Economics – 6 am pacific

Writing Simply

Greg Mankiw writes about a carbon tax in the New York Times. Whether or not you agree with the economic arguments for the tax, it is easy to agree that Mankiw writes very well. Mankiw is a Professor at Harvard and was the Chief Economic Adviser to President George Bush. You would expect him to be quite an authority on economic theory. But in this piece he explains a complex matter in a way that a high-school kid would understand it.

Writing simply is a craft. It requires hard work and practice. James Thurber, an American writer and humorist, was known to go over his writing again and again until he was satisfied that it was clear and simple. His “My Life and Hard Times” was a book that I read and reread, again and again, as a child – and still can, as an adult. It is a timeless classic.

Writing simply requires expertise. You can’t be clear and simple in your writing until you are clear about the subject in your head. Writing simply isn’t the same as writing about simple things. Richard Dawkins has written volumes of erudite stuff about evolutionary biology that is completely accessible to people with no more that high-school biology.

On the other hand, there are all manner of experts who hide behind a facade of jargon and what Thurber calls expression-complexes. Referring to psychoanalysts Thurber says:

…I have discovered that they all suffer from one or more of these expression-complexes: italicizing, capitalizing, exclamation-pointing, multiple-interrogating and itemizing…It is a defense mechanism used to cover up a lack of anything new and sound to say on their favorite subjects, and to make up for an inability to write simply and convincingly, or to think clearly.

Writing simply often requires having an opinion. The reason I like the Economist or Om Malik, is because they generally don’t waffle. You know where they stand on issues. The cover page of the Economist and its headline leave you in no doubt about their position on Syria.

Writing simply is risky. If you are wrong with your facts, you can’t hide behind a possible misinterpretation. If you are wrong with your opinion (like the Economist was, by their own admission, on Iraq) someone will call you out.

When that happens, you go back to your blog post and admit that you made a mistake. Right there, next to where you made it. In italics, so nobody misses it. And then continue to write the way you want to.

Tiger Moms and Indian Parenting

Amy Chua made waves with this piece in the Wall Street Journal. She also had a very successful Davos visit where she found herself debating Larry Summers, which is a daunting task, even on a subject that you might think you have him on the backfoot for.

Summers had a quotable quote

I think you have to decide whether achievement is the route to self-esteem or whether self-esteem is the route to achievement.

But he also said

“It is not entirely clear that your veneration of traditional academic achievement is exactly well placed,” he said to Ms. Chua. “Which two freshmen at Harvard have arguably been most transformative of the world in the last 25 years?” he asked. “You can make a reasonable case for Bill Gates and Mark Zuckerberg, neither of whom graduated.”

Now, Gates and Zuckerberg will certainly bump up the average earnings of Harvard dropouts quite a bit. I don’t have data to tell you if that will be enough to outdo the hedge fund millionaires among those who graduated. But I can guarantee that the median earnings of a Harvard graduate far exceed the median earnings of a Harvard dropout. And to Moms, medians matter, not averages.

As an Indian, I totally get where Amy Chua is coming from. Our Indian friends in the US are no less focused on their kids academics and extra curricular activities. You may think that this kind of parenting is part of the culture. It is, but it is not deep-set. It manifests itself because of economic reasons.

India, like China, is a poor country. There are no safety nets – no unemployment benefits, no healthcare insurance. If you don’t have a job, its a ticket straight to the poorhouse. The govt. hospitals don’t work and the rural employment guarantee program can only prevent starvation.

But just education doesn’t guarantee much. The dispersion in outcomes of your education is very, very wide. Even among college graduates, the average IIT graduate’s life-time income could be 10X that of an Arts graduate. I doubt that that is the case anywhere in the developed world.

And one more thing. The difference in quality of life between Rs. 4 lakhs and Rs. 40 lakhs p.a. is stark. Not like that between $40,000 and $400,000.

So if you are one of the millions of salaried, educated, middle class parents in India and you are thinking about the life your children are going to have, you are not thinking about self-esteem or creativity. You are thinking about simpler goals like how do I get my son into an engineering college? If your child shows just a little bit of promise, he will be entered into coaching classes every spare minute of the day. Or be sent to Kota. He will not have a life for two years of his childhood. Activities? Forget about it. You can’t make a living playing the flute. And no Engineering college needs you to have any extra-curricular activities.

Now imagine that you are that child. You made it into an Engineering college and then made your way to the US. How would you raise your kids? Probably the way Amy Chua did. Even though the income dispersion among college graduates is much lower in the US and even the bottom quartile of college grads have a pretty good quality of life, you raise your kids the way you were raised. It takes an effort to break away from your own upbringing. You may say, that’s why it’s cultural. But if it is, it wears off pretty quick.

