Saturday, October 31, 2009

Is Iran Irrational?

. Saturday, October 31, 2009

Jeffrey Goldberg passes along this quote from Yossi Klein Halevi:

In the last few years, Israelis have been asking themselves two questions with increasing urgency: Should we attack Iran if all other options fail? And can we inflict sufficient damage to justify the consequences?

As sanctions efforts faltered, most Israelis came to answer the first question affirmatively. A key moment in coalescing that resolve occurred in December 2006, when the Iranian regime sponsored an "International Conference to Review the Global Vision of the Holocaust," a two day meeting of Holocaust deniers. For Israelis, that event ended the debate over whether a nuclear Iran could be deterred by the threat of counter-force. A regime that assembles the world's crackpots to deny the most documented atrocity in history--at the very moment it is trying to fend off sanctions and convince the international community of its sanity--may well be immune to rational self-interest.

Bold added. Let's think about this. Why rational reasons might Iran have for building nukes?

1. Israel has a bunch of them, and Iran is scared of Israel for reasons described in Halevi's article: they quite often act rashly, and Iran wants to deter that.

2. Iran is a Persian Shia state in a largely Arab Sunni region. Their largest regional competitor (other than Israel) is Saudi Arabia, and they are nervous that Iraq will once again become a major regional power. Iran wants to deter other regional states, and preserve its status as a big player in the Middle East.

3. The U.S. military is on either side of them in Iraq and Afghanistan, and has been rattling its saber in Iran's direction since 1979. Iran wants to deter a U.S. invasion.

4. The pattern of recent history is that if you do not have nuclear weapons and challenge the U.S., you run a high risk of being invaded or attacked by the U.S. or Israel (Iraq, Afghanistan, Syria, Balkans, etc.). If you do have nukes and challenge the U.S., you run a zero risk of being invaded or attacked by the U.S. or Israel (Pakistan, N. Korea). The lesson is obvious and clear: if you want to deter international interference, get nukes.

As comforting as it might be to think of Iran as irrational and irresponsible (since that justifies aggressive action of the sort discussed in Halevi's piece), the truth is likely the opposite: if Iran is pursuing nukes, it is for very rational reasons.

Friday, October 30, 2009

Revealed Preferences

. Friday, October 30, 2009

It was Kim Il Sung who used to say, “Communism is rice,” meaning the system would succeed by giving the people enough to eat. The famine was caused by mismanagement and the inability to adapt to the collapse of the Soviet Union and the economic transformation of China. …

By the way, Kim Jong Il is famous for being one of the biggest foodies in Asia. Throughout the nineteen-eighties and well into the famine, he flew couriers around the world to procure delicacies for his own palate — fresh fish from Tokyo for his sushi, cheese from France, caviar from Uzbekistan and Iran, mangoes and papaya from Thailand.

From a fascinating New Yorker article about life in the Hermit Kingdom.

About Those GDP Numbers


See Munger and McMegan.

Look, we've spent something like 4-5% of GDP in stimulus, from the American Recovery and Reinvestment Act (a.k.a ARRA a.k.a. stimulus bill) to the bailouts. (You can track ARRA spending here and bailout spending here). We've spent about $120bn in ARRA and $575bn in other bailouts. That represents ~ 5% of GDP spent in deficit by the government: $700bn/$14.25tn ~ 5%. Those expenditures affect GDP evaluations, since GDP = Consumption + Investment + Government + Net Imports. If GDP's "natural" state rate now if government spending had stayed constant is negative 1-2%, then that translates into roughly 4% growth: -1 + 5 = 4. We actually got 3.5%, which is right in the back-of-the-envelope range.

But it's unclear if that means anything good. If the fiscal multiplier is greater than one, as CEA head Christina Romer believes, then that spending should have led to higher reported GDP than we actually saw (something like 5-6%, using Romer's estimate of the multiplier as close to 1.5)*. If the multiplier is less than or equal to one, as these folks argue, then at best this quarter's GDP report is a statistical mirage based on an accounting identity rather than actual economic improvement. If the multiplier is close to zero or even negative, as Robert Barro thinks, then economy is in great shape indeed.

I tend to take the middle view: the multiplier is probably close to 1 most of the time (although context is important), and I think the present circumstance backs that view up. In the 2nd quarter, GDP fell by about 1%. The government spends about 5% of GDP in deficit, and the next quarter GDP grows by about 3.5% despite falling employment. Coincidence?

This is one reason why talk of a "jobless recovery" is at least partially missing the boat: there hasn't actually been a recovery yet. We've just pushed some numbers from one side of an accounting ledger to other by taking on more debt and called it progress. It's not.

*Yes, I know that the lags matter too. But these, too, are unclear and you could just apply the same argument to next quarter or several.

China Won't Accept Carbon Tariffs


Via IELPB, the Chinese don't agree with Paul Krugman's assertion that carbon tariffs (or the threat of them) could help put teeth into a global climate change agreement:

"Up to now, whether it is the proposals in the U.S. climate bill or the comments by French President Sarkozy, the carbon tariffs are just a kind of deterrent used by developed countries to put pressure on developing countries, breaking the principle of 'common but differentiated responsibilities' and making them commit to their own emission cuts," Zhang told the conference.

He said retaliation would also be inevitable.

"The United States per capita emission rate is four times as big as China's. Does that mean we can impose 400 percent tax rates on all imported American goods? If so, the result is a global trade war that is good for no one and no use at all in the fight against climate change."

Also, "Frankly, if tariffs are being implemented unilaterally, they cannot be objective and cannot be non-discriminatory." Of course, if the U.S. goes down this road it won't only be China that places tariffs on U.S. goods. Considering that the U.S. is by far the world's largest per capita emitter, it would be really stupid for Obama to encourage a new norm of carbon tariffs.

This argument isn't entirely different from the standard response from developing countries when pressed to adopt strict carbon limits by developed countries: "You already got rich by polluting, and now it's our turn. Why should we have to pay to clean up your mess?" I've gotta say, it's a pretty strong argument, and it's not clear to me that developing countries will be willing to abandon it any time soon. And if developing countries aren't on board, it will difficult to get public support for self-immiserating policies in developed democracies.

The politics of climate change are just really, really bad.

Wednesday, October 28, 2009

Midweek Links

. Wednesday, October 28, 2009

1. For an Objectivist, Ayn Rand was full of contradictions.

2. Brazil tries the Tobin Tax (or something like it).

3. Another randomized trial paints a skeptical portrait of microfinance. Previous editions here. Will Grameen ever get positive research?

4. New research shows that increased trade leads to improved labor standards.

5. The Treasury/Frank legislation for dealing with "too big to fail" banks.

6. Republican Congressman Jeff Flake (AZ) is awesome:

Republican Congressman Jeff Flake, who represents Arizona’s Sixth District, today released the following statement regarding his vote against H.Res.784, a bill “honoring the 2560th anniversary of the birth of Confucius and recognizing his invaluable contributions to philosophy and social and political thought.”

"He who spends time passing trivial legislation may find himself out of time to read healthcare bill," said Flake.

And I'm sure resident Cuban Alex would approve of Flake's thoughts on ending the trade sanctions against Cuba:

Give Me Your Tired, Your Poor, Your Huddled Masses Yearning to Breathe Free


Today is the birthday of France's greatest gift to the U.S. (other than fried potatoes, of course): the Liberty Enlightening the World statue in NYC. How ironic is it that America's immigration policies reflect liberty so much less now than in 1886, when the statue was dedicated? We don't even accept many skilled workers these days, much less the huddled masses.

