Monday, August 31, 2009

Was This Really Needed?

. Monday, August 31, 2009
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I suppose I would be remiss if I didn't at least link to the FP forum on realism and American foreign policy. The lead article is by Paul Wolfowitz, who conflates everything to the point where he can't figure who's the realist: himself or Brzezinski. Along the same lines: might Scowcroft be an idealogue? Wolfowitz is only half-serious, but that's the problem.

The response articles -- by Walt, Drezner, Rothkofp, and Clemens -- try to engage the issue constructively, but... this "debate" simply isn't interesting anymore. It seems like almost everyone (even Wolfowitz) agrees on the main points. I'll sum up as best as I can:

Realism has some fundamental insights, without which IR wouldn't be IR (and foreign policy wouldn't be foreign policy). One of these is that states can/should/must sometimes engage other states that they might not like very much. In other words, pragmatism is not optional. Of course, states would prefer to engage state that they like a bunch, so if Bad States turn into Good States, then all the better. On this, realists and neoconservatives mostly agree.

The difference? Realists do not think we should expend state power to make Bad States into Good States; neoconservatives do. I think it's fair to say that recent history has humbled both: liberal intervention worked pretty well in the Balkans in the 1990s, and non-intervention worked pretty poorly in Rwanda, Sudan, and elsewhere; intervention did not work well in Somalia or in Iraq, nor is it possible to intervene everywhere all the time even if we knew it would work.

Realists and neoconservatives have different expected utility functions for the use of force in achieving national objectives. All of their disagreements boil down to that, and the world provides enough contradictory evidence that both sides can think the data are on their side. Neither of them bother much with institutions, and when they talk about the "national interest" they discuss the political economy only obliquely and in passing. Nor do they (usually) bother identifying what the "national interest" is.


There. Now can we stop killing trees and wasting ink on this tired old argument? I think we've all got better things to do.

Thursday, August 27, 2009

Nobelist Smackdown Watch II

. Thursday, August 27, 2009
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Another entry in a semi-recurring series. This time Wilkinson finds Akerlof (Nobelist) and Shiller (probable future Nobelist) trying to have it both ways:

So you might think that it wouldn’t have been a disaster had the U.S. followed Singapore’s example and replaced its “pay-as-you-go” tax and transfer retirement pension system with a system of mandatory personal accounts actually invested in the market. But, no. They hide the dots so the reader can’t connect them. They really do seem to go out of their way to prevent the reader from grasping that the Social Security reform proposal they deride was a mandatory savings program and that the mandatory savings program they praise finances retirement security.

Akerlof has a Nobel Prize. Shiller is a Nobel short-lister. So it’s hard to pin this on ignorance or incompetence. What’s going on!? ...

This bit of Animal Spirits gave me whiplash. It’s incoherence is simply overwhelming if you happen to know a bit about pension systems and retirement savings. Maybe we’re seeing an unresolved problem of dual authorship. I don’t know. What I do know is that this section of the book really does conveys the impression that some care was taken to omit very relevant details, and therefore to create a misleading picture — an impression only reinforced by Akerlof’s joshing, self-approving anecdote about his reputation for promoting demogogeury on Social Security. As Akerlof and Shiller are both phenomenally accomplished scholars who I’m sure have well-deserved reputations for intellectual honesty, I expect they’ll want to revise this section for the paperback edition of their book.


I haven't read the book, so I can't be sure who's right. But Wilkinson quotes several passages at length, and it looks pretty bad. Especially when he gets around to (implicitly) accusing Akerlof of intentional dishonesty in order to justify his past political advocacy.

Wednesday, August 26, 2009

Power Corrupts

. Wednesday, August 26, 2009
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Last week I pointed to Yglesias not understanding basic public choice theory. Apparently several other people also noticed and responded with lessons on... basic public choice theory. Yglesias didn't like that, says he understands public choice theory but doesn't understand the psychology of corrupt politicians, and then says this:

If some weird situation somehow resulted in me becoming a United States Senator, I would spend six years making trouble, having fun, and trying to do the right thing. Probably I’d lose a primary or something since I wasn’t bothering to raise money or campaign. Then I’d right a book about it.

I think it’d be a blast. And I think that’d also be the totally intuitive way to handle the situation. Obviously that’s also why I never will be a powerful politician. Instead, we’re fated to be ruled by the sort of people who are really desperate to cling to power. But it still strikes me as a very odd mentality.


Why is it odd, or hard to understand? Power is a form of status, just like money, fame, reputation, consumption, intelligence, etc. People go to extreme lengths and sacrifice much to gain those things, so why shouldn't they also do it for power? Indeed, as the infamous Stanford prison experiment showed, power is something that transforms many people, not just a rare few, and not just the ones who actively seek it. And one way of signaling power is flaunt it, or even abuse it with impunity.

Of course many people are not primarily motivated by power and instead pursue the quiet life, or lots of time with family, or an easy schedule, or high income, or privacy, or flexibility, or ethics, or whatever else. But there's no reason to think that if they suddenly got a bunch of power through some "weird situation" they wouldn't abuse it or try to keep it. In short, I think Yglesias is giving himself too much credit here: if he actually did become a senator, he might very well find himself raising money and campaigning for a second term, and eventually find himself compromising much more than he now thinks he would. (I think Lord Acton wrote something about this once...)

This effect is magnified by self-selection: almost every senator is not granted his seat by "weird situation," but rather by extreme effort and intention. Many of them have oriented their entire lives to reaching that pinnacle, have compromised much along the way, and will sacrifice almost anything to stay there. In short, what motivates corrupt senators is the same thing that motivates doping athletes.

Wilkinson picked up on some of this too, and took Yglesias' logic to its end:

So I agree with Matt that politicians are probably odd, and in a bad way. But then I wonder what Matt takes the general lesson of that to be. Maybe if I thought about it longer, I could imagine a story in which this doesn’t tend to imply skepticism about the efficiency and justice of a system in which politicians are given a great deal of discretion to shape individual and public life, but I can’t think of one right now. So I’m curious what Matt takes to be the broader implications of the idea that “we’re fated to be ruled by the sort of people who are really desperate to cling to power.”


Where else could you go with it? The only alternative that I can see is that you believe that other elites in society are even more corrupt, so you'd prefer the corruption of the politician to the corruption of the corporation.

Ted Kennedy

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As I'm sure you all already know, Ted Kennedy, the Lion of the Senate, passed away early this morning at the age of 77. He had been battling brain cancer since May of last year.

Mr. Kennedy was the last surviving brother of a generation of Kennedys that dominated American politics in the 1960s and that came to embody glamour, political idealism and untimely death. The Kennedy mystique — some call it the Kennedy myth — has held the imagination of the world for decades, and it came to rest on the sometimes too-narrow shoulders of the brother known as Teddy.

Mr. Kennedy, who served 46 years as the most well-known Democrat in the Senate, longer than all but two other senators, was the only one of those brothers to reach old age. President John F. Kennedy and Senator Robert F. Kennedy were felled by assassins’ bullets in their 40s. The eldest brother, Joseph P. Kennedy Jr., died in 1944 at the age of 29 while on a risky World War II bombing mission.
I was lucky enough to meet and spend a couple of minutes alone with Senator Kennedy in June of 2007 while I was interning in the United States Senate. I was returning back to the Hart Senate Office Building using the underground subway system that runs between the Russell Senate Office Building and the Capitol. I hopped into the subway car and wasn't paying much attention when an elderly man got into the same car that I was sitting in. I realized that it wasn't just any elderly man, but it was Senator Kennedy. He smiled at me and said hello, and as everyone who knows me would predict, I started chatting with him.

He asked me how my internship was going (which I'm guessing he knew by the bright red color of my Senate ID which all interns have to wear) and asked me what I wanted to do after my internship was over. I told him that upon finishing undergrad I was hoping to go work on a doctorate in political science and become a college professor. I'll never forget what the man told me after I said that: "Great profession. Always remember that your most gratifying memories will come from serving others. Remember that when you become a professor and step into that classroom."

I hadn't really thought back to what he told me until I found out that he passed early today. This morning I walked into a lecture hall with 180 students on the first day of class and that's when those words hit me. I didn't say a word during the lecture and didn't impart any knowledge to those students (since I'm just a lowly TA and not yet a prof) but I truly felt like I was supposed to be there and that I had found my way to serve others.

