Monday, January 31, 2011

Power and Influence: The Atypicality of the U.S.

. Monday, January 31, 2011

John Quiggin suggests that the uprising in Egypt is another data point suggesting the decline of the U.S.:

There was another round of the more-or-less endless debate about the decline of the US not long ago, focused on the weak employment growth that has characterized the current ‘recovery’. I expect that the obvious inability of the US to exert significant influence, in either direction, over the fate of client regimes in North Africa and the Middle East will provoke some more discussion among similar lines.

As a public service, I’d like to bring an end to this tiresome debate by observing that the decline of the US from its 1945 position of global pre-eminence has already happened. The US is now a fairly typical advanced/developed country, distinguished primarily by its large population. ...

In geopolitical terms, the US spends a lot more on its military than anyone else (in fact, more than everyone else put together) and (contrary to the beliefs of most Americans) hardly anything on development aid or other efforts at promoting global public goods. The amount of sustainable influence generated as a result appears pretty trivial. The number of places in the world where the US can directly determine, or even substantially influence, political outcomes is approximately zero – nothing like what might be associated with an old style Great Power, let alone a superpower or “hyperpower”.As I’ve observed before, Americans of all classes (except those directly connected to the military-industrial complex) get very little payoff for their military expenditure – trillions of dollars of expenditure has been unable to produce positive outcomes in a couple of relatively insignificant countries, or even to put paid to a bunch of pirates in the Indian Ocean. ...

fn2. As other countries catch up to the advanced group that includes the US, those in that group might be said to have declined in relative terms. But this doesn’t seem to me to constitute “decline” in any important sense.

Taking the last part first, a decline in relative terms is exactly what most people mean when they talk about the rise or decline of states. There's a storied IR debate about whether states are concerned about absolute or relative gains (or both), but basically everyone agrees that when we're talking about power and influence -- as opposed to, say, affluence -- relative differentials is what is important. So Quiggin is not only wrong here, he's got it perfectly backwards.

Also, there is no sense in which development aid is a public good. It is excludable, and it is rival. And it is certainly political. (Moreover, as a commenter points out, once private giving is included the U.S. is actually the world's leader in foreign aid.)

Moving back to the top, the claim that America is a "fairly typical" developed country is extraordinarily naive. Dan Nexon shows up in the comments to say:

I want to be clear that (1) I don’t think the US should be spending what it does on its military, (2) it is really easy to underestimate the degree to which US defense policy—through alliances, bases, partnerships, expenditures, presence, stab ops, nuclear umbrellas, LIC, etc.—structures the current international system. Whethe that impact is “good, “bad”, or more complicated is certainly up for debate. That it depresses many other states military expenditures is, I think, pretty clear.

A clear example of this actually involves the very client states in North Africa and the Middle East that Quiggin says the U.S. is unable to influence. Egypt, for example, spends about $4bn a year on its military. The U.S. provides $1.3bn of that in military aid. It also provides a good bit of economic aid. Does Quiggin (or anyone else) think that this does not give the U.S. significant leverage over the Mubarak regime? The U.S. said yesterday that it would revisit all military aid to Egypt in light of Mubarak's actions, and has now called for a transition of power. If Mubarak instead cracks down on protesters, presumably U.S. aid will dry up and the regime will be further weakened. And as I blogged yesterday, preliminary research by Phil Arena suggests U.S. aid to clients in N. Africa and the Middle East has a pacifying effect on the region by suppressing violence between Israel and its neighbors. So Quiggin has got this backwards as well.

We also know that U.S. influence shapes IMF lending and conditionality, and that other countries leverage their ties to the U.S. for their benefit. The same is true of the World Bank.

The U.S. security umbrella in Europe continues to heavily influence the region. What might the Baltics look like without the U.S./NATO interventions in the 1990s and continued security guarantee to Kosovo? How does Russia's strategic calculus change in Eurasia without the U.S. presence? What does the foreign policy of France or Germany look like if NATO was dissolved tomorrow? I think it's unquestionable that the removal of U.S. influence would lead to major shifts in the policies of nearly every country in Europe. The effects of a strong U.S. presence in East Asia are even more pronounced. I think it's also clear that no other state has anything approaching that level of influence, which puts paid the notion that the U.S.'s power is "typical".

It's true that some other advanced countries have some influence over some countries, mostly former colonies. But none except the U.S. have this level of influence in every region of the world. Or, really, in any region of the world.

Or consider this: Japan and the rest of Asia had major financial crises in the 1990s, yet the effect on the rest of the world was slight. Same with all of the major Latin American countries, Russia, and others. The U.S. had a financial crisis in 2007-8 and the result is utter chaos in Europe and elsewhere. If the U.S. and Japan were comparable powers this asymmetry shouldn't exist.

Quiggin argued in comments:

Certainly, I can’t think of many examples where the US has been able to prevail on a diplomatic issue where the EU, Japan etc disagreed.

Financial regulation, climate change, arms control/missile shield, invasion of Iraq, monetary policy/exchange rates, integration of China into the global economic community, Israel. For starters.

But the point is even broader than that. If the E.U. and Japan agree with the U.S. on many or most major issues, isn't that evidence that the U.S.'s influence is greater, not lesser? The system that the E.U. and Japan exist in was largely created and maintained by the U.S. If other major countries have been socialized into it, does that fact not demonstrate just how pervasive the U.S.'s influence is?

Sunday, January 30, 2011

Burmese Junta Dissolved

. Sunday, January 30, 2011

Man, the world is moving fast right now:

Myanmar’s ruling generals will preside Monday over the first meeting of Parliament in more than two decades, a move that they say completes the country’s transition to a multiparty democracy.

Officially, the opening of the two-chamber Parliament in the capital, Naypyidaw, will mean the dissolution of the junta that has ruled Myanmar since 1988, when the country was known as Burma.

But it does not appear to be the dawn of unfettered democracy. A quarter of the seats are reserved for the military, and a military-backed party controls more than 80 percent of the rest, allowing the generals to effectively retain their power, albeit in a less hierarchical system.

Maybe call it the Russian model? Looks like oligarchy to me.

The military government, meanwhile, is aggressively selling off buildings, factories and state-run companies, mostly to allies and family members of the country’s military leaders. The rush to privatization vaguely resembles the vast sell-off in Russia after the Soviet Union collapsed. ...

David I. Steinberg, a Georgetown University professor and a longtime observer of Burmese politics, predicted that the new political system would lead to more freedoms and openness, but that it would be a “slow and tortuous” process. He declared himself “cautiously pessimistic.”

Doha Done in 2011?


Richard Baldwin says the Doha round of WTO negotiations will succeed this year:

The paralysis of the last two years was primarily due to the Obama administration’s unwillingness to engage the issue, according to my discussions with more than a dozen WTO ambassadors and WTO leaders since August 2010.

Obama needed every Democratic vote to get his domestic agenda through Congress. As trade liberalization is deeply opposed by some Democrats, the administration treated “trade” as a four-letter word – not to be mentioned in any way in any situation. America, the argument went, needed healthcare reform, financial reform, and a stimulus package far more urgently than it needed a trade deal. ...

And then Obama lost his majority in the lower house. Plan A was out; Plan B was in – and this includes the Doha Round. Obama supports multilateral governance in general, is broadly in favour of free trade (his anti-trade remarks on the campaign trail were directed at bilateral deals with low-wage nations, Council of Foreign Relations 2008), and believes that Doha could create US jobs. ...

