Morning Links

-- Should the Canadian health care system become more like the U.S.'s? Probably not.

-- Are bank robberies a counter-cyclical activity? Probably (at least in Spain).

-- Does Condorcet's Theorem support mass democracy? Probably not.

-- Has increased income inequality resulted in increased social inequality? It depends.

-- Has the U.S./Japan alliance benefitted the world? Joseph Nye says "definitely", and that the alliance should continue:

In the early 1990's, many Americans regarded Japan as an economic threat. Some people - in both countries - viewed the security alliance as a Cold War relic to be discarded.

These trends were reversed by the Clinton administration's 1995 "East Asia Strategy Report." In 1996, the Clinton-Hashimoto Declaration stated that the US-Japan security alliance was the foundation for stability that would allow growing prosperity in post-Cold War East Asia. That approach has continued on a bipartisan basis in the US, and polls show that it retains broad acceptance in Japan. Most close observers of the relationship agree that the US-Japan alliance is in much better shape today than 15 years ago. ...

Given today's agenda, there is enormous potential for an equal partnership, working with others, in the provision of global public goods that will benefit the US, Japan, and the rest of the world. That is why I remain optimistic about the future of the US-Japan alliance.

ht to Attackerman for the Nye article.

Politics =/= Magic

Alex Tabarrok muses on the "political" part of "political economy":

Furthermore, the petition says that central bank decisions should not be "politicized." Again, this is disingenuous. Why are more independent central banks better at fighting inflation than less independent central banks? There is nothing magical about independence that makes for low-inflation. Suppose we pick someone at random and give them complete power over monetary policy. Such a central banker would be very independent but I wouldn't count on this policy resulting in much in the way of systematically lower inflation.

The primary reason that independent central banks are better at controlling inflation is that absent direct political control the default selection mechanism favors bankers, i.e. lenders, people whose interests make them more favorable towards lower inflation.

Thus, independence is a political decision that favors lenders in the decisions of monetary policy. Now, depending on the alternatives, there may be good reasons for making this choice but we should not fool ourselves into thinking that we have depoliticized money. We should not be surprised, for example, that "independent" central banks tend to make lender of last resort decisions that protect banks and bankers.

[bold added]

This isn't the first time I have been disappointed in Tabarrok's (lack of a) grasp of simple political economic theory. Fortunately for the world, there are a few people who think about the "political" part of "political economy", and they might even have something to say on the topic. For instance, Rosenbluth and Schaap found that electoral rules (i.e. single-member districts vs. proportional representation) play a major role in what types of banking regulations are chosen by governments. In proportional systems governments tend to choose "profit-padding" regulations that are intended to reduce risk-taking by limiting competition, thus guaranteeing higher profits for domestic banks. In other words, political variables can have major effects on banking policy.

Nor is it clear that bankers prefer lower inflation. If the higher inflation comes from lax monetary policy, then banks may prefer easy access to cheap credit over a lower price level*. In fact, Copelovitch and Singer found [pdf] that central banks that have multiple mandates -- i.e. to regulate banks and fight inflation -- choose different policies than those have a single mandate to fight inflation. Interestingly (and contra Tabarrok), Copelovitch and Singer found that central banks that regulate domestic banking sectors have higher inflation rates than those with a single mandate, but that central bank independence has no statistically significant effect on inflation rates. If bankers prefer low inflation, as Tabarrok states, then independent central banks are not acting in the interests of bankers**.

All to say that central banks may be "politicized" in many different ways, and the potential outcomes of that politicization is not predetermined or unidirectional. If these studies are to be believed, a less-independent Fed should lead to higher inflation and more prudential regulation of banks.

More distressing than Tabarrok's specific empirical claims is his attitude. Perhaps there is nothing "magical about independence that makes for low-inflation," but there could be something political about independence that makes for low inflation. In fact, there is a broad and deep literature in both the economic and political science disciplines showing that central bank independence is positively associated with lower rates of inflation. This is unsurprising for students of political economy, since we understand that short-run political incentives often diverge from longer-run economic incentives. "De-politicizing" monetary policy prevents politicians from damaging the macroeconomy in the longer-run in exchange for short-run political gains (at least, it prevents them from using monetary policy as such a tool; fiscal policy is another matter).

In short, there is nothing "magic" about politics, and we don't need "magical" reasons for expecting a link between central bank independence and lower rates of inflation: we have political explanations for these phenomena.

