Yotta Point

Some Readings on Income and Wealth Inequality and Intergenerational Mobility

I have been trying to develop a deeper understanding on the topic of income and wealth inequality and wanted to bookmark for myself some pertinent research and posts.

Josh Barro [Business Insider]

• 95% Of Income Gains Since 2009 Went To The Top 1% — Here's What That Really Means
• David Brooks is Wrong About Inequality
• Sorry, Libertarians — Inequality Does Matter

Andrew Berg, Jonathan Ostry [IMF]

• Equality and Efficiency
• [with Tsangarides] Redistribution, Inequality, and Growth
• Inequality and Unsustainable Growth: Two Sides of the Same Coin?

Matthew O'Brien [The Atlantic]

• Why The 1% Don't Feel Rich

Miles Corak [University of Ottawa]

• Income Inequality, Equality of Opportunity, and Intergenerational Mobility; PDF
• How to Slide Down the ‘Great Gatsby Curve’: Inequality, Life Chances, and Public Policy in the United States

Kathleen Geier [Inequality Matters]

• Ten facts you should know about global economic inequality

Colin Gordon [Dissent]

• The Computer Did It? Technology and Inequality
• Who Pays? Taxes and American Inequality

David Howell [The New School]

The Hockey Stick and The Climate Wars: A Brief Review and Climate Change Discussion

I recently read Professor Michael Mann's book "The Hockey Stick and The Climate Wars". There are several reviews of the book online, a couple of examples being Shawn Lawrence Otto's review at The Huffington Post and Jeff Masters' review at Wunderground. However, I found the book compelling, engaging and valuable on several fronts and felt it was worth making a few observations here. If you are a person who is not entirely familiar with the recent history and politics of climate science, it offers a highly readable and informative summary that captures some of the progress and setbacks over the last two decades or so. Mann's passion for climate science comes through very well in the book and in the process he also addresses in some detail the following aspects of climate change.

I. Scientific Process, Climate Politics & Denialism

1) The IPCC scientific process and rigor which is quite substantial to the point of making the reports somewhat conservative - despite the seepage of occasional errors into IPCC reports

2) The right role of true skepticism in scientific inquiry - and how this differs from the practice of climate change denial (or climate denial) that uses a combination of (a) a veneer of skepticism, (b) often incompetence in basic statistics and (c) the use of deliberately misleading data

• Mann cites several examples in his book; a perusal of blogs like Deltoid, Skeptical Science, Open Mind and others provides interminable, yet dark, amusement on this front

3) The slow but gradual evolution of scientific knowledge, a process that is self-correcting and generates better understanding over time

• Mann offers many interesting examples from the climate change field contrasting them with the typical demands of the blog/media/news cycle that might immediately trumpet a new research paper as if it almost single-handedly destroyed the scientific consensus, without waiting for the time-intensive scientific process to peer assessment, correction and learning

4) The role of the key players in the fossil-fuels sector - whose future assets, fuel reserves and stock prices are at significant risk if meaningful climate change policy actions are taken - and that of other ideologically aligned wealthy donors in funding climate denialism

5) The deplorable, often personal attacks on climate scientists who publicly speak or write about the serious manifestations and consequences of climate change through willful misrepresentation of their or others' work and/or false accusations of fraud or misconduct

• As Mann shows, these attacks are usually fronted by certain politicians (usually Republicans close to the fossil fuel industry), a handful of scientists who are typically not climate science experts, and often by denialist writers, bloggers and pseudo-scientists. Mann also suggests that the manufactured controversy has often coincided with time periods when the U.S. Congress was poised to pass climate change legislation - thereby making it easier to kill such legislation.
• The attacks and their consequences are examined in much detail given Mann's personal experience and the character assassination campaign he and some of his peers have faced over the years; he particularly explores the controversy over the "hockey stick" and the Climategate episode
• Mann makes reference to another excellent, must-read book on this particular topic - "Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming" by Naomi Oreskes and Eric Conway

