JOST A MON: economics

Feb 15, 2013

Jobs

I was working on some statistics the other day when the cleaner arrived. I left the work on the screen, and when she walked by, she noticed the mathematical formulae.

"You are mathematic?" she said.

She is not entirely fluent in English.

"You are a teacher?" she said.

"No, not a teacher," I said.

"But you are mathematic?" she urged.

"Yes," I said.

"I am economic," she said. "I study in Poland."

****

The boy sees me reading a history book. He has keenly noted my predilection for things past. He sits with me when I watch TV programmes on ancient civilisations and disappeared empires.

"I want to be historic, like Acha," he says.

"Not pre-historic, like the dinosaurs?" I tease.

"Stop it, Acha," he says.

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Dec 1, 2010

Met recently with a noticeably despondent Japanese economist. And boy, did he have something to be despondent about. Moribund politicos, he moaned. Far too populist! No new ideas on how to rebalance the Japanese economy. Massive corporate tax evasion. The yen will enter a long fall like a sumo wrestler. There will be a massive transfer of wealth from the younger generation to the soon-to-retire babyboomers. Their pensions are underfunded. There are no growth prospects. The corporate landscape is filled with zombies. Japanese equities are not going to improve in this lifetime. And who will want Japanese bonds at less than 1% yield? Damnation, death and despair is all that awaits us.

Then he looked at me hopefully and said, 'Maybe India will show the way.'

Right, India. This is your chance. I have spoken.

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Nov 26, 2010

Investor Guff

I am never disappointed when a bunch of investment types are thrown into a room with a 'senior' figure of philosophical bent. They strive to outdo each other in demonsrating just how deeply they have thought about matters of economic and historical import. They ask five-minute long questions. They look around the room after their questions, less interested in the answer than in the admiring reactions of their peers. Above all, they try to show the guru that they are no less knowledgeable than he is, and if he says, 'That is a good point!' they look smugger than a successful mugger.

Invariably, of course, the questions are the sort that one often finds discussed just that week in the Financial Times or the Economist. There are few original thoughts in the world, and those among investment managers are less original than most.

And so it turned out at George Magnus's lunchtime talk the other day. He himself spoke only for about a quarter of an hour, and then opened the floor to debate. After the usual hesitant silence, the alpha males started talking at once. One (with a heavy accent) said, "Everyone believes that in the next few decades, China will be bigger than the US. Historically, no handover from one superpower to another has happened peacefully, or without serious geopolitical risk. In lieu of war, how do you see the transition from US to China?"

Magnus, and some of the others who jumped in, thought he had said 'in view of war', so they spent the next few minutes debating possible escalations of violence between the two countries.

When the discussion faltered to a halt, the fellow said, "I said 'in lieu of war'." Were there any bashful faces? No.

Magnus brought up the Washington Consensus, and how there appears to be a less well-defined Beijing Consensus, and another worthy piped up. "Who'd want to live under a Beijing Consensus? The US has always been a benign superpower, so the Washington Consensus totally makes sense."

I've not heard the US being called 'benign' by too many people, but the fun didn't end there. Another fellow jumped up. "Two million Vietnamese killed. 'Benign'? Now China - there's a civilisation that's not bellicose."

Amazingly, Magnus seconded that view. Clearly nobody thinks the view of the countries around the South China Sea, or Vietnam or India, or Korea, or even Russia, or Tibet, is worth anything. The Chinese are no less 'benign' than the US, if by 'benign' you mean 'kick 'em in the teeth.'

Of course it's true that while the US hegemony is constantly chafed under, and people like to bash the Americans as often as they like to drink Coke, they also like to run to the Americans for security every time someone else flexes their muscles.

(But I can barely understand why an economic idea such as the Washington Consensus was suddenly interpreted as US hard power.)

Someone else popped up with: "But George, how can we convert your compelling ideas into trades?" Well, as it happens, George was speaking in the long run, ten to twenty years out. Which investment manager has that kind of horizon? They'd just like to make money in the next couple of years before their luck turns.

There was more such guff, but I tuned out shortly thereafter.

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Nov 25, 2010

George Magnus at Lunch

UBS organised a lunchtime session yesterday with George Magnus, their Senior Economic Advisor, and author of the recent Uprising: Will Emerging Markets Shape or Shake the World Economy. While Mr Magnus spoke, several investment managers nibbled delicately on Poached and smoked Loch Duart salmon rillete with buckler sorrel, Classic lamb navarin with autumn root vegetables and ratte potato puree, finishing off with White and dark chocolate mousse with chocolate sable, and some coffee. Magnus himself had to pass on his starter, barely got into his main course, and smacked his lips only once upon the dessert.

The question he sought to answer in his book was its subtitle: ‘Will Emerging Markets shake or shape the world economy?’

He broke up the prognosis into 3 indicators:

1. Demographic change: while many Emerging Market (EM) countries are aging rapidly, others (e.g. India, Indonesia, Turkey) are having a boost in working age populations that will continue to last over the next 10-20 years, and can provide a big increase in growth and productivity if they are all gainfully employed. If they aren’t employed, of course, there can be serious social problems.

2. Technological catch-up in EM: some EM countries attain excellence in some aspects of technology (e.g. green tech in China, biotech in India, …). But there isn’t that depth of cultural and social infrastructure that enables them to consistently beat the developed world at all aspects of technical prowess. The catch-up means – for the most part – that the revenues will likely continue to flow into the developed market countries that produce most of the technical knowhow.

3. Climate change: while the worst affected countries by climate change are all EM, they will possibly spend large amounts to develop infrastructure to resist the worst of its effects.

The EM world has developed its manufacturing capacity to supply a world growth rate of about 6% p.a, which was the sort of growth seen in the two decades before the credit crunch. If world growth slows, then this overcapacity can lead to economic problems in the EM as well. And if developed world begins to save more, EM needs to spend more, otherwise we will end up with de-globalisation, protectionism, … As Magnus points out, despite noises at G20 meetings supporting globalisation and open markets, there has been a trend in protectionist measures over past two/three years already impacting about 2% of world trade.

