Michael Spence has great hopes for AI

Nobel Laureate Michael Spence sees  AI as offsetting two big trends that are working against global growth.

One negative trend is that efficiency or cost has ceased to be the primary consideration in determining the source of supply:

The first is shocks, including war, pandemic, climate change, geopolitical tensions, resurgent nationalism, and growing focus on national security in the conduct of international economic policy. These increasingly severe and frequent disruptions are shifting global supply networks toward greater diversification and resilience. But that is an expensive pressure and a contributor to inflationary pressures.

Another is the fall in productivity growth:

Productivity deserves special attention. US productivity growth averaged 1.68 percent from 1998 to 2007, a period during which many Americans got internet access and, later, mobile phones. Productivity growth then slowed to 0.38 percent from 2010 to 2019.....In Europe, lagging growth and productivity are attributable in part to less rapid and effective adoption and deployment of digital technologies, and to underdeveloped tech sectors relative to the US and China.

These two forces are impacting economies in a number of ways:

The combined effect of these two sets of forces is a relatively rapid shift from demand-constrained to supply-constrained growth. Growth is subdued. Inflation endures. Real interest rates remain elevated. Many economists, including me, believe that the structural conditions I’ve described mean borrowing costs are likely to remain elevated, and certainly higher than during the decade following the global financial crisis.

Spence sees AI as counteracting these two negative forces and leading to a surge in productivity although this will take a long time to happen- he sees the impact no earlier than the towards the end of the present decade:

Of course it will take time. Roy Amara’s law applies here as in past episodes of technological transformation: we tend to overestimate the short-run impacts and underestimate the longer-term ones. My best guess (and it is just a guess, based on current patterns of investment) is that we may start to see meaningful impacts in labor productivity by the end of this decade.

Spence's views are worth noting because economists, in general, remain sceptical as to whether AI will cause productivity to accelerate- they see it as maintaining historical rates of productivity at best.

Is Warren Buffett's performance faltering?

That is what this article in the Economist suggests- and it is not the only one.

Berkshire Hathaway, the firm with which Warren Buffett has been famously identified, has underperformed the S&P 500 in the period 2009-23- the firm has produced an average return of 13 per cent per annum compared to the benchmark's 15 per cent. In the period since 2015, it has produced a total return of 155 per cent compared to the benchmark's 164 per cent, as another article points out.  

Before we start dumping on the fabled Sage of Omaha, it is appropriate to place the firm's underperformance in context as the second article cited above does:

The conglomerate's stock has reached a fresh all-time high in 2024, suggesting that, despite the underperformance relative to the S&P 500 since 2015, the company remains a formidable force in the investment world. Furthermore, Buffett's track record since the 1960s, with average annual returns around 20%, speaks to a legacy of success that few can match. The question of whether Warren Buffett has lost his touch is not new; it has arisen periodically throughout his career, only for Buffett and Berkshire Hathaway to emerge stronger.

The Economist article delves into the reasons why performance has been lacklustre in recent years. Size is part of the problem. On a bigger size, sustaining returns is difficult. But then firms such as Apple and Microsoft that are even bigger have managed to do so. An important reason is that the firm is invested in old economy firms and it appears reluctant to bring technological innovation into those, such as using software to let less risky drivers pay lower premiums in its insurance business. 

Mr Buffett chastises boards and management on various counts but his own corporate governance is little to write home about: his firm discloses the bare minimum, has an aged board and does not have an email address or phone number to which questions can be addressed. When you are performing, nobody bothers. When you don't, people start looking closely at these things.

On a different note, Buffett has often been cited as evidence that a forecast of the efficient market hypothesis is incorrect- he is one manager who has outsmarted the index over several decades. I had a post earlier on how Eugene Fama, the father of the hypothesis, still swears by it.

