Why Trump Won


A small cottage industry has emerged around trying to explain why Donald Trump won the US Presidential elections and is now set to become the 45th President of the United States, in January 2017.

In this column, I will not try and explain why Trump won, but something a little more than that. Hence, the headline to that extent is misleading.

The mainstream media in the United States is primarily based out of Washington and New York, which are on the east coast. Given this, we are now being told, they were not in touch with the realities of working class Americans in middle and rural America.

And it is these working-class Americans who ultimately voted for Trump. At least, this is the narrative that is emerging now, to explain why Trump won. Even if this post-facto narrative that is now emerging, is true, the Americans who voted for Trump did so for the wrong reason. Allow me to explain.

During the heydays of the manufacturing in the United States, the factories were based out throughout the large parts of middle America. Gradually, these factories have shut down and jobs have been lost. The conventional narrative is that these jobs have been outsourced to China, where its way cheaper to manufacture stuff that was earlier being manufactured in the United States.

This loss of jobs has impacted the sense of self of many Americans. As Ryan Avent writes in his book The Wealth of Humans—Work and its Absence in the Twenty-First Century: “Work is not just the means by which we obtain the resources needed to put food on the table. It is also a source of personal identity. It helps give structure to our days and our lives. It offers the possibility of personal fulfilment that comes from being of use to others, and it is a critical part of the glue that holds society together and smoothes its operation.”

Hence, those who have lost jobs over the last few decades, think the Chinese and the immigrants are to be blamed for it. In fact, this is one of the major reasons being offered by those analysing Trump’s success. We are now being told that Trump managed to tap into this frustration of middle America, of jobs that had been lost and so and so forth. Or as Donald Trump put it: “We will make America great again”.

But the figures do not reflect this. As economist Michael Hicks writes in a research paper titled The Myth and Reality of Manufacturing in America: “Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories.”

What does this mean in simple English? It essentially means that an average American worker is producing more stuff while working in a factory than he did in the past. And this is because of the advances made in automation and information technology. This has led to the average worker producing more. It has also led to the need for fewer factories carrying out manufacturing

As Hicks puts it: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”  Hence, American jobs have not been lost to China, nor have they been taken over by immigrants willing to work at lower salaries. They have essentially been lost to better robots.

But as the old saying goes “perception is reality”. The average white American living in middle America thinks that the Chinese and immigrants have taken over his jobs. He can come to that conclusion by driving around his area and seeing all the factories that used to manufacture stuff, now shut. He can see localities and areas which were once burgeoning with people, now having been abandoned. To him this is the reality.

The availability effect is at work here. Nobel Prize winning psychologist Daniel Kahneman defines the availability effect as the “ease with which instances come to mind”. Hence, an average American looks at the scene around him and thinks that the Chinese have taken away his jobs.

This is perception of the reality. This is an average American’s reality. And this has helped Trump win. Or so we are being now told.

The column originally appeared in Bangalore Mirror on November 16, 2016




“With every passing day I like Barack Obama even more,” remarked an ex-colleague a few days back. In fact, this seems to be the general feeling these days. The recent CNN/ORC poll put Obama’s approval ratings among Americans at 55 per cent. Obama’s rating in 2016 has been at 51 per cent. This has been the highest since his first year as President.

Obama is currently what Americans call a lame duck President. An individual can become the US President only twice. This essentially ensures that any President is typically lame duck during his last few months as President.

So what explains such high approval ratings for Obama, given that there is no way he is going to get a third term? What the economists call the contrast effect is at work. As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

And it is this contrast effect which has been driving up the approval ratings of Barack Obama. The elections to elect the next American President are scheduled to happen on November 8, 2016. The two main candidates are Hillary Clinton and Donald Trump. Of course, when people compare Obama to Clinton and Trump, he comes out right on top. This contrast effect has essentially ensured that Obama’s approval ratings have gone up.

In fact, the contrast effect has even led some people to say that Michelle Obama might be the right candidate for President in the years to come. As Myra Gutin professor at Rider University and author of The President’s Partner: The First Lady in the Twentieth Century put it: “Michelle Obama is able to talk to people in a way in which Hillary Clinton can’t.”

While the American first lady has maintained that she has no political ambitions, there is already speculation being made that she might be elected to the American Senate in the years to come. And all this is happening because of the contrast effect that is at work.