The Chinese seem to understand that they have a part to play in the rebalancing of the world economy, but whether they will actually do anything other than mouth platitudes at 5-year plan announcements remains to be seen.

I got a copy of his book (signed, but not addressed to me) and stepped back into the cold streets of the City. At that same time, another demographic challenge was revealing itself. Students had taken to the streets of London too - only they were protesting increases in their tuition fees as part of UK's fiscal austerity. It's a sad truth: the babyboomers have enjoyed a long, long boom, and will continue to reap its dividends long into retirement, while their children and grandchildren face years of unemployment and relative indigence.

The generational struggle can only get worse.

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Sep 28, 2010

Exporting Powerhouse

The Huguenot traveller and scribe Jean Chardin can be considered an early economic historian. In his Travels in Persia, 1673-77, he describes the massive sink for bullion that India was, and its enormous trade advantages with respect to its neighbours. He also astutely reasons why Hindu merchants were able to outbid and outprice their Muslim and Christian competitors.

By the 1600s, the Mughal Empire was established as possibly the wealthiest state in the world, easily comparable even to the Mings in China. Unlike the Chinese who were a massive net importer of products from around the planet, the Mughals were fortunate in reigning over an absolutely astonishing trade surplus. Gold and silver from the Americas and Europe simply poured into India. Being an agricultural and industrial powerhouse, and to all intents and purposes self-sufficient in food, India was able to export away most of its surpluses. And, with a large population base that was able to work for cheap (and with inflation being next to zero for well-nigh on a couple of centuries), India was able to produce goods so competitively priced that even factoring in the risks of international trade, they still were cheaper than local products in Iran and the Ottoman domains.

There was a large Indian diaspora in Iran in those years, estimated at close to 10,000 permanent residents. All over the trading territory on either side of India, from South-east Asia to the Mediterranean, Hindus of the Marwari subcaste, and their Jain counterparts, maintained interconnected affiliations with their kin. There were banias, in other words, plying their trade, as they have continued to do with much skill all the way to the present. They had become wealthy under the Mughals by offering them credit, and traded and lent money in Bandar Abbas in the Persian Gulf. But the 10,000 traders in Isfahan that Chardin referred to were Punjabi Khatris.

Many of these people had begun overland treks in search of trade even before the advent of the Mughals. Babur himself estimated that 20,000 of them came to Kabul every year from India. Many continued further west, establishing family firms in Persia in the manner of the Italians (e.g. the Medicis). Iran at the time was seriously cash-starved, being a net importer of nearly every possible good, and the Khatris were able to lend large amounts of money in that country to keep its markets functioning.

They were reputed to be very aggressive wheelers and dealers. An Englishman, Edward Pettus, who was posted to Isfahan by the East India Company said this of them (using the term 'bania' to mean all non-Muslim Indians):

The bannians, the Cheif Marchantes who vende Linene of India, of all sorts and prices, which this Countrye cannot bee without, except the people should goe naked ... they vende most of the linene they bring to Spahan after a most base peddlinge, and unmarchante like manner, carrying it up and down on their shoulders in the Bazar.

Although Chardin was a Huguenot who had taken refuge in England from persecution in France, he was not above some bigotry himself. His description of the Khatris evoked similar distaste for the Jews in his homeland, referring to them as nefarious and usurious moneylenders who drained Iran of its wealth by repatriating bullion back to India.

Despite this assessment, he was in general quite nuanced in his perception of Indian merchants. Clearly, Hindus and Jains had no religious proscriptions against charging interest. Chardin believed this gave them a leg up in new markets, and a serious advantage in established ones. But simultaneously, he also pointed out that Muslims had developed a subtlety in their financial methods as well, concealing interest payments when it suited them. On the other hand, the prohibition of usury meant that money didn't circulate quite as easily in Iran or Turkey amongst the locals, who preferred to invest in infrastructure ancillary to trade (such as caravanserais and bazaars). The Khatris by dint of their willingness to lend created a multiplier effect that redounded to their own benefit far more than the Muslims.

Check out: Stephen F. Dale, The Muslim Empires of the Ottomans, Safavids, and Mughals, Cambridge University Press, 2010.

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Apr 19, 2010

Solving The World's Ills: Attempt #41

It appears that dieting is harmful to your health. The stress induced by forcing a change in your diet results in heightened levels of cortisol, which eventually leads to heart attacks and cancer.

Surely this just goes to show that there's really no clear road to health. Exercise? Forsooth. Consume fewer carbs? Bunkum. Yoga? What for? Lifestyle illnesses will eventually consume us, and for all the blandishments of gyms and sculpted bodies, our systems will go down sooner or later, and there is no possibility of a reboot.

The reason for all this quite simple: a human's life is supposed to end early! It's only artificial measures such as medical care, and petroleum-fuelled rescue apparatuses, and a taboo against nose-picking that have led to multi-decadal lifetimes and pollution. In the good old ages until Alexander Fleming started mucking about with fungi, diseases and wild animals kept our populations in check. There was little existential angst. Our footprints on this planet were short-lived.

So here is my solution to all of the world's ills: environmental degradation, voracious capitalism, the pensions shortfall. Every human's life should end at 40.

How does this help? Well, for one thing, knowing from early childhood that our life is limited to four decades will either instil a powerful drive to overachieve, or stunt us into a shadowy existence of ennui and fatalism. People with the former quality will work wonders in our understanding of life, the universe and everything; everybody else can become managers. No need for pensions, no need to accumulate wealth, no boom and bust, and the constant demand for immediate gratification should work wonders for production. People can procreate in their teens, consolidate their achievements in their twenties and thirties, look after their grandkids till they are 40, and then go quietly into the void, after, preferably, handing over the keys to their apartments to the nearest stranger.

