Some trade-related news: follow-up

A few days ago I posted a few short notes on several trade-related happenings (here).  There have been some recent developments that are worth pointing out. 

Farm Bill.  I mentioned that, as of last week, Congress was still stuck on a Farm Bill, and there was talk of a so-called “dairy cliff” . . .  The expiration of the existing Farm Bill provisions would have caused the cost of some dairy products to spike in the short term.  There is now agreement on a temporary solution, however.  Provisions of the existing (2008) farm bill will be kept in place as a holdover, while lawmakers negotiate a broader package in the next Congress.

U.S.-Russia relations.  I also noted that on December 14 the U.S. normalized trade relations with Russia by repealing the Jackson–Vanik Amendment, which served as a potential restriction on trade between the countries.  The repeal notwithstanding, the U.S.-Russia relationship took a hit for another reason.  Just as the Amendment was repealed, the U.S. also adopted a new law, the Sergei Magnitsky Rule of Law Accountability Act.  The Magnitsky Law is designed to punish Russian officials suspected of human rights abuses, via visa restrictions and asset freezing.  (The title and impetus for the law were inspired by the arrest/death of an anticorruption lawyer, Sergei Magnitsky, who died in a Russian prison.)  It is widely believed that the Magnitsky Law led to the recently implemented Russian legislation that bans Americans from adopting Russian children (see here).

RIP Peter Kenen

I met him only one time, but he was very kind.  Influential contributions to the economics of monetary union. See reflections on his work here by Eichengreen and Wyplosz and here by Krugman.

This Looks Important: The Inefficient Markets Hypothesis

But I haven't read it yet:

The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World
Roger E.A. Farmer, Carine Nourry, Alain Venditti
NBER Working Paper No. 18647
Issued in December 2012

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a simple stochastic representative agent model by allowing for birth and death and by allowing for heterogeneity in agents' discount factors. We show that these two minor and realistic changes to the timeless Arrow-Debreu paradigm are sufficient to invalidate the implication that competitive financial markets efficiently allocate risk. Our work demonstrates that financial markets, by their very nature, cannot be Pareto efficient, except by chance. Although individuals in our model are rational; markets are not.

 I think Munger gets it wrong when he writes:

An objection to the ability of markets to get the rate of time discount "correct." My question: as compared to what? Compared to legislators with a two year time horizon (okay, six in the Senate, right after an election)? Why don't people make fun of the "efficient governments" hypothesis? The libertarian argument is not that markets are perfect, it's that politicians are even more short-sighted.

Again, having only read the abstract, I don't see this as saying that the actors aren't discounting correctly, but that they are discounting differently. This paper is still making pretty strong assumptions -- complete markets and no transaction costs -- but simply showing that with heterogenous agents financial markets are not Pareto-optimal. This is a big deal! It is also in line with things Steve Randy Waldman has been writing about for awhile (e.g.).

I don't think it implies quite what Munger thinks it implies; inefficient/irrational markets could still be more efficient or more rational than politicians. In fact, I imagine that the model would show that the market with a larger number of actors performs better than it would if it were controlled by a smaller number of actors, e.g. a government. But maybe not. I'll have to read it first. 

Update on L'Affaire Loomis

Via Dan Nexon. While I see Nexon's point that we are dealing with mealy-mouthed university administrators, I must completely disagree with his ("modest") level of satisfaction. This represents no victory at all because this new statement from URI officials, like the first one, completely misses the point. This is not about First Amendment rights. Nobody was saying that Loomis should be thrown into the deepest darkest dungeon never to be heard from again. They were saying that he should be fired or otherwise professionally damaged for an emotional -- and politically motivated -- response to a mass killing.

The relevant standard here is academic freedom, not First Amendment rights. The University of Rhode Island subscribes to the 1940 "Statement of Principles on Academic Freedom and Tenure" issued by the American Association of University Professors. This Statement indicates that Loomis deserves the full support of the University of Rhode Island even if he was speaking under the banner of the University. (Which he always is, implicitly, contra the views of the CT commenters.) Instead of espousing that principle, which is fundamental to the mission of public universities, the University has repudiated it by saying that Loomis deserves no greater protection than those who have written to the University on this matter, whether in solidarity with or opposition to Loomis.

Loomis does not need the University to protect him from the threats of violence he has received; he has the FBI and the Rhode Island police for that. Loomis does not need the University to protect him from those who would suppress his speech; he has the U.S. Constitution for that. Loomis needs the University to protect him from professional damage as the result of a campaign of sabotage in response to his expression of a political nature. The University has failed to do that. Therefore the University has failed.