How would Fama explain a phenomenon such as Buffett and Berkshire Hathaway? Fama has said that Buffett is not just an investor. He is somebody who takes over under-performing businesses and runs them. To see whether the efficient market hypothesis holds for entrepreneurs, Fama says he would have take a large cross-section of businesses and evaluate performance- and there isn't that sort of data. 

Fama sees Buffett as picking up individual businesses every few years and improving their returns. When it comes to running a portfolio, Fama says, Buffett himself has recommended that his wife put her money in an index fund! 

Says Fama, "Buffett is my hero". Shows it's hard to get members of the Chicago school to change their minds. 

Concentration in the Economics profession

Top researchers in Economics are concentrated in just 8 institutions in the US, an NBER study finds. The study gathered data on the educational and professional affiliations of 6000 award winners of 170 notable winners in three broad areas: natural sciences, enginnering and social sciences. Each of these three areas was broken up into six fields each, giving a total of 18 key fields.

All fields show a declining level of concentration, except Economics which is a clear outlier. Economics shows a high and ascending concentration over time. This is visible in the most notable of awards, the Nobel prize where again Economics shows high concentration whereas chemistry, physics and medicine show low concentration.

The authors examine the reasons why this is so. They hypthesise that three factors are relevant: the dependence on physical equipment, the development stage of a field and the role of prestige. In Economics, physical equipment is not important so researchers are highly mobile, it is a relatively new field and prestige plays a more important role in Economics than in other fields. 

How exactly does prestige matter? Well, the more famous economists receive more citations than academics in other fields. Institutional prestige can be measured by the ranking  of an institution. The top institutions in Economics remained at the top more than in other fields. Consequently, the best names tended to gravitate towards the top institutions, making for more concentration of talent.

Why should we be concerned? The economists at the top institutions control, in a way, publications in the top journals. This means that only ideas that they are comfortable with may get through. In other words, concentration in Economics may mean a monopoly over ideas. New, original and heretical ideas may not find adequate expression. That is bad for the advancement of knowledge.

The more difficult question, which the paper does not address, is: how do we prevent rising concentration in Economics? Part of the answer may be for the non-elite institutions to accept publications in journals other than the top ones for evaluation and tenure. A group of faculty of high calibre, whether from within an institution or from outside, may judge the quality of publications that have not made it to the top three or four publications and give ratings. Institutions may give extra weights to ideas that are outside the mainstream. If the stranglehold over ideas of the top journals wanes, so could the strangehold of the top economists and the institutions they belong to.

Institutions may also give a little more weight for the application of ideas or the impact on practice of academics. Where academics significantly influence policy-making, credit can be given for the purpose of granting tenure. One way or another, it is important that a few institutions do not arrogate to themselves the role of gate-keepers of ideas in Economics. 

Eugene Fama still swears by efficent markets

 FT carries a terrific interview with Eugene Fama, Nobel Laureate and author of the concept of "efficent markets". that idea that market prices capture all the information that is available, so they are right. Meaning, it's hard for investors to beat the market. The best thing to do for investors, therefore, is to simply invest in passive funds, that is, funds that mimic the broad market.

The fundamental inference has proved right over the past several decades:

The latest data from S&P Global, a company that produces financial benchmarks, indicates that less than 10 per cent of American stockpickers and under 20 per cent of British ones have beaten the market during the past decade. The numbers are similar elsewhere in the world, and get worse the longer the timeframe. This is a major reason why trillions of dollars keep gushing out of traditional, actively managed funds and into cheap, passively managed ones.

Why do people keep investing in mutual funds that manage funds actively? Well, every investor hopes he has found the 10 per cent of fund managers who outperform the market.

Fama concedes that sometimes market prices may not be right but that doesn't disprove the basic hypothesis. For the most part, it's hard to beat the market. Stock pickers who claim otherwise are plain wrong. Fama has a great quote for them:

I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers.

