Saturday, July 31, 2010

Are the Iran Sanctions Working?

. Saturday, July 31, 2010

Joe Klein believes the Iran sanctions are working:

But Krauthammer is right that there's something going on, something very important, with Iran--something that he and his fellow neoconservatives didn't anticipate. (Indeed, no one did.) The sanctions are working; they're having a major impact on the Iranian economy. The powerful bazaari community has been shocked not just by the universal support for the sanctions, but also by their comprehensive nature. Iranian ships are sitting at their docks because they international community is refusing to insure them. Banks that have done business with Iran in the past are refusing to do so now because the UN sanctions--that's right, those "weak" UN sanctions--target them as well. The Iranian economy, a stagflation fiasco before the sanctions, is cracking.

As a result, the Administration has been receiving all sorts of feelers--public and, for the first time, private--from the Iranians about resuming the negotiations on the nuclear program. Recently, the Iranians have promised not to enrich their uranium to the higher 20% level they threatened earlier--and proceed with the uranium exchange plan they negotiated with Turkey and Brazil. That's not sufficient. Any negotiations must take place within the IAEA matrix, with the UN Security Council's 5 permanent members, including the U.S., plus Germany. I'd hope that the Obama Administration would insist on a concession--a meaningful sign of good faith from the Iranians--like increased access for IAEA inspectors and the release of documents relating to their nuclear program that the IAEA has asked for, and not received, in the past--before any new round of negotiations begins. Too often in the past, the Iranians have used negotiations as a stall; they have to understand that's no longer possible. (If necessary, to preserve Iranian national pride after a century of being ordered around and messed with by the colonial powers, this can be done quietly.)

I'm not too sure what to think of this; there have been various reports over the past few weeks that an American or Israeli military confrontation with Iran has recently become more likely, not less. (Including one from, erm, Joe Klein.) In any case, "feelers" are no clear sign of progress, nor are concessions like those Klein mentions.

I think Klein is right about one thing: the new round of sanctions are hurting Iranian businesses and consumers. The political situation in Iran is already tenuous; the combination of an aging and ailing Khameini, crippled Ahmadinejad, and a somewhat robust reformist movement is certainly volatile. The sanctions could bring these tensions to a head. If, and this is a very big "if", the Iranian public blames their leadership for their economic suffering and not the international community, then this could pave the way for a shift in Iranian leadership, under which Iran might be willing to make a credible pledge to only pursue nuclear energy, and not weapons. That's the only scenario under which I see the sanctions "working", if by "work" you mean "ending Iran's weapons program beyond a reasonable doubt". Khameini and Ahmadi have too much at stake to make the sort of concessions that the Obama administration and its allies want to see.

At this point I have no idea if that scenario is plausible. Neither does Klein. I believe that over the medium-run it is plausible, but estimates put the clock at roughly a year before Iran crosses the Rubicon, or at least that Israel thinks that's where the clock is. In any case, it's really difficult to see whether there's been any budge from Iran, or whether there will be. It will depend on how, and how quickly, the domestic politics shakes out.

Saturday Morning Cartoons


A few weeks back I posted an excellent animation of a talk by David Harvey on a Marxist interpretation of the financial crisis. It turns out that it was made by RSA animate, and there is a whole series of them. Below are two more, the first of a talk by Slavoj Zizek on charity, and the second an interview with superfreakonomists Stephen Dubnar and Steven Levitt on altruism.

Friday, July 30, 2010

The Price Elasticity of Demand for Public Morals, Redux

. Friday, July 30, 2010

A while ago I wrote a series of posts discussing what I called "the price elasticity of demand for public morals". The upshot of those posts was that society has different moral preferences at high levels of development (or when economic times are good) than at lower levels of development (or when economic times are bad). Here's another data point:

On Wednesday, the House Financial Services Committee approved a bill that would effectively legalize online poker and other nonsports betting, overturning a 2006 federal ban that critics say merely drove Web-based casinos offshore.

The bill would direct the Treasury Department to license and regulate Internet gambling operations, while a companion measure, pending before another committee, would allow the Internal Revenue Service to tax such businesses. Winnings by individuals would also be taxed, as regular gambling winnings are now. The taxes could yield as much as $42 billion for the government over 10 years, supporters said.

The implication from my previous posts was that we should be more careful when making "moral" arguments about public policy, since they usually have no true grounding in morality, and more explicitly examine costs, benefits, and tradeoffs in a pragmatic way. That may involve asking some uncomfortable questions, but it could allow us to frame policy disagreements in the appropriate way.

