Tuesday, November 30, 2010

The Ireland Bailout, Animated

. Tuesday, November 30, 2010

Via everybody. I also found this analysis of the Euro situation by Ryan Avent to be pretty good.

Who Says We've Got Economics Envy?


Cowen Tabarrok says it should be the other way around:

(Economics, and perhaps social science in general, seems behind its time compared say with political science.)

That is mostly (I think) in reference to the incorporation of psychology and experimental methods into political science. The post is about what ideas are behind their time.

(Updated to note correct MR writer. Thanks Anon.)

Sunday, November 28, 2010


. Sunday, November 28, 2010

A former student e-mailed me and asked for advice on a paper he was writing about the Korea situation. Up until last week he had been focusing on China's role as facilitator of negotiations. He wanted my take on last's week attack, and the responses from the South, China, and the US since then. A few days late, but this was my off-the-cuff response:

I'm not sure how to read China right now. On the one hand, there is a long history of N Korea doing belligerent things to get attention, and then negotiating some agreement that gets them some aid or something in exchange for them not being stupid anymore. My first reaction is to consider their more recent actions in the same vein, given that history. In that case, you could maybe interpret China's nonplussed reaction as buying into that strategy to get all sides back to the negotiating table.

On the other hand, this recent action is more serious than past actions, and occurs in a different context: succession of power from Kim Jong Il to his son. I don't think this is going to lead to war necessarily, but I do think that it signals that the current status quo is likely untenable. The likelihood of a resumption of fighting has certainly gone way up, and S Korea appears to be losing patience. China also said (I think yesterday) that joint US-S Korean military exercises in the Pacific violated China's economic sovereignty (b/c China uses that water for shipping), which is a sign that China is not interested in marginalizing N Korea to get closer to the US and S Korea right now. Again... this could be a negotiating ploy, but then you'd have to think that both N Korea and China are bluffing. That could be correct, but I'm not very confident that it is.

Certainly the security dilemma is present, and there is some risk of spiraling. You can also think about how deterrence can have negative side effects... the US' security guarantee for S Korea could make S Korea *more* likely to retaliate and escalate the conflict. They know they have a powerful ally, so that will give them much more confidence than they'd have otherwise.

The US obviously does not guarantee N Korea's security, but China might. If so, then you might have a situation in which neither side (US or China) wants to escalate and both sides know it. In that case, N Korea might think that it can act with impunity. Think of it this way: N Korea knows that neither the US nor China want war, and will do whatever it takes to prevent it. The N Korean leadership is also going through a power shift, and the new leaders will want to demonstrate to their citizens that they are strong leaders, and worthy of support. What better way to do it than to attack S Korea in a limited fashion, and not suffer any repercussions? It's true that the only reason there won't be repercussions is because of China and the US, but the N Korean citizens don't know that. (There's a domestic politics information asymmetry too.)

Anyway, that's how I'm reading the situation right now.

Friday, November 26, 2010


. Friday, November 26, 2010

But despite its best efforts, the Fed has only succeeded in raising America’s broad money supply (as measured by seasonally-adjusted M2) to about $8.8 trillion. China’s central bankers, on the other hand, have increased China’s M2 to almost 70 trillion yuan, or $10.5 trillion. As Mr Kroeber points out, China has a greater quantity of money circulating in an economy a third of the size. Who is calling whom easy?


Wednesday, November 24, 2010

Using Network Theory to Understand Crises

. Wednesday, November 24, 2010

(Click for larger image. The U.S. economy as a network, divided by sectors: Technology (blue), oil (dark gray), other basic materials (light gray), finance linked to real estate (dark green), other finance (light green))

Brandon Keim at Wired covered some new work in which researchers are examining the U.S. economy as a network in order to better understand the 2008 financial crisis and why it had such a devastating effect on the real economy.

From this analysis came two striking figures. The first is a map [above] of links between companies in five key economic sectors: technology, oil, other basic materials, finance linked to real estate and other finance. As of 2003, the sectors are relatively distinct, with real estate isolated. By 2008, they’re a tightly linked jumble, with finance at the center. ...

Other research on network dynamics has shown that interdependence can promote stability, but eventually reaches a point of reversing returns (see “Networked Networks Are Prone to Epic Failure“).

Much more at the links, so please click through. To me, there are two ways of looking at this. The first is the conclusion reached by Keim, that interdependence on its own can be stabilizing, until it reaches a critical mass, at which point increased interdependence destabilizes the system. Interdependence obviously went up throughout the 2000s. But another way to look at it is to examine the pattern of interdependence, rather than the occurrence of interdependence.

It is clear that the financial sector became much more central to the economy, so the economy as a whole became much more susceptible to trouble in the financial sector. In this way, the U.S. economy appears to display a feature of non-random, hierarchical networks, which is that they are robust to shocks in peripheral parts of the network, but fragile to shocks at the center. In other words, if a shock had hit the peripheral oil sector (as happened, in fact, in the middle part of the decade), the increased interlinkages with finance would make the economy more resilient. But once a shock hit finance, the central sector, everything else was prone to collapse as well.

All of us at IPE@UNC (plus Andy Pennock, who's on the job market this year, as hiring departments should note) are working on a project in a somewhat-similar vein, but in an international context. I'm sure we'll be blogging much more along these lines in the coming months. In any case, it's fascinating stuff and is being used more and more to try to understand the complex interdependencies in the global economy. The political implications of this work is also important, though I haven't much mentioned them here.

