Tuesday, June 30, 2009

Altering Incentives

. Tuesday, June 30, 2009
0 comments

Much like Richard Posner, Martin Wolf is not a very big fan of Obama's proposed restructuring of the financial regulatory structure. But rather than focus on the fallibility of regulators as Posner does, Wolf focuses on the incentives at the heart of the financial system:

Lucian Bebchuk and Holger Spamann of the Harvard Law School make the big point in an excellent recent paper.* Its focus is on the incentives affecting management. These are hugely important. Still more important, however, is why a limited liability bank, run in the interests of shareholders, is so risky.

In a highly leveraged limited liability business, shareholders will rationally take excessive risks, since they enjoy all the upside but their downside is capped: they cannot lose more than their equity stake, however much the bank loses. In contemporary banks, leverage of 30 to one is normal. Higher leverage is not rare. As the authors argue, “leveraged bank shareholders have an incentive to increase the volatility of bank assets”. ...

Profs Bebchuk and Spamann add that four features of the modern financial system make the situation even worse: first, the capital of banks is itself partly funded by debt; second, the role of bank holding companies may further increase the incentives of shareholders to underplay risk; third, managers are rewarded for aligning their interests with those of shareholders; and, fourth, some of the ways managers are rewarded – options, for example – are themselves a geared play on rewards to shareholders. So managers have an even bigger economic interest in “going for broke” or “betting the bank” than shareholders. As the paper notes, the fact that some managers lost a great deal of money does not demonstrate they were foolish to make these bets, since their upside was so huge. ...

Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.


The classic criticism of CEOs is that their personal incentives are not aligned with the desires of shareholders. Wolf is arguing that the exact opposite is true: CEOs take massive risks because their principals demand it from them. However, this risk-taking creates systemic risk, and the events of the past year have showed that if firms are "too big to fail" they will not be allowed to fail.

This sounds a lot like moral hazard, but in truth that is only partly accurate. Shareholders do have plenty at stake, but their potential losses are bounded at zero while their potential gains have no upper bound. Simply allowing them to go out of business is not enough of an incentive to prevent risk-taking, since risk-taking is rational in this environment.

Wolf's last paragraph is unsatisfying, however. It may not be easy to see which firms are systemically important ex ante. Even relatively small firms can spread a lot of risk through counterparty obligations. But even if we could tell, how would we break them up? How would we "run them in a different way"?

We can't, says Brad DeLong, unless we publicly display managers of failed firms in the stocks:

Managers and traders are, however, where I would focus most of my attention. I believe we need compensation reform: compensation schemes that make it a complete personal catastrophe for the CEO and all other employees if their bank fails. If managers and traders are, personally, wiped out--reduced in assets to their last two cars and their last four-bedroom house--if any financial institution they worked for goes bankrupt anytime in the next two years, then we have a chance of creating sufficient caution. Otherwise, I don't see how we do it.


Who in their right mind would work in finance under those conditions? No, that is not the answer. Individuals and firms should be allowed to take risks without fear of punitive reprisals if it is in their rational self-interest. We cannot, and should not, attempt to change the nature of man. What we should do is find a way to link outcomes to actions in a way that minimizes externalities. But so far, that solution has proven elusive.

Altering Incentives

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0 comments

Much like Richard Posner, Martin Wolf is not a very big fan of Obama's proposed restructuring of the financial regulatory structure. But rather than focus on the fallibility of regulators as Posner does, Wolf focuses on the incentives at the heart of the financial system:

Lucian Bebchuk and Holger Spamann of the Harvard Law School make the big point in an excellent recent paper.* Its focus is on the incentives affecting management. These are hugely important. Still more important, however, is why a limited liability bank, run in the interests of shareholders, is so risky.

In a highly leveraged limited liability business, shareholders will rationally take excessive risks, since they enjoy all the upside but their downside is capped: they cannot lose more than their equity stake, however much the bank loses. In contemporary banks, leverage of 30 to one is normal. Higher leverage is not rare. As the authors argue, “leveraged bank shareholders have an incentive to increase the volatility of bank assets”. ...

Profs Bebchuk and Spamann add that four features of the modern financial system make the situation even worse: first, the capital of banks is itself partly funded by debt; second, the role of bank holding companies may further increase the incentives of shareholders to underplay risk; third, managers are rewarded for aligning their interests with those of shareholders; and, fourth, some of the ways managers are rewarded – options, for example – are themselves a geared play on rewards to shareholders. So managers have an even bigger economic interest in “going for broke” or “betting the bank” than shareholders. As the paper notes, the fact that some managers lost a great deal of money does not demonstrate they were foolish to make these bets, since their upside was so huge. ...

Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.


The classic criticism of CEOs is that their personal incentives are not aligned with the desires of shareholders. Wolf is arguing that the exact opposite is true: CEOs take massive risks because their principals demand it from them. However, this risk-taking creates systemic risk, and the events of the past year have showed that if firms are "too big to fail" they will not be allowed to fail.

This sounds a lot like moral hazard, but in truth that is only partly accurate. Shareholders do have plenty at stake, but their potential losses are bounded at zero while their potential gains have no upper bound. Simply allowing them to go out of business is not enough of an incentive to prevent risk-taking, since risk-taking is rational in this environment.

Wolf's last paragraph is unsatisfying, however. It may not be easy to see which firms are systemically important ex ante. Even relatively small firms can spread a lot of risk through counterparty obligations. But even if we could tell, how would we break them up? How would we "run them in a different way"?

We can't, says Brad DeLong, unless we publicly display managers of failed firms in the stocks:

Managers and traders are, however, where I would focus most of my attention. I believe we need compensation reform: compensation schemes that make it a complete personal catastrophe for the CEO and all other employees if their bank fails. If managers and traders are, personally, wiped out--reduced in assets to their last two cars and their last four-bedroom house--if any financial institution they worked for goes bankrupt anytime in the next two years, then we have a chance of creating sufficient caution. Otherwise, I don't see how we do it.


Who in their right mind would work in finance under those conditions? No, that is not the answer. Individuals and firms should be allowed to take risks without fear of punitive reprisals if it is in their rational self-interest. We cannot, and should not, attempt to change the nature of man. What we should do is find a way to link outcomes to actions in a way that minimizes externalities. But so far, that solution has proven elusive.

Cap, Coerce, and Then Trade

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I once wrote a paper in which I asserted that international agreements are a consequence of dilemmas of domestic politics. Voters pressure politicians to enact regulation (say, to protect the environment). Producers ask legislators to not pass the regulation because it will put them at a cost disadvantage in international trade. Legislators are thus forced to choose between making voters happy but losing producer support (and campaign contributions), and making producers happy but losing votes.

I argued that legislators often escaped this dilemma by using international agreements to force foreign producers to accept regulations identical to those imposed at home. As Hubert Humphrey once said, "Germans don't vote" [in the U.S., that is] and so it makes sense to push the cost of regulation onto foreigners. Sometimes, however, foreign governments are unwilling to change their regulation. In such cases, the government that wants new regulation must somehow force the recalcitrant government to do so. I suggested that one way they did so was by threatening to impose even stiffer costs onto the reluctant government if it continued to refuse to enact new rules.

Though the paper is one of my most often cited, it has not had much impact on how people think about where international regulation comes from. (Someone once told me that this reflects the paper's unfortunate focus on something nobody cares about--the Basle Accord.) Every once in a while, however, something happens that reminds me that the paper says something important.

This time it is the Waxman-Markey cap and trade legislation. The intent of the legislation--reduce greenhouse gases--addresses concerns of the Democrats' median voter, who cares deeply about climate change. Producers, however, are concerned that the higher energy costs generated by cap and trade will disadvantage them relative to Chinese firms who are not facing higher energy costs because China does not regulate greenhouse gases. The solution, added late to the legislation, is to impose tariffs on goods from countries that do not regulate GHG (i.e., China). Nobody really wants to impose tariffs, but the hope is that the threat of tariffs will be sufficient to induce China to agree to international regulations on CO2 emissions.

Monday, June 29, 2009

The Other Coup

. Monday, June 29, 2009
0 comments

Honduras is in turmoil after the President was removed by the military after the President tried to hold a referendum that was deemed unconstitutional by both the National Congress and the Supreme Court. I know nothing about this, but these rundowns at Global Voices and The Field have a lot of information and reactions from Honduras (ht: Dish).

The impression that I get is that the President enjoys much popular support, but was prevented from seeking another term by the Honduran constitution. Hence the referendum to re-write the constitution to allow Zelaya to run for office again. President Zelaya ignored the rulings by the congress and courts, removed the top general of the Honduran army from his post, and tried to hold the referendum yesterday. At which time, the military removed Zelaya from the presidential palace and put him on a plane to Costa Rica.