Unbounded optimism about AI

All of us have been reading about AI could turn into a Frankenstein monster and reduce humans to slaves.Economists have been sceptical about the boost to productivity from AI: the general view is that AI can at best sustain America's productivity growth at 2 per cent, which has been its long-term rate. It can't raise the productivity growth rate.

Along comes an article by computer scientist Ray Kurzweil that suggests that AI is about to open the doors to Paradise on earth in the years to come.  He says AI on the threshold of bring about  a transformation in three areas: energy, manufacturing and medicine.

The way to solve the world's energy problem is to rely on solar energy which is available in abundance. The challenge is to find photovoltaic materials that are inexpensive and increase the storage capacity of batteries. That is a chemistry problem- finding what combination of chemicals and materials will help address these issues. Kurzweil tells us how AI will crack this problem:

...AI can rapidly sift through billions of chemistries in simulation, and is already driving innovations in both photovoltaics and batteries. This is poised to accelerate dramatically. ... Once vastly smarter AGI finds fully optimal materials, photovoltaic megaproejcts will become viable and solar energy can be so abundant as to be almost free. 

Manufacturing will change as energy costs fall and also the costs of labour and raw materials. Robotics will reduce labour costs. It will also reduce raw material extraction costs. As for medicine, AI moleuclar biosimulations will reduce the costs implied in clinical trials and also make possible more effective drugs. We can produce medicines tailored to each individual patient. Away with disease! 

Kurzweil says longevity in the US and UK now grows by an extra six to seven weeks ever year. With AI, we may expect life expectancy to increase by 1 year annually. That means, in 30 years,life expectancy in Canada, for instance, will leap from 85 to 115!

Kurzweil's conclusion is breathaking: "This is AI's most transformative promise: longer, healthier lives unbounded by the scarcity and fraitly that have limited humanity since its beginnings. 

Makes me wonder: why on earth are economists fretting about long-term economic growth rates falling in the next ten years? 

Sceptical voices about AI's impact on economic growth

Will AI transform growth prospects for the world and usher in an era of greater abundance? That is what business executives and management consultants would have us believe. But serious economists are sceptical. Let me cite a few:

Daren Acemoglu of MIT cited here:

The professor ...... anticipates AI will boost GDP growth by only 0.93 percent to 1.16 percent over the next decade.

But even that figure may be too optimistic, he argues, because productivity estimates come from automating "easy tasks" – future tasks may be more complicated and less amenable to automation. He therefore contends there will be a more modest increase in TFP and GDP in the next ten years – on the order of 0.53 percent and 0.90 percent, respectively.

Nobel Laureate David Romer of NYU quoted here:

We’ve benefited from scaling up compute and ingesting a whole lot of data.... ....Scaling up compute is pretty easy. It’s just more machines, more chips. But what’s going to happen is we’re not going to have enough data. 

Charles I Jones of Stanford in a paper at the Jackson Hole Symposium last year:

*Automation has been ongoing for 200 years — stable growth ◦

*Steam engine, electricity, internal combustion, semiconductors ◦

*Maybe A.I. is the latest great idea that will allow 2% growth to be sustained a bit longer

Jones notes that long-term productivity growth in the US has been stable at 2 per cent. He reckons AI will help maintain that rate at best and prevent it from falling.

Dealing with inequality: are wealth and income caps the answer?

Inequality today, perhaps, draws more comment than poverty if only because extreme poverty has been successfully tackled in most parts of the world. There are many studies that document increases in inequality (notably the book by Thomas Picketty). Many of these findings are contested- some dispute the contention that inequality is rising. But the fact that there is substantial inequality is not disputed.

Now, we have two books that propose radical solutions. One wants a cap on wealth or savings of $ 10 million. Another argues that nobody should earn more than the current threshold for entering the top 1% of taxpayers ($330,000 in the US). The Economist argues that, whatever the theoretical arguments for limiting inequality, we do not have effective ways to place limits on income or wealth.