In India, closer to home, the prime minister Narendra Modi suddenly starts looking so much better when we compare him to the Congress Party leader Rahul Gandhi.

In fact, the contrast effect is a standard tool used in the marketing of products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine priced at $429. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled.

The $275 bread making machine was expensive on its own. But when compared to another machine at $429, it suddenly started looking like a good deal and the sales went up.

In fact, this is a standard trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.

Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover EconomistIn Dalston, Sainsbury’s [a big retailer] own brand of fresh chilled juice was sitting next to the Tropicana at about half the price.”

The moral of the story is, whether it’s juice or the American President, the contrast effect can really drive up sales.

The column originally appeared in Bangaore Mirror on October 19,2016

It’s no good blaming just China for the global stock market sell-off

It’s around 12.30 am at night as I start writing this column and I am watching the television coverage of the flip-flopping stock markets in the United States.
The Dow Jones Industrial Average started the day on August 24, 2015, around 1000 points down, from its previous close on Friday (August 21, 2015). It recovered more than 800 points and then started to fall all over again. Ultimately, it closed the day at 15,871.28 points, down 588.47 points or 3.58%, from its previous close.

Earlier in the day, the Shanghai Composite Index was down by 8.5% to close at around 3209.91 points. The BSE Sensex also saw a massive fall of 1624.51 points or 5.94% to close at 25,741.56 points. Stock markets around the world fell.

Analyst after analyst has blamed China for this massive fall in stock markets all over the world. And so have politicians. Before I get into this, here is some background. Until August 10, 2015, around 6.2 Chinese yuan made up for one US dollar. Between August 11 and August 14, the People’s Bank of China, devalued the yuan against the dollar. Since then the value of the yuan has moved between 6.38-6.40 yuan to a dollar. This was the biggest devaluation in the value of the yuan in two decades.

The yuan has been devalued in the hope of getting Chinese exports going again. In July 2015, the Chinese exports fell by around 8.3%. The fear is that the Chinese will continue to devalue the yuan in the days to come to prop up their exports.

A devalued yuan will lead to cheaper Chinese exports. Let’s understand this through an example. Let’s say a product exported out of China is sold at $50. At around 6.4 yuan to a dollar, the exporter makes 320 yuan every time he sells one piece of the product. We assume no other expenses for the ease of calculation.

Now let’s say the Chinese gradually devalue the yuan to around 7 yuan to a dollar. Then for every piece of the product that is sold the Chinese exporter makes 350 yuan. Instead of taking on the entire gain, the exporter may decide to cut the price in dollars and make his product more competitive. Let’s say he cuts the price of his product to $46. At this price he still makes 322 yuan, which is a little more than the 320 yuan he was making earlier. Nevertheless, given that he has cut his price by a significant $4, chances are he will sell more pieces of the product and make more money in the process. Chinese exports will go up and this will perk up economic growth as well.

Data from 2014 shows that China exports nearly 63% of its exports to the developed world (i.e. United States, European Union, Hong Kong, Japan, South Korea, Russia and Taiwan). Prices of products made in these countries would have to be cut, in order to compete with similar products which are made in China and exported to these countries.

This would lead to prices falling (or what economists like to call deflation) in these countries and that can’t be good for the overall economy. The stock markets are adjusting to this “new reality”. The Economist estimates that “more than $5 trillion has been wiped off on global stock prices,” since August 11, the day China first devalued the yuan against the dollar.

China has been largely blamed for this massive fall in stock markets all over the world. It is being said that China will export deflation to other parts of the world.

In fact, even Donald Trump, who is a Presidential candidate for the Republican Party in the United States, has an opinion on this. Speaking to reporters after the Chinese started devaluing the yuan he had this to say:I think you have to do something to rein in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything. China has no respect for President Obama whatsoever, whatsoever.
Well, you have to take strong action. How can we compete? They continuously cut their currency. They devalue their currency. And I have been saying this for years. They have been doing this for years. This isn’t just starting. This was the largest devaluation they have had in two decades. They make it impossible for our businesses, our companies to compete.
They think we’re run by a bunch of idiots. And what’s going on with China is unbelievable, the largest devaluation in two decades. It’s honestly – great question – it’s a disgrace

Economist John Mauldin had this to say regarding Trump’s comment on the devaluation of the yuan: “Before you dismiss this as nonsense, remember that it comes from a Wharton School graduate.” These MBAs I tell you.