Confirmation Bias


Apologies for the light posting lately. I was in Florida and mostly internet-less for the past week. I have posts on financial reform and income inequality in the works but first I want to point an example of how statistical analysis can be used, abused, and simply be murky. Reinhart and Rogoff have recently released a paper (ungated pdf) showing a link between high debt levels and a slowdown in economic growth:

[I]t is evident that there is no obvious link between debt and growth until public debt reaches a threshold of 90 percent. The observations with debt to GDP over 90 percent have median growth roughly 1 percent lower than the lower debt burden groups and mean levels of growth almost 4 percent lower. ...

Interestingly, introducing the longer time series yields remarkably similar conclusions. Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP).

This is for advanced economies; the effect is stronger for emerging economies. The paper does not utilize any fancy statistical techniques, but merely reports charts and tables of average growth rates at different debt levels for different countries. The association between high debt levels and lower growth rates is pretty consistent across countries, with a few exceptions (about which more in a minute). Obviously this is bad news for stimulus proponents who want to ramp up spending. The U.S. debt is now approaching the 90% of GDP threshold, and this paper could be (and has been) used by stimulus opponents as evidence in favor of austerity. This, in turn, has led stimulus proponents to attack it pretty severely. Here's Krugman, arguing that the R-R data don't count:

I think we can say that this paper has been completely discredited. I’m actually sort of shocked that R-R apparently failed even to notice that all of their high-debt observations for the US — and remember, it was their own choice to highlight US data — come from the years immediately after World War II, and to think about what that means.

There's one truth here, one partial truth, and one falsehood. It's (mostly) true that all of the high-debt observations for the U.S. come immediately after WWII -- though 2008 and 2009 come close to the 90% threshold, and 1944 and 1945 are not postwar years and do reach the threshold -- and it's true that R-R don't explicitly discuss this fact in any detail. (Although it's telling that Krugman has no such qualms about the Romer and Romer paper that finds a large fiscal multiplier by examining the WWII years.) It's partially true that R-R highlight U.S. data, but they also discuss (and disclose) data from 20 other advanced economies and a number of emerging economies in the paper as well. These cases also support the pattern. Without actually saying it, Krugman gives the impression that they ignore the rest of the world. It is untrue that the fact that the high-debt U.S. years follows WWII discredits the paper, and Krugman has to have willfully misread the paper (or not read it at all) in order to make that conclusion.

First, R-R open the paper by citing a previous study showing that debt increases are generally a consequence of financial crisis, not a cause. Indeed, this is one of the great takeaways from their book, along with the observation that debt crises usually follow financial crises. In this light, their newer article can be read as a claim that both low growth and high debt follow financial crises like the one we've recently experienced. This is probably the reading R-R prefer, since they explicitly claim that this is an empirical, not a theoretical, paper. They even say in the paper, following a discussion of the differences between war-debt and peace-debt, "Here we will not attempt to discriminate the genesis of debt buildups, and instead simply look at their connection to average and median growth and inflation outcomes."

Second, just because data has a context does not mean that correlations are "discredited". R-R can't help that the data are what they are. Maybe there are confounding circumstances that render the correlations spurious; maybe not. R-R acknowledge that more study is needed on the question. But the fact that this pattern persists across two centuries of data in 44 countries indicates that the correlation is at least fairly robust. Krugman is the one ignoring the cross-sectional comparison here, not R-R, when he only looks at the U.S. years and throws them out because they are special cases. In fact, the exceptions to the association R-R find run the opposite direction of what Krugman alleges:

Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those high-growth high-debt observations are clustered in the years following World War II.

In other words, the R-R paper is not discredited. In one sense it can't be, because they offer no causal theory for why the association they observe exists, so there's nothing to discredit. They merely point out the correlation, and offer possibilities for further research. They do not do any time series analysis, which is a shame because it makes it impossible to tell whether the low growth followed from the high debt, or whether the high debt followed from the low growth. If I was Krugman, that's the weakness of the study that I'd hammer on.

But to do that he'd first have to acknowledge that the association exists, which would mean that high debt levels are something to be avoided (except during war), which would weaken the case for massive fiscal stimulus when the debt-to-GDP ratio is already approaching 90%. He doesn't want to do that, so instead he has to attack the credibility of two very good empirical economists. In the end R-R aren't the ones being discredited.

Wednesday, July 21, 2010

The Importance of Starting Points

. Wednesday, July 21, 2010

This is a very good object lesson on why starting points matter when making time series comparisons, especially cross-sectionally:

But is Iceland’s post-crisis “miracle” real? No. It is an illusion created by the starting date Krugman chose for his figure. If we shift it back just one quarter – the quarter before Latvia and Estonia’s GDP peak – Iceland’s performance no longer stands out...

