David Harvey on the Financial Crisis

David Harvey, Professor of Anthropology at the City University of New York, has been on a tour promoting his work -- from a Marxist perspective -- on how the Great Decession reveals the necessity for moving to an anti-capitalist system. I don't agree, but this animated video of one of his lectures is wonderfully entertaining. And I think he's right about one thing: there are a bunch of competing market-oriented narratives about how and why the crisis occurred, and none of them are especially convincing. That doesn't mean the more radical take is correct, but it is worth remembering.



via Rortybomb.

The Cold War Is Really and Truly Over (Right?)

I knew it was gonna be awesome when Medvedev started a Twitter account. Even better when he started an English version. Is this lost in translation, or just perfection of politicians' pablum?

Improvements due to a high oil price could lead to unjustified tranquility.We have seen this before. We must not allow this to happen again.

Yes. We must be very careful to avoid "unjustified tranquility". We cannot let ourselves be tranquil again. We have seen this before.

Snark aside, Russia cannot depend on oil revenues forever. This is true, and Medvedev's whole thing on this North American trip has been about boosting information technology (and hamburgers?) in Russia. Just a funny way to say it is all.

Oh, and spies.

Brad DeLong Thinks Macroeconomics Is Easy

I'm looking forward to reading DeLong's long-in-the-works Slouching Towards Utopia whenever it ends up coming out:

Is macroeconomics hard in this sense? I confess that I do not think so. I think that macro is pretty easy...

What, exactly, the excess demand was in financial markets became a subject of dispute, with different economists placing the cause of the "general glut" that was excess supply of newly-produced goods and of labor at the door of different parts of the financial system. We have:

1. Fisher-Friedman: monetarism: a depression is the result of an excess demand for money--for those liquid assets generally accepted as means of payment that people hold in their portfolios to grease their market transactions. You fix a depression by having the central bank boost the money stock. Eliminating the excess demand for money also brings the goods and labor markets into balance and out of excess supply.

2. Wicksell-Keynes (Keynes of the Treatise on Money, that is): a depression happens when there is an excess demand for bonds--for ways of moving purchasing power from the present into the future. The workings of the banking system lead the market rate of interest to be above the natural rate of interest which balances the supply of funds saved and the demand for funds to finance business investment. You fix a depression by either reducing the market rate of interest (via expansionary monetary policy) or raising the natural rate of interest (via expansionary fiscal policy) in order to bring them back into equality. Then, with no more excess demand for bonds, the goods and labor markets will also be back in balance and out of excess supply.

3. Bagehot-Minsky-Kindleberger: a depression happens because of a panic and a flight to quality, as everybody tries to sell their risky assets and cuts back on their spending in order to try to shift their portfolio in the direction of safe, high-quality assets--which, of course, everybody cannot all do at the same time. The excess demand is an excess demand for high-quality AAA assets in particular, not of money (although outside money and some inside money are AAA assets) and not of bonds (some of which are AAA assets, but not all). You fix a depression by restoring market confidence and so shrinking demand for AAA assets and by increasing the supply of AAA assets. Eliminating the excess demand for high-quality assets is eliminated will bring the goods and labor markets out of excess supply and back into balance.

From the perspective of this Malthus-Say-Mill framework Keynes's General Theory is a not entirely consistent mixture of (1), (2), and (3)...

[I]t is not rocket science. It is, however, cutting-edge economics--beyond the cutting edge, in fact--for 1829.

The whole thing is word reading. Keep in mind that this discussion ends before it begins. It's not just interesting what governments could do in a perfect world with no constraints, but what governments can do (and do do) in the real world with lots of constraints. Someone else will have to write that book. Still, interesting stuff.

The European Crisis Is About European Politics

Wow. Paul Krugman almost had a Eureka! moment:

A number of commenters have pointed out that unemployment has been falling in Germany over the past few months. Um, yes — but not in the eurozone as a whole. And that is what we’re talking about here, aren’t we? Or is European monetary and fiscal policy to be run solely based on how things are going in one country?

Um, that is exactly what we're talking about here, Professor, where "that" refers to "Who controls monetary and fiscal policy in Europe". That's what all of this is about. Up until now, monetary policy was controlled by one country -- Germany -- and fiscal policy was supposed be to restricted by the Maastricht criteria. But since the Euro isn't an optimal currency area and poorer countries in southern Europe didn't control monetary policy, they had to use rely more on fiscal policy to satisfy domestic demands, which left them all in debt and effectively broke Maastricht. This is what all of this is about.