(ht: Josh Miller)



In case you hadn't noticed, blogging will be slow over Thanksgiving break. Which, for us, means paper writing, paper grading, exam grading, traveling and recovering from illness. We'll be back... whenever we're able.

Friday, November 19, 2010

The Honest Version of the G-20 Communiqué

. Friday, November 19, 2010


Via Clive Crook

Just Who Exactly Is Being Bailed Out in Europe?


(link to bigger image here)

Remember when I said that Greece wouldn't default, because Germany and France would bail them out in order to keep German and French banks solvent? The same is true of Ireland. The above table shows exposure of major banks in Europe's core to sovereign debt in Europe's periphery. The EU will continue to use the EFSF and IMF to bail out its members as long as that is necessary to preserve the stability of the banking system in the core EU countries. The EU is essentially going through it's own version of the 1980s Latin American debt crisis. The only difference is that in this case the periphery shares a common currency with the core. For now.

In short, it isn't Greece or Ireland that's being bailed out; it's German and French banks.

It gets interesting if/when Spain, which is probably too big to bail out, gets into trouble.

Realism =/= American Exceptionalism


Where does this stuff come from?

It’s very simple. Did you ever study international relations?

To my misfortune.

Har har. From an interview by David Samuels (bold) of Noam Chomsky, referring to Walt & Mearsheimer's Israel book. Pretty vapid interview. They don't dwell on IR for long, but they still manage to get an impressive number of things dead wrong. For example, they dislike Walt/Mearsheimer because it is realist IR when they should dislike it because it neither realist nor IR. Or take this part from Chomsky:

American innocence is built into international relations theory. That’s what American exceptionalism means. If you read the founders of the theory, like Hans Morgenthau, it’s very straightforward. Hans Morgenthau was a smart guy, a very decent guy, incidentally. He has a book called The Purpose of America. He said the historical record doesn’t conform with the purpose of America, but that doesn’t mean we don’t have the purpose. In fact he says, this is like atheists criticizing religion because people do bad things. The truths are still there, even if the record conflicts with them. That is the foundation of realist international relations theory.

How to parse this? Nearly all of it is wrong. (For all I know, Morgenthau actually was a decent guy.) American innocence is built into realist IR? Tell that to this guy. Or this guy. Morgenthau himself wasn't an American, and opposed American adventurism in Vietnam (a stance taken after the publication of The Purpose of America). Waltz claimed that states are functionally undifferentiated, which doesn't sound like American innocence or exceptionalism to me. Mearsheimer and Walt are certainly not alleging American innocence. In short, realism is the opposite of American exceptionalism or innocence.

This kind of makes me happy. Chomsky is wrong about basically everything these days, so it's comforting to know that comes from garden-variety ignorance. He just doesn't have even a rudimentary understanding of the topics he's discussing, and it sounds like he hasn't read an IR book since the 1960s. But it is depressing that both interviewer and interviewee view studying international relations to be a misfortune.

Thursday, November 18, 2010

Quantitative Queasing

. Thursday, November 18, 2010

UNCer Karl Smith linked to this piece by Allan Sloan, which is strange and hysterical in a number of ways. I want to highlight one small part of it:

Even before the Republican attack, our central bank was rapidly losing influence in the world, relative to other players.

Can that really be so? What other players? If it is, how can we explain the rest of the world's reaction to QE2, which is a fairly small plan by the Fed to lower medium-run interest rates in the face of massive unemployment and a large output gap? In other words, it's standard AD-boosting monetary policy, except on medium-run interest rates rather than short-run interest rates. If the Fed's influence is in "rapid" decline, why should Germany, Japan, China, Brazil, and other leading states care what Fed policy is? The Republicans who are suspicious of the Fed are worried that it has too much influence, not too little. Same with Democrats who think the Fed exists solely to benefit Goldman Sachs.

Since the subprime crisis hit, and even before, we've been hearing about how much power and influence the U.S. has lost over the past decade. And yet whenever the U.S. central bank bats an eyelid the rest of the world goes ballistic. We clearly need to think more seriously about the role of the U.S. in the international system.

Tuesday, November 16, 2010

What Causes Deficits, Ezra?

. Tuesday, November 16, 2010

"Basically, deficits happen when recessions happen. Anytime GDP shrinks, deficits explode. Sustained growth, by contrast, tends to bring the budget into balance. That's not to say policy doesn't matter... But policy -- and even control of the White House -- matters a lot less than the economy does."

Maybe policy matters more than Ezra thinks. Check out the pattern evident in two simple plots of tax and spending data. We all know that the two previous largest peacetime deficits came in the 1980s and the 2000s. Both seem quite related to policy. Military spending is defense department spending as a share of GDP. The two sharp against trend rises occur under Reagan and Bush. Legislated tax revenues is the estimated impact of congressional tax legislation on tax revenues* (because it measures the impact of tax legislation on tax revenues rather than actual revenue, values aren't driven by GDP growth.) Budget deficits seem to correlate strongly with congressional decisions to cut taxes and increase military expenditures. One is tempted to use the word "cause" here.

Of course, this could just be a coincidence.

<*Romer, C. and D. Romer (2008). A Narrative Analysis of Postwar Tax Changes. Berkeley, University of California, Berkeley.

