Wednesday, March 31, 2010

Why We Won't Get Major Financial Regulatory Reform

. Wednesday, March 31, 2010
1 comments

Short answer: there's no political will for sacrificing economic growth and domestic competitiveness. Andrew Ross Sorkin has a piece on the possibility of regulatory reform. It starts off nice and cute -- a chat over cookies with Geithner -- before getting serious:

Conspicuously absent from any regulatory legislation floating around Capitol Hill is the precise level of capital that banks should hold for every dollar they lend, called a capital ratio.

The bill also does not define what can be counted as capital, or how much of that capital should be readily available, known as liquidity. Those questions are being left to the regulators to sort out later.


What does this mean? It means that regulators have no idea what level of capital ratio is necessary to prevent crises, nor what type of capital, nor how much of it needs to be easily accessible at all times. And the stakes are high:

Of course, protecting against even infrequent crises probably means forcing banks to keep a lot of cash on hand in case their bets go bad. But that would come at the expense of economic growth as banks would make fewer loans.

Mr. Geithner insists that if there is one change that needs to be made to the banking system to protect it against another high-stakes bank run like the one that claimed the life of Lehman Brothers, increasing capital requirements is it.

But try pinning down Mr. Geithner, or anyone else in the Beltway, on how much capital banks should be required to keep, or even how the word “capital” should be defined, and certainties disappear.


This really is the crux of the matter. As Greg Mankiw has recently written, we can have a 100% safe banking system. But as Krugman pointed out, it would just require sacrificing a lot of economic growth. And most of that sacrificed growth would be to achieve very, very, small gains in safety (i.e. the relevant margin shifts the further along the safety/growth curve).

Not only that, but if the U.S. unilaterally enacted stricter regulations it would put domestic firms at a competitive disadvantage relative to foreign competitors. So enacting strict reform seems to be a double-whammy: first you sacrifice growth, then you privilege foreign firms over domestic firms. It's easy to see why the Obama administration has been slow to move on this front. Indeed, it seems like they are ready to punt almost entirely:

Instead, the final number is to be determined by a global coalition of regulators known as the Basel Committee on Banking Supervision, Mr. Geithner said.

“By the end of this year, we will negotiate an international consensus on the new ratios,” he said.


This makes all the sense in the world from the Obama administration. If they go through Basel then they'll be able to avoid a lot of the wrangling and lobbying that would occur if reform was debated domestically. Plus, if the new standard is international then American banks won't suffer a competitive disadvantage. Sounds like a win-win for reformers, right? The problem is that the U.S. already has some of the most restrictive prudential regulations in the world. Perhaps that's surprising to many of you, so I'll repeat in italics: The U.S. has some of the most restrictive prudential regulations in the world. Or as Sorkin puts it:

But even then, Mr. Geithner is likely to face a bruising battle, not necessarily from American banks but from their foreign rivals.

“Our major global banks have more capital today relative to risk than do many of their major international competitors,” Mr. Geithner said.

In Europe, banks and regulators focus on risk-weighted capital as opposed to pure capital, allowing those banks to keep significantly less collateral on hand for assets that are deemed not very risky, like ultra-safe Treasury bonds. That’s not the case in the United States.

So as the world tries to harmonize its capital ratios and definitions — a global fix is important so that banks don’t try to arbitrage the system — United States regulators may feel pressure to appease the Europeans by agreeing to lower capital ratios.


Add to that the fact that low capital ratios really weren't to blame for this crisis at all, and things don't look good for regulatory reformers. Don't get me wrong... there will be some sort of reform at the international level through Basel, and something else will happen at domestic level as well, but it won't be the major restructuring of the financial industry that many predicted early in the crisis.

Monday, March 29, 2010

Learn Something New Every Day?

. Monday, March 29, 2010
3 comments

I won't bother sharing the weird chain of events that led to my reading the Wikipedia entry on Jerry Brown's 1992 Presidential campaign. Suffice it to say, I remember 1992 and some of the election coverage but I had no political awareness then so I can't really recall the dynamics of the Democratic primary. Could this possible be true?

As he campaigned in various primary states, Brown would eventually expand his platform beyond a policy of strict campaign finance reform. Although he would focus on a variety of issues throughout the campaign, most especially his endorsement of living wage laws and his opposition to free trade agreements such as North American Free Trade Agreement (NAFTA), he mostly concentrated on his tax policy, which had been created specifically for him by Arthur Laffer, the famous supporter of supply-side economics who created the Laffer curve. This plan, which called for the replacement of the progressive income tax with a flat tax and a value added tax, both at a fixed 13% rate, was decried by his opponents as regressive. Nevertheless, it was endorsed by The New York Times, The New Republic, and Forbes, and its raising of taxes on corporations and elimination of various loopholes, which tended to favor the very wealthy, proved to be popular with voters. This was, perhaps, not surprising, as various opinion polls taken at the time found that as many as three-quarters of all Americans believed the current tax code to be unfairly biased toward the wealthy.


Clunky prose aside... WTF? I believe that Jerry Brown ran from the left on a populist platform. I also believe that he opposed NAFTA and free trade agreements more generally. I have no difficulty accepting that he used anti-corporate/anti-rich rhetoric and advocated tax reform to address those concerns.

But his solution was a flat tax created by Arthur Laffer? Could this possible be true? And it was endorsed by the NY Times and The New Republic? (Well, TNR was edited by Andrew Sullivan then, so maybe that's feasible. But only barely.) It isn't sourced, and it is Wikipedia, but sometimes truth is stranger than fiction. But this makes no sense at all. Does anyone out there have a longer memory than I? If so, can they confirm or refute?

Fighting Science with Snobbery

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4 comments

(Like everyone else I grow tired of rehashing this stuff, but a friend asked what I thought. As long as I was typing it up I thought I'd post it here.)

Ryan Sager asks a question...

Why do so few people in politics seem to know or care a whit about political science? People in sports care about sports science. People in business care about the science of how to do whatever it is they do better. But folks involved in politics — campaign consultants, journalists, and politicians themselves — could hardly be any more ignorant or disengaged when it comes to the science of politics.


... then answers it:

[M]y theory of why no one in politics likes to think about political science: because it renders them powerless. How do you do your job as a political consultant when the truth is that 90% of the success or failure of what you do will be determined by the unemployment rate? If you’re a political journalist, how do you write a story every day for a year (or three years, given our current presidential election system) saying, essentially, “Well, the fundamentals still make it exceedingly likely the president will be reelected.”


This echoes previous thinking on this blog and elsewhere, and I'm glad Sager came to that conclusion. I do think he's too generous to the wrong people -- I don't think that pundits and commentators realize how little they know about politics -- but at least he's barking up the right tree. Unlike Andrew Sullivan, who responded to Sager's article thusly:

And then there's the fact that so many political scientists are quant-wonks you'd run from if you met them in a Starbucks. And, yes, I have a PhD in political "science".


Well, maybe his PhD deserves the scare-quotes (he did it in Political Theory), but why generalize? I know (think?) he's only being half-serious, but Sullivan has an opportunity to say something constructive and spurns it in favor of name-calling. That's annoying.

I'll ignore the dig on "quant-wonks" (what?) for now and focus on what little resembles a substantive point: Is political science science or "science". In other words, is it a serious discipline or just a group of people playing with regressions and being creepy in Starbucks? I think I know exactly what Sullivan is claiming; I also think I know exactly why his insinuation is wrong.

Sullivan has made the common error of mistaking science for results. What do I mean by that? I have a (non-scientific) belief that when people hear the word "science" the first association is Laws: of Thermodynamics, Motion, Gravitation, Relativity, etc. In other words, the association of science is with old theories that have never been refuted. This is a mistake, in my view, and confuses results with method. I'm not a philosopher of science and I'm generally bored by those kinds of arguments, but I think there is near-universal agreement that what defines science is not findings but method: scientists examine the world in systematic ways, deriving hypotheses to explain observable phenomena, and testing those hypotheses against empirical evidence. If that definition is operable then modern political science, however flawed, qualifies easily. No scare quotes necessary, and no need to run for the hills at the first sight of someone with Stata installed on their laptop.