Somehow Krugman still misses it, tho:

The point is that what amounts to a regional development within an ailing European economy doesn’t signify much.

It does when that region is the one that controls monetary policy for the rest of the Europe.

Does Krugman really not know what this is about? What has he been talking about for the past few months?

Rage Against the Machine

Remember when I wondered where the anti-globalization protesters went? Turns out they migrated to Canada. It's hard to find clear reporting on the numbers of protesters or their specific activities, but apparently about 180 have been arrested so far. Still nothing like the Battle in Seattle, but it's not nothing.

What Do We Want?

Some commenters on my most recent post questioning the logic of Krugman's "Make War, Not Peace" attitude towards China raised some good points that I'd like to address. Ultimately, though, I think that Krugman and those who are sympathetic to him are just not sure about what they want to get out of a confrontation with China over its exchange rates. I'll explain what I mean as I go.

First, Wise Bass and Anonymous questioned the importance of China for funding U.S. deficit spending. Wise Bass was correct to point out a (slight) error in my post, which is that I said that China was the largest purchaser of U.S. debt. This is not strictly true (anymore) if you include the Federal Reserve or all private buyers as a single group. Clearly, however, China is a very large purchaser of U.S. debt, as Krugman is quick to point out ("$1 billion a day"). In fact, if China wasn't an important buyer of U.S. debt, Krugman's point becomes even more wrong, because a change in Chinese policy would then have little effect on the U.S. But I think Krugman is right about this much, so if China exited the market for U.S. Treasuries it would certainly have a noticeable effect on interest rates.

Or would it? Commenter Adam thinks it may not:

It might actually be a good time to lean on China to absorb some of the re balancing costs that its current account surplus pushes exclusively to the US.

Capital is fleeing Europe at a massive rate, and there's no reason to think that the US is going to have a failed auction any time soon. China is the single largest holder of US debt, and a few years ago it really was buying a majority of new US issuance. But it is only a marginal player now. A Chinese strike on new issuance would have a small, short term effect on US interest rates, but the resulting "flight to safety" should ensure that it's a very small and very short lived.

So the PBoC could dump its holdings, but then the PBoC's technical insolvency (it earns about 1% on its reserves, but once the RMB appreciates, it will earn negative returns) will become a liquidity crisis. The ministry of finance would have to step in to recapitalize the central bank, which is something the central bankers dread more than anything else right now as we go into the 2012 political cycle.

The other option is a trade war, which nobody can win from but the US would loose a lot less than China. The deficit country might be forced to pay higher prices, get some inflation (not a problem right now for US), and consume less. But the surplus country takes a demand a supply hit, and growth will slow much more in China than in the US.

It's not perfect, but it's a reasonable card to threaten right now because there's a realistic chance that the US can take the hit. China needs to step up and correct its twin surpluses much more quickly than they have shown any interest in doing. Krugman is mostly right on this, IMHO.

There are a few parts to this, but before I jump in I'd like to point out that while Adam's advice makes some sense on its own, it is answering a different question than the one Krugman is asking. Adam is answering the question "How can we get China to pay for its share of a (needed) global macro re-alignment?" Krugman is asking the question "How can we make fiscal stimulus in the U.S. more effective right now?" Adam's answer would not help reduce American unemployment in the short run; it would likely exacerbate it, for reasons I'll get into in a bit. But then again, so would Krugman's.

First, I'm not sure that China's current account surplus shifts all of the costs of global macro re-alignment onto the U.S., for the basic reason that China's persistent current account surplus indicates that global macro re-alignment isn't happening. It is probably true that persistent imbalances have damaged the U.S. economy over the past decade, and it may be true that they will continue to damage the U.S. over the next decade. (Although the economists' favorite question -- "Compared to what?" -- is certainly applicable here.) Not all of this can be blamed on China, however, and taking a "we broke it, you fix it" attitude towards a still very poor country would be heartless as well as combative.

More to the point: in terms of fighting the current recession using a Keynesian framework, how could picking a fight with China help in the short run? In other words, Krugman is hoping for a situation in which China suffers lower growth and the U.S. incurs higher inflation and greater borrowing costs, because he thinks that will make U.S. fiscal stimulus more effective. Are we sure that would be good for either economy? Are we sure that a large RMB appreciation -- which would benefit U.S. exporters but hurt U.S. importers and consumers -- would really stimulate the U.S. economy? What makes us so sure that the gains to exporters and non-tradable producers will out-weigh the costs to importers and consumers? What makes us so sure that this gain will be larger than the loss from an interest rate increase that must occur when a larger supplier of funds exits a market? These are the questions that Krugman and his supporters should be answering.

