Wednesday, September 30, 2009

Gender Dynamics of Modern Day Chess

. Wednesday, September 30, 2009

Probably because I am a huge dork, I was absolutely fascinated by Charli Carpenter's blog post today about the gender dynamics of modern day chess and its historical roots over at the Duck of Minerva. Charli's son asks, "In Chess, why is the Queen more powerful than the King?" Great question.

Charli writes:
My son asked me this very rich question during a chess game about a week ago. Indeed, the distribution of power among the royalty on the chess board is the reverse of the gendered logic documented by feminist theorists of the state.

In chess, the queen has mobility (the crucial barometer of power in the game) but less value, as the game can continue without her; the hobbled king is relatively powerless, but is the most valuable piece without whom the game ceases. In actual politics, the situation is reversed: women's relative lack of access to political and military power and even social, economic and physical mobility is sometimes justified and at any rate partly explained through their greater perceived value compared to men for reproductive and symbolic purposes.

Pleased though I was with my son's ability to recognize this contradiction, it took a week of digging to actually find an answer. Turns out Marilyn Yalom has written a brilliant little book about this very this paradox and how it came to be: The Birth of the Chess Queen. In her introduction, she asks:
"How did [the chess queen]come to dominate the chessboard when, in real life, women are almost alway sin a position of secondary power? What is her relationship to the other chessmen? What can she tell us about the civilization that created her?"
Reading on, one learns three fascinating parts of the answer.
First, the chess board once lacked a queen altogether: in India, Persia and the Arab crescent, early chess included only male figures, the closest thing to the queen being the "vizier." Yalom argues the appearance of the queen on the board coincided with the Arab invasion of Europe and the Christianization of the game as it took root in lands dominated by the idea of a woman as help-meet to a Christian king.

But second, the early queen was far from the icon of power she is today. Indeed, according to tenth century chess rules, the queen is second only to pawns in her abject powerlessness on the board - able to move only one step diagonally in any direction (less power than today's king). While my son and I have had much fun attempting to play by tenth century rules (which include the knight's final step moving on the diagonal), the question remains: how did the queen become so powerful? Yalom relates this to the importance of a series of strong European queens during the ensuring centuries.

So the queen was born of the gender politics associated with the clash between Christianity and Eastern cultures; and gained power in concert with traditions of queenly rule in Europe. But this doesn't explain the other side of the coin: why the chess king is so vulnerable relative to his counterpart - so (one might say) feminized? Queens may have had greater power in Europe than in other parts of the world, and chess may have been a site for using gender as a cultural marker for civilizational identity, but queens hardly displaced their husbands and fathers as the loci of political authority. Perhaps the chess king's vulnerability reflects the perception of many men surrounded by strong females that women actually hold the power, even if it's not wielded through the sword.

Or maybe chess has simply not caught up (yet) with historical shifts in gender relations in the family and political life. Imagine a set of chess rules where the king and queen function as partners - equally powerful and equally valued - each dependent on the other for protection. The goal of each army would be to defeat both; either king or queen could fight and be "taken," but once one partner is lost the other would revert to the vulnerability of the contemporary king, as it is the strength of the union from which their power is derived.

My son and I will shortly be beta-testing this chess system and invite faithful Duck readers to join in our little experiment and leave feedback in comments.

Tuesday, September 29, 2009

Liberté, égalité, fraternité

. Tuesday, September 29, 2009

An interesting thesis from Arash Abizadeh at McGill University. Here's the abstract:

Critics of state sovereignty have typically challenged the state’s right to close its borders to foreigners by appeal to the liberal egalitarian discourse of human rights. According to the liberty argument, freedom of movement is a basic human right; according to the equality or justice argument, open borders are necessary to reduce global poverty and inequality, both matters of global justice. I argue that human rights considerations do indeed mandate borders considerably more open than is the norm today but that, no matter how radical in its critique of state sovereignty, human rights discourse fails to address a crucial feature of this ideology. It is not enough to engage in a substantive moral argument about what the state’s moral duties are. One must also address the procedural political question of who has the legitimate authority to decide what rights and duties to act on in cases of disagreement. In addition to human rights discourse, I argue, border activists must also draw on the challenge posed to the doctrine of state sovereignty by the democratic theory of popular sovereignty. According to democratic theory, the people subject to the state’s coercive exercise of political power, and not the state itself, is ultimately the sovereign arbiter of political questions. And because foreigners are subject to the state’s border laws, democratic theory requires granting them a participatory say in setting those laws.

Via Wilkinson, who adds:

I notice some of my interlocutors are strongly attracted to the idea that the democratic preferences of a state’s voting citizenry is decisive. I’d probably make the argument in a somewhat different way, but I suspect that Abizadeh is right that the standard liberal-democratic story about the conditions for the legitimate exercise of state coercion requires that foreigners be allowed to weigh in on policies that subject them to state force. I’m far from sure what I think about this as a practical matter, but I think he’s on to something important. I suspect that if he’s right, many border-sealers would be happy enough to reject the standard liberal-democratic story and retreat to a “We get to make these rules however we like because it’s our club, damn it!” sort of position. But that’s hard to recognize as much more than a reflex in defense of tribal privilege.

The beginnings of a new norm? I doubt it. But it's an interesting thought experiment, especially for those of us who think that the concept of state sovereignty is more valuable as a pragmatic principle than a moral principle.

First Day of Class in Tehran


Students literally risk their lives by protesting on their way to campus:

Via Jon Western, who provides this translation of the chants:

We are Neda [Agha Soltan], we are Sohrab [Erabi], we are all one voice! [...] Imprisoned students must be freed! The coup government must resign! Oh Hossein [the 3rd Shiite Imam and a most revered figure in Iran], Mir Hossein [Mousavi]! If Karroubi is arrested, Iran will explode!

Protocols of the Elders of Xi'an


Noam Scheiber's recent discussion of Sino-American relations has many interesting bits, and I recommend the whole thing, but this part caught my eye:

To appreciate the complexity of the challenge China poses, it's worth considering one of the country's best-selling books in recent years: a paranoid (and vaguely anti-Semitic) polemic called Currency Wars, written by a dubiously credentialed man named Song Hongbing. Song, who briefly worked a finance job in the United States, alleges that the Western banking establishment hatched the modern financial system in an elaborate plot to dominate the world. Europe fell first, then America. (JFK was assassinated when he tried to resist.) More recently, Japan's lost decade and the Asian financial crisis of the mid-1990s served as warm-up acts for the coming assault on China. Predictably, the Rothschilds occupy the center of the narrative.

I mean, seriously. Everyone knows that JFK was killed by the mafia because he left Marilyn Monroe high-and-dry.

BdM Talks Iran on the Daily Show


We've linked a couple of times to pieces written by or about Bruce Bueno de Mesquita, an NYU Professor of Politics and senior fellow at the Hoover Institution. Last night, BdM took his formal modeling and predictions to the Daily Show and sat down with Jon Stewart to talk about Iran and using mathematical equations to predict the future:

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Bruce Bueno de Mesquita
Daily Show
Full Episodes
Political HumorHealthcare Protests

Update: BdM's book is at #83 on the Amazon sales list and climbing. Nice little Daily Show bump.

Stand-up Economist


The Stand-up Economist, Dr. Yoram Bauman, did stand-up at the 2009 meetings of the American Economic Association. This man is hilarious and the video is very entertaining. I wonder what would happen if I tried to become the "Stand-up Political Scientist." I'd probably be juggling 6-8 part-time jobs like Bauman and not taken seriously by academic departments. Scratch that idea.

(ht: Mankiw)

Monday, September 28, 2009

Paging Dan Drezner

. Monday, September 28, 2009

Achtung. I believe it is your duty as a premier Salma Hayek international politics blogger who first made his academic bones writing about sanctions to blog this. You're not going to let these folks steal all your thunder, are you? Surely a policy debate could use the expertise of an academic expert, right? Right? You could sell some books, the world could gain some knowledge, everybody wins.

Then again, I could just walk down the hall and ask this guy what he thought.

UPDATE: Maybe what I want is somewhere in here, but I'm busy these days so who knows when I'll get to watch it.

UPDATE 2: Success.

Should Zelaya Have Returned to Honduras?