Iceland’s massive devaluation improved the country’s trade competitiveness, while imposing huge losses on its krona-based savers. Ireland’s inability to devalue protected its citizens’ euro-based savings, but has forced it to improve competitiveness in other ways, such as through wage cuts. Of the lessons that can reasonably be drawn from Iceland’s experience over the past decade, the benefits to tiny statelets of having a currency to debase is hardly one of them.

Graphs and more analysis at the link. One lesson is that a whole lot of time series stats are questionable, especially those coming from partisan think tanks or public ideologues. Another is that sometimes it's really hard to make appropriate comparisons, because choosing a starting date is arbitrary by nature. I don't mean to pick on Krugman here (this time) because I don't think he's doing anything intentionally wrong. The point is to be careful when producing, or consuming, statistical information.

Judgment Day for Kosovo?


Tomorrow the International Court of Justice will rule on the legality of Kosovo's declaration of independence from Serbia. The ICJ was tasked by the UN General Assembly to make this judgment, but what will it actually mean? Stephanie Carvin sees the ruling as not having much importance for the Kosovo case, but could have some ramifications for future secessionist movements:

Second, no matter what the ICJ decides in its decision on Kosovo, I wonder if it is really going to make a difference. The starting point for this, of course, is that it is an advisory opinion – so it’s not going to make a huge difference either way as it is non-binding. It is either going to help solidify a fait accompli or it is going to basically make a decision that will fly in the face of political reality – Kosovo is not going back to whatever is left of the Former Yugoslavia. It may allow the Serbs to score some political points, (particularly if it goes to debate at the UN General Assembly) but that is about it.

Where this is obviously going to have greater implications is on other sovereigntist movements around the world. How they go about achieving their separatist ends will be of some interest.

Meanwhile, Steve Saideman sees even less in it:

So, I am saying that the ICJ ruling, whatever it is, will be used as justification for those countries that can use it as such, ignored by those countries that cannot use it as justification, and will not really affect what secessionists will do. I am truly a norm skeptic, although I am currently reading a book that addresses a dark side of norms that I am finding compelling--hypocrisy costs. But that is a post for another day.

What would I want to have happen here? Well, if the international community really supports the responsibility to protect and all that comes with it, it would make sense for the ICJ to allow for a remedial right to secession (as the normative literature on secession call it)--those who face significant repression/oppression should be allowed to determine their future and secede. Those who are not oppressed (that would be you, Quebec) would not have a right to secede, as granted by the international community. If host states, such as Canada, let their wayward provinces go, that is something else. But again, I am skeptical that norms will stop committed actors from doing what they want, at least in the short term and especially when domestic political incentives push in a particular direction (see Ties That Divide).

I'm with Saideman, especially his last sentence. It seems persuasive to me that sovereignty norms are usually window-dressing for power and interests: they are upheld when the powerful have in an interest in upholding them, and violated when they do not. The Kosovo case is a good example of that, as is the war in Iraq. These cases also reveal the vacuousness of another norm, the "responsibility to protect" oppressed peoples that requires the violation of state sovereignty under certain conditions. These norms are never upheld in a consistent fashion, usually because of domestic political incentives in the states that would have to enforce them.

I don't know enough about the ICJ to venture a guess about the ruling, but I know enough about international politics to predict that it is (almost) completely irrelevant. Tomorrow, just as today, the strong will do what they can and the weak will suffer what they must.

As to my personal feeling, I believe Kosovo was justified in separating from Serbia, and the international community was right to support them. That doesn't mean that I support everything done by Kosovo before and since the declaration of independence, and it certainly doesn't mean I support all separatist movements. But the situation in Kosovo was untenable; refusing to secede would have been suicidal. As Saideman says, this is not true in Quebec. I don't think it's true in Catalonia either, nor in Flanders. It's probably impossible to draw a straight line that adjudicates all of these cases, but for the most part I don't think it's terribly difficult to see which groups have legitimate claims to secession and which do not.

Tuesday, July 20, 2010

The Bottom Billion

. Tuesday, July 20, 2010

Hans Rosling, who we've covered before, has a new TED talk. In that past he's done a lot of interesting things illustrating data on computers. This time, he uses plastic IKEA boxes to talk about demographics and development.

I'm Very Happy Matt Rognlie Is Blogging Again


And I hope he continues after he gets to MIT:

Take a look at the 2009 CIA World Factbook figures on total fertility rate (summarized in the second table here) and you'll see a startling pattern at the bottom of the list:

223. Japan: 1.21
224. South Korea: 1.21
225. Taiwan: 1.14
226. Singapore: 1.09
227. Hong Kong: 1.02
228. Macau: 0.91

Out of the six lowest-fertility countries in the world, five are located in East Asia and the other is majority Chinese. In fact, despite its one-child policy, China has the highest fertility rate, 1.79 children per woman, of all countries in East Asia except North Korea (which probably shouldn't count).