[UPDATE]: McMegan adds comment, and basically gets it right (she's got the story right but loses a few points for saying "magic" rather than "politics"):

Central bank independence works, not because the bankers aren't accountable to Congress (they are, after all, reappointed every so often), but because Congress is only weakly accountable for the actions of the central bank. If Congress were held to account for the actions of the central bank, Congress would appoint bankers who would do populist things that would make us all worse off. Most of the financial policy journalists I know have the sense that Congress actually supported most of what Paulson/Bernanke/Geithner did, but knew they did not dare enact it. They don't want a more accountable central bank.

*In a rational expectations framework lenders shouldn't much care about levels of inflation since they can adjust the interest rates they charge to compensate. In the long-run equilibrium, real profits should be the same no matter what the inflation rate is, so long as the inflation level is mostly stable.

**Or the Copelovitch/Singer results are spurious. For example, they did not test potential interactions between central bank independence and a central bank's mandate, or indeed any interactions including central bank independence. I have a lot of problems with their article, but so far it has not been challenged empirically.

Perception and Misperception in Trade Politics

From a new article by Mansfield and Mutz in International Organization:

At one level, these results might seem curious. For example, why does a belief that the US should play the role of “world policeman” in preventing human rights abuses in other countries have anything to do with trade preferences? And why should how blacks feel about whites and Hispanics (or vice-versa) have anything to do with trade liberalization? Activist foreign policy attitudes, a positive attitude toward out-groups, and a preference for open trade, however, all reflect a sense of cosmopolitanism and inclusion. Isolationism, a negative attitude toward out-groups, and antipathy toward open trade all reflect a sense of insularity and separatism. In short, trade preferences are driven less by economic considerations and more by an individual’s psychological world view.

This article argues that the two dominant models of trade politics -- the Heckscher-Olin "factor endowments" model and the Ricardo-Viner "specific factors" model -- are both wrong because they both model individuals as motivated by their own individual self-interest. Instead, Mansfield and Mutz find that support for trade is more closely related to beliefs about how trade will affect one's group (and how people perceive which "group" they belong to).

This is the most interesting article on trade I've read in quite some time, and I suspect that it will find its way onto many IPE syllabi in the near future. I am very interested to see if the result holds up across issue areas and if these public attitudes have a direct effect on policy.

An ungated version is here (pdf). Ht to John Sides at The Monkey Cage.

Who Gets E.U. Farm Subsidies (redux)?

In a previous post, I noted that many E.U. agriculture subsidies went to huge corporate conglomerates rather than the noble family farmer that has captured the imagination of Europeans. But that was only the tip of the iceberg. Others receiving E.U. agriculture subsidies include a Spanish construction company, German gummy bear manufacturers, cruise ship caterers, the Roman Catholic Church, and Her Majesty the Queen of England. The NY Times:

This year for the first time, all of the 27 nations in the European Union were forced to disclose how they distribute the money from farm subsidies, with Germany the only nation failing to comply in full. A computer analysis by The New York Times and the International Herald Tribune of recipients in major countries has provided the first detailed look at who receives the money.

The data underscore the extent to which the subsidy program has evolved beyond its original goals of increasing food production and supporting traditional farmers as they dealt with market fluctuations. It also illustrates how the European Union has moved to emphasize rural development instead of price support and production incentives, and in the process has decentralized the system, giving countries more discretion over the dispersal of subsidies.

Agricultural subsidies have been a frequent topic at IPE@UNC, and we are always quick to point out that the U.S. is guilty of similar distorting subsidies. But the E.U. is the worst offender. They spend roughly four times as much as the U.S. does, and the beneficiaries are even more ludicrous: there are no gravel manufacturers or electrical companies receiving U.S. agricultural aid.

Why does this matter? Besides the fact that it is absurd for E.U. taxpayers to be subsidizing vacation estates for the Queen of England (that isn't even used for farming), these subsidies have a severely negative impact on LDC development. As the Times article says, "European officials and some economists believe that much of the cash from those subsidies ultimately trickles down to local farmers, since without them companies might buy cheaper food elsewhere." The "elsewhere" in that sentence refers to some of the poorest areas in the world, e.g. Africa and (non-E.U.) E. Europe. U.S. price supports undercut agriculture in S. America and Africa. Japanese subsidies have an adverse effect on growers in S.E. Asia. In other words, the burden of the subsidies is not only being borne by the wealthy taxpayers in the developed world; they are quite literally removing one of the few possible sources of income for many of the poorest people in the world.

When we talk about LDC development, we often talk about the effectiveness of aid programs, or the necessity of institution-building, or the economic consequences of war. But one of the biggest steps we could take to encourage economic development in the poorest parts of the world is to simply allow access to our markets. This would benefit consumers in the MDCs by lowering both taxes and the prices of goods. Of course, some major corporations and titled landowners might pitch a fit, but I think it's reasonable to say that we don't owe them anything.

