Sunday, April 11, 2010
On how malleable "economic" Theories can be
Back in business school, I was told that the spread of any interest rate over the "risk-free" short term government bill rate is a function of maturity risk, liquidity risk and default risk among other things. So, the higher the spread of the longer term Government bond rate, the greater the perceived uncertainty of the government's finances in the long run. Let's call this Theory A.
Theory B: At the same school, I was also told that longer term interest rates can be interpreted as the function of the market's expectations of short term interest rates in the future. For instance, one can think of the two year bond yield as the product of the current short term Fed rate and the market's expectation of the short term Fed rate one year hence.
I didn't note the contradiction between these two points of view back then. It all seemed very sober and scientific in the classroom. But now, I often wonder if these were political theories after all, masquerading as science.
The recent blog debate starring Megan McArdle of The Atlantic and Paul Krugman is particularly interesting. Here is the chart that spurred the debate (courtesy Steve Waldman). It shows that the spread of the 30 year/10 year bond yield over the 3 month "risk-free" rate has widened since the recession. Also, the spread is not showing signs of decline even after the recession subsided mid last year.
Megan is worried about this and interprets the trend as a sign of the market pricing in the perceived default risk posed by the US government. Like a good conservative Republican, she thinks this ought to be a warning to the government to stem the deficit and stop adding to the burgeoning public debt. I guess it is very clear that she subscribes strongly to Theory A.
Paul Krugman of the NY Times responded in typical fashion. Quite predictably, he said that Megan was all confused about yield curve basics. The long term bond yield remains high because the market expects short term interest rates to go up in future. Now, we all know that short term rates generally go up only if the Fed perceives improved economic times ahead. So Krugman is in effect saying - Don't worry about the yield spread. It is mostly good news!
Now, this is the classic Market expectations theory which we labeled Theory B earlier in the post.
The question is - which theory holds water? Krugman makes his theory sound more plausible, which is no surprise given his considerable verbal skills. But is he right? Can we be altogether sure that the long term rate is purely a function of future market expectations? If that's true, what about the default risk premia, liquidity risk premia and maturity risk premia that I read so much about in FM-1?
I'd like to believe that all these "theories" are political beliefs in the main. A liberal like Krugman who is so sceptical of Fama's efficient market theory and Lucas' rational expectations hypothesis is so willing to buy the prowess of the same inefficient market in predicting future Fed actions! It is convenient because the "market expectations" interpretation of the yield curve helps him shrug off critics who cavil at government spending and the huge debt burden by saying "Look...the bond market isn't particularly worried about the debt. Why bother!"
Similarly, the conservative Megan does not buy Theory B in the context of government bond market, but is quite likely to buy the not too dissimilar rational expectations theory which helps her make a case against expansionary government policy.
It's all so very politically convenient.
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Back in business school, I was told that the spread of any interest rate over the "risk-free" short term government bill rate is a function of maturity risk, liquidity risk and default risk among other things. So, the higher the spread of the longer term Government bond rate, the greater the perceived uncertainty of the government's finances in the long run. Let's call this Theory A.
Theory B: At the same school, I was also told that longer term interest rates can be interpreted as the function of the market's expectations of short term interest rates in the future. For instance, one can think of the two year bond yield as the product of the current short term Fed rate and the market's expectation of the short term Fed rate one year hence.
I didn't note the contradiction between these two points of view back then. It all seemed very sober and scientific in the classroom. But now, I often wonder if these were political theories after all, masquerading as science.
The recent blog debate starring Megan McArdle of The Atlantic and Paul Krugman is particularly interesting. Here is the chart that spurred the debate (courtesy Steve Waldman). It shows that the spread of the 30 year/10 year bond yield over the 3 month "risk-free" rate has widened since the recession. Also, the spread is not showing signs of decline even after the recession subsided mid last year.
Megan is worried about this and interprets the trend as a sign of the market pricing in the perceived default risk posed by the US government. Like a good conservative Republican, she thinks this ought to be a warning to the government to stem the deficit and stop adding to the burgeoning public debt. I guess it is very clear that she subscribes strongly to Theory A.