Bapat on Terrorism


UNC political science professor Navin Bapat, who taught me bargaining models last year, is the subject of this WWNorton interview. In it, he discusses his work on terrorism, the value of formal and quantitative IR more generally, and other topics.

Via The Monkey Cage.

Monday, November 15, 2010

Making Quant IR Credible

. Monday, November 15, 2010

Phil Arena, IR assistant professor at SUNY-Buffalo, has a new blog. He focuses on the security side of IR, but some of it crosses over. For example, this post on the difficulty of isolating causal processes from associative stats analysis. Basically the idea is this: Suppose there are two possible states of the world, one in which A causes B and one in which C causes both A and B but is not directly observable. Standard stats methods would not be able to distinguish between the two.

I think he does a pretty good job of describing the problem, so I'm not going to rehash his post. Just go read it. And I think we're seeing an increased use of Bayesian stats, instrumental variables, experimental approaches, and network analysis to try to mitigate the problem. In other words, I think things might be improving as the discipline matures. I completely disagree with this, however:

If you ask Jas Sekhon, one of the most talented methodologists we have in political science, he'll tell you that the answer for IR scholars is to give up on quantitative work altogether, learn how to do credible qualitative, and start asking more policy relevant questions.

An argument for better stats (or better theory) is not an argument for qualitative methods, which must be made on its own merit. I like qualitative methods and value their inclusion in the discipline, but it's not as if qualitative analysis is definitionally error-free, and "policy relevant" is very much in the eye of the beholder.

I also think that his suggestion that we focus more on theory -- which is unsurprising, since he does formal theoretical work -- is pablum. True pablum, but pablum nonetheless. Of course creating credible, rigorous theory is important and perhaps under-valued in IR, but the whole point of using stats is to evaluate theory. We don't know if a theory is credible or rigorous until we put it to some evidence-based test. Internal logic is important, but is not the end of the story.

Nevertheless it's a good post, and worth thinking about.

Note: Updated slightly for clarity shortly after posting.

Thursday, November 11, 2010

Weekend Links

. Thursday, November 11, 2010

Happy Veterans/Remembrance/Armistice Day everybody. Sarah and I are headed to Boston for the annual International Political Economy Society conference this weekend, and I'm not sure how much time and internet access we'll have, so blogging might be light. (If you'll be at the conference be sure to say hi.) Hopefully we'll have some interesting new research to discuss next week. In the meantime, here's some stuff I've found interesting lately.

-- James Vreeland and Raj Desai have a paper encouraging the IMF to embrace regionalism.

-- The Economist discusses potential replacements for Bretton Woods 2.

-- The Economist also put together this handy interactive "global debt clock" tool to visualize sovereign debt over time. In 2006 global sovereign debt was $27tn. In 2010 it's nearly $41tn, and that's expected to increase to $43tn next year. (The Economist also has a "Daily Chart" blog from which this was taken. It's usually interesting stuff.)

-- U.S. taxpayers are subsidizing American cotton growers and Brazilian cotton growers. A classic collective action problem.

-- I've been thinking about the implications of this for IR and IPE for a few weeks now.

-- Der Spiegel is not very bullish on the U.S., and therefore is nervous about the global economy.

-- The E.U. is going to bail out Ireland?

-- Robert Kaplan wins the "Grand Strategy of the Week" award this week.

Wednesday, November 10, 2010

Emmanuel's Gonna Love This

. Wednesday, November 10, 2010

Via the whole internet.

Exchange Rates are not Monads


Dan Drezner suggests that current international monetary conflict is a consequence of governments making different choices about which element of the unholy trinity they are willing to forgo. He suggests that China has given up free capital mobility and the US has given up a stable/pegged dollar.

But in what sense does the US not pegging the dollar imply that the dollar is not pegged? China and the other East Asian governments peg to the dollar. And even Japan, which doesn't peg the yen, does limit its fluctuation as if it has a target zone. For all practical purposes, then, the dollar is pegged against many of its most important creditors (the Euro is the only exception, but the euro area as a whole is a debtor rather than creditor area). If this wasn't the case, we wouldn't be having this conflict.

More generally, any discussion about the unholy trinity needs to recognize the n-1 problem. In any system of n countries there are n-1 independent exchange rates. Think about a three-country system. If China pegs to the dollar and South Korea pegs to the dollar, the China-South Korean rate is fully determined by the cross rate.

As a result, every exchange rate system (other than a gold standard) has one degree of freedom: one country can attain a fixed exchange rate, and capital mobility, and monetary independence. Whichever country holds this position gets to set monetary policy for the system as a whole. International monetary politics revolve who gets this degree of freedom and how it is employed.
  • The US held this position in the original Bretton Woods system. Because everyone pegged to the dollar, the US didn't have to use monetary policy to sustain its peg. The system collapsed as governments became increasingly dissatisfied with how the US set its monetary policy.
  • Germany held this position in the European Monetary System. Everyone pegged to Germany, and Germany used monetary policy to manage German monetary conditions. General dissatisfaction with German monetary policy played an important role in the shift to monetary union.
This suggests that we are back in a world very much like the late Bretton Woods: the US has a pegged exchange rate against many of its major creditors and capital mobility and monetary autonomy. The current conflict is a consequence of East Asian governments forcing the US to accept a peg at a rate it does not think is appropriate. Like Geithner and Co. now, the Nixon administration believed it couldn't devalue an over-valued dollar unilaterally.