There would be some small-time farmers that would be adversely affected, and I'm sure that Willie Nelson would write a teary song for them, but if we want to provide welfare for the least-fortunate among us, surely a Moroccan cotton farmer or Brazilian sugar grower is more deserving of our sympathy than an Italian multinational corporation or an Iowan corn grower that has been receiving handouts for decades.

Quote of the Day

This from a report [large pdf] published in 1990 by Larry Summers, David Cutler, James Poterba, and Loise Sheiner:

“For about 15 years, the United States runs current account deficits, so that more than 6 percent of U.S. assets are owned by foreigners in 2010. High saving for the subsequent 15 years results in current account surpluses and reduces foreign capital ownership to 3.5 percent. Past 2020, however, with the rapid increase in the number of elderly, the United States again runs current account deficits, so that in the steady state almost 9 percent of U.S. assets are owned by foreigners.”

Well that explains much of the past 20 years, doesn't it? Via A Fistful of Euros, who adds:

So, if we don’t do something, and do something now, to stop median ages rising too rapidly, then more crises are guaranteed, and the next round will make this crisis will seem like, now how do they put it, oh yes, a picnic.

Political Science and Economics Professors

Via Blattman. Really interesting post on political science and economic majors and the (I guess) demand for more (at least that's what the three grad students who write on this blog hope!)

This is the ratio of BA majors to faculty in private universities with ranked programs:

The graph comes from a new article in the JEP by William Johnson and Sarah Turner. Political Science seems to be the big outlier, with economics and psych not far behind.

The meshes with my experience: poli sci has become the largest major at Yale (even more so since the crisis) and we cannot hire fast enough--almost 8 junior faculty offers per year for at least three years.

Part of the explanation could be that econ, psych and poli sci are more easily taught to large groups (i.e. a more efficient technology) but I find that hard to believe.

The authors find some evidence that it's because econ professors are more expensive:

But here again we see the poli sci outlier.

The whole paper is good. Their conclusion: it's all politics.

All the more reason for so many new political scientists?

Video Time!

A couple of really interesting bloggingheads exchanges:

Dan Drezner (Tufts University and All Politics is Global) talks with Heather Hurlburt (Executive Director of the National Security Network). Topics include climate change, Obama's trip to the G8, the Doha Round of WTO trade negotiations, and China.

Matthew Yglesias (ThinkProgress.org) talks with Megan McArdle (The Atlantic) talk about health care reform, the future of American conservatism, and the financial crisis.

Finally, James Fallows and Niall Ferguson discuss "Chimerica" and the future of the Sino-American relationship:

How Soccer Illustrates Globalization

One of William Easterly's students guest-posts on globalization and soccer:

Some “soccer economists” argue that nations that are worse at soccer have benefited from exporting their players to world-class foreign clubs, where they gain valuable skills and experience before returning to play for their home country This is similar to recent literature that questions the traditional Brain Drain fear, with the Brain Circulation alternative – skilled emigrants bring home skills and connections that could be as valuable to their home country as the skills brought back by exported soccer players.

But there is also a homegrown story. As Dani Rodrik points out, the Egyptian team that beat Italy had a majority of players with experience playing in domestic, rather than foreign clubs. The USA team that similarly surpassed expectations has key players from both domestic and foreign clubs. So taking advantage of globalization perhaps requires BOTH strong domestic capabilities and international links.

One nation’s strategy for developing a strong domestic soccer league will be very different from the next. American kids who play under the supervision of soccer moms are different from the street kids in a Brazilian favela. Perhaps the venerable theory of comparative advantage needs to become more complex as each country learns to play to its strengths and use more of whatever are its most abundant resources to compete globally.

If I had known that there was such a job as "soccer economist" I would have stopped worrying about international financial regulatory policies a long time ago. Alas and alack, it's too late for me.

More seriously, the last paragraph is true and under-discussed. In introductory courses and textbooks we often talk about "comparative advantage" as if it were a general, exogenously-given thing. In truth, comparative advantages can be quite specific, change over time, and can sometimes be engineered through public investment. We don't often think about this in terms of sports, but the U.S.S.R. certainly spent a lot of money training Olympic athletes, especially in high-profile sports like gymnastics, basketball, hockey, swimming, and weight-lifting. I recall reading somewhere (can't find the link right now) that China invested a lot of money in "soft" Olympic events in which they were not typically competitive in order to pick up a higher metal count.

