Tuesday, December 29, 2009

J. David Singer, RIP

. Tuesday, December 29, 2009

Singer was one of the founding members of the Peace Science Society, an active researcher in conflict resolution, co-creator of the Correlates of War project, and author of several classics in the field of international relations (including "The Level-of-Analysis Problem in International Relations" [pdf]). His views on war and peace, developed during the height of the Cold War, were often controversial; unlike some of his peers he preferred the latter to the former. He encouraged rigorous social scientific analysis, advocated quantitative testing of hypotheses, and built (with others) the most commonly-used data set in conflict research. One bio is here.

China's Choice: How to Adjust


The United States wants China to allow the value of its currency to appreciate. This would make Chinese exports to the United States relatively more expensive, which would reduce the quantity demanded. It would also make U.S. exports to China less expensive, which should increase the quantity demanded and thus create more jobs in exporting sectors. If the reduction in the quantity demanded of Chinese exports and in the increase in the quantity demanded of U.S. exports is large enough, the current account deficit in the U.S. will narrow, the capital outflows from China will shrink, the global economy will be brought into greater balance, and the risk of a future financial crisis caused by the inflation of asset bubbles by the influx of foreign capital will be lessened.

China does not want this. China wants to keep its currency weak in order to keep the quantity of its exports demanded very high. This, in turn, boosts domestic employment in the exporting sectors. Given the still-very-large numbers of unemployed or underemployed Chinese with very poor standards of living, this is an understandable goal.

But one by-product of keeping the exchange rate low in the face of a trade imbalance is that it puts upward-pressure on domestic prices. Krugman explains:

Consider the real exchange rate, defined as RX = EP*/P, where E is the exchange rate measured as the domestic currency price of foreign currency (so an appreciation of the renminbi is a fall in E), P* is the foreign price level, and P the domestic price level. Basic international macro says that there is a “natural” level of the real exchange rate, determined by trade competitiveness and international capital flows. And the economy “wants” to get to that real exchange rate.

If you have a floating exchange rate, you get there via a rise or fall in E. But if you have a pegged rate, there’s pressure on prices instead. By deliberately keeping E higher than it would be under floating, China is creating pressures for P to rise; the inflationary pressures are directly related to the exchange rate policy.

This is exactly right. Now that inflation in China may be well over 10%, Chinese officials are growing concerned. The savings rate in China is very high -- around 40% -- and many Chinese investors are hedging against inflation by buying tangible assets like housing. This may be leading to a property bubble in China. Moreover, high inflation hurts poorer Chinese (i.e. those who consume most of their income) by reducing their standard of living. Add to that the fact that China's currency is pegged to the dollar, so it has actually depreciated with the dollar relative to the yen and euro in the past year, and pressure is mounting for the Chinese leadership to adjust upwards the RMB's peg to the dollar.

What would be the effect of this? So long as China doesn't couple a currency appreciation with trade protection, it would increase the purchasing power of Chinese consumers and improve standards of living. Some employment in exporting sectors might be lost, but gains in employment in importing and nontraded sectors would offset some or all of that effect. Also, a stronger currency would likely attract more foreign direct investment, which could lead to domestic employment. If China also took steps to strengthen the social safety net it could reduce national savings rates, which would lead to more domestic consumption and thus more domestic employment. Moving towards currency convertibility could give China more influence in international financial markets, especially regionally.

This is the path that China will have to take eventually. The tradeoff between growing inflation + asset bubbles on the one hand and competitiveness in traded goods will only be resolved by either moving away from an open trading system or from an undervalued currency. China has been able to have it both ways for more than a decade now, but all good things (from their perspective) must come to an end.

Monday, December 28, 2009

Fix Up, Look Sharp

. Monday, December 28, 2009

The recent Esquire profile of OMB director Peter Orszag and his team is interesting for several reasons. First, because it provides a glimpse into the OMB, the interplay between economic advisors in Obama's administration, and some of the differences between the OMB and CBO.

But more importantly, it is also the first time (to my knowledge) that a former UNC poli-sci grad student has been pictured in Esquire. That's right: Rob Nabors, who holds an MA from our program and is a former co-author of Dr. Oatley's [pdf], is pictured along with the rest of the team on the second page of the article.

So congrats to Rob, and now I've got a goal to aim for: having my picture published in Esquire.

Sunday, December 27, 2009

Weekend Links

. Sunday, December 27, 2009

UNC alum James Surowiecki on Chimerica and Chinese consumer spending

Employment Outlook for Humanities Ph.D.'s: Not Good

Airport security in America is a sham—“security theater” designed to make travelers feel better and catch stupid terrorists. Smart ones can get through security with fake boarding passes and all manner of prohibited items—as our correspondent did with ease.

World's Tallest Skyscraper - Burj Dubai - opens soon in the UAE

James Fowler, Associate Professor of Political Science at UC-San Diego (he'll be on Colbert on January 7th) talks Social Networks with Will Wilkinson of the Cato Institute in this bloggingheads diavlog:

New Protests in Iran


Big protests throughout the streets of Tehran, Iran today.

The protests, taking place on the holiday marking the death of Shiite Islam’s holiest martyr, were the bloodiest — and among the largest — since the uprisings that followed Iran’s disputed presidential election last June, with hundreds of thousands of people thronging Tehran alone, witnesses said. There were reports of hundreds of injured people and numerous arrests.

In Tehran, thick crowds marched down a central avenue in mid-morning, defying official warnings of a harsh crackdown on protests as they chanted, “Death to the dictator!” They refused to retreat even as police fired tear gas, charged them with batons and discharged warning shots.

The police then opened fire directly into the crowd, opposition Web sites said, citing witnesses. At least four people were killed, the Web sites reported, and photographs circulated of a man with a bloodied head being carried from the scene.

One of the dead was Ali Moussavi, Mr. Moussavi’s 35-year-old nephew, the Parleman News Web site reported. He was shot near the heart at midday in Tehran’s Enghelab Square, the report said.

Saturday, December 26, 2009

Terrorism and TSA Restrictions on Passengers

. Saturday, December 26, 2009

As I'm sure you all have heard, a 23 year-old Nigerian man (who studied mechanical engineering at University College London and whose father is a former Nigerian bank executive) attempted to detonate an explosive device aboard an international flight during the descent into Detroit's Metropolitan Airport yesterday afternoon. The man claims he acquired the device in Yemen and had orders from Al Qaeda to carry through the attack, and Christmas day seems like a good choice for a day to attack America.

As you also could have guessed, the TSA will surely tighten (and it seems like they already have tightened) security on both international and domestic flights and has already imposed new restrictions on passengers onboard aircraft. These restrictions, as always, are purely reactive. Does the TSA think that anyone is dumb enough to try to copy-cat the attempt by employing the same methods now that the TSA is surely watching?

The restrictions are targeted at
what passengers and crew can do in the air. Although the T.S.A. has not announced it yet, Air Canada appeared to scoop the U.S. government when it posted a statement on its Web site saying that passengers on U.S.-bound flights will not be able to leave their seat in the final hour of the flight, nor will they be able to have anything on their laps: “New rules imposed by the U.S. Transportation Security Administration also limit on-board activities by customers and crew in U.S. airspace that may adversely impact on-board service. Among other things, during the final hour of flight customers must remain seated, will not be allowed to access carry-on baggage, or have personal belongings or other items on their laps.”
I'm sorry but some of these restrictions are just plain stupid. Are you telling me that not letting me read a magazine or work on my laptop for the last hour of a flight will drastically impact national security or put an aircraft at risk? What do they expect passengers to do for that last hour, sit plainly and quietly in their seats bored out of their freaking minds? What will not letting passengers leave their seats for the last hour of the flight accomplish? Will reducing their mobility and confining them to airplane seats that keep getting smaller and smaller make the plane any more secure?