6) The increasing use of blogs (e.g., RealClimate) by climate scientists to communicate the science to the public and media, and push back in real time on false, distorted or misleading presentations of climate data

II. Science of Climate Change

7) The role that various natural (e.g., solar activity, volcanoes, various oceanic oscillations that operate over multi-year, decadal, multi-decadal or multi-century periods - such as the multi-year oscillation called ENSO or El-Nino/La Nina) and human-induced/anthropogenic factors (CO₂, sulfur dioxide - SO₂, etc.) play in influencing global warming and climate change

• Mann walks readers through how different factors can affect climate and temperature in different ways, thereby providing a nuanced discussion of climate change and warming, which is often missing or understated in websites arguing against the evidence for anthropogenic global warming

8) The role of temperature proxies - such as tree rings, ice cores, lake sediments, etc. - in the estimation of local, regional and global average temperatures in past centuries and millennia when accurate temperature measurements were not available

• In particular, Mann devotes considerable effort to explain the famous "hockey stick" graph (which has since been independently validated by both the National Academy of Sciences as well as recent work by NOAA's NCDC) and discusses topics such as the so-called Medieval Warm Period, urban-heat island (UHI) effect, and others which play an important role in climate change debates

9) The use of statistical frameworks such as principal component analysis (PCA) in the understanding of underlying phenomena and variables driving temperature changes

Mann's book tries to cover all that and more and does a really nice job overall in giving the reader an expansive view of the nuanced subject of climate change, while passionately conveying the real urgency of acknowledging the dangers of ongoing and future warming and the need for immediate action. I highly recommend this book.

In terms of where the book could have been improved, I would suggest the following thoughts for Mann and other climate scientists to consider. Unless someone is an avid follower of the field of climate change and global warming, it is difficult to grasp the nuances and subtleties inherent in understanding climate, weather and the variables that can cause them to shift. I think Mann's book can be further improved, perhaps in his next edition, by more explicitly delving into common points of confusion for people I have talked to, such as:

• Dueling reports of record heat and record cold (recent examples): This confusion might persist because typical discussions on global warming, even by scientists, fail to adequately inform people that warming refers only to averages and that record heat and cold can co-exist in a warming world as long as record heat events significantly outnumber record cold events as the average temperature rises
• Reports attributing certain seemingly contradictory climatic and meteorological events to global warming (e.g., less snow v. blizzards, flooding v. drought, etc.): It's important that scientists invest more time in developing communication to explain how both droughts and severe flooding could result from warming, that both blizzards and reduced snow can be a consequence of warming, etc.
• Why seemingly modest increases in global temperature (e.g., 0.8 degrees C) should result in significant increases in extreme events: It wasn't until the excellent work of Hansen et al. in 2012 did a clear framework become available to average readers like me to explain to others that a small shift in averages can lead to a large increase in probability of 3-sigma, 4-sigma and beyond temperatures, which in turn can lead to more extreme events over time, relative to past experience
• Lack of clear understanding of the role of additional factors that cause otherwise CO₂-influenced temperature changes to be non-monotonic: The recent work by Skeptical Science is very welcome in this context but it is rare to see scientists use simplified means of communication on such an important topic

Additionally, I would like to urge Mann and his colleagues/peers to invest more time in discussing & explaining the role of the potent greenhouse gas methane (CH₄) and the pros and cons of migrating our energy use from fuels like coal to natural gas, especially given the increasing concerns of methane leakage during natural gas extraction.

Finally, while I very much like blogs like Real Climate, climate scientists need to do a better job of communicating their findings and implications in plain English. Again, Skeptical Science is doing a fantastic job on this and newer initiatives like Climate Communication are welcome and overdue but scientists need to be more tuned to this need going forward.

"Why Smart People Are Stupid" and Other Revelations About the Brain

UPDATE 6/24: I cited Jonah Lehrer below. This has to be read to be believed - Lehrer might as well have titled his article about himself.

