12 and 2017-18. However, the slowdown and pandemic reversed this process. The agricultural sector witnessed a return of 36 million workers between 2017-18 and 2021-22. So pronounced was it that the absolute count of workers in agriculture stood higher in 2021-22 than in 2011-12, a decade ago. Besides a reversal of the structural transformation, the numbers also imply a declining per worker income in agriculture, thereby worsening the rural distress... Per capita income from all employment sources in urban areas was ₹5,186 per month for the pre-pandemic year of 2018-19. By 2021-22, in real terms at 2018-19 prices, this had marginally declined to ₹5,175 per month. For the country as a whole, per capita income increased by only 0.9% per annum between 2018-19 and 2021-22. Per capita consumption in urban areas is lower than its level in 2018-19, though this increased 1.4% per annum for the country. Declines in income and consumption are not surprising, as the PLFS data also shows that regular wages continue to decline in real terms, with urban regular wages declining at 1.4% per annum, faster than the 0.4% decline in rural regular wages...  

Though the number of workers in agriculture is no longer increasing, the data suggests that those who found refuge in agriculture during the pandemic are yet to return to their original occupations. This indicates that the economy is yet to fully recover from the twin shocks of the slowdown and pandemic.

3. An FT article on how smartphones and social media are destroying teen mental health. Mental health problems are on the rise in UK and US

The share of US teens who only met up with friends once a month or less has rocketed in the last decade, tracking worsening of mental health.

Girls are especially vulnerable to social media, with large amounts of screen time linked to negative psychological impacts including self-harm

4. China's increasing control over Cobalt, 

Over the next two years, China’s share of cobalt production is expected to reach half of global output, up from 44 per cent at present, according to a report by Darton Commodities, a UK-based cobalt trader. The increase comes despite western efforts to gain control over supply chains for critical minerals such as cobalt, lithium and nickel, which are essential for making electric car batteries. Chinese refining activity reached 140,000 tonnes in 2022, more than double its level of five years ago, as volumes processed in the rest of the world stagnated at the 40,000 tonnes mark, handing Asia’s largest economy a 77 per cent global share of refining capacity.

5. The widely varying water charges in US cities

6. The Economist writes on supply chain diversification away from China into an Alternative Asia (Altasia) stretching from Japan to India. 

Between 2020 and 2022 the number of Japanese companies operating in China fell from around 13,600 to 12,700, according to Teikoku Databank, a research firm. On January 29th it was reported that Sony plans to move production of cameras sold in Japan and the West from China to Thailand. Samsung, a South Korean firm, has slashed its Chinese workforce by more than two-thirds since a peak in 2013. Dell, an American computer-maker, is reportedly aiming to stop using Chinese-made chips by 2024... In 2020 South Korean firms’ total stock of direct investments in Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam—which together with unstable Myanmar make up the Association of South-East-Asian Nations (ASEAN)—and Bangladesh reached $96bn, narrowly outstripping Korean investments in China. As recently as a decade ago the stock of Korean companies’ investments in China was nearly twice as large as in Altasia...

The share of iPhones made in India is expected to rise from around one in 20 last year to perhaps one in four by 2025. Two Taiwanese universities have teamed up with Tata, an Indian conglomerate with ambitious plans in high-tech manufacturing, to offer courses in electronics to Indian workers. Google is shifting the outsourced production of its newest Pixel smartphones from China to Vietnam... More sophisticated manufacturing, especially of geopolitically fraught semiconductors, is also moving to Altasia. Malaysia already exports around 10% of the world’s chips by value, more than America. ASEAN countries account for more than a quarter of global exports of integrated circuits, easily surpassing China’s 18%. And that lead is growing. Qualcomm, an American “fabless” chipmaker, which sells microprocessor designs for others to manufacture, opened its first research-and-development centre in Vietnam in 2020. Qualcomm’s revenues from Vietnamese chip factories, many of which belong to global giants like Samsung, tripled between 2020 and 2022.

But there are formidable challenges,

China’s huge advantage has historically been its vast single market, knit together with decent infrastructure, where value could be added without suppliers, workers and capital crossing national borders. For Altasia to truly rival China, therefore, its supply chain will need to become far more integrated and efficient... For now the infrastructure that connects them is shabby, at best. Finicky regulations and national ambitions can easily gum up the alternative supply chain. Altasia’s poorer countries are not necessarily keen on the logical division of labour, which would see them play a bigger role in the more menial parts of the electronics supply chain. And forgoing all Chinese-made parts is next to impossible... Prospects for deeper integration are hazy, within Altasia and with big consumer markets in the rich world. India, on whose 1.4bn people Altasia’s future may hinge, seems in no rush to join RCEP... Altasia will certainly not replace China soon, let alone overnight... But in time China is likely to become less attractive to foreign manufacturers. Chinese labour is not getting any cheaper and its graduates are not getting much more numerous.

7.  An important positive trend about India's IT sector exports growth,

A quick breakdown suggests that IT services make up about 70 per cent of overall services exports. Within IT services exports, computer services have a 65 per cent share, followed by professional and management consulting services (22 per cent), technical and trade related services (8 per cent), and research and development (3 per cent)... Over the last three years, professional and management consulting has grown the fastest, at a whopping 29 per cent compound annual growth rate (CAGR), followed by computer services (16 per cent), and research and development (13 per cent). The one sector that generates revenues under each of these heads, and has, we believe, contributed to the fast growth in IT services, is Global Capability Centres (GCCs) and their rise. 

What are GCCs? Put simply, they are units set up in India by overseas multinational corporations (MNCs) to provide them with global tech services, research and development, engineering and IT support. Many large MNCs have set up GCCs in India, and the number has been rising, from 1,026 in FY15 to 1,570 in FY22. In fact, India is home to about 40 per cent of global GCCs, and this ratio is only expanding. Currently, their direct output is about $51 billion, making up 25 per cent of overall IT services exports. In the last two years (FY21-23), the output of GCCs has risen by a CAGR of 19 per cent, broadly in line with the growth in overall IT services exports... The GCCs are expanding both in scope and depth. After starting off as providers of support functions, they have moved up the ladder, to tech enablement, business operations, capability development, and even R&D and business development. Almost 50 per cent of the 1,570 GCCs in India provide engineering R&D support. These account for over 40 per cent of the total GCC headcount and have been growing at a CAGR of 12 per cent.

8.  Robin Wigglesworth points to a new working paper which highlights a very large gap in the US banks' assets market value and their book value, 

The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%... 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk.

9. Finally, Sekhar Gupta makes the point I have made on numerous occasions

There are powerful Indian company brands known across the world, at least in business circles... None of them, however, has created a product brand that rules the world. India does not have a purely homemade car, a two-wheeler, a software or operating system, not even a perfume or a beverage. We are collecting GI tags for scores of — mostly agri — products and yet not a brand that looks out from shop shelves globally. Corporate India has failed to create a garment brand, and almost all that our factories produce and export is sold under the labels of international store chains. To that extent, our garment makers are also doing outsourced work. Which is precisely what the Modi government is now promising in its larger manufacturing push with production linked incentives and other concessions. While it is great that India is now making a lot of mobile phones for export, none of these carry an Indian brand name. The Chinese and Koreans, on the other hand, have spawned a half-dozen brands that dominate global markets. The Modi government’s manufacturing push is very good and necessary, but basically it is pushing Indian manufacturing in the same direction as our software (services) industry: Outsourcing.