Friday, September 11, 2020

The Drèze DUET: Towards employment as a universal right

Published in Ideas for India, September 11, 2020.

Jean Drèze has recently proposed a "Decentralised Urban Employment and Training" Scheme, or DUET for short. In his words, "DUET could act as a step towards urban employment guarantee." The essential idea is for state governments to issue job stamps to “approved public institutions”, who would use these to pay wages to suitably registered workers. Workers would present job stamps and a work certificate (from the institution) for reimbursement directly into a bank account. I refer you to Jean's proposal for more detail.

I personally believe that we should push forward with the agenda of employment as a universal right, one that transcends rural versus urban. DUET would move that needle. With the rising tendency to displace labour – a trend that will only be heightened by the pandemic – such a right provides protection, at least to some minimal degree. So I support this proposal.

That said, there are many issues to be discussed, among them the funding of such a programme, its impact on rural-urban migratory balance in India, and the overall philosophy of employment as a right. I have views on these matters but leave these to my colleagues in this symposium. My comments pertain to two aspects. The first has to do with keeping track of workers. The second has to do with keeping track of projects.

The proposal requires workers to be drawn from a (presumably) local pool of registered workers. This takes me back to a long-held fascination with the framing of Indian policy, which often – if not invariably – involves a myriad regulations, some of which appear to have no real underlying objective, and most of which can either be gamed or create insuperable difficulties. Take this business of worker registration. It will invariably raise (for instance) the question of where millions of seasonal migrants really live. Presumably, the spectre of them double-dipping into MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and DUET, will raise its churlish head. We will then see bureaucrats making arbitrary decisions, horrendous quantities of paperwork to be filed, bonafide applications denied, and suspect applications accepted for political reasons.

If this were up to me, I would say: let India be India. Let a citizen of India work wherever s/he wants. Yes, to obtain income from the government, you need to register, as MNREGA job card holders now do, and a bank account has to be either provided or opened. You would then be permitted x days of government work anywhere in India; you, not your household. Say x is 100 days per person. If 40 of those 100 days get used up in a DUET project in Bangalore, then the remaining quota is 60, which – for all I care – can be spent on MNREGA or another DUET project in Kolkata. Of course that would not happen for the simple and sane reason that no one will want to shuttle between Bangalore and Kolkata to work on DUET projects. But let there not be a silly law – which will require all sorts of paper checks on local residence and accompanying scams and audits – that prohibits it.

If we want to nevertheless maintain the distinction between employment as a rural right and not as an urban right, then a MNREGA card can be given India-wide rights, while a DUET card holder can only be given city rights. A simple bank account with a yearly cap on government payments can easily monitor the rest. That would also take care of seasonal migrants who work in both village and city. However, that said, I would follow MS Dhoni and “keep it simple”.

The above arguments rely on the constraint that no more than a single bank account should be attached to any job card holder. Otherwise it is impossible to verify the yearly cap. This may require a link to the Aadhaar card, a potential bone of contention.

The second issue concerns projects. Groups of workers could still collude with organisations or employers, and pocket job stamps without doing any work, while the ‘employers’ pocket cash payments from the workers. Jean mentions "approved institutions – schools, colleges, government departments, health centres, municipalities, neighborhood associations, urban local bodies, etc." He also mentions "placement agencies" that will oversee the projects and presumably weed out scams. Sadly, it is turtles all the way down. I can see each of these ‘august’ bodies – or the relevant functionaries in these bodies – handing handing out job stamps in exchange for cash payments. A net injection of funds – as DUET surely calls for – spawns these financial opportunities by definition.

While I agree that the use of a placement agency could weaken collusive bonds, I have enough faith in the ingenuity of all human beings that I would not bet on it.

This is a hard problem. Collusion could be avoided by a system of ex-post project approval, but this will weigh heavily on honest employers. While approval is given after the project is completed, workers would have to be paid up front: they have gone home already (or should have) with their stamps. Then, must honest employers take on the risk of not having their project approved, perhaps by some government functionary who is holding them up? Who pays the workers then?

Some of my colleagues might feel that this is a second-order problem. Well, the graveyards of Indian public policy are littered with such second-order problems. The least we can do is try and avoid adding more skeletons. Here is a two-pronged suggestion:

Randomly audit projects using an oversight board, with stiff fines for fake projects – that much is obvious – but I suggest we reward the auditor with a proportion of those fines.

Yes, of course, that immediately raises the problem of harassment – that genuine projects will be touted as fake by auditors. There must be guidelines for the documentation of satisfactory project completion that cannot be contested by auditors: for example, photographic proof of trash removal, construction jobs, whitewashing of buildings, and so on. This creates a restriction, alas, on the kinds of projects that can be taken up. Specifically, the projects will have to be relatively long on measurable physical output and relatively short on hard-to-measure services. That could be a problem, but less of a problem than relying on the goodwill of some oversight authority.

In this context, I end with a comment on subsidies to existing business. Imagine awarding job stamps to existing employers – perhaps non-profits – to subsidise a fraction of labour costs. As Jean observes, this could have a lower employment impact in the net – that would depend on how much capital-labour substitution a firm is willing to do, while at the same time a given budget of stamps goes further.

All that is worth thinking about, but the point I want to make is that the fake-worker problem is attenuated with cost-sharing. Say the subsidy rate is 50%; then an employer with one employee could effectively get a second for free. If that second employee has zero marginal product, then the scheme is subject to the same level of gaming as before. But if the employee has a positive marginal product, the incentives for gaming substantially decline. In this sense, when costs are shared on existing business activities and are not fully borne by job stamps, there is a lower overall incentive to game the system. The potential disadvantages are: the output of that business may not be what we want to promote, and the net employment gain could be lower.

I hope these comments are viewed as constructive and not at all negative, because this DUET is worth playing.

Monday, August 17, 2020

Dipak Banerjee

These are transcribed notes for a short talk on Dipak Banerjee.