Judged by the standard of science as method rather than science as results the criticism that political scientists (or social scientists more generally) have discovered no Laws is a non sequitur. Laws are hard to come by in any discipline, which is why there are so few of them, but they are even harder to come by when the objects under study are not controllable. This does not condemn a systematic examination of the social world, however, especially when 90% of the variation of at least some political outcomes is pretty well pinned down (to use Sager's example).

The irony of course is that by citing Sager's piece Sullivan is implicating himself and nearly everyone he links to every day. But rather than acknowledging it and trying to incorporate more systematic approaches into his work he resorts to making fun of the nerds. (To be fair, Sullivan does sometimes link to research in a variety of fields. But not enough, and not nearly as much as other sources.) Well fine. But by denigrating method in favor of God knows what -- let's be generous and say Laws -- Sullivan is actually attacking science itself. I'm sure it's not his intention, but then... it's really hard to discern what his intention is. Other than snobbery, of course.

Sunday, March 28, 2010

Trade and Foreign Policy Attitudes

. Sunday, March 28, 2010
0 comments

Katja Kleinberg and Benjamin Fordham, two UNC Ph.D.'s and currently Assistant Professor of Political Science and Professor of Political Science respectively, at Binghamton University-SUNY have a new paper "Trade and Foreign Policy Attitudes" in the most recent issue of the Journal of Conflict Resolution.


The abstract:
Does trade influence whether individuals view other states as friendly or threatening? Liberal theory implies that it should, but the individual-level implications of the liberal argument are rarely tested. Trade should influence individual attitudes more strongly where trade is more economically important. International trade also creates both winners and losers within the trading states, and the foreign policy attitudes of these winners and losers should differ. The authors test hypotheses drawn from this line of argument using a forty-seven-country survey conducted by the Pew Global Attitudes project. They find some evidence that exports but not imports reduce hostile foreign policy attitudes. They find little support for the claim that the trade interests indicated by factor ownership influence attitudes toward trading partners in this broad cross-national sample. On the other hand, attitudes toward trade and foreign direct investment are correlated with broader foreign policy attitudes in the way liberal theory suggests. The authors conclude that there is reason to believe that trade influences individual foreign policy attitudes but that factor ownership does not provide an adequate account of individual interests in international trade in most cases.
As Tyler Cowen says, the paper is self-recommending.

Saturday, March 27, 2010

Sanctions, Sovereign Borrowing and Financial Integration

. Saturday, March 27, 2010
9 comments

Over the last couple of months, Sarah, Will and I have been working on our MA theses, each hoping to make a sufficiently important contribution to the discipline (or at least show sufficient potential to some day contribute something) to warrant the department to continue funding us and let us start studying for comprehensive exams and work on our dissertation proposals. I'm writing my thesis on the intersection between economic sanctions and finance, specifically how financial integration and sovereign borrowing affects a target state's decision to acquiesce to sender demands in high politics cases.


Earlier this afternoon, I stumbled upon an article titled "Don't Sanction Dictators" by Jason McLure that was published in Foreign Policy last summer that has a bit in common with the argument I'm trying to advance. In the piece, McLure argues that sanctioning dictators is a futile policy choice for advanced countries and uses the threatened sanctions against Eritrea as he makes his case. McLure argues:
Sanctions are made to cut countries off from vital international exchange. The trouble is, Eritrea already trades less with the outside world than any country in Africa and places 210th out of all 226 countries and islands for global commerce.
He then discusses the specific case of Eritrea and how sanctions against dictators won't work because they won't respond to the coercive attempts of larger states and concludes:
These lessons apply to sanctions on dictators more broadly. How do you punish North Korea with sanctions when its trading partners are already limited to a handful of countries -- none of which are likely to pay heed to a harsher set of rules? How do you choke Zimbabwe's Robert Mugabe when his strongest rationale for staying in power is to save his country from the hands of countries who would (and do) impose sanctions? Perhaps it's no wonder that such countries' leaders not only survive sanctions, but use them to justify bad behavior.
I'm really happy to see McLure make this argument, and the beginning of his logic is similar to what I am arguing in my thesis. However, McLure stumbles in a couple of ways, specifically when he conflates "international exchange" with trade flows and makes a distinction between autocratic and democratic governments that I argue actually doesn't matter. Analyzing sanctions episodes using a political economy approach, specifically looking at the influences of trade and finance on sanctions success makes a lot of sense and should give our explanations greater traction (at least I hope it does). This is one way in which the extant literature on economic sanctions has been surprisingly weak.

I disagree with McLure and argue that it's not that dictators are better able to withstand the coercive pressure of larger powers simply because of the characteristics of dictatorships, it's the fact that most dictatorships are not intricately linked with the international financial system to the point where larger powers (i.e. the United States) can impose sufficient costs to induce them to cooperate. This characteristic can't be solely attributed to dictators. It's in fact possible for democratic states to have very little integration with global financial markets and thus hold the same financial characteristics that are common in certain autocracies, and you can also have an autocratic government (Singapore) that is heavily integrated with and dependent on financial markets. Furthermore, I object for an array of reasons with immediately relying on trade flows to make an argument for sanctions success without engaging the finance side (if you want to know why, I'll have my thesis up on my website sometime by late April).

Larger powers have very little bargaining leverage over states that are not integrated with and dependent on the international financial system. Why? Because the costs that matter (borrowing costs that are directly imposed on governments, rather than trade costs that are dispersed across the population) can't be unilaterally imposed by these states. They need the cooperation of financial markets, and more specifically institutional investors in order to impose costs on targets. These larger powers need to increase the risk associated with investing in a given country, which increases the borrowing costs of the target state as investors seek higher interest rates and/or decrease exposure to that market in order to compensate for the increased risk. A credible threat to act if a government does not change its policy coupled with the effects (or potential effects) of sanctions themselves are sufficient to induce an increase in a target government's risk profile.

Institutional investors can only impose costs on states that require foreign capital to continue to finance their international debt obligations, roll over their debt and fund their operations. Those that are not sufficiently integrated and not dependent on global markets for access to capital will have dramatically lower costs when engaging in sanctionable (risky) behavior because they don't have to worry about increases in borrowing costs when calculating the costs and benefits of a given policy bundle. It is not that states with one type of political regime or another are better able to withstand coercive pressure from advanced, industrial countries, it's the fact that those states that are dependent on external sources of financing have the most to lose from engaging in that activity and can't withstand the coercive pressure. Non-integrated and non-debt dependent states' individual cost-benefit analyses are not sufficiently altered by sanctions threats or impositions and thus the costs associated with defecting from the status quo are very low. Therefore, sanctions episode success should be based on two indicators: 1) a country's degree of financial integration and 2) it's external debt to GDP ratio. Or at least I hope it is so that my thesis committee will find it in their hearts to pass me!

Friday, March 26, 2010

An Appeal to Better Natures

. Friday, March 26, 2010
0 comments

Given his infrequent, never productive, hit-and-run appearances on this blog, I was amused by this:

DeLong, true to form, ignored the content and jeered like a third grade bully. Most sadly, whenever he indulges this habit, DeLong sacrifices a chance to teach a little economics. Fortunately, the web is a big place and there are plenty of alternatives for readers who care about ideas.


True. The problem is that when DeLong is on, he's really on. Like when he maps the intellectual evolution of certain economic principles in time in ways that link history, sociology, politics, and economics. He's got a better sense of the history of political economic thought of anyone in the blogosphere (that I know of, at least). Or when he really gets down to business and parses macro. He's great at that, and so he can't be ignored. He simply has too much to offer. It's worth plowing through 20 of his "everyone who disagrees with me and/or doesn't have a PhD in econ is Satan" posts a week just to get the one or two golden ones. But it is tiresome when he steps on his bully pulpit, paints his opponents in the worst possible light, and neglects every opportunity to disseminate his knowledge to his audience in favor of demagoguery.

On his best days he's a moderate, with a pragmatist's technocratic sensibility. On his worst days he's a sophomoric would-be Beltway assassin, and therefore has nothing to contribute. I'd love to see more of the former and less of the latter.

