UNC Everywhere

In a recent article in Slate, Matthew Yglesias, cites research done by UNC political scientists-- Stephen Gent, Reed Wood, Jason Kathman. Their findings demonstrate that intervening on behalf of rebels increases the number of civilians killed by increasing the desperation of the government.

Shameless Self-Promotion

Adam Elkus was kind enough to interview me for the Abu Muquwama blog at CNAS. He asks about my use of network methods in my research, my thoughts on IPE more generally, and some experiences blogging. You can find it here.

Global Trends in Militarization Needs Global Explanations

In my opinion, James Fearon misses an opportunity to link theories together in a productive way. Of the global decline of military spending (% GDP) and mobilization (soldiers per 1,000 citizens) in the postwar era:

On the domestic side of things, there is pretty good evidence that the spread of democracy has been a significant factor. Not worth getting into the details here, but if you look at the data country by country you find that on average, when countries transition to democracy their military spending and army sizes go down, quite substantially.* In fact they tend to go down when they transition from very autocratic to only somewhat autocratic (that is, to “anocracies”, or semi-democracies using the Polity data). The effect of a democratic transition on arms levels in the state in which the transition occurs looks to be larger than the effect of transitions in neighbors on a state’s own military spending, although this is hard to be sure about statistically due to endogeneity issues. I would guess that most of the democracy effect is a domestic matter—for instance, autocracies want bigger militaries to help put down domestic opposition or to pay off cronies, or democracies want smaller militaries to lower coup threats—but some of it might also be an international effect. That is, if democracies want smaller militaries then this could reduce the demand for big armies in their neighbors.

Fearon is reporting a trend, not advancing a well-formulated argument, but I still think this is fairly weak. Here are some other things we know about violence in the postwar era:

-- Interstate violence is at the lowest point in the capitalist era. Given that, it makes perfect sense for military burdens to be at a low point as well. We do not know for certain why the world is so peaceful, but quite a lot of IR theory suggests that American hegemony (which Fearon does not mention) and nuclear weapons (which he does) may have something to do with it. Regarding the former, the American security umbrella covers other democracies and (sometimes) extends to countries transitioning to democracy -- the pacification and democratization of Europe since 1945 is obviously the most pronounced example -- so that could help explain the domestic patterns without telling a ad hoc story about democracies being worried about coup threats (which strikes me as being ahistorical and is in contradiction to the best evidence). Regarding the latter, technology should push down military cost burdens and personnel needed as more and more security mechanisms become computerized and/or automated, at least during times of peace. Nukes are part of that but so are drones, missile technology, cyber capabilities, etc. Given the decline of international conflict and the lower marginal costs of defense why wouldn't we expect the military burden to decrease?

-- As for the fact that the drop in military burden has happened most in democracies I'd note several things. First, it appears from Fearon's description that many democracies were quite heavily armed in the middle of the 20th century. In Fearon's graph at the link above this is quickly seen by the number of people per 1,000 that were in the military in 1945-1950 in "the West". Given that, I don't think a regime-type explanation works very well. Second, democracies are richer, and richer countries should (on average) spend less on their militaries as a percentage of GDP. That is, there is a almost certainly diminishing returns to spending on security: the 10 trillionth dollar spent on national defense will not get you as much security as the 10 millionth. Among consolidated democracies only the U.S. and Israel spend more than 3% of their GDP on their militaries, and I think there is general agreement that much of the American spending is due to rent-seeking, bureaucratic politics, and its ongoing hegemonic project rather than its regime type.

-- Almost all conflict which does occur in the international system is intra-state. Intra-state violence tends to happen more in non-democracies than in democracies. Countries in a state of conflict should dedicate more of their resources towards the military than countries in a state of peace. Therefore, because they are more peaceful, democracies should spend fewer resources on the military. The only wrinkle in this involves transitions to democracy, which often involve conflict. The way I read Fearon he's saying that after transitioning to democracy the military burden decreases; I'm not sure if his data could tell us what's happening during democratic transitions, but it would be interesting to know.