This new statement from URI is no better than the first. It simultaneously misses the point and refuses to honor its obligations to its faculty. A better statement would have read, in toto:

"The University of Rhode Island does not comment on the statements of individual faculty members, but it steadfastly defends the principles of academic freedom which are an essential component of the University's commitment to 'fostering a collective and individual propensity for inquiry' so that students may 'communicate, understand, and engage productively with people very different from themselves', including those with different beliefs and values."

UPDATE: Dan Nexon further explains his position. I respond in comments.

The New Global Savings Glut and the Politics of Imbalances

Neil Irwin:

But it’s not just the United States and Japan. Name a country with three elements—a stable political system, a credible central bank to call its own, and a free flow of capital across its borders—and it has, right now, extraordinarily low interest rates. That’s true for Canada and Australia (10 year yields of 1.85 percent and 3.36 percent), of Switzerland and Sweden (0.55 percent and 1.6 percent). Britain, certainly (1.94 percent), but even some countries that don’t technically fit our classification because they lack their own central bank (Germany at 1.42 percent and France at 1.99 percent. That would be the same France that The Economist, in a cover story last month, called “the ticking time bomb at the heart of Europe.”).  

So what is going on? Interest rates are, essentially, the relative price of money today versus its value in the future. And investors are saying that they don’t need very much compensation to delay their spending for the future, as long as they can feel secure that they will get their money back and that the money they get back will be worth roughly what they put in. 

To put it a different way, around the world there are all sorts of savers—pension funds, wealthy individuals in emerging nations, governments that want to ensure they have reserves put aside in case there were to be a run on their currency—for whom the goal is not so much to get a big yield on their savings, but rather to ensure that they will get their money back when they need it.

I may have more to say about this over the coming weeks as I'm writing a book chapter related to the topic, but for now let me just mention that this isn't only about the domestic factors that Irwin describes. It is also related to broader developments in the global economy in recent decades. The only development model which has sustained success is export biased: emerging economies export resources and consumer goods to developed countries. Second, the opening up of global trade has increased reliance on comparative advantage, thus benefiting the owners of the abundant factor of production. Third, the decline in capital controls have allowed financial flows to increase markedly. These three factors have led to a world where trade flows constitute 60% of global GDP, international financial balance sheets are 150% of global GDP ($100 trillion), and income inequality has increased markedly.

But it also means that the global economy is fundamentally imbalanced: developing countries must run persistent current account surpluses, while developed countries must run persistent current account deficits. These must be offset by financial transactions: developed countries essentially hand over IOUs to developing countries. And this process must be indefinite; or, rather, they must continue until the whole world has reached roughly equivalent levels of development, until a new political system makes the export-biased development model impossible (restrictions on trade and/or capital movement), or until the imbalances reach a tipping point and a crisis ensues.

The question is what deficit governments should do in this environment. Irwin suggests that they should take advantage of cheap finance to make domestic investments in infrastructure and education. Another option is to try to reduce the probability of a future (domestic) crisis by balancing the books. In the 1990s they largely chose the latter, which ended up leading to crises in the developing world as imbalances unwound. In the 2000s they chose the latter, which ended up leading to crises in the developed world as imbalances fueled asset price bubbles in real estate and sovereign debt.

The story of the 2010s will be how these imbalances are managed.

Some trade-related news

 Don’t forget the Farm Bill -- With all the talk about the fiscal cliff, some big trade-related legislation has taken a back seat.  In particular, this includes the U.S. Farm Bill, which (among other things) provides subsidies and insurance for farmers.   The current provisions are scheduled to expire at the end of 2012, as new versions must be passed every five years.  As of now, no agreement has been reached, causing some concern among farmers (see here).  Potential sources of conflict abound . . . conflicts between two of our favorite snack food providers (see here), and between U.S. farmers and the WTO (see here).  [By the way, there have been rumblings about Farm Bill provisions being included in a fiscal cliff resolution package . . . if one is reached, of course]

Normalized trade relations between U.S. and Russia – See here.  [Some background as to why U.S.-Russia trade relations were not "normal":  The Jackson–Vanik Amendment to the U.S. Trade Act of 1974 restricted trade between the U.S. and a number of nonmarket economies.  Pursuant to the Amendment, most favored nation treatment would be denied to U.S. trade partners that violated certain human rights, e.g., imposed restrictions on emigration.  That said, it is worth noting that the President can (and has often) determined that annual waivers from Jackson-Vanik are appropriate.]