Wednesday, March 24, 2010

Google, Chinese Badasses, and Trade Wars

. Wednesday, March 24, 2010
0 comments

I meant to post something about the Google/China row when it was more newsworthy, but got busy with other things. For those not up to speed, Google discovered that hackers, presumably working for the Chinese government, were hacking into the Gmail accounts of dissidents, trying to get data on subversive searches, and otherwise using Google to serve domestic political purposes. Or, as Google's chief legal officer put it:

The initial premise, that it all started from a hacking episode, is not quite right. We did have a hacking incident. Most hacking incidents that you see are freelancers -- maybe government sponsored, maybe not. They are out there trying to steal intellectual property, make some money. Or they might just be hackers who want to damage something for whatever reason. That's a fact of life that internet companies deal with all the time.

This attack, which was from China, was different. It was almost singularly focused on getting into Gmail accounts specifically of human rights activists, inside China or outside. They tried to do that through Google systems that thwarted them. On top of that, there were separate attacks, many of them, on individual Gmail users who were political activists inside and outside China. There were political aspects to these hacking attacks that were quite unusual.


That was distasteful to us. It seemed to us that this was all part of an overall system bent on suppressing expression, whether it was by controlling internet search results or trying to surveil activists. It is all part of the same repressive program, from our point of view. We felt that we were being part of that.


Google apparently took their famous corporate motto -- "Do no evil" -- to heart, and decided to close their Chinese (google.cn) search engine and redirect traffic to the Hong Kong (google.com.hk) engine. The issue? The .cn engine has filters on politically sensitive queries while the .hk engine does not, and it is illegal to operate a search engine in China without filters. China's "Great Firewall" now treats google.cn as a foreign search engine, and blocks many searches.

Needless to say, I think Google was absolutely in the right here. They were not willing to become a tool of the Chinese state to oppress would-be reformers, or even just curious citizens. But China obviously wasn't too pleased. The government immediately began threatening Google's other business arrangements in the country:

The overseas edition of the People’s Daily, the main newspaper of the Chinese Communist Party, on Wednesday accused Google of collaborating with U.S. spy agencies, Reuters reported.

‘‘For Chinese people, Google is not god, and even if it puts on a full-on show about politics and values, it is still not god,’’ said a front-page commentary piece. ‘‘In fact, Google is not a virgin when it comes to values. Its cooperation and collusion with the U.S. intelligence and security agencies is well-known." ...

But some of those other businesses quickly came under pressure. China Mobile, the biggest cellular communications company in China and one of Google’s earliest partners in its foray into smartphones, was expected to cancel a deal that had placed Google’s search engine on its mobile Web home page. Millions of people use the page daily. In interviews, business executives close to industry officials said China Mobile was planning to scrap the deal under government pressure, although it had yet to find a replacement.

Similarly, China’s second-largest mobile company, China Unicom, was said by analysts and others to have delayed or scrapped the imminent introduction of a cellphone based on Google’s Android platform. One popular Web portal, Tom.com, already ceased using Google to power its search engine. The company is controlled by Li Ka-shing, the Hong Kong billionaire who has close ties to the Chinese government. ...

“We certainly expected that if we take a stand around censorship that the government doesn’t like that it would have an impact on our business,” Mr. Drummond said. “We understood that as a possibility.”


This, too, could be expected and indeed Google expected it. Google was willing to bear the costs, but that doesn't mean they are insignificant. As Tyler Cowen tweets, Google are heroes for doing this.

But this made me think of something else: the claim made by trade warriors that the U.S. can force China to revalue the yuan by threatening tariffs if they do not comply. Krugman made the case:

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.


But if we can learn anything about the China/Google affair, this is the exact opposite of what is likely to occur. (Nevermind for now the fact that Krugman has the economics wrong, or that there is no reason to think that the EU, Japan, and other countries will follow suit since the incentives to free-ride s are very high.) Instead of simply capitulating, China will call the U.S. protectionists, take us to the WTO (where they will win), and will enact countervailing duties on our products. If they wanted, they may also sell off some Treasuries, which would depreciate the dollar and cause American standards of living to doubly drop -- first from the increased price of imports, second from the devalued dollar. Now we've got a trade war with massively declining standards of living in both countries.

China has shown plenty of times that it is willing to take some economic pain in order to preserve its autonomy. The recent case with Google is merely the most recent case, but it is illustrative: Google is the world's largest internet company, and China seems willing to cancel all economic relationships with them simply because Google wouldn't self-censor, and because they had the audacity to oppose targeted cyber attacks against political dissidents. Imagine how they'd respond if the U.S. took the Krugman/Bergsten line and "got tough". I very much doubt that China would simply rollover and capitulate. That's not how they operate.

(In other words, I'm saying that the Chinese leadership are badasses.)

Tuesday, March 23, 2010

Wuzza? Another Edition of "What Is Krugman Thinking?"

. Tuesday, March 23, 2010
0 comments

Krugman:

[JPMorgan Chase CEO Jamie] Dimon was castigated by many people, me included, for saying that a financial crisis is “the type of thing that happens every five, ten, seven, years.” Hey, no big deal.

But that is the way banking worked once upon a time. I’m reading Gary Gorton’s Slapped by the Invisible Hand, which tells us that there were bank panics — systemic crises — in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.

On the other hand, there were no systemic crises from 1934 to 2007.

The problem, as Gorton makes clear, is that the Quiet Period reflected a combination of deposit insurance and strong regulation — undermined by the rise of shadow banking. So we have a choice: restore effective regulation or go back to the bad old days.
(emphasis added)

First of all, the emphasized phrase is flatly untrue, and a distortion of what Dimon said. Financial crises are not limited to banking crises, and nobody but Krugman thinks that. Kindleberger, Eichengreen, Bordo, Reinhart & Rogoff... all notable economic historians of financial crises think of banking crises as being just one type of financial crisis.

Second, it wasn't just the 19th century: regular (every 7 years or so) financial crises go back centuries. Not in every jurisdiction, of course, but that matters less and less in a world where financial markets are highly globalized.

Third, there were so financial crises in between 1937 and 2007! Banking crises even! In America! Has Krugman forgotten about the 1980s Latin American debt crisis that would have sunk the American banking sector were it not for U.S. government intervention (through the IMF) in providing funding to Latin American governments? Has Krugman forgotten about the Savings and Loan crisis in the 1980s that led to the collapse of 747 S&Ls, the early-90s recession, and massive government intervention into financial markets? Has Krugman forgotten about the 1994 Tequila crisis that threatened American banks holding Mexican bonds, requiring a $50bn intervention by the U.S., IMF, BIS, and Canada? How about the LTCM collapse in 1998 that led to counterparty risk that threatened the solvency of every major bank on Wall St., thus requiring U.S. government intervention?

There. There's 4 systemic banking crises that necessitated U.S. government intervention within a 15 year period, and I left out a number of borderline cases (the Herstatt collapse in the mid-1970s, the dot-com collapse, or any crashes in any other countries that could have had or did have knock-on effects for U.S. financial institutions). Were they all as bad as the Great Depression or the subprime mortgage crisis? No, but that's not at all what Dimon was saying.

Why does this matter? Because Krugman has supreme faith that if we just add some (unspecified) regulations then we'll go back to the Quiet Days. But the Quiet Days correspond almost exclusively with the Bretton Woods system of fixed exchange rates, which wasn't entirely quiet in truth, and was unsustainable for other macroeconomic and political reasons. The collapse of Bretton Woods led to -- you guessed it -- the systemic economic decline of the 1970s. So even if we could go back, it wouldn't be Quiet Days, and it wouldn't last.

Following Krugman's advice could lull us into a false sense of security that "this time is different" when it really isn't. This is dangerous. Dimon is right: these things happen with alarming regularity all over the world, and they have done so for centuries. If we think we've escaped the pattern we're likely fooling ourselves. We do need to reform our regulatory structure, but we need to do so in a way that can facilitate crisis response, not merely crisis prevention.