Rest in peace, Ted Kennedy.

Walt on Politics and the Rule of Law

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Really good post by Stephen Walt over at Foreign Policy:

Am I the only person who sees a parallel between the furor over the Scottish decision to release convicted Libyan intelligence officer Abdel Basset Ali Mohmed al-Megrahi, and the heated debate over whether to investigate possible criminal misconduct during the Bush administration "torture regime?"

With respect to the former, many people are upset by the decision to release al-Megrahi -- who has terminal prostate cancer and only a few months to live -- because they do not think an act of mercy was warranted in his case. Fair enough; reasonable people can legitimately disagree about whether the dying man convicted of the Lockerbie bombing deserves any form of clemency. But the real anger stems from the suspicion that al-Megrahi's release was part of some larger deal, and that British officials traded the release for commercial or political advantages. In other words, opponents of the decision to release him are incensed because they believe government officials let broader political or business considerations interfere with an important issue of criminal justice.

Yet those who oppose an open-ended investigation into what the Bush administration did -- which might eventually lead to the prosecution of top officials -- are doing the same thing for which British officials are being criticized: they are saying that politics should outweigh the requirements of law and justice. In essence, they are saying that broader political considerations should trump the normal operations of the criminal justice system. Yet I suspect most of the people making this argument would be outraged if it turned out that the British government decided to release al Megrahi in part to cultivate Libyan business or secure other political advantages.

For a country that claims to revere the "rule of law," this really isn't a hard issue conceptually. Attorney General Holder's task is to determine whether laws may have been broken, and whether an investigation of the alleged wrongdoing is warranted. Once that investigation has been conducted, he then has decide if he has a strong enough case to warrant prosecution. If he thinks he does, the case goes forward, and defendants get their day in court. Politics isn't supposed to have anything to do with this process (though a sensible prosecutor would probably be especially reluctant to bring a weak case against prominent senior officials). Finally, if any defendants are found guilty, the president could then step in and issue a pardon, if he felt that doing so was in the best interests of the nation.

Note that it is still possible to criticize and debate every aspect of this process, but not by invoking partisanship, political expediency, or the need to "look forward rather than backward." People can disagree about whether there is enough evidence of wrongdoing to warrant further investigation (though I think the recent revelations make it hard to make the case that there is simply no basis for a further investigation). If AG Holder decides to indict anyone, or if he declines to do so, people will undoubtedly disagree about what he should have done so based on the available evidence. And if the cases go to trial we can argue about them too. If the defendants are acquitted, people will say the case should never have been brought; if convicted, some will claim they were railroaded. If people are convicted and the president pardons them, no doubt there would be heated discussions about whether this was appropriate or not.

But the key point is that if you genuinely believe in the rule of law, you can't invoke political expediency as a guide to whether possible crimes should be investigated and prosecuted. And the fact that the Attorney-General has decided to go forward should be seen as very positive sign, because it shows that he is willing to fulfill his constitutional responsibilities even if it is politically inconvenient for the president who appointed him. I have no doubt that the president would prefer to "look forward," because an investigation and/or prosecution will drive both the CIA and the right-wing media types crazy and because he's got enough alligators to wrestle with already. But he also promised us that he would end the politicization of the Department of Justice that his predecessor practiced, and Holder's decision, however inconvenient for Obama, is a reassuring sign that there is still life in the U.S. Constitution.

Am I being -- shall we say, unrealistic -- to stress the rule of law as opposed to the naked exercise of political power? Hardly. Realists have a rather dim view of human nature, which is why we like legitimate, well-ordered governments in which laws and checks and balances exist to keep human frailties in check. The Founding Fathers had a lot of realist instincts, so they constructed a variety of essentially liberal institutions to try to address and contain our worst instincts. Domestic politics in a well-ordered society is a lot nicer than life in the international system, which conspicuously lacks strong institutions and where the rule of law is weak. And that's why we ought to defend the rule of law in this case (and others), and try hard to keep politics out of the discussion.

Tuesday, August 25, 2009

The Baseball Bat Violinist

. Tuesday, August 25, 2009
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This has absolutely nothing to do with IPE, but it is too amazing not to put up. Glenn Donnellan of the National Symphony Orchestra played the National Anthem on his Louisville Slugger violin on August 8th before a Washington Nationals game.



(ht: Monkey Cage)

"It's good to be an advanced country"

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Yep. But it's also good to have a history of credibility. As Michael Tomz argues, a country's reputation plays a big role in the supply of funds available for them to borrow, and the rates a country must pay to get those loans. That reputation is forged over long and short time horizons, and investors update their beliefs about the true "type" of a borrower according to the country's behavior. The U.S. has a pretty long history of paying its debts. Not only that, but it has a pretty long history of not inflating the value of its debt away, which is why the spread on inflation-protected Treasury securities has stayed tight despite the fact that the U.S. has been racking up debt over the past year.

(That's what the above picture shows: the difference in yields between inflation-protected securities and regular securities. As you can see, the historical spread is between 2 and 3 percentage points, reflecting the unofficial inflation target of roughly 2%.)

As Tomz's book Reputation and International Cooperation shows, a good track record can reassure investors even in bad times. This has made it easy for the U.S. to sell Treasury securities at very low cost during this downturn, while some other countries can't get funding at almost any rate.

That said, the benefit of the doubt doesn't last forever. A reputation can be built up or torn down; it is not a bottomless resource. If the U.S. shows signs of defaulting on its loans or a tendency to inflate the value away, investors will punish the U.S. for a long time to come. The more debt the U.S. adds, the more incentive it has to do some such thing, and the closer it moves to the point where investors lose confidence in the capability or willingness of the Treasury to pay up when the bill comes due. So the U.S.'s long-constructed credibility should not be squandered; if it is, the negative consequences will be far-reaching and long-lasting.

A Comparative Look at Japanese Health Care

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The NY Times interviews U. of Michigan political scientist John Creighton Campbell, a comparativist who specializes on Japan and its health care system. The Japanese are some of the healthiest, longest-living people on the planet, and Campbell acknowledges upfront that this is largely due to lifestyle factors like diet and lower rates of violent crime. But they do have a very low-cost, universal health care system. How do they manage it, and what can the U.S. learn from it?

Reimbursement rates to doctors and hospitals are negotiated and set every two years. The fees are quite low, often one-third to one-half of prices in the United States. Relatively speaking, primary care is more profitable than highly specialized care, so Japanese doctors face different incentives than U.S. doctors. As a result, the Japanese are three times more likely than Americans to go to the doctor, but they receive many fewer surgical operations.


Slashing the pay of doctors is not feasible in the current U.S. political climate, but that's a large reason why we'll always have significantly higher costs than France, the U.K., and Japan. Even if we could control costs by limiting doctors' pay, it may not be desirable. Low pay for doctors and emphasis on primary care has led to shortages:

Financial stringency and organizational rigidities have led to inadequate hospital services in some areas, particularly in emergency care, where patients in ambulances are sometimes turned away. There also are doctor shortages in some regions and specialties. Consultation times can be too short for complicated diagnoses and for psychotherapy. ...

Many of the problems are largely due to underinvestment, and the severity of the cost control has become an issue in the current election campaign.


Several Los Angeles hospitals drew plenty of ire for dumping poor patients on the streets a few years back, and they deserved all of it. But would it have been better if the patients had not been admitted in the first place? Or if there are no specialists to see them at all? I'm sure this is not widespread practice in Japan; then again, it's not widespread in Los Angeles either. Strangely, Campbell doesn't see see this as rationing:

In the 1980s, health care spending was increasing as quickly in Japan as in America, but the Japanese government learned how to influence medical care provision without rationing by manipulating how it paid for services. Annual spending growth has thus been quite low despite a rapidly aging population.


Creating a shortage of doctors by limiting their pay is most certainly rationing. Of course, in the U.S. we ration in the other direction -- if you or your insurance company can pay for it, you get it; if not, good luck -- but not for emergency care. That's pretty much the only part of the U.S. health care system with more-or-less universal access (excepting some homeless in L.A., of course). This may not be as bad as it sounds, since it's likely true that Japan needs less emergency care than the U.S. due to aforementioned lifestyle factors, but it does sound bad.