One of the best books that I read recently is Nobel Prize winner Daniel Kahneman's "Thinking, Fast and Slow". You'll find a lot of reviews of the book online (e.g., Jim Holt at the NYT), but the best thing to do would be to pick up a copy of the book and read it (Sci Am has reprinted a portion recently). As one of the reviewers in Amazon.com, Adam Smythe, wrote [all bold text in this post is my emphasis]:

Daniel Kahneman, the author of this exceptional book, and Amos Tversky (who died in 1996) made economics and other disciplines a lot more realistic--and tougher--for economists, researchers and students. Prior to their work, economists and others maintained classical theories and explanations that relied on certain seemingly logical assumptions about human behavior. However, people don't always behave the way logic might suggest, for a variety of reasons that Kahneman (and Tversky) explained, starting in the 1970s. Today, the subject of behavioral decision-making is one of the more exciting ones in fields like economics, finance, medicine and even law, thanks to their pioneering work. In recognition of the impact of his work in economics, Kahneman, a cognitive psychologist and professor emeritus at Princeton, won the Nobel Prize in Economics in 2002, specifically for his work on prospect theory.

The title of this book comes from Kahneman's discussion of two simple models of how people think. "System 1" thinking corresponds to fast, intuitive, emotional and almost automatic decisions, though it sometimes leaves us at the mercy of our human biases. "System 2" thinking is more slow-going and requires more intellectual effort. To nobody's surprise, we humans are more likely to rely on System 1 thinking, because it saves us effort, even if it can lead to flawed thinking.

Andrew Revkin at Dot Earth (NYT) posted the video a recent talk by Kahneman and added:

As I noted via Twitter during the meeting, this talk and many other engaging presentations at the event illustrate the importance of adding a fresh facet to the popular notion that today’s citizens, and particularly students, would do well to improve their capacity for critical thinking:

“Critical thinking has to include assessing one’s own thinking.”

Last week, Jonah Lehrer at The New Yorker, mentioned Kahneman's work and wrote about another recent study whose implications are important in a post titled "Why Smart People are Stupid". Here are some relevant extracts from Lehrer's piece, but go read his entire post:

Reads for 1 Jan 2012

A very happy new year to everyone! Here are some readings to ring in the new year...

Economics & Finance

• Bill at Calculated Risk: Private Investment and the Business Cycle; Vehicle Miles Driven Decline: A possible contributing factor; Labor Force Participation: The Kids are Alright Part 2 [Bill also provides a helpful how-to link on "How do you put recession bars on graphs using Excel?"]
• Yves Smith at Naked Capitalism: Global Savings Glut or Global Banking Glut?
• Christina Romer in the NYT: A Financial Crisis Needn’t Be a Noose
• Richard Peach, Josiah Bethards and Joseph Song at Liberty Street Economics: Labor Force Exits Are Complicating Unemployment Rate Forecasts
• David Cay Johnston at Reuters: The corporations that occupy Congress; Where's the fraud, Mr. President?
• Menzie Chinn at Econbrowser: Regulatory Uncertainty, Macro Policy Uncertainty, and Demand
• Dave Altig at Macroblog: Uncertainty about uncertainty; Maybe this time was at least a little different? (regarding the failure of economic forecasting)
• Tara Sinclar at Econbrowser: Guest Contribution: US Federal Regulatory Budget and Macroeconomic Outcomes: What Do We Know?
• Cardiff Garcia at FT Alphaville: 'Tis the Seasonality, Hold the Jolly
• Barry Ritholtz at The Big Picture: Clouded Title - The Gross Illegality of MERS
• TaxProf Blog: CRS on Income Inequality (via)
• Mark Thoma at Economist's View: Peddling a False Narrative on the Financial Crisis
• Zsolt Darvas: A Tale of Three Countries: Recovery After Banking Crisis [focus on Iceland, Ireland and Latvia, via]
• Paul Krugman ay NYT: Debt and Growth in the G7
• David Romer: What Have We Learned about Fiscal Policy from the Crisis? (via)
• Bruce Bartlett in Economix at NYT: Cutting the Corporate Tax Rate Is No Economic Panacea
• Jake at Econompicdata: Consumers Don't Care About Savings Rates
• Louis Uchitelle in the NYT: Factory Jobs Gain, But Wages Retreat (via)
• Dean Baker in CEPR's Beat The Press: Robert Samuelson, Wrong Again
• Uneasy Money: Which Fed Policy is Boosting Stocks? (includes an interesting look at the link between inflation expectations and S&P 500 returns)
• Michael Panzner at Financial Armageddon: Buzzing Again (topic: "Heightened speculation about economic recovery...doesn't mean it will happen")
• Derek Thompson in The Atlantic: It's Beginning to Look a Lot Like 2009 in India (via)

