Romney's Foreign Policy Statements Aren't About Foreign Policy

I don't disagree with any of Drezner's critiques of Romney's white paper, nor with his overall grade. But I think that it's mostly irrelevant. Here's what Drezner says:

Similarly, for someone who says that, the Obama administration is "undermining one’s allies (p. 3)" in contrast to you, who will "reassure our allies (p. 13)", you don't actually talk about America's treaty allies much at all. True, you do talk about expanding America's allies to include India and Indonesia. Mexico gets some face time. Israel gets a lot of face time. On the other hand, NATO is not mentioned once in this entire document. Neither is the European Union. Japan and South Korea get perfunctory treamtment at best. Turkey is a major treaty ally but you treat it like a pariah state. For someone who's claiming that the U.S. will reassure its major allies, you didn't talk about them much at all. This is a really important problem, because Japan and Europe have been crucial allies in a lot of major American initiatives -- and they're getting weaker. Even in discussing new possible allies, I'm kind of gobsmacked that Brazil is never discussed. 

Another big problem is that your approach to China is so shot full of contradictions that I don't know where to begin. ... 

If the section on China is contradictory, then your discussion of Pakistan is worse. ... 

One final point, should you choose to revise this draft strategy -- you need to prioritize the threats you discuss in the paper. You list a bunch of them -- rising authoritarian states, transnational violence, failing states, and rogue states. If you have to prioritize, which threats merit greater attention? This should actually be pretty easy, since you absurdly overhype the threats posed by some of these countries (Venezuela, Cuba and Russia in particular).

But I suspect that these inconsistencies are exactly the message that Romney intended to convey. After all, he's not trying to convince the FP wonkosphere that he's got a consistent grand strategy that would get an exceptional grade in a graduate class. He's trying to convince GOP voters to nominate him for the presidency. And what do those voters want to hear? It seems likely that they want hyped-up threats from Cold War baddies, a blank check for Israel, and mixed feelings on China. I doubt they care much about Brazil, and they take Japan and Europe for granted. And, as Drezner noted previously, they (presumably) want someone who has thought about foreign policy for more than 15 seconds and has some coherent vision for how it should be conducted. Unlike Perry. Romney's tossing them the red meat that he hopes will convince primary voters that he's more serious and knowledgable about foreign policy than his competitors.

In other words, the audience matters. Romney's audience is the contemporary GOP, which is endlessly hawkish but only in some directions. He's signaling to them as hard as he can that he's hawkish in those directions too, but no others. Everything in the document makes sense when viewed in that light, even if it doesn't make sense as actual policy platform.

I'm not trying to knock Drezner at all; his job is to take these kinds of policy statements at face value and evaluate them. He is obviously aware of Romney's motivations. But it's worth remembering the context.

Trade Developments

Some of this is already old news, but there were some developments on trade over the past week.

-- The US looks set to ratify FTAs with Columbia, South Korea, and Panama. I've been pondering a longer post about the value of FTAs, which I'll try to get to in the future. For now it's just worth noting that these deals are pretty small beer.

-- Russia's going to try to get into the WTO. Again. This is potentially important for Europe (and Russia); not so much for the US.

-- Obama's going after China on violating WTO rules by not reporting subsidies -- 200 of them, apparently -- some of which are probably WTO-illegal. I think this is important. China's trade policies are incredibly distorting, and the global economy needs a rebalancing. Adjustment is occurring, but perhaps not quickly enough. Going through the WTO is much better than risking a trade war by unilaterally imposing tariffs in response to currency manipulation.

-- So, of course, Congress is also risking a trade war by considering unilateral tariffs in response to Chinese currency manipulation.

And some new research:

Why Do Some Countries Get Better WTO Accession Terms Than Others? 