Tim Armstrong is mostly complaining about other aspects of American foreign policy in the song above, but immigration is probably the greatest civil rights issue this country (and the world in general) currently faces. Meanwhile, the E.U. has been improving its immigration policies, at least with regards to other European countries. I hope the day never comes when it would be appropriate for the U.S. to give the statue back to France.

ASEAN: More Like NAFTA or EU?


The Association of Southeast Asian Nations (ASEAN) met last week in Thailand to continue work on Asian economic integration. They continued lowering tariffs and expanding investment into each other's countries. Meanwhile, China and Japan jockeyed for position as the leading power in Asia.

There are several proposals for a future East Asian free-trade zone — the Japanese version is called the East Asian Community — but all are vague, and leaders say they are a long way from reality.

The proposals are often compared to a European Union-style single market, but analysts say a pan-Asian economic bloc would be unlikely to have open borders, free movement of labor and common security policies.

China did not publicly offer its vision of an East Asian community, but a statement issued after a meeting of what is known as Asean plus three — the leaders of Asean, China, Japan and South Korea — said those 13 countries would form the “main vehicle toward the long-term goal of building an East Asian Community.” That would seem to exclude a role for the United States.

Japan still wants the U.S. to be involved. (Unlike Emmanuel ASEAN isn't my area of expertise, but I have a feeling that China wins this battle for regional influence. That doesn't mean that the U.S./Japan go away completely -- we're too big to ignore -- but it does mean a greater role for Beijing in maintenance of the Asian economy. In my view, this isn't necessarily a bad thing for the U.S.)

I'm not surprised that ASEAN will stay away from labor and security arrangements. These policies have been controversial in Europe, which is much richer, less competitive, and more ideologically similar than SE Asia. Most of these countries still have tons of unemployment, so it would be politically impossible to have open labor markets. And could you imagine Japan and China agreeing on a security arrangement? China and S. Korea? Burma and Singapore? Me either.

So it's unlikely that we'll see E.U.-style integration in Asia any time soon. But that doesn't mean that NAFTA-style trade and investment arrangements wouldn't be beneficial.

Tuesday, October 27, 2009

My Job Market Search Will Not Include Russian Universities

. Tuesday, October 27, 2009

St. Petersburg (Russia) State University has decided to rescind academic freedom:

Word spread this month among the faculty members of St. Petersburg State University: According to a document signed on Oct. 1, they have to submit their work to administrators for permission before publishing it abroad or presenting it at overseas conferences.

The order, which was circulated internally and made its way onto a popular Internet forum, says professors must provide their academic department with copies of texts to be made public outside Russia, so that they can be reviewed for violation of intellectual property laws or potential danger to national security.

Many professors are (understandably) upset. But it's all an overreaction, says the university's vice rector:

He said he did not believe that the order would interfere with professors’ efforts to publish abroad. “One of the psychological problems we’re encountering is that some of our colleagues, instead of reading the documents carefully to understand what will be examined, and for what purpose, are speaking out against any kind of control,” Dr. Gorlinsky said.

Umm, yeah. They are speaking out against any kind of control. It's sort of a touchy subject for academics. Especially Russian professors, who seem to remember Russian history:

Some professors reacted with alarm, saying the model recalled the Soviet era’s notoriously bureaucratic “first division,” which reviewed documents before they were released to the outside world.

Vyacheslav Y. Morozov, an assistant professor in St. Petersburg State University’s international relations department, estimated that 70 percent of the scholars in his department published and spoke abroad regularly, and worried that the new demands could make that impossible.

“It might be a model for the defense establishment, but I don’t think anything like that exists in the universities,” Professor Morozov said. “Maybe in China. Maybe in Iran.” ...

Several St. Petersburg professors said they worried that the rule would be applied selectively to penalize specific faculty members, either because they were in conflict with administrators, or because their work was critical of the Russian government.

I wonder what the penalty will be for violating the rule? A cup of Polonium tea?

Royale with Cheese


Warning: Above video has Tarantino language in it, so it's probably NSFW.

So the French love McDonald's so much that they're putting one in the Louvre. And somewhat surprisingly, everybody seems pretty nonplussed. Why? Because McDonald's (at least in France) may now be of better quality than local bistros:

Part of McDonald’s success in France can be explained by the company’s efforts to adapt to local taste buds. “The French eat McDonald’s in a French way,” said Caroline Deleuze, a spokeswoman for McDonald’s France. “They come less often but spend more because they want a proper meal.” That is defined as a sit-down experience with two courses.

Local menus offer sandwiches that aim to please local tastes. Le Royal Deluxe features a whole-grain mustard sauce on top of the standard beef patty, cheddar and vegetables, and it is now the second-largest selling burger in France, after the Big Mac. Le Big Tasty, a seasonal offering with a sauce that imitates the charred flavor of meat grilled on a barbecue, promises “le goût de l’Amérique,” or the taste of America.

McDonald’s France offers its version of the Caprese salad, called Little Mozza, and beer and espresso are also available. The company emphasizes the French origin of the beef and vegetables in its restaurants. ...

Mr. Drouard is untroubled by the McDonald’s in the Louvre. “We’re in a process of industrialization,” he said. “The French have become eaters of convenience food.”

McDonald’s popularity, he said, is the result of declining standards in what the French consider traditional fast food. “Bistros don’t know how to make a good sandwich anymore,” Mr. Drouard said. “McDo is a legitimate competitor.”

That's kind of funny to me, but not terribly surprising. Though nobody wants to admit it, even in the States the fast food chains are often of similar or better quality than local diners in the same price range. And McDonald's is very good at adapting its menu to suit local tastes. In Paris you can get the Caprese salad and "local" beef as mentioned above, but also jambon buerre (baguette with ham and butter). (Keep this in mind whenever you hear that globalization equals American cultural imperialism; it ain't true.)

In America, fast food is a countercyclical asset, so it always does well in recessions. The current one is no different. But in Iceland, the collapse of the krona made the inputs for McDonald's burgers too expensive to import without charging much higher prices. Instead, all three restaurants in the country will be closed in a few days.

Despite the setback in Iceland, the Big Mac is so ubiquitous that it is its own exchange rate.

Also: fast food restaurants maybe don't make you fat. How do you say "supersize me" en français?

Sunday, October 25, 2009

Sunday Links

. Sunday, October 25, 2009

1. Is Bosnia falling apart?

2. A Jeffry Frieden working paper: "Global Imbalances, National Rebalancing, and the Political Economy of Recovery".

3. China doesn't have much leverage over the U.S. w/r/t its dollar holdings.

4. Andrew Ross Sorkin narrates last Fall's panic on Wall Street.

5. 1989 was a very good year.

6. How Moody's sold its ratings. Jerks.

7. Thinking about how to deal with firms that are "Too Big to Fail".

8. Exchange rates are still the best way for macroeconomic adjustment.

9. Henry Farrell and Eric Posner on international law:

Saturday, October 24, 2009

How to Improve Regulation

. Saturday, October 24, 2009

Martin Wolf has a good column on the difficulties of crafting an appropriate regulatory structure. Basically, he says, in order to get a truly safe system we have to abolish banking. Despite recent difficulties, that isn't desirable. So he offers an outline for how improve the system without destroying it:

First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.

Kevin Drum is on board:

This is very sensible sounding: the first item is a backstop in case the others don't work, and four of the remaining five items are aimed at reducing leverage throughout the banking system. (Dynamic provisioning is the exception. It might be a good idea, but it's not directly related to reducing leverage.) Now extend this to the rest of the financial system and make sure to write the rules with no wiggle room, and you're done. Piece of cake, really. Any other problems you'd like solved?