The presence of a large current account deficit would seemingly indicate the opposite, because more of the American economy currently depends on imports than exports. The job losses the U.S. has recently seen have been largely in non-tradable sectors like construction, less-tradable services like finance, and less-skilled labor in retail and services. Those aren't going to come back if the RMB appreciates 10% against the dollar. Let's also remember that economic recoveries are often encouraged by more trade, even if these run up imbalances, rather than less. That is certainly one lesson to take from the interwar and Bretton Woods periods.

If the goal is to shrink the current account deficit, we can do that easily enough by importing fewer goods, thus making ourselves poorer. If the goal is to spur employment in exporting sectors, we can pursue beggar-thy-neighbor policies to make that happen. But if the goal is to raise our standards of living and boost overall employment, then cutting off imports seems completely counter-productive.

Second, suppose that what I just wrote was irrelevant. In other words, suppose short-run economic recovery was not our policy goal. Then Adam's advice starts to become a bit more logical. If we were ever going to strike at China to reshape our medium run outlook, now might be the time to do it. The world's demand for highly liquid, AAA assets is very high, and the U.S. remains in a very unique position to provide them. I still disagree that China is a "marginal player" in those markets now, and that argument violates the most basic assumption in Krugman's logic (which Adam says he agrees with), but picking a fight when the U.S. is strongest (i.e. less reliant on Chinese funds) might still make sense if the goal is to punish China.

That is, it might make sense if American political constituencies were interested in sacrificing employment and standards of living for the pleasure of knocking China down a few pegs, or scoring some short run relative gains, or correcting the trade imbalance for its own sake. It might even make sense if the American leadership was interested in any of those things. But neither is true. The American polity wants a quick economic turnaround, and the leadership wants a China that is integrated into the global economy, and more willing to take a responsible role in maintaining security and stability in Asia over the medium to long run. Neither of those things are likely to happen under the scenario that Krugman (or Adam) outlines.

The point I was trying to make in my previous post is that Krugman has confused his purposes. Confronting the Chinese right now along the lines Krugman wants might increase American relative power (or might not), but it will not help spur an economic recovery in the short run, which he has made clear is his ultimate goal. Nor will it help maintain order in the global political economy, which should be the ultimate goal of policymakers. It's a convoluted policy, with no clear goals and no reasonable expectations.

U.S. v. Ghana

I had intended more regular World Cup blogging, but I've been busy enough with other things that I haven't gotten around to it. But here are a few quick thoughts on the American and Ghanian teams leading up to today's match, which could reasonably be called the biggest in both nations' histories.

-- The Robert Green mess-up masked the fact that the U.S. was just as good mediocre as England in the first game. Quite frankly, the U.S. was fortunate to escape with a point, not just because of Green's fumble -- I think the U.S. would have pressed much more in the 2nd half if the score wasn't tied, and may have found an equalizer anyway -- but because of the general listlessness of England's game. Then again, England was fortunate to escape with a point as well. Other than the botched covering that led to Gerrard's gimme goal, England had no offensive momentum at all. (This continued through the Algeria game in which they didn't score and even into the Slovenia game in which they only scored once. That said, before the tourney started all the talk about England focused on their slow, old, battered defense and the question marks in goal. They only conceded once in the group stage, and that was a fluke, despite starting four different center backs.)

-- The two quick goals conceded to Slovenia revealed the U.S.'s major weakness: there is often space in between the central midfield and the central defense that can be exploited. This is nothing new: Slovenia's first goal was pretty similar to the goal scored by Giuseppe Rossi in the Confederation's Cup last summer. It also demonstrated that Gooch Onyewu simply isn't up to snuff, because of injuries or otherwise. He's great in the air, but he's too slow right now, and his reads are not sharp. Two of the three goals conceded by the U.S. were partially or fully his fault. The problem is that Clarence Goodson is probably not ready for prime time (and the knock-out stages isn't the time to experiment) and Bornstein is a ticking time bomb if he plays on the left and pushes Bocanegra into CB where he really belongs. (Credit where it's due: Bornstein was pretty good against Algeria, but then again Algeria is not a very good team, and did not attack down Bornstein's flank at all.) Bocanegra lacks the pace to be truly effective as a left back, although he makes up for it somewhat with intelligence. The U.S. doesn't have great options here, and eventually it will cost them. It nearly cost them escape from the group stages.