Still, Japan has a lot going for it and the problems in the system could be lessened to some extent by increased funding. This may be more difficult as the population continues to age, but right now Japan spends less per capita on health care than almost any other industrialized country. Interestingly, their system is not single-payer (except for the elderly, as in the U.S. currently): private insurance covers most people, but is strictly regulated. Health care premiums are paid for via a progressive tax. It sounds like Japan has mandates for purchasing coverage but no public option, although Campbell doesn't speak directly to those points.

In short, Japan shows one way to bend the cost curve: pay doctors less, and accept the shortages that follow. It might work well enough in a country with such healthy lifestyles, but I have a feeling that that would be a recipe for disaster in the U.S. Which is probably why you seldom hear American health care reformers citing Japan as a possible model for the U.S., despite the low costs.

A Must-Read on Securitization

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Here. One part I liked:

Finally, I'm consistently stunned at people's belief that, going forward, securitization is just a bad idea. That belief is akin to thinking that all stocks are bad after a stock market crash. The securitization market performed without grave incident for decades. The reason it went bad over the past few years was not because of securitization -- it was because of bad collateral. Had real estate not been overvalued, the market would have continued to function normally.

And in the future it should continue to function. This can be seen through other asset-backed securities not tied to mortgages that haven't seen treacherous losses. Such deals include stuff like auto loan-backed securities from prime issuers like Honda or Nissan. In a recession this bad, some with car loans might go delinquent or default, but the cushion in the deal should account for most of that. The collateral was strong enough that the rating agencies' assumptions worked.


Read the whole thing. The gist is that banks did their job relatively well, but ratings companies and institutional investors didn't. I suppose the point is arguable, but the fact remains: banks met the standards for AAA ratings that were given to them. If those standards failed, blame the standards and those supposed to maintain them, not the banks. This should give pause to those who think we can regulate our way out of future crises.

Say what you will about McMegan, the Atlantic's business coverage has been superb since she became editor. I have the whole Business channel in my RSS feed, and those authors often out-perform their peers at WSJ or anywhere else.

Social Science Battle Royale!

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At least that's how the U.K. press frames it. It's Krugman v. Ferguson (again), but as a summary of an important debate it could be worse. Frankly, I think they're both right in a way. The difference is less about true substance and more about time horizons, which could be expected when an economist and historian lock horns. Here's the nut:

“What they are really arguing about is whether we should exit quickly from the policy that has been taken up,” said Stephen Lewis, a veteran City economist with Monument Securities. “Even Krugman would agree that you cannot carry on building up public debt forever. Ferguson’s point is that we should be looking for the exit right now.”

In that, he is far from alone. Warren Buffett, the world’s richest man, was warning last week of the dangers of what he called, with his skill for a pithy phrase, “greenback emissions” — the vast accumulation of public debt that risks turning America into a “banana republic”.


Much more at the link (including juicy insinuations!), and this is not just a debate for the U.S., but rather for most of the industrialized world. It's a good read for getting a frame of the underlying issues even if the personalities are in the way. I have little doubt that Krugman is right about the short-run necessities, but I share Ferguson's concern for the medium- to long-run, and a historian's input is valid for discussing that time frame.

And frankly, I think the accusations of racism directed at Ferguson by Krugman, Fallows, and many others in the left-ish commentariat are disgraceful, and I was happy when Henry Louis Gates and others said so. I respect Krugman and Fallows quite a lot, but every analogy need not be over-thought or overwrought, and impugning character is no substitute for engaging in debate. Even if Ferguson's comparison of Obama to Felix the Cat (both are black, yes, but that wasn't really the point, nor was the observation meant to be derogatory) was a clumsy intro to an op-ed, it certainly exhibited no racist intent. (To be fair, Coates had a different reaction than Gates, although I'm not really sure how much that matters; this fire was fanned by several white guys after all).

So yeah: deficits, depressions, banana states, academic egos, the fate of the global economic system, and accusations of racism! What could be more titillating than that?

Monday, August 24, 2009

Naomi Klein: Pro "Shock Doctrine"

. Monday, August 24, 2009
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From Johan Norberg:

Ever since I read Naomi Klein´s book The Shock Doctrine I have suspected that she is not really opposed to the shock, just to the doctrine. After this statement from Klein in an article in The Progressive, it is confirmed:

"Do we want to save the pre-crisis system, get it back to where it was last September? Or do we want to use this crisis, and the electoral mandate for change delivered by the last election, to radically transform that system? We need to get clear on our answer now because we haven’t had the potent combination of a serious crisis and a clear progressive democratic mandate for change since the 1930s. We use this opportunity or we lose it."


Fits rather well with Klein´s definition of the shock doctrine, doesn´t it?

"Well, the shock doctrine, like all doctrines, is a philosophy of power. It’s a philosophy about how to achieve your political and economic goals. And this is a philosophy that holds that the best way, the best time, to push through radical ... ideas is in the aftermath of a major shock. Now, that shock could be an economic meltdown ... in that window, you can push through ... radical change"


Now it´s official: Naomi Klein has spent five years writing a book that accuses free-market liberals of thinking the way she does.


Dr. Oatley put the beat-down on Ms. Klein (and other pseudo-social scientists) here. It's maybe the best post this blog has ever produced.

ht: Will Ordinary

U.S. Makes Money from Citi Bailout

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$11bn profit, as of today:

The US government, by contrast, is sitting on a paper profit of almost $11bn on its 34 per cent shareholding in Citigroup, its only direct stake in a large financial institution.

The US authorities received more than 7bn shares in the troubled financial group at $3.25 apiece, after converting $25bn of preferred stock into common equity at the end of last month.

Since then, Citi’s shares have rallied, and closed on Friday at $4.70, increasing the value of the government’s stake by $11bn. That more than offsets the paper losses of all the other significant state interventions in listed banks – in the UK, Germany, the Benelux and France.


At least one IPE@UNC blogger (not this one) has also made a tidy profit from buying low on Citi. We made another half billion when Goldman bought back its preferred shares from the Treasury in June. So this goes to show what a lot of people were saying (including me, I think, but I can't find the post now): the "bailout" was never a handout, since the loans were to be repaid and/or the government got a preferred equity stake. It is very possible that TARP will end up turning a profit overall. At the very least, the final cost won't be anything close to $700bn. Saving the world from Armageddon and turning a profit on the side? Not a bad bit of business, if it ends up that way.

Via Derek Thompson, who adds:

Our bank strategy might not have much of a through-line (Let Lehman fail, then guarantee AIG for more than $100[bn], start doling out TARP to struggling banks, propose and un-propose and re-propose public-private plan to buy toxic assets, and so on) but it appears to be working, insofar as our banks are much better capitalized now than they were seven months ago. When the dust settles, economic historians (and really, anybody with an opinion) will be able to look back and assess the varying health among our financial institutions to conclude whether our ad hoc approach was instinctive but sound, or messy and fundamentally harmful, but to me, this article is another piece of information to file under: Things Really Could Have Been So Much Worse.


Yes. Very much worse. Which is why articles like the one Matt Taibbi wrote for Rolling Stone (no link; it's that bad) are so irresponsible: they completely missed the cause, the effect, and the consequence.

Against Industrial Farming (?)

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A few weeks ago, I posted an article in defense of industrial farming and hoped that it would spark some discussion about agriculture policy. There wasn't much, but here's one article from an "agri-intellectual". He doesn't rebut much of the first piece, instead trying to reframe the discussion:

I’ve said for a while that I see three big challenges for the sustainable-food movement as it scales up: 1) soil fertility—in the absence of synthesized nitrogen and mined phosphorous and potassium, how are we to build soil fertility on a larger scale?; 2) labor—sustainable farming requires more hands on the ground; who’s going to work our farm fields, and at what wages?; and 3) access—in an economy built on long-term wage stagnation, how can we make sustainably grown food accessible to everyone?

Hurst’s essay begins to engage these questions—sort of. I don’t have the time or energy right now to take it on point by point. But I will say that the discussion would be much richer if he acknowledged a few serious questions about the industrial-farming model he champions.


The rest of the response is mostly about climate change, which is also a major concern for "scaling up" sustainable farming, and worries about "ecological blowback". As are yields, of course, and costs. In short, the response was disappointing. Some of the comments are better, tho.

"Today derived impression that war is almost certain"

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That is George Orwell, writing on this day in 1939 on the news of the signing of the Molotov-Ribbentrop Pact. Interestingly, he had this to say about Neville Chamberlain:

Chamberlain’s speech as reported on wireless very strong & hardly seems to allow loophole for escape from aiding Poles.