But Matthew Yglesias sees trouble:

I’m not sure how much of this can stick in an industry where the product and the inputs (just money, really) can cross international borders so easily. Shut down some antics in London and they move to Zurich.

I'm on board with some of Wolf's ideas. The first is a clear priority; indeed, one of the reasons why the financial crisis was so bad that it threatened to kill the entire global economy is because Paulson and Geithner had no way to wind down troubled firms in an orderly fashion. Markets panicked as half the financial industry was in a state of flux, and an old-fashioned bank run was on. (For a good description of this, see this excerpt from Andrew Ross Sorkin's new book.) It wasn't that banks were too big too fail per se. It was that there was no legal way for them to fail in a timely, ordered fashion. So Paulson and Geithner had to try to find buyers for the troubled firms, transform investment banks into bank-holding corporations to get access to loans from the Fed, and try other ad hoc "fixes" to prevent total collapse.

I am similarly in agreement with Wolf that all bank activities should be "on balance sheet". A lack of transparency was a major problem in this crisis, and part of the reason was that nobody knew what obligations what banks actually had. And this includes the bankers themselves, not to mention traders, hedge funds, short sellers, etc. Any regulation that improves transparency in the financial system is a good one, if you ask me.

But contra Drum, I'm not sure what good the other provisions would have done in this crisis. All of the banks were more than well-capitalized, even Lehman. Merrill Lynch had $140bn in cash that dissipated in about a week because of withdrawals when they were fundamentally solvent. Most banks had Tier 1 ratios more than double their Basel requirements and overall capital ratios were similarly high. Bank runs caused illiquid firms to become insolvent, and chaos ensued because there was no way to wind them down.

There were two primary problems in this crisis: mispriced risk, and massive amounts of uncertainty that led to a panic. Wolf's proposals don't address the risk part, and once a panic sets in a bank is doomed no matter how much capital they hold in reserve. Moreover, one reason why banks were levered up so high was because of the risk-weighting scheme in Basel that, combined with the Recourse Rule, encouraged banks to invest in asset-backed securities. If we require higher capital requirements under a similar risk-weighting rule we'll be essentially encouraging even more leverage.

Yglesias' response is similarly misguided. The problem wasn't regulatory competition. Indeed, the U.S. has higher capital requirements than many other Western countries, yet that didn't matter to anyone. (Additionally, whatever the U.S. does generally becomes a widely-adopted international industry "best practice" standard.)

I would add one thing to Wolf's list: make it easier to declare "bank holidays" on part or all of the banking system. It now seems clear that excessive short-selling made the crisis much worse than it needed to be. Also, most of the work by Paulson, Bernanke, Geithner, and private firms had to be done over weekends while the markets were closed. If Bernanke and Paulson could have declared a week-long holiday + ban on short-selling the day that Lehman collapsed, and used that time to come up with permanent solutions, much agony might have been avoided. Same if they could have conducted "stress tests" or determined which banks could survive and which couldn't without markets reacting to every drop of sweat on Paulson's brow.

We Hit 100! Oh wait...that's not a good thing.


This afternoon, just like every Friday afternoon, the FDIC announced which banks it was in the process of closing and who would be taking over the seized bank's assets. The announcement always comes on Friday afternoon after the institutions have closed so that the FDIC and the new owners have enough time over the weekend to transfer all information and accounts, keep business disruptions to a minimum and prevent panicked customers (who aren't aware of the FDIC's insurance policy) from running to the bank to try to withdraw their funds. So far this year, every Friday has been met with an FDIC announcement and 106 banks have been closed, the most since 181 were closed in 1992.

Earlier on Friday evening the dubious honor of the 100th failure went to Partners Bank, of Naples, Fla., which had $65.5 million in assets, according to the Federal Deposit Insurance Corp. The 101st failure was American United Bank, of Lawrenceville, Ga., which had $111 million in assets. The 102nd failure was another Naples, Fla., institution: Hillcrest Bank Florida, which had $83 million in assets. The 103rd closure was Bradenton, Fla.-based Flagship National Bank, with $190 million in assets. The 104th was Bank of Elmwood, based in Racine, Wis., which had $327.4 million in assets. The 105th failure was Riverview Community Bank of Otsego, Minn., with $108 million in assets. The 106th failure was First Dupage Bank in Westmont, Ill., which had $279 million in assets.
An average of 10 banks have failed per month this year, and the federal coffer is thinning under the massive strain. The fund now stands at $7.5 billion, down significantly from $45 billion a year ago.

When the FDIC factors in expected closures, the agency says the fund is in the red and will likely remain there through 2012. Bank failure costs are expected to total $100 billion over the next four years, leaving regulators strapped for cash.

The news cycle and the attention of politicians and citizens alike are always fixated on the troubles at major national and international banks during recessions. However, the most overlooked aspect of the recession has been the effect of the crisis on community banking. Most people rely on state-chartered community banks for most of their borrowing needs, whether it be small business loans to cover payroll or expansion, car loans, or construction loans for commercial and residential properties.

To say that the community banks in this country are struggling is a severe understatement.

While larger financial institutions received aid from the federal government, smaller banks have found themselves left adrift. Like their larger counterparts, many of these banks made risky loans to individuals and real estate developers during the boom years and are now facing large numbers of defaults as the recession drags on.

Rising unemployment has made it difficult for many individuals to keep up with expenses, and businesses are feeling the crunch of consumers' reduced spending power. As a result, regional banks are left holding loans their customers can't repay.
Florida's community banks have been some of the hardest hit as real estate prices have nosedived and the bubble in the local housing markets popped. Many of these community banks got involved in investments that haven't performed very well and were lending to customers that had no business getting approved for loans. Driving around Miami this week it's incredible how many construction projects were started last year and are now just sitting and waiting to be finished. Also shocking are the dozens of high-rise condos built in the downtown area from 2003-2008 that now sit mostly empty, many funded by community banks.

Many more community banks will go under over the next 6-12 months, especially considering that unemployment rates will continue to rise making it harder for people to keep up with their loan payments and the fact that the FDIC's list of "problem banks" now stands at over 400, the highest level in 15 years. Times are tough for local bankers and just as hard for those locals trying to secure a loan from their community banks.

Friday, October 23, 2009

Slashing Pay on Wall Street

. Friday, October 23, 2009

Yesterday's announcement by the Obama administration that they "will order the firms that received the most aid to slash compensation to their highest-paid employees" has drawn much criticism and discussion across the blogosphere, including right here on this blog.
The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent. The companies are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the financing arms of the two automakers.
I've spent a decent chunk of time today watching CNBC (I love Fall Break) and following the arguments being put forward by the guests on the afternoon shows as well as CNBC's highly opinionated news anchors.

There are two main arguments being leveled at the proposed slashes in executive compensation at these seven TARP-funded firms: 1) The government should not get involved in decisions regarding executive compensation and 2) Capping compensation for these executives will incentivize them to leave these companies and make it easier for competitors to lure these executives away with higher compensation. The combination of those two factors, it is argued, will drastically hurt these troubled companies at a time when they need these executives to steer them back to profitability.

