Blog moved!

I have moved my blog to wordpress. Click here to access it.

Will the fiscal stimulus work?

As policy makers gear up to respond to the crisis, there is an incessant debate over what will work and what will not. One such recurring debate is about the efficacy of the fiscal stimulus. In what follows I list some interesting arguments from both sides of the debate.

Against the Fiscal Stimulus:

John Taylor has this good pictorial depiction of what is the effect of the rebate checks on consumption expenditure and it does seem that the fiscal stimulus did not work. A while back Robert Barro in this article argued that the best estimate of government expenditure multiplier is in the range of 0.8 and hence any expectation that the fiscal stimulus will work is misplaced. David Andolfatto has a good piece based on a IMF paper on fiscal multipliers.

For Fiscal Stimulus:

Kaushik Basu has an interesting take on how the crisis spread and what implications it holds for the policy response. His model seems to support a large fiscal stimulus at least of a temporary nature.

Arguing for fiscal stimulus based on Keynes's ideas is Paul Krugman. Interested readers are refereed to his writings on his blog. He also recently wrote a long piece criticizing the state of macroeconomics in the New York Times magazine. It is an interesting critique of the state of macroeconomic theory in the context of the current crisis. I am sure any response to his criticisms will constitute an even better food for thought.

Lucas's Rebuttal of Critics of Economics!

Criticizing economics and economists is in vogue. As the clouds of crisis show little signs of abating, a segment of population (read writers!) seems to be doing extremely well by joining this bandwagon. Economists could spun some theories and math to refute at least some of these criticisms. But it would not do much in terms of disparaging the well written accounts of failures of economists and their theories. Unfortunately, amongst us who actually can communicate well do not seem to be of any help in this regard.

So for what it is worth, this piece by Bob Lucas Jr. does a good job of speaking for all of us who lack the wit and word of the New York Times best sellers but who still like to delve in the esoteric world of bizarre abstractions we call models!

Myths about the Subprime Mortgage Crisis

Fed Reserve of Cleveland’s researcher has some interesting things to say about the current crisis:

http://www.clevelandfed.org/For_the_Public/News_and_Media/Press_Releases/2009/20090722.cfm

Economics, Economists, and the Crisis

The Economist has some interesting perspectives on the state of economics and the crisis. To read click on the following links.

http://www.economist.com/printedition/displayStory.cfm?Story_ID=14031376

http://www.economist.com/printedition/displaystory.cfm?story_id=14030288

http://www.economist.com/printedition/displaystory.cfm?story_id=14030296

On the Austrians and the New Keynesians!

Austrian Perspective on the Current Recession:

At a symposium on the crisis at a New England public university, a macroeconomist argued that the current crisis is precipitated by the Fed's policy of making housing affordable to the common man. A public economist argued that this argument is completely wrong. The housing bubble was created because a large number of people wanted to live beyond their means. Whom do you think the Austrians will side with? Click here to find out!

2008 Arrow Prize in Macroeconomics:

A while back Bills and Klenow analyzed some price data for the US and arrived at the conclusion that prices on an average changed every five months implying that the prices were not as rigid after all as the Keynesians would like them to be. But is this average frequency of change in prices a good indicator of price rigidity and does it discredit the Keynesian perspective on the effects of monetary policy? Click here to find out!

Math and Indians!

I was reading this wonderful new book on math econ by Kamran Dadkhah published by Cengage Learning. He has this amazing introductory chapter on history and philosophy of math and using math in economics. I have rarely come across such an exciting introduction to mathematics, especially in an economics oriented text. The later chapters are also well written and book also tries gears you up to use software like MATLAB and MAPLE to solve problems. If I were to teach a course I would definitely give this book a try.

Having said this, I have to admit that I was bothered by one thing. The name of Indians and their contribution to mathematics was almost conspicuous by absence in the introductory chapter!

Well, I knew one thing for sure- the numerals and zero that we use today is courtesy the Indians. However, is that all that is to our contribution? At the risk of sounding jingoist, I decided to dig a bit deeper and guess what, the search was not in vain! The internet was full of pages on Indian mathematics and in what follows are just a few highlights of what I found. If your appetite is rightfully whetted after reading through feel free to click on the links listed below!