But beware. While likely to conclude, nothing is sure about this deal. To drive the point home, Germany, Britain, Indonesia, and Turkey created a “High Level Trade Experts Group” in the run-up to the Seoul G20 Summit. The Group’s remit is to identify priority actions on trade, including Doha. The Group, which consists of nine trade experts[iii] appointed by the four sponsoring governments (I was appointed by the Cameron administration), today released an interim report in Davos where trade ministers are meeting informally to take political readings and identify blockages. The key points are threefold, in my view:

1. Doha is doable this year; rapid progress is being made in closing the negotiating gaps; this started in November 2010.

2. Getting the deal done requires head-of-state attention; they must authorise, or personally negotiate the last trade-offs framed by the draft agreement that their WTO ambassadors hope to have ready for April.

3. The window for this deal is the first half of 2011; after that all bets are off until 2013 at the earliest.

More at the link. I'm more skeptical, as I don't see Congress granting Obama fast-track authority. The GOP is not loudly pro-trade these days, and the xenophobic tendencies of the Tea Party movement might wreck any chances in the House. I would be surprised if a Democratic Senate would be especially interested in the idea either. Without that authority, Obama doesn't have the tool required to lead in the ways Baldwin would like to see. Moreover, without that authority -- which prevents amending or filibustering an agreement -- the Congress would likely tinker with it, amend it, stall it, and otherwise make passage less likely.

Baldwin points to 1994, when Clinton was able to work with a Republican Congress to pass trade legislation. But 1994 is not 2011. The economy had recovered from the small '91-'92 recession, and the GOP was out front in support of open trade and controlled both houses of Congress. Clinton still had fast track authority (it expired later that year). None of those things are true now, and any one of them could scuttle any deal.

And that's just in the U.S. Is Europe prepared to give in on agricultural supports at a period when economic uncertainty is especially high?

I think Obama should push for the resolution of Doha, and I think he will. But I'm not optimistic.

Saturday, January 29, 2011

Get Back to Work, Phil!

. Saturday, January 29, 2011

I'm very interested in reading this paper after it has been written:

In the case of Egypt, there's also an argument to be made that the US effectively bought the end to one of the postwar era's most intense interstate rivalries. (One of the too many papers I'm working on at the moment develops this argument. When it is ready, I will post a version here. The preliminary results suggest that the best explanation for patterns of conflict between Israel and her neighbors is the amount of US foreign aid given. Standard factors like parity and rapid shifts in the distribution of capabilities do not have much effect, though they do help explain how much aid the US gives.)

Two Pieces on Power


A couple things on power. First, Joseph Nye makes the case for European power in an excerpt from his new book:

The closest thing to an equal that the United States faces at the beginning of the 21st century is the European Union. ...

In military terms, Europe spends less than half of what the United States does on defense, but has more men under arms, and includes two countries that possess nuclear arsenals. In soft power, European cultures have long had a wide appeal in the rest of the world, and the sense of a Europe uniting around Brussels has had a strong attraction for its neighbors. Europeans have also been important pioneers and played central roles in international institutions. ...

The political scientist Andrew Moravcsik makes a similar argument that European nations, singly and collectively, are the only states other than the U.S. able to “exert global influence across the full spectrum from ‘hard’ to ‘soft’ power. Insofar as the term retains any meaning, the world is bipolar , and is likely to remain so over the foreseeable future.” ...

In terms of relative power, if the EU endeavored to become a global challenger to the United States in a traditional realist balance of power, these assets might counter American power. But if Europe and America remain loosely allied or even neutral, these resources could reinforce each other.

The future of European power depends on deepening European integration. Does that process appear healthy right now? I don't think you can even characterize Europe as a unified pole, so I disagree with Moravcsik that the world is bipolar. I actually expect Europe to continue to centralize political authority, but it will be a slow, murky, uneven process. I do agree that the realist expectation that the EU should be balancing the US -- and the obvious fact that it isn't -- drives the nail even deeper into that grand theory.

Elsewhere, Kevin Drum summarizes his view of American political economy:

I am, fundamentally, old fashioned about this stuff: I think of the world as largely a set of competing power centers. Economics matters, but power matters at least as much, and I think that students of political economy these days spend way too much time on the economy and way too little time on the political. This explains, for example, why I regret the demise of private sector labor unions. It's not because I don't recognize their many pathologies, or even the fact that sometimes they stand in the way of economic efficiency. I'm all in favor of trying to regulate the worst aspects of this. But large corporations have their pathologies too, and those pathologies are far worse because there's no longer any effective countervailing power to fight them. Unions used to provide that power. Today nobody does. ...

It's worth noting, by the way, that corporations and the rich know this perfectly well, even if lots of liberals have forgotten it. They know exactly what the biggest threat to their wealth is, and it's not high tax rates. This is why the steady erosion of labor rights has been, by far, their single biggest obsession since the end of World War II. Not taxes, unions. If, right now, you were to offer corporations and the rich a choice between (a) passage of EFCA or (b) a return to Clinton-era tax rates on high incomes, they wouldn't even blink. If you put a gun to their head and they had to choose between one or the other, they'd pay the higher taxes without a peep. That's because, on the level of raw power, they know how the world works.

I'm not convinced that unions are always, or even usually, a force for good or even on the side of "workers". Unions can also be cartels, and they can capture and distribute rents to relatively small numbers of people rather than the masses. They certainly put up barriers to entry. But I agree with the fundamental point that power is important but often ignored, and that the current American system is essentially corporatist.

Friday, January 28, 2011

On Second Thought...

. Friday, January 28, 2011

You can watch the revolution, live and in progress, here. Marc Lynch is blogging it. I agree with Joshua Tucker that Twitter is the best source for up-to-date information, although caveat emptor.

My thoughts are still forming. Last night I tweeted:

I want democracy in #Egypt. I also fear democracy in Egypt. I hate that the US gov is backing Mubarak, but I know why. #nogreatoptions

That basically sums it up for me, and I'm glad to see the Obama administration walking back its support for Mubarak. Obama needs to get out in front of this. Soon. ADDED: Then again, Dubya's early support for the coup against Hugo Chavez back-fired, so maybe taking a wait-and-see approach is best. For a while.

Here is Obama's speech in Cairo 18 months ago.

UPDATE: Apparently the U.S. has been supporting Egyptian dissidents for years.

The FCIC Report


I have been trying to make sense of the FCIC report released yesterday. I am apparently the only person who finds both the majority conclusion and the dissenting view unsatisfying and thus believes that we continue to misunderstand this crisis.

For those not paying attention, the FCIC majority view (six Democrats on the Commission) found that the crisis was avoidable and a result largely of excessive risk taking by financial institutions and regulatory failure by government agencies. The main dissent (there are 2) argues that these factors were clearly part of the story, but assign greater weight to "broad forces" such as the global savings glut.

I find both views unsatisfying because neither rests on any clearly identifiable macroeconomic model. The majority view seems to dispense with macroeconomic reasoning altogether. For them, the crisis is simply a matter of individual behavior; they seem willful in their refusal to embed this behavior in any macroeconomic context. The minority view seems to adhere to a model in which foreign savings generates a demand for safe assets which are available in greatest supply in the US. They don’t embed global financial markets in any broader macroeconomic model.

Because neither viewpoint offers a broader macroeconomic model, neither offers a satisfying answer to either of the two dimensions of the central question: why did the US experience a housing bubble? The majority view doesn’t address the “why US” question at all (a point nicely highlighted by the dissenting view). Nor does it answer the housing bubble question: between 2000 and 2006, residential investment in the US increased from 25 percent to 36 percent of total fixed investment while total investment didn’t increase as a share of GDP (get the data here). Deregulation, which affected the financial sector generally, doesn't explain this sectoral reallocation of investment. Hence, the majority viewpoint doesn't answer the second dimension of the question--why real estate?—either.