UPDATE: Double-D @ Crooked Timber says basically the same thing as me, except he (for some reason) thinks that it isn't important:

If we’re going to include things like the First Baring Crisis and the Panic of 1893 (which were big news at the time, but by no means earth-shattering), then I can give you a list. Even using a selective criterion of only crises with significant US involvement (ruling out the Nordic, French, Spanish and Japanese banking crises), we have the following list …

2007 – current crisis
2002 – Enron/Worldcom/Global Crossing crises
2000 – dot com bust
1998 – Asia/Russia/LTCM crisis
1994 – Tequila crisis
1991 – commercial real estate crisis
1987 – Black Wednesday
1985 – Savings & Loans crisis
1982 – LDC debt crisis
1975 – New York City bankruptcy
1971 – Collapse of Bretton Woods
1970 – Penn Central commercial paper crisis

As far as I can see, things were pretty stable between 1934 and 1970 (give or take the odd war), but that in the era of floating exchange rates it’s been very unusual to go seven years without a crisis and the modal gap looks closer to three years than four.


This is a very strange mistake for Krugman to make.

Chavez is a BLOGGER!

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0 comments

Joshua Keating over at FP informs us that Hugito will be joining the blogosphere:

While his media-savvy is undeniable, Venezuela's Hugo Chavez has never been the most tech-savvy of leaders. He has equated Twitter users with terrorists and threatened to impose controls on Internet content. But apparently not satisfied with his weekly TV broadcast or his radio-show that can air at any time of day, Chavez has apparently decided he needs a beachhead in the blogosphere:

He said a computer is being set up in a room of the presidential palace of Miraflores--and from it he would directly inform the public on who he is meeting with, what legislation he's signing, and other presidential matters.

"I'll be communicating with millions, and not just in Venezuela, but the whole world," Chavez said, who didn't provide any possible start-up dates for the blog.

Chavez said he also would use the blog to respond to comments and questions from readers, both supporters as well as those opposed to him. "It's going to be a battle, indeed," Chavez said.

I can't wait for Chavez to start going nuts on imperialists online. I'll definitely keep you all posted once he starts.

Monday, March 22, 2010

Mental Health Break

. Monday, March 22, 2010
0 comments

I'm not exactly sure what this is, but it appears to be some sort of border closing ceremony along the India/Pakistan line. The dry, sparse narration makes me think of nature shows, and the pomp and show makes me think of the Bird of Paradise mating dances from Planet Earth. Plus Silly Walks, of course. The cheering crowds indicate that this is a sport of some kind, but I can't tell who's winning. The handshake at the end is a nice gesture. Good sportsmanship, I guess. Could you imagine this happening along the U.S./Mexico border?




(ht: @ebertchicago)

Sunday, March 21, 2010

Well, It's Come to This

. Sunday, March 21, 2010
1 comments




Emmanuel-across-the-Pond's love of poking fun of the U.S. is only matched by his love of poking fun of those who don't seek the utter humiliation and extirpation of the U.S. That means me. Which is all fine and good, and leads to some good discussions, but I fear that he's gone one step beyond this time.

First, he endorses a theory of inequality that relies on "assortative mating" to explain shifts in income inequality. The theory basically says that before the 1960s capital and labor were in an "asymmetric marriage" where Capital guaranteed capital to Labor, and Labor guaranteed labor to Capital so they could mutually benefit from each other's company. (Funny... the rest of us call that relationship by another name: "markets"). Anyway, the crack-up supposedly occurred in the 1960s, and now Capital and Labor keep to themselves, doing everything in their power to keep everyone below them in the income ladder from climbing up.

As his own data show, the cross-sectional divergence in income inequality across OECD nations is pretty stark, and there is nothing in this theory to explain why. Nor can he explain cross-temporal shifts; if Labor was bothered in the 1960s, presumably they should be even more angry now that income inequality has drastically increased. In fact, the 1960s was during the Golden Age of increased income parity in the Anglo-Saxon world; the Gilded Age began in the early 1970s. But as the recent debate over health care reform in the U.S. has shown, at least that part of the industrialized world is not interested in class warfare.

But then he says this (presumably with tongue in cheek, but who knows) in a subsequent post:

I would venture that limiting credit to these people is precisely what the doctor ordered. ...

Americans are great at GM foods; perhaps in the future they should churn out genetically modified persons who have "thrifty" genes once these are better understood.


Seriously, Emmanuel? Would that make the "asymmetric marriage" or "assortative mating" more efficient? And why stop with the "thrifty" genes? Jeebus... I never expected an endorsement of the Brave New World from someone with such a healthy distrust for the Anglo-American powers-that-be.

UPDATE: Just in case it isn't evident, I'm being somewhat sarcastic in this post, although I do think that Emmanuel, the theories he advocates in these posts, and his general interpretation of the global political economy is dead wrong.

Thought of the Day

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0 comments

At least it is for me, inspired by reading about sovereign debt on a day when everyone else is concerned with basketball and health care reform:

One's normative political preferences are mostly formed by how strong one thinks the Law of Unintended Consequences is.


For what it's worth, I think the Law is quite strong in most circumstances, but that it often works in multiple directions. If that sounds obtuse, well, it is: it means that I am often not sure whether to support or oppose major policy changes because I honestly have no idea how they'll really turn out. It also means that although I sometimes sound like an Oakeshottian conservative -- “To be conservative, then, is to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant, the sufficient to the superabundant, the convenient to the perfect, present laughter to utopian bliss.” -- I also think that status quo bias is a killer. A whole lot of persistent injustices would be impossible without it.

It also means that I am distrustful of anyone who claims to know anything about how any policy will work. It makes me think that they are either disingenuous or haven't thought things through very carefully. The greatest and worst developments in human history have come through the abandonment of the status quo and the willingness to experiment. Arguably, none of them could have been anticipated beforehand.

I'm not religious, but one of my favorite verses of the Bible is Genesis 50:20 (NIV): "You intended to harm me, but God intended it for good to accomplish what is now being done, the saving of many lives."

Discuss.

Annals of Non-Scientific Polling

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I just received a robo-call from the Family Research Council asking me to participate in a survey. It went like this:

Robot: Are you a registered voter?

Me: Yes.

Robot: Do you have a favorable opinion of President Obama's government-run health care proposal?
(emphasis added)

I was stunned that they wouldn't at least pretend to be impartial. I'd read the Farley Family's experiences yesterday, but I wanted to see for myself, so even though I think this is a truly terrible bill (regardless of whether you prefer universal coverage or not), and even though I knew I was talking to a robot, I decided to try to pick a fight:

Me: Yes and I object to the question as asked.

Robot: Thank you for your time.


No follow-ups. If I'd been thinking more clearly I'd've said "No" to see if there were follow-ups as a test of Farley's theory. I'm hoping they call the wife later this afternoon so I get another chance. If any other readers get the same call, please respond "No" and let us know if they ask follow-up questions.

UPDATE: They called the wife's phone about 10 minutes later and she let me answer. This time when asked if I supported the Marxist take over of everything great about America I said "No". Were there follow-ups? Why..... yes! Of course there were. The next question was some variant of "Do you support abortion?" I said "No" and then the robot lit into a 30 second rant about how Obama pledged to Planned Parenthood during the campaign that he'd do everything in his power to eliminate all restrictions on abortion (which I think is untrue, but maybe not) and strongly implied, without directly saying so, that passage of the health care bill would lead to just that outcome. Then the robot asked if I'd be willing to contact my congressman about this issue and I said "Yes". The robot then helpfully gave me my representatives' information.

From the FAQ on the Family Research Council's web site:

Q - Is Family Research Council non-partisan?

A - Yes, Family Research Council is a 501(c)(3) non-partisan, non-profit, educational organization that does not support, endorse or oppose candidates. As a 501(c)(3), FRC is able to spend an insubstantial part of its budget on direct and grassroots lobbying.

FRC's political action arm, called FRC Action, is a 501(c)(4) non-profit organization with broader freedom under IRS regulations for lobbying, grassroots activism, issues advertising, and political engagement. For more information on FRC Action, visit www.frcaction.org.