I'm going to spend very little time with the first argument and most of this post on the second. There were many banks/financial companies that took TARP funds last fall, some that needed the funding in order to survive and other that didn't need the funding but were asked/required to take it anyway. Those that took it and didn't need it have, for the most part, already returned the funds. The seven aforementioned companies that took TARP funds were struggling and would have collapsed had the government not invested boat loads of taxpayer money in them. The government is now a major shareholder (for some the largest, for others the sole owner) in these firms and with that investment comes the right to change management and production practices and that includes compensation levels. I see absolutely no valid legal or moral argument against the government intervening to change pay rules or business practices.

Now whether government mandated pay cuts for executives are a good thing for productivity or company performance is a different question altogether. Many claim that if the government slashes salaries (by as much as 90% in the immediate short run and 50% as a whole once deferred stock options are included) for those 25 executives at those seven firms, those executives will simply leave the firm and this flight will damage firm performance at the time that their leadership is needed most.

Most of the articles written and discussed, including the one that Will linked to earlier, have reported that
At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents. At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.
These articles are presuming that these executives all left to take higher paying jobs at competitors, they left because they believed that the government would impose pay restrictions and that their departure will hurt the firm that they left.

I have a handful of questions because I really don't buy into the logic above. Where in the hell are these executives moving to? What financial companies, in the midst of the worst recession since the BIG ONE, are hiring executives at $30+ million a pop? Every company that I know of has been slashing jobs across the board. Where is this robust market for high ranking executives coming from? These claims are flying around with no hard evidence as to where these executives are going and who is luring them away with these large sums of money.

Also, I'm curious as to how many of these 27 (out of 50) executives from AIG and BoA that left over the past year were in their positions before the financial crisis? Are any of them responsible for some of the bad management and financial decisions that put these two companies in the horrible position that they currently face? If so, I don't see how them leaving would hurt their respective companies anymore than their decisions have already done. How many of these were retirements and how many were fired? You can't just look at 27 out of 50 executives leaving and assume that they all left because they were anticipating future government mandated pay cuts.

Next up is the claim that AIG, BoA and the other five firms aren't going to promote from within because their rising stars will be able to earn more remaining in their positions than being promoted to one of these few positions where pay has been capped. They claim that if they were to promote these people to high ranking positions, other companies will simply offer them more money and hire them away. In my very limited experience with Wall Street banks and other financial firms, I know that everyone at the top of these companies know each other and I'm really surprised that people are taking this claim at face value. These companies know exactly who the big whigs and top performers at each of the other firms are. You don't have to be promoted to CEO of AIG or BoA for people to know that you're big time. I go back to my previous point: where are all these $30+ million jobs? How are they going to hire all of these executives away? Look, these positions are going to be filled and these companies will put (hopefully) highly competent and smart people in charge. There are many qualified people who will agree to a $10 million dollar compensation package and the challenge of turning one of these companies around. There is no shortage of top level talent on Wall Street. Money means a lot to people, but it isn't everything. You don't simply pack up and leave because one company is going to pay you more.

To the last question: Will turnover in upper management positions at these seven firms really damage firm performance moving forward? Doubtful. As we all know, most of the day to day decisions are not made by the CEO, CFO or COO. These executives spend most of their time dealing with members of the board of directors, dealing with public relations and marketing issues, wooing potential investors and signing off on decisions made by their underlings. These executives aren't involved in daily trading decisions or most of what actually matters when earnings season comes around. Sure there will be some adjustment to new management but the claim that the departure of an executive will damage company performance is a bunch of bull.

Maybe the incentives for those traders who aspire to be members of upper management in the future will deter them from putting in all of their effort today because of slashes in compensation for high ranking executives. I don't know how much a cut in pay from $30 million to $10 million will undercut ambition but I'd venture to say that for someone making $100,000 to $1 million as a trader today, the ambition to make $10 million and be named CFO of a major company will still be there. I'm pretty confident in that.

To sum this long post up, I think all of this discussion of pay cuts for executives has been blown out of proportion. I don't think the feds coming in and mandating pay cuts for 25 executives hurts company performance, incentives for mid-level managers/traders or will promote some sort of intra-industry brain-drain.

UPDATE (11:26pm): The NYTimes has a "Room for Debate" blog where six experts provided commentary on the cuts on executive pay at the TARP firms. The experts are Tyler Cowen, Yves Smith, Nicole Gelinas, John Coffee, and Lynn Stout. I don't think Cowen actually addresses the issue. He claims that
These earners did not cause the crisis and they are working hard to bring their companies back from the brink. Cutting their pay is the last thing we should be doing because the best of them can simply move elsewhere, thereby undercutting the profitability of the firms we are trying to restore.
The odds of top traders sticking around at A.I.G. for $200,000 a year are small. There is a grain of a good idea in the recent proposal, namely that we should discourage firms from getting into a position where they need a taxpayer-financed bailout. But the new policy goes about this the wrong way.
No one is talking about capping a trader's pay at $200,000. The cap is on the top 25 high ranking executives making millions of dollars (I have no idea why he claims that $200,000 earners will be capped. Top traders make substantially more than that). The earners that the pay cap would affect may very well be those that were responsible for running these companies into the ground. My post above refutes his other points. I don't get to say this very often, but Tyler is wrong.

Soak the Rich?


So some rich Germans want to pay more taxes:

The group say they have more money than they need, and the extra revenue could fund economic and social programmes to aid Germany's economic recovery.

Germany could raise 100bn euros (£91bn) if the richest people paid a 5% wealth tax for two years, they say.

The petition has 44 signatories so far, and will be presented to newly re-elected Chancellor Angela Merkel.

44 signatories isn't very many, true, but the group held a public gathering to show support and garner publicity:

The group held a demonstration in Berlin on Wednesday to draw attention to their plans, throwing fake banknotes into the air.

Mr Vollmer said it was "really strange that so few people came".

Maybe Western Europeans aren't so different from Americans after all.

(ht: IR Blog)

The Price of a Pound of Flesh


The United States government hold large equity stakes in some financial firms. It has decided to punish those firms by heavily restricting the pay of the top employees. Proponents say that it is unfair for financial executives to benefit from taxpayer-funded bailouts. Skeptics of this plan agree that it's unfair, but note that this incentivizes the best employees to seek employment elsewhere, leaving the U.S. taxpayer with few qualified employees overseeing the trillions of taxpayer dollars invested in those companies. In fact, the government may wish to pay employees more in order to lure the top talent to the firms with public investment in order to maximize the return on that investment.

Obama sided with the crowd who wants the pound of flesh. The result: employees at Bank of America and AIG have already jumped ship:

Many executives were driven away by the uncertainty of working for companies closely overseen by Washington, opting instead for firms not under the microscope, including competitors that have already returned the bailout funds to the government, according to executives and supervisors at the companies.

"There's no question people have left because of uncertainty of our ability to pay," said an executive at one of the affected firms. "It's a highly competitive market out there."

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.

That's a 27 out of 50, a majority, who jumped ship before the plan was even announced. These folks were able to get other jobs quite easily, indicating that they have some skills that are highly valued by other firms. The ones who haven't left presumably will in short order if they have similar skills, leaving the least-qualified workers to manage trillions in public funds.

But maybe setting a strong precedent is worth it?

On Wall Street, reaction to Feinberg's ruling was swift, with some executives arguing that it will further handicap the most troubled firms by driving away top employees while making companies unwilling to promote rising stars for fear of bringing them to Feinberg's attention.

But Nomi Prins, a former Goldman Sachs employee, said Feinberg's rulings are unlikely to change the culture of bonuses on Wall Street.

"I don't think Wall Street is afraid of this at all," said Prins, author of "It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street."

"It's going to affect a small portion of a small portion of the industry. It won't have a lasting impact."