Over at Two Weeks Notice, Greg Weeks has a thoughtful and interesting post on Mel Zelaya's return to Honduras. Zelaya has been hanging out at the Brazilian embassy for a couple of weeks, fomenting dissent and chaos according to government sources, being "irresponsible and foolish" according to the US Ambassador to the OAS and being tortured by Israeli mercenaries according to himself.

The U.S. Ambassador to the OAS has criticized Mel Zelaya for returning to Honduras before an agreement was reached:

"The return of Zelaya absent an agreement is irresponsible and foolish ... He should cease and desist from making wild allegations and from acting as though he were starring in an old movie," Anselm said.

On the latter part, well, it doesn't help anyone to start talking about how Israeli mercenaries are trying to torture you. Even the Brazilian government told him to stop with that.

But here's the deal. Given the stalemate, odds were high that no agreement would have been reached before the November elections. The economy was/is hurting, but the coup government very clearly believed it could wait it out. The idea that negotiations would even occur seems absurd, since Micheletti said constantly that he would not negotiate. He gambled--reasonably--that when push came to shove the international community would eventually recognize the new government and go about its business. Panama had already indicated it would go that route.

There are, of course, many high-level private discussions going on, so maybe there are facts we don't know about. However, I wouldn't mind hearing an argument for how a negotiation could have successfully proceeded.

So you can call his return a lot of things, but foolish isn't one of them. Not if his goal is to return to the presidency. It was most definitely risky, but it is highlighting the illegitimacy of the coup government. That Micheletti is responding with such rampant disregard for the constitution or human life is tragic.

At least the U.S. did call the suspension of the constitution "deplorable" but I have yet to see whether the administration goes beyond that.
My bet is that the Micheletti "government" holds on until the Presidential election that is scheduled to be held in 62 days. I don't think any agreement will be made that would allow Zelaya to return to power and Micheletti surely doesn't want to negotiate with the OAS, the US or anyone else for that matter.

On Keynes, Lucas, and Rationality


Brad DeLong slaps Robert Lucas across the face. Hard.

Lucas seems to miss the entire big point. Black-Scholes tells you how to do things only if the trades of the non-von Neumann-Morgenstern agents in the economy--that's you, Bob--cancel each other out. If they don't cancel each other out--if there are, as you say, "millions of people like me," then a whole bunch of banks running off of Black-Scholes and similar models without taking account of your existence are going to create a hell of a lot of systemic risk, and then 10% unemployment.

Ouch. For full context, read the full post (not long). A "von Neumann-Morgenstern agent" is the same creature as the one often called Homo Economicus: fully rational, forward-looking, risk-neutral, and possessing something close to perfect information (in aggregate, at least). And if you like that, lookit what DeLong did to Ed Prescott.

In truth, however, Lucas acted rationally in the situation DeLong is referring to. A von Neumann-Morgenstern agent would sell off his equities sometime last fall and buy Treasuries, and then convert back to equities as soon at the equity markets stabilized and started recapturing their lost value (remember all the Wall Street talk about "bargain buys"?). In other words, when equities have a negative expected value over the short run but a positive expected value over the medium-to-long run it is perfectly rational to hold cash in the short run but equities in the medium-to-long run. This is even more true if the short run expectation is for zero (or even negative) inflation but the medium-to-long run expectation is for higher inflation (as DeLong suggests). There is no indication that Lucas, and/or the millions like him, did not do precisely that. Actually, the fact that the S&P 500 is now ~ 35% above its 2009 low is evidence that that is exactly what happened.

If this were not true, then all of Keynes (except maybe chapter 12) would be wrong. All of Keynes' major insights -- the importance of aggregate demand, the paradox of thrift, the difference between short-run and long-run outcomes, the danger of the liquidity trap -- depend on rational expectations. Without rational expectations there is no Keynesianism. The whole point of Keynes is that short run expectations can be different from long run expectations, and that both are important. A Keynesian like DeLong ought to be able to make that distinction.

The problem with Black-Scholes, e.g., isn't that it depends on rational agents; the problem is that it depends on historical volatility. In a panic, historical volatility is basically meaningless: the basic feature of a panic is that we're not operating in the fat middle anymore, but rather in the thin tail. Unfortunately it's impossible to predict future panics with any model based on history, since they are irregular events outside the historical norm. You can't model outliers (much to Alex's dismay). That's why it's an outlier.

Keynes doesn't help us here: he never tried to model outliers, nor did he encourage others to try. Instead, he proposed some mechanisms for trying to cope with them. It's like a researcher developing a treatment for a virus: she's not trying to find a vaccine; she's trying to find ways to deal with the disease after it's taken hold. Sure, the virus may eventually go away on its own as the immune system fights back, but why wait if we can help the process along? That's what Keynes was trying to do: not prevent the disease, but rather speed up the recovery.

DeLong thinks that Keynes' prescriptions work, and they are worth the cost in terms of debt and (possible) future inflation. Lucas (and Prescott) thinks those prescriptions don't work, or even if they do they aren't really worth the cost since fiscal policy tends to only be counter-cyclical in the valleys. That's the argument, and each side has empirical studies supporting their views.

But let's not make this about rationality. It isn't.

Saturday, September 26, 2009

Rogoff on International Financial Regulation

. Saturday, September 26, 2009

He doesn't think executive compensation is the main problem:

[T]here's no one-size-fits-all solution. It's hard not to be sympathetic to that, and clearly we've shown that a lot of the financial firms are effectively public entities with trillions of dollars of cash at their disposal. On the other hand, it's sobering to note that the European banks, by and large, did not have these huge, American-size payouts. Yet they managed to get themselves into just as much trouble. The short-term borrowing is the real problem.

By "short-term borrowing" he really means huge leverage ratios that require banks to roll over their entire net worth many times per month. When credit is flowing, that's not a problem. When it isn't, we get the Great Financial Meltdown of 2008. Along similar lines, Rogoff also wants higher capital requirements, particularly for short-term borrowing by banks. In other words, Rogoff sees the problem as fundamental to the structure of banking: banks borrow short and lend long. He's right, but that feature will always be with us. The trick is figuring out how to limit the systemic risk.

Rogoff also has thoughts on the difficulties of international harmonization:

Also, the undercurrent is the United States makes a lot of money off of international finance. It's a big profit center -- we are the winners, and we want to keep the system. The rest of the world says, "But you're generating risk." We have a very different agenda from, say, Germany or France. They will have much less to lose by strengthening regulation because they have much stronger regulation to start with.

It's not just the U.S.: the U.K. and Japan also make a lot of money from finance, and Japan in particular does not seem interested in jacking up capital requirements. Nor is it clear that that would have prevented this crisis or would prevent the next one. Indeed, stricter capital requirements in Basel incentivized banks to take on more securitized loans since those had a lower risk-rating than the unsecuritized debt banks were previously holding.

Friday, September 25, 2009

Weekend Links

. Friday, September 25, 2009

CEO pay didn't cause the financial crisis, but accounting rules might have. And a wonkier take. And a much-less-wonky take on the blame game.

What to do with the ratings agencies.

Bouncy Castle finance.

In appreciation of Norman Borlaug.

China may be getting antsy.

China starts a war over resource competition.

The G20 is very ambitious. I hope to have more to say on this soon.

The craziest ever things said in a UN speech.

The beats that didn't get chosen for Jay-Z's Blueprint 3.

Incentives Matter


President Lula da Silva doesn't understand public choice theory. He also can't outsmart a cheeky Newsweek reporter:

Newsweek: You often criticize the privatization process. But thanks to the sale of state companies even the poorest Brazilians have cell phones, and former public companies like Vale have become world-beaters under private ownership.

Lula: But the state could have done the same things.

Newsweek: Except that it didn't.

Lula: It didn't because the Brazilian elite used public companies for their own ends. When you do that, any company will go broke, anywhere in the world.

Er, yep.

Via KPC, who also quote Lula's views on the state of Venezuelan democracy.

Thursday, September 24, 2009

Two Nations Divided by An (Un)Common Arithmetic

. Thursday, September 24, 2009

Via LGM, when a £billion might not be a £billion.

NYC Goes Green


The Brooklyn Bridge, specifically, to protest Ahmadinejad's speech at the U.N. Video at the link.

The green banner stretched over a mile, and had previously been wrapped around the Eiffel Tower.