Energy & Environment, Food Security, Climate Change

Reads for Dec 18

Economics & Finance

• Paul Krugman at NYT: Inflating Your Way to Prosperity; Slow Learners; Lake Wobegon, Europe; No, It's Not The Welfare State; Chronic Confusion
• Brad DeLong: "Expansionary" Austerity in Europe
• Economist: Are Persistent Trade Deficits a Bad Thing?
• Paul Bergin at the SF Federal Reserve: Asset Price Booms and Current Account Deficits
• Kash Mansori at The Street Light: House Prices and Current Account Deficits; More House Prices and Current Account Deficits
• Global Macro Monitor at The Big Picture: Italy Works 20% More Hours than Germany or France
• Uneasy Money: Deutsche Bank Gets It, Why Can’t Mrs. Merkel?
• Scott Sumer at The Money Illusion: Like deer caught in headlights (talking about the Fed)
• Washingtons Blog at The Big Picture: FBI Estimates 80% of Mortgage Fraud Involved Industry Insiders
• Calculated Risk: Research: New paper on the role of investors in the housing bubble
• Michael Olenick at Naked Capitalism: NAR’s Big Miss on Home Sales Underscores Lack of Transparency and Accuracy in Mortgage/Housing Data
• Tamara Keith at NPR's It's All Politics Blog: GOP Objects To 'Millionaires Surtax'; Millionaires We Found? Not So Much [via]
• Mark Thoma at Economist's View: Percentage Growth in Annual Wages and Salaries [also see]
• Alex Tabarrok at Marginal Revolution: Roman Empire More Equal than the United States
• Brad DeLong: Why Oh Why Can't We Have a Better Press Corps? No, High Unemployment Is Not Primarily The Result of "Generous" Unemployment Insurance Benefits
• Chad Stone at CBPP's Off The Charts Blog: It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment
• Mike Konczal at Rortybomb: What is the Real Unemployment Rate and How Could We Tell?
• Macromania: Beveridge Curves for 36 U.S. Cities (Updated)
• Ben Walsh at Business Insider: A Bunch Of Academics Think They've Figured Out How To Tell If A Hedge Fund Will Outperform The Market
• Barry Ritholtz at The Big Picture: Interest Rates: 1831-2011; US Housing Prices Mirror Japan's Experience; Beware The Retail Hype; Retail Sales Disappoint on False Black Friday Reports
• Cardiff Garcia at FT Alphaville: The Decline of "Safe" Assets

To wrap up this section, here's an interesting comment by William Cohan in this FDL Book Salon on his book "Money and Power: How Goldman Sachs Came to Rule the World":

Goldman actually almost went out of business many times in its history; it is very good at getting into trouble — and also very good at getting out of trouble

...and he also notes:

actually i go through chapter and verse of the many frauds that Goldman has committed or participated in over the years

Should make for some interesting reading.