(Via MR)

Stimulus Spending in Comparative Perspective


The NY Times ran a series of articles on how stimulus funds have been spent in the U.S., E.U., India, and China. Let's have a look:

In the U.S., for all the talk of "rebuilding America's infrastructure" the need to fund "shovel-ready projects" has meant that stimulus funds have gone to some dubious projects, like a sports complex at a community complex in suburban Chicago. Actual new spending on infrastructure has been slow. And if the point was increase employment, it hasn't done that very well either: more money should have gone to state and local governments, and expanded education and job re-training. It's not that stimulus has done no good; it's just that the government hasn't gotten much short-term bang for its buck, nor has it led to long-term reform or structural improvement.

The record in the E.U. is even more spotty. The Stability and Growth Pact prevents local governments from engaging in much fiscal stimulus directly, and the broader E.U. has done very little. Some think that the E.U.'s "automatic stabilizers" are sufficient, while others are not interested in using E.U. funds to prop up individual countries (e.g. Spain). Additionally, many member states had high debts before the crisis, which has limited their abilities to fight it. In short, the crisis has shown -- once again -- that E.U. member states do have to sacrifice some sovereignty to join the union. But this may not be a terrible thing: Ireland's recent passing of the Lisbon Treaty shows that many in Europe have confidence in the union than has not been shaken by the crisis.

India responded to the crisis with aid for rural workers and tax cuts, but they may have overshot: growth is back to 6%/year, but inflation is now a worry. And the rapid response by the government was somewhat unfocused, leaving many questioning why more money wasn't spent on improving India's infrastructure and expanding opportunities for the poor. The recent decline in the dollar has also adversely affected exporters.

China's response to the crisis was swift and large: huge fiscal stimulus, a loosening of monetary policy, and injections of liquidity into the banking system. A good bit of the stimulus is going to infrastructure projects, but China had so many "shovel-ready" projects in the pipeline that some wondered whether this stimulus spending represented new spending or just planned expenditures under a new name. But China has not used the crisis to build up domestic institutions (like a social safety net and access to credit for private small businesses) that would increase domestic consumption and begin reversing the global imbalances that contributed to the crisis in the first place. Perhaps that transition is too much to ask of a short-term stimulus package, but they could have started programs to that end.

In short, a mixed record. And despite all the talk of reform, very few concrete actions have been taken to address the major issues in global or domestic economies. I suppose those will have to wait for the next crisis.

Slaughtering the State Department


Spencer Ackerman sits down with Anne-Marie Slaughter to discuss her efforts (under Sec. Clinton) to reform the State Department, and take some of America's foreign policy back from the Pentagon. Clinton ordered a new planning document for State, the Quadrennial Diplomacy and Development Review (QDDR), and put Slaughter in charge of creating the QDDR (along with Deputy SoS Lew and senior USAID official Michael). What is Slaughter hoping to address?

Asked if the QDDR will result in institutional changes at the State Department and USAID, Slaughter answered simply, “Yes.” While she said she could not yet determine would precisely would change, the QDDR’s working groups are asking a fundamental question: “What do we need?”

Three broad conceptual lines will determine the answer. The first, Slaughter explained, is that U.S. foreign policy is beset with “collective problems” — from terrorism to climate change to pandemic disease — that require joint international action, something all the stakeholders at Slaughter’s International Finance Corporation lunch recognized. ...

Accordingly, the second concept is about how State and USAID work with the military to address “the question of civilian operational capacity to crisis.” The widespread inability of the State Department and USAID — with budgets representing a tiny fraction of the half-trillion-per-year Defense Department — to deploy to conflict zones has expanded the military’s role in stabilization and reconstruction duties broadly understood to be civilian tasks. ...

The final overarching construct the QDDR will address goes back to Slaughter’s International Finance Corporation lunch. Powerful states remain “very, very important” in geopolitics,” she said, but “the landscape of nonstate actors is so dramatically different,” requiring State and USAID to think about how to perform diplomacy and and development work in an international environment where investment banks, multinational alliances, private advocacy groups, religious institutions and other players “have the power that once only states had.”

Slaughter does not yet know how the QDDR will answer to those questions. “I think by framing the questions that way, you’re asking people to look at the capabilities that we need” and then identify existing gaps.

The fact that it's nearly 2010 and the U.S. State Dept. is just now starting to look at nonstate actors as important for global governance should scare the bejeezus out of everyone. Seriously? I know it's the "State" department, but given that nonstate actors can greatly affect states you'd think that these things might've come up before.

Another criticism of State is its sclerotic nature. Institutional decay within the department has made it difficult for State to play a proactive role in American diplomacy (Matt Armstrong's recent piece making this case is referenced in Ackerman's article). Slaughter recognizes the difficulties, but she knows that the QDDR is just a report; follow-up actions are necessary too.

I, for one, am cheering for her. She knows what needs to be done, and everyone knows that America is not well-served by having nearly all of its foreign policy run out of the Pentagon. It's an uphill slog, but Obama seems committed to it, Clinton seems committed to it, and the country needs it. So hopefully something good will come out of the QDDR.

Thursday, October 22, 2009

Is Chavez Losing His Grip?

. Thursday, October 22, 2009

Chavez's popularity is dropping. Why, you ask?

Hugo Chavez's support has declined in the polls as many Venezuelans say they are fed up with 27 percent inflation, a stagnant economy, faulty public services - and a government they see as incapable of doing much about it.

Despite that, Chavez still has a 53% approval rating, and just won a new mandate in February. And he is still the most popular politician in Venezuela, and he intends to keep it that way:

Yet Chavez still faces no strong political opponents with anywhere near as much support. To win back popularity, Chavez is likely to boost public spending in the coming months, especially on visible projects like fixing up hospitals and stocking state-run markets with subsidized food.

Chavez's mismanagement of the economy and state bureaucracy hasn't hurt him more because he is able to place blame for the poor economy on external enemies (i.e. the U.S.), and claim that he is working for the poor in Venezuela. And he has expanded access to education and health care.

Perhaps more importantly, Chavez has been able to consolidate power in the government while his opposition remains fractured and divided. None of Chavez's potential challengers are perceived as being viable to a majority of Venezuelans, and Chavez can always denounce dissident movements as extensions of U.S. imperialism.

So Chavez stays in power despite the fact that Venezuela is in a downward spiral and is likely to remain so unless oil prices spike again.

Amartya Sen on India


An interview with Sen on the state of India, that starts with this:

There are many argumentative Indians, but very few who can hold your attention in quite the way Amartya Sen can—if you catch him at his expansive best. He dazzles you by moving fluidly between welfare economics and history, philosophy and international politics, the laws of Manu and Article 377, the pronouncements of Gautama Buddha and the policies of Manmohan Singh

It's nice to see Sen interviewed by an Indian magazine rather than the Western press. How else would we get things like this:

How peculiar it is that someone as non-violent as Gandhiji, who was very inspired by the Gita, was on the side of Krishna, who is making Arjuna fight a war and kill people, when Arjuna is saying maybe I shouldn’t kill!

And here is Sen on the record of India since independence:

But given the adversities we have had—a very poor country, largely illiterate, border wars with China and Pakistan, with Pakistan going its peculiarly difficult way, the relationship problems that we have had with the United States and the global powers—have we done as well as expected? Yes. Except in one big respect, namely that I had expected that non-dramatic deprivations would receive more attention than they ended up getting. Famines did go away with democracy, as I had expected, but I thought other things like gender inequality and the huge undernourishment of children would get more attention, but they did not get enough. That’s the disappointment.