To start with there seems to be a long history of substantive contributions starting with pretty sophisticated standardized weight measures from the Indus Valley civilization (2500-1900 BCE) to geometry, trigonometry, algebra and astronomy in the later periods.

Indians thought about the Pythagoras theorem in Budhayana’s Sulbha Sutras dating back to 800 BC (Pythagoras comes sometime in 569 BC). Budhayana also gives the value of square root of 2 till five decimals among other things. Around 4th century BCE, Panini wrote his Sanskrit grammar which is a context free grammar and happens to be an example of early use of Boolean logic and the null operator. It is also thought of as a precursor of the Backus–Naur form (used in the description programming languages).

Around this time we also see important contributions from Jain mathematicians that include simple algebraic equations and the first use of word shunya to refer to zero. They also anticipated the combinatorial identity, Pascal’s triangle and Bernoulli coefficients.

The classical period of Indian mathematics is said to be the period between 400-1200 ACE. Aryabhata, Varahamihira, Brahmagupta, Bhaskara I, Mahavira, and Bhaskara II are some of the prominent names in this period. This period sees major ground breaking mathematical activity in the history of Indian mathematics. Aryabhatta in his Aryabhatiya comes up with first ever tables for sine and cosine values. He talks about quadratic equations, gave the value of pi till 4 decimals, whole number solutions to linear equations, performs astronomical calculations for solar and lunar eclipses and also proposes that the planets revolve around their own axis and also around the sun. This was way before Galileo's time and surprisingly nobody wanted Aryabhatta’s neck for proposing the theory!

Bhaskara II (11 century ACE) anticipated and conceived the concept of derivative, stated Role’s theorem and derived the differential of the sine function and contributed to development of Algebra and Trigonometry. His book Leelavati is a well known text among the Sanskrit scholars.

The Kerala School of mathematics between 1300-1600 ACE gave important results before they were rediscovered by the European world. Infinite geometric series, Taylor series, proof by induction and so on to name a few were discovered by this school.

If you want to know more click on the following links:
1. Indian Mathematics on Wikipedia
2. Indian Mathematics Index

The Economic Globe

William Nordhaus and Chen Xi have created interesting graphics for the world economy which highlight the relation between geophysical variables and economic growth. To access this paper click here. To access the impressive rotating economic globe, click here.

Some food for thought for aspiring geoeconomists:

1. Economic deserts of the world are cold regions.
2. Other than in United States and Europe, much of the economic activity is clustered along coastlines.

Relative Factor Abundance and Food!

Everytime I stand in a line to get my favorite wrap or sandwich I wonder how these food items became my favorite. A couple of years back when I was fresh of the boat, I was taken aback by what I then thought as a sheer lack of developed food culture. I thought all that they do is harvest and stuff it in a bread or wrap it in a tortilla (courtsey the Mexcians!) and put on a great smile while selling it you as food!

Coming from a land which boasts of thousands of years of evolved and complex food culture, it was almost impossible to resist passing a value judgement on the food in US. But it turns out that I was saved by economics again from turing into a 'desi snob' when it came to food.

In my class the other day, I was teaching the importance of technology and relative factor abundance in determining how people in different parts of the world do the same things differently. While doing so I realized that I somehow completely missed this point when it came to thinking about food. Now that I get that it seems obvious that producing food is just another economic activity and hence follows the rules of economics.

India being labor abundant than US has a much more labor intensive food culture. Hence food in India is almost always freshly prepared and involves relatively elaborate and complex recipies even when it comes to everyday food. Stocking up the freezers with frozen dinners is completely alien to Indians, even for them who can afford to do so. Reason is simple- labor is cheap, so why eat stale!

In US labor is costly. So no elaborate recipies- just plain simple toss and stuff or just microwave for 10 min. Sure, there must be some complex food recipes that probably see light of the day only on occassions. Otherwise everything is convinient and clean. It is not that Americans cannot develop a complex food culture and Indians can, but the way food is percieved and processed is just an optimal response to relative factor costs.

In an earlier piece on this blog we already saw why most of the western food is bland . Now we also know why it is so simple. So lets top it off by a new law of food economics- Cheaper the labor relative to capital (closer it is to the spice lands), more elaborate and complex (spicier) is the food culture. Ceteris paribus of course!