I didn't catch whether the robot identified itself as being from the FRC or FRC Action. I guess it would have to be the latter, right? In any case, I wonder how much money we could make by stripping "non-partisan" 501(c) organizations of their tax-exempt status. There are plenty of all ideological stripes, and I don't see why advocacy of any particular cause, whether partisan or not, should be subsidized by taxpayers. We could certainly use the revenue right now.

Saturday, March 20, 2010

Department of "Brad DeLong, Please Elaborate"

. Saturday, March 20, 2010
2 comments

Brad deLong writes:


Needless to say, Paul Krugman is right: if China saves less and spends more, its capital exports drop. As its capital exports drop, its savers' demand for dollars in exchange for renminbi fall--and the value of the dollar falls relative to the renminbi. A revaluation of the renminbi is not an alternative to an increase in Chinese spending but rather part of the process of making that increase in spending come about.

What I continue to struggle to understand is, if China spends more, won't this shift China's demand for dollars from capital account transactions (buying fewer Treasuries) to current account transactions (buying more Boeings)? In fact, isn't this exactly what Krugman and DeLong hope will happen? If so, then Chinese savers' demand for the dollar falls, but Chinese spenders' demand for the dollar rises. Why would the renminbi appreciate?

So is the argument that China's marginal propensity to buy dollar-invoiced goods is lower than its marginal propensity to buy dollar-denominated assets so that increasing spending and reducing saving causes China to spend less on all dollar-denominated things (Treasuries and Boeings)? And, although it spends less, it could still purchase more because the real exchange rate has strengthened. So, Boeing sells more jets to China. If this is the argument, is there any evidence that it is correct?

I know I can't expect Krugman to drop by to clarify this for me. But DeLong swings by on occasion to keep Will in line; perhaps he could take a moment to fill in the pieces for me. No snark at all.

Thursday, March 18, 2010

The Over Valued Dollar?

. Thursday, March 18, 2010
0 comments

As Congress pressures the administration to label China a currency manipulator in the Treasury's semi-annual report on exchange rates, I thought it might be useful to look at the dollar's exchange rate on a real trade-weighted basis. The index above is the dollar's real effective exchange rate index (narrow) as calculated by the Bank for International Settlements. This narrow index does not include China, but is almost perfectly correlated with the BIS's broad index which does and weights China about 17 percent. I use the narrow because the broad index extends back only to 1994.


This index provides little indication that the dollar is over valued in real terms. Clearly the dollar was over valued at the height of the housing bubble. Just as clearly, the dollar has fallen subsequently. Although the dollar strengthened in 2008 and early 2009 as a consequence of the flight to safety in the midst of the financial crisis, it currently rests quite close to its post-Bretton Woods era floor.

It is not obvious therefore that the current account imbalance is a consequence of an over valued dollar and it is not obvious that a currency realignment is the appropriate corrective. I know that American legislators have little incentive to care about the macroeconomic perspective and that their motivation in pressing China for change reflects the microeconomic consequences (relative prices) for individual producers based in their districts. Their behavior is not particularly puzzling. What puzzles me is what Krugman is thinking.

Wednesday, March 17, 2010

The End of U.S. Influence Is Not at Hand

. Wednesday, March 17, 2010
2 comments

Joseph Nye takes a step back from the recent China hyperbole and notes the obvious:

First, the U.S. is not in decline. Americans and others have been predicting decline regularly over the years: after the Soviets launched Sputnik in 1957; again when Nixon closed the gold window in 1971; and when the American rust-belt economy seemed to be overtaken by Japanese manufacturers in the 1980s.


Predicting the decline of the U.S. has been something of a cottage industry over the past 5 or 6 decades. One of the foundational IPE texts took it as a given in the mid-1980s. The end of the Cold War stopped all of that talk temporarily, but it is difficult to keep those dogs at bay. Talk of the end of American influence has been popping up all over the place since the financial crisis. Nye explains why they are wrong:

But when one looks at the underlying strength of the American economy, it is not surprising that the World Economic Forum ranks the U.S. second (just behind Switzerland) among the most competitive, while China ranks some 30 places below.

Second, the fact that China holds so many dollars is not a true source of power, because the interdependence in the economic relationship is symmetrical.

True, if China dumped its dollars on world markets, it could bring the American economy to its knees, but in doing so it would bring itself to its ankles.

China would not only lose the value of its dollar reserves, but would suffer major unemployment. When interdependence is balanced, it does not constitute a source of power.


Even more fundamentally, I don't know if it's possible for a country with an extremely export-biased economy to provide global leadership. How would that work? The simple fact that China has felt it had to stockpile so many dollar reserves is evidence of American, not Chinese, strength: China is largely dependent on the U.S. for its growth. China's internal market will be a source of strength one day, but it will remain a weakness until they can employ all of their citizens in productive work and enact public policies (like a social safety net) that make massive domestic savings less necessary.

Emmanuel takes issue with Nye, noting that the U.S. has looming demographic problems. This is true, but the U.S. is not unique in this regard. Europe, Japan, and even China are all similarly on the wrong side of the demographic curve. Which is why productivity and competitiveness are so important. Here, the U.S. are still ahead of any other large country.

The recent crisis demonstrated that the world is not ready for the end of U.S. leadership. The saying used to be that if the U.S. sneezes the world catches a cold. Well, in the last few years the U.S. caught a nasty bug, but the rest of the world caught pneumonia. If only one lesson can be learned from the present downturn, it is this: the end of U.S. influence is not at hand.

Tuesday, March 16, 2010

And While I'm at it

. Tuesday, March 16, 2010
1 comments

Meanwhile, Emmanuel-across-the-pond drools over the latest congressional hysteria about the renminbi. As the FT reports,


More than 100 members of the US Congress on Monday called on the Obama administration to label China a currency manipulator, in a move that highlighted the pressure on Washington to take a more confrontational stance towards Beijing.

In a letter to Timothy Geithner, Treasury secretary, and Gary Locke, commerce secretary, the 130 Congressmen demanded the administration designate China a manipulator when it issues its regular report on currency manipulation next month. They called for countervailing duties to be imposed on Chinese imports.

I myself am astonished to learn that the leaders of this movement represent states with major manufacturing industries. I would point out that "helping the American manufacturer" is costly for American consumers, most of whom do not work in manufacturing industries (and this is not because of China's currency policy). If the Democrats truly wish to represent middle-class interests, they shouldn't be so intent on reducing real wages.

I am a Pessimist

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If you hadn't noticed, Paul Krugman has taken to advocating a "get tough with China" policy to promote a currency realignment. In his blog, he defends his belief that a stronger renminbi will reduce China's trade imbalance. One argument he advances is that relative price shifts brought about via real exchange rate appreciation will be sufficient to induce the US to import less from China. He argues against excessive export pessimism on the grounds (in part) that " it’s really important not to get caught up in the fallacy of misplaced concreteness. If you can’t think offhand of ways U.S. production might replace imports, that’s probably because you just don’t know enough."


In the interest of knowing more, therefore, I present the pie chart above. It depicts the importance of each major category of American imports from China in 2009. The data come from the USITC. Twenty-two percent of US imports from China were in textile, apparel, leather. Another big chunk--more than 10 percent--was in miscellaneous manufactured goods such as toys (half of this category in value) and sporting goods. All of these goods are labor intensive in production and are not coming back to the US as a result of a 20 percent currency realignment.

Another 36 percent of US imports from China are computer and electronic products. It is tempting to think of these as high tech production that can migrate back home. It makes more sense to think of these as labor-intensive assembly operations. Yes, my iphone was manufactured in China. The components from which it was produced, however, were not. In fact, in the most sophisticated elements in this category--microprocessors--the US exports more to China than it imports from China. So, most of this manufacturing activity is not coming back to the United States either.

Thus, two-thirds of the products the US currently imports from China are quite clearly products that American businesses will not produce at home unless the dollar falls by substantially more than 20 percent against the renminbi. The remaining third do not seem to be fundamentally different, with a few noticeable exceptions that constitute a small share of total imports. Consequently, with all due respect to Professor Krugman, I struggle to see how a stronger renminbi can cause American consumers to substitute home for Chinese versions of these products. For this reason, I am an export pessimist.