Krzysztof J. Pelc

International Organization 65 (4)

The process by which countries accede to the World Trade Organization (WTO) has become the subject of considerable debate. This article takes a closer look at what determines the concessions the institution requires of an entrant. In other words, who gets a good deal, and who does not? I argue that given the institutional design of accession proceedings and the resulting suspension of reciprocity, accession terms are driven by the domestic export interests of existing members. As a result, relatively greater liberalization will be imposed on those entrants that have more valuable market access to offer upon accession, something that appears to be in opposition to expectations during multilateral trade rounds, where market access functions as a bargaining chit. The empirical evidence supports these assertions. Looking at eighteen recent entrants at the six-digit product level, I find that controlling for a host of country-specific variables, as well as the applied protection rates on a given product prior to accession, the more a country has to offer, the more it is required to give. Moreover, I show how more democratic countries, in spite of their greater overall depth of integration, exhibit greater resistance to adjustment in key industries than do nondemocracies. Finally, I demonstrate that wealth exhibits a curvilinear effect. On the one hand, institutionalized norms lead members to exercise observable restraint vis-à-vis the poorest countries. On the other hand, the richest countries have the greatest bargaining expertise, and thus obtain better terms. The outcome, as I show using a semi-parametric analysis, is that middle-income countries end up with the most stringent terms, and have to make the greatest relative adjustments to their trade regimes.

Facts on US Inequality

I like this post by Derek Thompson on inequality in the US. It's not polemical, instead presenting important facts in the easy-to-understand graphs and charts. Most of it I knew previously, but not this:

When you add it all up, we have a country with steep divisions between rich and poor and a tax code that for all of its problems is progressive (although it has been more progressive in recent year). Here are two more graphs to take you home: the first shows share of income by quintile and the second shows share of federal income taxes by quintile. What you'll see is that income inequality is behind tax burden inequality.

The whole post is worth reading, and the accompanying graphs are enlightening.

Against (Secret) Death Panels

This is well outside of my normal purview, but since the assassinations of Anwar al-Awlaki and Samir Khan, both American citizens, I've been thinking a good bit -- not for the first time, thank you -- about the wide space between our conception of the checks and balances on the capricious exercise of government power, and the reality of it. People talked about this some during the Bush administration, but I'm now of the opinion that the primary difference between the Bush administration and others in recent history is the former's simple brazenness: Bush would come right and say "I'm the decider", and he'd have his lawyers so obviously butcher the tradition of law to rationalize his policies, and his Vice-President would declare himself a member of neither the executive nor legislative branches and therefore not subject to any oversight from anyone ever, and his ambassador to the UN openly advocated abolishing the UN... Bush just didn't give a damn. He'd practically dare anyone to do anything to slap his wrists. Every other president before or since has at least pretended to uphold the law. Bush said that wasn't necessary, since any action taken by the president was ipso facto permissible.

In other words, the difference between the Bush administration and other administration is that the former was brazen. But that may be the only difference. The Bush administration may have lied to get the US into a war -- or been selective in their disclosure of the known facts, depending on how charitable your interpretation is -- but the Reagan administration lied about the existence of a war. I'm not going to go down the list, but it's now indisputable that every presidential administration since World War II* has used the tools of war at their own discretion, with essentially no accountability. Alright, I know this is no new news.

But this is, to me at least. It seems that the Obama administration convenes a panel of NSC folks who determine who the US will attempt to assassinate. Without legal mandate or any oversight, of course. Here's how Reuters puts it:

There is no public record of the operations or decisions of the panel, which is a subset of the White House's National Security Council, several current and former officials said. Neither is there any law establishing its existence or setting out the rules by which it is supposed to operate.

This is, of course, completely obscene. There may be a case to be made that the president needs the authority to attack high-level targets at short notice, and use lethal force if that's the best or only option. I would hope that decisions involving the use of lethal force would be reviewable by some sort of oversight committee, but I could understand the argument in favor of such a policy. But as far as I can tell the president does not possess that power in any established legal sense. That makes this panel as it exists today no more than the District of Columbia's branch of Murder, Inc. but with the full resources of the United States government at their disposal. Legal immunity too.

I don't see how this is an acceptable state of affairs.