It isn't too surprising that China is higher: declines in fertility are heavily correlated with economic development, and despite its overwhelming success over the past three decades China remains far poorer than the six countries listed above. But the shockingly low fertility rates in the East Asian nations most culturally comparable to China offer a strong hint of China's demographic future. Shanghai, China's richest city—and our best example of what a richer China 20 years hence might look like—has a fertility rate of only 0.88!

Demographics will play a very large, and maybe so far underrated, role in the story of the 21st century. Many of the most pressing issues in international politics -- terrorism, macroeconomic imbalances, migration flows, resource scarcity -- are related to demographic transitions. Worse, these are hard to predict and even harder to control.

Monday, July 19, 2010

. Monday, July 19, 2010

I am reminded of the urban planner Christopher Alexander and his beautiful A Pattern Language: social science is not about rules, but rather about sets of principles which can guide decisionmaking. That is, social science is about finding general patterns which help us think about specific situations. This, as I like to discuss on this site, is very different from the scientific method of the hard sciences.

Ostrom’s empirical method strikes me as the right one. Empirics do not tell us which theory to develop. Theory does not tell us which empirics to examine. Rather, theory and data develop together, feeding back on each other, in order to help us find the patterns above.

That is from a discussion of Elinor Ostrom's career, and especially her expanded Nobel lecture published in the June AER, at A Fine Theorem. There is more at the link.

Sunday, July 18, 2010

Paul the Octopus Kingmaker

. Sunday, July 18, 2010

An Iraqi blogger is getting frustrated with the inability of its leaders to form a government following the March election, and has an ingenuous solution:

I suggest that we send a delegation to Germany as soon as possible to bring Paul the Octopus to Iraq before the German turn him into delicious meals and before the Dutch marines assassinate him because he predicted their loss. In this issue, we have to cooperate with Spain to save the octopus's life and prepared a great glass pool for him provided with some good mussels. We should also put each mussel in a small glass box writing the names of the politicians who are fighting over for the Prime Minister position and mainly Nouri Al Maliki and Ayad Allawi and Adil Abdul Mahdi. Of course we will have other names.

from my own point of view, this will be the most democratic experience for one main reason. Paul the Octopus is not Shiite, Sunni or Kurdish. He does not represent any majority or minority. He is not a member of Islamic party or secular party and the most important issue, he is not going to ask for any position in the coming government. He is just a creature who wants to live in peace

One in Five Million


Matt Rognlie is shrill:

Indeed, from the State Department Visa Office's report for fiscal year 2009, we can determine exactly how many "other workers" green cards were given to residents of Mexico, rather than immigrants already in the United States adjusting their status.

The answer? 23.

You have to hand it to Joe Arpaio. Yes, his father legally immigrated to the United States—just one year before the force of anti-Italian bigotry made it almost impossible for his countrymen to follow. And now, if a young Mexican resembling Nicola Arpaio wants to come to the United States, Joe's response is that he should stay in Mexico, get in line, and hope that he's one of the lucky 23 granted passage from a country of 110 million.

After all, he wouldn't want to be illegal.

(emphases in original)

"Other workers" (EB-3) green cards are those reserved for non-highly-skilled immigrants. In other words, it's the sort of green card that most Latino immigrants would have to apply for. Undocumented immigrants almost literally have no chance to improve their lives except by crossing the border illegally, and then they are threatened for choosing to do so. This is nonsensical or immoral. Perhaps both.

Saturday, July 17, 2010

RIP, David Blackwell

. Saturday, July 17, 2010

David Blackwell, pioneer in probability theory, game theory, and other mathematics, has died. A truly remarkable man, from a poor Midwestern town (close to where I grew up, incidentally). First black tenured faculty member at UC-Berkeley (after being turned down at Princeton), first black member of the National Academy of Sciences, and an early applier of mathematical game theory to conflict situations at the RAND Corporation. RIP.

Should the U.S. Pursue Closer Ties with India?


Matthew Continetti asks a good question:

Why do Americans spend so much time analyzing China's growth, but not India's? Yes, the growth of Chinese economic and military power since Deng Xiaoping proclaimed "to get rich is glorious" has been nothing short of extraordinary. But India has also embraced markets over the years, and the results have been equally amazing. We tend to think of India in terms of its relations with Pakistan and Afghanistan, and in terms of its cultural power, rather than in terms of the economic and geopolitical benefits of a prosperous South Asian democracy. But that should end. We have a lot to gain by befriending India, and a whole lot to lose.

