Dear parents, the engineering bubble has burst

In my extended-family when a kid grows up, the parents push him towards getting an engineering degree. If I may generalise a little more this is largely true for the Kashmiri Pandit community my parents belong to.

Once a youngster gets into an engineering course, all is forgiven and it is automatically assumed that the future will now be bright. And this may have been largely true for the nineties and the noughties, when India’s information technology companies were taking off. But now we are in the teens and the story has changed.

Why? The “indifference principle” is at work. As Steven E. Landsburg writes in The Armchair Economist: “Unless you’re unusual in some way, nothing can ever make you happier than the next best alternative.”

Landsburg explains the indifference principle through an example. As he writes: “Would you rather spend a bright summer day at the shopping mall or the…Fair…If the Fair is more fun than the mall, people flock to the Fair, building up the crowd size until it’s not more fun than the mall.”

So, the Fair doesn’t remain fun anymore because way too many people turn up. Something similar has happened to the engineering degree in India. The country is producing way too many engineers. As analyst Akhilesh Tilotia of Kotak Institutional Equities writes in a recent research note titled How many graduates are required to change a light bulb?: “Engineering graduate output of Indian universities stood at 15 lakh a year in FY2015 [the period between April 1, 2014 and March 31, 2015], up from 3 lakh in FY2005 [the period between April 1, 2004 and March 31, 2005].”

Hence, over the last decade, the number of engineers being produced has gone up five times. In fact Tilotia in his book The Making of India writes: “India in 2016 will graduate more engineers annually (1.5 million) than China (1.1 million) and the United States (0.1 million) combined.” One impact of so many engineers being produced is that it has “reduced the importance of ‘capitation fees’”.

Nevertheless, the trouble is that the employment opportunities for engineers haven’t gone up at the same speed. Information technology companies which were taking in a bulk of the country’s engineering graduates, aren’t recruiting at the same pace as they were in the past. As Tilotia points out: “net hiring in the IT sector has remained stagnant at 2.5 lakh [per year] over the past five years until FY2015”.

In fact, if we leave out the individuals recruited by the BPO sector from these numbers, the number of employees recruited by the information technology companies in the financial year ending as on March 31, 2015, stood at 2.09 lakh. The number of engineers produced, as mentioned earlier, stood at 15 lakh. Hence, there is a clear disconnect between supply and demand. The engineering dream to prosperity has clearly broken down.

The fascination of Indian parents for pushing their children towards getting an engineering degree has been built on hearing too many “success stories” of Indian engineers working in information technology companies in the United States on dollar salaries and other parts of the world.

Even those Indian engineers who have settled in the country and started working for the information technology companies in the nineties and up to the mid noughties, have done well for themselves. And these success stories have had a lot of impact on the thinking of parents.

The trouble is that the story has changed. As Tilotia writes: “IT companies have publicly stated that they are looking to automate meaningful parts of service offerings…Automation of workflow can significantly impact the prospects of entry-level joinees – their work is more susceptible to being automated.” Nevertheless, stories take a long time to unravel.

To conclude, as Landsburg writes: “In order for one activity to make you happier than another, you must be unusual in some way.” Hence, dear parents, the engineering bubble has burst. And as far as children go— please let them be!

