There is a new site called Footnote, which is dedicated to translating academic work for a general audience. They asked to re-run selected blog posts written by me, and I've agreed. Here is a link to the first one. Presumably more to follow.
So far I like the site. It's clearly still growing, but it's a really good idea and they have a decent cast already assembled. Give it a look.
- Does Political Science Deserve Public Funds?
- Why Has US Finance Grown? Because The World Is Not...
- Potential Consequences of the EU's Proposed Regula...
- Agreeing and Disagreeing with Kindleberger (and De...
- Room to Move (Redux)
- The Importance of Actors in Networks
- A Financial Story IPE Folks Should Love
- Annals of Silly(?) Policymaking: Procyclical Finan...
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Tuesday, June 26, 2012
There is a new site called Footnote, which is dedicated to translating academic work for a general audience. They asked to re-run selected blog posts written by me, and I've agreed. Here is a link to the first one. Presumably more to follow.
Monday, June 25, 2012
If you pay any attention at all to the political science blogosphere you know that the House of Representatives recently decided to prohibit the National Science Foundation from directing $14mn roughly -- 0.2% of its budget -- to political science research. This has caused much consternation among (some) political scientists, as well as indignant blog posts from political scientists and e-mails from APSA asking us to fill in form letters and send them to our Congresspeople.
What it has not done, generally, is come up with any sort of explanation for this event that is informed by political science, nor any sort of strategy for mobilization that would ensure outcomes that benefit the discipline.
This I find ironic. Faced with an
banal existential threat to its existence, political science has responded by a) acting as if social science methods do not exist, and b) acting as if it knows nothing at all about political mobilization, organization, competition, institutions, or much of anything else relevant to altering outcomes in the political sphere. The response from academics has been to whine, get defensive, and generally miss the point (which is almost surely not about whether political science is cool or interesting or even important).
In fact it's worse than simple ineptitude: rather than unifying around some strategy that will secure existing funding, the discipline has turned on itself*.
In a sense I think this goes back to broader schisms in the discipline**. Particularly in IR the past decade-plus has seen a lot of internecine battles over what is best practice for academics. Everything from "what we should study" to "how we should study it" has been debated, quite vituperatively, in journals, blogs, conference panels, graduate student seminars, letters to editors, and bitch-sessions at the tavern. The period from Perestroika to TRIPs has moved us a bit from knee-jerk anti-positivism towards "let a thousand flowers bloom", but there is another problem: the NSF.
Actual funding from the NSF is pretty paltry; getting those funds neither makes nor break political science as a discipline, and almost any NSF-funded project could be funded in other ways***. But getting an NSF grant is prestigious: it improves your application and tenure packets; it can lead to a reduction in teaching load thus increasing research output; it can help you get a full professorship or endowed chair; it boosts your status. Right now the NSF does not fund all types of political science research equally. It privileges certain types of projects, and in particular those smell that smell especially "science-y": studies that build and/or analyze large data sets. As it happens most of my research uses this kind of data set, and I certainly wish there were more of them in the world, but not everybody in political science does. In fact, most of us don't.
According to the most recent TRIPs, a majority of IR scholars consider themselves to be something other than positivists (Q. 26) and only 15% of us employ quantitative methodologies as our primary research method (Q. 28), although another 22% sometimes use them as secondary methods (Q. 29). Obviously international relations is not all of political science, and I'm sure that a greater proportion of Americanists use stats. But (I would expect) fewer comparativists do, and almost no political theorists do. To the extent that NSF funding is biased in favor of quant studies, it is biased against the majority of the discipline. Given that hiring and promotion decisions (and general prestige) are influenced by ability to attract grants from places like the NSF, this is no small thing.
This is probably why Jacqueline Stevens wants to see funding either abolished or distributed via a lottery system which would not privilege some types of work over others ex ante. To me that makes little sense, but I can see why some would prefer either outcome to the status quo ante.
Regardless of where you come down on this -- and I don't really care that much either way -- it's hard not to notice that political science has not covered itself in glory. It seemingly has no theory of politics that can help folks understand why this is happening or how to change it. Its best response to this challenge is classic rent-seeking -- we deserve this money because we do cool stuff -- but without any ability to effectively seek rents. That, in and of itself, might be reason enough to discontinue funding.
*Links to much other discussion can be found at that one. I'm too lazy right now to hyperlink them all myself.
**I'm not the first to point this out. Henry Farrell did as well, in one of the dozens of posts political scientists have dedicated to this bill.