Wednesday, September 23, 2009

More on the Price Elasticities of Morals

. Wednesday, September 23, 2009

Remember when I posted about the price elasticity of demand for public morals (see here and here for refreshers)? Nate Silver is following the same drift.

The problem, if it is one, is that sins also have high price elasticities:

But desperate state governments looking to casinos to bail them out of their budget nightmares are likely to be disappointed. The same may be the case with trying to tap other "sins" for revenue. Nationally, sales of alcohol for off-premises consumption were down significantly last year, an unprecedented 9.3 percent in the fourth quarter, according to the Commerce Department. The largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991.

Those lost sales also mean lost sales tax receipts. Even if those expenditures are replaced dollar-for-dollar with other expenditures, sin taxes are much higher than other taxes, so tax revenues go down. For states already feeling the crunch, this is bad news.

Blog Post of the Week


Reproduced, in its entirety, from Wronging Rights (definitely one of my favorite blogs; i only wish they'd post more frequently):

You may think it's a bit premature to award "Headline of the Week," given that today is only Monday, but I feel confident calling this one.

The award goes to the Independent (of Ireland) for "We can't abandon Africa to cannibalism and genocide." (Does the notion of intervention being necessary to keep "Africans" from eating each other ring any faint colonial bells for anyone else?) Sadly, they do not mention lions.

Yep. Blog post of the week.

Tuesday, September 22, 2009

Mmm... Chicken

. Tuesday, September 22, 2009

During a discussion of the use of game theory in IR last week, one of my students asked me "How do we know whether we're in a game of Chicken or a Prisoner's Dilemma?" Well, that's a good question. We can't just place a collect call to Tehran and say "Hello, Mahmoud! Listen, I'm just calling to make sure... we're playing Chicken, right?" And yet what game we're in has quite a lot to do with the strategies we should play because it effects the payoffs of those strategies. For example, John Bolton (and many in the Bush administration) saw nearly every political interaction as a game of Chicken. Obama, on the other hand, doesn't agree:

The question that I'm asking right now is to our military, to General McChrystal, to General Petraeus, to all our national security apparatus, is-- whether it's troops who are already there, or any troop request in the future, how does this advance America's national security interests? How does it make sure that al Qaeda and its extremist allies cannot attack the United States homeland, our allies, our troops who are based in Europe?

That's the question that I'm constantly asking because that's the primary threat that we went there to deal with. And if-- if supporting the Afghan national government, and building capacity for their army, and securing certain provinces advances that strategy, then we'll move forward.

But, if it doesn't, then I'm not interested in just being in Afghanistan for the sake of being in Afghanistan or saving face or, in some way-- you know, sending a message that America-- is here for-- for the duration. I think it's important that we match strategy to resources.

Obama views American resources as valuable, and thinks they should be spent only when they are likely to achieve specific ends. In other words, the payoffs in Afghanistan are asymmetrical so it isn't a game of Chicken. This is the realist position, and folks like Stephen Walt say similar things in reference to Afghanistan all the time. Bush viewed American prestige as valuable, and thought it should be sacrificed only when necessary. The differences in foreign policy (to the extent that they exist) are about how they view the game.

Monday, September 21, 2009

Did CAFTA Cause the Honduran Coup?

. Monday, September 21, 2009

That's the allegation of a post at Eyes on Trade:

The situation in Honduras has a number of important implications: Fair traders have long argued that NAFTA-style deals promote instability and now Honduras, a signatory to CAFTA, has suffered Central America’s first coup since the Cold War. CAFTA was approved in Honduras by local elites, the same interests who are threatened by Zelaya’s progressive policies. The instability in Honduras is an illustration of how NAFTA-style trade agreements can undermine democratic governance in member nations.

What's the evidence for this claim? Honduran "elites" supported CAFTA and opposed Zelaya's populism, so obviously the two must be linked.

Except... not so much. Zelaya was deposed because he wanted to alter the Constitution to allow himself to stay in office. Honduras' Congress, Supreme Court, and even Zelaya's own party (Partido Liberal) opposed this move, and it was ruled illegal. Zelaya was undeterred and scheduled the referendum anyway. So the Supreme Court ordered the Honduran military to remove Zelaya from office (and from the country). There is no indication that this had anything to do with CAFTA.

Ironically, one of Zelaya's biggest supporters since the coup has been the United States, a CAFTA signatory. Oh, and Zelaya himself was a "vocal proponent" of CAFTA, much to the chagrin of Latin American leftists. And the U.S. and Dominican Republic are considering using CAFTA-legal sanctions to force Zelaya back into office.

Zelaya's ousting had nothing to do with CAFTA, and CAFTA might actually help him get back to power. This kinda undercuts the argument that "NAFTA-style trade agreements can undermine democratic governance" doesn't it?

A Tobin Tax Isn't the Answer


Dani Rodrik (again) advocates the adoption of a Tobin tax:

The beauty of a Tobin tax is that it would discourage short-term speculation without having much adverse effect on long-term international investment decisions. Consider, for example, a tax of 0.25% applied to all cross-border financial transactions. Such a tax would instantaneously kill the intra-day trading that takes place in pursuit of profit margins much smaller than this, as well as the longer-term trades designed to exploit minute differentials across markets.

Economic activity of this kind is of doubtful social value, yet it eats up real resources in terms of human talent, computing power, and debt. So we should not mourn the demise of such trading practices.

He says that the tax will raise much-needed revenue for all kinds of socially-beneficial programs. But if the tax is successful in limiting cross-national transactions ("throwing some sand in the wheels of international finance"), then the revenue from the tax will be less significant. Only if large, frequent, cross-national flows persist will the revenue come in, and if that happens then the other goal of the Tobin tax (protection from "hot money" flows) will be betrayed. It's like raising cigarette taxes to pay for education: if people do what you want them to do -- stop smoking -- then you don't have any money to fund the new education program.

But even if that weren't true, Rodrik is in effect arguing that markets should be less efficient. The "intra-day trading that takes place in pursuit of profit margins" is done by arbitrageurs, and arbitrageurs serve a very valuable function: they bring financial markets into equilibrium in quick and relatively painless ways. Without them inefficiencies will persist for longer, potentially leading to harsher corrections down the road. Moreover, financial instability is not caused by arbitrageurs trading for tenths or hundredths of a percent; it comes from quick reversals of the "long-term international investment decisions" that Rodrik hopes to keep, and argues that the Tobin tax won't affect. It may be possible to argue that some short-term efficiency should be sacrificed for long-term stability, but that isn't what Rodrik is really saying. In fact, he acknowledges a Tobin tax will have no effect on stability:

What the Tobin tax does not do is help with longer-term misalignments in financial markets. Such a tax would not have prevented the US-China trade imbalance. Neither would it have stopped the global saving glut from turning into a ticking time bomb for the world economy. It would not have protected European and other nations from becoming awash in toxic mortgage assets exported from the US. And it would not dissuade governments intent on pursuing unsustainable monetary and fiscal policies financed by external borrowing.

So what we're left with is the new revenue. Rodrik says that a small Tobin tax would raise "hundreds of billions" worldwide. Presumably these will used on all sorts of really great projects that everyone loves (he lists "foreign aid, vaccines, green technologies, you name it"). But the vast majority of these taxes will be recouped by the countries with the biggest financial sectors (who receive the most inflows): the U.S., U.K., Germany, Japan. In essence, then, we would be taxing investors from poorer countries in order to redistribute to citizens of richer countries. How is this a net global benefit? Does it make sense for the Chinese to fund the health care system in the U.K. or retirement pensions in the U.S.? Should Indians have to pay for the privilege of investing in the U.S. or Japan?

I don't see how a Tobin tax would improve the system.

Sunday, September 20, 2009

Concert in Havana

. Sunday, September 20, 2009

Today, over 500,000 people have gathered in Havana's Revolutionary Plaza for a massive concert featuring Colombian star Juanes and an array of other Latin American and European performers (You can watch the concert live online here). The concert has been promoted as a gathering for peace intended to bring down the hard walls between the governments of the United States and Cuba and to promote dialogue between two countries that have had tense (and at times nonexistent) relations for over 50 years.