Potential terrorists will simply assemble their devices during the second to last hour of the flight instead of the last hour of the flight and keep the device in their backpacks and detonate them under the seats in front of them instead of on their laps. These restrictions are simply idiotic knee-jerk reactions made by bureaucrats that have simply not thought of the alternative ways in which terrorists will get around these restrictions. The only way to decrease the probability of such an attack is to prevent these materials from getting onboard the planes in the first place. Once the materials are on the plane, terrorists will find a way to detonate them. What are they going to do next: make me take my pants off during the last hour of my flight so that they can see exactly what is going on in my lap?

Don't be stupid; the TSA, or in this case the security personnel in Amsterdam royally screwed up, (and this extends to the intelligence agencies that overlooked the terrorist in this case after his father went to the US Embassy in Nigeria to notify them as well as the bureaucrats that are in charge of deciding what is and what is not allowed on airplanes - i.e. the liquid that the terrorist smuggled onto the plane and used in his device) and they think that imposing harsher restrictions on passenger mobility while on the flight will simply fix their screw-up. Not gonna happen.

Friday, December 25, 2009

Please: Don't Be Evil

. Friday, December 25, 2009

All our base are belong to Google:

In other words, according to Google, United States state governments have literally handed over our public data to be held and managed by a private company which has well-publicized partnerships with other governments such as China. The data is physically stored in Google’s buildings, on Google’s servers, managed by Google’s employees. This means Google now controls our government’s access to it’s own data. ...

With Google physically housing and managing state government operational data, they literally gain control of our government’s operations. What’s more, Google also has access to data mine the information. Would this be legal? Hopefully not, depending on the contract that our governments have signed. Would it be technologically possible? Of course. ...

It’s funny that we’re chasing after “terrorists” in our airports, and at the same time our state governments have moved fundamental operations data over to a private company which is not controlled by the public and has strong ties to foreign governments.

Google is outside our system of checks and balances. They are quickly becoming absolutely necessary for our government to function, but their operations are not transparent and are outside the control of the American people.

ht: @kinggary

Thursday, December 24, 2009

Santa Claus: International Trade Criminal

. Thursday, December 24, 2009

Ben Muse has the goods.

Merry Christmas, everybody.

And since we're all thinking about giving and getting, here's William Easterly and Peter Singer on ethics and aid:

Hearts and Minds


The Al Jazeera cameraman who was detained by American serviceman in Afghanistan in 2001, and held without charges for seven years before being released, is back on the air:

Among Al Jazeera’s viewers in the Arab world since the 9/11 attacks, perhaps nothing has damaged perceptions of America more than Guantánamo Bay. For that reason, Mr. Hajj, who did a six-part series on the prison after his release, is a potent weapon for the network, which does not always strive for journalistic objectivity on the subject of his treatment. In an interview, Ahmed Sheikh, the editor in chief of Al Jazeera, called Mr. Hajj “one of the victims of the human rights atrocities committed by the ex-U.S. administration.”

But Mr. Hajj has not restricted himself to Guantánamo and his own incarceration. He has expanded the network’s coverage of other rights issues, including press freedom in Iraq, Palestinians in Israeli prisons and the implications of the USA Patriot Act. On a Wednesday morning in mid-August, Mr. Hajj pushed Al Jazeera’s news desk to cover a hunger strike by political prisoners in Jordan, and he happily pointed to a nearby television when the Jordan news scrolled on the bottom of the screen.

Nor has his experience radicalized him: he said that, despite his upbringing in a violent and often repressive country and his experience in detention, he maintained a sustaining belief in democracy and the rule of law.

On the one hand, this is clear an embarrassment for the United States. And at this point only the most vehemently blind defenders of the U.S. would argue that the U.S. hadn't violated human rights on numerous occasions, including this one. On the other hand, Mr. Hajj has taken the platform that his imprisonment has given him and used it to decry human rights violations in general, not just the Bush administration in particular (although he's understandably focused on the latter).

On the other hand, these are the kinds of people that should give us hope. Mr. Hajj's story should embarrass Americans, who are still having trouble acknowledging their recent sins. But it should also embarrass those who claim that radicalization is result of -- or reaction to -- American foreign policy. As Mr. Hajj has shown, another response is to support freedom of the press and universal human rights. In other words, to support the same values and principles that the U.S. stands for. Perhaps it's ironic, but by violating these norms the U.S. may have done more to strengthen them than they could have otherwise.

Wednesday, December 23, 2009

Economics Smackdown

. Wednesday, December 23, 2009

Dan Drezner lays the smackdown on economics in this little bit of commentary from Marketplace.

For decades, there was a clear but unspoken pecking order in the social sciences. Economists were royalty, and every other discipline was part of the peasantry. Economists were treated as real scholars, with their very own Nobel Prize and everything.

Political scientists, on the other hand, were mocked for having the word "science" in the title. The old joke goes that an economist who switches to studying political science raises the average intelligence of both disciplines. It's not true, but the perception is powerful. Powerful enough for Sen. Tom Coburn to have tried scrapping National Science Foundation funding for "poli sci" earlier this year.

Coburn's effort failed, however, and for good reason -- 2009 was a banner year for political scientists, and a not-so-banner year for economists.

Drezner as always provides insightful commentary with some good jokes in overviewing how 2009 treated political scientists vis-a-vis economists. Hopefully the demand for political scientists continues well past 2013 so that us puny grad students who were crazy enough to embark on this journey through the world of political science will be able to find a job.

Tuesday, December 22, 2009

When Bad News Is Good News Is Bad News

. Tuesday, December 22, 2009

Greece's sovereign debt rating was downgraded by Moody's today, following similar downgrades by Fitch's and S&P's. Yet the Athens Composite Index actually rallied on the day. Why? Because the downgrade was less than expected. For now, at least:

Greece, facing a government budget deficit next year of more than 12 percent, has come under pressure from bondholders — and the European Union — to bring its finances under control.

The Socialist prime minister, George A. Papandreou, has promised to fix the problem even in the face of resistance from his own supporters. But he has not completely convinced investors that he can shrink the state sector, which employs one of every four working Greeks, especially in the midst of an economic crisis.

Moody’s cut its rating on Greece’s debt to the lowest level it has assigned to any euro zone member, at A2, five notches above “junk” status, but still two notches above the ratings assigned by rival agencies Fitch Ratings and Standard & Poor’s. Moody’s left open the possibility of another downgrade, saying the outlook on the debt was “negative.”

Greece has two problems: the government has pledged lavish public spending programs, but it is also an EU member, which brings certain obligations. Greece will not be able to keep both balls in the air for much longer; either some austerity measures will have to be implemented to curb budget deficits, or Greece risks being kicked out of the Eurozone (for more on why, see here and here). Public sector workers are planning a general strike next month to protest any austerity measures, so once again labor is sowing the seeds of its own destruction; when will we learn? The best case scenario is an IMF loan, which will certain come with some strings attached.