The Bush administration made it a point to solidify ties with this formerly nonaligned country. It seems like the Obama administration shares the same goal, but unfortunately also sees India as a lower priority than Afghanistan, Iran, reset with Russia, and "strategic reassurance" with China. Of course, an India closely aligned with the United States could help with some of these strategic dilemmas, and hedge against other threats. Why can't Obama spend less time assuaging America's competitors, and more time supporting her friends? A good place to start would be an Indian-American free trade agreement. It's one European idea Obama ought to emulate.

I think he's completely right about this. Christopher Hitchens has also argued this point vehemently a number of times. India is a largely-secular, largely-democratic, largely-open country in South Asia of rising economic and security importance. It would be disastrous if the U.S. were to waste the chance to become strong allies with India.

Still, there are are two reasons why the U.S. hasn't spent as much time on India as it has with China, and both have to do with time constraints. First is the U.S. relationship with Pakistan, whom the U.S. continues to view as a short-term ally of necessity in the fight for Afghanistan. Publicly cozying up to India could jeopardize what little cooperation we've gotten from Islamabad, and would make an already-difficult task much harder. I wouldn't leave the point there, tho. The U.S. has an opportunity to leverage its potential relationship with India to pressure Pakistan to do much more than it has done, and it should consider doing so. If Pakistan doesn't play ball, then the U.S. can turn to India or threaten to, further isolating Pakistan from the rest of Asia. And if the AfPak effort fails, cooperation between Pakistan and the U.S. will likely dry up anyway. In the short run, then, treading water with India makes sense.

Second is the related fact that India isn't going anywhere. Opportunities for building rapport with India will continue to be available over the next decade and beyond. India already has fairly close ties with Europe, and won't turn against the West to join with China, say. The U.S. has some time to try to deal with more pressing short run concerns before turning to a longer-term relationship with India. I'm not sure that the Obama administration is thinking at that level of abstraction, but I do think it's true.

Despite that, a good governor can juggle more than one ball at a time, and Obama should be doing more to strengthen ties with New Delhi. There is no reason why security initiatives with Pakistan should preclude economic ties with India, for example. And the U.S. should not allow itself to be blackmailed by Pakistan in any way, shape, or form. So I do think it's time for a closer relationship with India.

Friday, July 16, 2010

Factor Price Equalization, Part II

. Friday, July 16, 2010

This NYTimes article, which features a quote by Barry Eichengreen, focuses on the shift of textile manufacturing from China to places like Bangladesh:

It is the sort of place to which foreign manufacturers may increasingly turn, if the rising wage demands of factory workers in China prompt companies to seek new pools of cheap labor elsewhere.

Already, in factories behind steel gates and tall concrete walls, tens of thousands of workers, most of them women, spend their days stitching T-shirts, pants and sweaters for Wal-Mart, H&M, Zara and other Western retailers and brands.

One of the Bangladeshi companies here, the DBL Group, employs 9,000 people making T-shirts and other knitwear. Business has been so good that the company is finishing a new 10-story building with open floors the size of soccer fields, planted with row after row of sewing machines.

Eichengreen adds on his Twitter that China should be worrying that this trend will continue. Maybe it should, but China is moving up the value-added production ladder very rapidly. It may be willing to lose some textile jobs so long as it is adding semi-durable and technological jobs. Importing consumer non-durables from places Bangladesh could help keep inflation down a bit and help steer investment to more lucrative production. Such as providing inputs to manufacturing in Bangladesh, as the article points out. Yes, China still has hundreds of millions of under-employed, but many of those were never going to work in sweatshops anyway. China should be a bit worried... but not mortified.

In recent posts I noted that a rise in China's exchange rate would not necessarily benefit American import-competing manufacturers, since production would simply shift to other developing countries. Consider this another data point supporting that claim.

Also note that workers in Bangladesh have already gained more bargaining power than they had before the trade came, and that multinational corporations have (at least sometimes) sided with the labor movement. Local corporations, however, have resisted:

In January, H&M, Wal-Mart, Gap, Tesco and other Western clothing buyers asked the Bangladeshi government to raise the minimum wage and reset it every year, although the group did not specify what the wage should be. A spokeswoman for H&M, Malin Bjorne, said the company was willing to pay more for clothing to help support higher wages. It is unclear whether other companies would do the same.

But factory owners here argue that a big increase in wages would make them uncompetitive against Vietnam and other big producers, which have higher labor costs but also have better infrastructure and are more efficient producers. If that happened, Bangladesh’s China opportunity could prove all too fleeting, they say.

“If it’s 5,000 taka, I would close all my factories,” said Anisul Huq, a former head of the Bangladeshi garment industry’s trade group and a factory owner whose customers include H&M and Wal-Mart. “Even if it’s 3,000 taka, lots of factories will close within three or four months.”