The reason I don’t think this is culturally very deep set is because I can see how things can change within a generation. Even within India. Some of my friends in India would be called affluent anywhere, but in India they are in the top 1%. For their kids, they seek a more well-rounded education. Maybe they are wiser and know what really counts to get ahead. Or maybe they know that their own wealth gives their kids a safety net.

Does this parenting play out everywhere in the world? Probably not. I think there are a few conditions that are present in today’s India and China that make it so. One, the country must allow upward mobility. The economy has to be growing for there to be opportunities for talented graduates. Two, there should be a pretty sizable educated, salaried middle-class. That’s when parenting behavior becomes widespread enough to be deemed “cultural”.

Chart of the Day

This chart plots the trend line for Trade in Services as a percent of GDP. Trade in Services includes both imports and exports. The data is from the World Bank’s excellent databank.

Till the mid 90s India’s Trade in Services was growing at about the same pace as the rest of the world. Then suddenly it took off. We know why that happened.

That is a structural shift in the composition of Indian trade, BoP and GDP itself. And the Offshore services sector is still growing.

Comparing Chinese Manufacturing and Indian Services

I was doing some number crunching for the book and came up with this chart.

When you hear the phrase “outsourcing of jobs to India and China”, which you do often in American politics today, there is going to be a tendency to put them both on an equal footing. But the scale is enormously different. The gap is probably even wider than the chart indicates because the data is for Chinese goods exports to the US and Indian IT-BPO exports worldwide. Assuming that productivity ($/worker) in Chinese manufacturing is below productivity in Indian services, the Chinese jobs that depend on exports to the US have got to be more than 10x the corresponding Indian jobs. And yet, India plays nice with its exchange rate while China has an effective peg to the US dollar. Go figure.

The data is from OECD and RBI.

Currency Wars and India

Prime Minister Manmohan Singh in an interview to FT has said that he is “worried about the global situation” over rebalancing the global economy.

At the heart of the matter is what can be called currency warfare. Money is cheap in the western world. It seeks better returns. Better returns are in emerging growing markets like India and China. These countries are seeing huge capital inflows which put pressure on the currency.

China manages its currency. It is more or less pegged to the dollar and moves in a narrow range. This creates balance sheet issues for China – they need to keep sucking up dollars from the market, and buying US Treasuries with them, that offer low returns. But at least they protect their export competitiveness.

India on the other hand uses a much lighter touch on the rupee. Since September, the rupee has appreciated from 47 to nearly 44 rupees to the dollar. That has a tremendous impact on the profits and competitiveness of exporters like the Services industry.

Essentially, India is getting squeezed between an undervalued Renminbi and cheap money in the west.

I have never understood why informed opinion in the US defends the Chinese on this issue. Its not so much defending them as much as deflecting the criticism by saying “The Renminbi is not the problem. The US should look at itself to see what ails it – why are its students falling behind on Science and Math scores, what can it do to make its workers upskill etc. etc.” Which is hogwash. Yes, the US needs to look at these fundamental matters, but that’s not an argument for why the Renminbi should be undervalued.

None of this makes sense until you realize how much stuff big business in America manufactures or buys from China. Why would they want their dollar cost of imports to rise? US jobs be damned.

Some people argue that even if the Chinese loosened their grip on the Renminbi, and it rose say 10% overnight, it’s not as if jobs would whoosh back to the US. The difference in labor costs and the all-in cost of manufacturing is just too high.

So the undervalued Renminbi makes no difference to jobs in the US. But it does make a big difference to India. And other low cost manufacturing countries in Asia like Vietnam and Bangladesh. A fairly priced RMB could make India a very competitive destination for manufacturing.

Next month’s G-20 summit will see a lot of hot air, but almost certainly, no solution to this global quandary. The China-US game has reached a stalemate. India unfortunately is paying the price.

Where Will the Good Jobs Come From

Yglesias rebuts Ed Luce in the FT.

First, Ed Luce:

…a paradigm that has outlived its usefulness – the view that globalisation is an unmixed blessing for the US economy, and that America’s disappearing manufacturing jobs will be replaced by high-value jobs in the service sector. Things do not appear to be working out that way.

Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.

Yglesias rebuts:

In addition to my oft-made point that US manufacturing output is not in fact declining, it’s worth noting that the alleged need for R&D to be proximate to manufacturing options (plausible) cuts in both directions. Conventional wisdom is that manufacturing operations will all drift to low-wage countries. But if the USA is a better location for R&D than China, and if it’s strongly desirable to co-locate R&D and manufacturing operations, then many firms will want to retain manufacturing operations in the United States of America. So if this story is right, then more and better education for America is the key to retaining high-wage manufacturing jobs.

A few general remarks.