Paul Krugman of the NY Times responded in typical fashion. Quite predictably, he said that Megan was all confused about yield curve basics. The long term bond yield remains high because the market expects short term interest rates to go up in future. Now, we all know that short term rates generally go up only if the Fed perceives improved economic times ahead. So Krugman is in effect saying - Don't worry about the yield spread. It is mostly good news!
Now, this is the classic Market expectations theory which we labeled Theory B earlier in the post.
The question is - which theory holds water? Krugman makes his theory sound more plausible, which is no surprise given his considerable verbal skills. But is he right? Can we be altogether sure that the long term rate is purely a function of future market expectations? If that's true, what about the default risk premia, liquidity risk premia and maturity risk premia that I read so much about in FM-1?
I'd like to believe that all these "theories" are political beliefs in the main. A liberal like Krugman who is so sceptical of Fama's efficient market theory and Lucas' rational expectations hypothesis is so willing to buy the prowess of the same inefficient market in predicting future Fed actions! It is convenient because the "market expectations" interpretation of the yield curve helps him shrug off critics who cavil at government spending and the huge debt burden by saying "Look...the bond market isn't particularly worried about the debt. Why bother!"
Similarly, the conservative Megan does not buy Theory B in the context of government bond market, but is quite likely to buy the not too dissimilar rational expectations theory which helps her make a case against expansionary government policy.
It's all so very politically convenient.
Wednesday, June 13, 2007
Puritan America
Citizens of Virginia can expect a 27 month sojourn in prison if they serve beer to callow sixteen year olds. Huh :|
Read more about it here
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Citizens of Virginia can expect a 27 month sojourn in prison if they serve beer to callow sixteen year olds. Huh :|
Read more about it here
Saturday, February 03, 2007
On Conservatives, Liberals and.....Hypothesis Testing
What makes a person conservative or liberal? I don't know.
But the theory of Hypothesis Testing does help us gain insight into a person's political predilections. Gobsmacked, eh? Read on.
Suppose, for the sake of argument, that youth from the Middle East/N.Africa are more likely to resort to terrorism than any other race. To strengthen this supposition, we have to reject the hypothesis that terrorism finds no special favour among any specific group of people.
H0 : Youth from the Middle East/North Africa are no more inclined/indifferent towards Terrorism than youth from any other part of the world.
The alternative hypothesis is that youth in certain parts of the world are indeed more likely to turn into terrorists. Hence, racial profiling can help apprehend potential terrorists and debar entry to dubious immigrants.
For instance, assume that 5% of the youth wanting to immigrate to US are of Middle Eastern/N.African extraction. Going by the Null Hypothesis, in any sample of immigrant terrorists, the proportion hailing from M.E/N.A shouldn't exceed 5%. Right?
Now, consider a random sample of immigrant terrorists wherein 20% are Arabs/N.Africans and the probability of more than 20% of a random sample of immigrant terrorists being N.Africans/Arabs, given that the null hypothesis holds, is 5%.
Does this figure justify racial profiling? This is where your political predilection comes into play. A liberal might be wary of rejecting a true hypothesis (Type I error) and may be unwilling to disregard it even if the figure was as low as 1%. A conservative right-winger on the other hand, would not want to run the risk of accepting a false hypothesis (Type II error). He may be tempted to ditch the hypothesis for any figure less than 15%!
This has to be one of the great debates in public policy. What is the most appropriate significance level? Should policy makers opt for a high significance level and aggressively pursue racial profiling to weed out the slightest possibility of terrorist infiltration at the expense of civil liberties? Or should they refrain from 'profiling' altogether, and thereby run the risk of terrorist attacks?
The answer would vary depending on whether you're a fan of George Bush or Michael Moore ;)
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What makes a person conservative or liberal? I don't know.
But the theory of Hypothesis Testing does help us gain insight into a person's political predilections. Gobsmacked, eh? Read on.