***Phil Arena has one such proposal here, although I'm not too sure how serious he is about it. I find the fact that political scientists are not willing to fund their own research through their professional associations to be another indication that it probably doesn't deserve all that much funding. Some of his commenters suggest that public funding of political science is necessary because it generates public goods which will not be realized without government intervention. To that I say a) show me the evidence****, and b) public goods can be supplied without government intervention, particularly if there are motivated groups who can easily identify the location of those goods and organize to capture them. APSA is already organized, and presumably in a better position to find these public goods than Congress or even the NSF.
****Or even the logic. Most political science research, including NSF-funded research, is published by journals with subscription feeds that are prohibitively for individuals or even most libraries. Therefore the work is most definitely not "non-excludable"... it is excluded! So it is not a public good. But even if it were it would only be a public good in the most facile sense of "the creation and dissemination of knowledge is good" which merely begs the question: maybe, but wouldn't that money be better used in ways that spread knowledge in different ways? E.g., funding public libraries, giving laptops to low-income people, etc.
Wednesday, June 20, 2012
Guesting at Noah Smith's place, Dan Murphy seeks to explain why the financial sector grew to be such a large component of the US's economy during the 2000s. He offers three possibly explanations: finance became better at "making markets" by matching buyers and sellers, the need to manage risk became more important, and that people became convinced that employing financiars would help them boost their investment portfolios. Murphy suggests that the first two are not good explanations because they are static variables unable to explain change. He doesn't seem to think the third is as well, although it seems that way to me.
I don't think this is the right way to think about this. Instead, I'd rather embed finance into the broader US economy and then embed the broader US economy into the broader global economy. What changes have been taking place in the global economy over the past decade-plus that could help explain this? Two prominent things immediately come to mind:
1. The opening of capital accounts around the world, which began in the 1990s but accelerated dramatically during the 2000s.
2. Changes in the global trading system, particularly the expansion of the GATT -- which added many new members following the end of the Cold War -- and the transition from the GATT to the WTO.
The cumulative effect of these two factors both
forced encouraged the US to pursue its comparative advantage in high-skilled service labor (e.g. finance) and increased the market into which the US could sell its comparative advantage. The result is thus entirely predictable: finance becomes a bigger size of the US's economy, while comparatively disadvantaged sectors shrank. Factor in positive feedback dynamics in global financial markets and this isn't much of a mystery at all.
Tuesday, June 19, 2012
The European Union is considering a dramatic revision of the current institutional arrangement concerning banking regulation and supervision. Currently, members of the EU must implement international capital standards -- the Basel accords -- but regulation of domestic financial sectors is left up to national governments. Some governments choose to have their central banks regulate, others give that authority to a separate agency; each is fine under current EU rules.
The leaders of France, Germany, Italy, Spain and Austria are willing to back a powerful supranational supervisor, and a decision to relinquish national control over cross-border banks is being prepared for next week’s EU summit, according to senior officials. One said the new-found political impetus was “astonishing”.The "astonishing" political impetus has come from the fact that the EU is currently experiencing a number of bank runs, capital flight from the periphery to the core, and a general lack of trust in the solvency of many of its financial institutions. To shore up confidence, many in the EU would like to create a "banking union" that would involve continent-wide deposit insurance for EU banks. In exchange for that guarantee, states would have to give up sovereignty to a higher body, which would presumably be heavily influenced by the core European countries (in this case, Britain, Germany, and France).
What would the effect of this be? It turns out that I've done some research on that question.* That work suggests that the answer is: it depends. Specifically, it depends on who the regulator would be. The top two choices appear to be the European Central Bank and the European Banking Authority. Why does it matter?
My research, building off of some work by Copelovitch and Singer, argues that giving regulatory authority to central banks alters the policymaking incentives that central bankers face. Without getting too wonky, it incentives central banks to privilege the needs of the banking sector when choosing monetary policy, as financial instability could lead to the loss of their authority. This, in turn, incentivizes banks to behave more riskily, as they expect to receive preferential treatment from sympathetic central banks, so long as they stay above the statutory requirements. The cumulative result is a more bank-friendly monetary regime (the Copelovitch and Singer result) and a more risk-friendly banking sector (my result, supported by a ton of statistical tests). This may not be what the EU currently has in mind.
On the other hand, regulatory central banks may be better able to prevent financial instability in the first place by tailoring policy to the needs of the financial sector. I do not explicitly study this question, and I doubt it is strictly true, but central bankers have argued according to this logic in the past. Alternatively, unifying regulatory and monetary authority could reduce institutional competition and lead to better-coordinated policies. Of course, if that coordination is in a direction that rewards greater risk-taking by EU banks then that might not be the best thing.