Energy & Environment, Food Security, Climate Change

The Stormy Petrel of Eurozone Budget Deficits: Current Account Deficits

[NOTE: The second part of this analysis is posted in the next post: Eurozone Government Debt and Current Account Deficits]

Background

In my previous post discussing the recent EU "fiscal union" summit, I said:

You'll notice that Spain and Ireland were running fiscal surpluses with acceptable debt/GDP in the years immediately preceding the financial crisis - yet these countries are amongst the worst affected by the meltdown and and in the crosshairs of the ECB and austerity hawks. Slovenia had run modest deficits ahead of the financial crisis and its debt to GDP ratio was low and declining ahead of the crisis - yet, Slovenia's bond yields have been in crisis territory recently and its debt situation is worsening as the economy teeters into recession. Undoubtedly, countries like Greece made their problems much worse with very high levels of deficits and debt prior to the crisis. That said, even Germany ran significant deficits and had high debt levels prior to the crisis - yet, Germany remains relatively unscathed because it has run massive current account surpluses thanks in part to the Eurozone periphery that ran massive trade deficits that benefited countries like Germany.

This is a point that has been made by many people before: rather than fiscal profligacy, the main root cause of the current European financial crisis can be traced back to large current account deficits run by many EU members following the establishment of the Euro as a common currency, culminating in a sudden stop (in the vicinity of the Great Recession) that pummeled the economic and fiscal health of those countries. A useful chart is available from Kash Mansori at The Street Light - along with his follow-up observations...

In their book "This Time is Different: Eight Centuries of Financial Folly", Carmen Reinhart and Kenneth Rogoff point out:

An even stronger regularity found in the literature on modern financial crises is that countries experiencing sudden large capital inflows are at high risk of experiencing a debt crisis [15]. The preliminary evidence here suggests that the same is true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global levels since 1800, if not before.

[I've discussed some of these issues in more detail in a couple of other prior posts: Capital Flow Bonanzas and Their Aftermath and Q&A with President Bill Clinton at the 2011 Clinton Global Initiative, Part 2 - The Financial Crisis in Europe]

Given the known impact of large net capital inflows and current account deficits on fiscal stability, here's a natural question that came to mind in the context of the Eurozone:

Do pre-crisis current account balances, as opposed to pre-crisis fiscal balances, better predict crisis-period fiscal balances (quantitatively) for countries that are part of the European currency union (EMU)?

This post focuses on that question. The answer, as it turns out, is yes and the implications of this are obviously significant in the context of the recently concluded EU summit.

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Summary

In this post, I summarize the results of a simple analysis of the average current account (CA) and fiscal balances, as a percentage of GDP, for nearly a dozen European countries that use the Euro as their currency [Section 1]. The analysis focused on CA and fiscal balances in the 7 years preceding the start of the Great Recession (pre-crisis) and fiscal balances in the 2008-2010 (crisis) time period. Countries that joined the Euro currency union in 2007 or beyond were excluded from the analysis since they were not on the Euro long enough in advance of the financial crisis. The key finding from this analysis is that the average CA balance/GDP by country for 2000-2007 [Section 3a, 3b] is a much better quantitative predictor of the average fiscal balance/GDP for the same country in 2008-2010, than is the average fiscal balance/GDP of the country in 2000-2007 [Section 2a, 2b].

The analysis was completed with and without Ireland in the mix. Ireland is a massive outlier in the data when it comes to fiscal deficits - likely due to the fact that the main issue in Ireland was large-scale private debt rather than sovereign debt, and sovereign debt ballooned only later because of the Irish government's huge borrowing to bail out private banks during the crisis. With the exclusion of Ireland, the positive correlation between average pre-crisis CA balance/GDP to crisis-era fiscal balance/GDP is very high and even more stark [Section 3c, 3d]. It is significantly higher than the correlation between average pre-crisis fiscal balance/GDP to crisis-era fiscal balance/GDP [Section 2c, 2d]. 

