Afanasyev et. al: Budget and the fiscal system

Coming from a monetary policy background I still find it buffing how much more complex is fiscal policy. There’s a substantial number of levers that central bank can use. Still you might call the key rate The Instrument.
When it comes to fiscal policy volume of revenue and spending, their structure and a universe of related issues come into play so that bottom line deficit/surplus alone is far from being an indicator of fiscal policy stance. This not even looking at issues of budget federalism or politics of the budget process.
I gather, this complexity of the topic does not lend it to clear exposition.
The result is, there’s still no decent book on fiscal policy in Russia. I went through a couple of textbooks which were not substantial enough to mention here, before deciding to give a closer look at ‘Budget and fiscal system’  by Mstislav Afanasyev.
The book had a promising feature of being authorised by Alexey Kudrin who was behind many of the current features of the fiscal system including the Reserve fund and NWF, medium term budget planning, fiscal rule etc.
Having spent a fair amount of time with this book I’ve come to the conclusion that it might be one of the better books on fiscal policy in Russia. But this resulted not because of high quality of the text but because the bar is set at quite a low level.
Some of its more visible shortcomings below.
Extensive quotes from the Budget code, weak on economics 
The book is basically an introduction into the fiscal law, but it does lack any analysis of the fiscal system from the economics view point. Even such basics as cross country comparative tax burden analysis, efficiency of spending, tax collection efficiency are avoided.
Weak on case studies, examples
The text is close to sterile when it comes to the intersection of law and its application. There’re exactly zero information on problems of fiscal federalism, fiscal discipline on regional and municipal levels and politics seem to be absent from the budget process.

The text needs editing: extensive repetitions

The text is written in the this variety of language which you might expect to find in legal papers, but which seems much less appropriate for the textbook. Many paragraphs are word by word repetition of text in the preceding paragraph with the difference being that the same idea applies for example to two levels of the budget system. I think a more thorough editing would allow to cut up to a forth of the text.

The rediculous pie 3d charts
The 3D pie charts (authors favorite type of chart) occupy up to half of the page to show the relationship between two numbers.
Stub chapters: sovereign external lending
The chapter on external lending of the country is basically a plan to write a chapter. In the chapter explicitly devoted to external debt there’s no single example of external lending of any country, not to say discussion of the terms or a purpose of such a loan.
The philosophical chapter fetish 
For some reason the book devotes a whole complete chapter on the philosophy of the fiscal system which goes as far as discussing the nature of the state. It tries to cover everything from Thomas Aquinas to Mikhail Bakunin. The reason for this escapes me.

My personal preference would be for more detailed presentation of the core material.

All in all, it is hard to recommend this  this book. Text obviously needs work: more cases, examples, less repetitions etc.

To add a constructive touch, here’s a list of sources on fiscal issues which are highly readable: i) Economic Expert Group’s publications, ii) NIFI’s Financial journal is a good source but I usually only look at the articles authored by NIFI’s own researchers and skip everything else.
Afanasyev et. al: Budget and the fiscal system

Fioramonti: Gross Domestic Problem

The other day finished Fioramonti’s  “Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number” [1] and here’s what I learned.

In the first part the author provides light introduction into history of attempts to measure level of economic activity.  Before GDP emerged as a dominant standard there were some alternatives including social accounts system that was in use in USSR.  Overall this background chapter is also the most powerful one.  One key take away is the notion of recency of creation of the GDP framework.  Today you compare one government to another on their performance in terms of economic expansion until the 1930s there was no systematic approach to measure it.

The second chapter is devoted to shortcomings of the GDP as a measure of growth of the economy. Here Fioramonti plunges into the usual kvetching: how does GDP change if the worker is happy or not, how is quality of life represented in the GDP growth number. Apparently the author implies that the decent indicator of economic activity would show externalizes of economic activity: degradation of environment and lower wildlife population. For reason that escapes me he’s not happy with having all those indicators but wants to incorporate ecology into GDP.

Another critic, which is somewhat more of a methodological issue is the fact that GDP does not record activity of some of the  sectors, that are deemed outright illegal… in some periods, but might someday admitted into the formal economy. This however again is a minor issue. This part of the book is considerably weaker than the fitst, but…

…the weakest part comes last. It’s the collection of proposals for reform. For one, Fioramonti promotes the idea of ‘local money’, the money which can be earned and spent within some predefined geographical coordinates. This, in my view, does solve no problem, but in extreme scenario makes the owner of such money essentially chained to the place where his savings worth something.