Tuesday, October 20, 2009

A Moon Race?

. Tuesday, October 20, 2009

Richard Bilder, Foley & Lardner-Bascom Professor of Law at the University of Wisconsin Law School has a new article in next spring's Fordham International Law Journal on the legal ramifications of a possible "race to the Moon" by the Earth's current and future major space powers (US, Russia, China, India) to mine Helium-3, a valuable isotope of helium that has the potential to provide the Earth with "an unlimited source of safe, non-polluting energy for centuries to come." Here is the abstract:

This article addresses questions of U.S. international legal and space policy arising from current proposals of the U.S., Russia, China and India to establish national bases on the Moon, in part with the purpose of mining and bringing to Earth Helium-3 (He-3). He-3 is an isotope of helium that is available in quantity only on the Moon and could, as an ideal fuel for nuclear fusion reactors, furnish humanity a virtually unlimited source of safe, non-polluting energy for centuries to come. For example, it is estimated that 40 tons of liquefied He-3 brought from the Moon to the Earth – about the amount that could comfortably fit in the cargo bays of two of the existing U.S. space shuttles – would provide sufficient fuel for He-3-based fusion reactors to meet the full electrical needs of the U.S. – or a quarter of the entire world’s electrical needs – for an entire year. However, there is as yet no international consensus on whether, or how, any nation or private enterprise can exploit or acquire title to He-3 or other lunar resources. The article calls attention to what may become a “race to the Moon” to obtain He-3 and discusses: (1) the technical and economic prospects for the development of He-3-based energy; (2) the present legal situation concerning the exploitation of lunar resources such as He-3; and (3) policy options for the U.S. regarding the establishment of an international legal regime capable of avoiding conflict in the exploitation of He-3 and other lunar resources and facilitating the broad scale development of He-3-based energy.
We put our flag on the moon in 1969. I thought that meant we owned it! Free Helium-3 for everyone! And, yes I have evidence:

Should We Have Nationalized the Banks?


Economics of Contempt writes:

Paul Krugman is clearly confused. Regarding Citi and BofA, he writes:
Um, weren’t we being assured that recapitalization by the government — which would probably require temporary nationalization — was unnecessary, because the banks could earn their way back to adequate capital ratios?

Just saying.

Um, what? Is Krugman really that unfamiliar with quarterly earnings reports?

Citi's Tier 1 capital ratio is 12.7%. Citi's Tier 1 common ratio is 9.1%, up from 2.75% last quarter and 4.8% in Q3-2008.
BofA's Tier 1 capital ratio is 12.46%. BofA's Tier 1 common ratio is 7.25%, up from 6.9% last quarter and 4.23% in Q3-2008.

For frame of reference, JPMorgan's Tier 1 capital is 10.2%, and their Tier 1 common ratio is 8.2%.

Just saying.

The question is whether TARP was intended to recapitalize the banks or to boost profits. (These two might not be mutually exclusive in the long run, but there are tradeoffs in the short run.) For relatively healthy banks like Goldman and JP Morgan, TARP funds were issued to shield the unhealthy firms from bank runs: if all the banks were getting government money, investors wouldn't know which ones were insolvent. But it is now clear that Citi and BoA needed TARP to recapitalize, while Goldman and JP Morgan mostly needed to roll over some paper (or didn't need TARP at all) but were otherwise alright. In other words, Goldman and JP Morgan were solvent but illiquid at worst, while Citi and BoA were basically insolvent.

So they forego profits for a few quarters to recapitalize; a $1bn quarterly loss isn't much when the capital ratio has multiplied several times over the same period. So TARP worked, and banks have recapitalized. Without nationalization. So the "nationalize the banks like the Swedes did" folks were wrong.

Just saying.

P.S. Another question is why Citi and BoA overshot: 12-13% Tier 1 ratios are treble the Basel requirement, and more than twice as high as the "well capitalized" marker as well. If these regulations actually constrain bank behavior, then why are they voluntarily holding more capital then necessary (it's not just a reaction to the crisis; banks routinely have capital ratios well above the mandated minimums)? I plan to write more about this soon.

Monday, October 19, 2009

Even Better Than the Real Thing

. Monday, October 19, 2009

I'll give it to Bono: he never, ever, dials it down.

Sunday, October 18, 2009

Sunday Links

. Sunday, October 18, 2009

1. Is Michael Moore really an anarcho-capitalist?

2. Robert Pape on fighting the Taliban.

3. The implications of Ostrom and Williamson's research for regulatory reform.

4. An interview with Reinhart and Rogoff on the financial crisis.

5. Martin Wolf on the dollar.

6. Gaza's underground economy.

7. The awesomest private library in the world?

8. Eliezer Yudkowsky and Andrew Gelman talk about probability. Hoo boy:

Saturday, October 17, 2009

Ping-Pong Soccer Diplomacy

. Saturday, October 17, 2009

We've written before about how soccer and international politics intersect. Now I see that Michel Platini, the President of the Union of European Football Associations (UEFA), has been playing peacemaker lately:

Two weeks ago, he was in Jerusalem discussing with Israel’s head of state, Shimon Peres, the role soccer might play in the Middle East peace process.

Platini followed that up Wednesday by accompanying the presidents of Turkey and Armenia at a World Cup soccer match between the two nations in Bursa. It was the first time an Armenian president had attended a bilateral event in Turkey since relationships were broken off during World War I.

UEFA, the Union of European Football Associations, which Platini heads, heralded the event as “Football for peace — three Presidents in Bursa” over a picture of Armenia’s Serzh Sargsyan; Turkey’s Abdullah Gul; and UEFA’s Platini side by side in the tribune.

To his credit, Platini isn't pulling a Bono: he knows his job is to promote the integrity of the sport and leave the politics to the politicians. And, quite frankly, his current task might be nearly as difficult as getting a meaningful peace agreement in Palestine. He's trying to bring salary caps to soccer. And not just one league... he wants to simultaneously achieve this for all the leagues in Europe.

There was plenty of skepticism toward a former player pleading the case that sport in Europe needs what it gets in America — some acknowledgement of its special place in society and some freedom to operate under its own laws.

But Platini is making progress. In September, the European Commission, the executive arm of the E.U., held a two-day conference on licensing systems for club competitions. Surprisingly, this conference, for all sports, broadly supported Platini’s determination to bring the soccer teams within Europe, even those run by free-spending multibillionaires, under an UEFA umbrella to regulate club spending.

Platini has a trump card: UEFA runs the two most prestigious club tournaments in the world (the Champion's League and Europa League), so if national football associations don't play ball with him, he can kick them out of those tournaments (if he has the support of other leagues).

It's fascinating to me to see how national/regional governments deal with sports differently. In some places, they are subsidized. In others, heavily regulated. In some, professional leagues are given monopoly exemptions. In others, they are susceptible to competition. In some, there are pay limits. In others, none at all.

These differences are interesting. I wonder if they are emblematic of national/regional differences more generally (as this paper argues, ungated pdf here) or whether it is just a coincidence of history.

Friday, October 16, 2009

What's the Point of Political Science?

. Friday, October 16, 2009

Henry Farrell, responding to this response to Sen. Coburn's attempt to end NSF funding for political science, writes:

Political science, even at its best, has few, if any, redeeming aesthetic qualities. We do not offer beautiful theories of how the cosmos came to be; our prose is at best serviceable; if our diagrams convey the meaning they are supposed to and no more, then they have done their job. That means that political science has to justify itself on the pragmatic grounds of its usefulness. But much of political science is not only ugly, but not especially useful. It doesn’t say anything that non-political scientists might possibly care about knowing.