President Papendreu, a capital-S Socialist, has pledged to restore credibility without, you know, actually cutting spending. And he blasted the decision of the ratings agencies to downgrade. Edward Hugh says the agencies are right:

George Papaconstantinou, finance minister, responded in fighting spirit, and is quoted as saying “we don’t think this [the S&P rating downgrade] reflects the efforts the new government is making to stabilise public finances which had derailed” - a reference to a collapse in revenue collection and excessive spending under the previous government. “It didn’t take into consideration and didn’t assess correctly what is happening at this point.” But the whole point is that it was not only Greek finances which became derailed over the last decade, but the whole economic model on which Greek society has been based, and it is this derailment which needs to be fixed, and it is in this context that the measures which have been proposed fail to convince.

The future looks no better: demographic trends that will threaten state budgets in most industrialized countries are even more pronounced in Greece. If Greece can't adjust now, future adjustments may be even more painful. But it is not clear that the government has the will, or that the populace has the stomach, to take the necessary steps to fiscal rectitude. I expect things to get much worse in Greece before they get better.

CPI - Christmas Price Index


Clever holiday way of calculating yearly changes in prices by PNC Wealth Management:

Thanks to the weak economy in 2009 the PNC Christmas Price Index increased by a modest 1.8 percent compared to last year in the whimsical economic analysis by PNC Wealth Management based on the prices of gifts in the holiday classic, "The Twelve Days of Christmas."

According to the 26th annual survey, the price tag for the PNC CPI is $21,465.56 in 2009, just $385.46 more than last year. It is the smallest increase since 2002, when the index fell 7.6 percent.

The PNC CPI exceeds the U.S. government’s Consumer Price Index, the widely used measure of inflation calculated by the Bureau of Labor Statistics, which is down 1.3 percent this year.

Among the 12 gifts in the Index, three items fell measurably from last year while five increased in cost and four remained steady.

As part of its annual tradition, PNC Wealth Management also tabulates the “True Cost of Christmas,” which is the total cost of items gifted by a True Love who repeats all of the song’s verses. This holiday season, very generous True Loves will receive a bargain and pay $87,402.81 for all 364 gifts, a mere 0.9 percent increase compared to last year.

The sharp rise in gold prices proved to be the main contributor to the dramatic 42.9 percent jump to $499.95 for the Five Gold Rings. Typically when the value of the dollar decreases, as it has in the last year, investors buy more gold driving up prices.

The cost of the Seven Swans-a-Swimming, which generally provide the biggest swings from year to year in the PNC CPI, fell this year by 6.3 percent to $5,250 following last year’s eye-opening 33.3 percent rise. As the most volatile item in the Index, the swans are removed to determine the underlying inflation or core PNC CPI, which pushed the rate up 4.8 percent this year.
(ht: Mankiw)

Lee Sigelman, RIP


Details are still murky, but apparently the former editor of the American Political Science Review has died of cancer. His official page is here.

Suggestion Box


Drew Conway brought a new widget to my attention. On the left sidebar, near the top, we've added Skribit, a suggestions box. If there are topics you'd like us to cover, you can post them there. You can also post links if you'd like comment on a particular article or blog post.

Monday, December 21, 2009

The Year's Best in Global Political Economy

. Monday, December 21, 2009

Drezner asks for five nominations for the Albies, his award for most paradigm-shifting articles/books/ideas of the past year in political economy, named in honor of Albert Hirschman. Here are my suggestions:

1. The article in IO by Mansfield and Mutz on sociotropic attitudes and their influence on trade policy. I'm not 100% convinced in the result (and the authors have not yet made the data available), but if it holds up to further scrutiny it will make several decades of research -- and the dominant models of trade politics -- obsolete.

2. Jeffrey Friedman's article [pdf] in the Critical Review on the financial crisis. The thesis isn't exactly new; libertarians have long argued that regulations lead to perverse incentives that have deleterious effects. But in terms of this particular crisis and the particular mechanisms that contributed to it, I think his argument carries a good deal of weight.

3. Skyler Cranmer, Assistant Professor at UNC, has been doing work on network analysis and its implications for quantitative international relations research. His paper is under review, and thus not available for public consumption yet, but if his claims are true (and I think they are) they should have far-reaching effects on the discipline. I won't steal his thunder by explaining exactly what those claims are, but keep it in mind. Network analysis is already changing the IR game, and his work could carry that further. Perhaps this would be better on a 2010 list, but I've read the paper and seen it presented so I'm counting it for 2009.

4. The Freakonomicization of IR is finally upon us [pdf]. I guess I'm breaking my own rule because I first saw this paper presented in late-2008, but it's been circulating more this year. I'm not necessarily opposed to using instrumental variables when measuring latent concepts, but am I wrong in thinking that these studies usually raise more questions than they answer?

5. I'm reserving this spot for something I've yet to read: Beth Simmons' book on human rights, international law, and domestic politics. Everything I've heard of it has been good, and Simmons has always done good work, so I hope that when I get to it (hopefully in the next few weeks) it lives up to the hype.


Sunday, December 20, 2009

Hossein Ali Montazeri, RIP

. Sunday, December 20, 2009

The moderate Iranian cleric, hero to the reformers, has died.

Saturday, December 19, 2009


. Saturday, December 19, 2009

As expected, nothing much happened. I've run down the reasons why before. But there was one interesting moment (even besides the times that Chavez, Mugabe, and Ahmadinejad took the podium):

The deal eventually came together after a dramatic moment in which Mr. Obama and Secretary of State Hillary Rodham Clinton burst into a meeting of the Chinese, Indian and Brazilian leaders, according to senior administration officials. Mr. Obama said he did not want them negotiating in secret.

Oh, to have been a fly on that wall. Apparently, Wen Jiabao didn't take too kindly to Obama's intrusion, and sent a message of his own:

Mr. Wen did not attend two smaller, impromptu meetings during the day that Mr. Obama and United States officials conducted with the leaders of other world powers, an apparent snub that infuriated administration officials and their European counterparts.

I may have more to say about the actual agreement later, but I remain skeptical that a win-set exists for a meaningful agreement.

Wednesday, December 16, 2009

Quote(s) of the Day

. Wednesday, December 16, 2009

From Copenhagen. Mugabe:

Why is the guilty north not showing the same fundamentalist spirit it exhibits in our developing countries on human rights matters on this more menacing threat of climate change?


If the climate was a bank, they would have already saved it.

Fair play on the last point, although criticizing governments for being active in their domestic economies is a strange complaint from Hugo. There's more at the link, and Ahmadinejad is on the schedule tomorrow.

Question: how seriously should we take these sorts of complaints? It's a logical fallacy to dispute an argument based on the character of the speaker, but still (to quote HST): do we gotta take guff from these swine? Especially when their nations' biggest industries are exports of carbon-emitting fossil fuels to the Northern economies they bemoan.

(ht: KPC)

Distilling Great Thinkers


Tyler Cowen has an interesting post over at MR:

Following up on a discussion, Arnold Kling asks:

'Should we approach famous thinkers by digesting distilled versions, or should we study them in the original?'

I'm for distilling, for reasons Arnold offers, but I'm also for reading the originals. Here are a few reasons why, drawn from a number of longer sources I have read and digested:

1. Secondary sources are unreliable and they do not capture or understand many of the original insights. To remove it from the distant past, what I get from John Rawls or Robert Nozick is quite distinct from what I get from their distillers.

2. Truly great thinkers require numerous distillers. Can you read just one book on Keynes? No. So you have to read a few. Shouldn't one of these then be Keynes himself? Yes.
There are seven more reasons he throws up so if you're interested you should definitely check out the post.

There is one thing I have always wondered: Why don't great thinkers distill their own work/their own field's work? Why do we rely on lesser minds (by lesser minds I mean those that have not engaged in the theoretical work themselves) to distill complex work rather than have the great minds that come up with the theories do it themselves.