The findings here raise more questions about the effectiveness of the recently touted EU "fiscal union" which was largely a fiscal austerity pact, with inordinate emphasis on fiscal balances as opposed to CA balances. Specifically, the data shown here indicate that pre-crisis fiscal balances do not effectively predict fiscal balances during downturns/crises - they are less effective in doing so than pre-crisis CA balances. Hence, a "fiscal union" that demands fiscal austerity as a way to ensure low fiscal deficits in the future, with no attention paid to CA balances, is unlikely to consistently prevent large future fiscal deficits. Further, given the limited direct correlation between CA and fiscal balances over the same period of time [see "Baseline Charts" in Section 3], it is quite possible that countries might run fiscal surpluses along with large current account deficits over the same time period, and yet have little or no protection against future fiscal deficits during downturns [as shown in Section 3a-3d]. Finally, a misguided focus on short-term fiscal deficits and debt (as opposed to longer-term fiscal health) is more likely to drive deflationary results as well in the current environment - which could be another negative consequence of the recently announced EU "fiscal union".

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1. The Eurozone Countries

Age, Entrepreneurship and Success

Vivek Wadhwa is an Indian-American entrepreneur and academic who writes frequently, and often brashly, on the topic of innovation. I've always found his observations to be thought-provoking. His latest piece in the Washington Post is particularly so:

The case for old entrepreneurs

His article challenges an observation by well-known venture capitalist Vinod Khosla (of Khosla Ventures) on some of Khosla's comments at NASSCOM (see video). Here is the introductory portion of Wadhwa's article [all use of bold text in this post is mine - it's used for emphasis]:

“People under 35 are the people who make change happen,” said venture capitalist Vinod Khosla, “People over 45 basically die in terms of new ideas.”

Khosla, who believes that old entrepreneurs can’t innovate because they keep “falling back on old habits,” said this at the NASSCOM Product Enclave in Bangalore, on Nov. 9.

He isn’t alone in his views.

Silicon Valley VCs talk openly about their bias toward young entrepreneurs. Some argue that Internet entrepreneurs peak at the age of 25.

Khosla and those who think like him are wrong.

This topic is of great interest to me - not so much the question of age of entrepreneurs, but the question of what it takes to build companies that have exemplary long-term success. So, I'll use Wadhwa's article as a pivot to explore a few related aspects and then cite specific examples from the history of companies like Microsoft, Google, Apple and Sun Microsystems to make my case that long-term success takes a lot more than youth or ideas - it requires a level of experience and discipline that understands how to translate ideas into sustainable and lasting success.

1) Wadhwa's observations

Wadhwa cites various studies and data sets that make his case - i.e., older people are not only more likely to start new companies than younger people, they are more likely to be part of successful companies. One of the research papers he cites from his own team is this one: "Education and Tech Entrepreneurship". Here is the abstract of that study:

Required and Excess Reserves of US Banks - Is It Time for a Policy Change by the Federal Reserve?

In his recently released book - "Back to Work: Why We Need Smart Government for a Strong Economy" - President Bill Clinton has evidently proposed a slew of ideas to boost job growth and the US economy. Although I've not read the book yet, he has been discussing many interesting ideas through this year, including at the 2011 Clinton Global Initiative (my discussions on the Q&A with President Bill Clinton at CGI 2011 are available here: Part 1, Part 2, Part 2A, Part 2B, Part 3). One of his ideas apparently ties to the reserve policy set by the US Federal Reserve according to Dave Johnson's review of the book in Alternet [the use of bold text is my emphasis throughout this post]:

...Clinton offers a three-part economic and jobs growth strategy:

(1) put as much of the $4 trillion now held in banks and corporate treasuries back into the economy as fast as we can; (2) concentrate on the areas most likely to produce good jobs that have a positive ripple effect, jobs in modern infrastructure building, high-end manufacturing, green technologies, and exported goods and services; and (3) do literally dozens of other things that, when combined, can make a real impact now and also increase our long-term economic growth.

The list is full of smaller policy ideas, like #3, the Federal Reserve has to give banks an incentive to lend. The Fed should charge banks for parking money, maybe .25% and/or require banks to pay their customers a minimum 1% interest on deposits...