Dipak babu has had a fundamental impact on my life, not just on my professional career, but also on the way I think. Dipak Banerjee, Mihir Rakshit and Nabendu Sen --- three great professors at Presidency College --- all did research to varying degrees, but first and foremost they were deeply devoted to teaching.

In early 1974, I was 16 years old, and had just been granted admission to study at IIT. I was moving close to making a final decision on the IIT campus when I came across Paul Samuelson's book, Economics. It jolted something in me (of course, it must have been present before but perhaps I was not fully aware of it), and it soon became obvious that I was not cut out for an Engineering degree. It would have to be either pure mathematics or a subject with a strong social component. So I decided to take the entrance exam to study Economics at Presidency College, and I also took the ISI entrance exam. At that time, the Presidency exam had two components, English and Mathematics, and when I went back to the College to get my results I found I had done well. That was the first day I met Dipak babu. You walked into his office via an anteroom. To the right as you entered sat Dipak babu, smoking his ever-present Charminar. On the left wall was a large blackboard. I will tell you more about the blackboard in a little while.

Dipak babu wanted to know what my options were, what I wanted to study. I told him I was stuck between Engineering and Mathematics, with Economics in between. He said that I should do Economics, that I could study all the Mathematics I wanted along with it, but that there was a philosophical touch about Economics that I would be drawn to. Maybe I am romanticizing the past, but from a distance, it seems that Dipak babu already had a better idea about me than I did about myself.

Our first classes at Presidency College were truly inspirational. Even leaving the professors out, I was inspired (and a bit intimidated) by my classmates, all of whom seemed to have won an award in their schools, and most of whom were incredibly well-read and wide-ranging in their knowledge. There was an even balance between males and females, and the atmosphere was very lively indeed.

Dipak babu taught us Microeconomics, Mihir babu Macroeconomics, and Nabendu babu taught us Economic History. There were other excellent professors, but for me these three stood out. Dipak babu would walk into the classroom, generally in a bush shirt and trousers. He would invariably look a little absent minded. There was a sink in the room (why was it even there?), and he would spend some time twisting the tap, presumably to make sure it wasn't leaking, but more likely he was gathering his thoughts for the lecture. Then he spoke. He was a striking-looking man, and his English accent (very British) only added to the aura and legendary tales that swirled around him. Apparently he had dropped out of the very same college that we were all now in,  as a chemistry student, and then set sail for England. He worked in England (was he a coal-miner? an assembly line worker? a kitchen hand?). The more proletarian the work the cooler it was --- it added to the legend --- and on the side he had apparently taken evening classes in economics at the LSE, and had come to the attention of the great John Hicks, who had encouraged him. He had even published a paper on the continuity of the lexicographic ordering. To me, he was the very embodiment of "cool." 

And he was quick, very quick, with his wit, and with his ability to engage in repartee. We all admired him, we all respected him, and we were all intimidated to some degree, but we were never scared of him. One of my classmates, Abhijit Sengupta, wasn't even intimidated apparently, because the following exchange occurred in class:

Abhijit: <answers a question wrong, but otherwise unperturbed>

DB: "Tumi gadha. Jao giye goru chorao."

Abhijit (very quick): "Sir, gadha hole guru chorabo kemon kore?"

DB (just as quick): "Ohe, sheta jaanle ki aar gadha hote?"

[Rough translation:

DB: "You're a donkey. Go herd cows."

Abhijit (very quick): "Sir, if I'm a donkey how would I herd cows?"

DB (just as quick): "Ohe, if you knew that you wouldn't be a donkey to begin with."]

I remember that some of us were trying to do some research even in our first year. Shubhashis Gangopadhyay and I took our first efforts to Dipak babu. He read the notes carefully, then recommended we ask Dilip Mookherjee (then a third year student and already a mini-legend in his own right) for advice. But what was Dipak babu thinking? He was reading the attempted research of his students and treating us as fellow-scholars. He was directing us to other students --- who he respected --- for peer advice. What kind of atmosphere was this? Then, it seemed natural, but looking back, I see how incredibly special it was.

Not soon after that Dipak babu had a question for me: "[Kenneth] Arrow'r lekha porechho?" ("Ever read Kenneth Arrow?") When I said I hadn't, his reply was, "Porbe? Kintu shoptae ek baar eshe amaar shonge alochona korte hobe." ("Do you want to? But you'll have to come in once a week and discuss it with me.") Even writing these lines makes me emotional, because this was nurture at its best. My parents were wonderful people, but they were not academics and could not nurture me along this dimension. Dipak babu could, and I grabbed the opportunity. It was amazing. There I was, all of 17, reading one of the greatest intellectual works of the twentieth century, and every week I would be in Dipak babu's office, and he would ask me questions. The method was Socratic. Dipak babu would ask, and I had to go to the board to reply. I was apprehensive but again, never scared, and this continued. After Arrow came a mathematically much tougher book, Gerard Debreu's Theory of Value. Back I went to the board. The questions came non-stop: always probing, always direct, but never aggressive. I did not know then that I was experiencing a teacher at his best. I know it now, and to this day, when a first year undergraduate or even a school student in new York emails me to set up a meeting, I can never say no. 

It was especially because I came from a non-academic setting, that this was magical for me. I had only one goal: to master the material so that I could dissect it with my teacher, and he (I now imagine) was fulfilling an implicit promise to me --- that I would see and appreciate the philosophical beauty and logic of economic theory. Only much later did Abhijit, his son, tell me that I was one of Dipak babu's favorite students. Maybe Abhijit told me that to be nice, but now that Dipak babu isn't around to confirm or deny that assertion, I would like to believe that it was true. But what is more important to me is the time he took --- over and above his duties to teach classes or mark exams --- to truly engage with me, to teach me in the truest sense of the word. And for this my gratitude and respect know no bounds.

