Midweek Links

1. The dish on Dubai, and how Citi became exposed after TARP. Plus, possible repercussions for the U.S.

2. Japan has very big problems.

3. Foreign Policy's list of Top 100 Global Thinkers. I didn't make the cut, but BdM did! (#60)

4. Norms of sovereignty are changing, and Serbia isn't happy about it.

5. China's financial system is all messed up, and it will likely get much worse before it gets better.

6. Eric Hobsbawm on Charles Tilly:

Eric Hobsbawm on Charles Tilly from Social Science Research Council on Vimeo.

Road Tripping: Obama in Afghanistan (or, Why Obama Would Fail POLI 150)

This morning I give President Obama an F in POLI 150 ("Intro to International Politics" at UNC) for the flawed analysis in his administration's Afghanistan policy.

The core policy is: deploy 30,000 troops now and bring them home in 18 months. Obama defends the approach against reasonable criticism in the following way:

"When I asked Obama if the Taliban wouldn't simply wait us out, he was dismissive: "This is an argument that I don't give a lot of credence to, because if you follow the logic of this argument, then you would never leave. Right? Essentially you'd be signing on to have Afghanistan as a protectorate of the United States indefinitely."

I fail Obama for this response. As I would explain to the President were he to turn up in my office to ask why he failed, two really large and quite different flaws are at fault.

First, Obama commits an error of reasoning. One cannot discount an argument because one dislikes its implication. One can challenge an argument's logical coherence. One can assert that a logically coherent argument has little empirical support. One cannot do what Obama does here which is to give this argument little credence because he doesn't want to face the possibility that success in Afghanistan requires an indefinite commitment. Disliking the implications of heliocentrism doesn't make the theory any less true.

Second, Obama commits an error of historical analysis. American foreign policy since 1919 is (arguably) defined by precisely the implication Obama gives "little credence." The failure to recognize the need for a permanent American presence in Europe after WWI created the conditions that made WWII possible. Need I point out that the US still has a military presence in Germany? The Truman administration's failure to define its permanent interest in South Korea may have encouraged North Korea to believe it could invade with impunity. Need I point out that the US still has troops in South Korea? More generally, the lesson of 20th century US foreign policy is that we use indefinite commitments to defend important interests.

In short, Obama fails because his analysis rests on wishful thinking rather than logic and history. I wish the impact of Obama's flawed analysis was limited to a bad grade. Unfortunately, his flawed analysis produces an incoherent policy. If Afghanistan is important enough to American security to merit 30,000 additional troops today, then the U.S. ought to be committed to its defense indefinitely. If Afghanistan is not important enough to merit an indefinite commitment, there is no reason to deploy additional troops now. I see no logical basis for Obama's policy. Why send 30,000 additional people to defend a country today that he admits he is unwilling to defend in the same way two years from now?

North Korea Redenominates Currency

International news agencies and informants inside of North Korea are reporting that North Korea issued an order yesterday morning to redenominate the won, North Korea's currency. The Central Bank of the Democratic People's Republic of Korea (DPRK) has slashed two zeroes off of its currency and has placed limits on how much of the old currency can be converted into new bank notes.

Choi Soo-young, an expert on the North Korean economy at the government-financed Korea Institute for National Unification in Seoul, said: “The primary aim is to control inflation. But the North also wants to stop the [black and unofficial] market[s] from prospering too fast.”

North Korea's black market in both currency conversion and goods have flourished over the last decade years as the government turned a blind eye to their presence. But, the government has begun shutting down unofficial food and goods markets across the country as it tries to reassert its control over the economy. The DPRK also reinstituted its rationing policy in 2005. Under this rationing policy, the government runs stores where North Koreans go to purchase their necessities at low, state-subsidized prices. One reason the government has sought to reassert its power over the domestic food and goods markets,

is that the mix of state and private activity has fueled inflation, partly by drawing goods that would otherwise be sold at low, state-subsidized prices into more lucrative private markets.

The action is being aimed at negating profits that have been made in the black market over this period and decrease the growing gap between rich and poor in the country, hence the limit on how much of the old currency can be converted. By capping the amount that can be converted, the government essentially wipes out all of the wealth above that cap. One way to get around this cap would be to exchange the old currency into foreign exchange, but this option is very difficult since your typical North Korean doesn't have access to forex markets that can be used to convert the currency. Those that were able to convert the old currency into foreign exchange prior to the announcement lucked out.