First, if we want to cap wealth  or income, it implies a 100% marginal income tax rate above a certain income. That is very difficult to enforce: there would be massive evasion or people would flee to friendlier tax regimes. And if all nations enforced such a marginal tax rate?  The effect on incentives would be devastating:

Imagine a world where any gain above £180,000 a year, or $10m over a lifetime, was forfeit. Highly productive people—such as surgeons and engineers, never mind word wizards like J.K. Rowling—would have no financial incentive to keep working after that point was passed. Perhaps some would carry on toiling out of altruism or for the love of the job. But many would be tempted to kick back, relax and deprive the world of their exceptional skills, drive and imagination.

Consider, too, the incentives such a system would create for entrepreneurs. You have an idea for a better mousetrap. Under the old system, you might mortgage your house to raise cash to build a mousetrap factory, in the hope of making a fortune. Under the new system, you must shoulder the same risks (such as losing your home), for a small fraction of the rewards.

Potentially big ideas would stay small. Even if your mousetrap is so good that the world might reasonably be expected to beat a path to your door, it would be irrational to borrow money to expand production. The financial risks of trying to build a global business fall on you. The rewards go to someone else. Only a mug would take such a bet.

Well, it's important that we steer clear of extreme solutions to inequality. Wherever inequality is rising, we need to fix a few things that Joseph Stiglitz has emphasised several times: the bargaining power of workers, the power of corporations and the way the elite frames rules to suit itself. People will accept even a high level of inequality in society provided they see a certain fairness to it. At the moment, it all seems like a game that is rigged by the rich and the powerful. 

Rethinking fiscal rules

Public debt ratios have risen since the Covid shock as governments sought to cushion the impact of the shock. Global debt to gdp averaged 96 per cent in 2021. The average for advanced economies was 120 per cent. In 2008, after the Global Financial Crisis, the numbers were 64 per cent and 79 per cent.

The general view, articulated by the IMF, is that the rise in public debt was inevitable and desirable. But… it needs to be brought down quickly. That is, of course, the received wisdom taught in all Macroeconomics courses, namely, the lower the public debt, the better.

It is refreshing to hear a different view from Andy Haldane, former Chief Economist of the Bank of England. Haldane makes two interesting points. One, over centuries, global debt to gdp has tended to rise as governments respond to the need to create more and more public goods. Two- and this is very interesting- even as public debt has risen, the interest costs have fallen. Not quite what you the Macro course would tell you.

How do you explain these? Well, public debt is used often to create assets. These assets generate streams of income over time that can service the debt. So lenders to government look, not just at the debt, but at the assets that the debt creates. What matters thus is not public debt per se but net worth of government, that is, assets minus debt.

Recognising those assets would give us a measure of the true net worth of the government. Just as a company or household would look at their net worth when making investment choices, so too should government. Countries with high net assets have been found to have lower borrowing costs. Bond market vigilantes target poor ancestors, not borrowers.

Moral of the story? The need to create important public goods remains, perhaps, including those relate to climate change. No need to panic over rising debt levels- focus on debt sustainability. As long as debt creates productive assets, physical or human, chances are debt will be sustainable.

 

Don't believe the experts!

 Arvind Subramanian, former Chief Economic Advisor in the Finance Ministry, has a cheeky take in today's BS on the judgements on experts on sundry matters:

• China’s zero- Covid policy was hailed as a success until the recent spurt in Covid infections threaten to trigger an insurrection of sorts.
• The US was said to have fared badly in its handling of Covid because it’s a polarised society in contrast to the egalitarian Sweden- “until Sweden became a cautionary tale”.
• In the US, the doves ruled on monetary policy until a few months ago. With the persistence of inflation, the hawks took over. Now with signs of inflation abating, the doves “are flying again”· 
• Economists warned that the confluence of the conflict in Ukraine, soaring inflation and rivalry between US and China would plunge the world into recession. The clouds are receding in recent weeks and it appears, well, we may not end up with a recession, after all.
• Anybody remembers how many times the Chinese credit bubble was supposed to collapse and wreck the Chinese economy?