Monday, March 30, 2020

The Micro and the Macro of Covid-19

Or, The Case of the Invisible Denominator

I've been chatting with Jay Bhattacharya, Professor at the Stanford School of Medicine, and co-author of a very thought-provoking piece on mortality rates under covid-19. Briefly, these authors study incidence rates in three cases where either a full census of tests was conducted, as in the Italian town of Vò in Padua, or where a random sample was drawn, as in Iceland. Using incidence rates for covid from these cases, they suggest that the fatality rate for covid is far lower than we think, or fear. 
Going beyond these cases, the problem, of course, is a missing denominator: just how many are infected? Assuming we accurately know the deaths from covid-19 --- possibly not, but setting that aside --- the unknown denominator of actual cases moves us along an "isoquant" of fatality rates and contagion rates, which multiply out to the known deaths. The higher the contagion, the lower must be the fatality rate, for some given number of deaths. Where we are on that isoquant matters immensely for policy, especially in poor countries. (For instance, while I certainly hope that these musings do not form the basis of a dramatic Trumpian re-opening any time soon, I would also hope that they could be used to inform the wisdom of a lockdown in a poor country like India.)
In this post, I argue that a bit of common sense and some data can go some way towards unearthing the true fatality rate from covid-19. I will do that first, and then turn to the implications.
Here is the sequence of cumulative deaths for New York State, starting March 14 and ending March 29: 2, 6, 10, 17, 27, 30, 57, 80, 122, 159, 218, 325, 432, 535, 782, 965. (Thanks to the New York Times.) I think it is fair to say that as the numbers settle in, there is a doubling every 2 days.
(I am sure this doubling pattern is going to die out soon --- that last number 965 pertains to incidence on March 8-15, 14-21 days ago, and after that arrived the lockdown, upon which transmission rates will probably slow significantly, but we will have to any case, I am not basing any of what follows on these projections.)
If the death rate is assumed constant, then incidence in New York has probably been doubling every 48 hours as well, say over all of February to mid-March. Maybe earlier? Who knows? On the other hand, maybe the doubling conclusion every 48 hours is too much, because initial covid deaths were probably attributed to other causes, but still, 2-3 days does not seem like a crazy observation.
If that last number --- 965--- is attributed to the deaths from covid incidence 14-21 days ago, and if we assume a fatality rate of 1%, then the number of active cases on March 8-15 was around 100,000, which would mean that there were only 3 real cases in New York around February 8-15, assuming 48-hour doubling, and fewer than 100 cases with 72 hour doubling. Can that be? That looks unacceptably small, given that NY was almost surely seeded by January. I can therefore conclude that a fatality rate of 1% is way too high.
On the other hand, if the fatality rate is around 0.1%, which is that of the flu, then that same number 965 suggests that 1m people were infected in New York State around mid-March, and around 30-1000 in early- to mid-Feb, depending on whether you go with a two- or a three-day doubling and a 14- or 21-day lag. Even with a three-day doubling, the upper number of 1000 could look a tad on the low side, but here I am far less sure. That calls for a fatality rate around 0.1%.
There is no way we can go far below this estimate. If we get super-optimistic with a fatality rate of 0.01%, we have 10m infected on Match 8-15, close to complete saturation for New York State, which has 20m people. That is plausibly implausible.
We are playing with exponentially changing objects, which are incredibly delicate. But I don't think that fatality rates around the flu are ruled out at all.
I can imagine that a perfectly reasonable reaction to all this would be: let's wait for population level sero-prevalence tests instead of speculating. And indeed, Bhattacharya is involved in conducting them as we speak. But I am personally convinced by the above mixture of reasoning and common sense that what we are dealing with here is a virus with mortality rates that are roughly comparable to the flu. They could be somewhat higher, but not by much: we will only know for sure when the dust settles.
Which then brings us to the obvious question: if the above is correct, what explains the swamping of hospital capacity, the deaths we see, the horror stories of triage that we read? The answer is simple: Covid is seriously more contagious than the flu.
According to the Center for Disease Control, "influenza has resulted in between 9 million – 45 million illnesses, between 140,000 – 810,000 hospitalizations and between 12,000 – 61,000 deaths annually since 2010." That's, on average, less than 10% of the population every year. (To be honest, these estimates seem a bit low to me.) This is nothing compared to covid-19, which can easily infect half the population, and probably more. Imagine the comparison between 10% and 50%. Imagine we had a really nasty flu year, with the same benign household flu, but affecting half the population. There would be an unimaginable crisis, and people would be spilling out of hospital beds just as they are so tragically doing now. That is the macro picture.
At the same time, what would it look like to you, trapped in this nasty flu season? You and I would probably go, "Oh man, this year looks bad, it's really going around, everybody has it." That is the micro picture. 
There is, of course, still the same social case for a lockdown. But in our current panic-stricken way? Not really.
Ok, you might respond. But what about these objections?
1. Covid is nasty. (You know who said that.) People die horrible deaths from it.
That may or may not be true. People who die of the flu die of the pneumonia that the flu causes. In the end, one drowns to death, which is not a pleasant way to go. But barring data to the contrary, I don't see the difference.
2. Covid is particularly bad for those with pre-existing conditions. That is most definitely true. But if disease C and F have the same overall fatality rate, and one of them, say C, has greater variable impact depending on pre-existing conditions, then it could be easier, not harder, to deal with C, because you can tailor your behavior to your conditions, and you can't do that with F. (You could feel anxious about that, I agree, but it gives you more wiggle room.) 
3. Covid is more likely to send you to hospital. Let's go back to my CDC quote above: the flu results in 140,000 – 810,000 hospitalizations and between 12,000 – 61,000 deaths. That's about 12 hospitalizations per death. Covid appears to result in about 10 hospitalizations per death. Now, that does not tell us what the hospitalization rate is (that pesky missing denominator once again), but if you believe my arguments about a comparable death rate, you will have to agree that the hospitalization rate is not much different for the flu (the latter looks slightly higher, actually).
What implications does all this have for our daily lives? 
First, what I see around me is a mass freaking-out (yes, I'm included) that just makes no sense. This is assuredly not a freaking-out from the desire to be socially responsible and not overwhelm the hospital system, which is a thoroughly laudable objective. It is a primeval freaking-out, from the fear of being sick oneself.
Second,  and related, think of our current reticence to go to the doctor now. Again, if we have something that's significantly worse than having the flu (say, abdominal pain or a broken toe), we would go to the doctor in a bad flu season. Well then, we should also go now. Or at the least, our fear of catching covid-19 should not stop us.
Third, we should rethink lockdowns in poor societies where the implications are far worse than they are here. Here, we should compensate for those who lose their livelihoods. In a country like India, we cannot, even if we should. We need to rethink those policies.
One can reconcile macro-mayhem with micro-sanity.
This post was edited for an elementary arithmetical error, thanks to my dear friend S. Subramanian.