The dissenting view can't explain why foreign demand for risk-free assets caused by the savings glut sparked a housing bubble in the United States. This specific allocation of foreign savings (in terms of asset class and country) is hardly a deterministic (or even highly probable) consequence of a sudden increase in savings in the rest of the world. Indeed, the last time a set of countries emerged as major global creditors almost overnight (OPEC in the 1970s) excessive global credit financed sovereign debt (of the commercial bank variety) in Latin America. The financing of over-priced houses in Las Vegas was in no sense a necessary consequence of East Asian savings.

I think that answering these two questions requires one to embed the global savings glut and financial markets in a dependent-economy approach to open economy macroeconomics. The dependent-economy model, also known as the Australian model after the nationality of the key contributors (Salter, Swan, Corden), allows us to consider the impact of a current account deficit on the real exchange rate and the impact of the real exchange rate on the allocation of investment activity between traded and non-traded activities (or between manufacturing and housing if you wish to simplify).

The simple story is the following: a current account deficit causes real currency appreciation. Real appreciation raises non-tradable prices relative to tradable prices. This relative price switch encourages investment to shift away from traded to non-traded activities. More simply, with the dollar over-valued, domestic manufactured goods are less competitive with equivalent foreign goods. So, people invest in activities that don’t compete against foreign goods—e.g., building houses.

This simple mechanism explains one dimension of the crisis: given the US current account deficit, the dollar will strengthen and cause investment to shift into real estate. One would imagine that investment would also flow to sectors that support real estate (i.e., mortgage lending) as well as other areas sheltered from international competition. Hence, a reasonable hypothesis is that the reallocation of investment into real estate and away from other activities resulted from a real appreciation of the dollar caused by the current account deficit.

This leaves the second dimension of the question: why the United States? That is, what caused the US to have a current account deficit? Two mechanisms seem relevant. The first is the mechanism the dissenting viewpoint highlights—the current account deficit was a result of foreign demand for US assets. The second mechanism makes no appearance in the FCIC report—fiscal policy. A decrease in government revenue (2001 tax cut) and an increase in government expenditure (War on Terror) produce a federal budget deficit that reduces national savings. All else equal, the fiscal deficit increases the current account deficit.

As I said, we need not choose between the two mechanisms but we might want to think about their relative priority and importance. One might suggest that foreign enthusiasm for the dot-com bubble of the late 1990s generated a current account deficit and dollar appreciation. The popping of this bubble in 2000 should have seen adjustment, but the re-emergent fiscal deficit widened the current account deficit and kept the dollar strong. On top of this, the foreign quest for relatively safe assets reinforced the impact of the fiscal imbalance on the current account. A self-reinforcing element (mania-induced bubble) emerged as real estate prices began to rise. To that we could consider the consumption boom that resulted from HELOCs as home prices rose in value

In short, viewed through the lens of a dependent-economy model, the crisis was caused by the relative price consequences of a macroeconomic imbalance (the current account deficit). At least part of the blame for this macroeconomic imbalance lies with those who make fiscal policy (a group who seem to be the only government agents entirely absent from the report). There are other implications, but this post is already too long. More to follow.

Wednesday, January 26, 2011

Political Instability and Commodity Prices

. Wednesday, January 26, 2011

I've been pondering this from Yglesias for a few hours:

Think of a world in which there are two kinds of growth. One is leap-ahead growth in which technologically advanced societies dream up even more advanced technology. The other is catch-up growth in which technologically backwards societies learn to use the advanced technology that already exists in the advanced countries. In the twentieth century we saw some instances of catch-up growth, but leap-ahead growth accounted for the majority of global growth in output. One result of that is that we got much much better at extracting natural resources (energy, food, metal) from the fixed supply of land, and commodity prices generally went down. But over the past ten years, catch-up growth in India, Brazil, and (especially) China has been the majority of world growth. Consequently, the rate of stuff-utilization is going up higher than the rate of stuff-production, meaning we’ll see rising commodity prices rather than falling ones.

For rich countries, that’s inconvenient but we’ll deal. For China, it’s fine—the whole point is that incomes will be rising faster than prices. But for poor countries that aren’t growing rapidly, it’s potentially a disaster. This kind of trend is what’s driving the current instability in North Africa and will probably be a major story for years to come.

My first thought was "This sounds plausible" and then "But why just North Africa?". A quick glance around the region gives me pause. Yemen is growing at over 5%, yet there is instability. Tunisia has had solid growth for years, and has a GDP/capita of nearly $10,000, among the highest in the region. Egypt has had high growth rates (5-7%) as well. Lebanon has been growing from 7-9% per year, and has a GDP/capita of over $16,000. Obviously there has been instability in all of those places lately. But also in Iran, which has had anemic growth. Sudan has obviously had lots of conflict, but has it always corresponded with rising commodity prices? The current peace has occurred at a time when energy prices have been relatively high. I'm less familiar with the rest of North Africa, but I don't see an obvious pattern here.

This new research (ungated pdf here) seems to support Yglesias' position:

We examine the effects that variations in the international food prices have on democracy and intra-state conflict using panel data for over 120 countries during the period 1970-2007. Our main finding is that in Low Income Countries increases in the international food prices lead to a significant deterioration of democratic institutions and a significant increase in the incidence of anti-government demonstrations, riots, and civil conflict. In the High Income Countries variations in the international food prices have no significant effects on democratic institutions and measures of intra-state conflict. Our empirical results point to a significant externality of variations in international food prices on Low Income Countries' social and political stability.

But Paul Collier's research suggests that conflict is more likely when commodity prices fall. (More precisely, when prices are volatile.) Many low-income countries are commodity-exporters, so their incomes go up when global commodity prices rise. Does this imply that if commodity prices rise conflict is less likely? Does it depend on which commodity? Does it depend on how the income gains are distributed? Surely there is some research on these, but I'm not familiar enough with the civil war/development literature to reach any firm conclusions. The Blattman/Miguel survey of the civil war econ literature indicates that poverty and slow growth is the most consistent factor, not necessarily commodity prices.

My provisional takeaway is that it will depend on which commodity prices are rising and which countries are producing those goods. Prices of different commodities do not necessarily covary (or has that changed?), so the effects will not necessarily be homogenous across countries.

Tuesday, January 25, 2011

Promises, Promises

. Tuesday, January 25, 2011

State of the Union tonight. The administration seems to have concluded that we are engaged in a global fight for jobs: "the world has changed. The competition for jobs is real." The NYT even makes the "Global Fight for US Jobs" its online headline. It is all very weird; as they used to say, :this is where I came in. The meme even has Paul Krugman returning to arguments that pulled him from academic obscurity into the punditocracy.

The New York Times has an interesting graphic depicting the frequency of key words in the SOTU going back to Roosevelt. Obama used the word "jobs" more than any other president (31 times). He mentioned the deficit half as often as Clinton did in 1993 in spite of having a deficit that is twice as large as a share of GDP.

The President also offered some rather vague specifics. The highlights:
Mr. Obama outlined initiatives in five areas: innovation; education; infrastructure; streamlining the federal bureaucracy and cutting the deficit. He pledged to increase the nation’s spending on research and development, as a share of the total economy, to the highest levels since John F. Kennedy was president, and vowed to prepare an additional 100,000 science and math teachers by the end of the next decade.

He proposed new efforts on high-speed rail, road and airport construction and a “National Wireless Initiative” that, administration officials said, would extend the next generation of wireless coverage to 98 percent of the population.