I've seen a few bloggers express dismay that the Iranian uprising has garnered so much more attention than the Honduran uprising. There is a clear reason for this: Iran is a large, geopolitically important country in the most unstable region in the world and has long been an antagonist of the West. Honduras... not so much. Still, it seems clear that the referendum should have been allowed to go forward, and the removal of democratically-elected presidents by the military is pretty much never a good thing.

At least we know the U.S. government wasn't involved. We can't even get the military on the phone. From the Times:

Obama administration officials said they were working with other members of the Organization of American States to ratchet up pressure on the Honduran military to end the coup and dismissed the prospect of outside military intervention in the matter.

“We think this can be resolved through dialogue,” said the senior administration official. However, he admitted that the Honduran military was not responding to calls from the American government.


UPDATE: Sanchez wonders which side is right:

Without pretending to any expertise on the Honduran political scene, here’s what I’ve gathered to be the context: Zelaya was pushing for a national referendum on whether he should be able to seek reelection, though the constitution limits him to a single term due to end in January. The country’s Supreme Court declared this move illegal, and the congress recently passed legislation similarly barring any such plebiscite, but Zelaya was apparently undissauded. This weekend, under an order from the Supreme Court, the military spirited Zelaya off to Costa Rica. The line of succession was observed, and the president of the congress, a member of Zelaya’s own party, ascended to the presidency with the confirmation of the legislature.

Grant that this is a mess either way, that this is hardly an outcome that a liberal democrat should feel comfortable with, and that there are almost certainly aspects of this that I’m missing. Is it actually obvious that Zelaya is on the side of “democracy” here?


Yes, that much is obvious. He wanted a referendum, and nothing is more democratic than a referendum. If Zelaya won, the constitution would have been effectively modified via a democratic process and power would have been redistributed from the National Congress and Supreme Court to him (which, presumably, is why they struck the referendum down). If Zelaya lost the referendum then (again presumably) he would have stepped down.

What Sanchez means to ask, i think, is whether liberal-minded people should always and everywhere support the "will of the people" when that involves tearing down legitimate political institutions. I don't think there's an general rule that answers this question satisfactorily in all cases. I tend to side with institutions more than popular whims, but that's because I think that durable institutions can serve the polity much better than a democratic society that careens from one extreme to another every decade or so. However, if the institutions are not legitimate -- if they do not reflect the will of the people -- then they should be reformed.

In this case I don't know whether referendums of this sort are allowed by the Honduran constitution. It's quite possible that they aren't, and that Zelaya was violating the law by pushing for one. But saying that is not the same as saying that he is acting undemocratically.

Saturday, June 27, 2009

Holy Smokes!

. Saturday, June 27, 2009
1 comments

Pirate hunting has now turned into a vacation:

Luxury ocean liners in Russia are offering pirate hunting cruises aboard armed private yachts off the Somali coast.

Wealthy punters pay £3,500 per day to patrol the most dangerous waters in the world hoping to be attacked by raiders.

When attacked, they retaliate with grenade launchers, machine guns and rocket launchers, reports Austrian business paper Wirtschaftsblatt.

Passengers, who can pay an extra £5 a day for an AK-47 machine gun and £7 for 100 rounds of ammo, are also protected by a squad of ex special forces troops.

The yachts travel from Djibouti in Somalia to Mombasa in Kenya.

The ships deliberately cruise close to the coast at a speed of just five nautical miles in an attempt to attract the interest of pirates.

"They are worse than the pirates," said Russian yachtsman Vladimir Mironov. "At least the pirates have the decency to take hostages, these people are just paying to commit murder," he continued.
Three questions: 1) Who would pay that much money to go pirate hunting off of Somalia?, 2)Do the people that are shelling out this dough see anything wrong with what they're doing? and 3) Since when is Djibouti part of Somalia? We need to follow Ms. South Carolina's advice and get some people some maps!

(h/t: MR)

Abolish Agriculture (Committees)

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Hit play first.



Ezra Klein wins today's Archimedean "I Wish I Were in Charge" Award (which I so want to shorten to the Archimedean Silver Star award). He asks "isn't it time to abolish congressional committees on agriculture?" He astutely notes that such committees currently are a playground for "special interests" (he seems to think these committees used to be okay). These damn farmers, apparently, are now using their special committees to mess with the ability of right-thinking people to create the world Klein prefers (no special interests involved in climate change legislation, I guess). He concludes that maybe it's time farmers don't have such committees. [Throw away point: Ezra seems to think that no other industries have their own committees. This is true except for all of the sectors that do have their own committees: such as transportation, energy, armed services (defense industry) financial services, education, small business, and I think there are committees for health care services. Maybe these industries aren't "special interests" though].

Klein wins today's award for failing to recognize that what he proposes--abolish agriculture committees--is indeed impossible if his characterization of the world is in fact accurate. After all, if farmers are sufficiently powerful to have their own committees that they use to extract stuff from the rest of us (which they are and do), then they are sufficiently powerful to prevent the abolition of said very useful committees. And even if you somehow could abolish the committees, powerful farmers will find other mechanisms through which to achieve their objectives. Finally, if we could in fact abolish ag committees, then we would not actually need to do it (because farmers would not be powerful enough to use these committees to their advantage). Because Klein recognizes none of this, he wins today's award for offering us an analysis that provides no insight into anything other than what the world would like if Ezra Klein were in charge.

As Ezra enjoys his new status, perhaps he will consider why those pesky farmers have so much influence to begin with. Undoubtedly, this will lead him to suggest that what we really need to do is abolish the Senate--or maybe he'll just go straight to the heart of the matter and propose that we just stop letting those damn farmers vote. They all live in flyover country anyway, right?

Friday, June 26, 2009

What the Hell Are the Swedes Doing?

. Friday, June 26, 2009
0 comments

From the AP:

Angry demonstrators broke into the Iranian Embassy outside Stockholm on Friday, climbing in through shattered windows and injuring one embassy worker, police said.

More than 150 people had gathered outside the embassy to protest against the Iranian regime, when some of them attacked the building with rocks and tore down a fence to enter the embassy grounds, police spokesman Ulf Hoglund said.

"A few managed to climb through broken windows into the building," Hoglund said. He said one member of the embassy staff was injured inside the building, but didn't know how seriously.

Fifty police officers and an ambulance were dispatched to the scene. Hoglund said police had evicted the demonstrators from the building and arrested one person.

Organizers of the demonstration said a few of the protesters were injured in clashes with the embassy's security officers.
"We want a regime change," said Firouzeh Ghaffrpour, one of the organizers. "The Islamic system is not wanted by the people of Iran."

The protesters, mostly Iranians, also demanded the embassy be closed.

Police said the situation was under control later Friday, but demonstrators continued to block the entrance, preventing embassy personnel from leaving.


Okay, so they are mostly Iranians living in Sweden. But still.

There are a few (strange) photos at the link.

More on Climate Change (nerdy; skip if you don't like numbers)

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2 comments

My erstwhile co-blogger Sarah raised some questions about the costs of climate change in comments to my previous post:

Question - is the 2% total per year inflation adjusted? Because a 3% real loss in GDP by 2100 translates into a much higher nominal GDP loss.

Additionally, I'm very skeptical at this assessment. Temperature changes will have overarching economic and non-economic effects. Food and water supplies will shift and could decrease. Maybe the better way to look at the 2% of Global GDP cost of C02 reduction is like an insurance premium. If we have a pretty good idea of what it costs to protect us but a not-so-fail-proof idea of what it would cost if we did nothing, than buying insurance is a rational choice.


Dealing with the last part first, buying insurance is only rational if the expected NPV is greater than or equal to the cost of the insurance. Further, insurance is never geared at prevention; only mitigating the effects of something after it happens. In this discussion, "buying insurance" would be closer to doing nothing to stop climate change and instead using the economic gains to deal with the situation then.

But I want to focus on the crux of my first point: the costs of prevention are much, much greater than people tend to think. After all, when people say that we can mitigate the costs of global warming by spending one or two percent of GDP, it doesn't sound like very much. But it is actually quite a bit when you compound those costs over time. In my previous post, I presented an obviously unrealistic model in which there is no economic growth. Let's flesh it out a little more with some more realistic assumptions. First, let's assume that the U.S. economy will grow at its trend rate (roughly 3%/year) from now until 2100. If we do nothing about climate change, then our economy will grow from $14tn to over $200tn by 2100. According to the CBO report, we will lose 3% of that, or $6tn, due to the effects of climate change. Let's look at two scenarios where we combat climate change to look at the costs:

1. If we sacrifice just 1% of GDP growth per year (not actual GDP) over that time to combat climate change, so we grow at 2% instead of 3%, then what have we given up? In 2100 our GDP will be $83tn, or $117tn less than it would have been otherwise. In other words, our standard of living in 2100 would be halved. Of course, our standard of living from years 2011 - 2099 would also be lower at greater and greater rates. This is quite a lot to give up.