Here we see the "California effect" and the "race-to-the-bottom" in play at the same time. Sort of. These countries are practically at the bottom already, so it's not clear how much further they can go. And even though some manufacturing is shifting around looking for the lowest wages, it appears that overall wages and working conditions are going up everywhere MNCs go. Yesterday China, today Bangladesh, tomorrow Vietnam?

Apropos of Not Much


-- European banks are in trouble. Could be the story of 2011, and the Euro isn't safe just yet.

-- Bryan Caplan (a libertarian) makes his best case for conservatism. I wish more would attempt such an exercise, but Caplan's actual argument doesn't seem very... conservative.

-- Germany's trading partners are jealous.

-- A free book on The Future of Finance from the LSE. Some impressive contributors, but I haven't read any of it yet.

-- A free book on microfinance by David Roodman. I've linked to it before, but worth a reminder.

Factor Price Equalization


Somewhat apropos of my last post comes this report on the increased bargaining power of (some) Chinese workers:

In recent months, as the country’s export-driven juggernaut has been revived and many migrants have found jobs closer to home, the balance of power in places like Zhongshan has shifted, forcing employers to compete for new workers — and to prevent seasoned ones from defecting to sweeter prospects.

The shortage has emboldened workers and inspired a spate of strikes in and around Zhongshan that paralyzed Honda’s Chinese operations last month. The unrest then spread to the northern city of Tianjin, where strikers briefly paralyzed production at a Toyota car plant and a Japanese-owned electronics factory.

Although the walkouts were quelled with higher salaries, factory owners and labor experts said that the strikes have driven home a looming reality that had been predicted by demographers: the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced China’s population growth. ...

The other new reality, perhaps harder to quantify, is this: young Chinese factory workers, raised in a country with rapidly rising expectations, are less willing to toil for long hours for appallingly low wages like dutiful automatons.

I'm always skeptical of this sort of Tom Friedman-esque formulaic reporting, in which one or two (perhaps isolated) incidents are tied to a lazy statistic or two, and out pops a New Rule. So I certainly don't want to push this too far. But new UNC poli-sci professor Xi Chen has done research on contentious politics (e.g. the labor movement) in China, and his conclusion is that despite the popular imagination of Chinese social and economic organization as originating from top-down planning, quite a lot of it actually comes from a bottom-up process. (I believe a book on the topic is forthcoming soon.) A lot of low-level negotiation between employers and employees is certainly consistent with that thesis.

How pervasive is the shift in market power from employers to employees described in the article above? I can't be sure. But I can be fairly sure that it's more common today than it was fifteen years ago. This trend would be unlikely without trade, and should factor into any calculations about whether we should seek to structure trade policy to benefit American over Chinese workers. Would it change any minds if they knew that securing advantages for American workers means consigning Chinese workers to sweatshop conditions?

Thursday, July 15, 2010

How Free Is Trade? How Free Should It Be?

. Thursday, July 15, 2010

Tim Duy says that tariff and non-tariff barriers (like quotas and subsidies) to trade are not the only pressing concern:

When I express concerns over free trade, I am really expressing immense frustration over an international financial architecture that sustains and maintains global imbalances that yield outcomes that I believe are very difficult to justify and yet are accepted due to a blind faith in free trade. In essence, the ability to manipulate capital flows has made a mockery of the free trade crowd. I know. I used to be in that crowd, and in many ways still am. But I can no longer wrap myself in the free trade flag to justify the negative impacts of financial account manipulation. And if the US cannot seriously address financial account manipulation on a global basis - and if the Pettis article is correct, the US Treasury will fall short of what is needed even with the announced adjustment to Chinese currency policy - what choices are you left with? Either accept continued economic stagnation, or act unilaterally on the current transactions (tariffs) or financial (reciprocative devaluation or capital controls) side of the accounts. None of which are pleasant options.

To which Kevin Grier responds:

Here are some points to consider:

1. The current global trading system is very very far away from free. To criticize any current outcome and blame it on free trade is simply incorrect (If you don't believe me, take a look at "Travels of a T-shirt" or "Misadventures of the Most Favored Nations").

2. The dollar doesn't have to adjust for relative prices to adjust. The relevant relative price is the real exchange rate. US exports can become more competitive with a fixed nominal exchange rate simply by US prices rising more slowly than those of their trading partners. Higher productivity growth in the US would produce this effect.

3. Everybody has a comparative advantage. Statements like "America apparently has little left in the comparative advantage department" are non sequiturs.

4. I do agree that financial account manipulation should be discouraged, but it is way too simplistic to say it's good for China and bad for the US. It's good for US consumers, especially low income consumers and it's bad for Chinese consumers, especially higher income consumers.