One might argue that the Nixon administration blew apart the Bretton Woods system by embarking on what at least on German called the biggest monetary expansion in history (I think Emminger said this). Pouring dollars into the global economy forced Germany to purchase more and more dollars and accept higher and higher inflation. There was a clear limit to how much inflation Germany would accept. When that limit was reached, in early 1973, the Germans floated the mark the system disintegrated, and the dollar fell sharply. Devaluation achieved.

Is current US policy trying to blow East Asia out of their dollar pegs? I don't know, but it sure seems that one consequence of QE has to be further accumulation of dollar abroad. In the face of pegged rates and imperfect sterilization, this must increase inflation in China and East Asia. QE thus essentially amounts to external pressure to embrace a more expansionary monetary policy--exactly what the US is pressing China to accept in the G-20. So, is China more tolerant of imported inflation than German? We may be about to find out.

The Effect of the Unholy Trilemma on the International System


McMegan can't find anything wrong with Drezner's post about international politics and the unholy trilemma. Let me try to help her. Drezner's is a decent post, but it reads like he might have been a bit short of time because it's a bit under-developed. First, his claim:

The unholy trinity in open economy macroeconomics is pretty simple. It's impossible for a country to do the following three things at the same time:

1) Maintain a fixed exchange rate

2) Maintain an open capital market

3) Run an independent monetary policy

One of the issues with macroeconomic policy coordination right now is that different countries have chosen different options to sacrifice. China, for example, has never opened its capital account. The United States, in pursuing quantitative easing, has basically chucked fixed exchange rates under the bus, no matter how many times Tim Geithner utters he "strong dollar" mantra in his sleep to reporters.

So far so good -- although I'd emphasize more than him that it is possible to do any two of those three, so the choice is which one to neglect, not which one to pursue -- and he's honing in on an important dimension of IPE right now: what happens when the major economies disagree about which two to prioritize? Bretton Woods I emphasized #s 1 and 3; Bretton Woods II emphasized #s 2 and 3 (see graph above). Right now there doesn't appear to be a consensus.

As Drezner notes, right now the U.S. is letting the exchange rate float (which is nothing new; it has been official policy since the early 1970s), China maintains a closed capital account, Brazil is trending towards that direction, the E.U. has sacrificed independent monetary policy within its borders and fixed exchange rates beyond them, the U.K. is allowing sterling to float, Japan is also eschewing a fixed exchange rate, while open exporting economies like S. Korea and Switzerland have worked to protect their exchange rates. Right now nobody is stressing too much about maintaining capital account openness, but this is a relatively new development.

The interesting part of this, to me, is that divergent policies could put states, especially major trading partners, at cross-purposes. This could under-cut the effectiveness of states' domestic policy goals, which could lead to confrontation and instability. Unfortunately Drezner ultimately neglects the question of why different countries will prioritize different policies, and what the implications of those choices are for the macro system. Instead, he argues that we'll see "a lot more capital controls". That's true, but we'll also probably see a lot more central bank activity and a lot more exchange rate manipulation, depending on the domestic political incentives of states. We've already seen increased management along all of these dimensions recently. In other words, I think we should expect a more active role overall for states in managing their economies in the coming decade that in the past one, but different states will prioritize different goals.

What intrigues me is how the financial sector responds to a situation in which their freedom of action in emerging markets becomes more and more constrained. It's possible that they could pressure the Fed to change its position in the future. It's also possible, however, that big firms could see these controls as a useful barrier to entry for new firms.

My money is on the former response, however.

Or they could revert to their default position: the Washington Consensus. The major criticism from the advanced economies of emerging economies prior to the Asian financial crisis was the persistence of capital controls. The major IPE controversy from 1973-2000 or so was the use of the IMF to break those controls down. It's definitely possible that that debate flares up again in the coming years, precisely because capital owners in emerging countries benefit from a more-closed financial system while capital owners in developed countries benefit from a more-open financial system.

We'll have to wait and see, but the longer it takes the global economy to rebound, the stronger these pressures will become.

Tuesday, November 9, 2010

G-20 Trouble

. Tuesday, November 9, 2010

Remember back in 2009, when the G-20 surprised a lot of people by emerging as the pre-eminent global macro coordination body? Well, the next meeting is this week in Seoul, and as Felix Salmon notes things aren't looking so good:

The unity we saw at the London summit in 2009 is a distant memory: no one, now, can even agree on what internationally coordinated action should look like, let alone actually get their respective parliaments to implement it. Which in turn means that G20 national economic policies are increasingly likely to work against each other than constructively with each other. It might well take another full-blown crisis before Germany and the U.S. are on the same page again.

I think this was mostly inevitable, for reasons I'll go into in more depth soon. In any case, domestic politics has been in the headlines for the past year, at least in the States, but it looks like international politics is where the action is at moving forward.

Monday, November 8, 2010

Short Answers To Easy Questions

. Monday, November 8, 2010

Samuel Brittan muses:

Indeed, the insistence of the German government on impossibly severe fiscal policies makes one wonder if it really wants the euro to continue in its present form.

No, Germany does not want the euro to continue in its present form.