Subramanian thinks the problem is the media: they are looking for snappy comments all the time and experts are happy to give them quotes for their two minutes of fame.

 The problem runs deeper, methinks. Experts simply lack an awareness of grassroots realities. They are mostly armchair pundits who prefer to operate from the comforts of their air-conditioned offices. How else do we explain the high rate of failure of economic forecasts? It is said that economists can’t even forecast the past correctly. Then, there are the stock price and stock market forecasts, earnings forecasts.

 Political forecasts are worse- I have lost count of the number of times President Putin has been pronounced as seriously or terminally ill- seems fit enough to preside over the conflict in Ukraine. We were told that the Mr Putin would be deposed in a coup, the people of Russia would rise in revolt against the suffering inflicted on them, Russian economy would collapse…. and Ukraine was poised to triumphantly retake the Crimea from Russia. So much hot air.

 Mr Subramanian says experts should stick to their area of domain expertise. Alas, they don’t seem to do wonderfully even in that area. No better example that Mr Subramanian warning that a 5 per cent fiscal stimulus was needed to save the Indian economy from the impact of the pandemic- we seem to have managed quite well with a stimulus of under 2 per cent.

 

Debate on freebies: no easy answers

The debate on freebies- handouts or subsidies of one kind or another by the central and state governments- is getting shriller by the day. Everybody thinks freebies should be curbed because they wreak havoc with the government's finances. The solution is not as obvious as many think.

One of the most common answers is: subsidise items that generate positive externalities such as health and education. Clamp down on those that do not, such as power.

Former RBI Governor D Subbarao points out in an article in ToI today that it's hard to measure the welfare effects of a given subsidy, so it's hard to determine what are 'merit' and 'merit' subsidies. He proposes that we abolish the classification. Let politicians agree on a cap on subsidies. An independent fiscal council must vouch for the integrity of budgetary numbers. 

Dr Subbarao is right on the measurement issues. MGR's now-famous Mid-Day Meal scheme for school children was decried by many as simply giving away food for free. We know now that school attendance went up sharply, with the ensuring benefits. Politicians, with their acute understanding of realities at the grassroots, may have a much better sense of the welfare effects of a given subsidy than economists. So, many freebie schemes may not be as perverse as economists think. Any sensible Railways minister will include a junction in his constituency in the Railways budget- he knows how a rail junction can transform the local economy.

I am not sure that Dr Subbarao's suggestion for a cap on freebies will work. It may well go the way of the limits on the FRBM caps. Politicians will find ways around limits.

It is important to recognise that jobs in industry or services go to the relatively privileged, that is, those who have access to education and the means to afford it. A big chunk of freebies goes to those who will not be able to access the jobs created by productive expenditure. 

So, how much to spend on freebies relative to productive expenditure is a question of equity. It is a question that can be answered only by the electorate. Expenditure on freebies will fall only the potential beneficiaries of these diminish relative to the potential beneficiaries of job-creating expenditure- the votes will no longer be as strongly in favour of freebies. Politicians understanding this better than economists, so they will go on spending on freebies until this condition is met. 

World Bank chief economist departure

I guess I picked this up a little late... the World Bank's chief economist Penny Goldberg, who's from Yale, is quitting.

While the departure was reported to be over the Bank's decision not to publish a paper produced by its research department, the precise details were not know. The FT today  enlightens us on the subject.

The paper, authored by a World Bank staffer and two academics, was about how aid given by the Bank to countries was creamed off by the elite. This is hardly a secret. But for the Bank to substantiate the point with research is clearly to too hot for the Bank's top brass and its principal shareholders.