Saying it is imperative for the nation to tackle its deficit, Mr. Obama reiterated his support for $78 billion in cuts to the Pentagon’s budget over five years, in addition to the five-year partial freeze on domestic spending.
I might point out that the FY 2010 budget, called "A New Era of Responsibility: Renewing America's Promise" (without a touch of irony), totaled $3.55 trillion. The military's share was approximately $600 billion plus the cost of overseas contingency operations. Trimming $15 billion from that per year is not really a huge reduction, especially as the US winds down its commitment of troops and material to Afghanistan.

And the partial freeze of other discretionary spending programs is supposed to "save" $400 billion over 10 years. That is $40 billion a year, I think. Grand total of proposed economies: $55 billion. Budget deficit for FY 2010? $1.3 trillion. Yes, this improves as the economy recovers. But even assuming this recovery, the deficit remains $440 billion per year in 2014 and then begins to widen again. Let's just call this approach to deficit reduction uninspired.

Other than these "cuts," here is what the President offered:

"This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit...To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market."

All of which brings to mind the following passage from the 1997 SOTU:
Whatever our differences, we should balance the budget now. And then, for the long-term health of our society, we must agree to a bipartisan process to preserve Social Security and reform Medicare for the long run, so that these fundamental programs will be as strong for our children as they are for our parents.
Like I said, I think this is where I came in.

Monday, January 24, 2011

Explaining France

. Monday, January 24, 2011

There's been some interesting discussion of the similarities and differences between the French and American economies. Krugman touched on it:

In the 90s, with US employment surging while France (and much of Europe) was having trouble creating jobs, there was a lot of talk about the European employment problem. By the eve of the current crisis, however, the European job picture had changed a lot for the better, while even a business-cycle recovery didn’t seem to do much for US jobs.

Many Americans, even those who imagine themselves well-informed, don’t realize that there has been a big change here; my sense is that the US elite picture of Europe is stuck in a sort of time warp, in which it’s always 1997, and we have the Internet and they don’t. But things have moved on a lot since then.

Indeed they have. Now French employment -- measured as percentage of the working-age population currently employed -- is higher than the U.S.'s, and has been for most of the past decade. French wages are lower, but they retire earlier, get more vacation time, and hourly-earners have a shorter work week. But it's not only that. As Daniel Little notes, the French tax structure is actually less progressive than America's:

In a word, these experts conclude that the existing tax structure in France is seriously unjust because it is anti-progressive at the very high end of the income distribution -- the top 1 percent decline steeply in the percentage of their income that is collected in the form of the several tax vehicles. Only 20% of the state' revenues derive from taxes that are truly progressive...

[T]he total tax burden of the top 1 percent of income earners declines sharply from 48% to about 32%. And the reason for this is the portion of the French tax system devoted to funding social services (Cotisations sociales et taxes sur les salaires). This assessment is roughly flat from the 30th percentile to the 99th percentile, and then it declines rapidly. (The other components of taxes represented here include the income tax, a tax on returns on capital, and taxes on consumption including the TVA.)

France has a value-added tax (VAT) of nearly 20%. This is the sort of broad-based, flat(ish) tax that many on the American right seem to prefer. Overall, France's tax revenues are much higher than the U.S.'s as a percentage of GDP, but the tax code itself is not very progressive. Despite that, or perhaps because labor is not taxed prohibitively, French productivity is very high. Consider this anecdote:

Paris is the only city we know of where there are two rush hours, not one. From 4 to 6, you have civil servants getting home. From 7 to 9, you have people who work in the private sector.

France also has high labor mobility, and has benefited greatly from European integration and its previous colonies. It has exported its large corporations to Europe's periphery and to Asia, so even though it is not the manufacturing colossus that Germany is, it benefits from the global expansion of retail and services to emerging markets. Its large investment into nuclear energy has cushioned it from commodity volatility. They obviously benefit from exporting culture and history, in the form of tourism, as well.

All in all it may be fair to say that France has done better than it rightfully should have. Less-developed countries would not necessarily do well by following their lead, and it's doubtful that the U.S. would benefit from adopting a more French-like bureaucracy (although shifting to a VAT or consumption-based tax structure wouldn't hurt, as it would likely encourage more domestic savings and investment). It is not an especially innovative country, although it does develop a lot of pharmaceuticals. But despite all that France is doing pretty well. Much to the surprise (and chagrin?) of plenty of Americans.

Saturday, January 22, 2011

Smackdown Saturday

. Saturday, January 22, 2011

A couple of nice beatdowns of books I haven't read. First, UCLA history prof Russell Jacoby goes after Erik Olin Wright's Envisioning Real Utopias:

We are only on page thirteen and already we have utopias that depend on a social science that depends on a theory of justice that breaks down into two parts, social and political, the first of which subdivides in three ways. The second task of Wright’s social science envisions alternatives, which can be evaluated by three different criteria: desirability, viability, and achievability. Some things can be desired, but not viable, and viable but not achievable. ... So far, Wright’s book might be classified as an Undesirable Nonviable Alternative. ...

By page 150, Wright finally turns, almost, to “real utopias.” More theoretical brush clearing is required. He will look at real utopias with three criteria: desirability, viability, and social empowerment. A hundred and twenty pages earlier he had posited desirability, viability, and achievability as the foundation of an emancipatory social science. Now he has dropped the last term and added another. Who cares? ...

WHAT IS one to make of this morass? Wright seems to know nothing about the history of utopian thought, communities, or cooperatives. ... He says little about anything. The empirical information he provides is perfunctory at best. His command of Marxism seems limited. His historical reach extends to his own earlier works. His vast theoretical apparatus is jimmy-rigged and empty. The graphs are inane, the writing atrocious. To call this book dull as dish water maligns dish water.

Ouch. But this takedown of Dambisa Moyo's new book might be even harsher:

HERE are two predictions about the world economy. First, the West’s malaise and the rise of emerging economies will yield a mountain of books. Second, few of these are likely to be as bad as “How the West Was Lost”. ...

This is basic stuff. Much else in elementary economics also gets mangled here. Governments usually manipulate exchange rates to make their currencies artificially weak, not strong. In the Keynesian national-income identity, G represents government spending, not the budget surplus. The idea of a special tax on sports stars’ incomes to discourage youngsters from unrealistic aspirations is intriguing, if contentious; suggesting that the two groups might bargain away such effects is absurd.

There are some puzzling omissions. Ms Moyo rightly complains at the exclusion of big emerging economies (except Russia) from the G8. She celebrates the strengthening of their diplomatic muscles. Amazingly, she seems not to have noticed the prime manifestation of this: the rise of the G20, which since 2008 has eclipsed the smaller, rich-country club.

Worse, Ms Moyo commits some jaw-dropping factual errors. General Motors, she writes, was bought by Fiat, “an event unimaginable just a couple [of] years earlier”. Yes, and it still is: the Italian carmaker did not purchase GM, but a 20% stake in Chrysler, recently increased to 25%. France gets “almost 20% of its electricity from nuclear sources”. The OECD says the figure is close to 80%.

Ms Moyo’s editors are as bad as her fact-checkers. If they couldn’t spot the analytical flaws, they might have done something about the stylistic ones that range from curious analogies to long phrases in parentheses. Endnotes are used almost at random.

If, after that, you're still interested in Wright's book, the pre-print of nearly the whole thing is available here. And Wright discusses the theme in the video below, the slides from which are here.

Envisioning Real Utopias from West Coast Poverty Center on Vimeo.