*Currently under review so no link, but interested parties can e-mail me for a copy.
Monday, June 18, 2012
This post is basically to point to the new preface by Brad DeLong and Barry Eichengreen to Kindleberger's The World In Depression 1929-1939. I'm glad the book is being reprinted, and I am in agreement with all of DeLong & Eichengreen's intro. Except this part:
Kindleberger’s second key lesson, closely related, is the power of contagion. At the centre of The World in Depression is the 1931 financial crisis, arguably the event that turned an already serious recession into the most severe downturn and economic catastrophe of the 20th century. The 1931 crisis began, as Kindleberger observes, in a relatively minor European financial centre, Vienna, but when left untreated leapfrogged first to Berlin and then, with even graver consequences, to London and New York. This is the 20th century’s most dramatic reminder of quickly how financial crises can metastasise almost instantaneously.I don't think this is "arguable". First things first... Creditanstalt was decidedly not a "relatively minor" institution; as Ben Bernanke has noted it was one of the largest (and most well-connected) banks in Europe. Moreover, it wasn't the first major bank to fail. To give just one example, the Bank of the United States (a private bank located in New York) failed in December, 1930 -- one of the largest bank failures in U.S. history, which occurred months before the collapse of Creditanstalt. Indeed, in his monetary history of the U.S. Milton Friedman considered the collapse of the Bank of the U.S. as the pivotal moment that tipped the U.S. from recession into depression. In general, financial instability in the U.S. seemed to precede financial instability in Europe from 1929 on.
The U.S. and much of Europe was already in depression before the collapse of Creditanstalt. Indeed, chronology suggests that Delong & Eichengreen have causality reversed: the Depression (combined with the fallout from losing WWI, including reparations) caused the collapse of Creditanstalt, not the other way around. U.S. industrial production had fallen by nearly 25% before Creditanstalt's collapse. Farms prices were down by 40%. The financial system was decimated. Trade was collapsing. The signal events occurred in 1929, not 1931. By the latter date we are talking about knock-on effects, not first causes.
My view is not particularly controversial. The collapse of Creditanstalt exacerbated a pre-existing panic, but it did not generate one sui generis.
Contagion is powerful, but it tends to operate from the center outward rather than from the periphery inward.* The best read of the collapse of Creditanstalt is that it was evidence of contagion rather than the epicenter of it.
That said, Kindleberger's book is very good in general, as is the new Delong/Eichengreen intro.
*We've blogged about this before, and we have a piece that will hopefully be forthcoming soon that makes this case explicitly. For a simplistic precis see this Foreign Policy piece that Thomas and I recently placed.
P.S. While thinking about this I stumbled across this piece from a 1952 issue of Time which gets nearly every detail wrong in its first paragraph. For starters: Creditanstalt collapsed in 1931, not 1929; it was not controlled by the Rothschilds until after that collapse; Hitler persecuted the bank during Anschluss for that reason, so it not quite fair to say that the bank "served" Hitler. The rest of the article is blocked to nonsubscribers so I (mercifully) can't read it.
Friday, June 15, 2012
Layna Mosley, one of my professors at UNC, has a piece in Foreign Affairs on the European sovereign debt crisis. In a sense she's come back around to her dissertation work, in which she argued that international investors care much more about outcomes than the particular policies used to generate those outcomes, or things like the partisan composition of governments. Turns out that she was pretty much right about that, at least in the case of Europe.
She has two primary points. The first is that the composition of debt maturity matters quite a lot; a lot of short-term debt means a lot of servicing, which means a greater sensitivity to short-run developments. The second is that investors don't have nearly as much influence on government policies as most commentators ascribe to them. What influence they do have is, again, over outcomes rather than the particular decisions used to reach them. So yes, investors prefer lower debt levels, but they don't particularly care whether fiscal probity is achieved via spending reductions or taxation. Mosley previously referred to this relationship as giving governments "room to move": so long as they stay within certain parameters -- mostly relatively low/stable inflation and relatively low/stable debt levels -- governments have quite a lot of latitude to pursue other policies without being punished by investors.
It's a good piece with valuable lessons. Read it.
Thursday, June 14, 2012
(Apologies for the light posting. Real work plus a family emergency has gotten in the way. Normal posting should continue for most of the rest of the summer.)