*And possibly before, although my knowledge of American history is murkier before then.

(Via @interfluidity)

New Research

Political Uncertainty and Risk Premia 

Lubos Pastor, Pietro Veronesi 

NBER Working Paper No. 17464 

We study the pricing of political uncertainty in a general equilibrium model of government policy choice. We find that political uncertainty commands a risk premium whose magnitude is larger in poorer economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated when the economy is weak. In addition, we find that government policies cannot be judged by the stock market response to their announcement. Announcements of deeper reforms tend to elicit less favorable stock market reactions.

Does Short-Term Debt Increase Vulnerability to Crisis? Evidence from the East Asian Financial Crisis 

Efraim Benmelech, Eyal Dvir 

NBER Working Paper No. 17468 

Does short-term debt increase vulnerability to financial crisis, or does short-term debt reflect -- rather than cause -- the incipient crisis? We study the role that short-term debt played in the collapse of the East Asian financial sector in 1997-1998. We alleviate concerns about the endogeneity of short-term debt by using long-term debt obligations that matured during the crisis. We find that debt obligations issued at least three years before the crisis had a negative, albeit sometimes insignificant, effect on the probability of failure. Our results are consistent with the view that short-term debt reflects, rather than causes, distress in financial institutions.

Craziest Thing I Read Today

Matt Yglesias, who usually is not crazy:

Ben Bernanke isn’t the most important central banker in the world. Jean-Claude Trichet is. 

That's... crazy. Europe is certainly important, but the dollar is still the world's reserve currency, and Bernanke manages it. Plus, the Fed is responsible for overseeing the US financial system, which is central to the global financial system in a way no European countries are, separately or taken together. Additionally, the ECB isn't (technically, legally) supposed to have all that much to do with the European financial system; regulatory authority still resides with national governments. Trichet faces constraints that Bernanke doesn't face, which limits his influence, but even if that weren't true he'd be less important.

To illustrate: During the crisis, the Fed routinely provided liquidity support for foreign firms, most of which were in Europe. Has the ECB done anything similar for US firms? During the crisis the Fed opened up swap lines with every major central bank in the world. Did the ECB do anything similar? Not outside of the eurozone, as far as I can tell.

(Side note: Yglesias notes that the EU is a larger economy than the US. Which is true. But Trichet only controls monetary policy in the eurozone, not the entire EU, and eurozone GDP is roughly 75% of US GDP.)

Elementary Questions About Keynesianism

I think I asked this question back in '09 or early '10, but I didn't get a satisfactory answer so I'll ask it again. I am certain that there is a simple answer to it, but I haven't yet seen it. I know some Keynesian economists occasionally read this blog, so I'm hoping they'll set me straight.

As far as I can tell, the whole Keynesian framework depends on the existence of a liquidity trap. Without it, as Krugman keeps repeating, normal rules of macroeconomics apply: trade is good, monetary policy is effective, etc. But in Depression Economics all that is turned upside down. The rules of the game change because of the constraint imposed by the liquidity trap. Normal macroeconomics doesn't work.

In the Keynesian framework monetary policy is ineffective at the zero lower bound because people (banks, businesses, households) hoard cash. Thus there is a decrease in aggregate demand, economic activity slows, unemployment increases, etc. I get all of that. Here's the leap that I can't make: why isn't that true of fiscal policy as well? If I use monetary policy to give people money and they hoard it, why would they not hoard money if I use fiscal policy to give them cash?* The whole idea of Depression Economics depends on a psychological model of mass peoples -- what Keynes called "Animal Spirits"** --  that would seemingly apply universally to all public policy intended to stimulate demand. I see no reason why businesses or households would respond to cheap/free money from the monetary authorities by not hiring, but respond to cheap/free money from the fiscal authorities by hiring.

