Thursday, April 28, 2011

Walmart in India

Raj Jain, President of Walmart India, talks about the potential outcome if India opens retail to foreign businesses. Currently, foreign companies like Walmart are limited to wholesale joint ventures (i.e. must partner with another Indian company and can only sell to stores, not directly to consumers).

- Now 30-40% of food output does not make it to consumers. Jain thinks a good cold chain could cut that in half. He points out that the spoiled food is not necessarily wasted - it is used to feed animals.

- Consumers would gain from the convenience of one-stop shopping, transparent prices without bargaining, and frozen foods. Jain notes that China opened up retail 15 years ago but 75% of retail sales are still conducted at Mom and Pop shops. Walmart would not mean the end of local retail.

Economist (4-14): Retailing in India Send for the supermarketers

Thursday, April 14, 2011

Final Fed lecture

For the last post of the semester, I invite my students to watch and comment on two opposing views on quantitative easing. The term quantitative easing is used to describe the Fed's policy of buying  assets to pump money into the economy, thereby stimulating demand and reducing unemployment.

Opposed: over 4 million views, and lots of errors (jokes?) (7 minutes):

Pro: less than 6 thousand hits, but no errors (3 minutes):

Monday, April 11, 2011

The natural rate of unemployment

Christina Romer is currently on President Obama's Economic Recovery Advisory Board and was the former Chair of the Council of Economic Advisers. She is a full professor at the  University of California, Berkeley with an illustrious research and teaching record.

In this New York Times article she makes a good argument that the structural unemployment rate has not increased. If the unemployment rate stays high for a long time then the story changes - some people could lose their skills and become long-term, structurally unemployed. Some economists have argued that there already has been an increase in the number of long-term, structurally unemployed due to problems in the housing and financial sectors.

Romer points out that there were only 1.3 million people working in those sectors before the crisis. Even if none of them ever work again (but keep looking so they still count as unemployed), there are too few of them to have a big impact on the national unemployment rate. This ignores the possibility that other people who made stuff for new houses (like refrigerator manufacturers or landscapers) might also be permanently out of work.

For me, her most convincing point is that people who lost jobs in the housing and finance sectors are able to find new jobs at about the same rate as people who lost jobs in other sectors. In other words, people who worked in housing and finance are able to switch sectors - they are not much more likely to stay unemployed than anybody else. Once the recovery is fully underway they, and the rest of cyclically unemployed, should be able to get new jobs.

For more on this, and the effect of underwater homes see:

NYT (4-10-2011): Jobless Rate is Not the New Normal by Christina Romer

Jan Hatzius, Chief Economist for Goldman Sachs, agrees the natural rate (= structural + frictional) has not increased much and is probably now about  5.5%. (from 9-1-2010 interview on CNBC, 5 minutes)

Crash course on structural, cyclical and frictional unemployment (2 minutes)

Thursday, April 7, 2011

Fun with Graphs

Graphical tools can help tremendously with information overload. A challenge for my students: this week look over these sites and report on a pattern you observe. Try to find a pattern other students haven't found yet.

I. McKinsey's interactive graph on cities
McKinsey Quarterly : Cities the next frontier for global growth (2011)

Below is my favorite graph of the hundreds you can generate yourself at this McKinsey site.  It shows which cities will have the most  middle class consumers (households with income greater than $20,000 per year) in the year 2025. The height of the bar represents the number of middle class households. Only the top cities (by number of middle class households) are shown. I counted 23 bars.

This graph sends a clear  message to business:  if you want to sell lots of product in 2025, then you need to be entering emerging markets now. By 2025, only 3 of the top 23 cities (ranked by number of prospective middle class customers) will be in the U.S..

II. Gapminder's interactive graphs on health and wealth
Gapminder World
If this doesn't load, go to and then click on tab for Gapminder World

Below is a screenshot of one of Gapminder's interactive graphs for 1950. There was a clear distinction between groups of countries. By 2009, things look very different - only Sub-Saharan Africa and Afghanistan fall in the Developing Countries square. This explains the rise of alternative labels - like low income countries (LIC).

Click on the following link to see the graph for yourself: Gapminder "developing country" graph . If you explore the site, you will find many other graphical demonstrations of the relationships between countries' health and wealth over time.                    

Life Expectancy on vertical axis (y-axis) and GDP per person on horizontal axis (x-axis)
Key: Each country is a bubble. A bigger bubble indicates the country has more people.
The color of the bubble indicates where the country is located: 
             orange = Europe and former Soviet Union 
             yellow = North and South America
             red = Australia, China and Pacific Island Nations
             light blue = India, Pakistan, and Bangladesh
             dark blue =  sub-Saharan Africa
             green = North Africa

Wednesday, April 6, 2011

Touching the third rail

For the benefit of students who have not heard the expression "touching the third rail": Some trains are powered by an electrically charged third rail. It can kill  you to touch this rail.
In the U.S., entitlement spending has long been considered a third rail. Any politician who touches entitlements, would be run out of office. 

But finally, someone has been brave enough to propose actual legislation that addresses spending on entitlements. The big three entitlements are: Social Security (income for the elderly), Medicare (healthcare for the elderly), and Medicaid (healthcare for the poor and disabled - includes nursing home care for many elderly, approximately 25% of Medicaid spending goes towards the elderly - see Kaiser diagram).

By 2020, the Congressional Budget Office projects that these three entitlements will consume half of Federal spending. If  spending on entitlements is not cut and the U.S. wants a balanced budget by 2020,  then either: (1) military expenditures and discretionary spending will have to be cut sharply by 1/3, (2) taxes will  have to be increased, or (3) some combination of the first two options.

So far,  most polls of the public show they are opposed to cutting entitlements, but that has not stopped Congressman Paul Ryan from proposing a plan to tackle the U.S.'s long term budget deficit by cutting entitlements. He proposes changing the rules so that Medicare recipients receive a voucher towards their private health insurance (instead of the U.S. government footing the whole bill). Medicaid would be replaced with fixed block grants to the states. He didn't propose anything for Social Security, but frankly it is the least problematic of the three.

This proposal would limit the federal government's risk, but increase the exposure of states and future seniors to rising health care costs. Theoretically, it is possible that if plans are well designed, once consumers face more of the costs they will shop for bargains and the private sector will compete for them.

Ryan's plan would not affect anyone 55 years or older today. This would certainly increase its political chances of passing, but it may not be fair to today's younger generation. For more on this read,

NY Times (4-5-2011) Generational Divide Colors Debate Over Medicare’s Future

Now it is up to the Democrats to offer details of an alternative solution. Some solution is required.

Notes: According to the congressional Budget Office (, total projected federal spending in 2020 is $5,412 billion, and total projected federal revenue in 2020 is $4,703 billion. This results in a projected deficit of $710 billion. To close the $710 billion budget gap solely by reducing spending on defense and "other", spending on these programs would have to fall from $2,057billion (16% + 22% of $5,412 billion) to $1,356 billion ($2,057 - $710), which represents a 34% drop.  

Testimony before the Committee on the Budget, United States Senate (charts)