 

EU files submission in WTO Seal Dispute – here.  To recap:  A while back, the EU implemented a regulation restricting the importation of seal products out of concern regarding “the animal welfare aspects of the seal hunt.”  Canada, a major producer of seal products, challenged the regulation as an unlawful restriction on trade, asserting that the EU’s measure was inconsistent with WTO obligations.  Although Canada’s complaint and the EU response raise a host of trade law issues, one interesting point concerns the potential application of GATT article XX.   Article XX(a) is a provision under which a party can argue that a restrictive trade measure is justified on the grounds that it is "necessary to protect public morals."  There is not a ton of jurisprudence on the issue, so a WTO ruling on this would be exciting (to the extent that legal rulings are ever “exciting”).  [Probably more on this later.]

FDI Undeterred: Argentina's Messy Investment Climate

Argentina's investment policies certainly have been in the news recently. In this past Monday's (Dec 17) WTO Dispute Settlement Body's meeting, the US, EU, and Japan requested an establishment of a dispute panel against Argentina. Concurrently, Argentina sought to establish dispute panels against the EU (Spain in particular) and the US. Australia and Turkey lodged a formal complaint that Argentina was trying to use the DSB for inappropriate purposes. (See more here)

For more context, the Kirshner government wrested control of YPL from Spanish energy giant Repsol this past May. In the ensuing fall out, Repsol sued the Argentine government in a U.S. court, President Obama revoked Argentina's preferential trade privileges, and Repsol filed arbitration paperwork at ICSID earlier this month. No one is too confident that Repsol is going to recoup any of its $10 billion investment, especially since Argentina probably hasn't paid out a single arbitorial award. Spain is also threatening to sanction Argentina and Repsol has publically stated it will seek damages from any corporation that subsequently enters production and exploration agreements with YPL.

Standard political theories of foreign direct investment rest on a central insight from obsolescing bargaining (OBM) - FDI is limited by the political risk that firms face when they sink investment in a foreign jurisdiction, thus becoming "captive" to a potentially predatory state that faces incentives to promise contract sanctity ex ante and then renege on these promises ex post. From this perspective, no multinational should want to invest in Argentina - the risk of expropriation is just too high. Tools designed to mitigate the problems associated with time inconsistency of preferences just are not working in the Argentinian case (i.e. - Argentina is not compensating firms for contract breach, despite rulings against it). Yet, my weekly update from the Economist Intelligence Unit includes a discussion about how large oil multinationals are rushing to invest in Patagonia's shale deposits. Multiple oil giants are in contract negotiations with the Argentine government to undertake production sharing agreements with the newly nationalized YPL. And, they are doing this despite Repsol's threat to go after these private corporations for damages associated with nationalization.

So, what is the standard OBM missing? Of course, firms have to care about many things besides political risk. Economic factors are the primary drivers of investment decisions; political considerations are largely secondary. In this context, big countries with large domestic markets and with rich endowments of lucrative natural resources typically can get away with a lot of things small countries without energy reserves cannot. This economic/geographic argument underpins Rachel Wellhausen's recent post on the permissive environment for Argentina's nationalistic investment policies. And, understanding the economic factors that provide governments' more bargaining power vis-a-vie investors certainly explains much of the deviation away from what OBM-based theories predict.

But, I think there is something else we need to consider - how firm and investment characteristics modify OBM dynamics. Some of my current research considers how firms are heterogenous in both the amount of political risk they will accept and how they define political risk. What do I mean by this? First, firm characteristics matter for how risk acceptant they will be. Some of the most interesting current work on FDI focuses on explaining these systematic variations. Daniel Blake argues multinationals view their subsidiaries as a portfolio of potential revenue streams, and within this holistic management conception, MNEs might be willing to sustain losses in one location as part of a larger strategy of gaining market share. Ben Graham argues that firms can learn how to manage political risk, and that some firms are uniquely positioned to manage such risks and therefore may specialize in locating in high risk countries. Together, both of these arguments fit nicely with EIU’s assertion that large oil companies are willing to take large bets in Argentina’s shale fields despite threats of nationalization. Indeed, such threats may benefit large energy multinationals because small firms are less able to manage these risks, depressing acquisition prices. This is an important point because it indicates that certain multinational firms will actually benefit from nationalistic policies!

While a bit further afield from the Argentine case, I also argue firms vary in how exposed they are to the threat of government interference. Firms that enter countries through privatization of utilities and infrastructure as well as firms that engage in resource extraction on government land are more vulnerable to government interference than are manufacturing firms. Right now, I'm working on a project that shows that bilateral investment treaties (treaties specifically designed to overcome OBM problems) have differential effects on different modes of entry for FDI. The point here is that BITs may help attract FDI for privatization much more than FDI for private sector M&As or greenfield investment. Since there is some evidence that mode of entry matters for contributions to economic growth, this insight has important investment and development policy implications.