Good plan, eh? What's not to like?

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Mar 27, 2010

Leeches And Other Bloodsuckers

I can be stunned and stirred at the same time. Yes, I can. This is something that has been simmering under my hat for a while now, but a recent spate of data releases has finally caused my baffled fury to boil over.

Of what speak I? Why, Albion's perfidious government. In what has to be the grandest gerrymandering achievement ever, Labour has managed to create a vast class of people so utterly beholden to them that it is unimaginable for these folks to vote for anyone else. And who are these sheep? Why, public servants in all their disguises.

It is absolutely breath-taking. During the 10-odd years of Britain's economic boom, a period that our man Gordon Brown attributed entirely to his own skill (further embellished by his 'no more boom and bust' speeches), which part of the workforce added more jobs? You guessed it - the public sector. Between 1998 and 2007, of the 1.2 million jobs added in urban UK, two-thirds (two-thirds!) were in some bureaucracy or the other. In some parts of the UK, state employees are 70% of the workforce. We might as well be living in the USSR.

And what sorts of jobs are these? Not all necessary ones, of course, like teachers or police or nurses. Oh no. There were new metrics established that determined the efficacy of teachers and nurses and policemen. Who would monitor these metrics? The newly employed 'managers', of course. And watchers-to-watch-watchers in some surreal exponential series of artificial jobs.

To attract suitable talent from the private sector, massive salaries were offered to such worthies as heads of the various municipal authorities. Many of them were paid more than the Prime Minister, even.

Meanwhile, to fund all these pen-pushers and layabouts and non-jobs, the Treasury under Labour issued billions of sterling in debt, so that when they really should have been paying down the deficit, they instead caused it to swell to gargantuan proportions. When the crash occurred in 2007-2008, obviously the fiscal situation then took a further plunge into the abyss.

Of course, the joke, dismal as it is, doesn't end there. It turns out that these leeches on the body politic actually - in the median - earn more (£539 per week) than the private sector employee (£465).

In what universe is this sustainable? The private sector pays for most of this largesse in the form of tax. The state has continued to grow and grow. This makes eminent sense during a recession. But it made no sense at all during the years of growth.

Meanwhile, there are still more benefits to a public sector job. No matter what you earn, you are guaranteed a nice final-salary pension when you retire. (Civil servants who joined after 2007 don't have the perk, it appears.) Why NHS consultants many of whom earn more than £100,000 need a guaranteed pension is anybody's guess. Especially when final-salary pensions in the private sector are mere whispers, tales told of legendary times. The argument for defined benefit pensions for public servants used to be that they earned so much less than the private sector jobbie that this was fair recompense in their old age. We have seen that this is a staggering lie.

I can't blame the public servant, of course. If I got a job that assured me of a nice salary and a rollicking pension, security, in fact, for the rest of my life, I might jump at it. Particularly if I lived in some dismal part of the Midlands, say, where, for entertainment, all I could do was throw stones at passing trains. I lay the blame entirely on Labour, even as I doff my hat to their chutzpah. They have fucked the United Kingdom well and proper, and left its people so in thrall to them that I cannot see them ever bowing out of power.

Someone please tell me I'm wrong, and there's a way out of this hellish morass.

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Mar 16, 2010

Incentives

The human mind is a wondrous thing. It can imagine incentives where there are none, discern incentives other than those that are on offer, and - in all cases - act supremely rationally. But the human mind also operates under incomplete information, and what is rational to one is sheer idiocy to another.

The public health services in the UK have been crying themselves hoarse against smoking during pregnancy. Besides the respiratory burden imposed on the mother, chemicals in the cigarette tend to stunt foetal growth. Smaller, sicklier babies are the result.

What does the teenage mum take away from this? She thinks that her labour will be easier with a small baby. And so she smokes. Packs and packs.

Clearly, the part of the public health announcement that says 'unhealthy babies' is drowned out in the minds of these sexual athletes.

Why, though, are these girls so keen on a baby in the first place. Well, there's a couple of incentives again. First, they don't want to be known as lesbians in school. It's all about peer pressure, and school is a minefield even without being labelled a 'frigid dyke'. By the age of eleven, then, it makes sense to sleep with the first likely fellow that comes along. Falling pregnant is the ultimate stamp of heterosexuality.

Secondly, the public perception is that single mums' priority to obtain municipally funded accommodation rises dramatically. (Actually, according to Wigan Council, it doesn't - not directly, anyway.) Why would they want to stick around their working class homes with screaming mothers and absent fathers? Which teenager doesn't crave independence from interfering adults? Coming from broken backgrounds, a life away from all that turmoil can only bring peace, they think.

That civic-minded effort was instituted to help those at risk: poor single mothers who might get thrown out of their homes or faced assault from their partners. Unfortunately, somewhere between intention and execution, the plot was lost.

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Mar 8, 2010

Britons Mess Up Their Mission! (Read all about it!)

On the 26th of September, 1792, an extraordinary diplomatic expedition set off from Britain. Its leader was George Macartney, a well-connected Anglo-Irish aristocrat. Macartney had already gained wide diplomatic experience in Russia, India and the Caribbean. He had even suffered the misfortune of being taken captive by the French. His task was to use diplomacy to prise open trade for Britain with an even bigger empire. He was to be the very first British ambassador to China.

It all boiled down to this. In the 18th century, a new craze for drinking tea had swept across Britain, starting in the fashionable drawing rooms of the aristocracy, where Chinoiserie was all the rage, and in the end becoming a beverage around which almost everyone shaped their day. The British national drink was made in China, and so, of course, was much of the finest china – cups and saucers and so on. None of these came cheap. By the 1790s, the British were drinking some £20 million worth of Chinese tea every year. The Chinese would accept only gold or silver in payment and the British coffers were running out.