Suppose, for the sake of argument, that youth from the Middle East/N.Africa are more likely to resort to terrorism than any other race. To strengthen this supposition, we have to reject the hypothesis that terrorism finds no special favour among any specific group of people.
H0 : Youth from the Middle East/North Africa are no more inclined/indifferent towards Terrorism than youth from any other part of the world.
The alternative hypothesis is that youth in certain parts of the world are indeed more likely to turn into terrorists. Hence, racial profiling can help apprehend potential terrorists and debar entry to dubious immigrants.
For instance, assume that 5% of the youth wanting to immigrate to US are of Middle Eastern/N.African extraction. Going by the Null Hypothesis, in any sample of immigrant terrorists, the proportion hailing from M.E/N.A shouldn't exceed 5%. Right?
Now, consider a random sample of immigrant terrorists wherein 20% are Arabs/N.Africans and the probability of more than 20% of a random sample of immigrant terrorists being N.Africans/Arabs, given that the null hypothesis holds, is 5%.
Does this figure justify racial profiling? This is where your political predilection comes into play. A liberal might be wary of rejecting a true hypothesis (Type I error) and may be unwilling to disregard it even if the figure was as low as 1%. A conservative right-winger on the other hand, would not want to run the risk of accepting a false hypothesis (Type II error). He may be tempted to ditch the hypothesis for any figure less than 15%!
This has to be one of the great debates in public policy. What is the most appropriate significance level? Should policy makers opt for a high significance level and aggressively pursue racial profiling to weed out the slightest possibility of terrorist infiltration at the expense of civil liberties? Or should they refrain from 'profiling' altogether, and thereby run the risk of terrorist attacks?
The answer would vary depending on whether you're a fan of George Bush or Michael Moore ;)
Labels: economics, politics, statistics
Sunday, December 17, 2006
'Free to Choose' TV Series
Have spent many an enjoyable hour watching these programmes over the past couple of days. I like the structure. A half hour film followed by thirty minutes of stimulating discussion...
Check them out here.
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Have spent many an enjoyable hour watching these programmes over the past couple of days. I like the structure. A half hour film followed by thirty minutes of stimulating discussion...
Check them out here.
Labels: politics
Saturday, December 16, 2006
|Monday, May 15, 2006
On Reservations
Surjit Bhalla, the economist, has reached rather startling conclusions in a Business Standard report based on the 1999 NSS data.
The Conclusion is that the 'Upper Castes in the country do not have a dramatically higher chance of getting top jobs in comparison with SC/ST's and OBC's, in case all of them have the same level of education'.
Before furnishing the data, a few clarifications-
- This survey considers a person who has passed at least high school
(Xth Std) as a part of the 'Educated'
Labour Force.
- A 'good' Job is defined as a 'professional,
technical or a managerial'
job held by those who've passed at least high school.
Here's the data -
Probability of getting a good job
Pre-reservation || Post-reservation
SC/ST's 31.7% 63.9%
OBC's 28.6% 41.3%
Muslims 35.9% 28.0%
Caste Hindus 39.2% 28.0%
Let me elucidate.
The data suggest that an SC/ST high-school passout (this obviously includes those who've done UG/PG) has a 31.7% chance of landing a 'good' job.
For a Caste Hindu, the corresponding figure is 39.2%.
Hence, today the probability of landing a 'good' job for an SC/ST is barely 25% lower than that
of a caste Hindu. The difference is negligible especially if you factor in the fact that most of the SC/ST population is concentrated in the villages, where job opportunities are scarce. No discrimination whatsoever :)
Now, if Kamalnath goes ahead and implements the 22.5% reservation for SC/ST's in the private sector, the discrimination becomes very evident.
The Chances of getting a 'good' job for SC/ST's shall go up to 63%.
For OBC's the figure shall rise upto 41%.
These increases will be at the expense of the Upper Castes and Muslims, who'll bear the brunt of the government-mandated discrimination.