I agree to some extent with all of this, although I think that Duy's conclusion -- "Financial barriers to trade are a problem, so let's try to fix it by erecting other barriers to trade" -- doesn't get us very far. To me, the interesting questions arise from #s 1 and 4 in Grier's list. The current global trading system is very far away from free, and the patterns of protectionism are not coincidental. They have political causes, which we need to understand before we start advocating retaliation. First, the U.S. is not innocent of trade-distorting practices on the current or capital accounts (Duy acknowledges this), so it will be difficult to mount an international coalition to side with us against the Chinese. (This is a point that Krugman seems to not understand.) Can we really be sure that other states will have our back if we decide to really confront China? Do those countries want a devaluation of the dollar? If we go against China alone are we prepared to take the blowback while the economy is so weak?

Second, the current policy mix benefits some groups in China, Europe, and the U.S. and harms other groups. As Grier says, "it is way too simplistic to say it's good for China and bad for the U.S." Given that the U.S. low- and middle-income consumers benefit, and that consumption represents about 70% of the U.S. economy, why should we think that the U.S. would be better off in aggregate if the RMB spiked? Most Americans would become immediately (if temporarily) poorer, and it is doubtful that non-durable manufacturing jobs would come back to the U.S. anyway. Production would simply shift to Vietnam, or someplace else. The adjustment would take a little while, and involve some pain, but in five years the overall picture would probably look the same. In other words, it is likely that Chinese capital account manipulations hurt their fellow developing countries more than the U.S. Ending this manipulation would hurt low-income Americans (in the short run), hurt low-income Chinese (in the long run), benefit low-income Vietnamese (in the long run), and have little effect on the U.S. trade balance. I don't see how that's a "win".

Third, right now the U.S. needs capital inflows to fund budget deficits and investment. Keynesians complain that fiscal stimulus is "leaky" because of capital account manipulations, but don't acknowledge the corollary which is that deficit spending is also much less expensive for the same reason. In the current climate it is hard to see how such a policy would be economically successful.

Fourth, the status quo persists because it reflects the balance of power within these countries. U.S. trade policy is skewed towards low-income consumers and middle/high-income producers. Chinese trade policy is skewed towards low-income producers and high-income consumers. Does anyone think that's an accident? Does anyone think that a reversal of those dynamics will stand for very long? It would require a shift in interest-group power, and that seems very unlikely.

In the future, capital account distortions should be addressed just as current account distortions are: within the auspices of the WTO. That will be difficult to do for a host of reasons, especially because of the implications for domestic monetary autonomy, but it will be necessary. But I don't think the world is ready for that right now, and I don't think the initiation of a trade war is the right way to go about it.

Tuesday, July 13, 2010


. Tuesday, July 13, 2010

Up till now, I've refrained from commenting on the financial regulation bill that now looks set to become law for two reasons. First, it wasn't clear exactly what would be in the bill. Second, it wasn't clear whether anything would pass. Now that we have pretty clear expectations about both of those things, I'll share a few thoughts.

This bill is not designed to prevent the next financial crisis from occurring. In fact, it would not have prevented the last crisis. This is a very good thing. Too often, regulatory policy is shaped as if by "generals fighting the last war," i.e. regulatory policy is designed to protect against the last event rather than improving the overall ability of the system to withstand disruptions. This approach is self-defeating, since financial crises seldom have the same proximate causes, so this approach will never get it right.

So is this bill good? I think so. To understand why, consider this:

If there's any problem it solves, it's the regulatory confusion and weakness we saw amidst the last financial crisis. That's different than the regulatory confusion and weakness that allowed the last financial crisis to happen, of course.

The bill does that in two ways: The first is providing regulators with a lot more information. By placing derivatives on exchanges and clearinghouses, by creating a systemic risk council, by forcing banks to provide "funeral plans" that explain how to unwind them in the event of a failure, by creating an Office of Financial Research to collect daily data and provide quick analysis on transactions, there's much less chance that a financial crisis would leave regulators totally confused about what's going on, and who owes what to whom.

The second way is by providing regulators with more power to oversee all financially important institutions, rather than just banks, and giving them clear legal authority and a predictable method for executing a failing institution. That's the resolution authority you're always hearing about, and though the number of sign-offs it requires before it can be used (Fed, Treasury, FDIC, and three bankruptcy judges) seems so onerous that it'll make early implementation impossible, once everyone agrees that a firm needs to be brought down, it'll be much easier to do.

In other words, this bill presupposes that financial disruptions will occur in the future and makes preparations for dealing with them. The focus is on increasing transparency, preparedness, and planning for winding down insolvent firms. It doesn't do much on liquidity or capital adequacy requirements, which are the focus of the international negotiations of the Basel Committee. (I'll have more to say on that soon.)

