economics – Page 20 – Pertinent Observations

Thank God for the economic crisis

This post is based on my discussion with Baada yesterday. I hereby acknowledge his contribution to this post.

One of the hundred thousand random headlines that The HIndustan Times put on their front page during the last couple of weeks was a statement that China won’t hesitate to help out Pakistan in case India were to declare a full-scale war against Pakistan.

Given both historical precedents, as well as China’s perceived military might, it would be difficult, indeed, for India to attack Pakistan, unless of course there is some other external power supporting it. However, it would’ve been unlikely that the US would’ve supported India in such a war against Pakistan and China. Think current account deficit. Think external debt. Think Chinese foreign exchange reserves. The Chinese threat of economic terror on the US would’ve meant that the US would’ve left India alone to handle its two northern neighbours.

The current economic crisis has changed all that. No doubt it has fucked the US. The point is that it has fucked China even more. China, having been extremely dependent upon US imports in order to expand itself, seems to be in serious trouble now.

If China decides to sell its USD reserves now (the most obvious method of economic terror), the RMB is going to rise rapidly against the USD. And fuck China further in the exports department. RMB will also rise against the Euro and other major currencies. And China will get further fucked.

Effectively, the only way in which China can unleash economic terror on the US is by means of a suicide bomb. Thanks to the current downturn and all that, if China were to destabilize the US economy, it would also have to go down itself. This implies that the chances of China unleashing economic terror on the US in the current scenario are minimal.

Which means that if China decides to support Pakistan in case of a full-blown war, the US, as part of both its anti-terrorism strategy as well as its strategy to find a large Asian counterbalance to China, can support India. The threat of the US entering the war on India’s side will deter China from entering the war. Which means that Pakistan can’t count on Chinese support anymore. Which means that in case Pakistan does some mischief, India can consider the option of going to war. Which means that Pakistan is unlikely to do much mischief now.

So bless the flying spaghetti monster for the timing. Thank goodness this escalation in terror didn’t happen last year, when the Chinese economy was soaring, Acshully, rather than thanking the FSM, we can say that it has been bad timing by the terrorists.

Gym pricing

Earlier this evening, I went to check out a gym here in Gurgaon. The place itself was fairly nondescript – basic and decent but nothing extraordinary. What wasn’t nondescript was the price chart.

Monthly: Rs. 1800

Quarterly: Rs. 3600

Half-yearly: Rs. 5000

Annual: Rs. 7000

The amount of discount you get as you sign up for longer periods is stunning. One explanaitonis that atrition rates (for customers) are really high in businesses such as gymming. People regulalry promise themselves that they will do this and that, rather, they make resolutions. And one of the most popular resolutions is to become fitter. To join a gym. And thus, gyms can bank on people to make this kind of an irrational decision and sign up for a longer tenure than necessary and make money out of not helping people become fitter!

However, the attrition rate that the gym seems to be pricing in while setting their prices seems ridiculously high. By looking at the rates, they are betting that people who take up an annual subscription won’t attend the gym for more than three months. People who take a half-yearly thing will stay for a little more than two months.

This kind of a high attrition rate being priced in to the discount is quite worrying. It makes me think as to whether there is something wrong with the gym, because of which they are making the longer-term plans so attractive. And also from this perspective, the one-month plan looks like a real rip-off. The gym definitely doesn’t look as if it is worth Rs. 1800 per month. The discounted rates, however, look fine.

I’m wondering what to do. In the next couple of days I plan to check out one or two more gyms, and then come to a decision. However, if I decide upon the gym I saw this evening, I don’t know which plan to take. Surely there must be something that forces high attrition rates there, that the discounts are so high? But the one month thing looks like a rip-off. I don’t know what to do.

PS: if you know of any good and reasonable gym in Gurgaon, which is not too far from my place (DLF phase 5), let me know.

Sorry Vennai. Sorry MJ. Sorry Baal

But Lehman has to go. In the “larger interests” of continuing a vibrant, risktaking and efficient worldwide financial system, it is best that the Fed does not bail out Lehman.

I had written about this a few months back, in hindsight, after Bear was bailed out by Fed who arranged for a hurried takeover by JP Morgan. Given that Lehman is still alive, though just, I think it’s time to revisit the arguments that I had made there. Quoting from the earlier post:

However, I think the easiest method of regulating these banks would have been to convince them that they are not too big to fail. Yes, they allowed Bear to almost fail, and its shareholders almost got wiped out. However, my belief is that this episode will be quickly forgotten and people will be back to the same old risky practices once the current crisis is over.

Most wall street banks used to function under the assumption that they are “too big to fail” and that if they make huge losses, the US Taxpayer would somehow bail them out. This led to the oft-repeated unhealthy scenario of “private profits, socialized losses” and encouraged extremely risky behaviour. The Bear bailout has set a bad precedent in this regard, and might lead banks to go back to their bad habits once they are out of the current crisis.

Then, I had written that

What if Bear would have been allowed to fail? People with whom it transacted would have all lost tonnes of money. So how would that have helped? Basically, in future, banks would become more wary of counterparty risk. They would be continuously monitoring each other. If one guy behaved badly, other banks would stop talking to him. Which would push up the level of everyone’s behaviour. I think being boycotted by your friends is a bigger punishment by being caned by the teacher.