My guess is that this action will fuel a new black market in old currency, with prices being posted at these unofficial markets in both new and old won, although the old won being accepted only at a large premium. Over time, the excess old currency would make its way through the system and end up being converted into new currency by those who have yet to reach their ceiling. One possible way this can happen is by merchants in these unofficial markets identifying those that haven't reached their ceiling and paying them off to convert the currency for them. This may fuel a side market in currency converters and if the market works like it sounds like it would in my head, it would end up being a boon for really low income North Koreans.

One of the long-term effects of this redenomination will be an increase in demand for foreign exchange from North Koreans. The people recognize that their currency's value has declined rather drastically over time and have now experienced what their government does when it chooses to redenominate. Dr. Layna Mosley and I are currently working on a paper (should be ready sometime in the spring) on the reasons why and at what point in time developing countries choose to redenominate their currencies. One of the initial findings is that countries that redenominate once have a much higher rate of redenominating again. Based on this evidence, my second guess is that this redenomination will fuel a new black market in foreign exchange and people will try to hold as much of their income and savings in yen, yuan or dollars in order to insulate themselves from any future redenomination. An interesting extension of this argument is that these unofficial markets may essentially dollarize or "yenanize" as a result of citizens holding more foreign exchange. This may take a long time though, since, as noted above, North Korea isn't the most free society in the world and getting access to foreign exchange in order to feed demand will take time.

Noting that the rise of the black market in North Korea is a reason for the redenomination is important, but it's not the main reason for the redenomination. Choi Soo-Young, in her quote above, hits the nail right on the head. Persistent inflation is the primary reason for the redenomination. An important finding of the paper that Dr. Mosley and I are preparing is that inflation, specifically persistent hyperinflation, is the primary indicator that explains why and when countries choose to redenominate. The rise of the black market is one contributing factor to rising inflation in this case, but it is inflation itself that has historically provided the impetus for redenomination across the developing world, and it is no different in this case.

Paging Tom Colburn

Ezra Klein:

Politico isn't afraid of being known as the most sensationalistic, horse-race-oriented, controversy-focused news outlet. That's their business model, or at least the business model of the front page (the stuff inside Politico is a lot better, presumably because it's aimed at lobbyists and Hill staffers). What Politico -- and other campaign-obsessed outlets -- fear are the narratives that expose much of their work as simple distractions. What they fear, I think, is political science.

The reasons why are given at the link. At first this made me feel good, but then I realized that if Politico's biggest fear is political science then they must sleep very well indeed.

(ht: Monkey Cage)

True Words

What the matrix says is that if you look at today's American politics, you have to either support central planning or support a political party that hates intellectuals. If you are an intellectual who believes in decentralized markets, it's not an appealing choice.

That is Arnold Kling, describing why his two new books are important. By "central planning" Kling does not mean the Politburo (at least I don't think that's what he means), but rather a too-strong faith in the ability of technocrats.

Over Thanksgiving, I had a conversation on this topic with a family member who has also worked for the Republican Party. I described to him why the McCain/Palin ticket was so abhorrent to me that I ended up voting for Obama/Biden despite much trepidation. What I said was that while I disagreed with Obama on a great many issues, and hoped he was lying about others, at least he was surrounding himself with very smart people who could give him good advice. People like Goolsbee, Furman, Cutler, the Romers, Summers, Thaler, Blinder, Galbraith, Tyson, and Volcker. I don't agree with all of these people on everything, but I do think that they approach economic analysis honestly and with real care. If Obama took these people seriously, I thought, the economy would be in pretty good hands.

McCain, on the other hand, surrounded himself with ideologues with little or no formal training in economics (and was forthright about his own lack of understanding). People like Gramm, Hassett, Fiorina, and Luskin. The only actual economists that McCain consulted were Holtz-Eaken and Laffer. The former embarrassed himself in the campaign while the latter's views have been routinely distorted by McCain and the rest of the GOP. By the end of the campaign, McCain was mostly relying on Joe the freaking Plumber for his supply of economic policy platitudes.