To pay for the tea, Macartney’s task was to persuade the Chinese to open up their markets to British goods. The father of modern economics, Adam Smith, had written in his The Wealth of Nations in 1776:

To found a great empire for the sole purpose of raising up a people of customers, may at first sight, appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers.

Trade was at the heart of British identity at the end of the 18th century. A rapidly industrialising and voraciously consuming nation, Britain was extending its reach across the world. Over the waves that Britannia ruled sailed merchantmen packed to the gunnels with goods and slaves. They sold in Cape Town what they had bought in Calcutta, and bought in Jamaica what they’d sell in Europe. Inspired by Adam Smith, Britain built an empire on the principle of mutually advantageous trade among nations.

But unfortunately for Macartney, Confucius had never read Adam Smith.

After nine long months at sea, the British mission finally reached China. Macartney was intrigued by all he saw, and told the mission’s own artist to sketch everything in sight. The British were just as much objects of curiosity to the Chinese. They stuck out a mile in their tailored European trousers and were nicknamed devils by the locals, since in Chinese theatre, only devils wore tight clothes.

These days when a diplomat is posted to a new country, he is usually given sufficient time to learn all he can about his destination. Poor old Macartney didn’t get that opportunity. In 1793, there wasn’t a single person in all of Britain who could speak a word of Chinese. And the only Englishman who had tried to go on a diplomatic mission to China had died en route! So though he read as much as he could in preparation, Macartney was totally unprepared for the culture shock that was to await him. He might as well have come from another planet.

Qing dynasty China discouraged all contact with foreigners. There were no permanent foreign ambassadors, and trade with western merchants was tightly controlled and limited to the port at Canton.

The Chinese believed that they were the centre of the world, and that foreigners were essentially lesser people who were barbarians. They came to pay tribute, they were allowed to trade up to a point, but only up to a point. And Britain, becoming the biggest trading nation of the world, naturally believed in free trade, that all markets should be open, and that countries should deal equally with each other, and that we should have an ambassador in Peking whose main object would be to promote trade. And so there was a complete lack of understanding of the fundamental ideas. (Douglas Hurd, diplomat in Peking, 1954-56)

When at last Macartney’s expedition arrived in Beijing, they were overwhelmed by the sheer number of people. But their journey still wasn’t over. Macartney must have felt the truth of the old Chinese saying heaven is high, the emperor distant, when he found that the Emperor Qianlong had decamped to his summer retreat in the cool mountains of the north. As the weary party travelled northwards, a row was brewing over a tricky question of etiquette.

Even in the age of globalisation, every country clings to its protocol, its rituals and rites, which foreign diplomats ignore at their peril. Get the protocol wrong, where to stand, when to speak, how to address the president or the monarch, and you can blight your mission even before it has started. And in China protocol really mattered.

Macartney had been informed that when he arrived in court, he must perform the Chinese kowtow, prostrating himself before the Emperor. But Macartney, a proud and haughty man, felt that kowtowing would be an intolerable humiliation for him and thus for his sovereign, His Majesty King George III. The arguments went backward and forwards. Macartney suggested, “What if I take off my hat and kneel, same as I would do to my own king?” “No way,” came the Chinese response. For a barbarian not to kowtow to their Emperor was an unthinkable insult. “Very well,” said Macartney, “I will kowtow before the Emperor if a Chinese official of the same rank as me kowtows to a portrait of King George.”

This was considered an idea so outrageous that Chinese officials declined even to translate it for their superiors.

It was diplomatic impasse. Exasperated, Macartney noted in his journal, “The Chinese character seems at present inexplicable.” In perfect symmetry, Chinese officials dealing with him reported that “the barbarian nature is unfathomable.”

As Macartney reached his final destination, the argument over the kowtow was unresolved.

The unassuming town of Chengde is best known for the imperial mountain resort where the Qing Emperors would flee to avoid the summer heat. The Qianlong Emperor was over 80 years old and in the fifty-eighth year of his reign. To the Chinese he was the intermediary between Heaven and Earth. Macartney had brought with him what he had thought were suitably impressive gifts, from telescopes to clocks to a hot-air balloon, a dazzling display designed to wow the Chinese into opening up trade. But to Qianlong this was but a barbarian tribute, a sign of submission.

So much for Macartney’s gifts to the Emperor. They were intended to showcase British genius and prise open a new and valuable export market. The notion of paying tribute to the Emperor never crossed the minds of red-blooded Englishmen.

The night before Macartney was to meet the Emperor, he made his final preparations. But to kowtow or not to kowtow, that was the question. His instructions from London ordered him to “conform to all ceremonials of that court which may not commit the honour of your sovereign or lessen your own dignity.” But then again, they said, “While I make this reserve, I am satisfied you will be too prudent and considerate to let any trifling punctilio stand in the way of the important benefits which may be obtained by engaging the favourable disposition of the Emperor and his ministers.”

Behind the elegant ambiguity of the Foreign Office, the message was stark: Macartney was on his own, and he better not screw up.

Dawn came, September 14, 1793. Macartney and his entourage arrived at the imperial compound to find several thousand people gathered to celebrate the Emperor’s birthday. Five thousand miles and a year since he had set off, it was the moment of truth. The Emperor arrived on an open palanquin carried by sixteen men clad in gold. As he passed, the Chinese crowds instantly fell prostrate to the ground in a kowtow. What did Macartney and his mission decide to do? They simply went down on one knee.

When he was called before the great throne, Macartney presented the Emperor with some of the British gifts, intending to provide an opening for raising the question of trade. But Qianlong was not interested in engaging with these upstart barbarians who would not observe court etiquette. Over the following week, every time Macartney tried to raise the business of his mission, the Chinese officials would brush him off. Qianlong issued angry instructions. “Let us immediately order the envoy to return to Beijing. When Barbarians manifest sincerity and respect, I shall unfailingly treat them with kindness. When they are full of themselves, they do not merit the enjoyment of my favours.”