-- On the plus side, the U.S. has a lot more attacking power than most give them credit for, and it hasn't been fully unleashed yet. Consider this: the U.S. has scored four six four goals so far, and none of them have been by a striker. We know that Altidore can score in international play; he was fantastic in qualifying and scored a great goal against Spain in Confederation's Cup. And Buddle demonstrated that he can knock them in with his brace against Australia the week before the tournament began. Findley + Jabulani = Unmitigated Goal-Missing Disaster, but Gomez can also score, especially in his best role as 2nd half energy sub. But Dempsey should have three or four or even five goals by now rather than his one, Donovan is always dangerous and never seems to miss easy chances, and Bradley has demonstrated more than once that he is capable of coming up big. If the strikers get going, the U.S. can win a goal-fest even if the defense isn't the best. Not to mention, the U.S. has recently been known for scoring off of set-pieces, and have had no goals in those situations yet except for the mysteriously disallowed Edu goal. These chances are often created by good hold-up play by the forwards that lead to fouls, so Altidore and whoever pairs him will be very important moving forward. The U.S. should have scored three or four in the Algeria game (e.g. Dempsey's unfairly disallowed goal, Dempsey hitting the post then missing a wide-open net on the rebound, Altidore's miss from point-black, Buddle's header straight at the keeper, etc.), but they are usually pretty economical. The more comfortable and confident they get, the more likely those chances are not wasted.

-- The U.S. midfield is unsettled, and always has been. Michael Bradley is a mainstay and has been phenomenal, but he's been partnered at different times by Clark, Torres, Edu, and Feilhaber. None have especially impressed. Feilhaber has arguably been the best, but his first instinct is to join the attack, as is Bradley's. Given the concerns about the back four, one of the two central midfielders has to stay home. That's not Torres' role, as was clearly demonstrated in the first half against Slovenia. Clark might be the best candidate for that role, but his distribution and general presence on the ball is horrible and always has been. Costly turnovers and failed and missed passes are practically his calling card. Plus, his ball-watching nearly cost the U.S. dearly by handing Gerrard a goal. Edu hasn't been bad... but he hasn't been great either. If the U.S. had a solid holding midfielder that could support the defense, distribute well, and ignite the attack -- think Xabi Alonso or Javier Mascherano -- they would be a much better team. Then again, who wouldn't?

-- Ghana have scored two goals so far in this tournament, both on penalties. They've also conceded two. Their so-called forwards and attacking midfielders seem to have no finishing ability whatsoever, and this is not a new phenomenon: they haven't scored more than one goal in something like their last 14 matches. Nevertheless, they have advanced through the group stage in a very tough group (including Germany, Serbia, and Australia) after going to the semi-finals of the Africa Cup six months ago. In short, they know how to win close matches. They will be comfortable if the score is 0-0 in the 88th minute. They will be comfortable if the game is tied and goes into extra time. If it goes to penalties, well, all bets are always off, but Tim Howard (the U.S. keeper) is notorious for coming up big in those situations. Still, it wouldn't be surprising to see Ghana play a very defensive game, and try to strike on counterattacks and set-pieces.

-- That said, Ghana's strengths are the U.S.'s weaknesses. They have a very strong central midfield, and the wingplay of the U.S. isn't their greatest asset. Ghana is very fast, and could thus exploit the shaky LB position of the U.S. -- It's shaky no matter who plays there, frankly -- and the slow, foul-prone CBs. They are also very strong, thus negating the one advantage the U.S. often has in central defense. At different times, Onyewu, Bornstein, and DeMerit have all shown proclivities for conceding penalties. So far, Ghana has been able to draw them. If Ghana gets one and converts, they may be able to defend a one goal lead no matter what the U.S. throws at them. In fact, this was exactly how the U.S. was eliminate from the last World Cup: Ghana was granted a penalty on a dubious horrible call against Onyewu, and won the game 2-1. This is the U.S.'s biggest danger. They have to be quick, decisive, and careful in defense. That has never been this group's strong suit. The importance of strong defensive central midfield play cannot be overstated here. The U.S. also has a nasty habit of attracting red cards in important international games. Some of this has been poor refereeing in the past, but it has to be avoided today.

