It is mumbo jumbo. It is science. It is, wait for it, Economics!

Way back in graduate school, which is when I started picking up a little bit of economic jargon so that I can pass of as an informed person at a social gathering, and as an expert in a freshman class, I was full of questions.  Or, full of it, as some prefer to characterize me, even now!

I recall asking a graduate student, who was also from India and who was working on the doctoral thesis, a question, and the response was intriguing then as it continues to be even now--"oh, that is a macro question."  As in macroeconomics.

If I as a reasonably curious and intelligent person could not understand what I thought was a simple issue, and if a soon-to-be-Ph.D. was not informed about it to explain to me, then there was something seriously wrong.  It simply was not adding up well.  It was one of those instances when economics seemed like mumbo-jumbo.

At least Ben Bernanke talks about the American and global macro-economy in ways that lesser mortals like me can at least pretend to know what it is going on. With Alan Greenspan, it was not even mumbo-jumbo, but gobbledygook!  Which is all the more why economists like Paul Krugman and Joseph Stiglitz appeal to me and gazillion others--we are even able to disagree with them only because they talk and write in ways that we can understand.  Recently, Krugman even commented on the need to clearly articulate ideas and arguments:

What every economist, and for that matter every writer on any subject, needs to realize is that unless you are a powerful person and people are looking for clues about what you’ll do next, nobody has to read what you write — and lecturing them about what they’re missing doesn’t help. You have to provide the hook, the pitch, whatever you want to call it, that pulls them in. It’s part of the job.

Exactly!  It is a damn challenging task, however, to write well.  And even if well-written, macroeconomic issues ... well, consider the following, from an op-ed by Raghuram Rajan, in his new capacity as India's central banker:

An increase in gold imports placed further pressure on the current-account balance. Newly rich consumers in rural areas increasingly put their savings into gold, a familiar store of value, while wealthy urban consumers, worried about inflation, also turned to buying gold. Ironically, had they bought Apple shares, rather than a commodity (no matter how fungible, liquid, and investible it is), their purchases would have been treated as a foreign investment rather than as imports that add to the external deficit.

I bet that the first half of that paragraph is easy to swallow.  It just slides down without any effort.  The rich and the poor alike, whether they live in cities or villages of India, view gold as a safe investment.

And then you reach his observation that the macroeconomic accounting of rupees and dollars changes if Indians had bought Apple shares instead of gold.

That's when I throw a flag and rule that economics is not a science.  Economics is more like some version of a gentleman's agreement on how to think about something.  There are many instances where it feels like they simply made up the rules as they went along.  It is like questioning the offside rule in soccer or the ineligible receiver rule in American football.  That is how it is and you don't ask questions.

I don't care if all my observations here are nothing but bullshit--this is my space for my opinions.  That is how it is and you don't ask questions. :)

Have skills, will travel. If I have no skills ...?

There are not only two Americas, but two worlds.  One world of residents for whom geography is not a restriction, and the rest whose lives are highly restricted by geography. 

Consider the recent appointment of Raghuram Rajan as the head of India's central bank.  Rajan, who was born in India and educated at one of its best universities, came to the United States for higher studies.  His accomplishments after the formal education include having been the chief economist at the International Monetary Fund, an endowed chair professorship at the University of Chicago, and for having correctly predicted the Great Recession even as the world was partying away like there was nothing to worry about.  In a couple of weeks, the fifty-year old Rajan will take over as India's banker-in-chief.

Rajan's ease at transcending geography might be an exception only with respect to his varied accomplishments at the highest levels.  But, otherwise, it neatly fits into the increasing trend of "have skills, will travel" where those who can are no longer restricted by the geography of their birth.  Think about the numbers of actors and directors in Hollywood productions, or players in Major League Baseball, and you get even more examples of "have skills, will travel."

On a much, much reduced size, I too, of course, fit into that same category--born in India and coming to the United States by banking on my skills.  At the thirtieth reunion of our high school class, which was in 2011, I was amazed at how much of the globe we classmates had covered with our respective domiciles, leave alone the travels.  One classmate who also came to the US for higher studies is now an American expat heading a division of General Motors in China!

However, it is only one small part of humanity that has been liberated from the tight embrace of geography.  The lives of most of the rest depend not only on the countries in which they are born, but even the regions and states within those countries in which they live.

Last term, in my economic geography class, a sharp student often applied the lessons to the case of Coos Bay, where he was born and raised.  The more we got into the concepts, the more he worried that the world of economic opportunities seemed to be shrinking for those without any special talent, and for communities like Coos Bay that flourished on what was once an asset--natural resources.

In the often told story of the "American Dream," one did not necessarily have to have any exceptional skill in order to lead a successful middle-class life.  To paraphrase Woody Allen's comment in a different context, 80 percent of success in achieving that American Dream was merely showing up.  The unskilled and the semi-skilled, too, showed up, did whatever work they had signed up for, and could return to their homes with white picket fences and children and dogs.  It was possible because of the opportunity that the geography--the country in which they were born--provided.