Macartney was sent packing in disgrace. There were to be no new trade privileges, no new ports opened to British merchants, and no resident British ambassador. The mission was a total failure.

You can’t conceive of them saying Yes to Macartney’s demands. After all, what did he want? He wanted not only trading posts, possibly an island as a base for trade, and above all, he wanted diplomatic relations on an equal footing, and this was quite unthinkable to the Chinese. After all, there could only be one sun in the sky, and that, of course, was China. (Sir Percy Cradock, Ambassador to China, 1978-83).

Today a diplomat might very well say that, in Macartney’s place, he would have abased himself and kowtowed before the Great Emperor. His mission was to open up trade with China, not worry about the consequences to his own dignity. Macartney believed he was bringing something good to China and he was baffled by their rebuff. For the Chinese, though, it was less a matter of ceremony than hard economics. They wanted to maintain their own surplus, and so had little interest in importing British products.

Macartney brought back an edict from the Qianlong Emperor for King George III. “As your ambassador can see for himself, we possess all things. I set no value on objects strange or ingenious, and have no use for your country’s manufactures.”

But the most devastating thing about Qianlong’s edict was that it had been drafted even before Macartney’s mission arrived in China. The sad truth is that the ambassador never really stood a chance.

(Text from the BBC Four programme ‘Getting Our Way – Prosperity’, presented by Christopher Meyer.)

See also: P. Gillingham, The Macartney Embassy to China, 1792-94. (PDF here.)

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Mar 7, 2009

Winner!

Every month, on the first Friday, the US Bureau of Labour Statistics announces the Non-Farm Payrolls number. This is widely seen as an important macroeconomic datum for the US economy, and large surprises in it causes swings in nearly every financial market on the planet. It is considered to be difficult to forecast accurately, despite it having seasonal variations, and so is fair game in nearly every financial institution for a sweepstakes.

We are no different at my workplace. The sweepstakes is simple: whoever chooses a number that's closest to the actual as reported by the Bureau wins the pot. When I began participating a couple of years ago, the entry fee was £1 with the winner collecting it all. Last month, the boss, claiming that in these difficult times of credit crunch we should strive to make someone very happy, urged us to raise the stakes to £5. Amazingly, people agreed. He then proceeded to win handily. It turns out he ran some statistical regression or the other, and his guess came surprisingly close to the actual number.

Now, over the past several months, payroll numbers have been plummeting in the US. It's not too surprising, then, that fitting a trend line should be a reasonably accurate forecast. Previously, I had generally chosen randomly - as far away from the average opinion as possible, so that if the result were an outlier, that is, far from the average, I'd claim the pot. Never worked, dash it. This month, I briefly considered getting fancy with my forecast. I tried this model (ARIMA) and that (linear regression). Both of them gave me numbers that were not too different from the consensus of 79 economists polled by Reuters. What was the point of using these models, then? The last time I had chosen the Reuters consensus, I had been so far away from the announced number that it was embarrassing even to admit I had participated in the sweepstakes. But perhaps now my luck was turning? After all, only two days earlier, I had won £10 on the National Lottery. (Woo-hoo. 10x returns! Take that, financial practitioners!) So I chose a number (-675,000) close but not too close to the consensus (-648,000). The rest of the punters were all over the place; some predicting a drop in employment of a million even.

At this point, I can modestly admit that I won. About bloody time, too, I say. The number came in at -651,000. Kudos and backslaps (and suspicions of unfair advantage by means of statistical tests) came my way. I counted my gains. Fifty quid, folks. Fifty freakin' quid.

[In unrelated news, the wife's just announced that she is going shopping.]

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Oct 28, 2008

Saving the Economy

In these perilous times when house-prices are dropping, banks shutting down, the economy in recession, and shops struggling for want of paying customers, what is a responsible citizen to do? Hide away in a cubby-hole in anticipation of being laid off? Drastically reduce spending? Survive on potatoes till better times?

No. That, I am assured, will only make matters worse. Instead, go out and buy stuff! Get unemployment insurance now when it's still cheap! Stop worrying about steeply rising taxes in the future. Spend, spend!

One of my colleagues at work has taken this message to heart. He has Appled himself out, having obtained for good cash a MacBook, an iPhone, an iTouch, and several other arcane pieces of electronics whose names begin with the lower-case I. He gave up his rented flat in Dulwich and moved to more expensive premises in the Docklands. He claims to be saving a killing on cheaper commuting costs.

Another chap I know has bought himself some fancy French graffiti. He claims that he can do better, but doesn't have the time. He likes to encourage the arts.

I'm contributing, too. I've been worried about the local Lebanese barber. (I assume he is Lebanese. He could be Albanian. Or not.) I don't want him taking matters into his own hands, despairing of rising rents and the preponderance of long-haired men, and going on a razor-wielding murderous spree around south-west London. So I have decided to go to him for a hair-cut every twenty days. Not that I have much hair to cut. Still, it should keep him happy. Plus I'll be able to go about with a glow of self-satisfaction in having given back to the community.

At £6 a pop, I've done my bit.

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Aug 15, 2008

useR Conference 2008 - Dortmund, Germany

I attended the latest useR! conference this week, which lasted three days (Aug 12-14) at Dortmund. We've been using R at work for about a year or so now, and there's much to learn about this incredible statistical language and its ancillary 'packages', tools developed by academicians and practitioners in a variety of disciplines, all available free and online, supported by a vast cast of enthusiasts and gurus. So here I was, toting my little bag of goodies, and ambling from room to room to listen to some very interesting presentations across the R user spectrum.

The conference was held at the Statistics department of the Technical University of Dortmund. Only two weeks earlier, torrential rains had flooded the large auditorium of the department. Stains were still visible, but a massive cleanup before our arrival meant that everything appeared as it should - ready for four hundred visitors.