Manglore and Cultural Policing

There are few times when I agree with GPD. This seems to be one of those. It is a write up on the Manglore incident-certainly insightful and written in a good taste. A must read!

For those who do not know what happened in Manglore, follow this link.

Economics of Cinnamon Sticks!

I always wondered why cinnamon sticks look the way they look here in US. Back home, in the grocery store I usually shop, they always came as a bag full of chipped bark! In US they are nicely rolled up and longer pieces of bark. Apparently this is not limited to cinnamon but extends to almost all the spices or other goodies that come from far off places to the American markets. Why, do you think this is the case?

I stumbled on the answer while I was browsing random text books for the course I will be teaching next semester. It is called the Alchian-Allen law, after the two authors that first thought about it. The story goes somewhat like this. Suppose, in Srilanka, cinnamon sticks come in two qualities, one nice long rolled up barks (high quality) and the other just chips of the bark (low quality) and suppose the high quality stick costs $2 a piece and the low quality one costs 50 cents a piece. The relative price ratio of the high quality to low quality cinnamon then is 4. Further suppose that to transport these sticks to a store in New York city, it costs $1 per piece irrespective of the quality. Now the high quality cinnamon costs $3 whereas the low quality one costs $1.50 implying a relative price ratio of 2. It means the high quality cinnamon is relatively cheaper in US than in Srilanka. As a result, US consumers will consume more high quality cinnamon than the Srilankan consumers. However, because cinnamon is generally costly relative to other goods in US, consumers here on the whole will consume less cinnamon than consumers in Srilanka or for that matter than those in India.

Isn't that neat? Well, if you are smart you already might have figured that out but if you are a bit slow like me, suffice it to know that its a simple application of the law of demand. Consumer theory tells us that quantity demanded of a commodity is a function of its relative price and not the absolute one. That is precisely what we see here happening. The neat trick is to realize that adding a fixed charge lowers the lowers the relative price in the foreign place and that causes the consumers there to demand more of high quality stuff than low quality stuff. Thus, in general foreign place ends up consuming higher fraction of the high quality good but their overall consumption is less than where the good originates.

This is indeed a remarkable result and holds for a lot of commodities that are traded over long distances. As Eaton et.al say, examples of relative price effects are infact quite numerous. To mention a couple, Americans drink less of French wine than French but the proportion of expensive wine is higher or the New Yorkers consume fewer grapes than Californians but a higher proportion of high quality grapes.

This neat trick of fixed charges can work beyond explaining the effects of transportation charges. Consumers who prefer hand tailored suits to ready-made ones mostly also choose more expensive quality cloth because the fixed tailoring charges lower the relative price of expensive cloth. Tourists tend to spend on restaurants in your city much less than you do but most of their spending goes on good restaurants and so on. At the risk of generalization, it also explains why the world outside the Indian subcontinent prefers less spicy food. It now might be a habit but it arose in the first place as a result of the Alchian- Allen law!

I will leave it you to figure out other such examples. As a hint let me tell you that this law has another name- shipping the good apples out!


References:

Eaton, Eaton, and Allen (2005), Microeconomics, Pearson Cananda, 6th Edn. Chapter 4.

PS: Other than the cinnamon sticks one, all examples are from this chapter.

Race and financial deregulation

Policies can have unintended consequences and most of the time if we talk about them they are negative. However, financial deregulation in US might have had a favorable one; that of reducing the wage gap between whites and blacks. This weeks Economic Focus from the Economist comments on two papers which argue that it was indeed the case.

Is Obama really that different?

If Obama wins the elections tonight, it indeed would be a historical moment. But what does this mean for other nations? Will the rise of Obama significantly alter the way the world sees US? Will US ever refrain from mindless meddling in other nation's affairs under the pretext of "war on terror"? Will it ever stop touting 9/11 as the only deplorable act of terrorism in the world? Will it ever stop to think that people who see American planes bombing their homeland actually see it as act of terror?

This article in the Economic and Political Weekly uses the words of Obama from his book, The Audacity of Hope, to speculate about what exactly we might have in store when Obama becomes the President of the US.