The concert has been incredibly controversial on the streets of Miami where Cuban hardliners, primarily members of the older Cuban exile community, have been critical of Juanes and the other performers for going to Cuba, and refuse to even consider any type of rapprochement between the US and Cuba.

The WSJ provides good coverage of today's events:
Billed as a “concert for peace,” the event has produced a war of words in Miami where a majority of Cuban exiles feel the Colombian singer, who lives in the tony Miami suburb of Key Biscayne, will help legitimize the Castro gerontocracy. Some protesters say they will use a small steam roller in Miami’s Little Havana neighborhood to flatten a mountain of Juanes CDs as he takes to the stage in Havana. (Juanes didn’t immediately respond to interview requests.)
According to polls, while a majority of older Cubans, and those who arrived in early waves of immigration from the island are dead set against the concert, younger Cubans, more recent arrivals and those born in the U.S. of Cuban parents are much more prone to say, “Why not?”

Some, more liberal exiles hope the concert may open the way to more people-to-people contacts between the two countries -– a musical version of the “Ping-Pong” diplomacy that led the late President Richard Nixon re-establish ties with China decades ago. The concert has also received the full backing of the U.S. government, which facilitated permits for musicians to travel to Havana. Juanes even discussed the event with Secretary of State Hillary Clinton, who posed afterwards for photographs with the singer.

The fate of the Juanes concert may influence a pending decision by the New York Philharmonic, which is also mulling an invitation to perform in Havana next month.

Since taking office, President Obama has set in motion a slow rapprochement between Cuba and the U.S., lifting restrictions, like the amount of money Cuban Americans can send to relatives and the number of trips they can take to visit relatives on the island. Obama has said the U.S. is ready to act further if Cuba reciprocates, but Cuba has repeatedly said it is disappointed by Obama’s refusal to lift the decades old U.S. trade embargo.

While the Juanes event has caused controversy in Miami, not so in Havana where most people welcome any distraction from their drab lives. Some 36 current and former political prisoners signed a letter urging the Colombian singer to come to Cuba, saying the concert is a chance to advance reconciliation.

Gorki Aguila, leader of Cuba’s leading punk-rock band Porno para Ricardo, says he’s in favor of the concert, although he believes it will be manipulated by the regime. Speaking from Miami, where he is visiting, Aguila said that if Juanez talks about peace, he should also talk about what he sees around him. “He should talk about the reality of the people. There is no freedom of any type, the regimen has imposed its ideology for fifty years, and its time to be done with that,” said Aguila.
The older members of the Cuban exile community have long dominated all political discussion on Cuban issues within the United States, and it's about time the younger generation steps forward and flexes its own political muscle. The younger generations are far less conservative and much more open to engagement with the Cuban government and have come to realize that 50 years of isolation, embargo and idiocy have done absolutely nothing to bring about freedom and greater prosperity on the island.

The younger generation in the US holds the same disdain for Cuba's revolutionary past, but believes a more practical policy of direct people-to-people engagement would bring about a quicker and better solution to "That Infernal Little Cuban Republic" 90 miles off of the American coast. Gorki Aguila summed it up quite well in the quote above, the purpose of the concert and of engagement in general should be to normalize relations, but this should be discussed in the context of human rights violations, repression and outright abuse on the island. The Cuban government should not get a free pass for the hell it has put families and its own citizens through over the past 50 years.

Nevertheless, it's time for direct engagement with the Cuban people and for the United States to put forward a different approach. It's time for the Cuban diaspora to get over its stubbornness and bring Cubans both in the US and Cuba together.

Update (5:41pm): The latest estimates of the crowd now have attendance at 1.15 million people. Even though the government has tried to keep liberal politics and calls for freedom out of the concert, let's just say that some of the performers aren't cooperating. Songs and singers calling for "a time to change","libertad", and "the first step to overcoming fear is to stand up" are being blasted in the plaza.

Saturday, September 19, 2009

The Technological Trouble of Climate Change

. Saturday, September 19, 2009

A lot of discussion over climate change has focused on the political and economic difficulties in solving the collective action problem in a way that doesn't massively lower global standards of living. But there is a bigger concern, says Bjorn Lomborg:

Let us imagine that the world ultimately agrees on an ambitious target. Say we decide to reduce CO2 emissions by three-quarters by 2100 while maintaining reasonable growth. Herein lies the technological problem: to meet this goal, non-carbon-based sources of energy would have to be an astounding 2.5 times greater in 2100 than the level of total global energy consumption was in 2000.

The point is: even if we could all agree on where we wanted to go we have no idea how to get there. Agreeing to carbon caps is like agreeing to go to Mars: all and fine and good, but until we have ways of actually achieving the goal it doesn't really get us anywhere (except austerity, of course). Here's the proposed solution:

Green and Galiana propose limiting carbon pricing initially to a low tax (say, $5.00 a ton) to finance energy research and development. Over time, they argue, the tax should be allowed to rise slowly to encourage the deployment of effective, affordable technology alternatives.

Investing about $100 billion annually in non-carbon-based energy research would mean that we could essentially fix climate change on the century scale. Green and Galiana calculate the benefits – from reduced warming and greater prosperity – and conservatively conclude that for every dollar spent this approach would avoid about $11 of climate damage. Compare this to other analyses showing that strong and immediate carbon cuts would be expensive, yet achieve as little as $0.02 of avoided climate damage.

The idea of a small carbon tax that is phased-up as market alternatives become more common is appealing to me, although I don't expect political outcomes to be that technocratic. And this is perfectly compatible with a prize system (as described in this report) that is preferred by many economists.

This is not Pigouvian since it is redistributive, but it does seem to move us towards a direction of aligning private and social costs. I'd like to see more thinking along these lines and perhaps some pilot programs.

Friday, September 18, 2009

Weekend Links

. Friday, September 18, 2009

1. "Quasi" quantitative easing by the ECB.

2. The worst war since WWII is still ongoing (with 5.4 million dead so far), and nobody knows about it.

3. The Israel/Palestine controversy hits the Toronto Film Festival.

4. Emmanuel on the newest challenger to GDP as a measure of well-being. This one was commissioned by Sarkozy and created by Stiglitz and Sen. The UN's HDI had the same goal, but tells us basically nothing that GDP per capita doesn't; will this measure be any better?

5. Resurrecting Hyman Minsky.

6. Robert "Mr. Bubble" Shiller, interviewed by David Leonhardt.

7. Drezner and Salam on Lehman, our current economic situation, and the U.S./China trade spat:

Quote of the Day


“… the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.”

That is not Paul Krugman in 2009, or even J.M. Keynes in 1937, but Friedrich Hayek in 1974. Like Krugman in 2009 and Keynes in 1937, Hayek didn't much like the quantification of the discipline.

Via Nobelist Vernon Smith at the new Causes of the Crisis blog. Other contributors so far include Dave Colander and Jeffrey Friedman, with invites out to many others.

Wednesday, September 16, 2009

When Gordon Brown Saved the World

. Wednesday, September 16, 2009

This morning, I spent half an hour breaking down the Westminster system of parliamentary democracy that the United Kingdom holds so dear for my students in Intro to Comparative Politics here at UNC. We also showed them an old segment of Prime Minister's Question Time (PMQT) from when Tony Blair was the opposition leader and John Major was the Prime Minister.

One of my students enjoyed PMQT so much, he found this clip of Gordon Brown from this past fall on PMQT and emailed it to me. I remember watching it when it happened and laughing hysterically at the Tory reaction. So I thought I'd share it with the rest of you since I didn't share it back then. Hope you get a laugh out of it on this Wednesday evening.

Is Obama Mimicking George W. Bush on Trade?


I'm a bit late to the party, I know (I've been busy), but apparently there's a trade skirmish going on that could escalate. I don't know... something about tires and chicken? Here's a bit of a recap: Ben Muse gives 11 reasons why this is bad, DeLong thinks Obama is doing something stupid, Emmanuel is practically gleeful here (and here and here), IELPB has had about 10 posts on the topic in the past half-week, and Drezner's freaking out.

That's just a slice of the running commentary, so what could I add to the discussion at this point? Maybe a bit of context. In 2001, during his first year in office, George W. Bush also raised tariffs in a similarly reckless and illegal way. Drezner noted this on his blog, but argued that this time it's different for two reasons:

1. Bush raised tariffs on a sector (steel); Obama raised tariffs on a country (China).

2. Bush didn't have general protectionist leanings, so it was never likely that widespread protectionism would be a feature of his regime; this is not true of Obama (or at least we don't know that it's true).