Friday, March 27, 2020

India's Lockdown

(with S. Subramanian and Lore Vandewalle, a shorter version of this CEPR publication)

On the 24th of March, the Government of India ordered a nationwide lockdown for 21 days as a preventive measure against the coronavirus. The lockdown restricts 1.3 billion people from leaving their home. Transport services are suspended. So are services, factories and educational institutions. The lockdown has generally met with approval from international institutions such as the WHO, and is in line with what is deemed appropriate in economically advanced countries. For instance, Francis Collins, Director of the US National Institutes of Health, writes: “[W]hat we need most right now to slow the stealthy spread of this new coronavirus is a full implementation of social distancing.” 
The framing in these countries is “lives versus economics,” and by and large it is the right one. As Paul Krugman puts it (New York Times April 2), “most job losses are inevitable, indeed necessary … we’re going into the economic equivalent of a medically induced coma.” But the grim truth of Indian occupational structure and poverty highlights a shifted reality for poorer societies as they confront the pandemic: that a comprehensive lockdown is essentially a choice between lives and lives.
Specifically, given what we know of the epidemic, it is difficult to quarrel with the prescription of social-distancing and lockdown, when accompanied by State measures that provide adequate economic protection. We defer entirely to this prescription. But what happens when the State is unable—for reasons of fiscal capacity, or information, or poor targeting, or the sheer lack of political will—to provide the necessary back-up welfare measures? Then lives are at stake with or without a lockdown, and pragmatic morality requires a reworking of the alternatives. Appropriate policy stances may depend on precise epidemiological features (are we speaking of a high fatality-low infection regime or a low fatality-high infection regime?), on the society under stress (is it relatively affluent or relatively deprived?), and on the consequent distribution of lives lost under a prolonged lockdown (demarcated by economic status from the loss of livelihoods, or demarcated by age from the spread of the disease?).
This is the quandary explored in more detail in Ray, Subramanian and Vanderwalle (2020). We describe several features of Indian society that make for difficult choices. First, over 20% of all households make their major living from casual occupations, and so are particularly fragile in their ability to cope with an indefinitely imposed economic lockdown. Second, and related, well over half of India’s GDP is produced in the “informal sector” where transactions are largely outside the fiscal reach of the government. These sectors cannot switch overnight to an online economic existence, though it is possible that some fraction will have reciprocal long-term relationships with better-placed Indian households. Third, the estimates of savings that we do have suggest that liquid (or even illiquid) assets alone will not suffice for a three-week lockdown.
We then discuss the limited reach of policy. Some of the features just described make it hard for the government to provide directed (or targeted) transfers to the vulnerable. One can move away from this low-information benchmark in two different directions. There is the possibility of universal transfers, a policy that gives up on targeting altogether. Such a policy is not infeasible, but it is necessarily expensive and inefficient. Or one can rely on transfers that exist under “self-targeted” programs, such as the National Rural Employment Guarantee Scheme. It is unclear that the recently announced relief package of roughly USD 24b comes anywhere close to the quantum of what is needed, or that informational constraints will be fully understood and respected in the implementation of that package. So there are questions of both willingness and competence characterising State intervention.
It is imperative, in this time of crisis: (a) to pursue policies that are feasible; (b) to avoid draconian measures which many citizens cannot afford; (c) to not criminalize individual actions triggered by the need for survival; and (d) to communicate State intent in credible, unambiguous, and specific terms. Faced with these constraints, we submit the following proposal for critical evaluation. Like every alternative, this proposal has its limitations; see especially the discussion surrounding item (iv) below.
(i) All available data suggest that the death rate from covid-19 for people between 20-40 is comparable to, or lower than the overall death rate for all ages from influenza. With qualifications, one could argue that if it is acceptable for people of all ages to move around freely in the presence of influenza, it should be acceptable to allow (not force) all adults under 40 in India to work freely at the present time.
(ii) This measure can—and must—be supplemented by antibody testing as such testing becomes widely available, and as antibody stocks in the population build up. It is imperative that everyone certified under an antibody test should be permitted to work as well.
(iii) Later, as the infection rate subsides, new measures can be taken to move “up the age distribution” for work-permits.
(iv) Protection of the elderly and the very young must be left (though not entirely) to households, who will possess the incentives and motivation to provide for and monitor such protections. As indicated in the previous sentence, this is very far from negating the role that public support can play here. It is crucially important for the State to provide facilities for visiting, testing, isolating and treating older patients.
What is involved is a form of self-selection: people who can afford the luxury of staying at home will do so, while those that cannot will opt to go to work. As with many self-targeted outcomes, this one too is unfortunately mediated by the inherently inequitable prospects confronting our citizens: the laboring poor will exercise the option of working, while those with more secure fallback options will stay at home. But at least the poor will not be confronted with the involuntary contingencies of life-threatening economic shortfall.
The advantages of this proposal are clear: it allows most Indian families to keep a lifeline open, and in so doing it suggests a measure that is (relatively) equitable and balanced across income groups. It shifts the demands of social responsibility from a policy that relies on high-mindedness and concern across households to one that relies on altruism and care within households, which is always a good thing except in the eyes of the most utopian optimist. Finally, it is also worth remembering that India is a young country—just 5.1% of her population is 65 or older.
We highlight two points of vulnerability on which an evaluation of this proposal must rest.
1. Will the elderly will be adequately protected? It is true that our proposal gets older individuals out of the direct workforce, and it asks for protective measures primarily within the family, supplemented by State-assistance across families. But motivation and incentives are one thing, and household capacity is another. And yet, intergenerational contact cannot be fully avoided under any policy. While no measure is ideal, ours relies on the self-interest of households rather than a generalized notion of the social good.
2. Won’t this measure increase the overall incidence of, and deaths from, Covid-19? Alas, it will. If disease minimization is our objective, then the solution is a complete lockdown, even in the absence of State compensation. But: must we neglect the immense burden—in terms of human lives and suffering—that a comprehensive lockdown must place on the majority of the Indian population?
This last query leads to a closing thought. The debate of “lockdown versus economy” assumes very different political hues in economically advanced countries and in India. In the United States, for instance, we support a lockdown without hesitation. The SARS-CoV-2 virus is contagious—far more so than the flu—and even if individual mortality risk could be comparable across covid and flu (conditional on being infected, that is), the overall strain on the health system is enormous. It is true that the economic effects are also large—certainly so  in a high-inequality, restricted-social-net country like the United States—but at least, in that country, one has capacities needed to make people whole: starvation is not first-order. In India, it is first-order.