I'm nit-picking a bit here, albeit for a reason. Fearon found some interesting trends, reported them, and then thought-aloud about what might be causing them. There's nothing wrong with that. But the quick-reflex pivot to explanations based on local factors such as regime type is, for me, unsatisfying. Once one takes that step it makes it difficult to think about broader systems, and makes committing an ecological fallacy much more likely. If we're seeing a systemic trend -- lower military burdens everywhere -- then we should seek to make systemic arguments which can account for the trends. Too frequently we try to explain global phenomena by reference to local factors.

Walmart Workers Can't Be Paid Much More

Sorry for the quiet around here. We've been busy with real projects. But to keep the lights on I thought I'd re-post something I wrote on Facebook that got long enough to be of bloggish length. It's not normal subject matter for us, but it is related to some these we discuss from time to time. It concerns Justin Fox's claim that low wages for employees of corporations like Walmart are a "social decision" distinct from economic logic. I think he's right, but not really in the way that he means.

There's a much better way to get at this. Walmart and other low-end retailers are both producers (of goods/distribution of goods) and consumers (of labor). Their business model is to forego some of their producer surplus (hence the very low profit margin, around 3% of revenues) in order to boost volume. Per store, Walmart makes around $1.4 million/year... it's just that they have over 10,500 stores so their overall profits (~$15bn) sound impressive and their revenues (~$450bn) are astounding.

If you considered each store as its own "small business" you'd wonder what the hell they were doing, because to staff those stores they have to hire a ton of people to accommodate all that volume. That's why this model only works at scale. To maintain even a 3% profit margin they have to extract some of their workers' producer surplus to make up for the surplus they have given to consumers to capture market share. This is what a high volume/low margin business looks like. It's even more severe at Amazon. But they don't capture as much of their workers' surplus as people think.

Walmart's stores are staffed on average by about 300 people who make on average $12.67 per hour or ~$25k/year if they work full-time and take two weeks of unpaid vacation. $1.4mn profit per store /300 workers = ~$4,500. So that's how much surplus value Walmart is "extracting" from labor, if you don't factor in anything else like retaining earnings, paying shareholders, investing in new stores/products, etc. That's a lot of trouble to make a measly $1.4mn! The only way it makes sense (for shareholders) is if volume is HUGE. Which it is. Since the shareholders are relatively concentrated -- six Waltons own nearly half of the shares -- they make a killing. But it's practically all volume.

Anyway, $3k or so is the upper limit of how much more each worker could earn under the current business model. Say it's the difference between $25k and $30k. That's certainly not nothing, but it does not represent such a qualitative difference in standard of living that anyone would consider Walmart employees to be well-paid if they all got the full $4,500.

So what else could be done other to increase that $4,500/year? Walmart could claw back some of their producer surplus from consumers by raising prices and using the proceeds to raise wages, which would constitute a simple redistribution from customers to employees assuming no money taken by management/ownership and completely inelastic consumer demand. Both assumptions are pretty heroic in this case. That would basically just shuffle cash from some poor people (Walmart's customers) to other poor people (Walmart's employees). Or they could reduce margins even further, but 3% is already pretty thin. Or they could raise margins by paying their suppliers (e.g. poor Chinese workers) even less, and give the extra profits to their American workers. They could redistribute salaries from management -- their CEO makes $20 million to manage a company with $450 billion in revenues -- but Walmart employs over 2 million people... we're talking 10 bucks per worker per year if the CEO was paid nothing at all.

So any redistributionary choice that would fundamentally change the situation would seem to involve deciding which group of poor people are made worse off: Walmart's customers, its employees, or its suppliers. The political equilibrium right now is a mix of employees and suppliers. Changing policy -- say, by raising the minimum wage -- involves changing two of those variables: one goes up, one goes down. There's just not enough cash which can be taken from management to make all that much of a difference on a per worker basis, even if you reduced managements' salaries to $0 and retained no profits for future investments or any other purpose. And per-worker profit is so low that there's a pretty firm limit on how much more they can be paid.