Visualize the World


The World Freedom Atlas is a nice interactive online tool for visualizing a lot of measures relevant to social scientists, students, and journalists. It includes common variables used in Poli Sci research like Polity IV, Freedom House, UNDP Development Report, and World Bank measures, as well as measures from influential research like BdM et al's selectorate theory, Henisz's political constraints, Fearon's ethnic fractionalization, Easterly and Levine's ethnolinguistic fractionalization, and many others. It covers 1990-2006, and the interface is quick and easy. Apparently it was created by a student as part of a project for a geography class at the University of Wisconsin. I'd recommend playing around with it for a bit. It's really cool.

(via Ali Stoyan)

Obama, India and the UN Security Council


It was 7am this morning and I still hadn't been able to fall asleep. I turned on the tv and flipped through the cable news channels to see if anything could put me to sleep and stumbled upon Morning Joe who had Council on Foreign Relations President Richard Haas on talking about US foreign policy, international trade and foreign presidential trips. Decent discussion of past foreign trips, some talk on Afghanistan and a debate (not very spirited) on what would change now that the Republicans had taken over the HoR. Haas left and I thought to myself, "perfect, they'll bring on some 'strategists' that will start spewing some totally wrong 'analysis' that'll put me right to sleep in no time."

But the foreign policy morning theme continued. It turned out that President Obama was before the Lok Sabha, the Indian lower house of parliament and was going to give a speech around 7:15am. (So that's why Haas was on and they weren't talking about American politics. Damn! There goes my hope for cable news putting me to sleep.) The President's speech was rolling along like any other US presidential speech to the parliament of a strategic ally: lots and lots of butt-kissing, nice words regarding current and future strategic partnership between the oldest and largest democracies, praise for India's ability to raise so many out of poverty and of Indian business and technological advancement.

But then, out of absolutely nowhere it seemed like, President Obama announced that the United States endorsed a permanent seat for India on the United Nations Security Council. I almost fell off the couch. Not because I don't like the idea. In fact, I think it's a great idea and something that is long overdue (along with permanent seats for Germany, Mexico, Brazil, and South Africa) for a variety of reasons. But for an American president to endorse the expansion of the Security Council and to give a permanent seat to a rising power was unprecedented. But it also makes a heck of a whole lot of sense (nice carrot for future US-Indian cooperation, increases legitimacy of the Security Council by including rising powers and expanding voting members, etc.)

The most appealing and likely plan for UN Security Council reform would expand the council to 24 members, increasing the number of permanent members from 5 to 10 and the number of rotating, non-permanent members from 10 to 14. Some proposals call for the new permanent members to also have veto power while others give them only permanent status and reserve veto power for the original five permanent members. The trickiness in the Obama endorsement this morning was that he said "permanent" member which opens the door to including India and placating its demand for a seat in the forum but not watering down US (and other current permanent member) power by adding more states with veto power. The key is in the veto power and not necessarily in increasing the amount of seats or including new permanent members.

Developing (this is going to take a long time to happen) in a very interesting way...

Sunday, November 7, 2010

If You Can't Beat 'Em, Ban 'Em

. Sunday, November 7, 2010

This is what I meant when I wrote in the previous post that "I wish it were possible to push for immigration reform too, since it's the time for that as well, but I'm pretty sure the sort of immigration reform we'd be likely to see right now isn't the sort I'd support":

Rep. Steve King (R-Iowa), a staunch opponent of illegal immigration who will become chairman of a key subcommittee handling immigration rules, said that he thinks he'll be able to pass a bill out of the House to end the Constitution's birthright citizenship for U.S.-born children of illegal immigrants.

Ain't happening of course, but still. To the extent that this is common in the modern GOP, it is not the party of liberty, or free markets, or rights, or any of the rhetoric they use. It is the party of those who want the government to protect them from forces that threaten their privilege.

The Decline


Consider the never-ending narrative of American decline. My historical knowledge isn't super-deep, but I know for certain that that drum has been kicked at least since Sputnik ('50s), continuing through the Vietnam War ('60s), the closing of the gold window and the oil embargo/stagflation ('70s), the rise of Japan ('80s), European integration ('90s), and now the rise of the BRICs, especially China. During this entire period critics of the U.S. have focused on its sclerotic political system and messy "laissez-faire" capitalism (ha!), which was clearly inferior to the svelte technocratic industrial policies of the USSR OPEC Japan NICs E.U. China. The U.S. is becoming more and more irrelevant, I keep hearing. The quick rebound of China, Brazil, and Germany is proof that the world is decoupling from the U.S. The world is becoming more multipolar, the U.S. needs to learn how to shift into obsolescence and be just another state among states.

And yet when the U.S. announces that it is going to reduce some of the maturity of its sovereign debt in order to boost domestic demand -- an equivalent action to normal monetary policy operations, except on 5-year T-bills rather than shorter maturities, at a time when markets expect deflation (see graph above) -- the world goes ballistic. Huh? If the U.S. was as vulnerable as folks make it out to be, and the rest as powerful and resilient, this shouldn't even register. Instead the Chinese complain about "currency manipulation" as if QE2 wasn't a demand-side domestic monetary policy. Brazil complains about capital inflows creating bubbles, and institutes capital controls to counteract them, as if protecting local capital owners and commodity exporters in one of the most inegalitarian countries on earth had nothing to do with it. Japan enacts its own QE, and South Korea is pushing for, er, something to deal with exchange rates at the upcoming G20 meeting it hosts. The entire industrialized world is concerned that a relatively small program in the U.S. is going to threaten their entire economies.