Dave's fairly detailed review is worth reading in full but I'm inclined to disagree with his characterization of the latter idea as a "smaller policy idea". I'll use this post to explain why an idea like this could have a substantial impact on increasing lending and thereby boosting nominal GDP (NGDP). In fact, arguably pioneered by economist Scott Sumner who blogs at The Money Illusion, numerous economists across the political spectrum are advocating the need for NGDP targeting by the Fed (rather than prices or inflation), as a response to the large and persistent nominal and real output gap in the US economy. This becomes even more important given recent indications from historically reliable leading indicators that the U.S. could be headed into another recession.

Excess v. Required Reserves

To explore this topic more broadly, it's worth starting with the post "Cash Is Not The Problem" by Paul Krugman back in July 2011. Krugman discussed the massive cash balances that corporations have accumulated and briefly discussed the large amount of excess reserves held by depository institutions (banks), well above the level of required reserves:

Second, banks are also sitting on large amounts of cash that they aren’t lending...

At face value, Krugman has a point - banks are holding well over $1 Trillion in excess reserves. Given that we have a serious NGDP gap with anemic employment growth, it would seem appropriate for the Fed to drive banks to reduce their excess reserves via increased lending in order to stimulate faster economic growth, especially in a political environment where stimulative fiscal policy seems out of reach. However, the fact that banks have large and growing excess reserves does not automatically mean that loan growth is not occurring. To understand this better, we need to look at both excess reserves and required reserves.

I've included below a reserves chart from the St. Louis Federal Reserve Economic Database (FRED). Note that the scales for required reserves (left) and excess reserves (right) are completely different - by over an order of magnitude - meaning that excess reserves have been growing more than order of magnitude faster than required reserves since the start of the Great Recession. Excess reserves have grown from zero prior to the Great Recession to almost $1.5 T now, with the most rapid growth beginning in Fall 2008 when the Fed started aggressively intervening to prevent another Great Depression - via liquidity facilities, loans, asset purchases, etc. (QE1 and QE2 are good examples). The Fed also modified its policy on reserves starting in October 2008 and started paying 0.25% interest on reserve balances - the first time in its history.

India and Nehru

With widespread frustration in the US on the economic situation and dysfunctional government, and anger against Wall Street's big banks and government handouts to the banks, I thought a brief comment on India might be appropriate. India is the world's largest democracy and an emerging economic power in the world. Unlike in the US, which is a de jure two-party and often de facto single party political system with predictable results, India has a multi-party political system. While I am personally in favor of a multi-party system, it has its own challenges - one of which is that unless there is strong leadership that is focused more on public service than personal gain, it can be quite difficult to get things done. India has of course made enormous and impressive strides in the last two decades despite those challenges, especially in comparison to its neighboring state Pakistan - which was created after a violent partition from India in 1947 and has been in a state of turmoil since then. India's strides have nevertheless been made in an environment of extreme government corruption.

Throughout much of 2011, there has been a prominent movement in India against corruption at the highest levels of India's government, in significant part due to the leadership of Anna Hazare. With the ruling Congress party having more or less squandered its momentum from 2009 with key party or government officials being in the middle of massive corruption scandals, not much is now getting done in the Indian Parliament. It's also a period of soul-searching in India on the kind of leaders India really needs to take the country to the next level of achievement and well-being for its large population. In that context, I found some recent observations by Shashi Tharoor on the "quality of leadership" from India's independence era interesting and worth calling out. Tharoor is a Congress MP from the southern Indian state of Kerala, former Indian Minister of State for External Affairs and former UN Under-Secretary General for Communications and Public Information. Tharoor especially discussed Jawaharlal Nehru, India's storied and first Prime Minister, in an interview - see these videos. He also discussed with IBN what structural changes are needed in India's electoral system.

Perhaps the most interesting is this video where Tharoor talks about an article critical of Jawaharlal Nehru that appeared in November 1937 in the Modern Review (of Calcutta, now Kolkata). Here's historian Ramachandra Guha on the topic of that article [I've emphasized some portions in bold text]:

IN November 1937, the Modern Review of Calcutta carried a profile of the Congress President, Jawaharlal Nehru. The profile was not wholly flattering; it spoke, for example, of his "intolerance of others and a certain contempt for the weak and inefficient". It noted that his conceit was "already formidable", and worried that soon "Jawaharlal might fancy himself as a Caesar".