We now live in a world that is very different.  Tasks that require unskilled or semi-skilled labor are rapidly being automated or being sent away to other geographic areas where the cost of getting those tasks done will be much lower.  And, unlike with a highly skilled Rajan who can pack up and leave to wherever the next enticing offer comes from, the less specialized have considerably fewer economic opportunities.  Sometimes the prospect is of no economic opportunity at all--which is what Coos Bay residents, for instance, worry about.

Over the last few years, public policy discussions at DC and at Salem have not reflected these phenomenally rapid changes in global economic geography and how it affects the typical American who has been raised with the hope and guarantee of the “American Dream.”  Unemployment and underemployment, stagnant wages, the widening gap in terms of income and wealth that is simplistically reduced to the phrase “99 percent”, are all reflective of the geographic shifts in the global economy.

It is a harsh reality that a geographic accident of “born in the USA” is no longer the guaranteed pathway to the American Dream.  It is also a wonderful reality that another geographic accident of born in India or anywhere else is no longer a limitation.  The less our elected officials talk about these, the more I become the messenger with a message that depresses students in the classroom.

Shakespeare wrote centuries before this level of globalization that the world is our oyster.  Despite his immense imaginations, even he might be surprised at how much that observation is true now, and how awful life can become for those trapped in the sands.  

The undeserving one percent, and the deserving 99 percent?

Whenever I read anything that Raghuram Rajan writes, I find that I have nothing to disagree with him.  Of course, the extra affinity for the shared cultural background is a bonus :)

Rajan writes about the one-percent that, for instance, the OWS targets.  He comments:

While eliminating inefficient spending, especially inefficient tax subsidies, can generate some of these funds, more tax revenues may be needed. The rich can certainly afford to pay more, but if governments increase taxes on the wealthy, they should do it with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.

This is the distinction that the populist leaders and the OWS people do not make--they come across as angry people who want to punish the one-percent and seem to channel the old revolutionary and anarchist argument that all property is theft.  As Rajan points out:

It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle.

But then such sit-down discussions won't help, right, in the contemporary atmosphere of loud, knee-jerk, talk whether it is from the left or the right!

Full disclosure: I am nowhere near the one-percent :)

As Rajan also notes, education will be key, yes.  But, not the kind we do now.  In fact, students seem to be systematically avoiding the kind of education that will be needed for our collective prosperity--the sciences.  Students avoid the harder subjects and swing to easier majors, like geography (!):

Although the number of college graduates increased about 29% between 2001 and 2009, the number graduating with engineering degrees only increased 19%, according to the most recent statistics from the U.S. Dept. of Education. The number with computer and information-sciences degrees decreased 14%.

And then we import students into these very fields!  (not that I am complaining about that in particular.)  One of the many reasons why students avoid these potentially remunerative fields:

Science classes may also require more time—something U.S. college students may not be willing to commit. In a recent study, sociologists Richard Arum of New York University and Josipa Roksa of the University of Virginia found that the average U.S. student in their sample spent only about 12 to 13 hours a week studying, about half the time spent by students in 1960. They found that math and science—though not engineering—students study on average about three hours more per week than their non-science-major counterparts.

The more I think about all these, the more I wonder why I even bother to get all worked up about these issues.

Instead, I can go about my life disconnected from these, show up at my classes, grade their work, collect my paycheck and say thanks. 

Naaaaah ... that ain't me!

Why economists failed to foresee the Great Recession?

Raghuram Rajan, whose comments I have blogged about earlier only with appreciation, and who is fast becoming one of my favorite commentators on economic matters (the Indian connection is a bonus!) continues to think about why economists failed to anticipate the Great Recession--the question that bugged everybody from the Queen of England to my mother, who asked me the same question as the crisis started unfolding:

three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world

Hey Professor Rajan, can you condense these into a crystal clear bottom-line that in very simple words will offer the explanation to my mother and the Queen of England?

many simply were not paying attention!

There.  That is one hell of a blunt, honest assessment!  Thanks.

ps: of course, the topic of how economists screwed up (and continue to do so) is not a new topic; this is an example

My blog attracts traffic. even for searches like ...

I thought I might check the keyword searches that apparently generated some of the traffic to my blog. Interesting patterns.

Get this: my blog comes out as the first link (at least when I checked last) for quite a few.  I was impressed with these examples (all are Google searches)

• For readers who are curious about the intellectual (and personal) debate between Paul Krugman and Raghuram Rajan: the search for krugman rajan shows that my post is #1, even ahead of Greg Mankiw :)
• For those who are thinking of quitting engineering in favor of a different profession; such a search results in traffic to my page 

Who would have thought! 