Unlike Curving Normality who blogged regularly and live from the various sessions he attended, I am doing this from back at home. I did take notes during the talks on a little pad that was given to us courtesy Google, but my handwriting these days is much worse than it used to be, and I doubt even a pharmacist would be able to make much of it. Still, here goes - summaries of three of the more interesting talks I attended.

The first talk I attended was on Loss Functions by a professor of actuarial studies, Vincent Goulet. Actuaries are interested in such things as ruin, the distribution of insurance claims, and the probabilistic properties of insurance payouts. To model these events, Goulet introduced an R package named 'actuar', in which he proposed several families of distributions, including those called censored. These, in particular, are interesting to insurance specialists. A client with a deductible is not going to make a claim if he thinks his damages cost less than the deductible to make good. In such a situation, the distribution of claims would be left-censored. Likewise, insurance payouts are usually capped by the size of the cover. Payouts, therefore, follow a right-censored distribution.

This is of relevance to us in finance as well, especially if we want to model the effects of management fees on a portfolio. Because irrespective of how well a manager performs, he always gets his management fee, the returns to a client from the manager are always that much less than the manager's overall performance. For the manager's revenue stream, on the other hand, there's an effective floor - and that can be modelled by a left-censored distribution.

An example of the multifarious uses of statistical tools came from Miriam Marusiakova, of the Charles University of Prague, who presented an R package 'forensic' to help in DNA fingerprinting. It is well-known that the DNA composition of any two human beings (other than identical twins) are distinct. Since it is unfeasible to compare DNA strands in their entirety from various possible sources, forensic scientists have isolated certain markers that can serve as witnesses for distinction. Unfortunately, these markers themselves do not provide sufficiency of difference, and so a statistical analysis is required to determine how likely it is that the DNA found at a location came from one person or many.

Naturally, this is important! Let's say that a certain amount of DNA was found at a crime scene. There is a victim V and a suspect S. There are three possibilities: a portion of the DNA is known to be of the victim; there's only one type of DNA, suspected to be that of the offender; there's several sources of DNA found. The prosecution's hypothesis is that some of the DNA came from S. The defence's hypothesis is that the remaining DNA came from persons unknown U. How to determine which of the hypotheses is the correct one?

Miriam explained that external information needs to feed into the statistics. For instance, certain genetic factors are present to a greater or smaller degree in various populations. Not incorporating these factors into the statistics leads to overstating the case against the defendant. The classical probability law, named the Hardy-Weinberg law, is inapplicable in this case.

Another twist is that the offender and/or the victim, and the defendant are related! Usually, there is an assumption that the offender and the victim are independent. Miriam's package enables the analysis of all the above possibilities.

As a concrete example, she showed the widely different conclusions that could be drawn from the O.J. Simpson murder trial of the early 1990s in California. If the various factors and match probabilities were not estimated correctly, it was as easy to prove that the DNA found at the crime site was Simpson's as it was not. Lesson - estimate accurately and account for all possible variations.

The effervescent Janet Rosenbaum of Harvard University produced one of the most entertaining examples of research I've ever come across. She dealt with the notorious abstinence (virginity) pledge in the USA, and examined whether the sexual behaviour of teenagers who took the pledge was any different from those who didn't. (See here for some of her work, and this news report at the Washington Post.) I can do no better than quote from her very thorough abstract at the conference:

Objective: The US government spends over $200 million annually on abstinence-promotion programs, including virginity pledges, and measures abstinence program effectiveness as the proportion of participants who take a virginity pledge. Past research used non-robust regression methods. This paper examines whether adolescents who take virginity pledges are less sexually active than matched non-pledgers.

Previous researchers had compared the sexual behaviour of pledging teenagers against the general population of teenagers, and concluded that, indeed, the former were less likely to have had sex, and had a lower incidence of sexually-transmitted disease. For the US conservatives, this was brilliant news, meaning they could cut federal funding for contraception and women's sexual health, and provide instead abstinence coaching and use the numbers of pledgers as a metric of success.

But, of course, the comparison is not fair. The correct thing to do would be to match pledging teens with non-pledging teens who have similar backgrounds and ideologies. After all, the people who take the pledge are not average US teens. Many of them are from evangelical families, deeply religious, often born-again. When this matching is done, the results are quite clear:

Five years post-pledge, 84% of pledgers denied having ever pledged. Pledgers and matched non-pledgers did not differ in premarital sex, STDs, anal, and oral sex. Pledgers had 0.1 fewer past year partners, but the same number of lifetime sexual partners and age of first sex. Pledgers were 10 percentage-points less likely than matched non-pledgers to use condoms in the last year, and also less likely to use birth control in the past year and at last sex.

The behaviour of pledging and non-pledging teens is statistically identical! Worse, one to five years after having taken the pledge, 84% of those teens denied having pledged. Egregiously, many who had sex before taking the pledge declared themselves virgins shortly thereafter. To add insult to injury, pledgers were often more ignorant of contraception when they did succumb and have sex, and were thus less likely to protect themselves from disease or pregnancy before marriage.

Rosenbaum concluded that federal funds would be better spent in teaching effective birth and STD control than on abstinence measures.

Parental Control of Marriages and Female Education

Consider the following:

Patrilocal marriage and cultural norms prevalent in most parts of south Asia would seem to imply that her husband’s family stands to retain the major part of any additional gain an educated woman would generate. Hence, men would seem to have a strong incentive to prefer educated women as brides, especially since returns to women’s schooling are significant (whether directly, from the labour market, or indirectly, within the household, where the schooling of women may have important positive effects on the human capital of both present and future generations). Marriage markets in south Asia also exhibit widespread presence of dowry, i.e., payments from the bride’s family to that of the groom. Then, intuition suggests, ceteris paribus, parents of educated women should face lower dowry demands. Thus, competitive adjustments in dowry rates, by allowing parents to internalise the returns, should induce them to educate daughters. Yet, the persistence of low levels of female schooling and available micro evidence on dowry payments both suggest such incentives are neither strong, nor generalized.