The larger point is why is everyone blaming China for the massive stock market crash all around the world? What led to China letting its currency fall a little against the dollar between August 11 and August 14, 2015? Now that is a question worth asking and answering.

In October 2012, around 80 yen made up for a dollar. Since then, the Bank of Japan has been printing yen (or rather creating them digitally) to drive down the value of the yen in a bid to make Japanese exports more competitive and Japanese imports more expensive.

The idea was that if Japanese exports became more competitive on the price front (as a result of the devaluation of the yen, as we saw with the yuan example earlier), the total amount of Japanese exports would go up. At the same time, if Japanese imports became more expensive, the sale of goods produced locally would go up.

This would mean that exports as well as consumption of goods produced within the country would go up. And this would benefit the Japanese economy. As William Pesek recently wrote on Bloomberg.com: “The yen’s 35 percent drop since late 2012 made Japanese goods cheaper, companies more profitable and Nikkei stocks more attractive.” Further, with a fall in the value of the yen, Japanese exports became more competitive in comparison to exports from countries like Taiwan and South Korea.

Further, imports into Japan became more expensive and this hit countries like China. The Chinese exports to Japan fell by more than 10% in July 2015. By trying to devalue the yuan, China was only doing what the Bank of Japan has been doing for a while.

Other than the Bank of Japan, the European Central Bank, the central bank of the euro zone(essentially countries which use the euro as their currency), has also been printing money, in the hope of driving down the value of the euro. The ECB is printing around 60 billion euros a month.

As Mauldin points out: “First off, the two largest currency manipulating central banks currently at work in the world are (in order) the Bank of Japan and the European Central Bank. And two to four years ago the hands-down leading manipulator would have been the Federal Reserve of the United States…Today, the euro is off over 30% from its highs, as is the Japanese yen. Numerous other currencies are likewise well into double-digit slides. China has moved maybe 3 to 4%. Oh, wow.”

Also, it needs to be pointed out here that the Chinese yuan had been rising against the dollar, all this while, unlike what Trump pointed out. As Mauldin writes: “The rest of the world (Japan, Europe, Great Britain, Brazil, India, among others) [has been] letting their currencies drift down. The simple fact is that the Chinese currency rose by 20% over the last five years…It is utterly wrong-headed to call a 20% rise over almost 10 years “continuous devaluation.”

Hence, why blame only China? The currency wars are on, and China is just one part of it.
The column originally appeared on The Daily Reckoning on August 25, 2015