The figure for SC/ST's (63%) will now be almost 125% more than that of Caste Hindus (28%).
This is what the dumbass KamalNath intends to do. With the Intent of correcting a marginal difference of 25% (which may not be because of discrimination, mind you), he has come up with a grandiose reverse-discrimination scheme, that shall prove to be a nail in the coffin of the Upper Castes.
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Surjit Bhalla, the economist, has reached rather startling conclusions in a Business Standard report based on the 1999 NSS data.
The Conclusion is that the 'Upper Castes in the country do not have a dramatically higher chance of getting top jobs in comparison with SC/ST's and OBC's, in case all of them have the same level of education'.
Before furnishing the data, a few clarifications-
- This survey considers a person who has passed at least high school
(Xth Std) as a part of the 'Educated'
Labour Force.
- A 'good' Job is defined as a 'professional,
technical or a managerial'
job held by those who've passed at least high school.
Here's the data -
Probability of getting a good job
Pre-reservation || Post-reservation
SC/ST's 31.7% 63.9%
OBC's 28.6% 41.3%
Muslims 35.9% 28.0%
Caste Hindus 39.2% 28.0%
Let me elucidate.
The data suggest that an SC/ST high-school passout (this obviously includes those who've done UG/PG) has a 31.7% chance of landing a 'good' job.
For a Caste Hindu, the corresponding figure is 39.2%.
Hence, today the probability of landing a 'good' job for an SC/ST is barely 25% lower than that
of a caste Hindu. The difference is negligible especially if you factor in the fact that most of the SC/ST population is concentrated in the villages, where job opportunities are scarce. No discrimination whatsoever :)
Now, if Kamalnath goes ahead and implements the 22.5% reservation for SC/ST's in the private sector, the discrimination becomes very evident.
The Chances of getting a 'good' job for SC/ST's shall go up to 63%.
For OBC's the figure shall rise upto 41%.
These increases will be at the expense of the Upper Castes and Muslims, who'll bear the brunt of the government-mandated discrimination.
The figure for SC/ST's (63%) will now be almost 125% more than that of Caste Hindus (28%).
This is what the dumbass KamalNath intends to do. With the Intent of correcting a marginal difference of 25% (which may not be because of discrimination, mind you), he has come up with a grandiose reverse-discrimination scheme, that shall prove to be a nail in the coffin of the Upper Castes.
Labels: politics
Wednesday, January 25, 2006
A bunch of Retards
One wonders if the men at the 'commanding heights' of our political establishment are mentally challenged....
Nandan Nilekani has been awarded the Padma Bhushan for his contribution to 'Science and Engineering'...To the best of my knowledge, Nandan is not a Scientist, nor is he an Engineer (at least no longer). He is a businessman, and a very good one at that.
I'm sure the list would've been perused by a number of top bureaucrats, and the incongruity of it has apparently struck no one...
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One wonders if the men at the 'commanding heights' of our political establishment are mentally challenged....
Nandan Nilekani has been awarded the Padma Bhushan for his contribution to 'Science and Engineering'...To the best of my knowledge, Nandan is not a Scientist, nor is he an Engineer (at least no longer). He is a businessman, and a very good one at that.
I'm sure the list would've been perused by a number of top bureaucrats, and the incongruity of it has apparently struck no one...
Labels: politics
Saturday, February 19, 2005
An article on Anti-Americanism in The Economist magazine(subscription required).
What I liked was the author's succinct articulation of the reason behind
Anti-Americanism in the Arab world.
Arab anti-Americanism became widespread in the Middle East only with America’s open support for Israel after the 1967 six-day war............... Since 1967 America has been considered by Arabs to be incomprehensibly pro-Israeli. The potency of this view probably owes more to Arab failures than to anything else—failures to deal with Israel, to establish democracies, to create modern economies, to produce heroes in virtually any field of respectable human endeavour.
This must be someone’s fault. Whose? Why, the local thug (Israel) and its sponsor(America), of course.