The link I have provided gives the details of the research paper. The authors looked at aid flows to 22 most aid-dependent countries, flows from those countries to tax havens and also flows from those countries to non-tax havens. They found that periods of large aid flows to a country also saw large flows from the country to a tax haven. At the same time, there was no such surge in flows to non-tax havens.

This is not conclusive proof of the aid being creamed off but it's also not evidence that you can shrug off. The study estimates that 7.5 per cent of the aid leaks out. That may not take away the case for aid to the country- there's still a large portion that could benefit the people there. But it's clearly embarrassing for the Bank to accept that it is abetting corruption in aid-receiving countries. Also, there could be political reasons for the Bank's principal donors to keep the dominant elites in some countries happy.

Goldberg's departure follows the departure in2018 of David Romer following a quarrel over the use of some statistical methods. One should not be surprised if this causes top economists to think twice about spending time at the Bank.

Goodbye to central bank independence?

Central bank independence is an idea that came out of the stagflation in advanced economies of the 1970s. High inflation did not lead to reduced unemployment- the world discovered the truth that the Philipps curve trade-off exists only in the short-run. If you keep boosting money supply for too long, you get only inflation without the associated benefits of reduced unemployment.

So politicians decided they would leave it to central banks to decide monetary policy as a means of imposing overall macroeconomic discipline. Central banks would then no longer underwrite unlimited government borrowings and this was good for the economy.

Now central bank independence is under threat- and it's not on account of politicians, the Economist points out. The problem is the steady decline in interest rates in recent years, culminating in negative interest rates in many countries. Monetary policy no longer appears effective and this undermines the authority of central banks.

Moreover, the tool that some banks have resorted to, Quantitative Easing, which involves massive purchases of government bonds, amounts to the purchase of government debt using newly printed money- precisely what central bank independence was intended to avoid!

At the same time, there's a general sense that fiscal stimulus has a key role to play in the present situation:

Although economists remain broadly in favour of central-bank independence, the amount of new research affirming the importance of stimulatory fiscal policy is growing. The continued economic doldrums are also creating a political opening for more aggressive fiscal action. On August 2nd the Japanese government announced new stimulus measures worth ¥4.6 trillion ($45 billion) this year. Both American presidential contenders have plans that will raise government deficits, and the British government has abandoned its target of balancing the budget by 2020. Low interest rates have emboldened politicians who might otherwise have ignored the calls of frustrated voters for fear of the bond-market vigilantes.

As monetary policy wanes in influence relative to fiscal policy, so will the importance of central banks.

Here in India, we have seen a movement away from the commitment to a 4 per cent inflation target on the part of the RBI. This has at least partly to do with the perception of the political authority that rigidity in respect of the inflation target of 4 per cent was coming in the way of higher economic growth.

Central bank independence is not ordained by the gods. It was a mechanism devised by politicians in response to a particular economic situation. You can count of politicians to reduce its importance in a different economic situation.

More on helicopter money

I wrote about the possible use of helicopter money in the UK in my last post. The question is asked: how different is helicopter money from Quantitative Easing. Helicopter money is the government financing its spending by borrowing from the central bank. This leads to an increase in the creation of money. In QE too, the central bank pumps money into the system by buying bonds from banks.

So, where is the difference? As an article in the Economist explains, QE is, in theory, subject to reversal. The central bank can sell back the bonds in the market. This, of course, has not happened with the QE we have since post the crisis of 2007. Helicopter money, on the other hand, is a permanent expansion in money supply. It can, therefore, be expected to have a more stimulatory effect.

The flip side is that the markets would view helicopter money unfavourably for precisely that reason. It is easy money for governments- it's just a matter of dipping one's hands into the central bank's till. This could easily lead to a sharp depreciation in the currency.

Harvard, take this!

Quote of the day:

You have to admire Niall Ferguson. There aren't many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.

The quote is from Dean Baker blogging at the Centre for Economic and Policy Research.  Fergusson, the historian now at Harvard, has lashed out at Nobel Laureate Paul Krugman for his criticism of austerity policies in Europe and elsewhere.