So why did Bush raise steel tariffs in 2001? He never wanted to, but doing so got Congress to give him fast-track negotiating authority in the Doha round of WTO talks. As Drezner notes, the Bush administration knew that the tariffs would be ruled against in the WTO, so they weren't actually having to compromise anything (and he should know; he was working in U.S. Treasury at the time). Instead, they were making an end-around Congress and public opinion. Pretty clever.

Why can't Obama do the same thing? Drezner says it's because he's more wedded to Big Labor than Bush was. Really? Big Labor is always going to vote for Obama against any Republican, while Bush knew that his re-election fight would be difficult, so appealing to voters in Rust Belt states could mean the difference between winning and losing. Like W.J. Clinton, Obama likely has more latitude than a Republican in a similar position would have; like W.J. Clinton, Obama could probably get more done on trade than any Republican facing an a Democratic Congress.

If he wants to. He may not, of course. I've expressed frustration at his lack of attention paid to trade so far, and I've previously tried to parse his mixed signals on trade. Supposedly he'll give a speech on trade on the 17th that could clarify things, but he hasn't been consistent on trade over the past few years, and I don't expect him to start now.

What I do think is that Obama very much values expert advice, and his approach to economic issues is mostly technocratic. Surely Summers and Geithner and Goolsbee are yelling into his ear on this. In fact, both Geithner and Goolsbee have been sent to reassure nervous trading partners before. And remember how Obama was for "Buy American" provisions in the stimulus bill before he was against them? He's been cagey on trade for awhile, and I think there's probably a reason for that: his supporters think that NAFTA was a mistake and that China is killing them. Obama doesn't share that belief, but he can't/won't say that (though he will hint at it). Especially not until something gets done on health care.

Which makes me think that there may be more to this than is immediately obvious. Perhaps Obama wants to signal to Big Labor that he's on their side, but do so in a way that doesn't handcuff him.

The wild card here is China. In 2001, the U.S. was taken to the WTO and smacked down by the Dispute Settlement Court. In fact, I think they were banking on that. This time, China started dispute settlement proceedings but didn't wait for the completion of that process; it retaliated immediately. Obama might not have been counting on that. But now Obama is facing more pressure to revoke the tariffs: those adversely affected by China's retaliatory tariffs, and those who generally prefer an open trading system (and/or don't want to anger China just now). In other words, Big Labor might be on his side, but Big Agriculture won't be.

In short, I'm not sure how this will play out just yet, but I don't expect a wide-ranging trade war between China and the U.S. (sorry Emmanuel). That's the M.A.D. of international trade, and there's just too much at stake for either side to push the button. Doesn't mean they won't butt heads or test each other from time to time, but a return to mercantilism just isn't on the table.

Tuesday, September 15, 2009

Playing a Fool's Game

. Tuesday, September 15, 2009

Scott Sumner asks what is the best social science prediction of the past 20 years, and frames the question thusly:

Before answering this question, let’s first examine what has happened over the past 20 years.

1. The world has gotten much more peaceful. I recall reading that the last couple years were the most peaceful in all of human history (and pre-history for that matter.) Perhaps someone can find the article.

2. The world has gotten much more democratic. The number of democratic countries has soared at the fastest rate in history, by far.

3. The world has gotten much more market-oriented. There has been a huge wave of privatization and deregulation of prices and market access. And this trend extends far beyond the formerly communist countries.

So who got it right? According to Sumner, it was the much-maligned Francis Fukuyama, who first considered the "end of history" in an article in 1989 (his book of the same title was published in 1992). Fukuyama basically argued that the era of major inter-state war had come to an end, the norm of democracy was entrenched and would only be strengthened, and that capitalism would triumph over communism. Despite some setbacks, the trends on all three have pointed in Fukuyama's direction.

Commenters at Sumner's place almost immediately cited Samuel Huntington's "Clash of Civilizations" as a counter-point. Indeed, Huntington intended that article (also expanded to a book) as a rebuttal to Fukuyama, his former student. But despite the frictions and conflicts of the past two decades, Fukuyama's theory still holds up better than Huntington's: the world is still moving towards integration, not away from it, and overall violent conflict is still trending downward.

Of course history makes every prediction look foolish in the end, but that's part of Fukuyama's point: the "end of history" doesn't mean that conflict will never occur, or that the world order has permanently metastasized. Rather, Fukuyama argues the opposite, claiming that the old "great powers motivated by ideology" dynamics that dominated international politics for centuries has come to an end: ideological battles have been settled in favor of capitalism and democracy, the era of colonialism has come to an end, and great-power wars have been made obsolete by technology.

So is Fukuyama right? Probably not. But for several days I've been trying to think of a recent general theory that out-performs Fukuyama and I can't. Certainly not Chua. Not Barnett either, at least yet. Friedman? You gotta be kidding me. Putnam? I'm not at all convinced.

The floor is open to readers. Is Fukuyama's prediction really the best of the past 20 years? If not, what's better? If so does that say more about the goodness of Fukuyama or the badness of general theorizing?

Spoke Too Soon


Krugman in 2007, on Milton Friedman:

For example, the Fed responded to the 2001 recession by slashing interest rates and allowing the money supply to grow at rates that sometimes exceeded 10 percent per year. Once the Fed was satisfied that the recovery was solid, it reversed course, raising interest rates and allowing growth in the money supply to drop to zero.

[S]ince the early 1980s the Federal Reserve and its counterparts in other countries have done a reasonably good job, undermining Friedman's portrayal of central bankers as irredeemable bunglers. Inflation has stayed low, recessions... have been relatively brief and shallow. And all this happened in spite of fluctuations in the money supply that horrified monetarists, and led them—Friedman included—to predict disasters that failed to materialize.

That is in defense of the sort of Fed "tweaking" that led to the loose money of 2001-2004 -- and inflation of the housing bubble -- that Krugman now derides. I'm not a moneterist, but I'm just sayin': if in 2007 you say the Fed was right to pursue expansionary monetary policy (and you said the same thing in 2001, 2002, 2003, 2004, 2005, and 2006), and in 2009 you say the Fed was wrong to pursue those same policies because they led to bubbles, then maybe you should stop lobbing hand grenades at your ideological opponents for not being omniscient.

Just sayin'.

Nevertheless, that whole article is worth reading. It's a eulogy of sorts, and Krugman shows a fair bit of respect (though it comes with several accusations of intellectual dishonesty). It's basically the story of a very smart guy grabbling with the ideas of another very smart guy that he very much disagrees with but is forced to respect. And there's also a distinct note of admiration for Friedman's ability to steer public policy, a level of influence that Krugman has often yearned for but seldom achieved. Here's his conclusion, which applies every bit as much to Krugman as to Friedman:

The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications.

Perhaps the only difference between the two in this regard is that there is no such thing as "Krugmanism".

Monday, September 14, 2009

Transforming Preferences

. Monday, September 14, 2009

Finally, a reason for Will (a.k.a. Kindred) to care about climate change.

via Chris Blattman

Sunday, September 13, 2009

Krugman vs. Cochrane

. Sunday, September 13, 2009

Paul Krugman stirred up a lot of conversation in the blogosphere and in the Ivory Tower recently with his NY Times article on the state of macroeconomics. Will has done a very good job covering Krugman's piece and John Cochrane's response for this blog. I wanted to throw my unsolicited two cents out there and engage the pieces that have been written.

I agree with Will and John Cochrane that Krugman is using his recently awarded Nobel Prize, along with his tenured, endowed Princeton professorship and his NY Times blog and column to push a partisan agenda and has been quite misleading in many of his writings as of late (which Will also covered here). Many of the claims/arguments he puts forward in the NY Times article are not well informed, incoherent, at times disingenuous and some even border on personal attacks on well-intentioned economists. However, I do believe that if he wants to turn himself into a money-making political hack, that's his business. I don't see anything wrong with him using his column and Nobel fame to convince others that Keynesian economics is the answer to all of the world's problems; I just wish he was more honest as he goes about it.