2. But maybe we can spend more now and less later, as Nicholas Stern suggests. If we follow his recommendation and sacrifice 2% of GDP from 2010-2020 and then (presumably) nothing after that, then where are we? From 2010-2020 our economy grows at 1% per year instead of 3% per year and in 2020 our GDP would be $15.46tn, After that, growth returns to 3% per year until 2100 when our GDP would be $165.5tn, or $35tn less than it would have been if we'd done nothing. This represents roughly 17% of potential 2100 GDP, and also does not include the lower standard of living in years 2010-2099.

In both of the above the scenarios, the costs are actually much, much higher. For example, if we do nothing and have GDP of $200tn in 2100 and stay at the same trend rate of growth (3%), in 2200 our GDP would be roughly $3,844tn. If we follow scenario #1, but stop spending on climate change in 2100 and return to 3% growth, then our 2200 GDP would be $1,595tn, or roughly 40% of what it could have been. If we follow scenario #2, then our 2200 GDP would be $3,180. In both cases, the divergence between actual and potential GDP will increase over time with an upper bound of infinity. We never get that lost growth back, and in fact we lose more and more the further out into time we go.

All of this, of course, assumes that we can actually slow or stop climate change by spending this money. In practice, that will be very difficult to do without getting major concessions from the BRICs, the oil-exporting states, and the rest of the developed and developing world. Such concessions are not likely achievable. But even if we lived in a perfect world where international cooperation was easily achievable and our actions to slow climate change were effective, it still might not be worth it. A very high bar must be cleared before it makes sense to give up even a little bit of economic growth. That's why looking at compounding rates of growth is so important.

Now, the CBO report could be completely wrong; maybe climate change will cost the economy much more than 3% in 2100. Some people certainly think it will, and they may be right: there is a lot of uncertainty built into the climate models. But in order for it to be economically productive, the difference would have to be extreme; even in the less-costly Stern model (scenario #2), the CBO would have to be wrong by 600% in order for it to make sense to follow Stern's recommendations. I find that to be unlikely.

And I still haven't mentioned discount rates.

The Hopeless Science?

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2 comments

Robert Reich writes:

Someone recently approached me at the cheese counter of a local supermarket, asking "what can I do?" At first I thought the person was seeking advice about a choice of cheese. But I soon realized the question was larger than that. It was: what can I do about the way things are going in Washington?...

[I replied], We must make Obama do the right things. Email, write, and phone the White House. Do the same with your members of Congress. Round up others to do so. Also: Find friends and family members in red states who agree with you, and get them fired up to do the same. For example, if you happen to have a good friend or family member in Montana, you might ask him or her to write Max Baucus and tell him they want a public option included in any healthcare bill.
By implication, Reich believes that the absence of change is a consequence of an insufficient volume of mail. I wonder what underlying model of politics causes him to believe this. I can't understand how a professor of public policy at one of the best universities in the nation can offer such analysis. And why, in god's name, would a Nobel Prize winning economist endorse such analysis?

Surely political science offers moderately more compelling explanations for the status quo bias evident in DC? But, even if one lacks specialized knowledge of modern theories and theorems, basic familiarity with the U.S. constitution should encourage the recognition that American political institutions are designed to diminish the power of single individuals and diminish the power of each separate branch of government. Everything we know tells us that American political institutions make change hard. No volume of mail will change this institutional reality.

In short, the way things are going in DC is a consequence of the public hopes Obama embodies running smack into the reality of American political institutions. It is indeed audacious to hope that one man can bring rapid change in the American political system. Reich's failure to recognize this is a commentary on the failure of even basic precepts of modern political science to penetrate elite thinking.

Links for the Weekend

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The 8 Books Ahmadinejad Doesn’t Want You to Read







Thursday, June 25, 2009

The Economic Costs of Climate Change

. Thursday, June 25, 2009
2 comments

From a recent CBO report [pdf; pg. 21]:

Despite the wide range of projected impacts of climate change over the course of the 21st century, published estimates of the economic costs of direct impacts in the United States tend to be modest. Most of the economy involves activities that are not likely to be directly affected by changes in climate. Moreover, researchers generally expect the U.S. economy to grow dramatically over the coming century, mainly in sectors (such as information technology and medical care) that are relatively insulated from climate effects. Damages are therefore likely to be a smaller share of the future economy than they would be if they occurred today. As a consequence, a relatively pessimistic estimate for the loss in projected real (inflation-adjusted) U.S. gross domestic product is about 3 percent for warming of about 7 degrees Fahrenheit by 2100.

However, such estimates tend to mask larger losses in subsectors of the economy. Some sectors in certain regions are likely to bear sizable costs requiring significant adjustments and adaptations, and a few sectors in a few regions may be eliminated altogether.


The last paragraph is applicable to the rest of the world as well. Countries with greater reliance on agriculture or fishing may face a much greater economic burden than countries that produce manufactures or services. The costs of climate change will not be borne proportionately.

While 3% of GDP is not insignificant, it is not disastrous either, and the costs of slowing climate change could be much, much higher. According to an oft-cited report by British economist Nicholas Stern, it will cost 2% of global GDP per year, every year, until 2020. At a glance, it seems like an easy choice: 3% is greater than 2%, so it would be cheaper to spend the money now to save it later (if you don't bother discounting). But in fact, the 2% figure must be compounded to find the true cost.

Suppose the U.S. will not have any economic growth between 2010 and 2020, so GDP remains constant at $14tn/year. Under that scenario, if we sacrifice 2% of GDP per year to combat climate change, then our economic growth rate is -2%/year, and our GDP would be $2.5tn lower in 2020 than it was in 2010, or roughly 18% lower. 18% over ten years is a much greater expense than 3% over 90 years. (This assumes that there would be no economic growth until 2100 as well, which is unreasonable, but it doesn't change the substantive conclusion; it just shifts the numbers a bit.)

But that's not all; GDP would also be lower in each of the other years from 2011-2019, and these totals must be summed to get the full cost. If my math is correct, the total cost would be about 90% of 2010 GDP, or roughly $12.6tn.

But that still doesn't cover it. Because we have sacrificed 2% growth per year from 2010-2020, our GDP will also be lower in every future year until the end of time at an increasing rate even if we stop all spending on climate change prevention measures in 2020 (since foregone economic growth cannot be recovered). In other words, the cost of stopping climate change is infinitely high if your time horizon is long enough, but is extraordinarily large even in the short run.

Now this back-of-envelope analysis depends on these estimations being correct, and they very well might not be. Different inputs will yield different outputs. The Stern Review, for example, predicted much higher (global) economic costs for inaction than the CBO report and advocated massive, immediate action to prevent climate change. It may also be possible to slow or stop climate change at a lesser expense, although I have not seen a credible estimate lower than the one provided by Stern. I think it's quite possible that a different analysis could find that it is economically beneficial to spend heavily in the short run to prevent large economic damages in the long run. But conversations about how much we should be willing to sacrifice to slow or stop the warming of the earth must get its terms correct, and this starts with a proper understanding of the nature of compounding growth rates. And discount rates, but that's a discussion for another day.

Postscript: I have intentionally left normative arguments off the page. For some, preserving nature may be worth it at any cost; for others, nothing matters but dollars and cents. Personally, I am somewhere in between. I suspect most people are in a similar boat. These judgments must be made individually, but properly conceptualizing the positive implications of different feasible policies is necessary for forming a consistent normative judgment.

Posner on Financial Regulation

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Judge Richard Posner, who runs the Becker-Posner Blog with Nobelist Gary Becker, has an op-ed on Financial Regulation in today's NY Times.


This excerpt on evaluating and responding to financial crises with new regulations caught my attention:
It is natural for a new president, taking office during an economic crisis, to want to emulate the extraordinary accomplishments of Franklin D. Roosevelt’s first months. Within what seemed the blink of an eye, the banking crisis was resolved, millions were hired into public-works jobs and economic output rose sharply. But that was 76 years ago, and the federal government has since grown fat and constipated. The program set forth in the new Treasury report, heavy on structural change, could take decades to put into effect.

The report is premature because there hasn’t been time to study causes of the current crisis in depth — and until these causes are determined we won’t know how to prevent a recurrence. We need some counterpart to the 9/11 commission’s investigation of a previous unforeseen disaster.
He then goes on to critique the report and proposes a few ideas for future financial regulation and reorganization. A few thoughts/questions came to mind after reading his op-ed, especially the two paragraphs above.