Sunday, August 25, 2019

The Trumpet

I recently had occasion to revisit Edgar Allan Poe's masterpiece, "The Raven." If you have not read The Raven, you must. Maybe it's meant to be a forlorn lament for Poe's Lost Lenore, but I found it incredibly funny. Here is the first of several verses (to read the rest, click here):

Once upon a midnight dreary, while I pondered, weak and weary,
Over many a quaint and curious volume of forgotten lore—
     While I nodded, nearly napping, suddenly there came a tapping,
     As of some one gently rapping, rapping at my chamber door.
“’Tis some visitor,” I muttered, “tapping at my chamber door—
     Only this and nothing more.”

The Raven is written --- wait for it--- in trochaic octameter, with a difficult yet utterly enchanting lilt. David Pearce and I like limericks (and so does Dipankar Dasgupta, in Bengali no less!) but this was something else. Irresistible. So I offer you my attempt at (approximate) trochaic octameter, inspired by the great Poe. Feel free to send me additional verses!

The Trumpet

Once upon a midnight dreary, a wintry month both bleak and weary
An 8th November dark and bleary, now part of human lore ---
     At the tv we sat staring, as around the news kept blaring
     A revelation starkly glaring, one never heard before
Who was this, of orange bearing, scarcely imagined before?
     'Twas a Trumpet, nothing more

With orange mane so starchly tended, with corpulent mien distended,
With anger by his tweets subtended, this beast of blood and gore
     Had seized the Office of the Land, like pussy in his tiny hand,
     Had desecrated Good and Grand, at last he'd got to score
Yet what said he, this orangutan, once he had got to score?
     Quoth he, harrumphing: "Gimme more."

Perched fatly on an escalator, there he'd stood, the Orange Hater
Cursing Mexicans and Muslims and immigrants and more:
     "If I killed someone (just for sport), I know I'd still have your support,
     The facts I gladly will distort, I'll make up lies galore!"
"How would you win," a rival asked, "with all these lies galore?"
     Quoth the Trumpet: "You're a bore."

So there he smirked, inaugurated, his crowd-size promptly overrated,
Grimacing and gesturing, and growling as he swore:
     "Tax cuts for the one percent, that's what I'll do as President;
     And screw the rest --- that's my intent --- now that I have the floor."
"A dash of kindness..." asked the Public, "now that you have the floor?"
     Quoth the Trumpet: "Fuck the Pore."

Down in sunny Mar-a-Lago, nursing a mal estomago
The Trumpet flatulently burped a million tweets and more:
     "Plummy posts for loyal faces!" "Blacks had better know their places!"
     "Shithole countries are disgraces!" --- an unremitting roar.
"Could we tone down," asked the Public, "this vile and noisome roar?"
      Quoth the Trumpet: "Whatever for?"

Perchance with all the hi-falutin' maneuvers with Kim and Putin
The Trump will lose his plumpy footin', and wash up dead ashore
     No shithole place will be so crass, to breathe a Prayer or a Mass
     Thus may his fat recumbent ass decay for evermore
So we can turn, and then return, to the glory days of yore
     Quoth the Trumpet [off-stage]: "Nevermore!"

Postscript: I've discovered, to my gentle dismay but great admiration, that I am not the first to write about a US President in trochaic octameter. Here is a brilliant example by Frank Jacobs, from issue 265 of Mad magazine, September 1986. (There may be others.)

Wednesday, March 1, 2017

Kenneth Arrow, 1921-2017

Professor Kenneth Arrow died on February 21, 2017, at the age of 95. He was widely regarded (along with Paul Samuelson, John Hicks and possibly --- depending on tastes --- John Maynard Keynes, Milton Friedman and Gary Becker) as one of the greatest economists of the 20th century. He also happened to be my favorite economist of all time.    

Professor Dipak Banerjee, my teacher, introduced me to Kenneth Arrow in 1974, who appeared (much in the manner of Hindu god[desse]s for whom my mother has special reverence) in the form of a small yellow paperback. I acquired Social Choice and Individual Values from Dasgupta and Co. of College Street, and still have it. I was a first year undergraduate. That little book was a repository of the most profound logical thought. I had never seen anyone distill what appeared to be an abstract question in political economy into a theoretical device that cut sharply, and cut deep.

What was the question? Briefly, it was well known from the so-called Condorcet paradox that majority voting could produce nasty cycles in choices, even when the individual preferences involved in that voting process were perfectly reasonable.  That led to the question: was there any political system that could “reasonably” aggregate individual preferences? Now think about the question for a second: we know what majority voting is, but there is in principle an infinity of other systems. How could one ever formulate such a problem, let alone attempt to answer it? The very formulation — as axioms placed on an abstract mapping that connected individual preferences to their social counterpart — was sheer genius. But the apparatus was not only beautiful: it could also speak. It argued that under the minimal desiderata placed on the aggregator, there was no way of putting together individual preferences into a satisfactory social ordering; one that was cycle-free.