I don't think a truer word has been spoken.This piece made me wonder as to why societies/cultures tend to nurse strong aversions towards each other.Or for that matter,at a more micro-level,how do individuals manage to build up strong hates/dislikes.If A despises B intensely,can we infer that in most cases the
feeling stems out of a deep-seated feeling of inferiority or personal inadequacy that A might be experiencing? Having been in A's stead many times,I would be tempted to answer in the affirmative.
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What I liked was the author's succinct articulation of the reason behind
Anti-Americanism in the Arab world.
Arab anti-Americanism became widespread in the Middle East only with America’s open support for Israel after the 1967 six-day war............... Since 1967 America has been considered by Arabs to be incomprehensibly pro-Israeli. The potency of this view probably owes more to Arab failures than to anything else—failures to deal with Israel, to establish democracies, to create modern economies, to produce heroes in virtually any field of respectable human endeavour.
This must be someone’s fault. Whose? Why, the local thug (Israel) and its sponsor(America), of course.
I don't think a truer word has been spoken.This piece made me wonder as to why societies/cultures tend to nurse strong aversions towards each other.Or for that matter,at a more micro-level,how do individuals manage to build up strong hates/dislikes.If A despises B intensely,can we infer that in most cases the
feeling stems out of a deep-seated feeling of inferiority or personal inadequacy that A might be experiencing? Having been in A's stead many times,I would be tempted to answer in the affirmative.
Labels: politics
Thursday, November 04, 2004
Well,Bush ended up winning rather comfortably in the end. A margin of over 3 million votes!
That's huge considering the fact that he had lost the popular vote in 2000. I guess there were
three major issues associated with this election:
1. Homeland Security
2. Economic issues like jobless growth,outsourcing.
3. Social issues like same-sex marriage,gun ownership,affirmative action et al .
I'm surprised that the american commentators consider terrorism to be the single most important issue that helped Bush clinch the election. The 3 states in the US that
are most vulnerable to a terrorist attack are NewYork,Washington-DC and California.And the
Democrats have emerged as the victors in each of these 3 states. In fact, in the District of Columbia, Kerry won 90% of the popular vote.Surely,this could not have happened if security was that big a concern. I think the social issues were the ones that tilted the balance in favour of Bush. His brand of compassionate conservatism and his espousal of the Christian faith helped him strike a chord with the masses. This election ,more than anything else, reinforces the fact
that heartland America remains deeply conservative,God-fearing and socially regressive.
By the way, this is what Gaurav has to say about Bush's second term in office. His concluding sentence is scary to say the least.
Well well well! George Bush has been re-elected and insanity has been retained in the proceedings. For India it is good news, as the chumminess will further develop. Powell, who went hoarse taking credit for the India-Pak rapproachment, is likely to be replaced. Well it might be good news for India. But it is not good news for many other countries.If I were George Bush and I were re-elected, I would call for the world map first and the champagne second. Bet the dude is working on a list of countries to pre-emptively attack.And with no election remaining, there is nothing at stake. Methinks the America of 2005-2008 is going to make the Germany of 1937-1945 look like a soft state.
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That's huge considering the fact that he had lost the popular vote in 2000. I guess there were
three major issues associated with this election:
1. Homeland Security
2. Economic issues like jobless growth,outsourcing.
3. Social issues like same-sex marriage,gun ownership,affirmative action et al .
I'm surprised that the american commentators consider terrorism to be the single most important issue that helped Bush clinch the election. The 3 states in the US that
are most vulnerable to a terrorist attack are NewYork,Washington-DC and California.And the
Democrats have emerged as the victors in each of these 3 states. In fact, in the District of Columbia, Kerry won 90% of the popular vote.Surely,this could not have happened if security was that big a concern. I think the social issues were the ones that tilted the balance in favour of Bush. His brand of compassionate conservatism and his espousal of the Christian faith helped him strike a chord with the masses. This election ,more than anything else, reinforces the fact
that heartland America remains deeply conservative,God-fearing and socially regressive.