Our financial regulations seem to be mostly reactive to previous crises. Most if not all regulations come in the wake of a crisis as a response to the causes of that crisis. These regulations assume that future crises look eerily similar to past crises and thus implementing regulations aimed at repairing previous problems in the financial system will prevent these crises in the future. The fact that financial crises still happen provides three possible conclusions: 1) either future crises are not the same as past crises and thus regulations that are implemented to solve the problems associated with past crises are useless (they may be useful at preventing the same crisis from occurring again, but not at preventing future crises - which seems to be the main goal), 2) we are not very good at identifying the causes and lessons of past crises and thus have not yet identified the ways to remedy the structural problems that bring about these crises, or 3) we know what the lessons and causes of these crises are, but we just can't figure out how to tackle them and the regulatory reforms that we have put forward in the past, simply have not worked.

If future crises are the same as past crises, then we should be able to put together a typical blueprint for a financial crisis, including reasons why they begin, timing, and most effective responses. I point you to Frederic Mishkin's "The Anatomy of a Financial Crisis" which he published back in 1991 with (I think) this goal in mind. The paper does a good job at analyzing financial crises cross-sectionally and temporally. But, can we break down financial crises into there primary and secondary components like we can the human anatomy, and see how each piece works by itself and how they then interact with the other pieces? I don't think we can. I don't think it's possible to put together a blueprint of a typical crisis and thus create a basic foundation from which to evaluate all future crises.

Posner calls for more time to study and evaluate the causes and lessons of the Great Recession of 2007-2009. I definitely agree that many more studies of the causes of the crisis are needed (one of the reasons is because it gives me an interesting topic to research and write about and hopefully publish!), and we also need studies evaluating the effectiveness of the emergency measures taken by the federal government and the Federal Reserve as the crisis was unfolding. However, I'm a bit skeptical of his proposition that more time to study this crisis will greatly enhance our ability to regulate our way into preventing a future crisis. With absolutely zero data to back this up, I think all crises are fundamentally different, with different actors and different causes. I think we're oversimplifying financial crises if we think that they are all the same and that there is one magical package of regulations that have the power to prevent all future ones.

Defending the Median Voter Theorem

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Tyler Cowen recently wondered why the chattering classes don't view politics through the lens of the Median Voter Theorem. Matt Yglesias and Andrew Gelman respond by suggesting that disinterest in the MVT reflects the fact that the approach is empirically inaccurate.

This dismissal is both uninformed and uninformative. First, the MVT is trivially true. Given its assumptions (a single policy dimension, voters with single-peaked preferences (I most prefer zero troops in Iraq, second favorite is 500,000 in Iraq, least favorite is 1 million troops troops in Iraq), and simple majority voting, the outcome will embody the median voter's ideal point. Hence, if Congress votes on issues one at a time using simple majority, and all members have single-peaked preferences, legislation will embody the median voter's ideal point. Q.E.D. and all that.

Like any theorem, the MVT's expectations fail to hold when its assumptions don't hold. When members vote on multiple dimensions simultaneously or have non-single peaked preferences (I most prefer zero troops in Iraq, second favorite is 1 million troops in Iraq, least favorite is 250,000 troops in Iraq), then the median voter no longer dictates outcomes. This is why the evidence that Gelman and Yglesias present does not support the conclusions they reach. Gelman suggests the MVT is inaccurate because he sees no relationship between a moderate voting record in Congress and vote share at the state level. Yglesias asserts that the fact that Senators from the same state have different voting records in Congress refutes the MVT. Yet, neither Gelman nor Yglesias demonstrates that the MVT's assumptions hold in the cases they examine. Consequently, their evidence does not support any conclusions about the MVT.

Not only can we not dismiss the MVT for the reasons Gelman and Yglesias suggest, but in fact we might suggest that the MVT provides a strong first cut at understanding Congress. It's central expectations are consistent with what we observe. Legislation typically embodies centrist preferences and rarely embodies extreme outcomes and is generally quite stable. One might also suggest that the MVT helps us understand why change in the majority party has less impact on legislative outcomes than one might expect. The MVT certaily isn't the last word on Congress, but it's not a bad place to start. I challenge Yglesias or Gelman to propose a better one.

The MVT also helps us resolve puzzles such as, why did Congress include IMF funding (and "Cash for Clunkers" and money for H1N1 pandemic) in legislation to fund action in Iraq and Afghanistan rather than vote on all of these issues one at a time? Clearly some members wanted IMF funding. However, it is probably also true that the median voter on this issue did not. Members that want IMF funding can escape this "tyranny of the median" by linking their issue to others also likely to lose if voted on singly. IMF funders agree to support cash for clunkers, or larger military expenditures, or promise future consideration in exchange for votes for IMF funds. By engaging in heresthetics, one who is not the median voter can secure legislation that embodies her ideal point. And although the resulting legislation never embodies the MV's ideal point, the MVT nevertheless exerts a powerful influence on congresssional activity.

In short, the chattering classes should use the MV framework as a lens through which to view politics. Not because it is unconditionally true, but because it's useful. Their failure to do so, I suspect, reflects a failure to understand the framework beyond its most obvious (and possibly least interesting) implication. I think this state might be the fault of an academy which fails to teach rather than of a media that fails to wish to learn.

Wednesday, June 24, 2009

Has Persiankiwi been silenced?

. Wednesday, June 24, 2009
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Spencer Ackerman called the Iranian tweeter "the world's most important journalist" last week. He's been tweeting nearly non-stop since election day, providing many of the best, most accurate, tweets of the protests and police/basij response. But the tweets stopped 12 hours ago (a near eternity for PK) with these final, ominous dispatches:

they catch ppl with mobile - so many killed today - so many injured - Allah Akbar - they take one of us - #Iranelection

they pull away the dead into trucks - like factory - no human can do this - we beg Allah for save us - #Iranelection

Everybody is under arrest & cant move - Mousavi - Karroubi even rumour Khatami is in house guard - #Iranelection

we must go - dont know when we can get internet - they take 1 of us, they will torture and get names - now we must move fast - #Iranelection

thank you ppls 4 supporting Sea of Green - pls remember always our martyrs - Allah Akbar - Allah Akbar - Allah Akbar #Iranelection


Demosthenes is nervous. So is Nico (see 7:51 PM update). And an Iranian blogger has reached the point of exhaustion.

Hard Power

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USA 2-0 Spain.

If soccer explains the world, then what does it mean for the U.S. to stun the world's #1 team, who hadn't lost since 2006?

Lessons from Brazil

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Brazil's financial system has made it through the financial crisis relatively unscathed, which is somewhat surprising given their history of financial instability. The broader Brazilian economy has taken a hit as demand for their commodities and manufactured exports has slowed, but the financial system has stayed afloat. How? It seems to be a combination of a poorly-developed financial system (i.e. a system with less systemic importance for the broader economy), draconian reserve requirements, somewhat higher prudential regulations, and a generally cautious approach to financial development:

Mr Tombini points out that Brazil endured several periods of severe volatility in recent decades, although it has become more stable since runaway inflation was conquered in the 1990s. “We are used to dealing with challenging environments, for our institutions and our regulations,” he says. “Everything we have done since the mid- 1990s has tended to take a more cautious approach.”

For example, many countries’ banks are obliged to maintain capital ratios – capital as a percentage of assets – of at least 8 per cent, the minimum recommended by the BIS. Unfortunately, says Ross Levine, an economist at Brown University, “almost all countries have taken the Basel minimums as the norm. They’ve been a lot less cautious than they might have been.”

In Brazil, the minimum required is 11 per cent but many banks keep levels of 16 per cent or more.

Perhaps more question-able are Brazil’s very high reserve requirements – the share of their deposits that banks must park at the central bank. Many countries have phased these out but in Brazil they are about 30 per cent of all deposits.

Francisco Vazquez, a specialist in banking regulation at the International Monetary Fund, says Brazil’s reserve requirements should be replaced with more modern instruments, such as deposit guarantee funds. “The system is so complex that it’s hard to get a good idea of what the cost to banks really is,” he says. It is also one reason why borrowing costs are so high in Brazil.


Brazil has suffered through some nasty financial crashes in the last few decades. Because of that, they've erected an institutional structure that prizes stability and low inflation over growth in the financial sector. Some of these regulations -- like the extremely high reserve requirements and bans on short selling -- have probably done little more than make financial transactions more costly and inefficient.

Another aspect is the composition of assets held by banks. This World Bank study [pdf] shows that in 2007, 43% of all bank assets was sovereign debt, while credit was 34%. The above study also shows very high interest spreads between corporate and retail loans. In other words, access to credit for common borrowers is limited, and comes at a high cost. This should mean that credit is rationed primarily to borrowers of a very low credit risk, but that does not appear to be the case: Brazil's non-performing loan rate is fairly high even by Latin American standards.