One, in my opinion, R&D’s proximity to manufacturing is less important than its proximity to the customer. In the case of Applied Materials, they mention both proximity to “manufacturing operations and to its biggest future market” as the reason for moving R&D to China. Luce and Yglesias pick up on one (manufacturing), but not the the other one (markets) which is probably the stronger driver. From the software industry we know that offshoring development (akin to manufacturing) while keeping design and product management in the US, is now more the norm than the exception.

Two, the US is unlikely to lose its edge on R&D. It has the biggest market by far in the world for anything and therefore the biggest playground for innovators in the world. It also has a lot of other things – the best talent from around the world, great universities, protection of intellectual property, venture capital etc. etc. Much has been said about the advantage that the US has in R&D. Now, in any market, new entrants will always be able to chip away at the leader’s share, just by positioning themselves to do something that the leader can’t do or won’t do. But even if some R&D goes to China and India, it won’t be of a magnitude that can impact the US hegemony over R&D.

R&D is not an end in itself. It is a means to an end. R&D itself creates millions of jobs but you have to have an advanced degree in Science or Engineering to get one of those. Not everyone will get (or want) a job like this. If the US continues to preserve and grow “innovation” related jobs, that is good, but not quite enough. Where are the millions of middle class American jobs going to come from?

This is a serious problem. The future of globalization might depend upon it. When manufacturing started moving to China, services jobs took their place. They were well paying (and a lot more comfortable). As now more and more of the white collar services jobs are being offshored as well, where will those middle class jobs come from?

Richard Florida might have the answer.

Among the fastest-growing jobs categories, according to the BLS, are what are called personal services – everything from day care and elder care to home health aides, food preparation, hair-cutting, home maintenance, and the like. These jobs are nearly impossible to offshore as they involve direct face-to-face human contact. A key platform in a national jobs strategy must include increasing the quality of these currently low-paying service jobs, turning them into higher-paying, family-supporting jobs.

Florida also says that these jobs have seen very, very little investment in technology and skills. Jobs pay better if they require higher grade skills. Jobs require grade skills if they are complex and need the use of tools and technology. Higher productivity can enable higher wages. Higher productivity requires the use of technology.

Why Pre Existing Conditions Must Go

In response to my previous post on healthcare reform, a reader writes in from India

…Why should an insurer agree to insure a pre-existing condition? It does not make sense to expect a business to agree to a proposition wherein it knows it will have to pay out 10x on a premium of x….

Insurance by its very definition is protection against the unknown. If the condition and its medical costs are known why take such a customer on board?

Methinks that the reason insurance premiums went up at your small business is because these guys figured out that they will now have to shell out treatment money for everyone and hence they are trying to do a CYA before overall costs go up.

For medical issues, I think either
– a public run healthcare or
– government rights to a percentage of facilities/medicines at institutions that it then distributes among the needy works best.

If there is no government healthcare in the US, it is only logical that average insurance premiums will go up for everyone if the insurance business is expected to mix humanitarian issues with cold-hearted business decisions.

The humanitarian side is actually the governments job. Making money is the private insurance business’s job. Why mix the two?

The main argument the reader makes is perfectly rational. Why should an insurer take on a pre-existing condition when they know they are going to make a loss on it?

They don’t have to today. And that is why we have over 30 million people uninsured.

My Personal Tale of Healthcare Insurance

I wanted to get this story out before the Sunday vote in the House. If you believe in healthcare reform, call your Congressman. Most of them will have their offices open tomorrow.

Here’s my personal experience with healthcare from this week. Our healthcare insurer Aetna informed the company that our premiums were almost tripling. For a family of four, our premiums would go up from just over $1000 to over $3000. Why?, we asked. That’s just the way it is, they said. We’re going to have to drop our insurance, we said. Yes, they said, we expected that. And that was that. If you are a business with a small payroll, you and your employees are at the mercy of the healthcare insurer.

So, now I have to go out and get insurance for the family. My wife’s employer, also a small business, offers insurance, but I thought I’d go out and see if I could get insurance directly.

I called Anthem Blue Cross. Nice lady at the other end. Took down all the details. Then we came to pre-existing conditions. I said my son had one and described it. She said that she’d have to put me on hold. She was back in less than 10 seconds. Anthem Blue Cross could not offer any insurance at all. Sorry.

I then called Kaiser Permanente. My wife’s employer offers Kaiser and I thought I’d see if I could something directly with them. Kaiser doesn’t decline on the phone, you have to put in an application, which may be declined (it’s more polite, but everyone spends much more time making and reviewing applications). The guy on the phone was helpful. If you get Kaiser at your wife’s company, take it, was his advice.

Now, we have options. Even if we didn’t have my wife’s insurance, we wouldn’t be out on the streets, if something were to happen. But for many Americans (over 30 million of them) there are no options. If they don’t have a job or they have a job that doesn’t offer insurance, and they have a pre-existing condition, they won’t get insurance. Hospitalization in this country can cost $20,000 and up. Which means that they could be just one major illness away from bankruptcy.