Most do not remember Chamberlain as being so resolute. All of Orwell's diaries are being published in order, 70 years to the day from the time they were written. Today's entry is here.

Ledes That Make You Stop Reading

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From the NY Times:

In past global slowdowns, the United States invariably led the way out, followed by Europe and the rest of the world. But for the first time, the catalyst is coming from China and the rest of Asia, where resurgent economies are helping the still-shaky West recover from the deepest recession since World War II.


Ummm... no. Export-biased economies cannot lead the world out of recessions, because they need markets for their exports. As Kindleberger observed, the economies that lead the world out of recessions are the ones that provide markets for distressed goods.

After that opening I couldn't bring myself to read the rest of the article, so I have no idea if it gets any better. But I doubt it.

UPDATE: Curiosity got the better of me, and I went back and read more. Eventually, the author gets around to interviewing someone who knows what he's talking about, and Kenneth Rogoff says this:

“The big question is what happens next,” said Kenneth S. Rogoff, a professor of economics at Harvard. “If the consumer in the United States and Europe doesn’t come back, I’m not sure Asia has a Plan B.”


Right. Recovery is demand-driven, not supply-driven. Asia can't sustain its own recovery without external demand, much less pull up the rest of the globe. The rest of the article is babble.

Sunday, August 23, 2009

Good Point

. Sunday, August 23, 2009
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Gregg Easterbrook:

While the fixed vote in Iran received extensive international attention, the world paid no notice to an honest election in Indonesia -- the world's largest Muslim nation. As recently as the 1970s, Indonesia was a repressive military dictatorship; gradually it has become a democracy with a civil-society basis and freedom of speech, plus strong economic growth. And America did not force this outcome on Indonesia or, for that matter, have anything to do with what happened -- Indonesians made their nation a democracy entirely on their own. Why do the same politicians and pundits who have limitless breath to denounce the troubled Muslim nations say nothing about the success story of Muslim Indonesia? Islamist fanatics hate freedom in Indonesia as much as they hate it in the United States and Europe, and have committed awful crimes against Indonesia democracy. But the world only notices Indonesia when a bomb goes off there -- how about some notice for social and economic progress?


Quite frankly, I know nearly nothing about Indonesia. While prior knowledge is not always a prerequisite for me to blog on a subject, in this case my ignorance of Indonesian history and politics is so complete that I have nothing to say. This is stupid, since it's one of the largest countries in the world, it is the largest majority-Muslim country in the world, and has been transitioning in recent times. Indeed, the CIA World Factbook notes that Indonesia is now the world's third-largest democracy and sixteenth-largest economy (PPP). It's a big, important country and we really should hear much more about it.

ht: Daily Dish

Sunday Links

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The perverse American sugar policy.

The global Tragedy of the Commons.

Are International Relations teachers doing a disservice to their students?

A response to Robert Putnam: IQ tests for would-be immigrants. How offended should we be? Is within-group discrimination better or worse than across-group discrimination?

How the economic downturn has battered European solidarity.

Fraud (and worse) in last week's election in Afghanistan.

How the emancipation of women can make the world richer, safer, and healthier. I completely agree with the premise: this is the foremost issue of our time.

I Have to Admit It's Getting Gotten Better

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The increase in income inequality has led some to fret about the shrinking middle class in America. See, e.g., this piece by Krugman from a few years back. And the data actually do show that the middle class is shrinking, at least if measured by static income groups. But not because of rising income inequality:

The middle classes fell too, though by less. The sum total across the $35K to $75K categories fell by 5.4 percentage points. In other words: the net movement of households was an 11.5 percentage point gain in households above $75K and a net reduction of 11.5 percentage points in houses below $75K. So the percentage above $75K rose from 18.9% to 30.4%. That is, it increased by over 50%.

Let me repeat that: over 30% of US households in 2006 earned above $75K compared to under 20% in 1980. Over the same period, the percentage of US households earning under $35K fell from 42.8% to 36.7%. Fewer households are poor, fewer are middle class, and a hunk more are above $75K. (And in case you were wondering, those general trends hold for black and hispanic households too - with the percentage of black households under $35K falling by 10.9 percentage points and the number above $75K increasing by 8.9 percentage points, for example.)


Yes, those numbers are adjusted for inflation (2006 dollars) but they are not adjusted for the decline in household size or the real improvement of much of what we buy (i.e. a $1,000 computer in 1995 is much worse than a $1,000 computer in 2009 even though they show up as the same thing in the data). These would both understate the improvements in life quality, perhaps by quite a lot.

This gets at the eternal "absolute vs. relative gains" debate: in absolute terms, America has done very well in the past 30 years. We have more wealthy people and fewer poor and middle-income people. On the whole, the rising tide has lifted all boats. But it has lifted some boats much faster than others. Normative political economy is largely determined by which of the two is deemed more important.

Capabilities Cost Money

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Steve Sailer looks for ways to trim the costs of empire, and searches for the logic behind American troop deployments:

For example, almost 20 years after the fall of the Berlin Wall, we have 56,200 military personnel based in Germany. Doing what, exactly? Protecting Germany from whom? France? Poland?

We have 33,000 troops in Japan, another expensive country, and 28,000 in South Korea. ...

So, what's the war-fighting reason for deploying only moderately large numbers of troops overseas? It sounds like we have, in the unlikely event of a central European war, not enough troops in Germany to win, but, instead, just enough troops to suffer the worst defeat in American history.


I believe that it was Thomas Schelling who argued that putting 10,000 troops in W. Berlin would be enough of a deterrent to prevent a Soviet invasion of W. Germany. Why? Certainly not because they could actually repel an invasion, but because a "moderately large number of troops" sent a credible signal that we were committed. If the Soviets invaded, we'd have the rest of the US Armed Forces in the theater within a week. Staffing bases with a skeleton crew (or out-sourcing maintenance to the local population, as Sailer suggests) during peacetime signals that we aren't committed, and may invite aggression.

Of course we're not in the Cold War anymore, and a central European war is unlikely, but neither are the military personnel in Germany just defending Germany. The bases there give us capabilities to act in Africa and the Middle East as well as Europe. The 1990s interventions in the Balkans and Africa would have been much more difficult without the German bases, as would the 2000s interventions in the Middle East. Similarly, the bases in Korea and Japan allow us to act all over Asia, while preventing regional arms races and brinksmanship. It's about capabilities and being able to quickly react to unforeseen developments.

Maybe that rationale would not satisfy Sailer -- it doesn't satisfy Harvey Sapolsky -- but that is the rationale. It would be absurd if 60,000 American troops were only in Germany to defend that country. But that's not why they're there.

Friday, August 21, 2009

Welcome to Social Science

. Friday, August 21, 2009
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A pundit and an economist are baffled by rational-choice theory:

At the same time, I’ve come to be increasingly baffled by the high degree [of] cynicism and immorality displayed in big-time politics. For example, Senators who genuinely do believe that carbon dioxide emissions are contributing to a global climate crisis seem to think nothing of nevertheless taking actions that endanger the welfare of billions of people on the grounds that acting otherwise would be politically problematic in their state. In other words, they don’t want to do the right thing because their self-interest points them toward doing something bad. But it’s impossible to imagine these same Senators stabbing a homeless person in a dark DC alley to steal his shoes. And what’s more, the entire political class would be (rightly!) shocked and appalled by the specter of a Senator murdering someone for personal gain. Yet it’s actually taken for granted that “my selfish desires dictate that I do x” constitutes a legitimate reason to do the wrong thing on important legislation.

Making it all the odder, the level of self-interest at stake isn’t all that high. Selling the public good down the river to bolster your re-election chances isn’t like stealing a loaf of bread to feed your starving children. The welfare rolls are hardly stocked with the names of former members of congress. Indeed, it’s not even clear that voting “the wrong way” poses particularly serious threats to one’s re-election. But even if it did, one might assume that people who bother to dedicating their lives to securing vast political power did so because they actually wanted to accomplish something and get in the history books, perhaps, as one of the big heroes of their era.


I don't intend any particular point about cap and trade, but viewed more generally it's stunning how true this is. (In fairness, note that the title of this post is my framing, not necessarily Matt's.) Many people -- especially those who become politicians -- really do want fame and power and it is amazing what they will talk themselves into to get there and to stay there. They don't even want fame in the sense of being recognized, in the longer run, for having done the right thing. They want more personal influence and power now.