Update: Here is a nice comprehensive and comprehensible table of US imports from China by product category.

Oh No You Didn't

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Yikes. Dick Armey... this is not helping your cause:

A member of the audience passed a question to the moderator, who read it to Armey: How can the Federalist Papers be an inspiration for the tea party, when their principal author, Alexander Hamilton, “was widely regarded then and now as an advocate of a strong central government”?

Historian Armey was flummoxed by this new information. “Widely regarded by whom?” he challenged, suspiciously. “Today’s modern ill-informed political science professors? . . . I just doubt that was the case in fact about Hamilton.”
(bold added)

What the hell? This is now the second time in recent memory that a well-known Republican has come after political scientists. What's going on? Perhaps Armey -- an econ Ph.D. -- is trying to pick a social science fight. But if that's the best he can do than color me unintimidated.

Of course Armey is wrong about this. This whole point of the Federalist Papers was to make the case for a strong central government, ensconced in the Constitution, to replace the earlier ineffectual confederacy. That's why they're called the Federalist Papers. There's a whole other set of papers called the Anti-Federalist Papers that argues the opposite view. Perhaps the Tea Partiers could draw inspiration from them.

Via Krugman, who rightly adds that Hamilton also was anti-free market and was a mercantilist. Hamilton even went so far as to oppose the Bill of Rights. I have no idea what Armey is thinking.

Next stop for Armey: replacing Hamilton on the $10 bill with Reagan?

Monday, March 15, 2010

Today's Edition of "Legislators Are Stupid and Should Not Be Trusted with Anything Important"

. Monday, March 15, 2010
1 comments




Jacob Goldstein at Planet Money ponders a potential rainy-day fund for winding up TBTF financial institutions:

In the current system, there's no good way to deal with big financial institutions that are about to go bankrupt and don't fall under the umbrella of the FDIC, which oversees some banks. Exhibits A and B for why this is a problem are Lehman Brothers, whose bankruptcy sent the economy into panic, and AIG, which received a gargantuan government bailout.

Of course, the Treasury and the Fed put more than $100 billion into the AIG bailout alone -- which makes a $50 billion safety fund look a bit paltry. But the Senate bill would also allow the government to collect more fees after a bailout, if $50 billion didn't cover it.

The trust fund would be paid for by financial firms so big or so interconnected that their failure would pose broad risks to the economy. Under the Senate proposal, the Fed would decide which firms fit that description, Bloomberg News reports, and the FDIC would wind down big firms that are about to fail.


This is apparently part of the Senate financial reform plan. The House plan that passed last year included a $150bn plan.

I haven't read the plan because it doesn't really exist yet (and who knows what it'll look like if/when it actually becomes law). But if the plan functions as described then this is a very stupid plan. Why? Well, ostensibly the point of the rainy-day fund is to tax TBTF financial firms so as to avoid using taxpayer money to bail them out when they inevitably go bust. But the banks will simply pass on the costs of the tax to consumers anyway, so either way the bailouts will be taxpayer-funded. Of course it's less transparent this way, which is good politics even if it makes little or not substantive difference. That's not the problem, however. These rainy-day funds will presumably sit around in an account at the Treasury being used completely unproductively until the next financial crisis, which is inefficient but also not the problem.

Here's the problem: the existence of a rainy-day fund provides an explicit TBTF guarantee to banks that pay into it! The fund won't be used to make the investors those firms whole if they collapse, but it will be used to make their counterparties whole. What does that mean? TBTF firms will able to get access to capital at lower cost because those loans will be insured by the Federal government... for free! In the past banks had to sell credit default swaps to insure their risk, but now the American government is willing to use taxpayer funds to do it for them. Because TBTF institutions will get access to credit at cheaper rates, they will be incentivized to lever up even more than they otherwise would, which increases the likelihood of an intervention. Even better: all the TBTF banks will be incentivized to extend tons of credit to each other, knowing that if one of them goes down they all go down, so the government will have no choice but to bail them all out and (presumably) make them whole or close to whole.

Ah, but there was already a bailout guarantee, you say. It's true that there was a strong belief that the government would intervene in the event of a financial crisis, but there was no belief that they would rescue every firm or guarantee any counterparty obligations. There is some argument about whether a "moral hazard trade" existed for TBTF fail institutions (that I won't recount here, but let's just that if it existed it wasn't super-large), but no argument that financial institutions acted as if they counted on government intervention to buy their toxic assets or guarantee their counterparty obligations. (In fact, quite a lot of firms were allowed to fail in the recent crisis, by bankruptcy or forced sale at bargain prices, and many investors and counterparties were forced to take haircuts.) No such uncertainty will exist if this plan goes through.

Rational firms will do everything in their power to get TBTF status so they will be subject to the tax and the counterparty insurance it provides, pass the tax on to their customers, and reap the benefits afforded them by having greater access to capital at lower cost. The government could try to respond by ramping up regulations on capital adequacy ratios or leverage ratios, but how much confidence do you have that that will be successful?

That's what I thought. Better not to invite the moral hazard in the first place.

This is a stupid, stupid, stupid plan. I'm surprised that Felix Salmon hasn't been all over it. (Or maybe he has and I've just missed it.)

Yet Another Post on Sovereign Debt and Democracy

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Dr. Oatley disagreed with my post on democracy and sovereign debt, and cited some of his own recent research to smack me down. I don't disagree with a word of what he wrote. (And believe it or not, I noticed that that paper -- which I had previously read -- had just come out, but was waiting to post on it until he had a chance to.) I also don't think anything he wrote contradicts anything I wrote.

Why does he think it does? It's my fault. I used the phrase "democracies are exceptionally prone to the sort of time inconsistency problems that lead to things like debt crises" but didn't clarify what I meant by "exceptionally prone" (although "the sort of time inconsistency problems" was intended to temper the statement). I did not mean that democracies have the same perverse incentives that autocracies have with regards to accumulation of sovereign debt. In fact, I meant the opposite: democracies have completely different perverse incentives to accumulate sovereign debt than do autocracies, and this leads to different kinds of debt problems. What does that mean? For one thing, it means that democracies should be less prone to massive accumulation of sovereign debt than autocracies, but they should be more prone to debt shocks. Let's flesh this out.

Democracies face time-inconsistency problems stemming from the fact that democratic leaders are in principle-agent relationships with their constituents. Autocracies are not. So when autocracies increase sovereign debt it is often to confer rents to autocratic leaders and their cronies. An autocratic leader will have no trouble committing his citizens to austerity if necessary to pay down debt (or attract more loans) so long as he is safe in power, because those costs are not borne by him. Even if he defaults and is unable to secure future loans he may draw down funds funneled into Swiss bank accounts while the credit was flowing and live well. Or he may massively inflate his currency in an attempt to service his debts, which is another form of austerity. Indeed, autocratic leaders may wish to promote austerity, according to Acemoglu & Robinson (2006), if it will help maintain their domestic position.

Democratic leaders face incentives to spend in deficit, but also to not accumulate so much debt that austerity or default is required. Citizens in democracies are able to demand (and receive) social welfare spending programs that have automatic stabilizers built in. So in the event of a revenue shock like a major recession or demographic shift, democracies will be prone to a sudden debt crisis. Citizens accustomed to welfare spending (and the public sector employment that entails) will be loathe to give it up and may punish politicians that attempt to impose austerity (see Greece and Iceland right now, and Latin American democracies in the 1980s). They may be less concerned with the long-run effects that default will bring, or they may be better able to get "bridge loans" that tide them over until economic recovery without requiring austerity conditions.

Dr. Oatley acknowledges that Greece was not in his sample, but how about the other countries under discussion: Italy, Ireland, Spain, Portugal? No, because they aren't developing countries. The Baltic states? No, because during most of the sample period they were still part of the USSR. On the other hand, the Latin American countries that experienced debt crises in the 1980s and 1990s, many of which were democracies, were included in his analysis.

The point is that even if I can't generalize from Greece to the whole world, I may be able to generalize from Greece to other similar countries. Like those Muir suggests, and I was referring to originally, that are relatively new democracies, were recently autocracies and often have violent civil conflict within recent memory.