I just finished reading Stephen Hawking's book "The Theory of Everything: The Origin and Fate of the Universe", a series of seven lectures where he essentially distills what physicists believe to be the history of the universe and breaks down some of his own work in the field (his theory of black holes for instance). It is truly fascinating and a hell of a lot easier and less time consuming than going through all of Hawking's papers, which even if I spent all of the time in the world, I wouldn't be able to understand. He does a great job of breaking down the physical universe for those of us with lesser minds. Why haven't other great thinkers taken this same approach and distilled their work for the rest of us?

Some have posited that the comparative advantage of these great thinkers is to think and write great things, not to dumb them down for the rest of us. Others have argued that they simply don't have time to distill these great thoughts. For modern great thinkers, most are working in universities and there aren't any incentives for them to make their work readable for the masses. They are incentivized to publish in academic journals/presses and the publication of distilled work doesn't mean much (if any) in terms of promotion/salary increases.

So why would/should they take the time to distill their own work? Well, the more people are familiar with your work, the greater the probability of it having a lasting effect on civilization. The more people are familiar with some of the great work in physics, biology, chemistry, etc., maybe they'd be more prone to believe that it is the truth and turn away from mystical explanations of the cosmos, evolution, etc. Maybe the ivory tower should incentivize the dissemination of scholarly work in the hopes of making it more relevant to society and comprehensible to the masses. Maybe the people that critique academia for being irrelevant will see the relevance of academic work if they were able to understand it. Maybe not, maybe they still wouldn't read it anyway and don't care about understanding academic work. But, I think we should still try.

Midweek Links


1. There is plenty wrong with this Tony Judt piece on social democracy and America, but some good stuff too.

2. An interview with Paul Samuelson.

3. Christopher Caldwell on Belgium's civil controversies. Previous entries here. This remains my favorite civil unrest.

4. Niall Ferguson on 2009's top thinkers. They're all dead.

5. How traditional lenders compete with microfinance in India.

6. This is how we kick off finals week in Chapel Hill:

Tuesday, December 15, 2009

Mother Superior Gets Published

. Tuesday, December 15, 2009

Ann Dunham, mother of Barack Obama, was a cultural anthropologist who did her dissertation research in Indonesia (which is how young Barack ended up there). Now, 15 years after her death, Ms. Dunham's work is being published in book form for the first time, by Duke University Press.

There's some obvious cynicism about the book in some quarters, but it appears that Ms. Dunham's research may have been some of the first on microfinance. I haven't read the book (and since I'm not an anthropologist I'm not qualified to judge it's value anyway), but it sounds interesting:

The book runs about 300 pages and focuses on a blacksmithing village called Kajar, in the province of Yogyakarta on the island of Java. The work has been whittled down significantly from its original form, which ran more than a thousand pages and investigated the socioeconomics of several village-based handicrafts, including batik, pottery, and the making of puppets used in shadow theater. ...

Ms. Soetoro-Ng has come to see her mother as a pathbreaker as well. "Her work in microfinance was fairly pioneering, although I didn't realize that at the time. Now it has gained immense popularity, and there are a lot of people who see microfinance as an important facet of sustainable development." Dunham wanted to see that approach used widely, but she died before she had a chance to try. "That was her goal, to reach every corner of Indonesia, but also beyond," her daughter said. "I don't think you often found that coming from anthropologists, that kind of large-scale ambition coming from these programs. I think she was remarkable that way."

It may be somewhat ironic that the book is being published at a time when researchers are calling the effectiveness of microfinance into question, but even still the project is interesting. How it is received by the academic community remains to be seen.

Monday, December 14, 2009

TARP Makes More Money

. Monday, December 14, 2009

Wells Fargo is paying back all $25bn it got from TARP, and the government will make about $1.5bn in the exchange. Citi is also paying back $20bn, although they'll still owe some.

So Lemme Get This Straight


Ben Bernanke is not concerned enough about the short run, and in the long run we're all dead.

Ben Bernanke is too concerned about the short run, and in the long run he's gonna kill us.

Got it?

Sunday, December 13, 2009

Relative Prices and the Real Estate Bubble

. Sunday, December 13, 2009

Megan McArdle asks, Why did investment in real goods and services suddenly become so much less attractive than housing?" I suggest the answer lies in four words: real exchange rate appreciation.

Why would real appreciation divert capital to real estate? Think of the economy as composed of two sectors, the traded sector and the non-traded sector. When the currency strengthens, traded sector activity suffers. It becomes more difficult to sell American products abroad, and foreign products sell cheaply in the US market. Hence, anyone who makes traded goods is going to struggle. Non-traded sector activities do not face international competition, and thus do not suffer such competitiveness problems under a strong currency. In fact, if you earn your income in non-traded activities and consume lots of traded goods and services, then a strong dollar actually works to your advantage because it reduces the price of the things you buy while having little impact on your nominal wage. All of which we can summarize by suggesting that the return to non-traded activity rises relative to traded activity as the currency strengthens.

Consequently, if you are looking to invest hundreds of millions in the American economy in 1998-2006, are you going to invest in auto production and other traded sector activities or are you going to invest in real estate and other non-traded sector activities? The figure at the top of the post suggests that the answer should be rather obvious. The dollar appreciated in real terms against a weighted basket of the US's most important trade partners by 20 percent or so between the late 1990s and the early naughts. Consequently, investment in non-traded activities was much more attractive than investment in traded sector activities (with the obvious exception of investment in financial services).

All of which makes one wonder why the dollar strengthened so sharply in this period. But that is a topic for another day.

*Real Effective Exchange Rate indicies from Economic Report of the President, Table B-110

Weekend Links


Ahh, the last weekend of business this semester. Here are your weekend links:

1. The hadron collider is truly amazing. I just wish I understood it. MR quoted the right bit:

The believe-it-or-not superlatives are so extreme and Tom Swiftian they make you smile. The L.H.C. is not merely the world’s largest particle accelerator but the largest machine ever built. At the center of just one of the four main experimental stations installed around its circumference, and not even the biggest of the four, is a magnet that generates a magnetic field 100,000 times as strong as Earth’s. And because the super-conducting, super-colliding guts of the collider must be cooled by 120 tons of liquid helium, inside the machine it’s one degree colder than outer space, thus making the L.H.C. the coldest place in the universe.

2. How much climate aid from developed to developing countries is enough? Answers range from "every little bit counts" to "any amount is too much".

3. I can see DeLong's and Krugman's heads exploding from here.

4. The Year in Ideas.

5. How fair is "fair trade"?

6. Rodrik on China.

Friday, December 11, 2009

Hegemonic Instability Theory

. Friday, December 11, 2009

This passage from Martin Wolf got me thinking:

China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.

Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.

For some reason this brought to mind Charles Kindleberger, who argued, in The World in Depression, that the role of the stabilizer in managing the global economy can be summed up by the following five tasks:

1. maintaining a relatively open market for distress goods;
2. providing countercyclical, or at least stable, long-term lending;
3. policing a relatively stable system of exchange rates;
4. ensuring the coordination of macroeconomic policies;
5. acting as a lender of last resort by discounting or otherwise providing liquidity in a financial crisis.