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on August 5, 2015

Economics made easy

Vivek Kaul
Name of the book: Day to Day Economics
Author: Satish Y Deodhar
Pages: 214
Publisher: Random House India
Steve Landsburg wrote The Armchair Economist – Economics and Everyday Life in 1993. The book was the first of its kind and was written in a very simple way to explain the subject of economics to anybody and everybody.
In the just released second edition of the book Landsburg explains his reasons behind writing the book. One day in 1991, he had walked into a medium sized book shop and realised that the shop had around 80 titles on quantum physics and the history of the universe. But it did not have a single book on economics that could be read by even those who did not have an academic background in the subject. This motivated him to write The Armchair Economist and two years later he had a bestseller ready.
The little story tells us a few things about the “dismal science” called economics. Economists over the years have found it very difficult to communicate in a language which everybody can understand. On the flip side people haven’t paid enough attention to the subject even though it impacts them more than other subjects.
But things can only be set right once economists start writing and communicating in a language which everyone can understand. Satish Y Deodhar’s Day to Day Economics attempts to set this situation right. The book explains the economic terms and concepts that get bandied around in newspapers and television channels, in a very simple lucid sort of way, making it accessible to everyone.
What makes the book even better is the fact that Deodhar’s links the economic concepts to political and other events that are happening around us. Too many teachers of economics in the past have taught economics as a theoretical subject full of maths in isolation of what is happening around us. As Deodhar puts it “It…matters whether or not economics is made interesting in the classroom”.
Deodhar, a professor at IIM Ahmedabad, discuses the concept of fiscal deficit and the current state of economic affairs in good detail. Fiscal deficit is the difference between what a government earns and what it spends. For anyone wanting to understand why their equated monthly installments (EMIs) have gone up over the last few years this book is a must read. At the heart of the problem facing the Indian economy is the fact that the government expenditure has gone up at a much faster rate than its revenue. Hence the government has had to borrow more to finance its increased expenditure leaving less on the table for other big borrowers like banks and housing finance companies.
This has meant higher interest rates and higher EMIs. While understanding this will not bring down your EMIs in anyway but you will surely know who is to be blamed for your spiraling EMIs. But more than that you will understand that once a government commits to a certain expenditure, it is very difficult to curtail it. As Deodhar points out “it is difficult to curtail government expenditure once the government is committed to them.” What this obviously means is that your higher EMIs are likely to continue.
The solution as Deodhar rightly points out is collection of more taxes. This can only happen when the Goods and Services Tax, which seeks to replace state and central sales tax, is introduced. Also its time to get rid of the amendment ridden Income Tax Act and replace it with the Direct Taxes Code.
Deodhar explains the concepts of banking and inflation in the same lucid way. That apart a few mistakes seem to have crept in the book. The Foreign Direct Investment allowed in the insurance sector in India is 26% and not 27% as the book points out. Also the book says that banks in India were first nationalized in 1967. That is incorrect. The banks were first nationalized in 1969.
Another point which falls flat is Deodhar’s link between interest rates and the rupee-dollar exchange rate. Deodhar says that when interest rates are high in India, it makes sense for foreigners to lend money in India. When this money comes to India the foreigners have to change their dollars into rupees. This pushes up the demand for rupees and it appreciates in value against the dollar. While theoretically this makes perfect sense, what is happening in India is exactly the opposite. The interest rates in India are high, despite that the rupee has fallen in value against the dollar. This is because India imports most of the oil it consumes. It needs dollars to buy the oil. Hence when the oil companies buy dollars and sell rupees to buy oil, rupees flood the market, leading to its value depreciating against the dollar. At the same time foreigners haven’t been bringing money into India because they are worried about the government’s burgeoning fiscal deficit.
What this clearly tells us is that economics is not a fixed science like physics. Any action can generate different kind of reactions and even stump the best economists. And that is why most economists try and look at various options while explaining things. This lack of clear answers can even frustrate the best of people at times. As the American President Harry Truman once demanded “Give me a one-handed economist. All my economists say, ‘on the one hand…on the other’”.
(The article originally appeared in the Asian Age on September 16, 2012.
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected]

The Armchair Economist talks about seatbelts, popcorn at the movies, why we vote and safe sex