Arrow had received the Nobel Prize just two years before this encounter with him. He was just 51 years old, by far the youngest Laureate then (or since) in Economics. I ran off to the National Library in Calcutta to dig out the Nobel citation, excitedly anticipating a homage to my beloved Impossibility Theorem. Yet oddly, the The Nobel citation mentions Arrow’s monumental theorem only at the very end, and almost in passing. It focused instead on Arrow’s (and Hicks’s) contributions to general equilibrium theory:

“[Arrow] provided the basis for a radical reformulation of the traditional equilibrium theory. Through this reformulation, which was based on the mathematical theory of convex sets, the general equilibrium theory gained both in generality and in simplicity… The model presented in this paper became the starting point for the major part of further research in this field. Among Arrow's many important contributions should also be mentioned his development of the theory of uncertainty and its incorporation within the frame of general equilibrium theory and, furthermore, his analysis of the possibilities for decentralized decisions in a society where the price system is fixed by the central authority… As perhaps the most important of Arrow's many contributions to welfare theory appears his ‘possibility theorem,’ according to which it is impossible to construct a social welfare function out of individual preference functions.”

This was disappointing as far as my current passion was concerned. But it was also exhilarating: because there was more! (Later, I realized just how much more.) Back I went to Professor Banerjee. I wanted to know why general equilibrium was not just a question of several equations in the same number of unknowns, and what all this was about “the mathematical theory of convex sets.” In response, Dipak-babu helpfully produced another small tome by Gerard Debreu. This was based on the work with Arrow. Though certainly more mainstream this time in its questions, the techniques went way over my 17-year old head. Briefly again, the theory of general equilibrium in its purest form would need to deal with highly interactive systems of demand and supply, to which the simplistic logic of counting equations and unknowns did not apply well. Moreover, one would need to allow for not just single-valued functions describing supply and demand, but for choices that would sometimes be multi-valued, both for consumer and for producers. The resulting search for equilibrium would have to come from a deeper mathematical base. As I slowly began to follow the argument, I realized that this was no mere technicality. The idea was to take the philosophy of Adam Smith to its logical end, to establish the most fundamental conditions under which a general equilibrium could be said to exist, and to display its welfare properties. It was another tour de force in philosophy, of the kind that philosophers rarely would — or more aptly, rarely could — engage in.

It is noteworthy that Professors Arrow and Debreu had very different goals that drove their joint research. For Debreu, the theory of general equilibrium was the philosophical culmination of his work. He personally told me that he considered the two welfare theorems  celebrating Smith’s invisible hand to be the crowning glory of economic theory. In contrast, for Arrow, the very same results delineated an idealized frontier beyond which markets ceased to function with full efficiency. The theory of general equilibrium, with its attendant theorems that spoke to the magic of markets, were stakes driven into the ground to mark his explorations beyond. In April 1978, Arrow summarized this view in a lecture delivered at Columbia University:

“[I interpreted] neoclassical economic theory and particularly the then new and rapidly developing discipline of welfare economics as pointing to an ideal efficient economy rather than the actual one, marked both by massive unemployment and by monopolistic distortion… In true Hegelian fashion, capitalist instability and the socialist counterattack seemed to be synthesized: it seemed possible to have an economy that retained much of capitalist drive and initiative and yet gave room for the government to intervene to avoid at least the worst inefficiencies of unemployment and the idling of other resources. I accepted provisionally what seemed to be a widespread consensus in the euphoria of postwar economic growth. The state had an active role to play in maintaining effective demand and in dealing with the many imperfections of the market system revealed by theoretical welfare economics — the overcoming of market failures and monopoly and the realization of economies of scale…

I have spoken of a provisional acceptance. I still felt it important to explore more deeply the possibility that socialism was a superior possibility. I was more aware of the complexities of operation of a socialist system and sought to develop more deeply the theory of such a system. I also sought to explore more fully the criteria for a democratic social organization… [Today,] the apparent pause in economic growth, the crisis in stabilization policy occasioned by the current inflationary threats and realities, and the loss of purpose in redistributional measures all combine to raise anew the question of alternatives to capitalism.”

Yes, Arrow did make a cautious case for socialism. To me, it was particularly interesting that in the end, the case was made not on the positive grounds of inevitable destruction of the capitalist system, but rather on the normative grounds that such a system could be rife with inefficiencies and unequal treatment.

But the similarities with wishy-washy proponents of one “system” over another end there. Arrow was already deeply concerned with the problems posed by the asymmetry of information, and the efficiency with which the market could deal with such asymmetries. There were others who followed similar paths: among them Leonid Hurwicz, Roy Radner, Jacob Marschak, George Akerlof and Michael Spence. Asymmetries of information lay at the heart of theories of organization, contractual relationships, peculiarities in markets such the market for health, and even theories of racial discrimination based on statistical considerations. It is fair to say that Arrow made deep contributions to all these areas of research. In Arrow’s own words:

“My research, even before 1972, moved in directions beyond those cited for the Nobel Memorial Prize. Most of it, in one way or another, deals with information as an economic variable, both as to its production and as to its use. Two 1962 papers studied the efficiency with which the market encourages innovation and the implications of learning by doing for economic growth. In 1963 and later papers, I pointed out that the special market characteristics of medical care and medical insurance could be explained by reference to differences in information among the parties involved. Later themes included a specification of the demand for information and the implications of information as an economic input for returns to scale. Another area of study was the economics of racial discrimination.”