The implication is that political scientists need not only to think about how best to convey what they do to the public; they need to think about doing whats that ought to be so conveyed. This is not to say that political science needs to be in the business of pleasing the crowd; many of the truths that political science might want to convey might indeed be somewhat unpleasant to the sensibilities and prejudices thereof. But it needs to see itself as making a useful contribution to public discourse. Jeff (if I understand him rightly) is suggesting that political science needs to be engaged with public debates in some quite profound ways. This would require a major reshaping of how political scientists understand themselves.

I completely agree: political science should have implications for politics, and political scientists should be engaged in the public sphere. This doesn't just mean doing op-eds and getting cozy "advisor" positions in government; it also means doing work that is at least somewhat relevant to political discussion, and conveying that work in clear, understandable ways.

Sen. Coburn's proposal caused quite a lot of discussion on my campus, and I quite often found myself in the minority when I said that I couldn't really justify NSF funding for most political science work. (Since then, Elinor Ostrom was awarded the Nobel Prize for Econ, and her work has often benefited from NSF grants, but hers is clearly an exceptional case.) The thing is, tho, neither could anyone else justify it when put on the spot except with vagaries like "knowledge is good for its own sake". I don't disagree, but not all pursuits of knowledge are worthy of public subsidy, are they? Why is political science more worthy than anything else?


It's not that I think political science is undeserving relative to other NSF grant winners, or even government spending more generally. My argument isn't negative, it's positive: I don't see how political science is especially deserving, except in cases where extensive field work is required, or expensive randomized trials must be conducted (and I am very much in favor of this sort of research, so long as it is carefully designed and executed). An example of that would be Dr. Ostrom's work, or many of the field experiments that political economists like Chris Blattman are doing. But for average, run-of-the-mill research... well, if you want to justify it by saying that there are more egregious wastes of public expenditure, then fine. But that's not a very strong argument in my mind.

Now don't get me wrong: I'll soon be applying for these things, and if I win one I'll gladly accept it. And it's only $9mn/year, so it's not as if political scientists are breaking the bank. But as a matter of principle...

Bhagwati on "Capitalism's Petty Detractors"


Jagdish Bhagwati is characteristically blunt in a full-bore attack on capitalism's critics in a recent World Affairs piece. He accuses anti-capitalists of having short memories, selectively using examples, and missing "both the point of the issue and the sweep of history".

HIs argument, in short, is that the expansion of capitalism around the globe over the past half-century has been a success: poverty rates have massively declined in India and China (and elsewhere), political liberties have expanded in many places, and that improving wages for the poor and the expansion of the welfare state is impossible without the long-term growth that capitalism offers:

Thus, we need not apologize for liberal policy in terms of its effects on overall prosperity, on poverty in poor countries, or on the wages of the poor in rich countries. To compare an interruption of this remarkable progress to the collapse of the Berlin Wall is like drawing a parallel between a tsunami and a summer storm that brings rain and a rich harvest to parched plains.

Then he sets his sights on regulatory capture, his preferred explanation for the financial crisis:

Of course, the notion that freer financial markets and increased reliance on self-regulation would help the greater good played a role in what happened. The postwar period had shown, as noted above, the powerful effect of liberal economic policies on trade and direct foreign investment. But to carry over the legitimate approbation of freer trade in particular to the altogether more volatile financial sector, which represents the soft underbelly of capitalism, was surely unwarranted. ...

Furthermore, we should not underestimate the role that good old-fashioned lobbying played in the crisis. One of the seminal moments occurred when the heads of the big five investment banks, among them future Treasury Secretary Hank Paulson (then CEO of Goldman Sachs), “persuaded” the SEC to impose no reserve requirements on their lending. The result was reckless over-leveraging that accentuated the crisis when the housing bubble burst and securitized mortgages became toxic assets. But this had to do more with lobbying for profit than with ideology.

That may all be true, but fundamentally this was a market failure: the market mispriced risk in a systematic way, then spread that risk throughout the financial system in such a way that if anything went wrong everyone would be exposed. Of course, something did go wrong. This was compounded by the fact that regulators either ignored these financial instruments entirely or also misjudged the risk, but that was not the root cause.

To fix this, Bhagwati suggests an independent panel of experts who are "familiar with Wall Street but are not part of it" to evaluate new financial instruments, and provide assessments to regulators. I'm all for this, since I think this financial crisis -- like nearly all financial crises -- was caused primarily by a lack of transparency. To the extent that an advisory board can improve transparency, I'm in favor. But I'm not sure how this can be done without including some people from Wall Street. It's not enough to be "familiar" with Wall Street; current regulators are "familiar" with their subjects. This sort of job requires extensive knowledge of financial instruments, corporate culture, and a wide range of other things.

But I broadly agree with Bhagwati: this crisis is not a transformative moment for the international economic system, and any alterations to it will be marginal tweaks rather than paradigm shifts. As I've put it in the past, the new economic order is going to look a lot like the old economic order.

Thursday, October 15, 2009

Hans Rosling Ted Talk

. Thursday, October 15, 2009

These are two of the most interesting, engaging and funny Ted Talks I 've ever seen. They were given by Hans Rosling, a Professor of International Health from Sweden in 2006 and 2007. From Ted:

You've never seen data presented like this. With the drama and urgency of a sportscaster, statistics guru Hans Rosling debunks myths about the so-called "developing world."
Dr. Rosling tackles international development and the use of statistics and data in the first lecture and poverty and development in the second lecture. They truly are a must see.

Wednesday, October 14, 2009

Bloody-Freaking-Obvious Headline of the Day (and a terrible article, too)

. Wednesday, October 14, 2009

And the award goes to... (drumroll)... The New York Times, for "Biggest Obstacle to Global Climate Deal May Be How to Pay for It"!

Quite frankly, that's the only obstacle to a global climate deal. What else is there? Some states are just baddies who want to ruin the globe for everyone else?

But it's just a headline, and those are usually created by someone who didn't write the actual article, so surely the meat is better. Let's take a peek at the lede:

As world leaders struggle to hash out a new global climate deal by December, they face a hurdle perhaps more formidable than getting big polluters like the United States and China to reduce greenhouse gas emissions: how to pay for the new accord.

Oh. I see. Elizabeth Rosenthal of the NY Times thinks that there are two distinct hurdles: 1. Cutting emissions; 2. Paying for cutting emissions. But the only reason why #1 is an issue is because of #2. They are the same hurdle. This is pretty much a single-hurdle issue.

Maybe it gets better. 2nd paragraph (bold added):

The price tag for a new climate agreement will be a staggering $100 billion a year by 2020, many economists estimate; some put the cost at closer to $1 trillion. That money is needed to help fast-developing countries like India and Brazil convert to costly but cleaner technologies as they industrialize, as well as to assist the poorest countries in coping with the consequences of climate change, like droughts and rising seas.

Two things of note here. First, as one of the liberal econobloggers (is it Mark Thoma or Dean Baker? I can't remember) is fond of saying, just who are these "many" and "some" economists? Do they have jobs? Research experience on the questions at hand? Any political agendas? Why the anonymity? These questions might not matter much in every article, but because of the second point I think it is very important. Namely: the difference between $100bn and $1tn is 1,000%. This is not a rounding error; this is a difference of $900bn each year, starting in 2020 and projecting into the future in perpetuity (I'm guessing it's real dollars, but the Times doesn't bother mentioning it). Now, "some" economists may lowball their estimate to encourage aggressive action on climate change to suit their political priors, and "many" other economists might overestimate to discourage same, but we'd never know because we have no idea who these people are.