(Either that or they're using it as cover to justify policies that they wish to enact anyway. I actually think this is more likely, since they can always continue to devalue against the dollar without retribution if they wish, and anything that boosts American demand is good for Chinese, Japanese, Brazilian, and South Korean exporters. But I don't know that for certain; maybe these leaders really are freaked out.)

Of course all of this follows a financial crisis that originated in the U.S. but was not contained within it. Forgive me for thinking that at this point the importance of the U.S. to the global economy almost cannot be overstated. At this point I wouldn't be terribly surprised if the replacement of Bretton Woods II is a variant of Bretton Woods I. The U.S. needs to recognize its place in the world, and act like a hegemon should. There's not chance the G-20 is capable of doing it.

So far I think we've done a reasonably good job -- the trading system has remained intact, warnings of competitive currency depreciations have been all smoke and no fire, countercyclical lending has gotten to states (like Greece) that have needed it, international institutions have held together remarkably well -- but we can do even better. Now is the time to finish the Korea FTA and give fast-track negotiating authority to Obama. Doha isn't going anywhere right now, but in a few years time there could be a window for movement, and it would be good to have the tracks laid ahead of time. Now is the time to let other countries devalue against the dollar if they need to, while still pursuing policies that will boost domestic demand, including demand for imports. Yes that hurt employment in tradable sectors, but mostly in the sort of less-skilled manufacturing that will not yield new jobs anyway. In the meantime, it will boost employment in importing sectors, and provide low-cost goods for struggling households. I wish it were possible to push for immigration reform too, since it's the time for that as well, but I'm pretty sure the sort of immigration reform we'd be likely to see right now isn't the sort I'd support.

Now is emphatically not the time to "get tough" with other countries that also pursue policies in their domestic interest, even if they have some short-run negative consequences for the U.S. There is a lot of low-hanging positive-sum fruit hanging out there. There's no need to take an axe to the trunk.

After all, if the Federal Reserve can't get the U.S. economy moving, the Bank of Japan won't be able to either.

The U.S. should not set policy out of fear of decline.

Friday, November 5, 2010

Tyler Cowen on the Past and Future

. Friday, November 5, 2010

Tyler Cowen gave a talk at UNC today, in what appeared to be a class taught by Mike Munger. It was open to the public, so I went. Cowen introduced it as a mix of his last book and what will become his next one. The former considered micro and micro-micro economic development; the latter concerns the macro economy. He closed by discussing implications for the American political economy.

Cowen began by arguing that the most notable economic developments in the U.S. in recent times has been the ability to collect and manipulate information, especially what he calls "cultural information". The ability of individuals to collect and readily access culture at very low marginal cost through social networking and digitized media has allowed us to create our own economies. These have dramatically improved our quality of life, but unlike previous inventions they have not increased GDP by much or employed many people.

Then he shifted to his macro view, which is most heavily influenced by two events: the stagnation of median wages since 1973, and the financial crisis. The former indicates, to Cowen, that we haven't been as innovative as we thought. Most of the important inventions (which he loosely defines as mixing fossil fuels with machines) occurred well before 1973, and we've spent the time since making marginal improvements to the same technologies. As we've done so we've increased productivity, and that's why everyone has a refrigerator and a telephone. But we haven't really come up with new innovations; we've just improved the old ones. The exception to the rule -- information technology -- has improved quality of life but not measured GDP.

Cowen brings this together by saying that he is a "utility optimist" but a "numbers pessimist". He thinks that we'll continue to improve the ways we can collect and manipulate information and this will have important real benefits for people, but they will not create many jobs or provide a large boost to GDP. He says that we cannot expect to maintain a trend rate of real GDP per capita growth of 3% a year; 1% -- which is more than what the median earner has had since 1973 -- is the new normal. That doesn't mean we're stagnating; it just means that we have poor measures of progress. He recommends the Wolfers/Stevenson happiness research as an ongoing attempt at correction.

But this divergence between numbers and utility is where he sees the problem for political economy. Voters will demand 3%, rather than accepting 1% plus non-monetary improvements in standards of living. Politicians will thus promise 3%, and will pursue policies that generate it. That means encouraging a debt-based economy, encouraging too much consumption, and encouraging bubbles in asset prices that lead to financial crises. He didn't explicitly say it, but it sounds like he expects boom-and-bust cycles to continue until the American public is willing to accept 1% growth, or until we break through the "innovation plateau" that we've been stuck in since 1973.

I think I've summarized his argument correctly, and I'm sure he'll be writing much more about it in the future. I think it's a compelling story, but I'm not yet completely convinced. Here's how I see the world since 1973:

1. The natural advantages of the U.S. economy post-WWII had mostly dissipated by 1973. This was inevitable, indeed it was something the U.S. strove for, so the previously-high growth rates were simply not sustainable. This isn't about innovation; it's about competition. As W. Europe and and Japan "re-industrialized" and were able to productively mobilize labor, they narrowed the U.S.'s margins. At the same time, the U.S. had mostly already reaped most of the GDP benefits of mobilizing female workers and integrating minorities by 1973.