Ben O'Laughlin recently attended a talk given by Anne-Marie Slaughter to the British Parliament that focused on how the Clinton State Department is trying to lay the groundwork for perpetuating the U.S.-led liberal order. For those who have followed Slaughter's career, both as an academic and as a former senior advisor in Clinton's State Dept, the basics should not surprise. She's a strong advocate of leveraging networks to embed the U.S. at the center of the global system. She believes that one way to do that is via "smart power", a term coined by Joe Nye* and popularized by Sec. Clinton, that emphasizes persuasion as a complement to capabilities. What I found interesting, however, was the way that the State Dept is going about this:
Slaughter began by saying that structures are being put in place whose effects won’t be visible for some years. The structures the US is building are informed by the assumption that the biggest development in international relations is not the rise of the BRICs but the rise of society – “the people” – both within individual countries and across countries. The US must build structures that harness societies as agents in the international system. Slaughter returned to Putnam’s (1988) two-level game, the proposition that it is in the interaction of international and domestic politics that governments can play constituencies off against one another to find solutions to diplomatic and policy dilemmas. Slaughter took up this framework: the US administration must see a country as comprised of both its government and its society, work with both, and enable US society to engage other countries’ governments and societies. The latter involves the US acting not as “do-er” but as “convenor”, using social media and organising face-to-face platforms for citizens, civil society groups and companies to form intra- and international networks.The bold is added and it's the part that I'm not sure about. A few lines up Slaughter says (via O'Laughlin) that she is "not convinced" on the empirical evidence that influencers are, erm, influential. I wonder why, because it as far as I can tell it's a pretty robust finding across many differential fields that use network analysis.** In network terms, "influencers" generally have a high "degree", meaning that they are at the center of the network and many other actors in the network are linked to them. In many cases, non-central actors are not linked in any way but through the central actor. So if you want to gain influence in the network you get the most bang for the buck by influencing the influencer.
Critically, these two levels are flat. This took me by surprise. At the society level, citizens, civil society groups and companies are connected horizontally. No particular group or individual is afforded a priori centrality. Why is this a surprise? Public diplomacy experts have spent the last few years trying to target ‘influencers’ in societies. Influencers are political, religious or cultural figures who are listened to by others. This idea is informed by network analysis, marketing, and the idea that State Department messages are more credible in different parts of the world when mediated and delivered by a local influential figure than by Hillary Clinton on TV. Slaughter was not convinced by reliance on influencers, empirically or normatively. She argued that all the millions marketers have spent still hasn’t generated any clear knowledge about how influencers can be identified and utilised. Not only that, but it is surely preferable to try to engage whole societies and treat all individuals equally. That would flourish a greater democratic ethos than appealing to amenable clerics, companies, journalists and intellectuals in the hope they might spread the word downwards.
Moreover, once established influencers tend to remain influential. This is because they are already influential. And influencers tend to become influential because of some intrinsic quality. Let's take an example. Bill Gates became influential because of his ability to make personal computing user-friendly and accessible, an intrinsic attribute. But once he gained an initial influence advantage he was able to gain even greater influence simply because he was already influential. This is not an intrinsic attribute of Gates', but rather what is called a "network externality". That is, one advantage of using Gates' products is that many other people are using Gates' products. So Gates attracts new followers largely because he has already attracted followers. In fact, Gates has been able to continue doing this despite the fact that his new products have arguably been inferior, relative to its competitors' products, than his early products. At this point Gates' position as an influencer is almost solely due to his position as an incumbent influencer.
How does this relate to Slaughter's program? It's all fine and good to engage everyone in the world with the U.S.'s message, to encourage everyone to think like stakeholders, and to try to build large coalitions that are broadly supportive of the U.S.'s interests (or at least are not reflexively against them). But this is a very high-cost, low-yield strategy. As O'Laughlin goes on to note, this is a very long-term plan with no guarantee of success. I'd add that if the U.S. cannot simultaneously get the influencers on its side then it is very likely not to succeed in buttressing the liberal order. And if the U.S. can get the influencers on its side then it is very likely to succeed whether it appeals directly to each individual in the world or not.
There's no reason not to do both, but a tactical change from targeting influencers to targeting everyone is misguided, in my view.
What I find interesting about this is contrasting Slaughter's approach with someone like John Ikenberry's. They have both spent their careers theorizing about the liberal order and the U.S.'s hegemonic relationship with it, and have co-authored a bunch of pieces on the subject, but seem now to have diverged in what they think about what needs to be done for it to persist. Ikenberry continues to stress the importance of international institutions, particularly formal institutions. Slaughter has also emphasized formal institutions in the past, particularly legal institutions, but seems not to be shifting focus. There is nothing contradictory about the contemporary work of Ikenberry and Slaughter, but they have diverged a bit in the points they've chosen to emphasize.