In other words, if the monetary multiplier is small because of the hoarding impulse derived from animal spirits, then the fiscal multipler should be no greater and probably smaller, for a few reasons. Cash transfers on the fiscal side only moves the money once, and then it should be hoarded in the same way as cash from monetary policy (which is also moved once). But fiscal policy also incurs new debt, which must be serviced. That imposes real future costs in the form of interest -- which is admittedly quite small or even negative in the present environment -- and fiscal drag from future taxation, both of which can be anticipated. Tack on some waste/corruption/deadweight loss and it's hard to see how fiscal policy would be more effective than monetary policy at the zero lower bound or anywhere else. Even at a high discount rate monetary policy can always be cheaper than fiscal policy, so it should seemingly have a higher multiplier.

I freely admit my ignorance and stupidity in this matter. I understand that economics often makes no sense until someone explains it to you, and my economics education effectively ended with my undergrad major. So I'm asking someone to explain it to me: why do animal spirits negate monetary policy at the zero lower bound but not fiscal policy? I'm guessing it has something to do with financial intermediaries, but then doesn't that require an additional, separate assumption about psychology?

*The closing scene in the HBO adaptation of Sorkin's Too Big to Fail has Poulson muttering to one of his deputies something like "We gave the banks the cash; now they better spend it and get the economy moving". I'm sure that's apocryphal, but the whole point is that they didn't. They hoarded it, as a Keynesian would expect from monetary policy, but not from fiscal policy. Poulson, of course, was most concerned with the fiscal intervention.

**While I'm here, there's something else I don't understand: Why is it that Keynesians smirk at assertions that businesses aren't hiring between of "uncertainty" when their entire underlying model depends on precisely that claim? Partisans on the right surely miss part of the story when they attribute this uncertainty only to Obama's policies -- I agree with Summers when he said that the biggest uncertainty is over the entries on the order books, i.e. aggregate demand --  but the uncertainty that matters is over expected profits. One part of that equation is revenue, the other part is costs including regulatory and tax costs. Decreasing uncertainty over the former (in a positive direction) increases confidence and thus investment, but so does decreasing uncertainty over the latter (in a positive direction). Both sides seem to be right and wrong. Or, rather, incomplete without the other.

PSA

A bunch of smart people (Downes, Fearon, Nye, others) discuss in print whether/why regime change doesn't "work". Perhaps of interest to some readers. I'll just say that regime change "works" almost every time we attempt it, in that we usually succeed in changing whatever regime we want to change. What doesn't "work" is subsequently establishing a liberal democracy that cow-tows to our every wish.* Which seems like another matter, distinct from "regime change" and requiring its own term. But I don't get to make the rules.

*The wish is seldom defined. Our own democracy never fulfills our own every wish, which I believe is a true statement no matter how you identify "our".

Thoughts on an Article I Haven't Read

That would be this one, which tells me in the headline and subtitle that North Carolina "grooms its best students to be good teachers". I strongly suspect that this is not true empirically, and I certainly hope it is not. Teaching requires basic competence of the subject material plus the ability to lesson-plan effectively and communicate well. While this is not an easy job relative to many other tasks, it's not on the same level of difficulty of oh, say, developing new medical procedures, inventing new technologies, or devising and testing new theories of human interaction.* Given that, I'd rather our best students focus on the most difficult tasks and/or those with the highest social benefit, while our capable-but-definitely-not-the-best students focus on getting first graders to color inside the lines or getting eighth graders to dissect a frog without vomiting.**

*The inclusion of the latter is me puffing out my chest, in case you couldn't tell.

**Not sure if I have those activities assigned to the proper class because I skipped 8th grade and never dissected a frog, so I assume that's when that happened.

Sunday Links

-- NYT roundtable on Basel III.

-- Michael Lewis goes to California.

-- Long interview with Daron Acemoglu, on a number of topics.

-- Economist special report on shifting of economic activity from west to east.

-- Opening statement of Firedoglake book salon on Chinn/Frieden's Lost Decades.

-- The attempt to collect and publish in one place accurate data on the graduation and placement rates of poli sci departments. I fully support this, and hope UNC gets on board soon.