(ht: Josh Miller)

Thursday, January 20, 2011


. Thursday, January 20, 2011

There's a new data set that may be of interest to development-minded folks:

Do you want to know how much the U.S. invested in education in the Democratic Republic of Congo in 2009? The Foreign Assistance Dashboard makes it easy to see and compare investments across sectors and countries at a glance. Civic-minded developers and researchers can download any and all of the Dashboard’s data in a machine-readable format to mash, visualize, and analyze U.S. budget data in new ways.

Today’s launch of the Foreign Assistance Dashboard is but a starting point for greater U.S. aid transparency. In the months to come, the Dashboard will grow beyond State and USAID to include data from all Federal agencies that provide foreign assistance. In addition, more granular and timely data will enable users to drill down to the details of specific projects and track trends. With time, the Dashboard will illuminate not only dollars spent but also the impact of our investments. Ultimately, government-wide collection of featured high-value data will be institutionalized through guidance from the Office of Management and Budget.

Always Ask Not


Earlier this week I noted the 50th anniversary of Eisenhower's farewell address, the famous "military-industrial complex" speech. Well, today is the 50th anniversary of Eisenhower's successor's inaugural address, JFK's "Ask not" encomium. The libertarian slice of my brain has always hated that speech, and Gore Vidal's recollection of it describes why:

When he gave the inaugural address I was thrilled because I was as stupid as everybody else. I remember it was old Max Ascoli, whom we used to laugh at - he was married to a Rockefeller, Italian-Jewish intellectual, ex-liberal, and put something out called Report magazine. Arthur Schlesinger and I were praising this wonderful speech, and Max Ascoli said, "I haven't heard anything so dreadful since Mussolini." We thought, "sour old Max." ... Well, when you read that speech today you realize that we're declaring war on the entire world. The national security state's voice had spoken.

Okay, that's overstating it a bit. But there certainly is something martial about it.

(ht: Seth Studer)

Green Graft


This doesn't strike me as a very large problem, but it is interesting:

The European Commission suspended trading in greenhouse gas emissions permits on Wednesday for at least a week after the theft of permits worth millions of euros via online attacks. ...

The attacks raised new questions about the viability of Europe’s main tool to combat a rise in greenhouse gases in the atmosphere.

The stolen permits are part of Europe’s effort to cap the amount of carbon dioxide, the main greenhouse gas, that companies may emit each year. Europe’s system is the world’s largest market for greenhouse gas emissions credits.

Companies exceeding their emissions quotas buy certificates from companies that succeeded in shrinking their carbon footprint by, for example, adopting lower-emission technology or modifying production in other ways.

This is not the first problem that Europe has had with its cap and trade system, however:

Europe’s system has had a rocky ride since trading began six years ago, including extreme volatility, tax fraud, recycling of used credits and suspicions of profiteering, in addition to online attacks.

One year ago, swindlers used fake e-mail messages to obtain access codes for individual accounts on the national registries that make up Europe’s system.

This is all pretty low-level theft, but in small ways it does undermine the integrity of the system. This is one reason why most technocracy-minded folks prefer straight carbon taxes rather than cap and trade. When cap and trade works well it mimics carbon taxes, but it is prone to rent-seeking, inefficiency, and (apparently) fraud. Carbon taxes have fewer moving pieces and they're more difficult to game.

More broadly, cases like these demonstrate that reaching an international agreement on climate change isn't the whole battle. Preventing leakages, inefficiencies, and poor incentives may be just as difficult, especially since states with weak or corrupt domestic institutions (e.g. China, India) are involved. It's a very real problem, but it isn't discussed very often.

Wednesday, January 19, 2011

In Praise of Jeb Bush...

. Wednesday, January 19, 2011

... And against Samuel Huntington. I'm completely with Ezra Klein on this one:

America has not just assimilated, but actively benefited from, many previous waves of immigration. If you're to oppose Hispanic immigration, you have to somehow explain why you won't look, in 30 years, like the people who were hanging "No Irish Need Apply" signs on their storefronts, or like Benjamin Franklin, who said of the Germans immigrating to Philadelphia, that they "are generally the most stupid of their nation." And plenty of people, including notable political scientists like the late Samuel Huntington, have been trying:

Americans like to boast of their past success in assimilating millions of immigrants into their society, culture, and politics. But Americans have tended to generalize about immigrants without distinguishing among them and have focused on the economic costs and benefits of immigration, ignoring its social and cultural consequences. As a result, they have overlooked the unique characteristics and problems posed by contemporary Hispanic immigration. The extent and nature of this immigration differ fundamentally from those of previous immigration, and the assimilation successes of the past are unlikely to be duplicated with the contemporary flood of immigrants from Latin America.

Huntington offers a couple of hypotheses for why this might be: Hispanics are characterized by a "lack of ambition," and they are so geographically close to their home country that they won't have sufficient incentive to assimilate, to name but two. But these hypotheses aren't being borne out: Hispanic immigrants are following the patterns of past immigrants fairly closely, and in some cases, outdoing them. We need more American politicians pointing this out. Good for Bush.

Thanking China For Stealing Our Jobs


Look, if China subsidizes green technologies, and then those technologies are created and sold at below-market prices to the U.S., then that is a very good thing for the U.S. It means that China is effectively paying for part of our energy conservation (and, by extension, our energy consumption, since green technologies drive down the price of fossil fuels). Munger nails it:

Look, if the only way you can make money is to pay more than 100% of the purchase price in subsidies, you don't want to be in that business.

Conversely, if you can pay less than 100% of the purchase price to get the product, then that's a really good transaction. This Chinese policy hurts Chinese people and helps American people. In fact, it doubly helps us, because not only do we get solar panels are much lower prices, but we also no longer have to subsidize American production with tax dollars. That money can now go to other productive uses.

We should be pleased. Maybe Amy Chua can have her kids write a really nice "thank you" card.

Tuesday, January 18, 2011

Shorting China

. Tuesday, January 18, 2011

A thought experiment: What will be said if, in 2013 or thereabouts, the Euro has broken up, China is in the middle of a banking crisis, and the concomitant drop in global demand drives down commodity prices and slows down growth in Brazil and the petrostates? For the last several years we've heard little except how broken the Anglo-American economic model is, and how the days of U.S. as leader of the global economy are over, and yet all of the above not only seem within the range of possibility but now appear more likely than they did just a year ago. If it happens, will everyone be talking about the "unipolar moment" once more?

None of those things are assured of course, but the probability of one or all of them happening is well above zero. Many hedge funds are now betting on a Chinese slowdown:

The manager, who wanted to remain anonymous, said: “The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.” ...

He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the “key engine for global growth”, China is an “enormous tail-risk”.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.” ...

A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc. China is the global price-setter for oil, coal and base metals.

That doesn't make them right of course, and China came through its last financial crisis relatively unscathed. But the pattern of recent history is that catch-up growth can happen very rapidly for awhile, but cannot sustain itself forever, especially when it is state-led. We've seen this story before. China has been papering over real problems for quite awhile now, and may not be able to keep it up forever. There is a lot of malinvestment (especially by local government), a sketchy banking sector, a real estate bubble, and quite a lot of rent-capture and cronyism. Despite rising incomes and an appreciating yuan (in both real and nominal terms), Chinese household savings has been going up, which may indicate that Chinese citizens may be nervous about their future incomes. And of course there's the growing demographic nightmare.

Predictioneering is a fool's game, so I won't do it. But looking around the world it's easy to think that the U.S.'s problems are more easily managed than many of its presumptive rivals. That's a depressing thought in one sense, as the U.S. has certainly seen better days. On another level, it's worth remembering that the period of U.S. leadership has corresponded with large advances in standards of living and large declines in violent conflicts. There are worse things than the persistence of the old order.