Cochrane does a good job calling out Krugman for the mistakes in his article and taking him to task for personally attacking other economists. He also provides a very good defense of mathematical economics, model creation and assumption building. His arguments for using advanced mathematics as a way of checking and proving logical arguments is quite good. He's right in that there are things we can't do with prose that can be done quite well with math, economics being one of them. And I'm sure he'd also agree that there is still a need to translate these models and equations into words so that the rest of the mathematically challenged world can understand what is going on; this is what Krugman should be doing with his column as Cochrane makes clear. His explanations of the economics, especially where Keynesians and Monetarists differ were sound and enjoyable, and showed key differences in positions between the camps and where he believed Krugman was wrong.

Even with all of the good things Cochrane does in his piece, he fails in some of the same ways Krugman does. They're both deeply ideological (which is clearly evident in their writing) and obviously have an agenda that they each want to promote. They both take extreme positions, Cochrane for unfettered, free market capitalism and Krugman, an expansionary view of government's role in society and expansionary government spending. Granted Krugman does it misleadingly in a NY Times article with a veiled political agenda, but Cochrane also has his own political agenda and interests that he seeks to promote.

It's pretty clear that unfettered, free market capitalism just does not work and his attempt to put a large part of the blame for the economic collapse on government intervention is clearly misleading. Moral hazard and government promoted excessive risk-taking are definitely to blame. But denying that the idea of self-regulation of banks was a bad one, as well as believing that a lack of regulation and oversight in other markets were solely the fault of the government is misleading and wrong. He criticizes the role of the government as regulator and argues that the problem started with the over-regulation of commercial banks. He believes that government did a poor job with its regulatory responsibilities (he's correct there), but denies the role that business interests and the push for unfettered capitalism played in dismantling the regulatory structure that had previously been in place as well as the culture and ideological leanings within regulatory agencies that believed a lack of oversight was a good thing because it was in the best interest of the banks and other large financial corporations to not be overexposed and take on too much risk and that they could police themselves. He would also have us believe that the market alone, with a little bit of help from the Fed, would have pulled us back from the brink last fall. It's pretty clear that without massive government intervention one year ago this weekend, the meltdown surely would have been much, much worse, not better.

Cochrane's portrayal of Krugman as equivalent to that of a "global warming skeptic, an AIDS-HIV disbeliever, a creationist" within his field is both ignorant and wrong. There is much consensus in medicine, environmental science and evolutionary biology on those three issues. In economics, I don't believe that sort of consensus exists, nor should it at the moment. There is much within economics that is not black and white, that simply cannot be proved with the rather limited toolbox that we have as scholars and the limited data that we have at our disposal to study such convoluted and difficult problems. It is not a verifiable fact that Neo-Classical Economics holds the key to knowledge within the field of economics and I hope even Neo-Classicists can acknowledge that. In my opinion, the Keynesians and the Neo-Classicists are both well short of the truth and have a lot to learn from each other as well as from emerging fields like behavioral economics.

Both of these men have been doing great scholarly work in economics for a long time. One, Krugman, has gained vast fame and fortune as of late, is trying to disseminate his work and beliefs to the masses and entrench his position in economic lore for many years to come. The other, Cochrane, sees his life's work, his beliefs and his ideology being poo-pooed on by a Nobelist he feels is being misleading, by government officials whom he feels are making bad economic decisions and by other lay people whom he believes are blaming the wrong people for the recent economic misery. Both have their own agenda and both are trying to ensure that their view of the economic world survives to breathe another day. Be careful how much stock you put into each of their viewpoints.

Cochrane: Against Krugman's View of Macroeconomics


John Cochrane, one of the prominent "freshwater" economists that Krugman assaulted in his screed last week, has responded. (My feeble response to Krugman is here.) As much as anything, it reminds me of Kenneth Rogoff's famous rejoinder to Joseph Stiglitz's hit-piece on the IMF from years ago (which ended with a tart "Other than that, I enjoyed the book" just two sentences after calling for Stiglitz's book to be removed from store shelves).

But Cochrane's retort is much more thorough. He hones in Krugman's caricature of "efficient markets" research, the modern interpretation of Barro-Ricardian equivalence, the fundamental causes of the economic collapse (which Krugman also did not predict), his newfound disdain for mathematics, his newfound preference for political advocacy over economic rigor, and his numerous character assassinations. Moreover, unlike Krugman, he actually bothers to cite research in support of his claims.

I would love to quote from Cochrane's piece at length, but it demands to be read in full: all 4,435 words of it. The text may be downloaded from Cochrane's site or from Economix in the form of a .doc file. Even though I do not fully agree with Cochrane, I truly think this should be required reading for anyone who read Krugman's essay. This is especially true for those who agreed with it but cannot verbalize why. Either way, it should not be taken for granted that Krugman's view of the state of macroeconomics is the only view or even the predominant one.

Here's Cochrane's intro, and then his conclusion, but please read the whole thing:

Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all. ...

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

Other than that, Cochrane enjoyed the article.

Saturday, September 12, 2009

Why We Shouldn't Try to Inflate Our Way out of Debt

. Saturday, September 12, 2009

Chris Hayes has a policy paper out advocating moderately high inflation over the next few years to reduce the debt burden. Yglesias loves it:

The idea is basically that if we could sustain a five or six percent inflation rate for a period of years, that would make it much easier to work off the debt overhangs—both in the public and private sectors—that otherwise threaten to hobble the economy for years. You would need, of course, to try to be sure that this doesn’t spiral into accelerating inflation. But the point is to move beyond the kind of anti-inflation hyper-vigilance that came into vogue after the Great Inflation of the 1970s. That mentality was an understandable reaction to what had happened, but the fact that an out-of-control wage-price cycle is a bad thing doesn’t mean that inflation should always be kept as low as possible. A moderate amount of inflation could do a great deal to help us.

There's only one problem: you can't inflate your way out of debt:

The bad news for central bankers is that creating currency isn't like, say, diluting shareholders in a company. You're always rolling your debt, and the market's response to an inflationary strategy is (not surprisingly) higher interest rates. It's a treadmill, and it's extremely hard to get ahead.

So why do we have this mythology, as Donovan calls it, of inflating our way out of debt? It's probably because on the surface there's some simple logic to it, though more importantly it's a myth borne out of necessity. The opposite idea, that we'd actually have to cut spending and raise taxes (which is to say, actually pay off our debts) is just too painful to contemplate.

Even worse, if a country tries to sneak out of debt by inflating it away not only will investors demand higher interest rates, investors may demand a risk premium on top of higher interest rates, or even refuse to lend at all. Even if that doesn't happen it's nearly impossible to stay ahead of lenders when you have to roll over the debt.

And of course, inflation also carries many significant downsides. In short, trying to inflate the debt away is a very bad idea.

Finding Shoes Just Got Easier


Sarah loves shopping the first and second sections. Will and I prefer the third. From the New Yorker's style issue:

More on the Grim View of the Fed


Okay, so my last post on Grim's piece on the Fed was a tad, er, shrill. I thought (and still think) that in advancing his central argument -- that the Fed stifles discussion, debate, and dissent -- Grim did not do due diligence. For example, his piece never mentions any member of the Board of Governors or the fact that dissents at BoG meetings have been common during Bernanke's term. In fact, last year many were complaining that the Fed was too divided to send clear policy signals, and this was hampering the effectiveness of the organization.

Nor does Grim mention the ideological battles between Janet Yellen (President of the San Francisco Fed and possible future Chairperson) and William Poole (former President of the St. Louis Fed), which are well-known to any casual observer of the Fed in the 2000s. Yellen is an inflation dove, while Poole is a hawk, and their debates took place at the highest fora in the Fed and had a direct influence on policy-making. Many other debates took place under the radar, but had broad influence within and without the Fed.

Moreover, it is silly to argue that the Fed shouldn't seek the opinion of as many economists as is feasible. If the Fed didn't employ so many economists as researchers and consultants it would be much easier to argue that they had ideological blinders on. If the Fed is so blinkered, then why bother hiring so many different researchers? Why use up resources, fund research, and pay salaries of so many economists if you're just going to ignore them all dissent?

That's not to say that there aren't some cheerleaders out there; of course there are. But as Grim so ably showed, the Fed is a very large organization that hires a lot of people. What bureaucratic organization is immune from this accusation?