Arguably, the U.S. has performed each of these quite well since the end of the Cold War. Also arguably, it is a combination of these that has led to the recent financial crisis and global recession. What do I mean? Well, the U.S. has kept open a market for goods, which has led to the export-oriented industrialization in Asia but has also created the massive macroeconomic imbalances that led to the crisis. The U.S. has also led to a system of (mostly) stable exchange rates, esp. in regards to China which pegs directly to the dollar, and the Chimerican macroeconomy has been symbiotic and well-coordinated for quite some time. These, also, led to a huge current account deficit in the U.S. America hasn't strayed from providing global liquidity either, although China has done its best to sop much of it up and spend it in American debt markets. This, too, was a large part of the economic crisis.

My point? Perhaps the U.S. should have provided less of an open market for excess goods, or fought the fixed valuation of the yuan to the dollar. Perhaps the U.S. should have actively tried not to coordinate so well with China, and instead competed more directly in export markets (or refused entry into the WTO until China had a managed-floating exchange rate, or levied tariffs on China for the same reason, etc.). Perhaps, by trying to act as a stabilizer, the U.S. actually facilitated the conditions that lead to instability. Perhaps the U.S. should have been just a bit more isolationist, a bit more closed, and a bit more uncooperative.

I'm not saying that Kindleberger is wrong, but I think there is something of a paradox here. Are the actions that the hegemon should take during global recessions the opposite of what they should do during expansions? I'm not sure. But something is definitely missing from Kindleberger's account: an exit strategy. Policies that are appropriate during downturns are not always appropriate during normal times, and policymakers generally aren't nimble enough to simply reverse course after the crisis has passed. Unwinding is hard, takes a long time, and can cause new crises if not done properly. It's a fine line to walk, and so far most states don't seem to be very good at it.


(ht: Angry Bear)

Scary Words


From Michael Pettis:

The Chinese financial system, I would argue, is less liberalized, and certainly less efficient, today than it was one year ago and even five years ago.

Much more at the link.

Thursday, December 10, 2009


. Thursday, December 10, 2009

1. Why criticisms of China's role in Africa ring hollow.

2. The Economists' diary from the Copenhagen conference.

3. Why China's economic reforms worked and the USSR's didn't.

4. The purchase of Alaska from Russia in 1867 was a bad deal. And no, not because of Sarah Palin.

5. Jared Diamond is, I think, too generous in his praise of corporate greening.

6. What's at stake in Doha?

7. Hitchens v. Wright:

Re-examining NAFTA


Did the free trade agreement live up to expectations? Not for Mexico:

In one key way, Nafta did deliver as expected: Exports and foreign direct investment tripled from the early 1990s as Mexico became a leading supplier of cars, electronics and a broad variety of industrial parts to the United States. Productivity in Mexican manufacturing rose 80 percent.

But annual economic growth averaged only 1.6 percent per capita between 1992 and 2007 — low even by Mexican standards until the 1980s. ...

The oversupply of labor, along with government policies that succeeded in keeping wages low, has led to a slight increase in the gap between average wages in the United States and Mexico — precisely the opposite of what Nafta was expected to do.

Two things. First, it's not clear what the counterfactual here is. Would Mexico's growth rate have been higher or lower without NAFTA? How about wages? Just because the country's economic performance has not been as good as hoped does not mean that things would be better without NAFTA. Since NAFTA poverty in Mexico has decreased, and there has been some growth. Second, NAFTA isn't the only thing that's happened in Mexico in the past 16 years. There was the Tequila crisis in 1994 and significant political upheaval, and new competition in manufacturing from China and other countries. Moreover, Mexico has not made investments in education and skills development that would help them move into high-value-added industries, nor has the expected political reform -- especially purging of corruption -- ever materialized. Is NAFTA to blame for any of that? Perhaps. But I can't see how.

Nevertheless, despite the non-existence of a "giant sucking sound", NAFTA cannot be considered much more than a qualified success. If that. Which is the conclusion that Brad DeLong came to a few years back:

What Causes Economic Growth?


Nothing. And everything. William Easterly reviews an important new article:

Despite Climategate, even a superficial reading seems to indicate that there is enough evidence for effects of man-made activity on the climate.

Surprisingly, there is a lot less evidence for effects of man-made activity on something that actually is completely man-made: the rate of economic growth in each country.

I had this frustrating thought as I was reading an important new paper, “Determinants of Economic Growth: Will Data Tell?” [1]

The paper gives a conclusive and resounding answer to the question in the title: no.

It has taken economists a lot of hard work to attain this level of sublime ignorance. There were three steps in the the great History of Evolving Cluelessness:

1. Economists spent the past two decades trying every possible growth determinant in sight. They found evidence for 145 different variables (according to an article published in 2005). That was a bit too many in a sample of only about one hundred countries. What was happening is there would be evidence for Determinants A, B, C, and D when tried one at a time to explain growth. But the evidence for A disappeared when you also controlled for some combination of B, C, and D, and/or vice versa. (Interestingly enough, foreign aid never even merited inclusion in the list of 145 variables.)

2. The Columbia economist Xavier Sala-i-Martin and co-authors ran millions of regressions on all possible combinations of 7 variables out of the many possible determinants of growth. Skipping a lot of technical detail, they essentially averaged out the millions of regressions to see which determinants had evidence for them in most regressions. There was hope: some were robust! For example, the idea that malaria prevalence hinders growth found consistent support.

3. This new paper by Ciccone and Jarocinski found that every time the growth data are revised, or if the sample is changed to another equally plausible one, the results vanish on the “robust” variables and new “robust” variables appear. Goodbye, malaria, hello, democracy. Except the new “robust” determinants are no longer believable if minor differences between equally plausible samples changes what is robust. So nothing is robust.

There is more at the link, including whether we should think of the growth literature as GrowthGate.

Wednesday, December 9, 2009

We're Better Than You

. Wednesday, December 9, 2009


Tuesday, December 8, 2009


. Tuesday, December 8, 2009

Last week I wondered whether Greece might default on its debt, what that might mean for the Euro. Well, Der Spiegel stares down the barrel:

Greece has already accumulated a mountain of debt that will be difficult if not impossible to pay off. The government has borrowed more than 110 percent of the country's economic output over the years, and if investors lose confidence in the bonds, a meltdown could happen as early as next year.

That's when the government borrowers in Athens will be required to refinance €25 billion worth of debt -- that is, repay what they owe using funds borrowed from the financial markets. But if no buyers can be found for its securities, Greece will have no choice but to declare insolvency -- just as Mexico, Ecuador, Russia and Argentina have done in past decades.

This puts Brussels in a predicament. European Union rules preclude the 27-member bloc from lending money to member states to plug holes in their budgets or bridge deficits.

And even if there were a way to circumvent this prohibition, the consequences could be disastrous. The lack of concern over budget discipline in countries like Spain, Italy and Ireland would spread like wildfire across the entire continent. The message would be clear: Why save, if others will eventually foot the bill?

If Greece cannot roll over its debt, its liquidity problems could turn quickly into solvency problems.

If Greece had not been Greece, but instead had been some Eastern European country that was not the birthplace of democracy and the nation-state, it probably wouldn't've been let into the eurozone in the first place. But now it is in, and the EU faces a conundrum: if it doesn't bail out Greece somehow, the consequences for other countries could be dire. Investors might lose confidence in other countries, since the inflexibility of the euro gives states little room to maneuver if they get into trouble. If investors get too spooked, it could lead to a lack of funds for states in deficit that need to roll over their debt. Like Spain. Or Ireland. Or Italy. Higher premiums could cause other states to default, which would further weaken confidence in the euro, etc. This was roughly the pattern of the Asian financial crisis (although without the common currency, of course).