Call me cynical, but I'm really surprised that they are surprised. I would've expected them both to be more, er, realistic.

Thursday, August 20, 2009

Who's Been Sleeping in Putin's Bed?

. Thursday, August 20, 2009
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From FP Passport:

In a move towards great transparency and accountability, the Kremlin yesterday released figures detailing a recent order of new furniture. It sounds simple enough but, as is usually the case with Russian politics, it quickly became the stuff of legends -- or at least, Aesop's fables. The total value of the interior ministry's furniture tender, it appeared, was $755,900 (24.4 million roubles) and included a cherry wood bed with head and footboards coated in a thin layer of 24 carat gold. Though other items will be delivered to an address in the exclusive dacha district on the outskirts of Moscow where many senior officials live in state-owned homes, the gilded bed will be sent to the ministry headquarters.

Unsurprisingly, the news has received much criticism in a country where the economy shrank 10.9 percent in the last quarter. I think the question praying on all our minds is: who's going to be sleeping in the gold bed?


Good question, but maybe not the right one. If this is what happens after the government is made to be more transparent, imagine what was going on before. So the right question is "How many other gold beds are there that we don't know about?" Perhaps everybody is sleeping in gold beds.

Oh, who am I kidding. The gold bed must belong to this guy:

Another View on the Iran Election

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Via Gelman, a (somewhat stats-based) dissent from the widely-held view that the Iranian election was rigged. Not that it matters much at this point, and not that I take this review at face value, but there you go.

Matt Rognlie Does Not Understand the Public Option

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Neither do I. He says it all in one paragraph:

The adverse selection problem here is so overwhelming that there is almost certainly no price at which the government can break even. But this will only be discovered after the public plan has already swung into operation, and millions of people have signed up. What does the government do now? Throw up its hands, announce that the plan isn't solvent, and force millions of customers who have placed their trust in the public plan to join the ranks of the uninsured? Of course not. Subsidies are inevitable.


There is more at the link. Of course nearly everyone who supports a public option also supports some version of single-payer, so for them Rognlie's argument is not troublesome. (Perhaps it is not troublesome for Rognlie either; he doesn't say.) And people who oppose single-payer understand perfectly well that a public "option" is basically a Trojan horse towards that end. This is well understood by anyone who has thought about it.

(It should be instructive that Walmart is a strong proponent of the public option, since it will not only move many of their employees onto the dole, but also subsidize many more potential customers.)

But basically Matt is saying that would-be reformers cannot have it both ways: there will be large costs for any meaningful reform. If you want the reforms anyway, then you must justify the costs. If you can't/won't do that, then you need to abandon the reforms. Of course, the flipside is also true. If you are unwilling to pay the costs, you must justify why. And nonexistent "death panels" and "Stephen Hawking would be dead" arguments don't count, nor does any phrase that includes the words "Soviet Union". If you oppose reform, you need to make the case that you shouldn't have to pay for other peoples' health care. That's a case that can be made, but you can't do it by accusing gay Jews of being Nazis:



I actually disagree with Frank there. It would be much more beneficial to have that conversation with the dinner table. I mean, seriously. Barney Frank is a Nazi?!? I'm not a super-huge fan of the man, but Nazi is about the last thing I'd call him.

Good News on Remittances

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Several aspects of the Great Global Decession (no sic) that should interest students of IPE are the knock-on effects of the global economic slump. These won't get the same headlines as 500 point drops in the Dow or 9% unemployment, but they can be similarly significant. So I've been interested to see how the downturn will affect trade flows, LDC development, currency valuations, immigration trends, and the like. Along those lines, we're starting to get some reports on remittance flows, and PSD notes the results are a bit surprising:

One of the bright spots in the financial crisis so far has been the resilience of remittance flows to developing countries. While other forms of private finance fled developing countries when the international financial system came under stress, migrants kept sending money home. The latest Migration and Development Brief from the World Bank contains the relevant details: remittances to developing countries rose 15 percent between 2007 and 2008.


This is heartening, but also somewhat perplexing. Why should remittances be going up during a global downturn? It isn't entirely clear. But there is an intriguing possibility:

[T]he combination of a weak rupee and higher interest rates in India compared with rich countries, may go a long way towards explaining last year’s vastly increased flow of remittances from Indians abroad.


And again:

[F]lows to some South Asian and East Asian countries increased sharply in 2008 partly because depreciating currencies against the US dollar made assets in the home country more attractive, with a “sale effect” resulting in a shift in remittances being sent for consumption motives to investment motives.


So immigrants are using the "flight to safety" appreciations of the dollar and Euro to maximize the value of remittances. But trends in 2007-08 don't necessarily paint the full picture. After all, quite a lot happened late in 2008 and early 2009. So it's worth asking whether the '07-08 trend has continued. Emmanuel notes that it has, at least in the Philippines:

Dilip Ratha, widely known as the authority on remittances, expects a 4% decline in remittance inflows. Notably, even Nouriel Roubini's RGE Monitor is in agreement that Philippine remittances will decline.

However, the methods all these entities use is not very sophisticated by their own admission. I have been at a conference where Dilp Ratha spoke. He explained how he arrived at his predictions. Basically, it involves establishing what percentage remittances to a source country are of a destination country's GDP. Next, inflows to a source country are projected by multiplying the percentage arrived at against the predicted GDP in the destination country for 2009. Unsurprisingly, using such a formula yields the negative expectations all these banks, IFIs, and research groups have as a function of declining economic activity in most destination countries.

This unanimity would be all well and good if it were not for remittances to the Philippines, er, increasing in the first half of 2009. Moreover, in not a single month has there been a year on year decrease in remittances. RGE casting aspersions on official predictions of a slight increase in remittances have proven to be wide of the mark thus far.


Obviously this is still developing. But if remittances hold up against expectations it can only be considered a good thing.

For Insomniacs

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Spencer "Attackerman" Ackerman suggests following the ongoing Afghan election at Alive in Afghanistan. That seems like a good idea. 538 has some pre-vote analysis, but it's not really clear what we should expect. I have nothing more to add except some ennui.

Wednesday, August 19, 2009

What do Political Scientists Study?

. Wednesday, August 19, 2009
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From Charli Carpenter over at The Duck of Minerva:
In the April issue of PS: Political Science and Politics, I discovered this little gem: a one-page "article" entitled "Picturing Political Science" which consisted of the following:

"What do political scientists study? As part of a larger project, we coded every article in 25 leading journals between 2000 and 2007. We then created a word cloud of the 6,005 titles using http://www.wordle.net. The 150 most-used words appear in the word cloud. The size of each word is proportional to the number of times the word is mentioned. Draw your own conclusions."

International? Check. Political? Check. Economy? Check. Yes, we're relevant!

The Cleveland Fed Has Some Fun!

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Really fun video on systemic risk and systemically important institutions.

(ht: Free Exchange at the Economist.)

Tuesday, August 18, 2009

U.S. Loses W.T.O. Dumping Appeal

. Tuesday, August 18, 2009
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This is positive:

The World Trade Organization’s top court rejected on Tuesday an American appeal in a long-running case on antidumping measures, clearing the way for Japan to threaten trade sanctions against Washington.

The final ruling by the Appellate Body of the W.T.O. in the case, which Japan started in 2004, dealt another setback to a controversial American method of dealing with unfairly priced imports.

But it also highlighted sensitivity about antidumping measures. The measures impose additional duties on imports that are sold for less abroad than they cost at home, but can be abused for protectionist purposes. ...

The case turned on a controversial method known as “zeroing” used by the United States to calculate duties on goods imported for less than they cost in the originating country.

The way the United States handles its antidumping measures was also at issue. Washington argued that it could continue to levy duties on goods that entered the country before a W.T.O. ruling finding such duties illegal — a stance rejected by the court.

The United States is the only one of the W.T.O.’s 153 members to back zeroing, which the Appellate Body has ruled against consistently.


The U.S. is clearly in the wrong here, and I'm happy to see the W.T.O. put its foot down. I discussed how anti-dumping protections often make trade less free and fair before.

Zombies!