Most economists talk about the graver things in life. Fiscal deficits, interest rates, GDP growth rate and once in a while about why they think that the financial world is coming to an end. But that is not the case with Steven E Landsburg, a Professor of Economics at the University of Rochester in the United States, where students recently elected him Professor of the Year. Nearly twenty years back he wrote The Armchair Economist, a book which brought an easy understanding of the dismal science to the masses. The book has been a bestseller since then motivating him to write a new and revised edition which was published this.
Landsburg is also the author of Fair Play, More Sex is Safer Sex and The Big Questions. He considers himself as the most important figure in the world of modern poetry, in consequence of the his status as the only living being who reads poetry but does not write it. In this freewheeling interview to Vivek Kaul, he talks about why safe belts are unsafe and more sex is safer. He also speaks on why he has no clue of why people vote and popcorns being so expensive at the movies.
You write that “most of economics can be summarized in four words: people respond to incentives. The rest is commentary.” Why do you say that?
I say that because it’s true, and because it’s important. When the price of lettuce falls, people buy more lettuce. When the price of haircuts falls, people get more haircuts. When the penalty for murder becomes more certain, people commit fewer murders. Due to some combination of arthritis (which makes it difficult for me to turn my head to the right) and irresponsibility, I had a years-long habit of backing the right rear corner of my car into lamp posts, trees and other stationary obstructions. Often enough so the body shop owner joked about giving me a quantity discount. I paid $180 to get my bumper repaired, and I came to think of this as an unavoidable expense. Then in 2002 I got a new car with a fiberglass bumper, backed it into a tree, and discovered that this repair was going to cost me over $500. I have not backed into anything since. Even economists respond to incentives.
Do seatbelts bring down the number of traffic related deaths?
This is a good illustration of why it’s important to think about incentives. A seat belt makes it easier to survive an accident, and so reduces the incentive to avoid accidents in the first place.
But research shows that drivers with seat belts drive less carefully —to such a large extent that they’re just about as likely to die as drivers without seat belts. Also pedestrian deaths seem to have increased. If you find it hard to believe that people drive less carefully when their cars are safer, consider the proposition that people drive more carefully when their cars are more dangerous. This is, of course, just another way of saying the same thing, but somehow people find it easier to believe. If I took the seat belts out of your car, wouldn’t you be more cautious when driving? What if I took the doors off? So if we really wanted to reduce the number of driver deaths, the best policy might be to require every new car to come equipped with a spear, mounted on the steering wheel and pointed directly at the driver’s heart. I predict we’d see a lot less tailgating.
Why is popcorn so expensive at the movies?
Not for any of the reasons that pop quickly into most people’s minds. It’s not enough, for example, to observe that the theater owner is exercising his monopoly power. If that were the whole story, he’d be charging monopoly prices not just for popcorn but for everything else in the theater — the water fountains, the restrooms, and the right to sit down once you’ve entered the theater, for example. The reason he doesn’t charge monopoly prices for those things is that his theater would become less desirable, and to maintain his clientele, he’d have to slash prices at the box office. The same would be true of popcorn, if everyone bought the same amount of popcorn. What’s gained at the popcorn stand is lost at the box office. In fact, it would be even worse than that: By jacking up the price of popcorn, he makes the entire theater experience less desirable, so the total amount he can extract from his customers is lowered, not raised. So the high price of popcorn can’t be explained as a way to exploit customers generally; it must be a way to exploit popcorn-lovers in particular. And this makes sense only if the theater owner believes that popcorn-lovers are more likely to tolerate high prices than popcorn-haters are. Why should that be the case? I’m honestly not sure.
Why is more sex safer sex?
In economics, we’re always thinking about the incentives faced by decision-makers. A decision-maker who does not face all the consequences of his actions often makes bad decisions from a social point of view. For example, the factory owner who decides to pollute the air usually does not feel all the consequences to other people’s health, and therefore over-pollutes. Likewise, people who are very likely to be infected with terrible diseases, when they take new sexual partners, are not accounting for all the consequences of their decisions, which means that from a social point of view, they have too many partners. But the flip side of that is that people who are very likely to be *un*infected, because of their cautious past behavior, when they take new sexual partners, make sex (on average) *safer* for the rest of us. If the likely-to-be-infected are like polluters, then the likely-to-be-uninfected are like anti-polluters: People who go out and pick up trash in the parks.
Why do people vote even when they know that there one single vote is unlikely to influence the outcome? Do they do it because they think that in a democracy it’s a good thing to do?
I haven’t the foggiest idea why people vote. But to say that it’s “a good thing to do” is hardly an explanation. There are lots of good things to do. Instead of spending 15 minutes at the voting booth, you could spend 15 minutes picking up trash in the street. If all you’re looking for is “a good thing to do”, it’s still not clear why you’d choose to vote.
Why are failed corporate chieftains often retired by their boards with very high pensions and a lot of other facilities?