One thing does stand out. In 2007, Brazil's banking system held assets equal to roughly 75% of GDP (see above study). This number is relatively high for Latin American countries, but low relative to many other countries. In Spain, for example, banking assets totaled over 200% of GDP, and Spain's financial system has been decimated by the financial crisis. Before its implosion, Iceland's banking sector was so large relative to its economy that "it made no sense to calculate the percentage". It's possible, in other words, that Brazil (and much of the rest of Latin America) has had fewer adverse effects from the financial crisis not because of tighter regulations, but simply because its financial sector was smaller than in OECD countries.

If any readers know of any studies that look at this question, please post them in the comments.

Iranian Government Retires Four-Elevenths of the Soccer Team's Starting Line-up

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From CNN:

Four Iranian footballers have been "retired" from the national side after protesting against the contested election result in the country during a match against South Korea, according to media reports.

Members of Iran's national soccer team sported green armbands in their game against South Korea.

The players drew attention to the situation in Iran by wearing green armbands during last week's World Cup qualifying match in Seoul.

Green was the color used by opposition leader Mir Hossein Moussavi during his campaign for the presidency and has been widely worn by supporters protesting since Mahmoud Ahmadinejad was announced the winner.

Six players wore the armbands during the first half of the match, returning in the second minus the accessories.

However, according to Iranian news reports four players -- Ali Karimi, 31, Mehdi Mahdavikia, 32, Hosein Ka'abi, 24 and Vahid Hashemian, 32 -- have been "retired" from the sport following the gesture.

The pro-government newspaper, Iran, reported the players had received the equivalent of a life ban.

Ahmadinejad is a known football fan, and has taken a keen interest in the national team's affairs.

Last week he compared protesters in Tehran to fans of a losing soccer team.

In 2006 Iran was banned from international competition for a short time by the world governing body FIFA after claims of improper interference by his government.

Monday, June 22, 2009

Not Just Circumstantial Any More

. Monday, June 22, 2009
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If there was ever any doubt (there wasn't), it is now over: the election was rigged, and not just the 50 cities and 3 million votes that the Guardian Council admits were fraudulent. No, it was much more pervasive than that:

In a third of all provinces, the official results would require that Ahmadinejad took not only all former conservative voters, and all former centrist voters, and all new voters, but also up to 44% of former Reformist voters, despite a decade of conflict between these two groups.


Much more at Juan Cole's. Here is the study itself [pdf].

Sunday, June 21, 2009

Roger Cohen from the streets of Iran

. Sunday, June 21, 2009
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A Supreme Leader Loses His Aura as Iranians Flock to the Streets


The NY Times' Roger Cohen is one of the few Western journalists still in Tehran, braving the street protests and beatings and reporting back with details. 

Does Policy Matter for Growth?

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Matthew Yglesias reads Charles Kenny and decides that policy is overrated:

One point Charles Kenny makes in The Success of Development that I’ve also seen argued convincingly in other contexts is that public policy choices seem to matter less than people would lead you to believe. This is a particularly striking fact:

Looking more broadly at the experience of the communist bloc under communism, over the period 1950-1988, no East European country grew as slowly as the UK, Mexico, Switzerland, Colombia, the US, Australia, India, New Zealand, Peru, Chile, Argentina or Venezuela.


People sometimes about the poor policy choices that led to Argentina’s poor growth performance in the 20th century. But it’s hard to make the case that Argentina was following worse policies during this period than Poland. Also: “Between 1928 and 1937, at the same time as farms were brutally collectivized, famine killed as many as 10 million people in the Ukraine, and Stalin‘s great terror was unleashed, the Soviet Union was the fastest growing country in the world.”

NB: I am not advocating Stalin-style economic policies.


This is the wrong way to look at things. Another way to look at it would be to say that no Western European country but the UK and Switzerland had lower growth rates than countries in the Soviet bloc. Still another would way to look at it would be to compare broader aggregates over time, rather than individual cases, to see larger trends. This approach is most appropriate when one is trying to compare economic systems, as Kenny and Yglesias seem to be doing:



As you can see, the "West" outperformed everyone else in the second half of the 20th century, and the difference is not subtle.

But Kenny's broader point is that we have yet to find some magic combination of policies that are easily exportable and automatically lead to lots of economic growth. This is true. As Kenny wrote in an earlier paper [pdf]:

In short, the last six years has not changed the basic conclusion that the growth literature has taught us much less about how to get rich than it has about who is already rich. There is nothing particularly new in recent growth theory, but perhaps that is no surprise because there is remarkably little new in growth, either –the rich today are by and large those who were rich yesterday. That there might not be a holy grail of growth policy, however, is no reason for people of economic faith to stop looking, so no doubt the next six years will see another 13,000 articles on the subject to review.

Saturday, June 20, 2009

Brazen

. Saturday, June 20, 2009
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Khamenei burns his Reichstag. (Reference point)

Some coincidence, eh? Just yesterday, Khamenei warned of terrorism happening today despite no acts of terrorism all week long. And then, whaddyaknow: like prophecy, it actually happens. That dude's got foresight.

Once again, the best sources for following events in Iran are Sullivan, NIAC, Nico, The Lede, and Twitter feeds from inside Iran.

[UPDATE: 2:35 p.m.] I should note that some chatter in blogosphere suggests that the bombing was faked. According to one report, the state-run television station may have reported the bombing before it occurred. Another suggests that the only damage to the building or site was one broken window, and there was no debris, blood, or bomb fragments. So maybe Khamenei is wagging the dog rather than burning the parliament.

Friday, June 19, 2009

Weekend Links

. Friday, June 19, 2009
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-- A new (free until August 1st!) book on economic development: The Success of Development. The author welcomes suggestions.

-- Were there three or four mistakes in recent American macroeconomic policy? It depends on the day.

-- The U.K. cedes regulatory authority to the E.U. Does this contradict or support the findings of Dr. Oatley's second-most cited paper [pdf]*?

-- A roundtable on "The Lessons of 1937" by Christina Romer, featuring Thoma, DeLong, Eichengreen, Cowen, Bordo, Waltzer, and others.

-- The IR Guide to Parenting (Happy Father's Day, Dads)

-- Gary Becker takes a comparative look at where the U.S. health care system ranks relative to other countries. The oft-cited statistics are often mis-leading.

-- Robert Mugave's most recent campaign advertisement:



*Not sure if the citation thing is true, but that's how Google Scholar sees it.

Stranger Than Fiction

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A rare nervous moment for Obama:

This week, President Obama hosted South Korean President Lee Myung-Bak at the White House. The meeting was cordial, of course, and the countries vowed their mutual allegiance, of course. But everyone had to tiptoe around the elephant in the room: the Korea-U.S. Free Trade Agreement. ...

The Koreans did their part: The government opened its market to some U.S. beef exports, a politically difficult and highly divisive move that brought over a million protesters into the streets of Seoul and threatened to bring down the Korean cabinet. The United States did... nothing. We left the Koreans standing at the altar. Democrats in Congress, including then-Senator Obama, opposed the agreement. Perhaps the most significant reason given for opposition was that the Korean government meddled too much in its auto sector.

Seriously.

Actually, Korea had agreed to cut its tariffs on autos and to take some measures to address its non-tariff auto trade barriers; however, opponents contended that those measures would not go far enough. This criticism, of course, predated the Obama administration's decision to take over much of the U.S. auto sector and erect its own non-tariff trade barriers.


IPE@UNC covered the proposed U.S./S. Korea free trade deal in a series of posts.

It's really too bad Obama and Myung-Bak tiptoed around the controversy. Yawn. Things would have been different if the meeting had taken place in Seoul rather than Washington. The South Korean parliament deals with such matters much differently:

Half a League, Half a League, Half a League Onward

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The invaluable NIAC passes along a stunning note from an Iranian student blogger (3:09 p.m. update):

I will participate in the demonstrations tomorrow. Maybe they will turn violent. Maybe I will be one of the people who is going to get killed. I’m listening to all my favorite music. I even want to dance to a few songs. I always wanted to have very narrow eyebrows. Yes, maybe I will go to the salon before I go tomorrow! There are a few great movie scenes that I also have to see. I should drop by the library, too. It’s worth to read the poems of Forough and Shamloo again. All family pictures have to be reviewed, too. I have to call my friends as well to say goodbye. All I have are two bookshelves which I told my family who should receive them. I’m two units away from getting my bachelors degree but who cares about that. My mind is very chaotic. I wrote these random sentences for the next generation so they know we were not just emotional and under peer pressure. So they know that we did everything we could to create a better future for them. So they know that our ancestors surrendered to Arabs and Mongols but did not surrender to despotism. This note is dedicated to tomorrow’s children…


All the Tweeters sound more scared after Khamenei's speech than they have all week, but they are no less resolved. It appears that Khameini has only two options left: capitulate, or order a massacre.