But back to soccer and whether it really does explain the world: social scientists don't have only to look at the implications of soccer on trade, brain drain, or immigration; several political scientists recently studied [pdf] national cultures of violence by looking at the behavior of soccer players. And nationalist forces have instituted the new "6+5" rule for UEFA club matches, mandating a certain percentage of "native" players on professional teams. These quotas serve the same political function in soccer as they do in other types of trade: local workers who face new international competition seek some protection from that competition in the form of regulatory rents.

Can the FA take UEFA to the WTO Dispute Settlement Court?

And what are the geopolitical implications of one nation's central bank sponsoring another nation's championship team?

It's Earnings Season!

Goldman Sachs, the investment bank, today announced that its second quarter earnings rose to $3.44 billion, and that it had put aside $11.4 billion for salaries, bonuses and benefits in the quarter, up by nearly half from a year ago.

At that rate, Goldman employees could, on average, earn roughly $770,000 apiece this year — or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more. Only three years ago, Goldman paid more than 50 employees more than $20 million apiece. In 2007, its chief executive, Lloyd C. Blankfein, collected one of the biggest bonuses in corporate history -- nearly $70 million. The latest headline results — $3.44 billion in profits — were powered by earnings from the bank’s secretive trading operations and exceeded even the most optimistic predictions.

Many analysts were surprised that Goldman posted such hefty prospects, especially since it was only last month that Goldman repaid the $10 billion that it received from the U.S. Treasury Department in October. Although it is widely believed that Goldman was required to take the funds, even though they probably didn't need the extra capital.

Megan McArdle comments on why these profits shouldn't have come as such a surprise:

This is not actually hugely surprising, given that three of their biggest competitors went out of business or were acquired in the last year; as financial markets unfroze, Goldman, which had one of the cleanest balance sheets, was bound to see a hefty increase in their profits.

Goldman's stock price has also rebounded nicely, up about 77% since the beginning of the year. (Dammit, should've bought it!) It also turns out that by paying back the TARP monies last month, Goldman also freed itself from any government interference into their compensation practices, thus allowing Goldman to freely pay its employees these nice little bonuses.

Many are up in arms about paying these people so much money, even if they did as well as it seems they did this past quarter; McArdle addresses a bit of this in her post. But what are we supposed to do? Have the government intervene again, this time to cap pay inside a private corporation that made record profits, just because they made record profits while the rest of the economy is still tanking and unemployment is about to cross 10%?

I don't think that'd be a good idea; we already set a pretty bad precedent by bailing out the banks in the first place, even though it was probably needed to restore market confidence and recapitalize institutions that were in trouble. Further meddling, especially into the compensation practices of a financial firm not under government ownership, would be setting another bad precedent.

Thomas Schelling on Climate Change

Conor Clarke interviews the old master of game theory and Nobel Prize winner. Part one here. Part two here. Some excerpts:

I think they ought to drop the idea that there are going to be enforceable commitments. There have never been enforceable commitments on anything of that magnitude. And I think they should try to negotiate not what emissions level they will seek in 20 or 50 years, but what they will actually DO. And when they've arrive at what looks like an understanding they hold a big conference and publicize it. If they can't quite reach an agreement among themselves, then they might see they if they can get the heads of state to come together. But I don't think this kind of work is being done right now. ...

I don't worry much about enforcement. I think that if the major countries reach an agreement they'll do their best to do what they said they would do. But if you say what you're going to do is get emissions down by 15% in 20 years, none of them knows what that means. That's not a commitment to something they're going to do; that's a commitment to some vague aspirational goal or something. ...

So if we can double our GDP in the next 70 or 80 years, even if we lose some of our GDP from climate change -- even if we lose 10% of our GDP from climate change -- we're still ahead so much that the effect of climate change wouldn't be noticed. But it would be pretty disastrous in a lot of the less developed parts of the world. And that's why I think it's crucially important not to demand anything of China, India and so forth that will significantly impede their economic progress. ...

[T]he developed countries -- the OECD or something like that, plus Japan -- if they are really serious, they'll tell India and China and Brazil, "we're going to provide enormous assistance to help reduce your dependence on fossil fuels. And we don't expect you to pay for it yourselves. We will pay for it because we're rich and you're not."

The whole thing is worth reading, of course. At different points Schelling advocates scaring the bejeezus out of citizens of the rich world (using "exaggerations" if necessary), more pollution in the developing world, and considers the irrational morality of helping future generations in China and India at the expense of present generations of Americans.

UPDATE: Wilkinson comments.