In the third paragraph we get more nameless experts, only this time they are "negotiators and scientists". It isn't until paragraph five that we get any meaningful information at all, and it is not very meaningful, but at least this source has a name and some words have quotes around them:

But to date there is no concrete strategy to raise such huge sums. There is not even agreement about which nations should pay or in what proportion.

“The level of ambition in funding is not matching up to the sense of urgency everyone now has,” said Luiz Alberto Figueiredo Machado, the lead climate negotiator for Brazil, which hopes to get financing to preserve its rain forest.

He added, “Financing and an inadequate level of financing are a deal breaker for us.”

Financing is a deal breaker for everyone, which is why there has (so far) been no deal. This bit, like the rest of the article, implicitly bemoans the fact that states tend to be self-interested, that there are collective action problems, that states have difficulties making credible commitments, and that cheap talk is rampant. Strange concepts to a journalist, apparently, but any actual economist ought to have been able to come up with at least two of those. Someone who studies international interactions might even be able to fill in the gaps. Such a person might even have a name.

Soft Power


The world's heads of state, ranked in order of hotness. Is it a surprise that Obama didn't crack the top 10? Or that Putin beat out Sarkozy?

The comments are also interesting.

(ht: Chris)

Midweek Links


Michael Lewis got caught up in the housing bubble too.

Ireland accepted the Lisbon Treaty. Now what?

Ian Baruma on China's growing class divisions.

Who is to blame in last year's Russia/Georgia conflict?

Some Nobel stuff: Elinor Ostrom's wonderful presidential address to the 1997 APSA conference, and a sum-up paper by Oliver Williamson. Unlike these cretins, we're big fans of Ostrom at UNC, so here's a bonus lecture (via KPC):

Tuesday, October 13, 2009


. Tuesday, October 13, 2009


Saudi Arabia is trying to enlist other oil-producing countries to support a provocative idea: if wealthy countries reduce their oil consumption to combat global warming, they should pay compensation to oil producers.

Man, has it been a weird news week.

UPDATE: Tyler Cowen's response reminds me of SNL:

The Dollar Is China's Problem


J. Paul Getty once said: "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." In modern times it could rephrased: "If the U.S. owes China $100bn, that's the U.S.'s problem. If the U.S. owes China $2tn (and growing), that's China's problem." The question is what can be done about it.

As Kenneth Rogoff notes, the current U.S./China imbalance resembles the U.S./Europe imbalances of the 1960s-70s. Europe didn't do so well in that deal, as the inflation of the 1970s eroded much of the dollar's value. But the issue is bigger now, and affects more than just China:

In the run-up to the financial crisis, the US external deficit was soaking up almost 70% of the excess funds saved by China, Japan, Germany, Russia, Saudi Arabia, and all the countries with current-account surpluses combined. But, rather than taking significant action, the US continued to grease the wheels of its financial sector. Europeans, who were called on to improve productivity and raise domestic demand, reformed their economies at a glacial pace, while China maintained its export-led growth strategy.

He says a dollar crisis is not imminent, but is "certainly a huge risk over the next 5 to 10 years". Recall that before the financial crisis Nouriel Roubini and Paul Krugman (among many others) were predicting a dollar crisis, and the U.S. now faces a much worse fiscal position than it did before the crisis. So there are legitimate reasons for worry, but Rogoff says this is China's problem, and only China can fix it:

Any real change in the near term must come from China, which increasingly has the most to lose from a dollar debacle. So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain. But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic-demand-led growth strategy.

Yes, China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow.

I'd add that some adjustment needs to come from Germany and other export-biased industrialized economies too, but Rogoff's point is sound: China desperately needs to develop its domestic market. This will hurt the U.S. some in the medium run as its borrowing costs go up, but it is a necessary transition.

Fortunately, we have a mechanism for gradual, relatively painless, macroeconomic adjustments: floating exchange rates. But that only works if the exchange rates are truly allowed to float. If they are not, then imbalances will continue to pile up until there is some sort of currency crisis, and then the adjustment becomes much more painful.

Right now almost every economic issue seems to be on the table, and this is the most pressing: the U.S. cannot continue to soak up all the excess savings in the world forever, and exporting countries need to reinvest some of those savings domestically. The global economy needs to transition, and there's no time like the present.

Monday, October 12, 2009


. Monday, October 12, 2009

This morning, the Nobel Prize in Economic Sciences was awarded to Elinor Ostrom, Arthur F. Bentley Professor of Political Science at Indiana University and Oliver Williamson, Edgar F. Kaiser Professor Emeritus at the Haas School of Business at UC-Berkeley for their work in the field of economic governance (which to me sounds a heck of a lot like Political Economy - we were only one word short!).

Yes that's right, you read correctly: a POLITICAL SCIENTIST won the Nobel Prize in Economics (take that Tom Coburn). Dr. Ostrom received her Ph.D. in Political Science from UCLA in 1965 and is the first woman to be awarded the prestigious prize.

According to Wikipedia, "she is considered one of the leading scholars in the study of common pool resources. In particular, Ostrom's work emphasizes how humans and ecosystems interact to provide for long run sustainable resource yields." From the NY Times:
Her work demonstrated “how common property can be successfully managed by user associations,” the Royal Swedish Academy of Sciences said at a news conference on Monday in Stockholm. And Mr. Williamson has “developed a theory where business firms serve as structures for conflict resolution.
It was nice to see Political Science get some recognition. Congratulations, Dr. Ostrom!

Hawks vs. Doves in the Fed


Remember last month when Ryan Grim wrote a terrible article arguing that the Fed had taken over the entire economics profession and didn't allow dissent? I went ballistic on him at the time, but it now appears that his timing couldn't've been worse. First was the "saltwater" vs. "freshwater" argument started by Krugman that showed that economic theory is not as unified as Grim makes out. But now we see deep divisions within the Fed, even at the top levels:

Fissures are developing among policy makers at the Federal Reserve as they debate how and when to start raising the benchmark interest rate from its current level just above zero. ...

But Fed officials have hinted at new disagreement in recent weeks. The arguments go beyond the traditional split between hawks, who worry that easy money will stoke inflation, and doves, who contend that unemployment is the top problem.

Indeed, the Board of Governors looks to be very divided and it is unclear where Bernanke stands. Then again, maybe they're just being cagey:

RBS Securities (the firm formerly known as Greenwich Capital) mentioned an interesting article by well respected research firm Wrightson in which Wrightson posits that some of the recent hawkish comments by Federal Reserve officials are a shot across the bow of leveraged speculators. Wrightson makes the salient point that if the trajectory of rates is unclear then leveraged positions are not such safe bets.

Perhaps. But I don't believe it. Fed officials are very aware that it takes a very long time for Fed actions to trickle through the system: one quarter to two years for output, and one to three years (or more) for inflation. So they are shooting at a moving target that is in the future. There is plenty of uncertainty, and thus plenty of room for debate. The Fed doesn't want to stifle employment in the short- to medium-run, but they also don't want to spike inflation and re-inflate another bubble. It's a tightrope act, made difficult by the Fed's dual mandate.

This is a historical division: the hawks are concerned about inflation and the doves are concerned about unemployment. FWIW, in this case I'm with the doves. I think the medium-run unemployment worries are much more concerning than the possibility that inflation goes up to 4 or 5% for a year or so.

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




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