The Trouble of Rationality

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Yglesias has been reading the new Justin Fox book and mulling over the Efficient Markets Hypothesis:

The “weak” EMH says that stock market motions are unpredictable and a person without access to private information can’t “beat the market” in a consistent way. The “strong” EMH says that stock market prices are in fact correct and, therefore, that liquid financial markets allocate capital perfectly. ...

The strong EMH certainly doesn’t seem true—market history is full of crashes and bubbles. But the EMH is a nice, solid totalizing theory that can serve as the basis of a research program. By contrast, while you can poke tons of holes in strong EMH, you can’t really produce an alternative totalizing theory. Such a theory would, after all, violate weak EMH. And if you had such a theory, you would use it to make money and in doing so restore the market to equilibrium. But then you circle back ’round to the fact that the market exhibits all these huge irrational swings.


I'm going to shoot from the hip a little bit here. Why can't anybody produce an "alternative totalizing theory" to EMH? Because to do so you have to assume that investors are irrational. Which, judging by the title (The Myth of the Rational Market), is what what Justin Fox does (N.B.: I haven't read the book so this may not be true). And a lot of behavioral economic work has found that investors actually are irrational, at least in the Homo Economicus sense of the term. Contrary to popular belief, these views have not been heterodox for a very long time, if they ever were. As Yglesias notes, chapter 12 of Keynes' General Theory basically spells this out. Alan Greenspan is certainly not considered anti-market, but his most famous saying is about "irrational exuberance".

So okay: why don't we just model economic actors as irrational, then? Because we can't, at least if by "irrational" we mean erratic and unpredictable. If peoples' behaviors are random, then what are we trying to model? This is clearly a false view of the world: people often make mistakes, but they broadly act in their self-interest as they understand it. And when people do deviate from textbook rationality, they tend to do so in systematic ways, which implies that they are trying to make rational decisions but face informational and emotional constraints.

For example, the "disposition effect" shows that investors systematically sell assets that have increased in value and hold assets that have lost value. This an example of a larger "irrationality" whereby people are risk-averse toward potential losses and risk-loving toward potential gains. Such behavior does violate the assumption that agents maximize utility -- built into much economics and political science -- but only if risk-neutrality is part of that assumption. If it is not, if we accept that actors place greater weight on the status quo than any other point on the utility continuum, then it becomes much easier to interpret investor behavior. If we assume that the first instinct of humans is to preserve what we have, and the second instinct is to be risk-averse towards losses and risk-loving towards gains, then manias and panics become perfectly natural side-effects of normal human behavior. Bubbles and bank runs should be expected. Moreover, this is perfectly consistent with a "weak" version of EMH.

This begs the question: if the status quo bias and endowment effect are common and predictable, perhaps even instinctual in an evolutionary sense, then perhaps we should refine our definition of rationality to reflect that fact. Doing so would require adding some uncertainty to our models and accepting less precision, but it would also prevent us from making extraordinary mistakes like accepting "strong" EMH as gospel truth.

In fact, social scientists have done something similar to that: "bounded" rationality allows individuals to possess imperfect information and face other constraints, but to then make decisions as rationally as they can under those constraints. Most cutting-edge research uses some version of bounded rationality rather than perfect rationality, and such models are consistent with "weak" EMH. This isn't perfect -- even if you know that risk-neutrality is rational you may not be capable of forcing yourself to act that way 100% the time -- but it gets us closer to reality.

All to say that we don't have to reinvent the wheel to understand things like financial crises or the political responses to them. We have the framework at our disposal. There is room for improvement, naturally, but we aren't flying blind.

Easterly on Hayek on the Secret of Development

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Short answer: there is no secret. Development is an emergent process that cannot be socially engineered. The most concise statement of Easterly's view that I have seen.

Parsing Iran

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Like many others, I have been glued to the Glowing Pixel Screen for any news coming out of Iran. I have been hanging on every word of @PersianKiwi -- whom Attackerman called the "World's Most Important Journalist" at present -- as if they were prophecy. I've been tracking the "Inside Iran" Twitter feed for days. All of it is certainly romantic, and I certainly feel greatly for the disenfranchised, but they train us to be unfeeling, objective, scientific automatons here at UNC*, so I have spent a lot of time thinking about a simple question: what does it really all mean?

Stephen Walt asks a question that only a realist could:

Here's a hypothetical question for you to ponder. Which world would you prefer: 1) a world where Ahmadinejad remains in power, but Iran formally reaffirms that it will not develop nuclear weapons, ratifies and implements the Additional Protocol of the NPT, comes clean to our satisfaction about past violations (including the so-called "alleged studies"), permits highly intrusive inspections of Iran's nuclear facilities, and ends support for Hamas and Hezbollah as part of a "grand bargain" with the West; or 2) a world where Mir Hussein Mousavi -- who was the Ayatollah Khomeini's prime minister from 1981 to 1989 -- wins a new election but then doesn't alter Iran's activities at all?


Walt acknowledges that this is a false choice that likely does not reflect reality, but his point is clear: the pragmatic choice isn't necessarily the emotionally appealing one. As such, it frames the discussion nicely.

As it turns out, something closer the reverse of Walt's hypothetical is true: Ahmadinejad is the hardliner who refuses to allow inspections of the nuclear program or engage the West on weaponization. Mousavi, while reiterating Iran's legitimate rights to nuclear energy under the NPT, has strongly signaled a willingness to engage the West on weaponization and inspections:

Time: You haven't spoken much about foreign policy during the campaign. If you're elected, will your foreign policy be different from the one that exists now, especially toward the U.S.?

Mousavi: The meaning of foreign policy is not just relations with one country. The U.S. is one of the countries in that group. The criticism that I've had is that we have not used the vast potential that we have to create good foreign policy. In our foreign policy we have confused fundamental issues and matters that are in our national interest with sensationalism that is more of domestic use.

Time: With a change in government, do you think there may be a change in Iran's stance on its nuclear energy program?

Mousavi: We may change our methods. In regard to nuclear energy, there are two issues. One is our right to nuclear energy, which is non-negotiable. The second issue is related to concerns about the diversion of this program toward weaponization. Personally, I view this second part, which is both technical and political, as negotiable. We will not accept our country's deprivation from the right to nuclear energy.


Note that Mousavi opposes Ahmadinejad's fiery rhetoric, dismissing it as "sensationalism" intended for domestic audiences. In general, he campaigned on a platform of engaged, moderate, and pragmatic foreign policy. That does not mean that he and Obama would become BFFs, but it does indicate a greater possibility for rapprochement.

Mousavi has also criticized Ahmadinejad for the "wipe Israel off the map" remark (that whole video interview is worth watching. He does not support a two-state solution, but rather political reform in the model of South Africa after apartheid, i.e. strong minority rights including political voice for the Palestinians). This, perhaps, is not the answer that many in the West would most prefer, but it is surely an improvement over Ahmadinejad's approach. In the same video, he promises "direct talks" with the United States, which Ahmadinejad has similarly repudiated.

In truth, the election was probably much more about domestic policy than foreign policy. I am not an expert on Iran's domestic politics, so I don't want to speculate too much, but Mousavi campaigned on a platform of women's rights and other social issues, (kind of) liberal economic reform and a repudiation of Ahmadinejad's crude populism. All of which can be supported without betraying pragmatic realism.

I don't want to overstate things: Mousavi is very much part of the Iranian establishment. He has not spoken against Hamas or Hezbollah, nor promised an end to Iranian support for those groups. Any changes he might make to Iranian policy would probably marginal, not radical. That doesn't mean that they wouldn't be largely positive; just that it would be easy to make more make of his "reformist" reputation than is really there. Sweeping changes to Iran's policies or institutional structure were never on the table. Or, at least, they shouldn't have been; as Drezner notes, the game has changed in the last week:

I'm pretty sure a Rubicon has been crossed in Iran that can't be uncrossed. This isn't 1999 and 2003 -- too many days have passed with the Khamenei regime on the defensive. The regime as it existed for the past twenty years -- hemmed-in democracy combined with clerical rule -- is not going to be able to continue. With the largest protests of the past week scheduled for tomorrow, I think this ends in one of two ways: the removal of Ahmadinejad and Khamenei from power, or bloodshed on a scale that we cannot comprehend.

Actually, come to think of it, those two outcomes are not mutually exclusive.