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Daniel Drezner views the oncoming zombie assault through the lens of IR theory, and hits all the high points. (Be sure to check out the comments where Charli applies the full feminist treatment to challenge prevailing attitudes towards zombies.) I think he gets neoconservatism wrong, however. In this case, the neocons are the zombies, and the local populations are human. The zombies think that a sudden, massive onslaught will start a "Big Bang" process from which humans never recover. Here the zombies have miscalculated; one thing that's clear from all zombie movies is that once the initial "shock and awe" of zombie attacks wears off, the humans always win through some combination of cunning, epiphany, local knowledge, and brute force.

Drezner has also neglected another possibility: the effective colonization and enslavement of the zombie populations. Drezner cites Shaun of the Dead in his discussion of constructivism, but misses the main part. Most movies end as the tide has turned back to the humans, but Shaun of the Dead doesn't, instead envisioning a world in which zombified versions of loved ones are kept around as objects for human amusement. They are practically pets, and are certainly enslaved (often in cages, but sometimes by chains) and exploited for their entertainment value. They are treated subhumanly, but that's pretty much okay because they are subhuman.

In this way, a human/zombie war could only be resolved by an imperial imposition of human will onto zombie populations. It will be easy to galvanize public support for this; after all, zombies actually are the "other" that nationalists often conjure to attract support for their policies. What will be interesting is whether society stays segregated, or if zombies gain more and more social access over time. Could a Zombie Rights Movement gain any traction? Would this resemble the human/mutant struggles in the X-Men comics (unlikely, since mutants are stronger than humans but zombies are weaker)?

Clearly more theorizing is needed. And has no one considered the possibility that aliens have used their superior technology to create the zombies that we're fighting? Perhaps we shouldn't cast Wendt aside just yet.

PSA: IR Theory Resource

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The other day I stumbled across Theory Talks, a blog run by a Peer Schouten, a Ph.D. candidate at the University of Gothenburg. In the words of its proprietor, Theory Talks "is an interactive forum for discussion of debates in International Relations with an emphasis on the underlying theoretical issues. By frequently inviting cutting-edge specialists in the field to elucidate their work and to explain current developments both in IR theory and real-world politics, Theory Talks aims to offer both scholars and students a comprehensive view of the field and its most important protagonists."

In other words, the site interviews prominent IR figures and focuses on the theoretical aspects of their work, controversies and debates in the discipline, and how to move the discipline forward. So far there have been several dozen of these, including talks with Wendt, Katzenstein, Nye, Keohane, and many others. It's a nice resource.

Monday, August 17, 2009

Why We Can't Prevent Financial Crises with Regulation

. Monday, August 17, 2009
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The U.S. Federal Reserve, for instance, could hardly stand idly by while the Bank of America or Citibank became unable to meet its liabilities. Yet this responsibility creates a problem of moral hazard, since the largest banks, in effect, have automatic insurance against disastrous consequences of risky but (in the short-run at least) profitable loans. They have incentives to follow risk-seeking rather than risk-averse behavior.


That is Robert Keohane in After Hegemony. It was published in 1984, before financial "weapons of mass destruction" were yet to be dreamed of, much less utilized (and Keohane was far from the first to think about these issues). The current crisis wasn't created by credit default swaps or mortgage-backed securities; it's an artifact of the structure of the system*. Since we do not know of any way to transform the structure of the system in a positive way, we are left with marginal regulatory tweaks. If well-constructed, these marginal tweaks can bestow marginal improvements. But we should not convince ourselves that we can transform a structural problem with marginal tweaks. We can't.

Yes, this means that we'll always have financial crises (although they won't always be as bad as this one). We could throw every Wall Street banker and AIG insurance underwriter in prison, abolish all derivatives, require huge down-payments for mortgages, and we'd still have periodic crises. Just as we face a tradeoff between security and liberty, we face a tradeoff between financial stability and dynamism. We'll have to accept some of the one in order to get any of the other.

Kind of Blue

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This has nothing at all to do with IPE, but today marks the 50th birthday of Miles Davis' Kind of Blue. It is the best-selling jazz album of all time, and (like many people) the first one I owned. I'm not sure it's my favorite jazz album, but it was a gateway drug for me: it led me to ingest more and more jazz in greater and greater quantities. You can trace the past and future of jazz through that record: Coltrane -- whose landmark album Giant Steps was released just a few months after Kind of Blue --played on it, as did Cannonball Adderley. Prior to that album Davis had played in bands with Max Roach, Dizzy Gillespie, Charlie Parker. After it, Davis' bands included Herbie Hancock, Chick Corea, John McLaughlin. The final death of bebop's hegemony in the jazz world was not only augured by Kind of Blue; it was caused by it. The space that Davis and others would soon occupy -- free jazz, fusion -- would have been impossible without the tectonic shift in jazz from chord-centric swing and bebop to "modal" jazz. In a very real sense, Kind of Blue represents the high-water mark of jazz's popular and artistic appeal.

Fred Kaplan has a nice article on the album here. Below is a short (8 minute) documentary on the record and a live performance (with Coltrane) of Kind of Blue's classic opening track, "So What".



Good News and Bad News in Afghanistan

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First the good news: Richard Holbrooke has claimed a victory over the Taliban in Afghanistan. From the FT:

Richard Holbrooke, President Barack Obama’s special envoy to Afghanistan and Pakistan, warned of the heightened threat, saying the Taliban had “thrown everything” at ruining the country’s fledgling democracy. But he saluted Afghanistan for taking a big step in practising politics as they should be, despite leaving some polling areas unprotected.

“A ferocious offensive by the Taliban [was] designed to try to kill the elections. Their goal is to prevent the elections and they have failed in that,” he said on a visit to Islamabad.


Any defeat of the Taliban is a good thing, but let's pull back a bit and see what this election is about. From the NYTimes:

President Hamid Karzai, who is still the frontrunner, is the most vocal in calling for negotiations, pledging that if he is reelected he will hold a traditional tribal gathering and invite members of the Taliban and Gulbuddin Hekmatyar, another opposition leader to make peace. And just in the last few weeks his government has started several initiatives to approach local Taliban commanders through tribal elders. The government also has started work to win over the tribes by hiring thousands of their young men to be part of a local protection force, primarily to ensure security for elections. But each of his three main opponents is critical of Mr. Karzai’s record in following through on such promises.

Dr. Abdullah Abdullah, Ashraf Ghani, and Ramazan Bashardost all oppose the Taliban, but also promise if elected to do better and to make peace a priority. The candidates differ on how to pursue a settlement: by negotiating a comprehensive peace with the Taliban leadership; or by trying to draw away mid-level Taliban commanders and foot soldiers, an approach that has been tried with little success over the past seven years as the ranks of fighters have swelled.


Okay... so the central campaign issue is how best to appease the Taliban. Or, as Sec. Clinton said:

“We and our Afghan allies stand ready to welcome anyone supporting the Taliban who renounces Al Qaeda, lays down their arms, and is willing to participate in the free and open society that is enshrined in the Afghan constitution,” Secretary of State Hillary Rodham Clinton said in a speech last month.


And what does that "free and open society that is enshrined in the Afghan constitution" look like? Well, that's the bad news. In a nutshell, it's the right to murder your wife if she doesn't put out:

Last week, though, Human Rights Watch discovered that a revised version of the Shiite Personal Status Law had been quietly put into effect at the end of July — meaning that Shiite men in Afghanistan now have the legal right to starve their wives if their sexual demands are not met and that Shiite women must obtain permission from their husbands to even leave their houses, “except in extreme circumstances.”

The new law was signed by President Hamid Karzai, who is depending on support from Sheik Muhammad Asif Mohseni, the country’s most powerful Shiite cleric, in this week’s presidential election. Shiites, who were oppressed by the Sunni-led Taliban government, are believed to make up between 10 and 20 percent of Afghanistan’s population.


On the bright side, the religious right was unable to prevent a provision that banned the marriage of girls under the age of 16. Because, you know, growing girls need their dinner. Plus, women can vote in the elections so they'll be able to kick the bastards who are starving them to death out of office if they want to. That is, if their husbands permit them to leave the house on election day and they don't get killed by somebody else on the way.

So let's review the American/NATO mission in Afghanistan as it stands today: fight the Taliban to support the government that is trying to appease the Taliban, while supporting the Afghans' god-given, Constitutional right to bear arms rape and/or murder their wives. It's pretty hard to feel righteous about this, isn't it?

This Does Not Mean What You Think It Means

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All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results.