I'm not saying this has to happen, but it's a plausible scenario. What is clear is that Greece is in a game of chicken with the EU, and who wins has implications well beyond the current case. The eurozone may face its stiffest test of integration since the collapse of the EMS. This bears watching.

Via McMegan, who adds some nice commentary. As does Edward Hugh at the indispensable A Fistful of Euros. He's not hitting the panic button yet, but he does see a fight brewing:

We might be forgiven for getting the impression that to date rather than acting as a stimulus to deep economic reform, Euro membership has rather acted to reward those countries who would get into more and more debt, with ever less sustainable economic models, by supplying them with funding at far cheaper rates of interest than the markets would otherwise make available. It is this particular clockhand that Europe’s leaders would now dearly like to turn backwards, and this is why I have little doubt that it is in Greece that a stand will now be taken. If not, then that longest of long runs may arrive rather sooner than some of us, at least, are comfortable with.

Making Transparency More Transparent


I agree with all of this, but Klein misses the most important fact: wages are taxed, employer-provided health coverage is not. That seems like a pretty important distinction to me, since the marginal tax rate for most Americans is 40%. If average health benefits equal $13,500 in extra compensation as Klein says, the typical worker saves 40% of that, or $5,400 a year, by receiving it in the form of health coverage rather than cash.

I don't think that's the way it should be, but that's the way it is. I agree with Klein's calls for transparency, but that points in both directions. By not admitting that fact, Klein has done his readers a disservice.

The Diffusion of Labor Rights


The newest issue of the American Political Science Review includes an article by UNC's own Layna Mosley (with Brian Greenhill and Aseem Prakash), "Trade-based Diffusion of Labor Rights: A Panel Study, 1986-2002." An ungated version is here. The article argues that there is a "California Effect" for labor rights that is somewhat similar to the effect on environmental policy. The abstract:

This article investigates the nature of the linkages between trade and labor rights in developing countries. Specifically, we hypothesize that a serves to transmit superior labor standards from importing to exporting countries, in a manner similar to the transmission of environmental standards. We maintain that, all else being equal, the labor standards of a given country are influenced not by its overall level of trade openness, but by the labor standards of its trading partners. We evaluate our hypothesis using a panel of 90 developing countries over the period 1986-2002, and we separately examine the extent to which the labor laws and the actual labor practices of the countries are influenced by those of their export destinations. We find that strong legal protections of collective labor rights in a country's export destinations are associated with more stringent labor laws in the exporting country. This California effect finding is, however, weaker in the context of labor rights practices, highlighting the importance of distinguishing between formal legislation and actual implementation of labor rights.

One question is whether the divergence between law and practice narrows over time. The study gives some evidence for that: all the signs are positive, and the third-year lag for the effect of bilateral trade context on practices is statistically significant even though the effect is insignificant at lags 1 and 2. Clearly, more work is necessary, and longer time horizons may be needed to truly observe any "reverse decay" effects of law on practice. If such are effects are found, it may provide evidence that including labor standards in trade agreements can have a positive effect.

Either way, this study strikes another tentative blow against "race to the bottom" arguments.

Monday, December 7, 2009

The Curious Case of the Missing $100bn

. Monday, December 7, 2009

The WSJ says that the Obama administration expects to lose $141bn from TARP, down from previous estimates of $341bn. The NYT says that the Obama administration expects to lose $42bn from TARP, down from previous estimates of $341bn. It's not that I'm not grateful, but where'd the NYT find that extra $99bn?

Turns out, it's buried:

The officials said the government could ultimately lose $100 billion more from the bailout program in new loans to banks, aid to troubled homeowners and credit to small businesses.

But that's the pessimistic projection, and I'm feeling good today. Check it out: the bank bailouts, subject of much consternation and populist rage, will actually make the government money. About $19bn, in fact. A certain somebody saw this one coming. So where are these losses coming from? Main St. (and London):

The estimated $42 billion in losses is a net figure that accounts for some profits to offset the losses. The Treasury officials said the government had lost about $60 billion, roughly half to Chrysler and General Motors and the other half to the insurance giant American International Group.

Had we not bailed out GM and Chrysler, we could've saved the entire global economy for about $30bn, maybe less. Call me a statist, but I think that's a friggin' bargain.

Gaming Chinese Marriages


Tyler Cowen passes along this little nugget from China, where a husband and wife entered into a contract whereby she may only beat him one each week.:

The 32-year-old man, who was named by the Chongqing Evening News as Mr Zhang, took the unusual step after suffering intense abuse from his wife, who studies kung fu.

"I don't want to beat him, but arguments are inevitable and I can't help myself," his wife told the newspaper. She added that in the week before they signed the deal, she had beaten him up three times. ...

In order to curb his wife's aggression, Mr Zhang proposed signing a contract in front of his in-laws. If his wife breaches the contract, she has to return to her parents' home for three days. "She is very obedient to her parents, and her parents will support me and blame her," he said.

I was a bit surprised that Cowen didn't tie this to the already-bad-and-worsening highly skewed female-to-male ratio in China, which is largely a product of the one-child policy but has the side-effect of creating a scarcity of women. This provides the existing women with lots of relationship leverage, which might be why Mr. Zhang's parents are relatively nonplussed:

Mr Zhang's parents told the newspaper that although they felt bad that their son was regularly attacked, the couple were a good match. "They have a good marriage, so we can say nothing about it," said his father.

My question is this: how will this really affect the marriage dynamics in the Zhang household? Cowen also neglected to discuss this, which is very un-Tyler-like. I can think of a few things:

1. If Mrs. Zhang uses up her beating early in the week, then Mr. Zhang can act with impunity until the start of the new week. Therefore, Mrs. Zhang should use her beating as leverage and save it until later.

2. Knowing this, Mr. Zhang should push her buttons early in the week. If she succumbs and beats him, then he can behave however he likes for the remaining days. If she reserves her beating, then he gets his way.

3. The closer it gets to the end of the week, the less of a deterrent the threat of the beating becomes. Why? Because Mr. Zhang knows that it's coming eventually, so he may as well act as he prefers. By the time the beating already comes, Mr. Zhang will have had a full week's worth of antagonism. Presumably, he values this or they wouldn't be in this situation in the first place.

In other words, despite being stronger, Mrs. Zhang has lost all leverage in the relationship and Mr. Zhang is now incentivized to behave badly. This assumes, of course, that Mrs. Zhang strongly prefers not to live with her parents. If she does not, then she may as well beat Mr. Zhang twice on Monday, come back on Thursday and beat him again, and spend the weekend at her folks' place. Lather, rinse, repeat.

Or, if you prefer: wax on, wax off.

But even if she prefers to live with her husband rather than her parents, she should still beat him twice on Monday if he misbehaves at all to prevent his misbehavior the rest of the week, so long as she prefers her parents' house to his shenanigans. This can change the equilibrium if Mr. Zhang prefers living with his wife even if it means compromise over being beaten repeatedly and living alone. So he may choose not to misbehave at all. In this case, the deterrent isn't the beating, but the resulting separation. All the leverage shifts back to Mrs. Zhang: by tying her hands, she is getting what she wants without having to beat her husband. Schelling would be proud.

Of course if that was the marriage dynamic, Mrs. Zhang could've just threatened to go to her parents' house whenever Mr. Zhang upset her. But then they would never have been in this situation in the first place. So I'm sticking with my first interpretation, and predicting that the marriage does not last.

Tiger Woods, call your lawyer. This is better than the deal you're getting right now.

Saturday, December 5, 2009

The Methodologists' Lament

. Saturday, December 5, 2009

Stronger from ticoneva on Vimeo.

via Cheap Talk.