2. Somewhat related to #1, I think Cowen has the wrong level of analysis. While it may be true that median incomes have stagnated in the U.S. since 1973, real global GDP/capita has nearly doubled since 1973. Even allowing an increase in inequality, global median incomes has certainly increased markedly, probably well more than 3% a year. (A quick search didn't turn up a global median income growth time series, but I can't imagine this isn't true.) We would expect this to happen as more countries employ their populaces in industrialized work. In other words, the experience of the U.S. from 1900-1973 has become the experience of the world from 1973-2010. This has put pressure on American middle class wages, as we should expect it would: when the supply curve of less-skilled labor shifts right, the returns to less-skilled labor goes down. But the returns to more-skilled labor have not gone done, which is why the American mean and median have diverged.

3. I don't think the new normal has to be 1% growth. It could also be 3% growth, but not broadly dispersed. That has, in fact, been the story of American post-1973. Not all of that growth was a myth. After all, before we got the micro-micro innovations like Twitter and iTunes we also got the micro-macro innovations like the PC. These did raise the real productivity of the economy, but not necessarily for the factory worker or custodian. Those initial innovations made Bill Gates much richer in monetary terms than Joe the Plumber, but Joe the Plumber got psychic benefits that he would not have otherwise had. In Cowen's language, numbers and utility went up, but not necessarily in equal amounts for everyone. I don't see that that process has run its course. Facebook and Twitter may hire many fewer people than GM and Ford hired when they boomed, but Mark Zuckerberg is the youngest billionaire in history.

4. If #3 is correct, then the political economy dimension becomes about distribution of monetary gains, not divergent perceptions of utility vs. numbers. Interestingly, this will not be a battle between capital and labor, but between labor and labor. (It doesn't take much capital to create Facebook; Zuckerberg did it in a few months on an IBM.) Maybe labor becomes more of a lottery. If that continues to happen, I'd expect the political equilibrium to be a strengthened welfare state. I don't think recent political swings necessarily contradict this, since the best political models are the most structural political models. Additionally, public anger over the bailouts is much stronger and deeper than many expected, and no one is interested in weakening the major entitlement programs.

I'll have to think about this more for than just an afternoon/evening to form stronger conclusions, but that's where I'm at now. Perhaps as Cowen develops his thesis more fully he'll address some of this, and especially consider if/how the story changes when we think globally. Either way I'm looking forward to seeing how his thoughts develop.

P.S. I live-tweeted the lecture, and asked the Twitterverse for questions. Daniel Davies asked me to ask Cowen what he thought of Keynes' "Economic Possibilities for Our Grandchildren". Cowen's response was essentially "It is one of the more interesting intellectual mistakes of the 20th century." I don't think Davies liked that response too much, but I'll let them speak for themselves if they like. I'd never read the essay before. It is interesting. And it is, I think, mistaken, although not entirely. A pdf is here.

Wednesday, November 3, 2010

In Which I Don't Understand What Smart People Are Saying

. Wednesday, November 3, 2010

I guess I'm an idiot, as I can't understand simple things. Paul Krugman says:

One clear result of the midterms is that we won’t have anything like a further round of stimulus. And this, in turn, means that the narrative all the Very Serious People will tell is that fiscal policy was tried, it failed, and that’s that.

To support this he presents two points of data, and only two. They are:

1. Germany's economic decline has been worse than the U.S.'s.

2. Germany's government spending has been higher than the U.S.'s.

From this, he concludes:

3. U.S. government should spend more in order to boost growth. (Or, alternatively, the U.S. didn't really try fiscal stimulus at all.)

As far as I can see, that conclusion is a non sequitur given the data he's presented. He updates the original post to say "Just to be clear, I’m not saying that the Germans were big Keynesians; the point is that neither of us were". Fine. But if there is a correlation between government spending and economic growth during this downturn, that correlation is very clearly negative given the data he's given us. How can we conclude from this that the election narrative that "fiscal policy was tried, it failed" is wrong? The data that he's given supports that very conclusion.

This is not a sophisticated analysis, and there are all kinds of relevant variables that aren't included. But Krugman doesn't say which of those might be mitigating factors. He doesn't qualify the data he presents. It's a really strange conclusion for him to reach. As I've noted before, Germany really messes with the standard Keynesian analysis. Tyler Cowen built off of that post here.

Brad DeLong writes about this post, but doesn't square the circle either. Like Krugman, DeLong is much smarter than me, so I guess I'm missing something obvious. I wish they'd point out what it is.

Also note that this crude analysis supports this recent study on the fiscal multiplier, since Germany has a fixed exchange rate with many of its trading partners, while the U.S. does not.

What am I missing?



UNCers: Tyler Cowen will be giving a talk on campus tomorrow (Nov. 4), at 4:30 in Greenlaw 101, sponsored by the PPE minor. I'll be there. Info here.

Rum Diaries


Here's an interesting article on how an obscure provision in the U.S. tax code has caused two U.S. territories to go to the mattresses:

Now the spirit once called Kill-Devil has set off a bitter dispute between two United States islands, Puerto Rico and the Virgin Islands, over a tax that the federal treasury collects on rum.

The fight began when the Virgin Islands persuaded the world’s largest distiller, which said it was leaving Puerto Rico, to move to St. Croix by offering a staggering $2.7 billion in tax incentives. The new distillery, for Captain Morgan spiced rum, will provide no more than 70 permanent jobs on the south shore of St. Croix — but it will entitle the Virgin Islands to collect billions in rum tax revenue from Washington.