Crooked Timber is hosting a symposium on Germany, its response to the EU debt crisis, and its role within the EU more broadly. The first three installments are in, with more to follow. I especially liked Mark Blyth's contribution, which I think gets the situation right. In a nutshell, he argues that Germany is doing what it's doing as a stalling tactic to give its banks time to prepare for an inevitable run.

The "New Rules": Not New, Not Rules, and Not Helpful


In anticipation of his new book The Globalization Paradox, Dani Rodrik imagines what a new Bretton Woods arrangement would/should look like, and comes up with this bizarre list of seven "new rules for the global economy". I'll take them in turn.

1. Markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. They rely on courts, legal frameworks, and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate. And all of this is true of global markets as well.

Umm... are there no courts? No laws? No regulators? No safety nets? No social insurance? No countercyclical fiscal policy? Rodrik and I are looking at different economies. Perhaps the precise mix of these does not satisfy Rodrik (although that shouldn't matter, since he adopts a pluralist position below), but he cannot seriously argue that they do not exist. As for "all of this is true of global markets as well", I'm not sure what he means, he doesn't elaborate, and this seems to contradict some of his later points. To whit:

2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities. The nation state lives, if not entirely well, and remains essen­tially the only game in town. ...

Agreed. But again, this is the status quo. We have some international agreements (he lists the Basel Accords and some WTO rules), but we maintain national standards in addition to those, and all of them are subject to approval from domestic polities. Is Rodrik asking for less international cooperation? What problem does he think that would solve?

3. Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best. The United States, Europe, and Japan have produced comparable amounts of wealth over the long term. Yet their labor markets, cor­porate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these “models” – a different one each decade – anointed the great success to be emulated. ...

Right. Again, this is the status quo. The Washington Consensus is well and truly dead, if in fact it was ever alive. The Brazilian model is different from the UAE model is different from the Chinese model is different from the Indian model is different from the German model, etc. No one is trying to coerce anyone else to adopt their system.

4. Countries have the right to protect their own regulations and institutions. ... We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threat­ens domestic practices enjoying broad popular support. If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates. ...

This is a major part of his previous book, One Economics, Many Recipes. I see this largely as status quo too, although I can see why there would be an argument. It's true that emerging countries were often bullied in previous trade rounds, but the failure of the Doha round is partial indication that emerging economies now possess a stronger bargaining position. As for the specifics he lists -- tax policies, financial regulations, labor standards, or consumer health and safety -- there are no international prohibitions limiting national sovereignty in these areas. In fact, WTO rules make explicit exceptions for things like consumer health. To the extent that governments are pressured to change national policies in these issue-areas, that pressure comes mostly from markets or global civil society, not foreign governments. Which is why there is so much cross-national heterogeneity over those policies.

5. Countries have no right to impose their institutions on others. Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. ...

Oh, I see. So you can use protectionism to uphold your own values, but only if that does not impose on others. Excuse me? A tariff or border adjustment is by definition coercive. Either you adopt my values or else you cannot make money in my markets. One cannot have this both ways, no matter how much one would like to.

6. International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should aban­don international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. A completely decentralized free-for-all would benefit no one.

What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit. ...

I guess the disclaimer is meant to head-off criticism that this explicitly violates everything that came before it. Other than the fact that it does, it is also meaningless. Traffic rules? Not including a speed limit? Does he mean, like, using your turn signal? I wish there was a for-instance here, because I cannot guess what Rodrik is driving at.

7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. ...

Look, either the norm of national economic sovereignty and the need for local decision-making and autonomy is important or it isn't. If it is, then regime type should be irrelevant. If it isn't, then #s 1-5 are irrelevant. Rodrik justifies this by saying that "legitimacy" comes from democratic deliberation, but what happens when democracy yields illiberal outcomes? When majorities oppress minorities? When majorities in one country oppress minorities in others? This is to elide the most obvious criticism, which is that democracy itself is in the eye of the beholder.

Looking over this list, there isn't a single thing that addresses any of the major issues facing the global economy, which Rodrik lists as "the eurozone crisis, global recovery, financial regulation, international macroeconomic imbal­ances, and so on". There are very few things that even count as functional "rules" in a way analogous to Bretton Woods. As general principles, almost all of them are already present in the status quo, and the ones that aren't (#7) are almost surely wrongheaded.

This column is intended as a precis of his forthcoming book, so maybe he offers better argument and example there. I hope so, because what's in the column is weak sauce.

Monday, January 17, 2011

The Military-Industrial Complex 50 Years On

. Monday, January 17, 2011

Today is obviously dedicated to the memory of Martin Luther King Jr., but 50 years ago Dwight Eisenhower delivered his famous "military-industrial complex" speech. His granddaughter recalls what he was referring to:

The pressures Eisenhower faced during his presidency were enormous. Over the years, as the Soviet Union appeared to reach military parity with the United States, political forces in Washington cried out for greater defense spending and a more aggressive approach to Moscow. In response, the administration publicly asserted that there was no such thing as absolute security. "The problem in defense is how far you can go without destroying from within what you are trying to defend from without," Eisenhower said. And he followed through, balancing the budget three times during his tenure, a record unmatched during the Cold War. ...

"This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. . . . We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. . . . This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron."

This sounds very much like things Stephen Walt has been yelling for the past decade. And this understanding of Ike's famous phrase is very different from the typical interpretation, where "military-industrial complex" is essentially shorthand for rent-capture by defense agencies. I think most people can agree that there is quite a lot of both going on right now, and when even the Defense Department wants its funding cut you can tell that things are out of control.

But I don't think the American public are all that interested in weighing the costs of the national security state versus the benefits. We don't think in terms of tradeoffs -- extra airport security means higher taxes or fewer schools -- or if we do we seem to immediately decide that security is the highest pursuit, even if we're chasing diminishing returns.

In many ways this is a perfect companion to MLK Day. We remember MLK and the civil rights movement for the large advance of human liberty it produced. It helps remind us of the sort of society we used to be, the sort of society are now, and the sort of society we hope to be in the future. It's also worth dwelling for a few moments on the implications of our foreign policy and public spending on those goals. I don't think that points us in any one direction as Walt does, but I do think reflection is a valuable exercise.

Sunday, January 16, 2011

The Dollar and the Global Economy

. Sunday, January 16, 2011

I want to briefly highlight two recent pieces on international monetary policy by Barry Eichengreen, who is always worth reading on the topic. The first highlights similarities between the current international monetary system and that of the 1960s, which ultimately culminated in the collapse of the Bretton Woods regime. It's a nice short article, and succinctly summarizes the positions of the major players. The gist: it's hard for trade-surplus countries to continue to hold down their nominal exchange rates while large deficit countries -- i.e. the U.S. -- pursue an expansionist monetary policy, as that creates high domestic inflation in the surplus countries. Dr. Oatley once referred to the U.S. Fed's policy of "smoking out China's yuan undervaluation", and I think that puts it nicely. A similar confrontation broke Bretton Woods I, and this could break Bretton Woods II.

The second previews Eichengreen's new book, on the role of the dollar as the world's reserve currency, and why it isn't going to change any time soon. He runs down the list of likely contenders and finds them all seriously wanting. He doesn't mention path-dependence, but that is another contributing factor. He also sounds a warning, that U.S. fiscal rectitude is needed to maintain stability in the global economy. Because if the dollar goes down, everything goes down with it.

With exorbitant privilege comes exorbitant responsibility. Responsibility for preventing the international monetary and financial system from descending into chaos rests with the United States. How much time does it have? Currency crises generally occur right before or after elections. Can you say November 2012?