And, of course, all the interest in the Ambanis and Tina Munim :)

Protectionism and currency battles

Somehow, I cannot imagine Christine "I am not a witch" O'Donnell casting a meaningful Senate vote on bills that address anything remotely related to the following discussions :)
(editor: why pick on O'Donnell?  You think Al Franken can? Awshutup!)

My increasingly favorite economist Raghuram Rajan is interviewed by Der Spiegel:

SPIEGEL: China and India are advancing to become the engines of the world economy, whereas the economies in the old industrialized world have become sluggish. What is the future role of economies like those of the US, France or Germany?
Rajan: The traditional industrial countries have to be prepared for the fact that they will lose their natural advantages. Let me give you an example: When you're working for a fashion company in Milan, you just have to look outside your window to be inspired. But the new customers live far away -- in Shanghai, for example. That's where the demand is and where the designs will soon have to be created. Things will not be as easy in Milan as they once were.
SPIEGEL: So you're saying that Western companies will not only be moving parts of their production abroad, but also services?
Rajan: The central question is this: How can industrial companies serve the demand that is developed thousands of miles away? This is the great challenge for the coming years. I suspect that in such an environment protectionist impulses will get stronger.

Over at Financial Times, Martin Wolf explains how the global economic wars are being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Hey, Professor Bernanke, rev up those dollar bill machines :) 

Wolf adds:

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).
Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

WTF is all I can think now!

Krugman v. Rajan: I root for the Indian-American :)

I clearly remember when I first heard about Raghuram Rajan, who is an economics professor at the University of Chicago.  It was from reports that he had taken on the then unassailable Fed guru, Alan Greeenspan, and warned about potential disasters.  Rajan did that with a whole lot of formal economic language, most of which I was/am incapable of understanding. And Nouriel Roubini warned about the disaster in theatrical ways, which I could easily understand :)

It was interesting to me that both these had offbeat ethnic names.  Placing the origin of Rajan's name was easy for me--both the first and last names are dead giveaways.  Naturally, I have then been on the alert whenever his name popped up in serious discussions in the publications that I follow (no, not the academic ones!!!)

The latest is a fascinating context.  Rajan and Paul Krugman are duking it out.  It is the wild, wild, west on the worldwide web.  (yet another evidence for how scholarly discussions are rapidly happening in real time and in open channels, as opposed to the time-delayed journal routes.  I love this.)

Rajan is clearly pissed off with Krugman's review of his book. Again, this is awfully close to a live debate: Krugman's review essay is in the latest issue of the NY Review of Books.  I read that on Sunday, when, as is my Sunday routine, I checked in with the NYRB site.  Perhaps it was there even earlier, and perhaps Rajan had access to that review in advance.  It is just awesome that Rajan's response--this essay--is dated September 19th.  How much more of a live debate can I take? :)

Anyway, Rajan writes:

Paul Krugman and Robin Wells caricature my recent book Fault Lines in an article in the New York Review of Books. The article, and their criticism, however, do have a lot to say about Krugman’s policy views (for simplicity, I will say “Krugman” and “he” instead of “Krugman and Wells” and “they”), which I have disagreed with in the past. Rather than focus on the innuendo about my motives and beliefs in the review, let me focus on differences of substance.

And that was the opening shot.  Rajan then goes through his arguments systematically.  As a non-economist, and more so when it comes to finance and monetary issues, I have a tough time then figuring out why Rajan is wrong.  As I have noted even earlier in a few posts, Krugman might have been ideological and a tad too shrill.  Rajan himself notes how there is a lack of consensus, in this case on the role of the fed in the crisis:

I admit that there is much less consensus on whether the Fed helped create the housing bubble and the banking crisis than on whether Fannie and Freddie were involved. Federal Reserve Chairman Ben Bernanke, a monetary economist of the highest caliber, denies it, while John Taylor, an equally respected monetary economist, insists on it. Some Fed studies accept responsibility while others deny it. 

As one on the sidelines, I am like many who have a tough time figuring out which expert is correct in the interpretation of apparently the same data that everybody is sifting through.

At the end of the day, I suspect that Krugman is becoming a lot more ideological and sarcastic when he doesn't need to.  Rajan makes this point as well:

Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, “Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing that both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35) as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including on the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.

I am cheering Raghuram Rajan in this fight because his essay is a lot more convincing to me than is Paul Krugman's.  The fact that Rajan is an Indian-American also helps :)  It is also bloody humbling to realize that I am the same age as Rajan is, and what a non-entity I am, and how much the guy has accomplished.  Awesome.

Update: I notice the comment(s) ... but, first, here is more from Rajan--over at FP ... but, the contents look nearly identical to the earlier one.  This FP is dated Sep 20th, but it doesn't refer to the AEI essay ... hmmm....