This has been my gut feeling since about Monday. But I don't think it's a foregone conclusion: Rafsanjani and the Assembly of Experts have yet to speak out. This could turn into an internal battle between Rafsanjani and Khamenei that occurs behind closed doors in Qom. If Rafsanjani wins, the state of Iran could be transformed into a more republican entity. Or the political structure could stay the same, but with Khamenei and Ahmadinejad replaced by Rafsanjani and Mousavi. If Khamenei wins, the country could turn into a fully theocratic dictatorship. Or the status quo could remain in place. I don't think anybody really knows what the feasible outcomes are at this point.

Finally, I'll ask my own hypothetical question for the realists: If you had the choice between two Irans that had basically the same foreign policy, which would you prefer: 1) an Iran in which the government was stable, legitimate, and had the support of a majority of its people; or 2) an Iran in which the government ruled dictatorially by suppressing popular movements, restricting the press, rigging elections, and demonstrating a willingness to do whatever is necessary to remain in power (including killing large numbers of people), and faced the potential of collapse and/or civil war at any time?

I'll take the government that is accountable to its people.

*Not at all true, but so runs the stereotype about American IPE.

More of the Same, Please

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Dani Rodrik wants to see some sand thrown in the gears of globalization:

The conundrum of global reform is that the proposals that go far enough, such as establishing a global financial regulator, are wildly unrealistic, while those that are realistic, such as reform of the IMF, fall far short of what is needed.

What we need is a vision of globalization that is fully cognizant of its limits. We can start with a simple principle: We should strive not for maximum openness in trade and finance, but for levels of openness that leave ample room for the pursuit of domestic social and economic objectives in rich and poor countries alike. In effect, the best way to save globalization is to not push it too far.
From this essay, it is not clear what Rodrik specific changes has in mind. But given Rodrik's recent talk at LSE, there appear to be four main thrusts:
1. Markets need to be embedded in systems of governance
2. Political communities will remain predominantly in nation states
3. No "one way" institutional design
4. Countries have the right to protect social institutions, but not impose them on others
Rodrik calls this "Capitalism 3.0" (1.0 was the laissez-faire system that ended after WWI; 2.0 was the rise of the Keynesian welfare state). The hallmarks seem to be a system in which institutions vary by country, reflecting national priorities and interests, varying demographics, and the endowments of each state. In other words, no more "Washington Consensus", nor one-size-fits-all capitalism. Markets are international but governance must be national. We should give states a lot of slack to govern as they see fit rather than forcing a specific agenda on them

Obviously I wasn't at the LSE talk, and Rodrik hasn't posted any slides/video/audio/transcript, so I can't be sure that the talk was as described above (although Rodrik endorses the account here), but it strikes me that that was a feature of Capitalism 2.0. While it is true that in the past IMF loans and World Bank development assistance have come with strings attached that reflect the dominant neoliberal paradigm, overall there is plenty of institutional divergence across capitalist countries. Indian capitalism looks little like Brazilian capitalism. Danish capitalism looks nothing like Estonian capitalism. Singaporean capitalism has little in common with French capitalism.

Indeed, as Rodrik notes, the pervasiveness of actual governance on the international level is often overstated, and achieving more of it is exceedingly difficult. Rodrik goes so far as to assume that it is impossible to get a truly global system of governance. Rodrik's argument is that a global governance system is not only infeasible, but also undesirable. He wants to see globalization scaled back; he wants more sand in the wheels. In fact, what he is proposing is less a new creation, but a return to a modified version of the original Bretton Woods arrangement.

The world I see is less uniform than the world he sees. I see plenty of institutional divergence, and plenty of flexibility for countries to set their own policy. I see countries responding to changes in their macroeconomies on an ad hoc basis rather than accepting top-down institutional demands from the United States or international institutions. In other words, I see a world that largely conforms to Rodrik's standard already. What few specific changes he would like to see are on the margins, unlikely to be implemented (e.g. the WTO may not succeed in a further lowering of tariffs in Doha, but they are even less likely to give more rope for countries to pursue protectionist policies), and represent a movement back to the old Bretton Woods system rather than the creation of a new system.

In short, I see the New Economic Order as the same as the Old Economic Order. And, on balance, that is a good thing.

[UPDATE: Marc Dotson posted a link to video and slides from Rodrik's presentation in the comments. They are here. After reviewing the slides my substantive thoughts haven't changed.]

Wednesday, June 17, 2009

Oops

. Wednesday, June 17, 2009
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Via McMegan, Paul Krugman in 2002:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Monday, June 15, 2009

Paul Krugman on the Recession in the EU

. Monday, June 15, 2009
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The Guardian has a good interview with Paul Krugman on macroeconomic conditions in the EU.

"Britain's looking the best among the major European economies ... Britain actually may have stopped contracting - that's the most positive thing one can say." Elsewhere, PK attributes this to a devalued pound and a generally aggressive monetary policy. I think Britain should be quite pleased to not be constrained by EMU.

He also takes up the German puzzle: "How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

His Answer: Germany depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

His Concern Moving Forward: "We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there's a European savings glut which is coming out of Germany. And it's much bigger relative to the size of the economy."

Why is the German government so resistant to an aggressive response? It all seems so very Mellonesque.

Update: Scott Sumner concurs with PK's analysis of the UK.

Morning Iran Round-Up

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Another superthread. See previous threads here.

[UPDATE: 9:40] Tehran, right now (from Skynews, via Twitter):



[UPDATE: 8:55] Khameini's "change of position":



[UPDATE: 8:10] I'm signing off for awhile, but Sullivan and Pitney are still going strong, and Twitter feeds from inside Iran are still working.

[UPDATE: 7:40] Dennis Ross removed as U.S. envoy to Iran? If so, why?

[UPDATE: 7:35] Some of the aftermath of yesterday.

[UPDATE: 7:29] All the Twitter chatter is that Mousavi will be participating in the rally in-person. He hasn't been seen since Friday, and had said that if the government refused his request for a demonstration permit (which they did) that he would lead a crowd through the streets to Imam Khomeini's tomb.

The rally/protest should be underway as I type.

[UPDATE: 7:15] Demosthenes runs down endgame scenarios. Nothing is clear:

As to the other two... they were predictable. There aren't a lot of endgames here. One is an out-and-out revolution, but as I said earlier, I find that unlikely. Revolutions and civil wars require a number of predictable elements, and while some exist in Iran—like a huge gap between people's self-perception of their status and what they believe should be their status—others aren't. Among others, the alternative elite structure that forms the backbone of a revolution as a prospective government just isn't appearing. Mousavi, Rafsanjani, Karrobi and the rest still have stakes in the current system, and nobody else appears to be in any kind of position to take over.

(Certainly MEK isn't.)

What this suggests is that they are going to attempt to use the strife to convince the power-holders in the current system, the Mullahs, that neither Ahmadinejad nor Khamenei are fit to rule in their name. Mousavi and Karrobi are doing that by not backing down and ensuring that the protesters aren't going to back down either. Rafsanjani is doing that by approaching the Mullahs in the Assembly of Experts as the spokeman for his moderate faction, and trying to convince them to see things his way.


Iran tried to get the press out of the country and shut down the internet, but (so far, at least) they have been unable to do so. If they had been successful, they could have just killed everyone and moved on. But now the world is watching, and extreme crackdowns will make it harder to achieve national goals like furthering the nuclear program, re-establishing economic ties, and broadening Persian influence in the region. Mousavi, Rafsanjani, and Karrobi may not wish revolution, but they might get it anyway.

-- Has Ahmadinejad gotten stronger because of the protests? Rozen doesn't think so.

-- Rozen also with a brief summary of yesterday's events.

-- Khameini, after twice congratulating Ahmadinejad on his victory, has instructed the Guardian Council to review the election.

-- Obama's approach is sure to disappoint some.

-- WTF, E.U.?

-- The official election results, broken down by candidate and province, along with a few maps, tables, and graphs.

-- Fallows on Iran and the internet.

-- Mousavi asked permission for a demonstration today. It was denied. He called it off, but it is unclear whether protesters will oblige. Some internet chatter:

I am in Iran as well and most of the stuff IM was saying were horsecrap. I could have gotten killed yesterday had I not pulled a few jacky chan type moves. Anyways In about 2 hours there's gonna be war. Rahpeymami az meydoon enqelab ta meydoon azadi. People don't care if mousavi shows up or not this time we're going out with weapons of our own.


It was scheduled to start at 7:30 a.m. EDT.

Sunday, June 14, 2009

Quote of the Day

. Sunday, June 14, 2009
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"Iran is the most stable country in the world."

- Mahmoud Ahmadinejad



Echoes of Baghdad Bob.

Fresh Iran Thread

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The previous post was getting unwieldy, but there's a lot of juice there so check it out if you need to play catch-up. I also had a running post yesterday.

{UPDATE> 10:45] Final update for tonight: everything seems to have settled down for now; even the tweets have slowed. The next major event is scheduled for 4:00 p.m. (in Tehran, 7:00 a.m. EST) when Mousavi has planned a large protest march.