Nobel in Economics

So as you know this year's prize goes to Krugman and rightly so. But it is also interesting to see that the Nobel committee is not above popular perceptions. In awarding the prize for work in international trade it conveniently forgot Jagdish Bhagwati and Avinash Dixit.

Bhagwati should have got it in his own right, though its diffcult to put your finger on one particular contribution. Dixit should have got it becasue Krugman would not have got it in first place if Dixit did not write that paper with Stiglitz!

So its important to do good work, but its probably more important to make your presence felt!

Economics of free labor mobility!

Ever wonder what would happen if humans moved freely across borders as against just goods and capital? Jess Benhabib and Boyan Jovanovic of the NYU have something interesting to say on this. They ask what level of migration would maximize world welfare. Welfare is assumed to be a weighted average of the utilities of the world’s various citizens. Using a calibrated one-sector model they find that unless the weights are heavily biased towards the rich, the extent of migration that would be optimal far exceeds the levels observed today. The claim remains true in a two-sector extension of the model.

Of course, political considerations and constraints are paramount in formulating an immigration policy; be it allowing in geeks or non-geeks! Notwithstanding this, the Benhabib-Jovanovic paper is definitely an interesting thought and simulation exercise in a relatively unexplored area of modeling and policy analysis.

Click here to read the article.

A Tale of Twenty Cities!

The National Council of Applied Economic Research (NCAER) has recently published a report titled, "The Next Urban Frontier: Twenty Cities to Watch". NCAER definitely expects the report to be a cash cow given that its priced at Rs.100,000 (approximately $2200)!

But that does not mean that you have to go without reading it. Here is a PowerPoint presentation based on the report. Relax, the numbers do all the talking!

McCain or Obama: What do economists think?

This recent article in the Economist gives interesting statistics on what Economists think about the two presidential candidates. Interesting points to note:

1. Economists either identify with the democrats or abstain from identification. Very few identify with the republicans.
   
2. A significant proportion of economists think that elections will influence the economic policy in years to come.

India-US Nuclear Deal

This controversial deal for trade in nuclear reactors targeted for civilian use has finally come through. All the downside apart, it will be great to have the energy problem solved in a much cleaner way. Read the coverage in the Financial Times for details.

However, given that the nuclear deal is for non military purposes, there is nothing ironic about it coming through on October 2, as FT would like us to believe!

Supreme Court, Hussain & Hindu Morality

The recent Supreme court's stand on M F Hussain's nude portrayal of Bharat mata as being a piece of art could come as a surprise to some. Of course the so called "Hindutva" brigade is not at all happy and the so called left- secular lobby could not but betray a smile!

Now are Hindu's really not used to having their gods and goddesses scantily or not clothed at all? The answer is no. Through out history we as people living beyond the Sindhu river have never been moralizing about nudity or overt displays of love and sex. We celebrated love, life and bodily pleasures. Look at the walls of Khajuraho or Konark temples or the various statues of fertility goddesses. To have a glimpse of how common people viewed these things read Gatha Saptashati. Now I know this is gross simplification and also anachronism, but you get the point right!

Hindu values (or the way VHP and likes would like to think about it) have changed a lot in the last two centuries and now resemble more the Victorian ideals of morality. So are they not real? Actually they are- we as Hindus today believe in Victorian ideals of morality as being the essence of being a Hindu. There is no problem with that. The problem is believing that it has always been like that or allowing politicians in fooling you to believe that way.

So is M F Hussain wrong in painting Bharat mata nude? As I said, some three hundred years back we would not have thought of it as wrong. But today we are different and we would react in a different way. Would every body join the bandwagon? I do not think so. There are still some people who see things differently or a have a more balanced perspective because of reading history.

Having said that, it is also notable that M F Hussain has never used his artistic expression to portray Islam or Christianity. It would be interesting to see how he would do it and how these religious groups react to it.

The so called left liberals and secularists are a different creed altogether. For e.g., I did not read any news about the secular brigade criticizing the Christian response to Dan Brown's Da Vinci Code in India. So its the art of politics that they have mastered or what we would call engaging in selective empiricism!

China and inflation in rich countries

This recent write up in The Economist gives some more arguments on why China cannot be blamed for the recent inflation in rich countries.