Now, Walmart's business model of extremely high volume at very low margins does not represent the entire economy, although I see a number of trends pushing more and more of the retail economy in that direction, so this logic won't always apply. But it's about as close to the competitive equilibrium models of econ 101 as contemporary markets get. So if there was ever a case to be made that wages are social decisions rather than economic decisions -- and there is, although I'd prefer "political decisions" over who captures the producer and consumer surplus to "social decisions", which just sounds slippery -- Walmart probably isn't the best example for Fox to use.

UPDATE: Tyler Cowen's column today speaks to a related issue: the politics of wealth vs income.

Distributional Politics of the Ice Cream Parable

Tyler Cowen is thinking out loud:

This parable assumes that [monetary] injection effects are important, namely where the new money goes first. This Austrian-like view is unfashionable, has weak theoretical foundations, and violates the Modigliani-Miller theorem, but at the moment markets seem to believe it. Should we believe it too?

Yes we should. Or at least we shouldn't let Modigliani-Miller stop us. In his 2011 Presidential Address to the American Finance Association, John Cochrane said the following:

Discount rates vary a lot more than we thought. Most of the puzzles and anomalies that we face amount to discount-rate variation we do not understand. Our theoretical controversies are about how discount rates are formed. We need to recognize and incorporate discount-rate variation in applied procedures.

If discount rates are varying a lot -- across time, space, and actors -- then a representative agent model such as Modigliani-Miller is not going to perform very well. And, as it turns out, it doesn't. I have paper, while I'll be sending out for review soon, which drills down at banks' activities (at the firm level) across countries and time. It turns out that there is all kinds of variation being driven by a whole host of variables at multiple levels of analysis. Which, you know, we all know intuitively... but it's not what our models expect. So let's ditch Modigliani-Miller. Capital structure is clearly not irrelevant in the real world.

Going back to Cowen, here's something with which we might be concerned. Central banks act by trading debt instruments for others at price. In normal times the swap is either short-term sovereign debt for cash or present dollars for future dollars plus interest. In our current environment, it's practically anything for cash. Who benefits from this situation? Those who can create debt that can be sold to the central bank for cash. In normal times this has primarily been governments, but governments are doing everything they can to stop creating debt. So who does that leave? Banks.

Because central banks want to be active they have been broadening the range of debt instruments that they will conduct business in. So here's a worrisome dynamic: governments are trying to reduce debt, while banks are being encouraged by central banks to create debt instruments which they can trade for cash. Karl Whelan may be correct that traditional solvency concerns don't apply to central banks, but that doesn't mean that there aren't knock-on effects from this.

The upshot is that expansionist central bank policy requires somebody to lever up. If governments won't do it and households can't do it then banks and large corporations pretty much have to. The more activist the central bank wants to be and the less indebted the government wants to be, the more banks have to create debt instruments however they can. Possibly that could mean loans to individuals and smaller firms, which could be stimulative, but households and firms are deleveraging. Meanwhile, bank regulators are telling banks to stop lending to risky groups. So where's the debt going to come from?

Banks and big credit-worthy firms are going to do very well. They're getting debt finance for free, so their equity can be deployed elsewhere or held in reserve. This is why stock markets are up so much. This is why Apple and other corporations are taking out loans when they don't even need the cash and have no real plans to do much of anything with it in the short run. Everyone else is not going to do very well, because the traditional mechanisms for distributing from central banks to the citizenry -- fiscal policy plus bank loans to individuals and small firms -- is being cut out of the story. In one sense that might be okay if the future costs of debt servicing are higher than the expected return folks would get from borrowing. But the distributional implications of this are clear: the economy is going to become more unequal and less efficient. Credit is not being allocated to facilitate productive investment -- there might not be many -- but to create debt instruments to sell to central banks for cash. The policy mix we have right now practically requires inequality to go up, which is a sign that the economy is seriously imbalanced.