Germany's Growing European Hegemony


Once you get past the silly Merkel/Sarkozy pop psychology (basically the first page), this article on the EU is pretty strong. Here's the conclusion:

With Germany ascendant and looking both inward and eastward, Britain staying out of the euro zone and France carrying less weight, the question of German leadership is now at the fore. Germany has traditionally avoided trying to lead Europe from the front; memories from World War II, though faded, have not yet gone away in the rest of the continent. Even now, anti-German feeling is rising among Greeks, Portuguese and Spaniards, who feel abandoned, even betrayed, by Berlin.

Still, Merkel is going to have to exercise more leadership if the euro is going to be saved, even if she still hides to some degree behind France. And active German leadership of the E.U. means a clearer understanding that politically difficult compromises are going to have to be made and that money will have to be spent and promised — all in the face of growing German discontent.

John Kornblum, the former American ambassador in Berlin and still a resident there, sees a model for Germany in the United States and the way it helped keep Europe together after the war, mediating disputes and finding compromises. “The Germans don’t see it yet,” he says. “But they will have to take on the role of the United States in Europe, and have the same kind of balancing role we had for such a long time.” At that point, Germany’s marriage with France won’t matter so much anymore.

Saturday, January 15, 2011

Euro Economics: Only Half the Story

. Saturday, January 15, 2011

I found Krugman's NYTimes mag article on the economics of the eurozone to be solid. Of course at this point the economics are well-understood by informed observers. What's not is the politics of the eurozone. And on that point Krugman is no help, as evidenced by his closing:

So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.

Well, we've been writing about that a lot over the past year or so. So far it seems clear that the strong nations in the EMU (especially Germany) are not prepared to be their neighbors' keepers. They are not ready to ditch the common currency either. So they've taken (perhaps) the worst option: forced austerity for the periphery in exchange for temporary solvency, in order to give the banks in the core time to get their books in order. That, and allow the ECB to take a more active role than they are (technically) legally allowed.

As of today, I think the ball is actually in the peripheral countries' court. If they do a "full Argentina", as Krugman calls it, or even a milder debt restructuring, it will force Frankfurt's hand. If they are willing to stick it out and go through crushing austerity -- the Baltic option -- then the eurozone will survive on something like its present course. I wouldn't put any money on the latter happening in Greece or Spain, although it could work in Ireland.

The point is that, at this point, the economics is merely the backdrop for the politics.

Thursday, January 13, 2011

Fact of the Day

. Thursday, January 13, 2011

China is already number one. So says Arvind Subramanian:

When the presidents of China and the United States meet next week in Washington, neither will likely be aware that, measured in terms of purchasing power, it is Hu Jintao not Barack Obama who represents the world’s largest economy. Some time in 2010, the Chinese economy overtook that of the United States. My calculations of GDP for 2010—which of course are subject to the uncertainty associated with all such exercises—are based on new estimates of GDP that will soon be published by the Penn World Tables (PWT) under the guidance of Professor Alan Heston at the University of Pennsylvania.

Via Blattman.

Quote of the Day


From Phil Arena, dishing some snark to academic IR:

Of course, we know democracies abhor violence, are ill-suited for bearing the costs of prolonged war (especially counterinsurgency warfare), only choose wars they know they can win, and win quick, and all of this is true because their leaders are held accountable for their decisions. So something must be wrong here. It can't be that our understanding of how democracy works is deeply flawed.

Wednesday, January 12, 2011

Has the ECB's Independence Gone Up or Down?

. Wednesday, January 12, 2011

The question in the title refers to the fact that central bank independence usually refers to the isolation from the political process that a central bank has in setting policy. Traditionally, the ECB has been considered to have a lot of independence. But it has also had a very narrow, strict mandate: to promote price stability in the eurozone. It did not have a mandate to promote full employment. It did not regulate the European banking system. It was not a lender of last resort. So the ECB's freedom to pursue the goal of price stability was very high, but pre-crisis its freedom to pursue other goals was very low. Depends on what you mean by independence.

That's all changed over the past few years. The Financial Times' stupid, self-hurting TOS prevent cutting, which means (among other things) that I've been linking to them a lot less frequently than I used to, but this article is worth highlighting. Who would have thought in 2006 that the ECB would be intervening in bond markets to prop up Portugal's debt auction? Portugal says it does not need a bailout, but this is a bailout. It's just a monetary bailout rather than a fiscal bailout. The ECB intervened so the auction wouldn't fail.

At this point the ECB looks like the main thing holding EMU together. And it's able to do it because, unlike national governments, it doesn't have to face an election following a fiscal transfer to the PIGS. It can just intervene when necessary, serving as the "lender of last resort" that it claims not to be. In other words, its scope of authority has been greatly expanded since the crisis began, without (as far as I know) any new statutory authority being given to it.

The ECB is still not pursuing employment-boosting monetary policies, but by buying the debt of needy countries it is in effect subsidizing fiscal policies that could boost employment. The alternative is austerity, either self-imposed or demanded by the EFSF/IMF, which involves major internal contraction. And while the ECB is not regulating banking sectors, it is doing whatever it can to prevent a banking collapse, especially in Spain. If the ECB hadn't overstepped its official mandate back in 2007-8, there is little question that the entire European banking sector would have melted down by now.

So the ECB is now acting more like that Fed than it had pre-crisis. I would consider that an increase in the ECB's independence, because it can act in more ways to promote the economic well-being on Europe. The difference is that the Fed has a political mandate to act the way it does. The ECB does not. By intervening in bond (and other) markets, the ECB is essentially spreading the credit risk of the eurozone's riskiest governments across the entire union. If this were properly understood in Frankfurt it would be deeply unpopular. Perhaps it is; my thumb isn't enough on the pulse of Euro domestic politics to know.

There are political battles on the horizon in the eurozone. It will be interesting to see the fate of the ECB in the coming years. My guess is that Europe's leaders will see that a stronger, more flexible ECB would make fiscal union less necessary; given that, I expect the ECB to retain its new-found authority, and perhaps get some more. We'll have to see.

This Is What Adjustment Looks Like


The real exchange rate -- including domestic inflation -- is still the appropriate measure:

The [Chinese] central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi’s appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets — while also protecting the jobs of tens of millions of Chinese workers in export factories.

Now, though, that cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters’ price competitiveness — just as a stronger renminbi would do if Beijing was not intervening to begin with. ...

Inflation in China is not just the result of China’s currency market intervention, although Mr. Hu and other economists describe it as the biggest single cause. Another cause is aggressive lending by Chinese banks, despite repeated demands by regulators to slow things down.

Meanwhile, David Leonhardt tries to play down currency concerns in advance of Hu Jintao's visit to the U.S.:

For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there. The policy goes by the name “indigenous innovation. ...

The most relevant comparison of two currencies is one that is adjusted for inflation in the two countries. When inflation is higher in one country, as in China today, it means that country’s products are becoming more expensive — and imports into the country become relatively cheaper. In effect, the real price of Chinese-made goods is rising faster than the exchange rate suggests.

Without taking inflation into account, the renminbi has risen 3 percent against the dollar since last summer, when China began letting it rise. Once inflation is accounted for, the real increase has been about 5 percent. At that pace, the renminbi could erase its artificial undervaluation — as some economists estimate it — in less than two years.