So why hasn't the market adjusted?

This paper by a trio of researchers at the University of Nottingham studies the conundrum. Indraneel Dasgupta et al propose an economic model for the problem, propose a resolution, and examine the policy consequences. Here is an explanation for the puzzle:

[P]arents in south Asia, especially in the rural areas, typically desire their married sons to live with them in a subordinate capacity. They expect sons, along with their wives, to submit to parental authority in domestic decision-making. Co-residence within such a hierarchical setting can provide significant benefits, both emotional and material, to parents. Marriages are also typically ‘arranged’: these are contracts negotiated between parents. This suggests, when seeking wives for sons, parents may value characteristics that facilitate the continuation of parental control over sons (and thereby, co-residence) after marriage, i.e., characteristics that reduce the prospect of future intergenerational conflict and consequent household partition. Lack of education on part of the bride may constitute such a characteristic. Hence, parents may prefer uneducated brides unless educated brides bring in significantly more dowry. This in turn would reduce parental incentive to educate daughters.

Amazing how economic theory can shed light on societal ills. One way to look at social dynamics is as an emergent phenomenon stemming from fundamental human greed. What best proxies greed? Lucre. In the end, it all boils down to the green stuff. To perpetuate wealth among the male line, it is important for sons to remain with the parents. It turns out that if a man has completed primary schooling, the educational level of his wife is correlated with the propensity to depart from the parental abode, resulting in a fission of the joint family. It would, therefore, behoove a parent to choose an uneducated bride for her son. This parental choice in the bride results in underinvestment in the education of daughters.

What if the government were to implement cash endowments or affirmative action to improve the educational lot of women? Dasgupta et al suggest that these measures will be useless:

Governments often offer direct incentives to parents for sending daughters to school. These can be low fees, subsidised school meals, provision of books, uniforms, health care facilities and welfare benefits contingent on attendance, etc...Thus, relatively small ‘bribes’ will be ineffective. This happens because, if parents are to educate daughters [...], the state needs to compensate them for the higher dowry they will then have to pay. Hence, our analysis suggests that parental authority in marriage decisions regarding sons may make the level of female schooling ‘sticky’. State interventions, whether in the form of increasing direct parental returns from schooling of girls, or of subsidizing female education, may turn out to be ineffective in improving female schooling levels.

So what can be done?

There is some evidence that if men were to choose their own brides, levels of female education may begin to rise owing to the economic incentive of an additional income or from the improved human capital of their children. Providing a housing subsidy to newly-weds, allowing them to leave the joint family, can also remove the source of parental bias against educated brides, and thereby better educational attainment. Dasgupta's analysis further suggests that discouraging early marriages, and providing legal or administrative support to individuals who marry against parental opposition may be important in this context.

Other questions remain: do parents consider educated brides a threat to household stability? Does this perception of a threat result in discrimination against the brides?

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Apr 14, 2008

Tall

In the five years that I lived in London up to January 2008, I don't think I saw more than four or five women taller than me. In the last four months, I've encountered more than a dozen. What's going on? Where are they all coming from? Why are they all in the City? And why do they all have heavy bags that they use mercilessly to knock lesser mortals out of the way as they bestride the pavements like colossi?

Personally, I blame the Dutch. Ever since their king conquered England 320 years ago, they have been growing ever more prosperous and taller. Now it appears that their women are the tallest in Western Europe. Sure, there are some communities in the Dinaric Alps who can look down upon the Dutch, but face it: how many Dinarians are there in the City? And anyway, these Amazons who power their way down Bishopsgate are all blue-eyed and rosy-cheeked and smiling, and everybody knows that that's what the Dutch are: a happy and well-fed people.

The link between quality of diet and height has been known for quite a while. The remarkable growth of the Japanese post-WW II has been documented here and there. Sure, there are supposedly tall tribes in Africa (e.g. the Dinka) who are probably malnourished, but very well adapted to the hot clime. But, in general, the average height of a population is a good proxy for the quality of their lives.

As usual with such sweeping study, there's always an interpretational ruckus. The average height of Indian men has increased much more than that of Indian women in the past sixty years. Clearly, this would lead one to conclude that women in India have had a much worse time of it - foodwise, especially - than their menfolk. But no. The cry goes around town that the correlation between height and nutrition applies only to foreigners. We Indians are different.

But I'd like to claim that so are the Africans. And mid-nineteenth century British. In fact, everybody is different.

This paper suggests that the reason why South Asians are shorter than would be implied by their relative wealth is that historically, their population could only be supported by adopting a vegetarian cereal-based diet that did not permit people to be so tall as a more balanced diet with a higher percentage of fats and animal-basd foods...the preferences that evolved to support the diet, most notably vegetarianism, may take many generations to change.

The paper also points out that while there is a directional relation between quality of food and height, the reverse is not necessarily valid. Also, inferences on quality of life from records of average height are dangerous. For instance, the Irish in the 19^th century were poorer yet taller than their British counterparts. The Irish had a nutritionally better-balanced diet (of dairy and potatoes) than their cousins across the Irish Sea.

Likewise, attempts to infer African income levels or African disease burdens from African heights would fail spectacularly, much more spectacularly even than the well-known but relatively minor failures in the height to income relationship in mid-nineteenth century Europe and America, particularly because at least some of the latter can be accounted for by an increased burden of disease.

The Economist recently had an interesting discussion of the relation between income levels and height. Stature, it announces, is a measure of deprivation, not necessarily prosperity. As the quality of life improves for a population, its average height rises dramatically. But once essential nutrition is widely available, even if the population continues to grow richer, its height does not grow as much.

Consider this, though. Two societies with equal average wealth can have different average heights. In general, the society with the taller average is more equitable. Why is that? Because in a more equitable society, the good quality of life is better distributed among its people.