*I can use the diminutive because I met him once. That's all it takes, right?
**For one recent study in international relations relating specifically to advocacy networks, see this piece by Charli Carpenter.
Tuesday, June 5, 2012
Its membership in the euro currency union hanging in the balance, Greece continues to receive billions of euros in emergency assistance from a so-called troika of lenders overseeing its bailout.
But almost none of the money is going to the Greek government to pay for vital public services. Instead, it is flowing directly back into the troika’s pockets. ...
If that seems to make little sense economically, it has a certain logic in the politics of euro-finance. After all, the money dispensed by the troika — the European Central Bank, the International Monetary Fund and the European Commission — comes from European taxpayers, many of whom are increasingly wary of the political disarray that has afflicted Athens and clouded the future of the euro zone.More here. I have said for awhile now that the story in the eurozone is that the north would keep the south liquid until the north's banks were sufficiently capitalized to handle a default, at which point the money would stop flowing. I thought that would be sometime in 2013 (I think I wrote a post saying that, but can't find it now), but now I think it could be this year.
Why should IPE folks like this story? Because this is the type of tale we tell all the time: "bailout" funds are used to bail out the donor, not the recipient. Just like "aid" funds to the developing world are often tied to certain types of disbursement and are thus a form of subsidy for corporations in the developed world.
There are parallels here (of course) to the Latin American debt crises of the 1980s, where much of the debt was owed to commercial banks in the U.S. The U.S. Treasury pushed for IMF intervention, mostly so U.S. banks could get their money back without the federal government having to officially bail them out. (The story is even more nuanced -- Congress understood what was happening and demanded new regulations of the banking sector, which led to the creation of the first Basel accord -- as Thomas argues here.)
Monday, June 4, 2012
Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.
The International Monetary Fund said banks will have to slash their balance sheets by $2 trillion (£1.6 trillion) by the end of next year even in a "best-case scenario".That is only within the European Union, and it came about due to panic over Greece last month. Basically, this means that EU banks have to increase their capital cushions by over 200% by the end of this month. What does that mean?
The Bank for International Settlements (BIS) said cross-border loans fell by $799bn (£520bn) in the fourth quarter of 2011, led by a broad retreat from Italy, Spain and the eurozone periphery.Note that this just in Europe. But it made me wonder (on Twitter): why do this now? After all, it was Germany that insisted on a longer phase-in period for Basel III during negotiations, while the US/UK/Switzerland wanted that stricter capital requirements. Now the EU is doing a rapid phase-in and tougher capital limits years before they are required to by Basel. And they're doing it in the middle of a bank run during a continent-wide recession. What gives? A few things.
1. Banks do have to get to 9% tier 1 capital by the end of the month, but they don't have to come fully into compliance yet. That is, a lot of junk capital that is prohibited by Basel III -- but was allowed under Basels I and II -- will still be allowed. (ht to @Procyclicality for this point)
2. Nevertheless, this is still a big boost to minimum capital standards. So how will banks come into compliance? Two quick and easy ways are to:
a. Hold more cash.
b. Buy more sovereign debt.
The first of these is contractionary -- it's basically hoarding more cash rather than lending it out -- although the ECB can facilitate it if they want to pump eurozone banks full of cash. Non-euro EU central banks, such as the Bank of England, can do the same thing if they want and the US Federal Reserve has injected a bunch of liquidity into foreign banks when needed in the past as well. As a zero-risk instrument, cash has a zero risk weight, so adding more of it to your portfolio brings your overall capital ratio up.
The second of these is expansionary. OECD sovereign debt also carries a zero risk weight under Basel III, as it did under Basels I and II. This might seem bizarre at first, but remember who's making these rules: OECD governments. And OECD governments want to pay low interest on their debt. To do that, they rig the regulatory rules to make it more attractive for financial institutions to buy that debt. Hence, a zero risk weight in Basel.
So what does that mean? If banks need to boost their capital stock, there are two ways to do it: by raising more capital (e.g. by selling equity) or by shifting their risk portfolio. The
Was this the point of this policy? I don't know. Probably it was mostly a freak-out after runs started on Greece and then Spain. But I imagine it was part of the calculus, or at least has become so since. In practice this will likely be a transfer of private funding for public funding. Given that the ECB cannot provide liquidity directly to eurozone governments, but can accept sovereign debt as collateral when lending to banks, this could be part of a stealth bailout program that began when Mario Draghi took over as ECB chief from Jean-Claude Trichet last year. Call it "bailout by regulatory arbitrage".
Will it work? I don't know.