One alternative is to let risk back into the system but I don't hear anybody calling for that right now.

At some point central banks will be pressured to tighten. It looks very likely that this will be under conditions of steady but slowish growth. This is where the Big Unknown comes in. When that day comes will banks (and corporations) start using their cash productively or keep hoarding it? Given the experience of the past decade or so, will there be many people who even want to borrow in order to build a McMansion or buy a luxury car or MBA? If they did, will regulators let banks lend to them? Will the originate-securities-and-distribute-to-surplus-countries market come back as strong as before?

Plus ça change, plus c'est la même chose

Dan Drezner is kicking Britain -- and the American foreign policy commentariat -- while they're down. The essay is mostly good, although regular readers of this blog probably won't find much of it new, but I must disagree with part of his conclusion:

There is no denying that the relative power of the United States is less now than it was a decade ago.

I think that is deniable. A decade ago the U.S. had alienated many of its allies, the United Nations, and all of the BRICs by invading Iraq with a "coalition of the willing" led by a president which half of the country believe did not actually win the 2000 election. Some suggested that American democracy was at risk at home, while its foreign partnerships -- especially NATO -- were similarly endangered. A decade ago the U.S. was still recoiling from the 9/11 attacks and was braced for a very dangerous future. A decade ago the European Union was resurgent, Iran was less isolated (and more recalcitrant), and China was building up its "Beijing Consensus". All of the talk in IR/FP circles was about decoupling, anti-American balancing, the end of legitimacy of American economic leadership via multilateral institutions like the IMF, WTO, and World Bank, and the end of security leadership via the UN and NATO. For all of George W. Bush's posturing, the U.S. faced some very severe challenges, and handled almost all of them pretty poorly.

Some of these persist, but Drezner is correct to note that at this point all of the potential challengers to U.S. primacy have faltered, while the U.S. is picking itself back up. We're talking about "relative" power, remember, so let's just ask who is on the other side of the U.S. in this equation. The E.U.? The BRICs?

Sean Starrs has a very interesting paper out on "early view" in International Studies Quarterly making the case that American economic superiority hasn't slipped at all since the crisis. Here's the abstract:

This paper argues that a fundamental failing in the debate on the decline of American economic power is not taking globalization seriously. With the rise of transnational corporations (TNCs), transnational modular production networks, and the globalization of corporate ownership, we can no longer give the same relevance to national accounts such as balance of trade and GDP in the twenty-first century as we did in the mid-twentieth. Rather, we must summon data on the TNCs themselves to encompass their transnational operations. This will reveal, for example, that despite the declining global share of United States GDP from 40% in 1960 to below a quarter from 2008 onward, American corporations continue to dominate sector after sector. In fact, in certain advanced sectors such as aerospace and software—even in financial services—American dominance has increased since 2008. There are no serious contenders, including China. By looking at the wrong data, many have failed to see that American economic power has not declined—it has globalized.

This paper is interesting in two ways. First, it recasts the discussion away from monadic attributes -- GDP share, say -- towards global categories -- market share of American multinational corporations. Second, it suggests that the old "relative power" discussions, which tend to be cast in dyadic terms, is also inappropriate. Instead we need to think globally. If China increases its GDP share relative to the U.S. but does so by importing American technology, adding a small amount of value, then exporting a finished product, the statistics will show a big GDP boost from exports but can we really say China has gained on the U.S. in any meaningful way? As Susan Strange once wrote, becoming a blue collar worker in service to American white collar management does not make you more powerful than the Americans. The old dependency theorists understood this quite well even if they got some other things wrong. Add to this Benjamin Cohen's recent work (with Tabitha Benney) showing that the US dollar has not slipped in importance in the monetary system (recent events have demonstrated this), and my dissertation (recently defended) showing that American prominence in global banking has increased since the crisis, and the overall picture looks clear: relative to recent history, the U.S.'s power position has not changed and has in some ways improved.