This is a paradigm-shifting argument by a non-expert. Read the whole thing, and keep in mind that this has implications beyond the United States. Another important piece:

To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.


No politician is proposing anything like this sort of reform. Why not? Because politicians get elected by insisting that trade-offs do not exist. Of course trade-offs do exist, but you won't win a mandate by saying so. Keep that in mind as you read about the ever-shifting composition of the various health care reform bills being discussed in the Congress.

Saturday, August 15, 2009

BdM

. Saturday, August 15, 2009
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The NY Times Magazine has published a long article on Bruce Bueno de Mesquita, political scientist and paid prognosticator for the government and many corporations. He is one of the most prolific academics in political science, and is both very influential and highly divisive. It is probably not an overstatement to say that he has changed the orientation of the discipline more than any other figure in the past quarter century, and his orientation is towards rational choice modeling and game theory. In my mind and despite its flaws, his co-authored 2003 book The Logic of Political Survival will likely stand as the defining work of international relations and/or comparative political economy in the 2000s (although not everybody shares this opinion). Even more, he's the only international relations scholar to have his own special on the History Channel, titled "The Next Nostradamus". Bueno de Mesquita's out-sized reputation (and ego), along with the proprietary nature of much of his work and the large sums of money he receives for it, has generated plenty of detractors inside and outside the political science community. But he has his supporters too:

Bueno de Mesquita’s most regular client by far has been the C.I.A. He says he has performed more than 1,200 predictions for the agency, tackling questions like “How fully will France participate in the Strategic Defense Initiative?” and “What policy will Beijing adopt toward Taiwan’s role in the Asian Development Bank?” In 1987, Stanley Feder, a research political scientist for the C.I.A., published a report analyzing forecasts that Bueno de Mesquita’s firm did of political events in 27 countries; he found that the success rate of its predictions was the same as that of the C.I.A.’s own analysts, only more precise. (He “got the bull’s-eye twice as often,” Feder wrote in his report, which was declassified in 1993. No other reports have been declassified since.)


Sounds great. So where's the rub?

Donald Green, a political scientist at Yale, questions whether Bueno de Mesquita is serving the discipline well. “When I see clips of Bruce at the TED conference,” he says, referring to the annual conference promoting ideas in technology, entertainment and design, “I watch the video and I think, Wow, this is so far from the typical way in which political scientists of any stripe behave.” Some political scientists are openly dubious about the accuracy of Bueno de Mesquita’s model. Stephen Walt, a Harvard professor of international affairs, says that Bueno de Mesquita’s nonprediction work — like his theory of the “political survival” of heads of state — make him a “respected scholar, deservedly so.” It’s the predictions that Walt doesn’t trust, because Bueno de Mesquita does not publish the actual computer code of his model. (Bueno de Mesquita cannot do so because his former firm owns the actual code, but he counters that he has outlined the math behind his model in enough academic papers and books for anyone to replicate something close to his work.) While Bueno de Mesquita has published many predictions in academic journals, the vast majority of his forecasts have been done in secret for corporate or government clients, where no independent academics can verify them. “We have no idea if he’s right 9 times out of 10, or 9 times out of a hundred, or 9 times out of a thousand,” Walt says. Walt also isn’t impressed by Stanley Feder’s C.I.A. study showing Bueno de Mesquita’s 90 percent hit rate. “It’s one midlevel C.I.A. bureaucrat saying, ‘This was a useful tool,’ ” Walt says. “It’s not like he’s got Brent Scowcroft saying, ‘Back in the Bush administration, we didn’t make a decision without consulting Bueno de Mesquita.’ ” Other academics point out that rational-actor theory has come under increasing criticism in recent years, as more evidence accumulates that people make many decisions irrationally.


Academics hate it when others get a bunch of glory (and money) using proprietary data, as Bueno de Mesquita does in his private consulting. It makes it impossible to verify the legitimacy of the results. On the other hand, few argue that Bueno de Mesquita's academic work is not of quality even if they argue with his conclusions; he has been one of the most published political scientists of the past few decades, and his work has appeared in all of the top journals. His academic work has used public data, transparent sources, and has been replicated (and disputed) by many other scholars. And he's certainly not the only arrogant academic. So the animus towards Bueno de Mesquita comes almost entirely from his work outside of the academy.

Still, academics are highly skeptical of a model that can supposedly predict everything. Why? Because it can't:

[I]t’s true that there have been cases when Bueno de Mesquita’s model has gone awry. In his 1996 book, “Red Flag Over Hong Kong,” he predicted that the press in Hong Kong “will become largely a tool of the state” — a highly debatable claim today. (In 2006, Reporters Without Borders noted concerns about self-censorship but said that “journalists remain free in Hong Kong.”) In early 1993, a corporate client asked him to forecast whether the Clinton administration’s health care plan would pass, and he said it would.

What’s more, with corporate clients in particular, there’s always the potential problem of reflexivity, of the prediction itself influencing events and making it hard to evaluate the prediction’s value. Suppose a firm is told a merger will fail, for example, and abandons its merger efforts. Was the prediction accurate or a self-fulfilling prophecy?


On the other hand, Bueno de Mesquita's track record -- what we know of it, anyway -- is probably better than anyone else's.

His new book, the first targeting a general audience, comes out next month and looks poised to be the next BlackFreakoOutliers. The NYT Mag article is well worth reading in full. Below is his TED talk from this year.

A Question for Progressive Egalitarians

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The new Piketty-Saez income inequality data has been updated to include 2007, and it shows an even greater percentage of national income going to the top of the income distribution. That has likely changed since 2007 because financial crises and recessions tend to reduce income inequality by shrinking the incomes of the top earners, but progressives like Matthew Yglesias have responded to the new data with statements like this:

This trend has a variety of underlying causes, some of which are worth changing and others of which (better global communications leading to a bigger superstar effect) are basically good. Be that as it may, using the tax code to take some of this wealth and transform it into more and better public services for the broad mass of people would do a lot of good.


There's a tension here between egalitarian goals and progressive goals: egalitarians want to make the income distribution more equal (through progressive taxation if necessary), while progressives want as much tax revenue as possible to fund a host of public works projects. Most progressives are egalitarians also, so there's a trade-off to be resolved. Why? Under a progressive tax system government revenue is maximized by greater income inequality, because higher earners are taxed at higher rates than lower earners. From a revenue/public goods perspective progressives should want top earners to earn as much of national income as possible, since it will then be taxed at a higher rate and generate more money for things like high-speed rail and green R&D and public works. If the income distribution is more egalitarian, then tax revenues will decline (because more income is being taxed at lower rates) and the government will have fewer resources for public works.

Sometimes the preferences of egalitarians and progressives dovetail (i.e., public education, nationalized health care), but this isn't always true. So an academic question for egalitarian progressives: if you had to choose between a more equal income distribution and a greater role for the government at the margin where those two things do not run together, which would you choose? And what does your choice say about your political philosophy?

This isn't a "gotcha" question; I'm generally interested in what people would choose and why.

Friday, August 14, 2009

Why Oh Why Can't We Have a Better Press Corp?

. Friday, August 14, 2009
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Unlike other bloggers, I don't do many of these. It's just not my style, and I don't expect much from the press to start with. But Steven Pearlstein's column from yesterday on the Fed made me want to end it all. It is so wrong about so many things that... ugh. For starters, there's this:

There are two easy fixes for this problem. Congress could extend the chairman's term from four years to six but remove the possibility of reappointment. ...

Who is the right person to preside over this new Fed? That's easy: Ben Bernanke.


I mean, come on. Those two mutually-exclusive thoughts were literally printed a mere four paragraphs apart. This is not some wonky, misinterpreting-the-numbers sort of mistake. This is something that no 4th-grader could get away with in English class. Just imagine:

Little Jimmy: Wolves should not eat the little piggies.

Teacher: Well then, who should eat the little piggies?

Little Jimmy: The Big Bad Wolf!

Teacher: That doesn't make any sense.

Little Jimmy: Well that's what the Washington Post says about it.


But wait, there's more! Pearlstein also advocates developing a deeper bench of Fed governors to (not) rely upon to (not) replace current Fed chairmen (who shouldn't be reappointed except when they should be). And how does he propose to develop this deep bench? By not filling vacant governorships. Just watch:

One way to develop a better farm system for the chairmanship would be to give more power, influence and visibility to the other governors, raising the bar so that those who are appointed show some promise of being chairman some day.