A few weeks ago Tyler Cowen ran through the major provisions and offered commentary. The mantra was "the devil is in the details", and they most certainly are. How much transparency we get and how robust the resolution authority is matters quite a lot, and it is probably impossible to fully know in advance how these things will work. Cowen's conclusion:

The bottom line: the good parts of the bill aren't nearly as good as they should be, and the bad parts became much better with time. The biggest omissions are simple and tougher restrictions on leverage and reform of the mortgage agencies. Overall consider this a victory for the status quo and you should realize that the underlying problems have not been solved.

I'm more optimistic than Cowen. I don't think the "underlying problems" can be solved solved so easily. Trying hard to do so may invoke the Peltzman Effect, which (arguably) played a major role in this crisis. Remember that many derivatives were created to avoid regulation; the resulting opacity was a major contributor to the crisis. Is anyone sure that we can close all loopholes or anticipate all possible weaknesses in the future? If you want a less complicated, more open financial system, then the solution is likely not to create ever-more-complicated regulations that incentivize the exploitation of loopholes. The solution is reduce opacity, strengthen overall stability, and be prepared for adverse scenarios. I think this bill makes some progress on those fronts.

Monday, July 12, 2010

Sometimes Truth Is Stranger Than Fiction

. Monday, July 12, 2010

Scott (aka squid314) explains why the History Channel's "World War II" is the least believable show on television, even less believable than Doctor Who and Battlestar Galactica. It's pretty much unexcerptable but isn't very long, so just read the whole thing.

(ht: Robert Farley)

Europe's Mounting Banking Problem


Apologies for the light posting in the last week. Frankly, there hasn't been a whole lot to comment on. But this ominous NYTimes report highlights an increasing worry for the global economic recovery:

The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.

The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.

Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.

This has been a growing concern for some time now, and it frames Europe's economic policies in a different light than those worried about "invisible bond vigilantes" have done. The European policy mix -- sovereign bailouts + slashed government budgets -- has always had an eye on the European banking sector. If sovereigns defaulted on debt owed to banks, then the already-damaged European banking sector would likely collapse without massive government intervention. This would touch off another global financial crisis, perhaps worse than the 2007-2008 panic. By providing funds for governments to pay back their obligations to banks, European governments hope to avoid that scenario. It's a big concern:

Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.

U.S. banks must refinance about $1.3 trillion through 2012. While that sum is nothing to scoff at, analysts seem most concerned about Europe because the banking system there is already weighed down by the sovereign debt crisis.

Banks roll over obligations all the time. In normal times, when there is no credit crunch, this does not represent a problem. But if credit markets seize up again banks will find it very hard to stay afloat. If the crunch is severe enough, it could have very adverse consequences for the global economy. So far there are few signs of that happening, but the next two or three years will be perilous.

In the best case scenario for 2010-2012, as I see it, many banks will have to roll over their obligations at higher interest rates than before. This dampens profits, but does not cause major liquidity or solvency problems. Banks will limit their lending because they will not have access to funds at the same low rates that they had previously, and this will hamper economic growth. Much of Europe will remain mired in recession or low growth for several years, but the extreme adverse event -- another financial crisis -- will be averted.

I think that's the best case scenario. Maybe not. There are a lot of moving pieces here, so it's hard to know how it will play out.

Sunday, July 4, 2010

Great Moments in Interviewing History

. Sunday, July 4, 2010

Deborah Solomon, while interviewing former Secretary of State (and Treasury) George Shultz:

It’s been seven years since we invaded Iraq, and there is so much sorrow in the world.

WTF? Somehow, the 89 year old came up with a wonderful response to that "question":

You ought to come out to California.

Elsewhere, Solomon wonders whether PBS is showing a documentary about Shultz because "they’re trying to appeal to Republicans". Could be. Or it could be that one of the most important government officials of the past half-century is interesting enough in his own right to merit an in-depth look. The rest of the interview is no better, and may even be worse.

At least Solomon didn't put words in Shultz's mouth like she has a habit of doing. Well, she doesn't appear to have done that. This time.

Why is the NY Times printing this?

John Adams on Political Science


I was doing a bit of Fourth-related reading today, and came across John Adams' Thoughts on Government, which I had never read before despite the fact that Adams has always been one of my favorite American patriots. This is from the opening paragraph:

[A]s the divine science of politics is the science of social happiness, and the blessings of society depend entirely on the constitutions of government, which are generally institutions that last for many generations, there can be no employment more agreeable to a benevolent mind than a research after the best.

Right on.

Adams wrote Thoughts on Government in the Spring of 1776, partially (it seems) because people kept asking him what government the United States should create, and he was getting tired of providing the same answer over and over. After referencing Locke and others he writes, "there is no good government but what is republican" because a republic is "an empire of laws, not of men". It's a nice little essay.

Happy Fourth, everybody.

International Political Economy at the University of North Carolina: July 2010




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