First-Year Reading List


Charli Carpenter asks for help compiling a reading list for her grad school seminar in IR that will leave students well-prepared to dive into a comp reading list:

Question: If you were going to assign one and only one book for each of the following weeks to a gateway doctoral seminar in IR theory for political science students who may or may not choose IR as their major field, what would that book be?

1) Realism and Neorealism
2) Liberalism and Neoliberal Institutionalism
3) Constructivism
4) Critical Theory (will incorporate feminist IR here)
5) International Security
6) International Political Economy
7) International Institutions (Law and Organizations)

My answers:

1. Neorealism and Its Critics, ed. Keohane
2. Neorealism and Neoliberalism, ed. Baldwin
3. Constructivism and Intl Relations: Alexander Wendt and his critics, ed. Guzzini and Leander
4. Haven't read it yet, but Steven Roach's newish reader looks interesting.
5. The Strategy of Conflict, by Schelling.
6. Cohen's intellectual history of IPE
7. The special issue of IO in 2001, ed. Martin and Simmons. MIT Press released it in book form.

If I were teaching the course, I'd include a week on rationalism and use Strategic Choice & IR, ed. Lake & Powell.

No major surprises here, but that isn't the point, is it? I think these provide good jumping-off points for getting into the literature and scholarly debates of the discipline, and by reading portions of books like Waltz's Theory and responses to it rather then the whole thing, students can be exposed to more voices and ideas.

UPDATE: A commenter at DoM suggests Schelling as the international security reading. Of course. My list is updated to include The Strategy of Conflict.

Parsing the Efficient Markets Hypothesis


Eugene Fama, creator of the Efficient Markets Hypothesis, is mystified by the claim that the financial world took him seriously, and that that sort of market fundamentalism caused the financial crisis:

The premise of the Fox book ["The Myth of the Rational Market"] is that our current economic problems are largely due to blind acceptance of the efficient markets hypothesis (EMH)…

The book is fun reading, but its main premise is fantasy. Most investing is done by active managers who don’t believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems. Finally, MBA students who aspire to high paying positions in the financial industry have a tough time finding a job if they accept the EMH.

I continue to believe the EMH is a solid view of the world for almost all practical purposes. But it’s pretty clear I’m in the minority. If the EMH took over the investment world, I missed it.

Mike Konczal comments:

But he’s right. Most market participants don’t think markets are so efficient that they can’t get some alpha out of it. So who does believe in market efficiency? Is there a group of people who believe it significantly more than Fama believes people that participate in markets believe it? Yes: Our regulators and our government. ...

Justice Holmes once famously dissented that it’s a form of judicial activism to base our courts on “an economic theory which a large part of the country does not entertain.” It seems like the same should be said for our government and our regulatory bodies, especially as they try and figure out how to fix the mess that is the financial markets. And it’s worth noting that the founder of this economic theory, The Efficient Markets Hypothesis, doesn’t even believe that people actually in the financial markets entertain it.

The notion that regulators were more fundamentalist than market participants is perhaps shocking but seems accurate to me. (It should be noted, as Konczal does, that a minority of regulators wanted to regulate OTC derivatives, but it's not quite clear what that would have looked like in practice. Summers and Rubin are ridiculed now for thinking that banks wouldn't screw up the way they have, but is it reasonable to have expected them to have correctly made the opposite prediction? Hindsight and all that.)

The remaining question is this: if the strong-form version of EMH depends on rational actors making full use of aggregate information, and yet this picture does not accurately describe the world, is that because a). the actors are irrational; b). information is not complete in aggregate; c). individuals mostly act rationally most of the time, and information is mostly complete in aggregate most of the time, but black swans can kill.

If the correct answer is c)., as I believe it is, then Fama is correct: EMH is a solid view of the world for almost all practical purposes. This is the weak-form version of EMH. But under the same set of assumptions it is also true that investors should not behave as if it were. If all investors did, and made every investment decision by playing the averages, then they would miss opportunities to maximize the return on their investments. That, of course, would be irrational. But because no individual has full access to all aggregate information, and because some people act irrationally some of the time, we should expect EMH to never be true according to the tenants of EMH. So investors must act as if EMH were wrong, by doing so they demonstrate that it is wrong (or at least doesn't have strong microfoundations), but by missing the mark mostly randomly they demonstrate that weak-form EMH is actually correct approximately all of the time, and that strong-form EMH is approximately correct almost all of the time.

The problem begins when errors are not random. But this takes us right back to the question we just answered: are errors non-random because investors are irrational, because information is imperfect in aggregate, or both? We're going in circles. As Konczal says, this is a strange theoretical place to be. And as Matthew Yglesias pointed out awhile ago, there's no easy way to square this circle.

So what are the implications for policy? Should we expect regulators to be more or less rational than investors, and to possess more or less information? Interpreted one way, Konczal's argument can mean that regulators are both less rational and possess less information than investors. Interpreted another way, if regulators are rational they have no choice but to regulate as if EMH were true, but if EMH were actually true then there would be no cause for regulation. Is this an argument in favor of tying the hands of regulators (and investors) with inflexible rules in the hopes of preventing non-random errors from accumulating into a financial crisis? If so, what kinds of regulations are these? Should these regulations assume EMH or the absence of it?

A good answer to that question is worthy of the Nobel Prize.

Why Does Krugman Have to Keep Doing This?



Health care reform hangs in the balance. Its fate rests with a handful of “centrist” senators — senators who claim to be mainly worried about whether the proposed legislation is fiscally responsible. ...

But if they’re really concerned with fiscal responsibility, they shouldn’t be worried about what would happen if health reform passes. They should, instead, be worried about what would happen if it doesn’t pass. For America can’t get control of its budget without controlling health care costs — and this is our last, best chance to deal with these costs in a rational way. ...

You might think, given this picture, that extending coverage to those who would otherwise be uninsured would exacerbate the problem. But you’d be wrong, for two reasons.

First, the uninsured in America are, on average, relatively young and healthy; covering them wouldn’t raise overall health care costs very much.

Second, the proposed health care reform links the expansion of coverage to serious cost-control measures for Medicare. Think of it as a grand bargain: coverage for (almost) everyone, tied to an effort to ensure that health care dollars are well spent.

I really feel kind of silly posting this, because Krugman has just committed such a simple logical fallacy that it shouldn't even have to be pointed out. But one of my favorite quotes comes from Orwell: "We have now sunk to a depth where the restatement of the obvious is the first duty of intelligent men." I am not so stupid as to compare my intelligence to Krugman's, at least the Old Krugman, but in the interest of restating the obvious, here's what Krugman is saying:

1. We need to cut costs.

2. We should add some costs, but they won't be too big.

3. Then we should cut other costs, and the new savings will be bigger than the new costs. Honestly. Smart people who know nothing about politics say so.

What's the problem with this? Well, even if you believe #3 is feasible, and even if you believe that it is politically possible to cut Medicare by even one cent and live to tell the tale, there is NO REASON why enactment of #3 depends on the enactment of #2. In other words, if we can cut Medicare costs without sacrificing quality of care then we should do it. Absolutely. Yesterday. But that has absolutely nothing to do with whether we should then turn around and give those savings back to "relatively healthy" people rather than, say, balancing the budget. The case for #2 has nothing at all to do with the case for #3, and it directly contradicts #1.