Other statements are too emotional:  “There’s little doubt, indeed, that the popularity of national income accounts has given the upper hand to all industries that pollute and deplete, since GDP portrays these acts as economic progress.”

This is a rather naive way of thinking of the forces behind ‘pollution and depletion’.

The whole proposals chapter reminds me of the good old Hugh Laurie scetch:

Overall the first chapter might worth a read, but the book is quite unfocused and short on original ideas.

Fioramonti: Gross Domestic Problem

Ha-Joon Chang: 23 Things they don’t tell you about capitalism

Got the book as a gift from one of the good ol’ CBR friends, actually one of the best of them. Ha-Joon’s ’23..’ is  light reading with no serious data work stuffed with a couple of historical anecdotes.

The structure of the book is as promised consists of 23 ‘things’ – short essays – which start with a presumably common fallacy followed by paragraph in which Ha-Joon shares his own take on the matter in a paragraph or two and ends with a larger discussion of the matter.

The topics range from the role of education in promoting economic growth, ability of economics to contribute meaningfully to the common good of the society to high frequency trading.

The one sentence impression the book is Ha-Joon prepared an antidote for sophomores who’ve taken Econ101 too literally, even religiously.

 In this it succeeds.
 However, I have three gripes with the book.
 First, the name of the book suffers an awful case of click-bait syndrome. Why the author who is seemingly serious with background as an adviser to WB, IMF etc. would go for something which is one step away from ’24 tricks that energy companies don’t want you to know?’ is a complete mystery. Additionally a couple of conspiracy theory markers are scattered through out: ‘how the capitalism really works’, ‘a chance for people to wake up to reality.’

Second, most of the ‘things’ are trying too hard to extract a quantum of surprise from the facts that are blindingly obvious:

thing 10 is “for international comparisons you’d better use PPP based figures”

thing 16 is “humans are not protein based calculators trying to maximize well defined utility functions”;

thing 19 is “corporations do plan for the future and use internally non-market mechanisms to distribute resources”;

thing 22 is “high frequency trading will not create generally useful technological advances directly”.

Third, the discussion of the issues is mostly qualitative and detached from the real data (except for the PPP thing, where author comes dangerously closely to some systematic cross country comparison but narrowly avoids it slipping into another round of anecdotes), and from the results already available from the literature.

Let me illustrate the latter point. One the more interesting ‘things’ deals with the fact that equilibrium on the labor market is in large part determined by the immigration controls. This in fact a very reasonable comment and which deserves discussion. However the author jumps from the fact that taxi drivers in Mumbai and Stockholm earn different amounts of USD to the conclusion that ‘most people in the rich countries are paid more than they should be’ being protected by that same immigration control. This a rather brave statement and various studies that were dealing with the same exact question do not find a lot of convincing evidence to support the matter.

For one Dustmann et al., 2003 conclude:

“The main result of the empirical analysis is that there is no strong evidence of large adverse effects of immigration on employment or wages of existing workers. In this respect our findings are consistent with empirical results from international research. There is some weak evidence of negative effects on employment but these are small and for most groups of the population it is impossible to reject the absence of any effect with the data used here. Insofar as there is evidence of any effect on wages, it suggests that immigration enhances wage growth.

Overall, ’23..’ is a book that I would not recommend, but handful of the ‘things’ deserve attention including 1, 2, 4,17.

Below is a selection of quotes:

  • “Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation”, p.5
  • “While they complain about minimum wage legislation, regulations on working hours, and various ‘artificial’ entry barriers into the labor market imposed by trade unions few economists even mention immigration control as one of these nasty regulations hampering the workings of the free labor market”.
  • “Attempts to bring inflation to very low levels have reduced investment and growth, contrary to the claim that greater economic stability […] will encourage investment.” p.61
  • “Our obsession with inflation should end. Inflation has become the bogeyman that has been used to justify policies that have mainly benefited the holders of financial assets, at the cost long-term stability, economic growth and human happiness” p.61
  • “[…] the very fact that its PPP income is more or less the same as its market exchange rate is proof that the higher average standard in the US is built on the poverty of many” p.108
  • “poor climate does not cause underdevelopment; a country’s inability to overcome its poor climate is merely a symptom of underdevelopment” p.121
  • “But an influential Marxist school of thought argues that capitalists deliberately ‘de-skill’ their workers by using the most mechanized production technologies possible, even if they are not the most economical, in order to take the workers more easily replaceable and thus easier to control.”

1. Dustmann, Christian, et al. “The local labour market effects of immigration in the UK.” (2003).

Ha-Joon Chang: 23 Things they don’t tell you about capitalism