Off the top of my head I can't recall any research that addresses this question directly (perhaps readers can illuminate), but it seems like it maps fairly well to me and is congruent with Dr. Oatley's research because it asks a somewhat different question.

Sunday, March 14, 2010

Democracies and Sovereign Debt (Again)

. Sunday, March 14, 2010
3 comments

I have a very different take on Greece's sovereign debt struggles.

Here’s a random thought (writes Doug Muir): this blog has seen a lot of posts recently talking about economic problems in Greece, Spain and the Baltic States. All of these are countries that were, within living memory, governed by brutal non-democratic authoritarian regimes. Accident? Or is there something else at work here?
Will develops the point further: "democracies are exceptionally prone to the sort of time inconsistency problems that lead to things like debt crises. As such, there is a huge potential for moral hazard built in if states are able to escape their debt obligations without pain. Just ask California. It's an internal contradiction of democracy, if you like."
I must demur. I just published a piece in ISQ (ungated version) that explores the relationship between democracy, autocracy, and sovereign foreign debt in developing societies. The article suggests that in general, democracies are substantially less likely to accumulate crushing sovereign debt burdens than autocracies. The finding is robust to model specification and estimation technique. The relationship is so apparent it even shows up in simple descriptive statistics: not one of the 44 countries that evolved into so-called Heavily-Indebted Poor Countries Initiative was a democracy for any meaningful period of the time during which it accumulated sovereign debt.

The typical difference between autocracies and democracies is very large. For example, take the average debt held by all developing country governments in the late 1970s, roughly 33 percent of GDP. Then allow this debt to grow at the average borrowing rate for the average autocracy and by the average annual borrowing rate of the typical democracy. After twenty years, the autocracy owes its foreign creditors 98% of GDP while the democracy owes its foreign creditors half as much (49% of GDP). Thus, at least during the last forty years, democracies are substantially less likely to accumulate large sovereign debt burdens than autocracies. Consequently, democracies are substantially less likely to confront sovereign debt crises than autocracies.

Of course, because my sample does not include Greece my results don't speak to the Greek situation directly. They do suggest, however, that Greece is an anomaly, i.e., a democracy that accumulated a very large sovereign debt. Because it is an anomaly, I would be reluctant to use the Greek case to derive general propositions.

Sovereign Debt As Social Contract

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The Economist blogger Charlamagne has written an insightful post on Greece:

The Greek civil war, and the bloody score-settling that followed, is a living memory for many Greeks. Any consideration of Greek nepotism or clientelism needs to be seen in that light. So for example, it is not enough to say that Greek civil servants enjoy jobs for life, and that is a big problem. (Though it is a big problem, not least because many Greek civil servants are paid pitiful wages—partly because there are so many of them. That means they will resist austerity measures all the harder, because they feel like victims in this crisis, not fat cats.) But the bloated public sector is also a function of history. ...

Newspapers here in Belgium talk all the time about the government needing to "buy social peace" by paying off some interest group or other. In Belgium, the alternative to "paix sociale" is a strike. In Greece, plenty of grown-ups remember when the alternative to social peace was their neighbour, or their loved-one, vanishing in the night into a jail cell or worse. The current clientelist truce between right and left is the price (albeit a horrible, wasteful price) established for the current version of social peace enjoyed in Greece.


Douglas Muir adds to it:

I’ve always had a very low opinion of Papandreou pere; it hadn’t occurred to me to think of him as a post-conflict figure, trying to restore social comity to a country still riven by its past. I’m still not sure that was really the case, but it’s an interesting perspective. ...

Here’s a random thought: this blog has seen a lot of posts recently talking about economic problems in Greece, Spain and the Baltic States. All of these are countries that were, within living memory, governed by brutal non-democratic authoritarian regimes. Accident? Or is there something else at work here?


It is an interesting question and maybe there's something to it. On the other hand, almost all of Europe and much of the rest of the world has been governed by brutal non-democratic regimes within living memory, yet not all countries are at risk of sovereign debt default. It seems like there's a missing variable somewhere, and I think it's incentives built into the EMU.

More generally I think it's worth thinking about how the evolution of the concept of "liberal democracy" since the end of World War II has left many states in difficult positions. All democratic states have embedded liberalism in a web of social welfare institutions in order to build consensus and maintain social stability, but the price of those compromises has varied cross-nationally. As I've argued before, democracies are exceptionally prone to the sort of time inconsistency problems that lead to things like debt crises. As such, there is a huge potential for moral hazard built in if states are able to escape their debt obligations without pain. Just ask California. It's an internal contradiction of democracy, if you like.

I have empathy for the citizens of Greece and other states that find themselves in difficult positions. But I have even more empathy for the future citizens of Greece and other states who will surely suffer more if their governments cannot get their house in order. I'm not quite sure how to escape this trap without austerity.

Happy Pi Day!

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Saturday, March 13, 2010

Geithner Files

. Saturday, March 13, 2010
0 comments

Things I learned from Joshua Green's very long (but excellent) profile of Timothy Geithner:

1. Contrary to popular belief, Geithner was not only aware of the dangers of derivatives and off-balance sheet transactions, but he spoke out about them repeatedly over a number of years. His talk about "fat tails" sounds like it came straight from Nassim Taleb.

2. Bush was routinely lambasted for not properly vetting administration officials, as was McCain during the campaign, but Obama seems to have chosen Geithner based primarily on one hour-long interview. True, Geithner had great references, but given the context -- the height of the financial crisis and administration of the new TARP program -- it still is a bit odd.

3. The Geithner financial crisis plan was forged in the Tequila and Asian crises in the 1990s. The plan: get the muscle of the government involved early and often, or deeper and more costly intervention will be necessary later. No surprise there. But the price of government involvement might be: "shut down weak banks, bust up oligarchies, and clean up corruption. Then withdraw." This is not the popular view of the government bailouts, but I think it expresses the pattern of government involvement pretty well.

4. The entire orientation of the Geithner plan was to minimize government involvement. That's why the stress tests happened, why the banks weren't nationalized, why TARP was structured the way it was. The goal was to recapitalize the banking sector by maximizing private sector input, and thus save taxpayers hundreds of billions, if not trillions, in the process. It was a big gamble, but it seems to have paid off pretty well.

5. Criticisms of Geithner as being too friendly to Wall Street are spot on: he has systematically resisted punitive measures against banks, and has even argued against tight monitoring of how TARP funds are used. The interesting thing? Unlike almost anyone else in senior levels of any recent presidential administration, he's a career bureaucrat. He's never worked on Wall Street, and recently turned down the presidency of Citigroup.

6. Geithner is a pragmatist above all else: “In a crisis, you have to choose: Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.” This is not good horse-race politics, but if it leads to better outcomes it may be the best political strategy possible.

7. As I've mentioned before, TARP is turning out to be an exceptional bargain. Here's some figures:

Geithner likes to point out that after a year on the job, he’s spent $7 billion recapitalizing financial firms while private investors have put up $140 billion. TARP money is being repaid faster than anyone imagined, and if Obama gets the $90 billion tax on big banks he proposed in January, it could eventually be recouped. It’s likely that the cost to taxpayers will be much less than the 5 to 10 percent of GDP that the Cleveland Fed says is typical for a crisis, and possibly as little as 2 to 4 percent—about the cost of the much smaller savings-and-loan crisis of the 1980s. A recent Treasury study indicates that it could be less than 1 percent. By any reasonable standard, this would be an impressive achievement, and it would owe a great deal to Geithner’s strategy.


Green has some criticisms too, but they are pretty boilerplate: regulatory reform hasn't been strict enough, etc. Still, the overall picture that emerges is that Geithner has helped saved US taxpayers quite a lot of pain, and quite a lot of money, by taking the actions he did.