The Loomis Affair

I speak for no one else on this blog, much less the Department of Political Science or UNC, when I say that I support this statement in support of Erik Loomis.*

I support Loomis mostly because I have a sense of humor, but also because I believe that the Michelle Malkins of the world should not be able to dictate to anyone what is in good taste, and I believe a flagship public University should not acquiesce to blatantly partisan mock outrage over a trivial non-issue.

I disagree with Loomis' ideas, rhetoric, and methods much more often than I agree with them. I cannot ever remember a time that I've been enriched by reading him. But that's well besides the point. If losing one's job was the penalty for every improvised (clearly exaggerated) jibe then not a single one of Loomis' accusers would be employed.

I signed the CT statement. I hope others will as well.

*I do hope everyone associated with this blog and the broader UNC community agrees with me, and expect that they do/will, but I cannot speak for them.

Diversity of What, Emmanuel?

I see Emmanuel has posted about what he calls “White Political Economy”: “I'm sorry to say that mainstream IPE--like much social science, to be fair--suffers from the phenomenon of Lots of Monolingual White Guys at American and British Universities Talking to Each Other and Calling It "International." Emmanuel continues, “To be truly worthy of the term "international," I believe you must have certain things like a diversity of backgrounds, ethnicities, experiences, genders, outlooks and perspectives.”

I am of two minds here. I agree that contemporary political economy is dominated by guys at American universities (and maybe British too) talking to and writing for each other. I also agree (and indeed argue on record) that the mainstream conversation is conducted within excessively and dangerously narrow theoretical and empirical channels. And I agree that those who do not embrace this perspective—who don’t (as Emmanuel puts it), “suck up to” the big names—tend to be outsiders. Finally, I agree with Emmanuel’s implicit statement that a more diverse political economy would be a better political economy.

However, I don’t agree that the solution lies in a diversification of the ethno-linguistic and gender characteristics of the practitioners. Sure, I value the diversification of the profession along ethnic and gender lines. No, I disagree with Emmanuel because the solution he proposes is based on the very analytic structure he deplores--individualism. The recruitment of a more diverse population into graduate school will not solve the problem because systemic forces dominate individual attributes. As Emmanuel points out, one doesn’t succeed in academics by being different; one succeeds by being only a tiny bit different from everyone else. And so we recruit students into graduate school and proceed to make them think like the typical political economist. We call this socialization; and we are quite self conscious about it. And because the field as it is currently structured is dominated by a single point of view, we train students in a single point of view, the perspective that Emmanuel criticizes as "economistic mid-level theory".

If we want a more diverse IPE, as Emmanuel and I do, then we must offer a compelling alternative to this economistic mid-level theory. If we are not to train our students to think in terms of “economistic mid-level theory,” then how should we train them to think? If we are not to train our students to employ the generalized linear model, then what empirical techniques should we teach them to use? In short, the lack of diversity in contemporary IPE stems not from the failure to recruit an ethnically diverse and gender balanced population of graduate students. No, the absence of diversity stems from the failure of those who disagree with the contemporary mainstream to offer another path.

There Is No Technocracy: Bank of Japan Edition

From the Telegraph:

"Its very rare for monetary policy to be the focus of an election. We campaigned on the need to beat deflation, and our argument has won strong support. I hope the Bank of Japan accepts the results and takes an appropriate decision," he said.

The menace behind his words did not have to be spelled out. He has already threatened to change the Bank of Japan’s governing law if it refuses to comply.

Political economists have not done a very good job of analyzing the political role of central banks and other "technocratic" institutions. We've spent most of our time looking for central bank independence how that conditions inflation outcomes, with a bias in favor of low inflation. But central bankers respond to the political environment in which they operate, have preferences of their own, and should therefore be treated as political actors.

Via Scott Sumner, who also notes:

In 2001 Argentine fans of the “currency board” learned that their policy regime was not as impregnable as they’d assumed. And in 1933 American supporters of the gold standard found that even the world’s largest monetary gold stock couldn’t prevent a devaluation under duress. The reason was the same in both cases—voters get the last word.  

On the 1930s see Beth Simmons, who persuasively argues that differences in political regimes conditioned choice of policies during the Depression. On Argentina I like Paul Blustein's account, which is journalism (not social science) but there's more real social science in it than many academic books.