In other words, to me the choice was between sensible, smart people who had some views that were somewhat different from mine and dangerous ideologues who had proven themselves wrong about nearly everything over the past 10-20 years. My vote went to the group I thought would be better technocrats, and nothing McCain or Palin have said or done since then has made me regret it, despite the fact that I have not been especially happy with all of Obama's decisions.

That said, I'm not actually sure that Kling has his matrix exactly right. Despite a lot of talk about the virtues of decentralized markets, the recent record of the GOP shows a strong pattern of susceptibility to corporate and other lobbyists. This is certainly true of Palin (Kling's example of an anti-intellectual supporter of decentralized markets), and not how a true believer in the virtues of decentralized markets would legislate. To be sure, Democrats are also successfully lobbied by interest groups. Since the political scientist in me expects lobbying to always be somewhat successful no matter which party is in control, the choice (in this case) was simply between the intellectuals and the anti-intellectuals, and that's not much of a choice at all.

Until the GOP can fill in the bottom-right blank in Kling's matrix, they'll have a difficult time winning votes from people like me, and I suspect there are a lot of us.

(ht: MR)

Who Adjusts?

Now that things have slowed down a bit, regular posting should resume. There's been a lot going on in the past few weeks, but I'm going to let most of it pass since I'm late to the party.

In a recent e-mail, Dr. Oatley mentioned that he thought that my regular postings on financial regulation were somewhat missing the point: the real blame for the economic crisis lies with the large external imbalances that have been building over the past decade. Even though I think that regulatory regimes are interesting and important, I think Dr. Oatley is exactly right to emphasize macroeconomic factors. So I was interested to read ECB Executive Board member Lorenzo Bini Smaghi's recent take on the same topic:

A strengthening of the IMF was agreed after the Asian crisis in the 1990’s, and the G-7 summit in Cologne in 1999 mandated the Fund to play a strong surveillance role to ensure greater transparency and encourage early adjustment by countries with unsustainable balance-of-payments positions.

But, over the last decade, the expectations raised by this mandate have not been met. Some emerging economies did not let their currencies float but, instead, continued to peg them at undervalued exchange rates in order to promote their exports and build up reserves as a form of insurance in case of crisis.

Moreover, the IMF has not succeeded in convincing countries to pursue macroeconomic policies consistent with sustainable current-account positions. Nor have advanced economies, particularly the United States, taken IMF advice fully into consideration. The accumulation of large surpluses, especially in emerging Asian economies and oil-exporting countries, enabled the US to finance its current-account deficit. It also lowered long-term interest rates in the US and made monetary conditions there more expansionary.

In the context of this testy exchange, "some emerging economies" can only mean China. And I suppose it's not surprising that an ECB official would deflect blame from EU countries despite the fact that Germany, for example, also ran large current account surpluses in the run-up to the crisis.

But is it right to criticize the IMF for not succeeding "in convincing countries to pursue macroeconomic policies consistent with sustainable current-account positions"? Not really. Until a crisis hits, the IMF is basically powerless. It can monitor behaviors and help boost transparency, but it has little formal authority to coerce states into allowing their currencies to float, say. How exactly is the IMF supposed to "convince" states to stop acting in their own self-interest? Smaghi doesn't provide an answer, but doesn't see much help coming from multilateralism, arguing that emerging economies that want a larger role in the IMF mostly want to weaken conditionality while increasing access to cheap credit.

Gee, it almost sounds like the global economy needs maintenance from a strong state. But Smaghi never proposes that Europe step into the breach. Actually, he never mentions Europe, or even a single European country, at all. Instead, the U.S. and China are somehow expected to voluntarily cede authority to the IMF while eschewing domestic political concerns to bring their current and capital accounts into balance. Well, color me skeptical.

Interestingly enough, the quickest, easiest feasible way to moderate imbalances is a higher peg for the yuan against the dollar. But this isn't necessarily something that Europe would like to see. So if the U.S. and China act more prudently, it may come at the expense of the Eurozone. What would Smaghi say then?