Arrow’s contributions to the economics of information are fundamental. In similar vein, I believe that his research into  learning by doing and economic growth is also an attempt to break free of the first-best world so lovingly described in Debreu's A Theory of Value. The short paper on learning by doing is a modern classic, foreshadowing a modern literature on endogenous growth:

“Though doubtless no economist would ever have denied the role of technological change in economic growth, its overwhelming importance relative to capital formation has perhaps only been fully realized with the important empirical studies of Abramovitz and Solow. These results do not contradict the neoclassical view of the production function as an expression of technical knowledge. All that has to be added is the obvious fact that knowledge is growing in time. Nevertheless a view of economic growth that depends so heavily on an exogenous variable, let alone one so difficult to measure as the quantity of knowledge, is hardly intellectually satisfactory…

"The theorems about the economic world presented here differ from those in most standard economic theories; profits are the result of technical change; in a free-enterprise system, the rate of investment will be less than the optimum; net investment and the stock of capital become subordinate concepts, with gross investment taking a leading role.”

As a graduate student, reading all this in late 70s and early 80s, I viewed Arrow as a thinker who could both ask the deepest questions in economic and political philosophy, and at the same  time use mathematical arguments with ease and utility to answer them to a substantive degree. This was someone who could put past accomplishments into perspective, leave them behind, and seek to look beyond to newer and more difficult concerns. Such were the nature of his forays into questions of incomplete information, pervasive externalities, increasing returns and interpersonal equity. There was just one word for it: inspirational. The inevitable reaction was not long in coming: I wanted to be like Ken Arrow. Surprise surprise, that was not destined to happen. But something else did: I had the immense good fortune to become his colleague at Stanford.

I was at Stanford on a job flyout, at the very beginning of 1982. I had been warned about the meeting with Arrow. Apparently, all I had to do was tell him the assumptions of my model and then, before I could get any further, he would proceed to tell me all the results that could conceivably be proved from those assumptions. This was unnerving news. But nothing of the sort happened.

I walked into his office. It was small and cluttered, full of books that went up high. It had a vertical rather than horizontal feel. Arrow himself gave the opposite impression. He was shorter than I had expected, strong, rooted to the ground. The man seemed to be in constant motion. He was both brisk and welcoming. He was wearing brightly colored suspenders, and there was an immense bicycle helmet on his desk. (I did not then realize that these, along with the perennially flipped pencil at seminars, would be an intrinsic part of my later memory of him.) I began talking about my work. It was a bit of an out-of-body experience; I could see myself talking to him. Arrow listened very closely. There was an intensity of gaze that never wavered, except when he would start speculating, during which he would look up at the ceiling and back to me. He asked questions non-stop. He talked very fast, the words tripping over one another, the tone uneven, the sentences clearly struggling to keep up with the flow of thoughts. He didn’t exactly anticipate my results. But after 15 minutes, I had a second eerie sensation: that I was talking to someone who  had thought about my problem for a very long time. This was a weird feeling that I came to associate with Arrow over the next few years.

When we finished our meeting, I summoned up the courage to quote Joan Robinson on Bagicha Minhas and the CES production function: “It is a sad comment on the state of our education that a talented young man be brought from India to be bamboozled like this.” He roared with laughter and said, you can put that up on your office door if you come here. I did.

The interaction with Arrow was pretty much a constant thing. He was teaching History of Economic Thought at the time. I was ploughing through Schumpeter’s book and sat in on a few lectures. I would have thought his favorite economist was Walras. But it wasn’t, it was Cournot, and the choice now makes complete sense. Arrow had long moved away from general equilibrium and he was now firmly in the world of imperfect competition. Cournot’s notion of equilibrium — now Nash’s — spoke to him more forcefully than a price-taking system. (He had, of course, long worried about the existence of the Walrasian auctioneer, who was supposedly setting these prices in the first place.) Arrow invariably spoke of Cournot with great enthusiasm.

Less enthusiasm was shown towards the neo-Ricardians. Once I had mustered up enough courage, I would talk with Arrow with complete freedom, and before long I had told him that I had once spent an entire day with Piero Sraffa at Cambridge, and that he had given  me a signed copy of his book (another famous little tome that did the rounds in Calcutta, albeit in somewhat different circles than Professor Banerjee’s.) I told him that I admired the book for its apparent demonstration that the distribution of income across labor income and profit could not be fully pinned down by economics — that some reference to the political system was needed. Arrow looked at me with a mix of irritation and pity: “I’ll get you out of that soon enough.” And of course he did convince me that Production of Commodities By Means of Commodities had an extra degree of freedom in it that generated a fake indeterminacy, though I still harbor a sneaking suspicion that Sraffa was on to something.

Arrow was obviously deeply concerned about the role of information and constantly sought to bring that central idea up in all the sensible contexts he could find. As an example, I was working then on non-convexities in labor markets via nutrition and how this could generate inequality. Arrow impressed upon me the parallel with informational nonconvexities and how this could generate high rates of return to individuals (or holders of hedge funds), thereby resulting in persistent and growing inequality. Of course, interested as he was in formal structure, he delighted in the possibility that the same theoretical setup could potentially be applied to matters as disparate as undernutrition and information. That same delight in formal structure helped me on many other occasions; ranging from game theory to general equilibrium, where he took the time to read my work and was always both critical and encouraging. These interactions have never left me, and many decades later, when I am almost as old now as Ken was when I met him, they continue to inform my own thinking.

When I left for India in 1986, he was initially skeptical, but then immensely encouraging. I think he did feel that the tenure-track system had its constraints; that except in the most creative and courageous of researchers it could foster inhibition and an unquestioned adherence to the status quo. In the end, he understood my reluctance to be in that system and to go back to India instead. He kept in touch with my research and always responded to my occasional questions, and remained a guide.

I cannot help but wonder about how many professional lives he has affected in this way. I wasn’t even his student. I have never written a paper with him. I was completely peripheral, a junior colleague whom he took care to encourage, and whose excessive phone bills to India he occasionally covered on his research budget. Admittedly, I hung out with him as much as I could, but it is absolutely clear to me that the intellectual energy that came out of Kenneth Arrow and into the lives of so many that were fortunate to interact with him was nothing short of phenomenal. I can extrapolate this from my own experience with utter confidence.