Yet another piece of evidence (if one weren't already convinced) that "equitable" and "India" are, still, sadly far apart.

Despite globalisation and the general (average) rise in wealth around the world, the state of childhood nutrition remains dire, especially in South Asia (where it is worse than even sub-Saharan Africa). Meera Shekar of the World Bank has written this study (PDF alert!) of the problem. Check it out - it makes some seriously disturbing points about the state of health of the world.

Also, take a look here (PDF alert!) at Angus Deaton's Health, Height and Inequality: the Distribution of Adult Heights in India.

On a lighter note: Greg Mankiw suggests that taller people be taxed more than shorter folks because the giants tend to out-earn and out-perform the midgets over their lifetimes. I think the point he is making is that taxing entrepreneurs for the fruits of their given-by-nature genius is no different from taxing taller people for their naturally-obtained economic benefits. Of course, there are any number of refutations and counter-arguments, and were I more interested in arcane economics, I might follow them all.

Of course, the reason why - as models go - Elle Macpherson was more successful than, say, Kate Moss (I'm not saying she was, but what if?) - may not be entirely because the former is better eye-candy than the latter. There's a paper (yet another PDF alert!) reported at the Freakonomics blog that links height with intelligence, and documents that, as early as age three, taller children perform significantly outperform on cognitive tests; these scores persist throughout childhood. Hot damn, and we just found out that our boy is in the 25^th percentile of height for his age group. I'm now getting worried again.

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Apr 23, 2007

The Seamier Side of Life

Since I'm on some sort of economic roll, I might as well point out a couple of interesting things I came across today.

Everybody and his pit-bull has heard about Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, that jazzy exemplar of lateral thought and the application of Economics to matters profound and ridiculous. Who else but Steven Levitt would have realised that the fall in crime experienced in the USA over the past few decades stemmed mainly from the Supreme Court judgement in the case of Roe vs Wade in 1973? All those morally degenerate scions of single-family, mainly African American, homes who otherwise would have raped and pillaged their way through the land were mercifully aborted in the wombs of their benighted mothers.

As it turns out, there are other economists wielding the left sides of their brains to startling effect. Another Steven, this time Landsburg (him of the Armchair Economist fame) has written an equally iconoclastic book called More Sex is Safer Sex: The Unconventional Wisdom of Economics. It is funny (“In one recent survey, 37 per cent of New Yorkers said they’d leave the city if they could. Of course, since none of them had left the city, and since all of them could, the only proper conclusion is that 37 per cent of New Yorkers lie to pollsters."), disturbingly logical (giving to one charity is better bang for the buck than giving to many, despite our 'selfish' intentions of spreading the goods), and weird (incentivise firefighters: keep the property they save but beware of them setting off fires in the search for profit).

That last bit reminds me of a hilarious book on skullduggery in the life insurance industry, which talked of similar moral hazards. Bet Your Life by Richard Dooling describes the issue faced by insurance companies in the early years of the business of people taking out policies on total strangers, murdering them, and pocketing the proceeds. Viatical insurance was a consequence: as laws banned the issue of insurance on unrelated people, it became viable for an insured person (who has to die to claim the benefit of said insurance) to sell his policy in a secondary market. This way, he could get some money up-front and the purchaser would stand to gain from his eventual death.

The bulk of the book, though, has little to do with morality. Dooling prefers to skewer the industry (which finds it more profitable to raise premia rather than prosecute fraud), and nobody - not the compulsive video-gamester narrator Carver Hartnett, nor his partner and object of frenzied horniness, Miranda Pryor, or indeed any of the other characters dotting the book - is particularly likeable or respectable.

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Apr 2, 2007

Food Supply and the Economics of Manumission

Isn't Economics wonderful? It ties in with human behaviour so perfectly that one can imagine a centre in the brain dedicated entirely to the execution of this subject. Consider, for example, the case of food supplies. John Reader describes in his magisterial Cities a plausible chronology of events: with urbanisation proceeding apace and the concomitant strain on natural resources in the area surrounding the town, survival (and entrepreneurship) caused trade to flourish. Trade in grain took off as private parties realised that there was money to be made from their hungry compatriots. Initially, the procurement of food was left to private enterprise; the public sector was interested mainly in the security of the trade routes and the distribution (e.g. the Athenian Assembly maintained a large navy to protect the grain ships coming in from western Russia). Clearly, the benefit was that the people with the smarts could be depended upon to provide the public good (at vast profit to themselves). However, this also meant that the vagaries of supply made prices volatile, leading to social unrest. Gradually, the government of the day (e.g. the Roman Senate) decided to step in to fix prices and even provide appropriate free rations for all its citizens.

Meanwhile, slavery was so wide spread and slaves so cheap that even the poorest citizen owned one. The feeding of these fell outside the government's 'free ration for every citizen' plan. What ensued should be obvious to anyone - even to those without the benefit of a degree in Economics from an Ivy League school - such as myself. Citizens found it cheaper to free their slaves. A law obliging freed slaves to continue to work for their erstwhile masters at low retainers ensured continuity of service for the citizen. At once, too, the burden of feeding these freedmen fell onto the government. Two gains for the price of none!

Successive governments found that even rumours of food shortage brought out the riotous and anarchic among the populace, and were forced to increase the subsidy. Worse, folks poured into the cities from the countryside with genuine or fradulent claims of citizenship just to be on the gravy train. Roman emperors did themselves no favour by increasing the number of subsidised foods (oil and meat in addition to grain, by the time of Septimius and Aurelian). Eventually, of course, this largesse proved economically unviable.

Is this not a good case study for governments trying to please the rabble?

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JOST A MON

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useR Conference 2008 - Dortmund, Germany

Parental Control of Marriages and Female Education

Tall

The Seamier Side of Life

Food Supply and the Economics of Manumission

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