By the way, this is what Gaurav has to say about Bush's second term in office. His concluding sentence is scary to say the least.
Well well well! George Bush has been re-elected and insanity has been retained in the proceedings. For India it is good news, as the chumminess will further develop. Powell, who went hoarse taking credit for the India-Pak rapproachment, is likely to be replaced. Well it might be good news for India. But it is not good news for many other countries.If I were George Bush and I were re-elected, I would call for the world map first and the champagne second. Bet the dude is working on a list of countries to pre-emptively attack.And with no election remaining, there is nothing at stake. Methinks the America of 2005-2008 is going to make the Germany of 1937-1945 look like a soft state.
Labels: politics
Wednesday, June 23, 2004
How Manmohan Singh became the Indian PM...
Liked this pic a lot!Pasted it from Guhan's blog. :)
Labels: politics
Tuesday, May 11, 2004
A HUNG PARLIAMENT?
Elections have concluded ,speculations galore and if exit polls are anything to go by,no pre-poll alliance will get anywhere near a majority. The resounding defeat of TDP in the
Andhra assembly elections have added credence to the exit polls and the NDA spin-doctors are increasingly finding it difficult to gainsay the inevitability of a hung parliament.
A fractured mandate was inconceivable 4 months ago when the house was dissolved ,but it was always on the cards after the NDA bungled its gameplan in TN and to a lesser extent,in Maharashtra.Snapping up ties with the DMK was the worst bloomer that they could have possibly committed , and it's a shame that they did not foresee the disastrous consequences of their action.
There's another school of thought that the DMK was keen to leave the NDA anyway to tie up with the Congress with an eye on the 2006 assembly election, and the NDA was in fact presented with a fait accompli i.e it was compelled to forge an alliance with Jayalalitha!Anyway,the bottomline is that the TN debacle might cost the BJP the majority that it so desperately needs.
Another miscalculation was in Maharashtra where a few months ago,the BJP and the NCP came within a whisker of forming an alliance,but their efforts were thwarted by Bal Thackerey who put his foot down owing to his personal antagonism with the NCP's Sharad Pawar.If that alliance had materialized,the Congress would have been wiped off in the state.
So much for my post-mortem!Now,all eyes are on our president!Will he invite Vajpayee as the leader of the largest pre-poll alliance,or will he resort to the expedient of calling upon any leader who can produce letters of support from 272 newly elected MP's?
Your guess is as good as mine!
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Elections have concluded ,speculations galore and if exit polls are anything to go by,no pre-poll alliance will get anywhere near a majority. The resounding defeat of TDP in the
Andhra assembly elections have added credence to the exit polls and the NDA spin-doctors are increasingly finding it difficult to gainsay the inevitability of a hung parliament.
A fractured mandate was inconceivable 4 months ago when the house was dissolved ,but it was always on the cards after the NDA bungled its gameplan in TN and to a lesser extent,in Maharashtra.Snapping up ties with the DMK was the worst bloomer that they could have possibly committed , and it's a shame that they did not foresee the disastrous consequences of their action.
There's another school of thought that the DMK was keen to leave the NDA anyway to tie up with the Congress with an eye on the 2006 assembly election, and the NDA was in fact presented with a fait accompli i.e it was compelled to forge an alliance with Jayalalitha!Anyway,the bottomline is that the TN debacle might cost the BJP the majority that it so desperately needs.
Another miscalculation was in Maharashtra where a few months ago,the BJP and the NCP came within a whisker of forming an alliance,but their efforts were thwarted by Bal Thackerey who put his foot down owing to his personal antagonism with the NCP's Sharad Pawar.If that alliance had materialized,the Congress would have been wiped off in the state.
So much for my post-mortem!Now,all eyes are on our president!Will he invite Vajpayee as the leader of the largest pre-poll alliance,or will he resort to the expedient of calling upon any leader who can produce letters of support from 272 newly elected MP's?
Your guess is as good as mine!
Labels: politics