Trump’s wrong: How the Big Mac burger tells us Mumbai real estate ain’t cheap

donald trumpVivek Kaul

In a recent interview to the Forbes India magazine, Donald Trump the billionaire American investor and business tycoon said “Your real estate is unbelievably cheap…Mumbai is a great city and yet it is not priced like other comparable cities. It is priced lower than cities that are less important. That gives investors a tremendous amount of growth potential.” He made similar statements in interviews to several other publications.
This statement needs closer examination. Let’s do that by comparing prices in Mumbai and New York, the largest city in the United States.
A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
In comparison,
the price of a median home in New York in July 2014 stood at $524,500. For most of July 2014, one dollar was worth Rs 60. Hence, in rupee terms the price of a median home in New York stood at around Rs 3.15 crore ($524,500 multiplied by Rs 60). While Trump did not go into these details, this is the logic he must have used to say that the real estate prices in Mumbai are cheap, in comparison to other big cities around the world.
The trouble with this calculation is that it has been carried out at the market exchange rate. It doesn’t take the purchasing power of the currencies into account.
Purchasing power is essentially a concept which takes into account the fact that how many “units of a country’s currency [are] required to buy the same amount of goods and services in the domestic market[in this case India and the rupee] as a U.S. dollar would buy in the United States.” This is necessary because foreign exchange market determined exchange rates do not always take this into account.
There are several ways of taking purchasing power into account. A quick and dirty way is to consider
The Economist’s Big Mac Index. This index compares the price of McDonald’s Big Mac hamburger in various countries around the world. In July 2014, the Big Mac had an average price of $4.80 in the United States. In India it was sold at an average price of $1.75.
Hence, what could be bought at $1.75 in India would need $4.8 in the United States. This means Rs 105 (Rs 60 multiplied by 1.75) is worth $4.8. Or in other words one dollar is worth Rs 21.9 (Rs 105/$4.8), in purchasing power terms.
If one dollar is worth Rs 21.9, then the price of a New York city median home in rupee terms works out to Rs 1.15 crore ($524,500 multiplied by Rs 21.9). In comparison the average cost of a flat in Mumbai is Rs 1.2 crore. Hence, the real estate prices in New York are slightly cheaper than Mumbai once we take the purchasing power into account.
As mentioned earlier, using the Big Mac index was a quick and dirty way of taking purchasing power into account. Data from the World Bank can be used to carry out a more reliable calculation. In case of the Big Mac index we are just taking the price of one particular brand of burger for taking purchasing power into account. As per World Bank data one dollar is worth Rs 16.8, once we take purchasing power into account.
This means that the price of a New York median home in rupee terms is around Rs 88.1 lakh ($524,500 multiplied by Rs 16.8). This is almost 32% cheaper than the price of an average home in Mumbai.
These calculations clearly tell us that real estate in Mumbai is not cheap by any stretch of imagination, irrespective of what Trump would like us to believe. In a recent report brought out by UBS Investment Research analyst Ashish Jagnani estimated that Mumbai had 50 months of unsold inventory of homes. This is the highest among all major cities in India. Gurgaon comes in next with 30 months of unsold inventory.
Another recent research report titled 
India Real Estate Outlook brought out by real estate consultants Knight Frank points out that the unsold inventory of residential apartments in Mumbai stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell(QTS) can be explained as the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the report points out.
Further, the “inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell,” the report points out. Donald Trump had come to India for the launch of the Trump Tower, located in Worli, South Mumbai.
The enormous level of inventory in Mumbai is because people are not buying homes. This has led to an inventory of unsold homes which is at a seven year high across different cities., the UBS report points out. People are not buying homes, because homes have become too expensive. As Jagnani of UBS mildly puts it, there are “affordability concerns amid property prices” going “up 13-30% in key cities over last 2-years.”
The article originally appeared on www.firstbiz.com on Sep 14, 2014
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)