Partly so the chieftains won’t be afraid to take risks. We want our corporate executives to take reasonable risks in order to boost profits. Sometimes reasonable risks lead to failures. If every failure meant personal ruin, executives would be far too cautious. When a corporate risk turns out badly, it’s often hard for the stockholders to know whether the executive was foolish or just unlucky. In case he’s proven foolish, they want to fire him. In case he was just unlucky, they want to treat him well, so that future executives will be willing to risk bad luck.
What is common between college education and long useless peacock tails?
They’re both used to show off. And for that reason, they can both be wasteful. Growing a longer tail than your neighbors’, just to outshine him, is, from a social point of view, a waste of effort — you gain status but your neighbors lose status, so on average nobody comes out ahead. Likewise, getting more years of schooling than your neighbors, insofar as you’re doing it just to advertise your willingness to endure the ordeal, can be socially wasteful. Of course, some students actually learn something useful while they’re in school, so the analogy with the peacock’s tail is incomplete.
Do death penalties deter crime or are there better ways out?
The bulk of the evidence is that passing a death penalty law has very little effect on crime, but that actually executing people has a very substantial effect. In the United States, quite a few studies have found that each execution prevents several murders — typically the studies find that “several” means approximately eight. Of course that doesn’t prove that the death penalty is a wise policy — you might worry, for example, that a government empowered to exact the death penalty will not always use that penalty wisely or even honestly.
An increasing amount government debt puts more money into people’s pockets. What is the logic behind saying that?
There are two ways the government can increase its debt. One is by spending more; the other is by taxing less. Obviously, when they tax less, they put more money into people’s pockets. In that case, the net effect on individual finances is mixed: On the one hand, you, as an individual taxpayer, will eventually be taxed to pay off not just the government’s debt, but also the interest on that debt. On the other hand, you, as an individual taxpayer, not only have more money in your pocket, but also the opportunity to earn interest on that money. Those effects roughly balance out. So if government debt is causing you harm, it must be for reasons more subtle than the ones we usually hear about.
Why do celebrity endorsements increase the sales of the product even when we know that the celebrity has been paid to recommend the product and isn’t really an expert on that product?
The company that hires a celebrity endorser is sinking a lot of money into advertising — money that will take them years to earn back. You can be pretty sure this is a company that cares about its reputation, and so is likely to provide a quality product.
You write that advocates of mandatory helmet laws for motorcycles argue that arider without a helmet raises everyones insurance premiums. The opposite might very well be true. Why do you say that?
If helmets are voluntary, then helmet-wearers get better insurance rates for two reasons. First, helmets prevent injuries. Second, by wearing a helmet you can advertise that you’re a generally cautious person — the sort who probably gets his brakes checked regularly and so on. If helmets become mandatory, you still get the first break — the helmet is just as effective when it’s mandatory. But you no longer have an opportunity to earn the second break, so your premiums might well rise.
Why are employees better off with some amount of monitoring from their employers?
If your employer had no way of knowing whether you were showing up for work or performing any of your duties, it’s unlikely he’d be willing to pay you very much. The more he can verify, the more valuable you’re likely to be. So, for example, software programs that keep track of office workers’ keystrokes, while they might feel intrusive to the worker, are also making that worker more valuable and quite likely account for the employer’s willingness to pay the worker’s salary.
Why does the business world reward good dressers?
I don’t know for sure, but I suspect that the ability to dress well is a signal of several valuable skills: The ability to observe fashion trends, the intuition to understand the limits of what’s acceptable, and the talent to be creative within those well-defined limits.
What made you write the book The Armchair Economist?
One day in 1991, I walked into a medium sized bookstore and counted over 80 titles on quantum physics and the history of the Universe. A few shelves over I found Richard Dawkins’s bestseller *The Selfish Gene* along with dozens of others explaining Darwinan evolution and the genetic code. In the best of these books, I discovered natural wonders, confronted mysteries, learned new ways of thinking, and felt I had shared in a great intellectual adventure,
founded on ideas that are dazzling in their scope and their simplicity. Economics, too, is a great intellectual adventure, but I could find, in 1991, not a single book that proposed to share that adventure with the general public. There was nothing that revealed the economist’s unique way of thinking, using a few simple ideas to illuminate the whole range of human behavior,shake up our preconceptions, and jolt us into new ways of seeing the world.
I resolved to write that book. *The Armchair Economist* was published in 1993, and attracted a large and devoted following. In the intervening 20 years, it has earned much high praise. But what I take most pride in is that *The Armchair Economist* is still widely recognized among economists as the book to give your mother when she wants to understand what you do all day. After 20 years of correspondence with readers, I found new ways of explaining this material that I thought were even clearer and more engaging than in the original book. That — plus my desire to update many of the examples for the 21st century — motivated me to write the new and revised edition that was published in 2012.
(The interview originally appeared in the Daily News and Analysis on August 13,2012.
(Interviewer Kaul is a writer and can be reached at [email protected])