The World According to Americans

From Barry Ritholtz, via The Faculty Lounge:

Happy Thanksgiving

A few years back, after being saved from death by a medical procedure, Daniel Dennett gave thanks for goodness:

Yes, I did have an epiphany. I saw with greater clarity than ever before in my life that when I say "Thank goodness!" this is not merely a euphemism for "Thank God!" (We atheists don't believe that there is any God to thank.) I really do mean thank goodness! There is a lot of goodness in this world, and more goodness every day, and this fantastic human-made fabric of excellence is genuinely responsible for the fact that I am alive today. It is a worthy recipient of the gratitude I feel today, and I want to celebrate that fact here and now.

To whom, then, do I owe a debt of gratitude? To the cardiologist who has kept me alive and ticking for years, and who swiftly and confidently rejected the original diagnosis of nothing worse than pneumonia. To the surgeons, neurologists, anesthesiologists, and the perfusionist, who kept my systems going for many hours under daunting circumstances. To the dozen or so physician assistants, and to nurses and physical therapists and x-ray technicians and a small army of phlebotomists so deft that you hardly know they are drawing your blood, and the people who brought the meals, kept my room clean, did the mountains of laundry generated by such a messy case, wheel-chaired me to x-ray, and so forth. These people came from Uganda, Kenya, Liberia, Haiti, the Philippines, Croatia, Russia, China, Korea, India—and the United States, of course—and I have never seen more impressive mutual respect, as they helped each other out and checked each other's work. But for all their teamwork, this local gang could not have done their jobs without the huge background of contributions from others. I remember with gratitude my late friend and Tufts colleague, physicist Allan Cormack, who shared the Nobel Prize for his invention of the c-t scanner. Allan—you have posthumously saved yet another life, but who's counting? The world is better for the work you did. Thank goodness. Then there is the whole system of medicine, both the science and the technology, without which the best-intentioned efforts of individuals would be roughly useless. So I am grateful to the editorial boards and referees, past and present, of Science, Nature, Journal of the American Medical Association, Lancet, and all the other institutions of science and medicine that keep churning out improvements, detecting and correcting flaws.

ht to Steven Landsburg, whose excellent new blog in support of his new book The Big Questions is quickly becoming one of my favorites, who adds:

Indeed. And because the supply of thankfulness is not fixed, it will not depreciate the value of Professor Dennett’s sentiment to add a word of thanks not just for goodness but for greed—the greed that inspired generations of inventors and investors, laborers and capitalists, doctors and nurses, technicians and scientists to envision and perfect such a thing as an artificial aorta, to educate themselves in the healing professions, and to show up for work every day. For the most part, they did it to make a buck.

There is more at both links, including a call to arms from Landsburg. But the central point is important, and worth stretching: there is a lot of goodness in the world, and quite a lot of it is motivated by things less noble than altruism: it isn't charity that brought people from all over the world together to save Dennett's life, and the lives of millions of others. So today I give thanks for all the networks and spontaneous orders that allow mutually beneficial relationships to develop between people(s), and I give thanks for institutions that facilitate Pareto-improving interactions. It truly is marvelous, if you stop to think about it.

Tips for Conveying How Busy and Important you are to Your Colleagues

Feminist Law Profs Blog and The Faculty Lounge put up two great and funny posts on ways to look productive to your colleagues. It was written for law professors but most can easily be applied to our lives as social scientists. The first list, from Fem Law Profs, gives specific tips on how to "act like your being productive":

What good is your inner, clandestine productivity if your dean, colleagues, students and even you yourself don’t really know the extent of just how unbelievably productive, busy, stressed, in a rush, and important you really are? Here are some tips on how to communicate this to others at your law school.

Tip #1: Walk fast when on campus and explain to colleagues that you cannot go out to lunch because you are busy responding to law review editors’ comments on your manuscript.

Tip #2: Remind your colleagues how many students you teach, how many exams you have to grade, how frightfully many hours it will take you to grade them, and how grading exams really cuts down the time you can be available for scholarship, service activities, friends or family.

Tip #3: Send an e-mail informing your dean or colleagues that you have been invited to speak at the local Rotary Club or the neighboring town’s PTA meeting.

Tip #4: Bring massive amounts of work to talks by outsiders and student events, and make sure to visibly mark on documents — as if editing your own paper or making comments on student work — in full sight of everyone else in the room.