I will not post so much on the topic tomorrow, but I will try to hit the high points and provide links to other news aggregators.

Finally, Hitchens has weighed in. His take is predictable: don't call this an "election". It's not.

[UPDATE: 6:20] Via Sullivan, Mousavi's spokesman provides a timeline of election day:

According to Mr. Makhbalbaf, in the early hours after voting had ended, the Interior Ministry had called Mr. Mousavi’s campaign headquarters to inform them that Mr. Mousavi would be the winner and, therefore, Mr. Mousavi must prepare a victory statement. Mr. Mousavi was, however, asked by the Ministry not to boast too much, in order not to upset Mr. Ahmadinejad’s supporters. Many of the president’s supporters are among the ranks of the Basij militia, and thus armed.

According to Mr. Makhbalbaf, the Supreme Leader, Ayatollah Ali Khamenei, was also informed of the developments. He also recommended a “good management” of the victory statement, meaning not boasting greatly about the victory, because that would be in Iran’s national interests and stability.

At the same time, the reformist newspapers were also informed that they can prepare their Saturday edition to declare Mr. Mousavi the winner, but were not allowed to use the word pirouzi (victory) in their articles, in order not to upset Mr. Ahmadinejad’s supporters. One reformist newspaper prepared its front page with the title, “People took back the flag of their country [from Mr. Ahmadinejad].”

But, just a few hours later, a center that had been set up by Mr. Mousavi in Gheytarieh (in northern Tehran) for monitoring the election and vote counting, was attacked by armed security agents. They ransacked the center, destroyed computers, and attacked the staff. Supporters of Mr. Mousavi intervened and arrested 8 security agents. The police was called to take them to prison, but the police released the attackers.

According to Mr. Makhbalbaf, the central headquaters of Mr. Mousavi’s campaign was also surrounded by security forces, as was the Interior Ministry building. Then, new data began to be released by the Ministry, indicating that Mr. Ahmadinejad had won the elections decisively.


[UPDATE: 5:45] Voting irregularities didn't just occur within Iran; members of the diaspora also left polling stations frustrated and confused.

[UPDATE: 5:15] From yesterday, Gordon Robinson frames the possible scenarios nicely (via DeLong):

Broadly speaking, there seem to be three scenarios for what is unfolding in Iran.

Scenario One: Ahmedinejad and his supporters stole the election, plain and simple. The revolutionary old guard felt threatened by the reformists so it rigged the vote to guarantee a conservative victory. As is usual in such cases there are rumors of ballot boxes stuffed, of precincts reporting numbers completely at variance with what poll watchers observed, etc., etc. From this perspective it appears that there was never a real campaign, and the outcome was always foreordained. Robert Dreyfuss’ excellent dispatch today in The Nation includes an interview with former Iranian foreign minister Ibrahim Yazdi in which a number of election irregularities are outlined. It is all standard dictatorship fare. This scenario sees the outcome, in effect, as a reassertion of power by the Supreme Leader and the religious old-guard. There is, however, another way of looking at things…

Scenario Two: There has been a coup. Ahmedinejad and the security services have taken over. The Supreme Leader has been preserved as a figurehead, but the structures of clerical rule have effectively been gutted and are being replaced by a National Security State. Reports that facebook, twitter, text messaging and foreign TV broadcasts have been blocked, that foreign journalists are being expelled and that large concrete roadblocks (the kind that require a crane to move) have appeared in front of the Interior Ministry all feed a sense that what we are now seeing was pre-planned. Underlying this is the theory that Ahmedinejad and the people around him represent a new generation of Iranian leadership. He and his colleagues were young revolutionaries in 1979. Now in their 50s they have built careers inside the Revolutionary Guard and the other security services. They may be committed to the Islamic Republic as a concept, but they are not part of its clerical aristocracy and are now moving to push the clerics into an essentially ceremonial role. This theory in particular seems to be gaining credibility rapidly among professional Iran-watchers outside of the country. Then again…

Scenario Three: Ahmedinejad won. Really. At moments like this it is easy to forget that Tehran is not Iran. Foreign media tend to congregate in capitals and, in any case, the Iranian security services do not make it easy for foreign journalists to travel outside of Tehran. Please note I am not pushing this theory, only saying it merits consideration. This article from Saturday’s Guardian makes especially interesting reading.

Four years ago Ahmedinejad was elected because the rural and urban poor bought into his populism. In the years that followed he showered his rural base with road-building, electrification and water projects. Moreover, is it so hard to believe that the antics which cause educated Iranians to cringe and westerners to recoil in horror might inspire in ordinary Iranians (particularly those who live outside the capital) a feeling of pride at seeing their president stand up for the nation and confront its enemies? If the career of George W. Bush taught us anything it ought to have been that being loathed by foreigners and the local elite can be good for one’s political fortunes at home.


[UPDATE: 4:35] Tehran Live has been "banned in Iran by government". They have posted dozens of iconic images of the protests since the election, including this one:



[UPDATE: 4:18] Alex Hoder tweets that the Iranian military has informed the Revolutionary Guard that they (the military) will not commit violence against Iranians. This could turn into RG + Hezbollah against civilians and/or military. That... would not be good.

Remember earlier today when Ahmadinejad said that Iran was the most stable country on earth?

[UPDATE: 4:15] NIAC has more discussion of the leaked "real" election results discussed in the thread below this one (update 3:13 at NIAC, 2:30 on my post):

We’ve been very hesitant to publicize any of the so-called “true” election results that have surfaced, since it’s the easiest thing in the world to make up numbers and plug them into a graph and present it as fact. But this comes from mowj.ir, where “an informed source” inside the Ministry of Interior’s Election HQ says

All 9 communiques of the MOI were written and planned in advance; numbers were faked via a software program which distributed vote counts among polling stations in such a way to make everything look plausible.

Supposedly, the initial results that the MOI announced were based only on the first 500,000 ballots received, and that set the rest of Friday’s events in motion. According to this site, the real results were:

Mousavi – 21.3 million (57.2%)
Ahmadinejad – 10.5 million (28%)
Rezai – 2.7 million (7.2%)
Karroubi – 2.2 million (6%)
Obviously, this should be taken with a huge grain of salt. But Mowj is the unofficial website for the Mousavi campaign, so we wanted to present it here for you to interpret yourself.


My take? There's no way those numbers are legit. And please note that those numbers are different than the ones originally posted at DailyKos & BigSoccer, and reproduced by Sullivan & Ackerman. Perhaps a bit of gamesmanship by Mousavi, perhaps not, but another reminder that we really don't have any clear idea of what's going on there.

[UPDATE: 4:07] Another account of "imported" Hezbollah cops, via Sullivan.

[UPDATE: 4:05] Zakaria's roundtable from GPS today:



[UPDATE: 4:00] Updates from Farsi television, including a brutal clash between the 300 Revolutionary Guard and 700 students that resulted in 100 hospitalizations.

[UPDATE: 3:50] Up to now, the foreign press in Iran had mostly been treated with respect even as the local media was heavily censored. That appears to be changing (3:22 update). The NBC and ABC offices have been raided, equipment and videotapes confiscated. The BBC was told to leave the country, and their broadcast signals into Iran are being heavily jammed. Al-Arabiya's offices were closed this morning, as were some German media outlets.

This is especially concerning given the planned protests tomorrow. If the government is planning violence, then obviously they would want to boot out the foreign media first. Cell phones and many internet sites (including Facebook) remain offline, further hampering communication with those in the country. Twitter still works, but it's hard to verify the truthfulness of tweets.

Foreign governments may not wish to comment on the election itself until more information is available, but they can certainly protest the expulsion of the international press. Without the media, further information may not be forthcoming.

Sullivan links to this anonymous letter from Tehran posted at Salon:

The Guardian Council has to accept the election results. All eyes are now on Hashemi Rafsanjani, who has apparently just resigned as chairman of the Expediency Council. He was the sole member of the original "yaran" of Khomeini, or Khomeini's original team, with power and influence. Hossein Mousavi is under house arrest. ...

It is, however, a mistake to think that any restoration of the election results will occur. The battle is elsewhere now and while the obvious theft of the election has enraged and disappointed millions, the action now is to demonstrate that folks aren't just going to take it. This was clearly a bad strategy on the part of the leadership as they could have easily given another 10 to 20 years of energy to the system by sacrificing the current president. Legitimacy, much debated by social scientists, actually turns out to matter. It's not just force that rules, though that appears to be the case right now in Iran. Short-term calculations (get rid of the old generation of leadership for a new breed of revolutionary) will prove to be disastrous.

International Political Economy at the University of North Carolina: June 2009
 

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