The Fed is the most scrutinized technocratic organization in the world, and we're going through a financial crisis that has devastated the real economy, so some existential musings are certainly appropriate. But Grim goes way beyond that, stringing together a series of one-sided quotes and weak insinuations. To what end? He wants to show that the Fed's is influence is substantial, monolithic, and pernicious. The first part is not in dispute, the second part is demonstrably false, and the third part -- if it can be shown at all -- requires an argument that would be well over Grim's head.

It is a very bad article.

Friday, September 11, 2009

Yeah, But Can He Name All the Capitals?

. Friday, September 11, 2009

Via Good Klein, Senator Franken gots mad skillz:

Thursday, September 10, 2009

Worst Attempt at Character Assassination... Ever

. Thursday, September 10, 2009

Shorter Ryan Grim: "The Federal Reserve should not be allowed to hire economists; it should be staffed by reactionaries instead".

(Full disclosure: I have once been inside a Federal Reserve building (Chicago), and I even have the business card of one of their senior economists. So I've clearly been bought-and-sold.)

(Full disclosure II: Alex once participated in a "Fed Challenge" (sort of a "Model U.N." for economics students) while an undergrad. So he clearly has no integrity at all whatsoever.)

(Full disclosure III: SBD once worked at a bank, and banks deal with the Fed every single day. Her livelihood was directly related to compliance with Fed diktat, so she clearly is a shill of Greenspan and Bernanke.)

(Full disclosure IV: None of us predicted the biggest outlier in the past 80 years of financial history. So we're clearly in league with the nefarious Fed.)

Case closed: the influence of the Fed is everywhere, and it is pernicious. Pretty soon, Dan Brown will be writing books about how Ben Bernanke is the secret love child of Alan Greenspan and Ayn Rand.

Seriously: I have neither the time nor the energy to go after Grim point-by-point, and I'm not the best person for the job anyway (but surely someone who is so qualified will take the time). But I'd just like to point out how little Grim knows about his subject. Take this passage as illustrative:

The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.

HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.

At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.

Let's look at that list. The American Economic Journal: Applied Economics (the 446th most important Econ journal) made the cut, as did the American Economic Journal: Economic Policy (ranked 530). The "American Journal of Economics" is not in the top 790, if it exists at all (it seems not to, at least if Google can be trusted. Considering that Google is Grim's primary investigative tool for this survey, this fact seems somewhat damning to his argument).

Meanwhile, what is missing from that laundry list? Oh, I don't know... maybe 7 of the top 10 journals in the field? Metrics for ranking journals varies somewhat, but most people agree which journals are in the top 10 and any survey of top Econ journals must include, as a minimum, the Quarterly Journal of Economics, the American Economic Review, and Econometrica. None of them made Grim's list.

A charitable interpretation of this is that Grim has no idea what in the hell he's writing about. Actually, there's no question about that at all. What is unclear is whether he is also being intentionally dishonest, or whether his bad-faith arguments are accidental.



Eric Loomis has a great idea:

It's been a year since the financial crisis first hit. Thirty years of tearing down New Deal and Great Society regulations undermined the apparatus to stop financial panics from taking place. In my mind, the recent collapse has a lot more in common with 19th century panics than the Great Depression. But to explore this a bit more, I want to spend the next week examining the different financial panics in American history.

First up: The banking collapse of 1837, in which 50% of American banks failed.

Link Dump: "Everywhere I Look I See Idiots" edition


Naomi Klein: Still an idiot. (Previous entries in this series here.)

Thomas Friedman: Getting idioter as he ages. (Previous entries in this series do not exist, because none of us can be bothered.)

Muammar Gaddafi: Beyond idiot.

(Some) Editors of Academic Journals (But Not Any of the Ones I'd Submit To): Terrible, terrible idiots.

Joseph Stiglitz: Not an idiot, but still wrong.

China: Idiots? (Special swine flu edition. Dedicated to Alex -- who has the dastardly disease -- and a good number of my students, who are either similarly afflicted or just don't want to come to section.)

Thomas Friedman: Double-trouble:

Wednesday, September 9, 2009

More on Japan's Health Care System

. Wednesday, September 9, 2009

As the U.S. debates health care reform, I've been interested in comparative looks at other systems. A few weeks ago I wrote about Japan's health care system, which is very inexpensive and also has very good outcomes, and one way that they keep costs low: they pay doctors very little relative to the U.S. Toward the end of that post I mentioned that even with low doctor salaries demographic shifts will make it difficult for Japan to hold down expenses over the medium run. A recent WaPo article highlighted the same thing:

Half a world away from the U.S. health-care debate, Japan has a system that costs half as much and often achieves better medical outcomes than its American counterpart. It does so by banning insurance company profits, limiting doctor fees and accepting shortcomings in care that many well-insured Americans would find intolerable.

The Japanese visit a doctor nearly 14 times a year, more than four times as often as Americans. They can choose any primary care physician or specialist they want, and surveys show they are almost always seen on the day they want. All that medical care helps keep the Japanese alive longer than any other people on Earth while fostering one of the world's lowest infant mortality rates.

Health care in Japan -- a hybrid system funded by job-based insurance premiums and taxes -- is universal and mandatory, and consumes about 8 percent of the nation's gross domestic product, half as much as in the United States. Unlike in the U.S. system, no one is denied coverage because of a preexisting condition or goes bankrupt because a family member gets sick.

But many health-care economists say Japan's low-cost system is probably not sustainable without significant change. Japan already has the world's oldest population; by 2050, 40 percent will be 65 or older. The disease mix is becoming more expensive to treat, as rates of cancer, stroke and Alzheimer's disease steadily increase. Demand for medical care will triple in the next 25 years, according to a recent analysis by McKinsey & Co., a consulting firm.

If current trends hold, Japan's health care costs will be equal to the U.S.'s within a decade, and that's even if they keep doctor's salaries down. But shortages of doctors are getting worse, particularly for specialists, and average wait times are getting longer. Quality of service is declining as costs are increasing. It's not a good mix, and the Japanese system is beginning to look as unsustainable as the U.S.'s system.

The whole article is worth reading.

Monday, September 7, 2009

I Fear for the Finance Students at Washburn University

. Monday, September 7, 2009

My post on Krugman's essay on macroeconomics got picked up by Seeking Alpha, and generated a decent bit of discussion. Most comments there are of the wing-nut variety -- and both political poles are well-represented -- but a decent number of academics and professionals post and comment there too. So I was disheartened to see the following comment from Robert Weigand, an endowed professor of finance at Washburn University:

Sounds like more of the same: Many words devoted to attacking Krugman and Keynes; few words devoted to proposing an alternative path to economic recovery. Are you implying that we should cut taxes and . . . then what? Your comparative intellecutal advantage is supposed to be providing insights into the connection between economics and politics. Reaganomics blew up because, even when Republicans controlled Congress, no one could get them to reduce of even slow federal spending. Thus the $14 trillion deficit. Now that the Dems are in charge (thanks to a huge anti-Bush turnout at the polls) . . . they're not going to cut spending, either -- tax cuts are therefore out of the question. That leaves Keynesian solutions. Lets just hope the fiscal stimulus works and we don't wind up stuck in a Japanese-style liquidity trap, or slow-growth stagflation scenario. Additionally, the reaction from European and Asian financial markets today was telling. Their governments announced continuation of the stimulus programs and stocks rose on the news. So the market obviously likes stimuli.

I responded to Weigand in that thread, but the response was substantive enough that I thought I should reproduce it here:

Nice straw man, but I'm not "implying" anything. I said quite clearly that Fed policies (including QE) have so far been sufficient to arrest the downturn and begin the recovery. So far as I know, no one disputes this. So any case for fiscal stimulus (including tax cuts, which I oppose) has been severely weakened. That doesn't mean that fiscal stimulus can't have positive effects (i.e. the multiplier is probably greater than 1), but it does mean that it is probably unnecessary, so the negative aspects of stimulus (inflation, the debt burden, deadweight loss from future taxation) should be given greater weight.

The rest of your comment makes even less sense. We have debt problems... so we should engage in more deficit spending? Fiscal stimulus (in the form of tax cuts) doesn't work... so we should enact more fiscal stimulus? We face deflation... AND stagflation? Financial markets are all screwed up... so we should set public policy based on day-to-day market fluctuations in Europe and Asia? These are all non sequiturs.