Tip #5: Get ticked off and behave badly at faculty meetings.

Tip #6: Do not timely answer e-mails from anyone who may be relying on you to show up to an event, help review applications or schedule a meeting, then get huffy when the meeting takes place before you respond to the e-mail.

Tip #7: Make sure you tell students and administrators, “Now is not a good time.”

Tip #8: Pretend that you don’t know how to use the copy machine or create a pdf.

Tip #9: Refer to anything you write that is longer than 500 words as an “article.

Tip #10: Check how many times your and your colleagues’ articles have been downloaded on SSRN.

Tip #11: Regularly log on to the Westlaw JLR database and search “FIRST /2 LAST % AU(FIRST /2 LAST)” using your own name.

Tip #12: Keep your cell phone on during class and all meetings, and let it ring several times before stepping out to answer it.

UNC Professor of Law Kim Krawiec writing over at the Faculty Lounge adds some more to the list:

1. Make the support staff mark your exams and papers. Why should an international superstar waste time on menial activities like grading?

2. Even very busy professors should take the time to demonstrate their importance. Email your faculty list serve with regular updates about your standings in SSRN’s Top Authors ranking.

3. Truly busy people have little time to spare for even relatively efficient communications like list serves. Save time: blog about how much more productive you are than your colleagues!

4. If you burp, sneeze, or say something important to the local media (like “fraud is bad”), make sure that your school’s website reports on each instance, thwarting attempts to highlight colleagues’ scholarly accomplishments.

5. Don’t use your own office for media tapings. Instead, demand the use of scarce classroom, library, or other common spaces. In fact, insist on the dean’s suite.

6. Busy people must multitask to get everything done. When on a symposium or conference panel, text in full view of audience members and fellow panelists. If you receive an amusing communication, laugh out loud while others are presenting.

7. Another panel tip: demand to present first and then leave as soon as you speak without waiting to hear your co-panelists. Alternatively, demand to go last, then show up late, just before your start time. One instance may not be enough to demonstrate your busyness. Make it a hard and fast rule.

8. Time, page, and other limits are for less important people. When giving a faculty workshop, send a paper that is at least 100 single-spaced pages, and spend the entire hour presenting it. Why leave time for questions? Your paper’s already perfect.

9. Treat attempts to schedule committee meetings as an opportunity to demonstrate your many contributions to the institution. When prompted by the chair for a list of available meeting times, do the opposite: list every event on your calendar.

10. Don’t try to remember the names of students, staff, or untenured faculty. You’re too busy.

The Perils of Debt

Very interesting column in the New Yorker by UNC-Chapel Hill graduate James Surowiecki on the American tax code and the incentives built into the tax code for individuals and businesses to take on increasing amounts of debt. He runs a blog over at the New Yorker called "The Balance Sheet."Here is an excerpt from the column:

The government doesn’t make people go into debt, of course. It just nudges them in that direction. Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. This gives the system what economists call a “debt bias.” It encourages people to make smaller down payments and to borrow more money than they otherwise would, and to tie up more of their wealth in housing than in other investments. Likewise, the system skews the decisions that companies make about how to fund themselves. Companies can raise money by reinvesting profits, raising equity (selling shares), or borrowing. But only when they borrow do they get the benefit of a “tax shield.” Jason Furman, of the National Economic Council, has estimated that tax breaks make corporate debt as much as forty-two per cent cheaper than corporate equity. So it’s not surprising that many companies prefer to pile on the leverage.

There are a couple of peculiar things about these tax breaks—which have been around as long as the federal income tax. The first is that they’re unnecessary. Few people, after all, can save enough to buy a home with cash, so home buyers naturally gravitate toward mortgages. And businesses like debt because it offers them tremendous leverage, making it possible to put down a little money and potentially reap a huge gain. Even in the absence of the deductions, then, there would be plenty of borrowing. The second thing about these breaks is that their social benefits are pretty much nonexistent. Advocates of the mortgage-interest deduction, for instance, claim that it increases homeownership rates. But it doesn’t: in countries where mortgage deductions have been eliminated, homeownership rates haven’t dropped. Instead, the deduction simply inflates house prices.