Pearlstein wrote that two paragraphs after writing this:

[Congress] could end the current practice of appointing new members of the Fed's board of governors to fill the partial, unexpired terms of governors who leave. All new governors should be appointed to their own 14-year terms, without possibility of reappointment.


Pardon me, but I don't think that Congress should be giving more power and influence to empty seats. Those are inanimate objects and should have as little power and influence as possible (I'm fine with more visibility if the seats are well-made and aesthetically pleasing). Now well-educated people, on the other hand, should have more power and influence. But Pearlstein made it clear that he doesn't think that we should fill empty seats with well-educated people even though there is no reason to not appoint someone smart to fill empty seats on the Board of Governors. None. Or, if there is it must be a secret because Pearlstein didn't mention it. There are two empty seats right now, and perhaps we could use the brains of two more smart economists as we try to dig out of this recession.*

But there's even more:

Whenever the Fed comes under serious attack, as it has recently, its reflexive response is to accuse its critics of jeopardizing the Fed's independence. Yet if you think about it, the greatest threat to the Fed's independence comes not from outside the institution but from a chairman and members who are so anxious to get reappointed that they begin to tilt policy to win favor with the White House or with Wall Street or take on a reluctance to criticize policies that they think harmful to the economy.


[sarcasm]Wow, really? You mean to tell me that people who are appointed to their jobs by the government will try to do things that please the government in order to keep their jobs? That thought had literally never occurred to me.[/sarcasm]

So how do we fix this clear conflict of interest? Well, if you think about it, the only possible solution is to remove all the vestiges of regulatory independence this country has and give more powers to the executive branch, because the executive branch has no political interests at stake and regulators in the executive branch don't care about keeping their jobs at all:

The Fed should be required to give up its duties as day-to-day bank regulator, handing those over to a single, consolidated supervisor, as Sen. Mark Warner of Virginia has proposed. It should also be forced to relinquish its largely unexercised powers to regulate abusive lending practices to the new consumer protection agency proposed by President Obama.


I know I'm laying it on pretty thick, but this butchering of logic is practically subhuman. I have no idea how much the Washington Post pays Steven Pearlstein, but I guarantee that I can do a better job in my spare time for 1/3 the cost. Think about it, Hiatt.

*A more charitable interpretation is that Pearlstein meant that Governors should get no more than 14 years on the Fed board, no matter the extenuating circumstances. But quite frankly, I see no reason to give Pearlstein the benefit of the doubt here, so I'm not going to. And anyway, the terms of Governors are staggered -- like those of Senators -- for a reason, and temporary appointments -- like those for vacated Senate seats -- are made to uphold that balance. In any case, Pearlstein literally offers no argument for why this practice should be abolished in the Fed (or the Senate), but he thinks it should be anyway. Just because.

Links

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-- One of DeLong's best-ever posts, an ode to John Hicks.

-- The Mundell-Fleming "Unholy Trinity" in action in emerging Europe.

-- The collapse of global supply chains.

-- Krugman prophesied in 1996.

-- More new research on microfinance effectiveness. There are still few reasons for optimism.

Entrepreneurship and Health Care in the OECD, part trois

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John Schmitt, Senior Economist of the CEPR, left a comment on my last post on the CEPR report (which Schmitt co-authored) on entrepreneurship in the OECD and the implications for American health care reform. I would like to thank him for responding, but also address some of his specific claims. His argument, essentially, is that his speculation in the CEPR report -- that the lack of universal health insurance is a major reason why the U.S. has lower rates of small business employment -- is plausible and fits with anecdotal evidence. It certainly is plausible, as I wrote in both of my posts on the report. But it isn't the only plausible explanation, and in my first post I sketched out a few other possible causes.

Schmitt raises some issues in his comment that I'd like to discuss. First, this part:

Scott Shane (who's blog post you quote) believes, instead, that what is causing low small-business employment in the U.S. is our high per-capita income. To support his view, he notes that there is a strong negative correlation between national per-capita income and the self-employment rate.

Shane's view is also plausible, but odd. Why would we expect higher incomes to cause lower small-business employment? If people are on average richer, wouldn't they have more money to start their own small business? Wouldn't they have more money to buy the products and services of small businesses? (And, how is it that more small business, which is supposed to be making our country more prosperous is, on average, strongly correlated with being poorer?) A correlation is not an explanation, and neither Shane's post nor your's helps readers to understand why the U.S. lags.


Schmitt doesn't bother disputing the correlation, but instead tries to redirect attention by pointing out that Shane's result is counterintuitive. That may be so, but it doesn't refute the evidence. What it does do is indicate that there may be complex institutional or structural factors at play that make simplistic explanations (i.e. "the U.S. has less small business employment because it lacks universal health care") fall short no matter how intuitive they may be. For example, the regulatory environment for small businesses is much different in the U.S. than in most other OECD countries. This is independent from health care policy, but must have some effect on small business employment. So is the general business environment. National attitudes towards Big Business and preferences for mom-and-pop shops are also different in the U.S. compared to, say, France.

Further, there is no intuitive reason to think that small business owners should be richer than employees of large firms. Many small businesses struggle mightily to stay afloat even if the owners work much more than 40 hours per week and refuse to take vacations (as a former part-owner of a failed small business, and an employee of several others, I have some experience in this regard). If we don't limit our thinking to the OECD, this may be even more clear. In poor developing countries, almost everyone is self-employed as a subsistence farmer or a small-time trader. And yet they are very poor. An economist should quickly recall the efficiency gains that often come from scale, and the ability of larger firms to develop and use new technologies that enhance productivity and make them wealthier. In other words, we should not be at all surprised that poorer economies have more small business employment.

(For a quick case study, consider the differences between wine production in the U.S. and France as described in Mondovino. France's mode of production involves many small, family-run businesses; the U.S. relies more on several major corporations. Which do you think is more profitable? It's not the small businesses, which are going out of business (or selling out to a conglomerate) at ever-increasing rates. Saying this has anything at all to do with the health insurance systems in the U.S. or France is absurd.)

More from Schmitt's comment:

Fairlie, Kapur, and Gates (RAND Working Paper, November 2008) extended and updated Wellington's work. They also found that 65 year-old men (who were thus eligible for Medicare) were significantly more likely to own a business than men just a little younger (and thus not eligible for Medicare). (Fairlie, Kapur, and Gates's work was funded by the Kauffman-RAND Institute for Entrepreneurship Public Policy, hardly a source to participate in "baseless speculation motivated by partisanship.")


(Last part first: the "baseless speculation motivated by partisanship" bit was a jab at Krugman, who will seemingly say anything that reinforces his priors and disparages those who disagree with him, not the CEPR authors. I have plenty of respect for the CEPR and Dean Baker, and had no intention of casting general aspersions on their work. And I enjoyed this report a lot, although I would have preferred that they stick with the data rather than make speculative claims.)

Now, then. I do not dispute the findings of the RAND study, but I do not accept on its face that this effect is explained by the Medicare cut-off age. Why? Well, what else happens after the age of 65? For most workers, the answer is retirement. Many workers do not need to work full-time after the age of 65, but they also are not ready to stop working entirely. So what do they do? Start a part-time business like a consulting firm, or a "hobby business" to give them some enjoyable work to do a few days a week. Perhaps they purchase a summer home and rent it out when they aren't using it. Doing so pushes them into the ranks of the self-employed, but health care has nothing to do with it.

Shane notes in his post that the U.S. does not rank last in the OECD in small business employment in any category defined in the CEPR report, and all the countries below the U.S. have universal health care systems. If the driving force for low rates of entrepreneurship in the U.S. is lack of universal health care, then this fact must be explained. Schmitt may be right that neither Shane's post nor mine helps readers understand why the U.S. has lower rates of small business employment, but neither does his report for the CEPR because the data aren't clear. It's certainly possible that health care plays a major role; it's also possible that variance in regulatory structures and market pressures are the driving factors. Most likely (in my mind), it's some combination of the three.

My whole point in all of this is not to say that differences in health insurance systems have no effect on differences in rates of entrepreneurship. In fact, I've said in all three of my posts on the topic that that is a plausible explanation. But there are other plausible explanations as well, and we should seek out better evidence and more rigorous testing before accepting one hypothesis over the others. After all, isn't that what scientists do?

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

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