Now, about this bill. It’s a very, very long bill. If you really want to understand the issues it tackles, go read Ezra Klein. But basically it boils down to a few things. Health insurers should not be able to deny insurance based upon pre-existing conditions. It also bans recissions (kicking an insured person out) and life time caps (another cute trick to limit payouts). To make this work for insurance companies there has to be an individual mandate (everyone must get insurance).

Six months after the bill is passed, denying insurance based upon pre-existing conditions for children will become illegal. That’s when I’m going to call Anthem Blue Cross again. I can only imagine how many people are waiting with far more desperation for that six month boundary to be crossed.

Here’s where you find out who to call http://www.congress.org/

If you are calling right now, call your Congressman. If you read this blog, and you live in the US, you probably have a nice job and healthcare at work. If I were you, here’s what I would say to his or her aide on the phone:

Congressman (or Congresswoman) I have a nice job and healthcare insurance. I am calling you in spite of the fact that I have nothing to gain if this bill passes. That’s because I feel for those people who do not have insurance today or can’t get it. We cannot be a great country if we let our people sink into misery because we’ve let healthcare become the monster it is today.

Please fix healthcare by voting yes on healthcare reform.

Make Work Homework

A few years ago my son who is now in middle school got some vocabulary homework for English. It was a pretty long list of words. He was supposed to write the meaning of each word and then use it in a sentence. And then, get this, draw or download a picture from the internet that illustrates the word. The homework took thrice as long as it would have without the illustrations.

Now if you think about it, if the child has learnt to use the word in a sentence, there is little value in an illustration. Especially, since most of the words pertained to intangible things like “blatant”. If it were an art class I can still see some value in an exercise where students reflect and then draw a picture depicting “blatant”. But not for 50 such words and not for an English class.

There is a phrase for this kind of work. Its called “Make Work”. Basically teachers are giving homework just to make up the 3 hours or whatever of homework they need to give per day. Like many issues, there is economics behind Make Work Homework.

Public schools and most private schools in the US have a student-teacher ratio that has gotten higher and higher over time. Obviously, there are cost reasons for this. The primary driver of cost efficiencies in a school is the average number of students in a class.

A teacher spends time on preparing for class, grading homework and other small activities. The time required for preparing for class does not vary by the number of students in class. It also goes down with experience. But grading homework varies directly with the number of students. And it can add up to quite a lot of work. If the teacher is hard pressed for time, she can’t reduce the amount of homework given to students. But she can give the kind of homework that takes less time to check. The example I cite above is exactly that kind of homework – with asymmetric workloads for student and teacher.

I believe this is the root cause of Make Work Homework. It takes a lot of time for the student to draw an illustration and very little to eyeball it while grading. This asymmetry works in favor of the teacher. She can give the prescribed amount of homework and still keep her grading workload low.

This is not to say that anything requiring an illustration is Make Work. Not at all. Sometimes it is absolutely necessary. Visual learning can be very powerful. And sometimes it can be justified with the argument that children learn in different ways and at different paces. What may seem like gratuitous drawing and coloring to one student may be essential reinforcement of what is being taught in class for another student.

But a lot of what passes as homework for our children, is the product of a teacher trying to reduce his workload.

Copenhagen – the Mother of all Negotiations

Who hasn’t been in a tough negotiation? If nothing else, negotiating with your kids can often be most difficult. But the negotiations at Copenhagen summit and next year on climate change are going to be the hairiest negotiations you can ever imagine.

An FT article [pay wall] shines some light on why the negotiations were so difficult. The biggest reason is of course that these are multi-lateral negotiations. And different groups have different interests. Developed countries want developing countries to make commitments on emission reductions while not over committing themselves. They also want transparency in developing country emission measurement.

Developing countries don’t want emission reductions to get in the way of development. They want developed countries to pay for clean technology.

There are a also a whole bunch of developing countries in Africa who are not significant emitters but will feel the brunt of climate change. They have nothing to give in the negotiations but a lot is at stake for them.

And then there are also a few heads of state like Chavez, Morales and Ahmadinejad, who simply use the stage to take potshots at the US and the West. But they still have to be invited to party.

Obviously, 170 independent actors can never achieve any consensus. So groups were formed. US, UK, Germany, France as representatives of the developed countries and China, India, Brazil and South Africa as representatives of the developing world. But this still wasn’t enough to get an agreement. The bulk of the world’s emission in the next 20 years is going to come out of the US and China. If only these two countries had sat down and thrashed it out, we would have had a deal.

The world is not going to be happy with their leaders if they don’t put their shoulders to the wheel and get a deal together soon in the new year.