At the same time, China's immaturity has made many of its neighbors nervous. Japan, Korea, and Australia have increased security and economic ties with the U.S. which had slipped a bit a decade ago. The Transpacific Partnership will likely extend these gains. China's inability to encourage others to bandwagon with it is evidence that it has not gained much, if any, leverage on the United States. China's increasing reliance on the world's baddies -- which are increasingly under threat -- as sources of raw materials and markets for trade and FDI is not an indication that it is moving it into a position at the core of the global system. The inability of China to make ASEAN+3 a meaningful institution -- or develop any other -- is another weak spot, as is its recent growth slowdown, financial instability, and the fact that it faces 250-500 domestic protests per day.

Or perhaps I could put it another way. If, in 2003, I had told you that the Iraq and Afghanistan wars would be a disaster, the U.S. would propagate the worst global financial crisis since the 1930s, the Middle East would be in utter turmoil, the biggest development in American politics is the rise of right- and left-wing protest movements, China would grow at 10%/year over the course of the decade and that the net result of all of this is that the U.S. has become more prominent in the global economic and security systems... you'd probably think I was insane.

But that's what's happened.

UNC Everywhere

A friend of mine -- a student at the Kenan-Flagler Business School -- is profiled in the Financial Times.

Expecting the Unexpected

Here's David Beckworth explaining a "foolproof" mix of monetary and fiscal policy (bold added):

In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits. ...

If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed. ...

What is there not to like about it?

I have eliminated most of the substance of his post because those 'ifs' are just too big for it to really matter what comes after. The public does not, cannot, and will not understand why an NGDP target is superior to an inflation target. Hell, most economists don't buy this, a big percentage of financial market actors don't either, and plenty of central bankers are at best skeptical. Meanwhile, 30% of the public doesn't know who the Vice President is. (I couldn't easily find a statistic on the % of Americans who know who Ben Bernanke is, but it's gotta be less than 20%.)

I think academics and maybe some policymakers vastly overstate the value of the expectations channel. People are not so forward-looking as they are in models. Here's what they (sometimes) know: Do I have a job? Does it pay well? Is that job threatened? Do I have a bunch of debt? Can I service that debt? If the answers to any of these questions (and perhaps many others) is "no" then the public will "hoard cash", where "hoard cash" actually probably means using any excess income to pay down debt.

It gets even worse. The Paradox of Thrift is a paradox because what is individually rational is not collectively rational. The expectations channel doesn't make that go away even if there is a functioning expectations channel. Which there isn't, or at least not one that the Fed can so easily manage.

We can't base policies on the presumption that people are 100% informed and intelligent. If we want folks to spend money we have to just find a way to give them a bunch of money. If they have money, they'll spend it. If they don't, they won't. I personally think that monetary mechanisms are generally better for this than fiscal mechanisms, but I also think the jury is still out on that one.

More importantly, monetary policy benefits banks while fiscal policy (in the form of spending) benefits subcontractors, unions, urbanites, and public sector employees. Fiscal policy in the form of tax cuts benefits the top 10%, i.e. the ones who overwhelmingly pay the federal tax burden. So these questions are political.

(Via)

Atomic Bombs and Audiences

LFC points to an article by Ward Wilson suggesting that the Japanese did not surrender in WWII because of the bombs dropped on Hiroshima and Nagasaki, but because the USSR dropped its neutrality with Japan. This argument presumes that the USSR's policy change was independent of the US's decision to drop the bombs, and the US's decision to drop the bombs when it did was independent of any consideration other than motivating Japanese surrender. Given what was going on in Europe (and China) at the time this seems exceptionally unlikely. Stalin had bigger fish to fry than securing marginally better terms of surrender for the Japanese Emperor, and he had agreed at Yalta to declare war on Japan within three months. The US had already conceded half of Europe but was determined to keep the USSR out of Asia. Given the rapidly-expanding US/USSR rivalry and the US's technological advantage it was in Stalin's interest to mollify the US at least until the USSR could also develop atomic weaponry.