You're right about one thing: my comparative advantage is in examining the links between politics and economics, and most of my posts are oriented towards that nexus. But that requires having an understanding of basic economic theory; apparently that's not a prerequisite for finance professors.

I'd add only one thing: Even though I didn't mention it, I do know that tax cuts and spending programs have different multipliers. Acknowledging that changes the substantive argument very little, but even if it did I doubt Weigand would know the difference.

Geithner's Plan for Financial Regulation


No, I haven't read all 600-odd pages. Thankfully, Kevin Drum summarizes:

Basically it requires (a) stronger capital requirements across the board; (b) higher capital requirements for bigger firms, which would make larger firms somewhat less profitable; (c) an emphasis on real capital, not shell games; (d) higher capital requirements in good times and lower requirements in bad times; (e) a simple leverage constraint as sort of a backup to the more complex main capital rules; (f) stronger regulation of off-balance-sheet vehicles; (g) some kind of minimum liquidity requirement so that banks can't be wiped out in just a matter of days by a bank run; and (h) extension of all these rules to big non-banking entities (the "shadow banking" system).

I'm skeptical that (a) and (b) will have the desired effect and may actually encourage more risk-taking; (c) is a by-product of the risk-weighted Basel approach that isn't going anywhere; (d) would be great, transitioning the regulatory framework from pro-cyclical to counter-cyclical, but will be difficult to implement unless we give the Fed much more authority; (e) is logical and feasible; (f) is logical but probably not feasible; i'm not really sure what (g) means; and (h) is a no-brainer.

Alan Blinder likes the proposal but is fearful that the most important pieces will fall by the wayside while the least important pieces are enacted:

Today, the electorate has a vague sense that it has been ripped off and that change is needed. But the sentiment is unfocused and inchoate — with these two exceptions: People clearly want greater consumer protection and restrictions on executive pay.

By no coincidence, those are the two pieces of financial reform that seem most likely to survive the Congressional sausage grinder. Don’t get me wrong; we need both. But the two don’t constitute the entirety of reform, or even its most important parts.

Blinder thinks the three most needed regulations are the creation of a systemic risk monitor, a new process for winding down insolvent financial institutions of systemic importance (i.e. no more Lehman's), and more transparency in derivatives trading. I am in full agreement with the last two, but it's difficult to see how the first could be successful.

In June I wrote what kind of reform I expect to get. Two of the three are in the Geithner plan and the other has been talked about by Congress. I share Blinder's pessimism over what is really feasible once the bills start circulating through Congress. There are a lot of vested interests that will battle against major changes, and I'm not just talking about industry lobbies. It's not clear how much new responsibility the Fed wants, nor how much it should have, and the current fractured system benefits a host of bureaucrats as much as it benefits the banking sector.

Moreover, this issue is complicated and there is unlikely to be any strong public pressure for any specific type of reform (except, possibly, caps on executive pay). The public wants "reform" but it doesn't really know of what sort, so industry groups and entrenched regulators should be able to tweak any legislation to their advantage. If Congress is to focus on just one thing, it should be transparency: for derivatives trading, for ratings agencies, for regulators, for leverage ratios. A more heavy-handed approach may bring more trouble than good without solving the underlying problems.

On Krugman on Macroeconomics


Everyone should read the Krugman essay on the state of macroeconomics, if only to see where the faultlines lie. The piece is basically Krugman's victory lap: he thinks that he and the other paleo-Keynesians have been vindicated, the Chicago school has been vanquished once and for all, and the New Keynesians have been forced to take a side: you're with Keynes or you're against him. No more trying to have it both ways.

He has good reason for thinking this: the Chicago School's strong-form belief in markets as efficient price aggregators has been tempered, if not refuted, by the current crisis*. But as Krugman notes, this is nothing new: financial crises happen with alarming regularity all over the globe, and only a fool or ideologue would suggest that these manias, panics, and crashes are efficient. In short, the current crisis tells us nothing about the truthiness of the Efficient Markets Hypothesis (EMH) that the Asian financial crisis, or the Argentinian depression, or the collapse of LTCM didn't tell us. All financial crises have very significant costs, and it takes a very brave person to argue that bubbles are good for an economy.

Krugman is also right to question economists' faith in the Fed. To be sure, the Fed had a great run during the "Great Moderation" from 1982-2008, where recessions were generally brief and mild. Perhaps such successes lulled economists into a "In Fed We Trust" mentality, and Krugman claims that this is the fundamental failing of the New Keynesians: the Fed can do quite a lot to stabilize the economy, but it is not omnipotent. In such circumstances where the Fed's normal tools of management fail to gain traction -- when the Funds rate reaches its zero bound -- the New Keynesians have no answer (according to Krugman). Krugman proposes paleo-Keynesianism.

But Krugman fails to acknowledge the weakness of his own position, and paleo-Keynesianism certainly has its faults. Not only is the academic literature on the effectiveness of fiscal policy mixed**, the justification for it seldom holds. In order for fiscal expansionism to succeed where monetary expansionism has failed, Krugman must model individuals as holding contradicting expectations. Second, actual incidents of Keynes' "paradox of thrift" are very rare, and maybe non-existent. Without these theoretical supports, the Keynesian view of fiscal stimulus is severely weakened.

Perhaps worse for Krugman's case is our actual experience over the past year. It is now clear that the Fed was effectively able to fight the recession and stave off deflation, and that bumping against the zero bound does not necessarily involve getting snared by the liquidity trap. As Krugman himself acknowledges, the U.S. economy is most likely already out of recession despite very little stimulus spending (something like $100bn). Unless you believe that $100bn in stimulus spending was enough to shock a $14tn economy out of recession, you must conclude that monetary policy was effective (if unconventional) and thus the main justification for stimulus advanced by Krugman and other paleo-Keynesians was wrong. Score one for the faith of New Keynesians in the efficacy of the Fed.

Never mind, says Krugman, fiscal stimulus is still justified to fight a "jobless recovery" in which GDP growth is positive but high unemployment persists. In fact, the data seem to show that this is happening in the U.S. at present. It's possible that Krugman is right and stimulus could have a positive effect in fighting unemployment. But employment is often a lagging indicator and the recovery is barely underway. It is more likely that employment would improve without stimulus over the next year than that it wouldn't. Moreover there is no theoretical tradition that believes in the persistence of high unemployment during economic expansion. The case for stimulus doesn't look all that strong at the moment, so Krugman is on very shaky ground. But even if he's right, this sort of "mission creep" is worrisome.

All of that said, Krugman's main point stands -- economic theory is not as sound as it appeared a year ago -- and is in fact stronger than he believes since he exempts his own theoretical tradition from criticism. As I said, the whole thing is worth reading to get up to speed on the arguments. But keep in mind the source: Krugman has a strong interest in denigrating any school of thought but paleo-Keynesianism; he has plenty at stake in this debate. There is more of benefit in the Chicago and New Keynesian schools than Krugman acknowledges, and less in the paleo-Keynesian school. So if there is to be a "New Economics" it should combine the best from all three traditions and others besides.

P.S. After I wrote all this, I saw that Scott Sumner addressed some of the same concerns and came to some of the same conclusions, albeit in a different way. Sumner, like me, sees Krugman's dismissal of monetary policy as premature and therefore sees his core argument in favor of paleo-Keynesian fiscal stimulus as a non sequitur. Please read his post.

*The weak-form belief in markets as most efficient price aggregators has not, I think, been refuted by the crisis. It simply states that markets reflect all information about the prices of a good, and thus represent the best estimate of a good's value. It is possible for the best estimate to be very wrong and still be better than even-more-wrong "other" estimates of value. Or fluctuations in financial markets reflect changes in information, and thus be rational. Tellingly, neither Krugman nor any other critic of EMH even propose an "other", much less defend it, which is why some version of the EMH has persisted for so long and will continue to persist: markets may not be infallible, but they are better than anything else. The Chicago school might not be quite dead after all.

**Yes, I know about Romer/Romer, but all other studies are less positive. And as this Brookings report states, the negative consequences of debt accumulation and deadweight loss from implied future tax increases must be weighed against any positive benefits from stimulus.

International Political Economy at the University of North Carolina: September 2009




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