Cong trying to do a Romney in Gujarat by attacking Modi

Vivek Kaul

The Congress campaign in Gujarat is getting desperate. Sample this.
“When it comes to GDP growth, Gujarat is lagging behind states like Bihar, Odhisa and Chhattishgarh,” the Union Commerce and Industry Minister Anand Sharma said while addressing a public meeting in Gandhinagar. “Narendra Modi says Gujarat is most progressive, but if you have been to other states, Bihar, Odisha and Chattisgarh are much ahead,” he added.
When Indian politicians start using terms like Gross Domestic Product growth with voters you know that they don’t have much else to talk about.
Data from the planning commission shows that the state gross domestic product (GDP) at current prices (which does not adjust for inflation) of Bihar, Odisha and Chattisgarh grew at the rates of 20.4%, 16% and 15.3% in 2011-2012.
In comparison Gujarat grew at 15.8%. So the economic growth (which is what the state GDP measures) of Bihar and Odisha was faster than that of Gujarat. But Gujarat grew faster than Chattisgarh.
But as the old saying goes we should be comparing Apples with Apples and not Apples with Oranges. And to add to that as one of my teachers used to say “percentages should be used carefully lest we draw the wrong conclusions”.
Let me deviate a little and give an example to explain what I am basically trying to say.  Let us say you earn Rs 10,000 a month and your income jumps to Rs 20,000 a month, a gain of 100%. On the other hand let’s say you earn Rs 1 lakh a month and your income jumps to Rs 1.3 lakh a month, or a gain of 30%.
So even though the percentage gain in the first case is more, the absolute gain is more in the second case. Hence, when we are talking percentages it is important to keep the base number in mind. So Bihar did grow faster than Gujarat but it was because of what economists like to call the “base effect”.
Gujarat’s state GDP in 2010-2011 was Rs 5,13,173 crore. It went up by 15.8% to Rs 5,94,369 crore in 2011-2012. In comparison Bihar’s GDP for 2010-2011 was Rs 2,17,814 crore. And it grew by 20.4% to Rs 2,62,230 crore in 2011-2012.
The point being Bihar is growing on a lower base and that’s why the percentage growth is higher. The same argument holds for Odisha as well.
The other point that comes here is the population of the state. Bihar’s state GDP went up by Rs 44,416 crore to Rs 2,62,230 crore. This gain of Rs 44,416 crore was spread across a population of 10.38 crore people. This implies a gain of Rs 4,279 per individual who lived in Bihar.
Now let’s do the same calculation for the state of Gujarat. The GDP of the state went up by Rs 81,196 crore to Rs 5,94,369 crore. This gain of Rs 81,196 crore was spread across a population of Gujarat is 6.04 crore as per the 2011 census. Hence, this implies a gain Rs 13,447 per individual who lives in Gujarat.
This basically means that the growth in Gujarat at an individual level was three times that of Bihar in 2011-2012. Hence, Sharma’s argument that Bihar grew faster than Gujarat doesn’t really work.
And Sharma is not the only one attacking Modi. Ajay Maken, the youngest minister in the Union Cabinet alleged at a rally that the ruling BJP government was neck-deep in corruption in the name of development. Well that’s like the pot calling the kettle black. As has been proven time and over the last few years, India hasn’t seen a more corrupt government than the current UPA government ruling the country.
Mani Shankar Aiyer, a former minister in the UPA government, called Modi Ravana and asatya ka saudagar. He also called him a paani purush. Congress Rajya Sabha MP Hussain Dalwai, said “Modi is just a mouse before Sardar Vallabhbhai Patel”.
Bharat Solanki, Union Minister for Drinking Water and Sanitation, decided to beat all the abuses being hurled at Modi and termed him as “Nathuram Godse” and alleged that “under the BJP rule in Gandhi’s Gujarat not truth but lies carry more currency”.
Elections campaigns can get nasty. But the Congress doesn’t seem to have learned from its 2007 blunder when Sonia Gandhi called Modi a “maut ka saudagar”. While it might have sounded like a brilliant turn of phrase to the Congress speechwriter who wrote Sonia’s speech, it clearly backfired on the party.
The issue here is what does the Congress attack Narendra Modi with? Economic development as I showed above is healthy in Gujarat. It is one of the few states in the country which has a power surplus. The roads are ‘just’ fine and the cities are largely clean. Modi doesn’t really have any big corruption charges against him unlike the Congress government as well as the party.
So what do you do in a situation like this? You get personal and attack on Modi’s big blip, the 2002 riots in the state, and hope that it creates enough fear in the minds of the voter and he decides to vote for the Congress.
But does the issue really matter to the major portion of the voters in Gujarat? The answer is no. As Aakar Patel, a known Modi baiter, recently wrote in the Open magazine “Gujaratis like to think they are great national­ists. It doesn’t occur to them that India suffers every time they triumphantly keep memories of the massacre alive, by backing the man first unwilling or unable to stop it, now too incom­petent to prosecute its participants. They are voting Caesar(i.e. Modi) back to power.”
Hence, Congress’ negative campaign isn’t really going to work. In fact, it might work in  favour of Modi, who will continue to espouse the cause of Gujarati Asmita and portray himself as a lone gladiator taking on the Congress baddies.
Also negative campaigns do not really work. Take the case of the recent Presidential elections in the United States. Romney’s attacks on Obama got too personal towards the end of the campaign. Donald Trump, a Romney supporter, wanted to see the college records of Obama. The insinuation here was that Obama may got into college in America as a foreign exchange student from Indonesia.  Trump also wanted access to Obama’s passport. The insinuation here was that would allow him (i.e Trump) to prove something Muslim about Obama.
As marketing guru Al Ries told me in a recent interview on Firstpost “Mitt Romney spent most of his time attacking Barack Obama. That’s the wrong strategy. What a politician needs to do is to offer a positive concept first and then point out that his or her opponent lacks this concept.”
Some of the biggest state elections in India have seen winning parties run extremely positive campaigns. Akhilesh Yadav ran the umeed ki cycle campaign in Uttar Pradesh and Mamata Banerjee ran the poriborton campaign in West Bengal.  While they are busy making a mess of the states after coming to power, but then that is a different issue all together.
In comparison. the Congress party doesn’t really have any strategy in place when it comes to taking on Narendra Modi. And what it is doing clearly won’t work.
The article originally appeared on www.firstpost.com on November 12, 2012.
(Vivek Kaul is a writer.  He can be reached at [email protected])