I had referred in an earlier post to the record of the Cameron government in the UK and its impact on the recent British polls. Baker rebuts the view that the Cameron economic record is anything to write about. 

Wanna boost the economy? Go for infrastructure spend

The IMF is now telling us that public spending on infrastructure can provide a great stimulus to the economy- and in the developed world as much as the developing world.

 Larry Summers comments on the IMF findings:

Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

Spending on infrastructure thus involves an increase in government spending and an increase in the ratio of public debt to gdp at the beginning of the period but translates into a reduced debt to gdp ratio at the end of the period.

When this is so obvious, it has never been clear to me why in India the government has been leery of a sharp increase in infrastructure spending- and I am not referring to the recent period where concerns about inflation have come to dominate the debate.

Gary Becker

The passing of Nobel Laureate Gary Becker went unnoticed in the Indian press. Becker showed how the tools of economics could be applied to numerous areas outside the field of economics. Here is the Economist's tribute.

Thomas Piketty book flawed by errors?

This could be the story of the year on the book of the decade. FT claims its investigation of the spreadsheets used by Thomas Piketty in his sensational book, Capital in the 21st century, showed there were serious errors:

The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.

.....In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970. An independent specialist in measuring inequality shared the FT’s concerns.

Chris Giles provides a detailed critique of these errors here. 

What is the best way to give food subsidies?

There are three ways in which subsidies can be given: food handouts, cash, vouchers. Which is most effective is an important policy issue. The Economist summarises the results of a recent paper on the subject, which analysed an experiment carried out by the World Food Program in Ecuador in 2011:

The study found that direct handouts—Iran’s new policy—were the least effective option. They cost three times as much as vouchers to boost calorie intake by 15%, and were four times as costly as a way of increasing dietary diversity and quality (see chart). Distribution costs were high, and wastage was also a problem. Only 63% of the food given away was actually eaten, whereas 83% of the cash was spent on food and 99% of the vouchers were exchanged as intended. Food transfers have also been the costliest option in similar projects in Yemen, Uganda and Niger, according to John Hoddinott at IFPRI.

In Ecuador there was little difference in cost between handing out cash and food vouchers, the other two options. But vouchers were better at encouraging people to buy healthier foods because of restrictions on what items could be exchanged for them. It was 25% cheaper to boost the quality of household nutrition using food vouchers than it was by handing out cash. A switch from universal subsidies to vouchers could be the most efficient way of boosting health as well as relieving poverty.

So, the order of preference, according to the study, should be: vouchers, cash, handouts. However, it would be unwise to generalise from the results of an experiment in a small country such as Ecuador. It is easier to hand out vouchers to a small population. Moreover, access to food can be ensured. In a large country, such as India, how do we ensure that, in the absence of public distribution outlets, there are places where people with vouchers or cash can go to in order to exchange these for food? Moreover, we need a certain stability in food prices. Vouchers or cash may not fetch enough food if they have been issued on the basis of food prices that were lower than the prices at a given point in time.

Your success is in your genes

Once in a blue moon, there comes along a book that knocks the hell out of all your preconceptions and convenient beliefs. Gregory Clark's book, The son also rises: surnames and the history of social mobility must fall in this bracket. I haven't had a chance to read the book myself but I have seen many the reviews (including the ones in the Economist and the Guardian), an interview with Clark and several comments on the Net. Clark's own brief exposition on his book is here.

Clark's thesis is that how successful you are in life can be traced to your ancestors 15-20 generations ago, or nearly 300 -450 years ago. This means the way society is constructed today reflects the distribution of haves and have-not in the nineteenth century or so. Here's a stunning precis of his thesis:

According to his calculations, if you live in England and share a last name with a Norman conqueror listed in the Domesday book of 1086—think Sinclair, Percy, Beauchamp—you have a 25 percent higher chance of matriculating at Oxford or Cambridge. If you’re an American with an ancestor who graduated from an Ivy League college between 1650 and 1850, it’s twice as likely that you’re listed in the American Medical Association’s Directory of Physicians.