The essay was written under the pen-name of "Chanakya". There was much speculation as to who the author might have been. It was certainly a critic of the Congress President, possibly a critic of the Congress Party as well. Then it was revealed that the author was none other than Jawaharlal Nehru himself.

I had quite forgotten about Chanakya's mischief, till correspondents commenting on my column "A Horoscope for the Congress" reminded me of it (The Hindu — Sunday Magazine, March 13). The column had dealt with an anonymous article entitled "After Nehru ... ," published in the Economic Weekly of July 1958. This essay had forecast that, after Nehru, a once principled Congress party would become a captive of caste, communal and regional caucuses.

Speculating about the identity of an author who writes anonymously is an exercise composed equally of excitement and frustration. (Recall the months of frenzied speculation in the American press about the author of the novel Primary Colours.) My own guess was that the man who made this prescient forecast was either a Western political scientist or a serving civil servant, each of whom would have had to mask their name while advancing a controversial thesis. But then I got a mail from a friend in Dehra Dun, which read: "... an intriguing article. Knowing Nehru's penchant for writing anonymous provocative articles, do you think there is any chance that he could have written it?" And a reader from Kolkata (Calcutta) wrote in to say that he remembered reading the article when it had first appeared, and discussing with his friends — in the College Street Coffee House, no less — whether it was the Prime Minister who had written it.

That amazing trait of Nehru's is all the more interesting given how he ran the country despite his confessed fears of being an authoritarian. In his book, "India: The Years of Indira Gandhi", Yogendra Malik made these observations:

Q&A with President Bill Clinton at the 2011 Clinton Global Initiative - Part 3: Shared Value and Shareholder Value

[Part 1 includes links to President Clinton's comments on a number of topics; Part 2 was focused on his comments on Greece, the Euro and the financial crisis in Europe; Part 2A and Part 2B were focused on food security - the role of commodity market speculation & corn-ethanol conversion on food prices and sustainable agriculture]

The focus of this post is President Clinton's observations on the role of shared value vs. shareholder value when it comes to corporations, their impact on society and job creation.

Summary

The key takeaways from this post are the following:

a) President Clinton strongly endorsed the need for U.S. businesses to focus on shared value as opposed to merely shareholder value, in order to be successful in the long-term and create more jobs in the US. According to Michael Porter and Mark Kramer, the "principle of shared value...involves creating economic value in a way that also creates value for society by addressing its needs and challenges." [Section 1]

b) Shared value does not refer to "corporate social responsibility" but a very different way to shape and run a business which recognizes that societal and environmental impact should not be viewed as externalities for firms but rather as key factors that shape business strategy and practices. As Porter and Kramer have illustrated with examples, if this is done correctly, perceived "harms and constraints [do] not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches—and as a result, increase their productivity and expand their markets." [Section 2]

c) There are many examples of firms that are achieving great success by focusing first on key stakeholders other than shareholders, e.g., Apple, which has become one of the most successful companies in the world with a focus first on customers, rather than shareholders. [Section 2]

d) There is growing recognition, as was particularly evident from some of the CGI panel discussions [Section 3], that:

• Corporations should focus on creating shared value and be given the legal flexibility to operate as such - e.g., via the creation of a new corporate legal entity called a benefit corporation
• A pure focus on profit is not necessarily likely to lead to long-term success or profitability - e.g., the massive collapse of financial companies worldwide recently, given financial companies perhaps more than any other class of companies, are ostensibly focused solely on financial profitability
• Free market principles by themselves do not allow for optimal outcomes at the level of individual countries; country-level strategies require the cooperation of public, private and non-profit entities.

In the following sections, I'll explore the above points in greater detail.

1. President Clinton's Observations