There are many stories about Ken Arrow. Some are semi-apocryphal. Some we can vouch for. For instance, I have seen him nod off during talks (including one that I gave) and then wake up to ask a remarkable question. And he did flip pencils in seminars, and I have seen him on at least one occasion attend a talk with his bicycle helmet on. Once Doug Bernheim and I, convinced that a speaker was wrong, paid no further attention to the seminar and tried to construct a counterexample together. Arrow somehow knew that that was what we were up to, because after the seminar he walked into Doug’s office (where we were still at it), wrote the required example on the board, did a little jig and walked away — complete with bicycle helmet. But one story possibly is apocryphal, and yet fully sums up the Ken Arrow that I was so fortunate to know. Arrow was in class, teaching. He was speaking fast, running as he always did with his thoughts. Students were frantically taking notes as the disembodied sentences emerged. And then, suddenly: “Stop, stop! That’s all wrong!” As the students frantically began to erase their jottings, he continued: “No, no, not what I said, what I was going to say.”

That was Kenneth Arrow: self-effacing, razor-sharp, a genius; ever ahead of himself, ever ahead of his time.
PS: Some asked me about another Arrow story elsewhere in this blog, which they couldn't find. Here's the link.

Friday, January 6, 2017

Where's the Dirt?

From an email conversation on demonetization with a reporter from the Calcutta Telegraph (Devadeep Purohit) December 28. His story ran January 1 here.

There are divergent views on when the impact of demonetization would be over. Are you looking at any timeline? 

Well, there are some obvious timelines:

Short-run: December 30. I predict that there will be no last-minute extensions for deposits, simply because an embarrassingly large fraction of the estimated Rs 16 tr outstanding appears to have come back, well over Rs 14 tr (and I am sure the number will be far higher as we get the updated figures). 

[Backdrop: The rupee is about 68 to the dollar, and Indian GDP is around Rs 130 tr.] 

It's embarrassing because I am sure the government did not want so much of the outstanding money to obediently come back! Either the share of black wealth held in cash is small, or people have been very efficient in using money mules of various kinds to launder their black money (presumably at a price, but not one that the government will pocket). The truth is probably in between.

Medium-run: the fiscal year ending 2017, where there are some more opportunities to bring in money; for instance, anyone can deposit via Pradhan Mantri Garib Kalyan Yojana and pay a 50% penalty tax (plus another 25% blocked off as a forced loan to GOI); supposedly no questions asked. Though I doubt that after this, people will ever believe that this government can honor commitments about no questions being asked. I'd be interested in seeing the numbers they can generate here, as the high conversions mentioned above suggest that most of the money has already come back.

So will there be no access at all to the black dividend? Apparently, there is a sizable amount of around Rs 7 tr which has been deposited by "large agents" (depositing Rs 200K or more per person). Maybe there is something there, but it is too soon to tell. Each case will have to be followed up. All I can say is that the Income Tax Office will have to do some serious work for a change, investigating these cases.

Longer-run: Up to now what we have seen is effectively a huge GOI-instigated withdrawal of currency, which the Indian public appears to have participated in with great efficiency, though also with great hardship and cost. It is unclear that anything substantial has been achieved in terms of accessing the black dividend, at least in the here and now, while there have been huge costs imposed on the poor, about which much has been written. But what about the longer-run? This takes me to your next question:

The Prime Minister has emphatically spoken about today’s pain for tomorrow’s gains while justifying demonetization. Do you think that demonetization can have positive spin-offs for the economy?

Possibly. If there are any gains to be had, it will come through the fear of using cash for large transactions, or rather the unwillingness to accept cash for large transactions, in the anticipation that the Government might pull off such a stunt again. For this we have to take something important into account. Everyone criticizing the demonetization is correct in stating that the percentage of black wealth held in cash is low (almost surely way less than 10%). But that is not true of individuals who are gearing up for a large transaction, such as buying real estate. There are important points at which the cash ratio shoots up. If there is a real distrust of cash then these spikes (which facilitate large transactions) will be discouraged, and that could be a positive for bringing more transactions under the legal umbrella.

But I also hasten to add that this potential gain comes at a corresponding cost. Everyone has already spoken about the short-run cost on the poor. But there is a long-run "trust cost": if he can dismantle the currency, what is he going to dismantle next? What new de-mons do I have to look out for when making a long-term investment in India? The fears that have been planted in the hearts of those seeking to make illegal transactions have also their reflection in legitimate fears among people and organizations who are seeking to carry out legal transactions.  It isn't just a question of today's pain versus tomorrow's gain.

And of course, on top of that, this naive comparison of pains and gains is problematic. Prime Minister Modi is not supposed to be passing judgment over a utilitarian calculation of costs and benefits, especially when the costs have been borne overwhelmingly by the poor.

A lot of estimates about the possible fall out of demonetisation on the GDP are doing the rounds. But some experts think that given the quality of data availability in our country, it is difficult to come up with such estimates and they even apprehend that the data might fail to capture the true impact. Your thoughts on this debate.

It's really not so much a question of data as of imperfect economic theory. We know the amounts circulating under R500 and R1000 notes pre-demonetization. We will have accurate figures of how much will come back by the end of the year, and we know that the replacement procedure has stumbled badly and can quantify that. With these three figures in hands we can calculate the net monetary shrinkage in 2016, and we can apply a simple quantity theory of money to make predictions for short-run GDP shrinkage. (Here's a serious, careful example.But we don't know how the informal sector will adapt, or has adapted, to the whole thing; how much that sector has gone "informally cashless" and has managed to facilitate transactions anyway. 

Believing as I do in the inexhaustible creativity of the Indian financial mind, I would not be surprised if there were some pretty clever adjustments to enable business as usual under a commonly perceived crisis. That would cushion the drop. So I am partly doubtful of back-of-the-envelope predictions, not because the macro data is bad but because we simply don't know how people can adapt. (That said, it's better to have these around as simple benchmarks than have nothing at all.)