True only of elitist societies such as the US or the UK? Not by a long chalk, says Clark. He has looked at Scandinavian countries and found that social mobility hasn't changed much. Most astonishing is his study of China. Despite the cultural revolution, despite the annihilation of large numbers of those in the elite, Chinese society is dominated by the descendants of those who were at the top before the Maoist revolution. As Clark puts it:

When you look across centuries, and at social status broadly measured — not just income and wealth, but also occupation, education and longevity — social mobility is much slower than many of us believe, or want to believe. This is true in Sweden, a social welfare state; England, where industrial capitalism was born; the United States, one of the most heterogeneous societies in history; and India, a fairly new democracy hobbled by the legacy of caste. Capitalism has not led to pervasive, rapid mobility. Nor have democratization, mass public education, the decline of nepotism, redistributive taxation, the emancipation of women, or even, as in China, socialist revolution.

The exasperating thing about Clark's findings, one that will raise hackles amongst do-gooders, is that there isn't much you can do to improve social mobility. If you had great ancestors, you have everything laid out for you; if you are ancestors did not amount to much, chances are you won't either. The best of educational opportunities, the most open and meritocratic selection processes will not make much of a difference to outcomes. To quote Clark again:

If your surname is rare, and someone with that surname attended Oxford or Cambridge around 1800, your odds of being enrolled at those universities are nearly four times greater than the average person. This slowness of mobility has persisted despite a vast expansion in public financing for secondary and university education, and the adoption of much more open and meritocratic admissions at both schools.

Clark's conclusion is grim and unsettling:

Large-scale, rapid social mobility is impossible to legislate. What governments can do is ameliorate the effects of life’s inherent unfairness. Where we will fall within the social spectrum is largely fated at birth. Given that fact, we have to decide how much reward, or punishment, should be attached to what is ultimately fickle and arbitrary, the lottery of your lineage.

What do these findings mean for public policy? Should governments thrown up their hands and just allow genetics to play out? Not at all. Quite the contrary, perhaps. Since inequality will not be rectified in the natural course- and certainly not by providing adequate economic or educational opportunity- there is an even stronger case for affirmative action or quotas to redress inequalities in society. By the same token, since the gifted will naturally rise to the top, the case for large incentives to reward the successful is undermined.

In India, the argument that we should open primary and higher secondary education through scholarships and generous funding in order to help who have lagged behind traditionally would not wash, going by Clark's findings. If we believe that inequality is unacceptable beyond a point and that social inequities threaten peace and order in society, the case for affirmative action is even stronger than before. It is only through aggressive quotas in jobs as well as higher education that we can give a leg-up to the under-privileged.

We Indians can, perhaps, legitimately tell Clark: we knew this all along; here we say 'sab sar pe likha hai'.

Labour's falling share of national income

Workers' share of national income has declined across the globe, the Economist reports. It has happened not just  in the US but in more egalitarian economies such as those of Scandinavia  and it in emerging markets as well.

What has caused this and should be something be done about it? The Economist dismisses the familiar theories: exploitation by large firms and weakening unions. Labour's share of income, it notes, has declined in economies with different levels of unionisation. The bigger factors seem to be greater use of IT, which has increased the wages of those with better skills, greater capital-intensity and globalisation, which has led to jobs being exported to cheaper parts of the world.

What should be done? Jobs go to those with better skills, so education and worker retraining are important. More jobs need to be created - and this could mean a cut in corporate tax rates. Thirdly, higher taxes on capital gains, which would harmonise taxes on incomes of labour with those on returns to capital.

A decline in workers' share of income and a rise in incomes at the top are both contributors to growing inequality. Policy makers need to wake up before the social costs become unaffordable.