Wednesday, March 10, 2010

University Administration Jobs and Hiring Practices

. Wednesday, March 10, 2010
0 comments

This morning, UNC students and faculty awoke to an email from UNC Chancellor Holden Thorp notifying the university community that Dr. Bruce Carney, Samuel Baron Professor of Physics and Astronomy and the interim Executive Vice Chancellor and Provost at UNC, has been appointed the permanent Executive Vice Chancellor and Provost. I have absolutely no doubt that Dr. Carney deserves the job, will serve the university proudly and competently and will prove to be a very good hire in the years to come. Dr. Carney has been at UNC since 1980, starting off as a lowly assistant professor and working all the way up to his current endowed chair and serving as chair of the Physics department and both Senior Associate Dean and Interim Dean of the College of Arts and Sciences along the way.


What was interesting to me when I read the email from Chancellor Thorp was that the university held a national search, brought in three external candidates for interviews, lectures and Q&A, and then hired the internal, interim position-holder that was not a candidate for the position. In the almost two years that I have now been associated with UNC, the university has hired at least a couple internal scholars/administrators for top university administrative positions, including Chancellor Thorp himself, who previously was Dean of the College of Arts and Sciences, Director of the Morehead Planetarium and Kenan Professor of Chemistry at UNC.

When I was at Marquette University during my undergrad years, a similar hiring process phenomenon occurred when Dr. John J. Pauly, the Dean of the College of Communication, a fantastic scholar and overall really nice guy, was hired as the university's Provost. A couple of data points at two different universities caused me to ask myself whether a university's reputation for hiring internal candidates for top positions reduces the quality of external applicants since external candidates may have a reasonable belief that certain universities are biased towards internal candidates. Additionally, could it be that universities target the hiring of high quality administrators, those who have the potential to become chancellors, provosts, university presidents, etc. earlier in their careers, grooming them for these top positions while acclimating them to the culture and internal workings of the university at a lesser position?

Drs. Thorp and Carney both spent the entirety of their careers at UNC before being appointed Chancellor and Provost, respectively. Were the applicant pools for the positions that they eventually received of lesser quality than they otherwise would have been because there was an expectation that an internal candidate would be chosen? I'm not arguing that either scholar would not have ultimately been chosen for each position, but rather asking about the relative quality of the applicant pool conditional on a given university's reputation. Dr. Pauly bounced around a good deal before arriving at Marquette, receiving various promotions along the way before becoming Dean of the College of Communications and then Provost. Was Dr. Pauly selected as Dean with an expectation of rising the ranks to Provost in the near future? The same question about the quality of external applicants and the expectation of the selection of an internal candidate would also apply.

If anyone knows any research that's been published engaging these questions (I'm guessing it'd come from Sociology, Economics or Business) I'd be quite interested in checking it out. If this research hasn't been previously done, well I hopefully just hooked up an undergrad or grad student in one of these fields with a master's thesis or dissertation topic. I better get a shout-out in the acknowledgements!

Connecting Government and Academia

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2 comments

Yesterday, I spent the day in Washington, DC attending an all-day panel on political violence that brought together an array of academics from various fields including political science, criminology, sociology, public policy, statistics, mathematics and psychology, private sector analysts and researchers, and government practitioners from various departments and agencies. The panel was put together by the Institute for Homeland Security Solutions, a collaborative effort between Research Triangle Institute International, the University of North Carolina at Chapel Hill and Duke University, and the Human Factors and Behavioral Sciences Division (HFD) of the Department of Homeland Security’s Science and Technology Directorate, which is the primary research and development arm of DHS.


I'm not allowed to divulge any details from the all-day event nor can I talk about who was present or what they said since government officials and agencies were involved and are funding the project (which kind of sucks but makes sense and is understandable), but this kind of academia-government interaction is exactly the type of collaborative effort that is needed to foster cooperation between academics and practitioners, and the kind of interaction that Joe Nye, Dan Drezner and others have called for in recent months.

One of the primary goals of the discussion was to bring social science scholarship and methodology to the table to help government agencies find answers to problems and questions that they face on a daily basis. There is a lot that government practitioners can learn from social science research and the ways we approach complex questions. Furthermore, these types of meetings let academics see the types of questions that government officials are dealing with, the types of problems and puzzles that need more attention, and can potentially help us frame our work in a way that can help these agencies solve everyday problems. I'm not saying that we should only be asking questions that are relevant to policy-makers, but rather that engaging the policy community can help keep us relevant and may make our work better. Yesterday's meetings were definitely a step in the right direction towards making social science research and approaches more relevant to the policy-making community.

Tuesday, March 9, 2010

Now This Is How You Do Journalism

. Tuesday, March 9, 2010
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I spend more time bashing bad press work than praising good. I don't know if that's because there isn't very much good stuff, or because I'm mean-spirited, but today I can happily praise this article on Greece and the IMF by Sewell Chan and Liz Alderman of the NY Times. Let's parse it a bit:

In the last two days, Greece’s finance minister has threatened to turn to the International Monetary Fund for a bailout if Chancellor Angela Merkel of Germany and other European politicians resist pledging aid to help Greece cope with its newfound frugality. Asking the fund for help could create a new round of financial and political turmoil by sending the message that Europe cannot resolve its own problems, analysts said.

“It would be damaging for the euro zone going forward because it would sow seeds of doubt about whether this is really a currency union, or just a group of countries that share a currency,” said Simon Tilford, the chief economist of the Center for European Reform in London.


Good, quick summary of the issue, similar to the take I've been taking recently (see here and here for examples, and Dr. Oatley's take here). It frames the issue appropriately: this is not (just) about what Greece has to do about its debt; it's a political issue about who pays for maintaining a non-optimal currency zone. Next we get details about what that political fight is about, and what the stakes are:

Policy makers and leaders of many countries that use the euro see Greece’s troubles as a problem within the family. They want a homegrown political solution to show that Europe can fix internal economic crises without outside help.

Turning to the I.M.F., which often helps struggling emerging-market nations, is seen as a stigma that is to be avoided, a concern underscored by the European Central Bank’s president, Jean-Claude Trichet, on Wednesday. “I do not trust that it would be appropriate to have the introduction of the I.M.F. as a supplier of help,” he said.

No member of the euro zone has had to borrow from the I.M.F. since the official use of the common currency began in 1999, and no major industrialized country in Europe has done so since Britain in 1976.

But from Greece’s perspective, the I.M.F. would force the government to swallow nearly the same bitter medicine that Germany, France and others have required — but at least Athens would receive guaranteed financial aid from the I.M.F. in return.

In addition, it is not clear that Germany and other European governments seeking to contain the crisis have the resources or expertise to monitor Greece and other profligate euro members for the many years that it will take for the troubles to blow over.


Again, very well said. But even better... the journalists actually talked to some people who know some things about the political economy of the IMF, and named them by name! None of this "some economists say" or "many economists believe" nonsense: get good sources, tell us who they are, and let them say what they mean. This article enlists Randall Stone, Kenneth Rogoff, James Vreeland, Michael Mussa, Mark Copelovitch, and Simon Johnson (among others). That's a strong roster! I don't want to quote all of what they all said for space reasons, but the quotes are used well and impart useful information to readers who may not have a strong knowledge background in these topics. I do want to highlight one part from Copelovitch, tho:

The biggest challenge is in Germany, which has historically tended to enforce fiscal and economic rectitude on its neighbors. Many German taxpayers are vehemently opposed to paying for the profligacy of their free-spending neighbors in Greece and other southern European countries that let their deficits soar sky-high instead of taming them when times were good.

At the same time, German banks also underwrite much of the Continent’s debt and exert considerable influence in domestic politics, according to Mark S. Copelovitch, a political scientist at the University of Wisconsin, Madison. Germany “doesn’t want its banking sector to go under because Greece has defaulted,” he said.


A-ha! Here we have more politics: German citizens don't want to pay for Greece's profligacy, but German leaders don't want to sacrifice the German banking sector (which has underwritten or purchased a lot of Greek debt) to prove a point.

The article closes by talking about the personal/political rivalry between Sarkozy and IMF head Strauss-Kahn as another complicating dimension. It's a very good piece, and I commend Chan and Alderman on their work. They convey a lot of meaningful information in 1000 words, and make use of very good sources. Please read the whole thing.

International Political Economy at the University of North Carolina: March 2010
 

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