The rational response to this sort of argument is to say "Yeah? Prove it. Cut Medicare costs without sacrificing coverage or quality of care first, build up a trust fund for this new expanded coverage with the savings (and without any other sources of funding), and if the balance of the fund is positive in say 2015 then we'll spend it on covering the 'relatively healthy' people who don't currently have insurance."

Think Krugman would take that deal? Of course not. Because he knows, as I know, that cuts to Medicare are politically impossible. And he knows, as I know, that magical mystery health care savings have a tendency to not materialize. And he knows, as I know, that universal health care is impossible without increases in taxes even if generating some savings from Medicare reform were possible. And he knows, as I know, that it is impossible to pay for health care reform without redistributing from "relatively healthy" people to "relatively unhealthy" people (i.e. it's not at all just a rich -> poor transfer).

Now that might be justifiable along any number of dimensions (although the median voter doesn't seem to think so, and Krugman knows that too, which is presumably why he's trying this end-around in the first place). But if it is than Krugman should make that case rather than the one that he is making, which amounts to "We all get health care and ice cream and pet unicorns and have money left over for cap-and-trade!"

He should really stop this. It's beneath him.

UPDATE: And here is Krugman complaining about good unemployment news because it will distract from what's really important: er, unemployment. What?

Friday, December 4, 2009

Playing Mind Games with the Fed

. Friday, December 4, 2009

Brad DeLong says that Ben Bernanke is unprofessional, and recants his support for another term for Bernanke as Fed chair. Why? Because Bernanke said this:

At his confirmation hearing for a second term as chairman, Bernanke emphasized that the government has spent less than half of the money in the $787-billion package passed earlier this year and that analysts are still determining its impact. "Only about 30 percent of the funds have been disbursed," Bernanke said. "It's a little bit early to make a strong judgment, a little bit early to decide whether or not to do additional fiscal actions..."

Meanwhile, Kevin Grier notices Philadelphia Fed President Charles Plosser making noises about an exit strategy for the massive government involvement in the financial sector, and a pullback from its loose monetary policy:

Arguing that the U.S. economy has entered sustained recovery and forecasting growth rates of 3% for next year and 2011, Plosser said the Fed must take “appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy.”

This could include hiking rates from their current level near zero even “before unemployment or other measures of resource slack have diminished to acceptable levels.”

On the one hand, we could take these statements at face value: the Fed is concerned about the 1970s experience with overreach, stagflation, and the effect of massive public debt on the currency and broader economy. These are valid concerns. Of course there are other valid concerns, like 1937, that points to keeping the pursestrings open for a good while longer. There is good reason to have both experiences in mind, and of course it is always difficult for the Fed to thread the needle between overreach and undershooting.

But there are reasons to not take these statements literally. The Bernanke Fed has had its independence challenged and has faced criticism for too-loose policies and the bailouts. Meanwhile, the Congress seems to have no desire to try to pass a second massive stimulus and is facing massive popular pressure to not explode the deficit much more. So Bernanke's statement during his confirmation hearing may be viewed as telling the Congress what they want to hear in order to reassure them that the Fed is not a loose cannon and is going to act responsibly in the coming years. Why? So they will confirm Bernanke and leave the Fed's independence alone. After all, Bernanke doesn't control the fiscal purse anyway... his every incentive is to dish some cheap talk to Congress.

Plosser's statement may be viewed in a similar light: reassure the government that the Fed isn't going to go crazy and thus try to keep Fed policy off of the Capitol floor. As Grier concludes:

If I were a Fed President (YIKES!!), I guess I would make speeches like this one in public, but support leaving easing in place until unemployment and other measures of slack have turned the corner in private.

I'm not saying this is the only way to read the situation -- Bernanke and Plosser may truly be very concerned about the exploding deficits and the demonstrated lack of political will in Congress to cut back when it truly is necessary -- but it's certainly one way.

Could Greece Default?


Greece is in big, big, trouble:

Most blatantly, Greece misled the world about the acuteness of its fiscal plight. Back in March, the situation looked bad – but manageable. The European Commission forecast that the Greek public sector deficit this year would be above the 3 per cent limit set under EU rules and “exceed 4 per cent in 2010”. At the time, officials were concerned the actual numbers would be higher. Nobody, however, was prepared for the shock unveiled by the Socialist government elected in October. Statistical revisions showed the public finances so much worse that the Commission changed its projections to a deficit of 12.7 per cent this year and 12.2 per cent in 2010. ...

On almost every measure, Greeks have been living beyond their means. The current account deficit reached almost 15 per cent of gross domestic product last year, making the US deficit of 5 per cent look modest. External public debt now exceeds GDP. ...

Since joining the euro, Greece has regularly flouted the deficit and debt limits set in the zone’s “stability and growth pact” that is meant to correct for the lack of a single eurozone fiscal authority. Scant progress has been made in reforming the country’s public sector, which added 50,000 mostly low-skilled employees in 2004-09.

Greece has been playing a game of chicken with the E.U., and it looks like the E.U. is not going to back down. This could force Greece to turn to the IMF and accept stiff conditionality, or... what? Can the E.U. let Greece default on its debt? It would be very difficult (perhaps impossible) for the E.U. to kick Greece out of the monetary union, and it is mostly inconceivable that the E.U. would let a member country default on its debt, as that would have an impact on the borrowing costs of the rest of the Eurozone countries. In any case, Greece seems to believe that the E.U. will bail them out and thus avoid the iron fist of the IMF. But E.U. is sending signals in the opposite direction:

The eurozone has a “no bail-out” clause, which prevents collective liability for debts incurred by a member. In February – when the crisis was at its most intense – Peer Steinbrück, then Germany’s finance minister, admitted that in the worst case “we would have to take action”. That eased pressure on the weakest members, including Ireland. But Mr Steinbrück has since been replaced and his promise now carries little weight; in the eyes of conservative European policymakers, it increased the risk of “moral hazard” – rewarding bad behaviour.

“It is one thing if you are in the middle of a systemic crisis. Then you can’t allow anyone to fail and don’t worry about moral hazard,” says Mr Gros at Ceps in Brussels. “Now we are out of the woods and it may be a good time to reduce moral hazard.” In a research note last week, Deutsche Bank economists wrote that Greece’s continuing violation of the rules “may have changed the minds of EU authorities ... We believe that they may have to set an example for other countries in trouble”.

Greece is not a terribly important part of the greater E.U. economy, so worries about systemic reverberations from punishing Greece would be somewhat slight.

I don't know what's going to happen -- it's not even clear to me what the options are at this point -- but this story certainly bears watching.

Wednesday, December 2, 2009

Russian Government Advocates Punching Russian Policemen

. Wednesday, December 2, 2009

No, seriously:

[H]ere’s one you don’t see very often: the Interior Minister of a country suggesting the people should literally hit back at the police. As reported in the Washington Post, Interior Minister Rashid Nurgaliyev stated:

May a citizen hit back at a policeman who has attacked him? Yes he may; if he is not a criminal, if he is walking along quietly and breaking no rules.

Moreover, the Power Vertical quotes a Russian MP, Andrei Makarov, as suggesting:

You can neither modernize nor reform the Interior Ministry. You can only abolish it. The whole police force needs to be decommissioned and cleansed with help from civil society and human rights groups.’

While such a comment might not be unexpected from an opposition deputy (to the extent that any even exist in Russia these days), what is particularly interesting is that Makarov is actually a fairly prominent member of Russia’s ruling party, United Russia.

I'd like to link to a particular N.W.A. song here, but instead here's a video of Argentinean legislators throwing chairs and punching each other (it starts at about the 1:30 mark).

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




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