The near-failure of Lehman has presented the Fed with an opportunity of setting right the mistakes that it did when it arranged the Bear bailout. They are lucky that there is an investment bank, not too large, which is on the brink of failure, and whose complete failure can change the way wall street functions.

I hope Lehman doesn’t fail. I hope they manage to do something on their own, or arrange some sort of funding, to pick themselves up from this crisis. However, if these efforts fail, they should be allowed to fail, however ungracefully. A bailout can only worsen the way major investment banks function.

The stamp paper market

Following the Telgi scandal the Karnataka government had a great brainwave. They decided that one of the reasons duplicate stamp papers were in circulation was that stamp paper was available freely. The only remedy to this, it was decided, was to restrict sales of stamp paper. So now the street corner guy doesn’t sell the paper. Initially it was supposed to be available at a few select branches of the State Bank of Mysore. Currently, it is available in only one place in Bangalore – the head office of SBM.

A stamp paper is an extremely important and necessary document, and especially necessary if you need to transfer some stuff. Say some property or some assets or even a gas connection. And given that the number of such transactions hasn’t come down, and that people continue to die, the demand for stamp paper remains high. The supply is now restricted, and to get a stamp paper you need to stand in line for a few hours in the hot sun.

Given this situation of restricted supply, and assuming that people are not cancelling their transactions becasue of the lack of availability of the paper, I’m wondering where the paper is available. Is the only option to pay someone trusted in order to stand in line for half a day and get you the paper? Is there no better method? A semi-skilled labourer earns about Rs. 250 per day, so to make him fetch you a stamp paper that is notionally worth Rs. 20, you have to pay about Rs. 130 extra!

I’m sure there exists a black market in this. My problem is that I’m not able to find it. I’ve noticed that when the people at the counter issue the paper, they write your name and address on it. Nevertheless, i’m sure some black marketers have found a way in order to bypass this and peddle the papers. And as I mentioned, that the volume of deals hasn’t been going down implies there are more sales than what happens in that single window at the SBM office.

I’m willing to pay up to Rs. 100 each for a Karnataka government stamp paper that costs Rs. 20. Can someone direct me to the black market where these things are available? Many thanks in advance.

On Caste and the Gentleman Class

Some 3-4 days back, I wrote a post in the Indian Economy Blog with a conjecture as to why India never got an overwhelming “gentleman class” in the way that European countries did. I forgot to cross post it here back then, so I’m doing it now.

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The economics of motorcycle maintenance

Yesterday I gave my old bike for servicing. It was in such bad shape that for a while I was worried that the cost of servicing would be greater than the salvage value of the bike. This morning, when I went to pick it up, I was pleased to see that the bill came up to Rs. 445 only. The first thing I did after that was to ask the mechanic how much I could get if I were to sell my bike. And he started laughing loudly.

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The difference between Taleb and McKenzie

A few minutes back I finished reading Richard McKenzie’s Why popcorn costs so much at the movies and other pricing puzzles. Since the book is not available in India, I managed to procure an online pirated version through a friend. And since the book isn’t released in India, I didn’t feel guilty about reading the pirated version.

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Computer Science and Economics

Left-wing economics is idealistic, and the basic assumption is that everyone is a good guy, and he will work in the best interests of the system.

On the other hand, the basic assumption behind right-wing economics is that everyone is inherently a bad guy, and will work only for his own benefit. Hence, systems have to be devised so as to align a person’s selfish interests with the system’s interests.

To put it in other words, left-wing stuff is ideal. It assumes best case performance, or marginally below best case performance, from all players in the system. Similarly, in assuming that everyone has only a selfish motive, right-wing economics does what can be called a worst-case design.

Training in Computer Science inherently teaches you to think about the worst-case possibilities in everything.

In this context, isn’t it? surprising that so many people from a computer science background are leftist?

Billing rates

When I got my house painted three months back, the head painter suggested a new method of calculating his fees. Instead of charging by the man hour, which is how usually painters are charged, this guy proposed that we pay him by the square foot. Once all the work was done, he and I together measured up our house, and calculated his fee based on that.

And he had different slabs of rates, depending on whether we were using a single or a double coat, and there was a different rate for windows and grill work (there’s a lot of those in my house). This method of fee calculation was extremely convenient from my perspective as I didn’t have to run after the painters and make sure they were working. In the traditional model of hourly payment, you need to run after the workers and make sure they are working. If they take a tea break, they are wasting your money. If they are doing something slowly, again you are at a loss.

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Munger on urban transportation

The latest podcast on Econtalk has Duke economist Mike Munger talking about public transport, and how things have changed for the worse in Santiago after public transport was nationalized.

One of the points mentioned in the podcast talks about homogeneity in services after nationalization. Munger talks about how usage of the public transport system dropped after nationalization and people started using their cars much more. The reason, he mentions, is that earlier there were different classes of service. But the current left-of-center government decided that everyone has to travel in the same way and so the class system in buses was abolished.

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