If it were up to me I'd play this line-up, including Bornstein because I just can't trust Onyewu to not blow an assignment or concede a penalty right now, and pray that he (Bornstein) doesn't combust just yet:

---------------------Howard------------------
---Cherundolo---DeMerit---Bocanegra---Bornstein---
----Donovan----Bradley-----Edu-----Dempsey-----
---------------Altidore---------Buddle----------

That line-up is the best for the counterattack, hold-up, and wingplay, which should be the U.S.'s offensive strategy. To begin the game, at least. That, and getting a goal from set-pieces. The U.S. need to score first, for two reasons. First, because otherwise they may get impatient and leave open spaces that Ghana can exploit; Second, because if Ghana scores first they are a good enough defensive team to keep a clean sheet. They aren't likely to concede multiple second-half goals like Slovenia did.

This is a winnable game for both teams, and I'm looking forward to it. Let's just hope it isn't decided by poor calls from the officials.

FWIW, 538 has the game at 50-50 odds, mostly because of a continental advantage for Ghana. Discarding that, the U.S. are favored to avenge 2006. As we've seen, home-continent advantage has been pretty inconspicuous so far in this tournament. The U.S. can only hope it remains that way.

Riddle Me This

If Krugman wants another massive fiscal stimulus package funded by additional deficits, and he does, and he wants the Chinese to stop depressing the value of their currency by buying American debt, and he does, then where does he expect the funds for fiscal stimulus spending to come from? More precisely, if Krugman succeeds in removing the largest purchaser of American debt from the supply side of the funds equation ("$1 billion a day"), then why wouldn't he expect the cost of borrowing to increase massively? And why does he think this will be good for the national accounts?

Then there's this conclusion to his most recent column:

China needs to stop giving us the runaround and deliver real change. And if it refuses, it’s time to talk about trade sanctions.

Is it good for economic recovery to pay more to borrow than we have to, pay more for imports than we have to, and shut off access to a very large and growing market for our exporters by triggering a trade war? Of course not.

Usually when I disagree with anyone, especially someone as intelligent as Krugman, I can at least see where they're coming from. Not this time. I really cannot reconcile his anti-China invective with his pro-Keynes dogma. It just makes no sense.

Worth a Shot, I Guess

Kim Jong-Il never ceases to amaze:

Citing costs induced by six decades of American hostility, Jong-Il has rummaged up his calculator, revived his old grudges, and delivered a tab to the U.S. to the tune of $65 trillion -- plus tax.

KCNA, North Korea's official state-run news agency, has asserted North Korea's "justifiable right" to collect financial compensation from the U.S. for an alleged six decades worth of antagonism -- one trillion dollars for every year since the Korean peninsula was divided in 1945.

The check's in the mail, Dear Leader. While you wait for it, why don't you not send the DPRK's soccer team to the gulag? That would be dumb.

Dawn of the Dead

Drezner's been hinting about his zombies-and-IR-theory research program for about a year now, and the first sign of where he's headed with it appears in this Foreign Policy excerpt from his forthcoming book:

The specter of an uprising of reanimated corpses also poses a significant challenge to interpreters of international relations and the theories they use to understand the world. If the dead begin to rise from the grave and attack the living, what thinking would -- or should -- guide the human response? How would all those theories hold up under the pressure of a zombie assault? When should humans decide that hiding and hoarding is the right idea? ...

What follows is an attempt to satiate the ever-growing hunger for knowledge about how zombies will influence the future shape of the world. But this is a difficult exercise: Looking at the state of international relations theory, one quickly realizes the absence of consensus about the best way to think about global politics. There are multiple paradigms that attempt to explain international relations, and each has a different take on how political actors can be expected to respond to the living dead.

The whole thing is entertaining, as one might expect, and Drezner offered some further context on his blog. He clearly intends this as a teaching tool, and like a somewhat-similar Godfather-and-IR-theory tract from a few years back, I am sure it will be useful for teaching. I look forward to reading the book version when it comes out in December. But Drezner hints that he may want this to be something more:

The Atlantic's Max Fisher gets what I'm going for here, noting that:

Zombie theory sounds an awful lot like counterterrorism or cybsersecurity theory, to give just two example. But the beauty of zombie theory is that it applies too all sorts of emerging trans-national security threats, including those we have yet to anticipate or imagine.

These could include pandemics, environmental catastrophes, immigration flows, etc. In other words, almost any international threat other than traditional state vs. state controversies. While these are certainly interesting issues, much current IR theory is focused on international interactions like those he describes. The book's table of contents seems to indicate that his goal may be to survey the theoretical literature on these questions in a way that is understandable and accessible to students who know more about popular culture than IR theory. That is a worthwhile exercise on its own, but it isn't clear whether he intends to add to previously-existing theory or merely seek to summarize and apply it.

In either case I am sure it will be a great read.