That bounty comes at the expense of Puerto Rico, where 90 percent of the revenue from the rum tax had been used for public projects and social services rather than corporate incentives. The Virgin Islands has promised to give nearly half its tax revenue back to the distiller, the British company Diageo, prompting a series of charges and countercharges between neighbors roughly 50 miles apart in the Caribbean. ...

The billions of dollars at stake are the result of a quirk in the tax code that was intended to aid the islands while preventing their offshore distilleries from gaining an unfair advantage over competitors in the states.

Because rum producers in the islands are exempt from federal excise taxes, the government imposed an “equalization tax” on Puerto Rican rum producers in 1917 and gave the money to the commonwealth. In 1954, the United States extended the arrangement to the Virgin Islands.

Now the islands are competing to lure producers with tax incentives. Many are complaining that the tax revenue should go to the people, not the corporations, but if the corporations leave there's no revenue for the people at all. So the islands compete against each other, some of the revenue gets redistributed from Puerto Rican citizens to the corporation, and some other revenue gets redistributed from Puerto Rican citizens to Virgin Islands citizens. Bad for Puerto Ricans, but great for Virgin Islanders.

Of course, absent the equalization tax the corporation would have moved out of the U.S. jurisdiction entirely, likely to Guatemala or Honduras, and both U.S. territories would lose. In any case, tax incentives matter, and they can be very distorting.

Tuesday, November 2, 2010


. Tuesday, November 2, 2010

Listening to Marketplace tonight. Kai Ryssdal introduces a freakonomics piece: "How Powerful is the President". Ah, I say to myself, surely this will feature a political scientist. Um, no. Two economists and one law school prof. But it gets worse. One of the economists is J.C. Bradbury, the so-called "baseball economist." So apparently, an economist who specializes in the analysis of baseball statistics knows more about whether the president is powerful than any political scientist alive. This should hurt.

How China Views the Midterms


Maybe more sensibly than we do:

It’s easy to forget that most Chinese still see their country as hopelessly far beyond the U.S., so the following kind of reaction to the ad is common: “A country that couldn’t be any weaker is always emphasizing its rising clout, while a truly powerful country is always dwelling on its weakness and vulnerability—how ironic.”

One notable point is that Chinese reporters have been less impressed by the potential effect of the Tea Party than their American counterparts. “The Tea Party is a product of a certain period of time,” as a recent piece from China National Radio put it. “As the economy gets back on track, with more income and more stable jobs—when the country is richer, and people will be more at ease—the Tea Party will probably not have as many supporters. This is a bit like those radical anti-war organizations that popped up in America in the past. After some time, their voices faded out. When that day comes, we will realize that the Tea Party movement had pushed forward some rather insignificant figures in the world of American politics.”

Bottom line: All in all, the Chinese have been left puzzled by the midterms, which appear, from afar, to be defined by a kind of cognitive dissonance. From the Chinese perspective, Americans appear to be thrashing against the realities of a new era: faced with a sudden sense of weakness and global changes in power, Americans look unable to summon the energy or unity to make even the simplest self-sustaining choices, and instead, are seeking refuge in the tinny appeals and false comfort of demagogues. “Americans are feeling quite contradictory,” as a piece in the Southern Daily put it recently. “[T]hey want to build more railroads, train stations and schools, they want to use clean energy, but they don’t want to pay higher taxes in order to do all of these. They are the offspring of immigrants and feel very proud of that, and yet they also oppose the idea of immigration.”


It Wasn't Glass-Steagall Repeal


Another reminder from Salmon:

After all, Bear Stearns and Lehman Brothers and Merrill Lynch were both entirely Glass-Steagal compliant, as, for that matter, were Fannie and Freddie and AIG.

For some reason this has still not been internalized.

Election Day Links


I'm cynical enough to kind of enjoy gridlock, so bring it on.

-- Daniel Davies makes the case for not voting, or at least not voting for the Democratic party even if you are a liberal. His argument is partisan, but applies equally to both parties and draws from basic game theory. Just replace "Democrat" with "Republican". Me? I'll be staying in today. Voting has a negative expected utility for me. I think this should be required reading.

-- William Easterly rolls out the Coffee Party manifesto. I'm more or less on board, but I'd prefer a different name.

-- Will Wilkinson wonders why the Democratic Party stopped organizing around liberty/freedom, and instead focused on soft paternalism. Good question. I don't think it really matters, but it's a good question.

-- Contra High Broderism, partisanship is nothing new and neither are negative campaigns:

(Image ht: everyone in the social science blogosphere. Video ht: Fred Ghansah.)

Monday, November 1, 2010

Against the Kristof/Friedman Comparative "Method"

. Monday, November 1, 2010

Texas in Africa takes out the trash:

Even though Kristof has more anecdotes than your average observer, it's still not evidence. As @WrongingRights tweeted while quoting her dad, "The plural of anecdote isn't data." Data that isn't gathered systematically isn't data at all. ...

Because Kristof's only research method is his personal observation, we can't be sure that he's not simply making general claims on outliers. He's not using data; he's using anecdotes. And anecdotes are a slippery slope on which to base claims about the kind of aid work that will best aid the world's poor.

At least Kristof talks to professional aid workers and NGOs. It's possible that their opinions are based on underlying data, or at least a model, and that he's getting good information from them. Friedman's method -- "the boy pulling my rickshaw in Mumbai is more optimistic than the farmer at the Dairy Queen in Topeka, therefore India must be in better shape than America" -- is even worse. How much worse I can't say. But it has to be worse.

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




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