I.e., just move the question back a step: why did the USSR pick precisely that moment to revisit their position as a potential intermediary between the US and Japan? There are two candidates. First is the Yalta agreement. Second is the deployment of the atomic bombs. Here the timing of the US dropping the bombs becomes important. The US could have dropped the bomb at any time from July 15th forward. August 8th was the deadline for the Soviets to enter the Pacific theater per the Yalta agreement. Hiroshima was August 6th. The USSR entered on August 8th by invading Manchuria (it was still the 7th in Moscow, but the time difference meant it was the 8th in Tokyo). Nagasaki was August 9th.

There is quite a lot of evidence that Stalin did not recognize the significance of atomic weaponry until it was used, and some good reasons to think that the bombs were in fact dropped primarily for the benefit of Soviet audiences, not Japanese. Stalin believed this anyway. The bombs -- or at least the second one -- were probably dropped to keep the Soviets out of E. Asia. There is no other good explanation for why the first bomb was dropped just before the deadline for Soviet intervention on the terms agreed at Yalta, or for why the second bomb was dropped at all.

From hindsight this makes the use of atomic weapons less justifiable on strategic as well as moral grounds. The Soviets obviously took from this experience that the Americans were quite dangerous and were in fact imperial. The dropping of the bombs hardened Stalin and perhaps made the Cold War more dangerous than it needed to be. This was made clear by the Bolshoi speech in 1946. Whether or not the bombings had any deterrent effect from 1945-1949 (the period before the USSR successfully detonated a bomb) is difficult to discern, but once the Soviets had achieved nuclear parity (or close enough to it) competitive brinksmanship was probably inevitable. It may have been anyway, but the U.S. took the first step by bombing Hiroshima and Nagasaki. Any other possible paths of history were cut off at that moment.

Another example of why we should be wary of Ceteris Paribus Theories of International Relations.

A Brief Theory of the Great Stagnation

World War II left industrialized societies with two main features: a lot of industrial capacity, and a lot of dead men. These combined to drive up wages for workers, and for cultural and pragmatic (high wages mean no need for dual income households; high fertility was encouraged to replenish the population) reasons workers were overwhelmingly men. The marginal unit of labor was thus very valuable and labor supply was restricted since the baby boom generation needed twenty or so years to grow up.

By the end of the 1960s the baby boomers were entering the workforce but industrial capacity had not grown at the same rate as the population. Thus, new entrants into labor markets -- which increasingly included women and minorities as well as young white men -- put downward pressure on wages. The marginal unit of labor was no longer very valuable. Median wages began to stagnate at the same time that over-crowding of cities was leading to social unrest. Governments did not do a good job of managing these duel pressures. The 1970s are a period of stagflation and urban decline.

The post-baby boom economy has lots of labor, so income gains are not broadly shared. Who benefits? Those who can sell the product of their labor into the biggest markets. That means the heads of major corporations, financiers, professional atheletes. The rise of information technology increases these opportunities, but only for a minority. Think of these as the prominent nodes in a network.

This isn't so much capital-versus-labor anymore. The beneficiaries aren't the landed elite or the factory owner. Instead, the beneficiaries are those in managerial positions in large corporations, those who are able to leverage technical education to create consumer products that are popular, and those who are very good (or not so good, as the case may be) at managing peoples' money. That is... it's labor. It's labor that has put itself in a central position in the economic network of late-capitalism. Michael Jordan didn't become a multimillionaire by extracting the surplus value of anyone else's labor. He did it by selling his own labor to millions of people simultaneously, and then leveraging his celebrity to move into high positions in the corporate hierarchy. Mark Zuckerberg became a billionaire by giving his product away for free. Steven Spielberg gets rich on volume, not margin, and has made more from Dreamworks than from directorial fees. And some dude at Goldman Sachs gets rich by making sure all of their money doesn't go away.

The political left and right do not understand this. This is not a dynamic that will lead to wealth trickling down, nor will increasing the strength of labor unions be able to alter it. This is a new economy, but we're treating it like it's the old economy.