Speculative Conjecture on Regulation and Crisis


Finally someone else is writing about the politics of financial regulation, so you know I'm all over this one. Riffing off of Reinhart & Rogoff (R&R) at The Monkey Cage, David Andrew Singer asks how we could know whether this time is different:

Financial crises happen regularly throughout history; indeed, R&R's analysis makes the enduring pattern of boom and bust perfectly clear. However, the book explains very little about the patterns it presents. The authors "select on the dependent variable" by examining only cases of countries in crisis, and as a result they are unable to make causal inferences. Are large capital inflows the root cause of the current financial crisis, and did they cause earlier crises throughout history? With no variation in the dependent variable, we cannot discern whether the alleged macroeconomic triggers are the real culprits, or whether other factors are at work. Examinations of past financial crises tell us little about whether or when current account deficits lead to financial instability, or about the political and institutional factors that might militate against systemic market failures.

The point here is that because R & R only look at crisis periods, and not non-crisis periods, it is impossible to know for sure whether the macro variables are really causing the crisis. For example, even if most crises occur when countries have high current account deficits, there are many periods when countries have high current account deficits and yet do not have financial crises. Looking only at crisis periods, we might conclude that current account deficits cause crises. Looking at all periods, not just crisis periods, we (might) conclude that they do not. Or we might find a conditional effect: rapid depreciations in the current account cause crises, but more gradual depreciations do not. Or maybe levels matter more than changes, or maybe there is an interactive effect between the current account balance and levels of national debt. Etc. This is why research is hard.

But then Singer goes on a harangue:

Despite the challenges of causal inference, many social scientists seem content to attribute the financial crisis to underlying macroeconomic imbalances. In my view, these arguments provide useful cover for financial regulators who might otherwise be held accountable for their rule-making. If systemic failure is the periodic and ineluctable result of global capital cycles, then there is little reason for regulators to enact tougher regulations. Why should central banks and regulatory agencies impose more stringent capital requirements and prohibitions against risky investments? If the roots of the crisis are macro-structural, regulators feel no incentive to alter the rules. How else can we explain why U.S. regulators, when facing the public or their overseers in Congress, speak of recent bank failures as if they were exogenous acts of nature? ...

From a research design perspective, a reasonable way forward is to test hypotheses about the conditional impact of capital inflows on the probability of financial crises in the developed world. The scope and quality of regulation are likely contenders for inclusion in such a model. The cases of Australia and Spain suggest that large capital inflows might be less destabilizing if the banking system faces strict capital requirements and prohibitions against non-traditional banking activities. Other possible conditioning variables include, inter alia, resource endowments, partisanship, and corporate governance.

Singer has done a lot of good research on regulation (as I am trying to do, now), so it makes sense that he thinks it's important. I do too. But as far as I know there is no persuasive research showing that crises are the result of poor or lax regulation either. At least not of the "large-N", quantitative variety. One of the reasons for this is that cross-national time series data on financial regulations are rare and incomplete. But even a cursory look across the past few years of history suggests it's more complicated than that. India was recently regarded as a paragon of financial stability... until it wasn't. In fact, the U.S. had stricter regulations pre-crisis (at least in terms of capital adequacy and leverage) than many other major economies, including Germany and Japan, and it's been the U.S. (and U.K.) pushing for tougher standards in the Basel negotiations.

Despite some harmonization through the Basel Accords, national regulatory standards still vary quite a lot. Nevertheless, the subprime crisis spread throughout the system in ways that make national regulatory standards look largely irrelevant. At least, there's no clear pattern to me. What best predicts exposure to crisis (to me) seems to be how integrated a country is in the international financial system, especially to the U.S. and U.K., and how large the banking sector is relative to GDP. Countries that were very tightly connected and had large financial sectors (e.g. Iceland, Ireland, the U.S. and U.K.) have suffered quite a lot. Those that were less integrated into the system or had smaller financial sectors (e.g. Australia, Brazil) have done better.

Singer mentions Spain as a positive example, which is curious because Spain is in the middle of a banking crisis right now that has already required massive public sector bailouts, and that appears to be intensifying and now is threatening to turn in a sovereign debt crisis. (Which is exactly what R&R would predict, by the bye.) This despite the fact that, as Singer notes, Spain has a relatively strict regulatory structure.

Considering a time series leaves us even more unsure. In the U.S., Glass-Steagall didn't prevent the crises revolving around the Latin American debt, savings and loans, and dot-com bubbles. The Basel Accords obviously didn't do their ostensible job either, either in the 1990s or 2000s. The U.K. had more financial instability before "light touch" than after, until 2008. It's not that crises are exogenous shocks; it's just that the regulatory structure doesn't appear to tell us too much about how susceptible to crisis countries are either. Of course we don't know that for sure, because data limitations have limited our ability to rigorously tests these claims. But it isn't obviously true, even if it is intuitive and intellectually appealing.

I think Singer is correct about his main point: R&R doesn't tell us everything we need to know. There are certainly intervening variables that are important, and strength of regulation may be one of them. In fact, I would be very surprised if regulation had no effect on stability or instability. But we also need to remember that regulations are political creations; there is no ex ante reason to believe that regulatory codes are even primarily intended to promote stability. Regulations affect distribution, and that makes them inherently political rather than technocratic. Indeed, much of the Dodd-Frank reform bill was about either punishing financial institutions, protecting consumers, shuffling regulatory authority, or winding-up failed institutions. Not a whole lot of it really concerned stability, and it didn't say much of anything about capital, liquidity, or leverage.*

Jeffrey Friedman has argued that specific parts of the regulatory code -- those privileging mortgage debt, asset-backed securities, and OECD sovereign debt -- made the system less stable. These parts of the regulatory code had an explicitly political purpose: to encourage home-ownership, especially among the lower classes, and to make access to bond markets incredibly cheap for governments. This ground is ripe for political economists.

Singer concludes with this:

Until we conduct more rigorous tests, social scientists will remain in the uncomfortable position of offering only speculation and conjecture. The availability of hundreds of years of data on previous crises should not give us a false sense of confidence about our capacity to explain. Indeed, we simply do not know whether this time is different or not.

I completely agree. I would argue that this applies equally to claims about the effects of regulation as well which are, as of now, at least as speculative and conjectural.

*Title I concerns financial stability, but mostly reorganizes already-existing regulators and tasks them with monitoring and addressing systemic weaknesses. It doesn't create any substantive new statutory requirements of banks.

Monday, January 10, 2011

OMG WTF Federal Reserve Fact of the Day

. Monday, January 10, 2011

Via Felix Salmon:

At the end of 2010, the Federal Reserve system had $2.423 trillion in assets and $2.367 trillion in liabilities, which means that the simplest measure of its total equity — assets minus liabilities — comes to $56.6 billion. The Fed also managed to earn net income of $80.9 billion in 2010. Which means that its return on assets was incredibly high at 3.3%, while its return on equity was an astonishing 143%.

I think it’s fair to say that no bank in the history of the world has ever had income of anywhere near $80 billion in one year: that’s over $700 per US household. Somehow, the Fed is making roughly $60 per household per month, and remitting that money straight to the Treasury.

Much of this is TARP, but also QE1 and QE2. On net I'll take it as a good thing that the Fed is giving billions to the Treasury, but the scale of interventions in asset markets is so large that it can't but make me nervous.

This is also another reminder that the U.S. Federal Reserve is the most powerful and important actor in the global economy, bar none. Its actions have far-reaching ramifications, and its capabilities are enormous. Sometimes that's good. Other times, probably not.

Or, it's better to say that when the Fed acts, it can help some groups quite a lot, and can devastate others.

Downgrading Islamist Terror As A Public Threat?


We should, says Dan Gardner:

Islamists? They were behind a grand total of one attack. Yes, one. Out of 294 attacks [in Europe]. In a population of half a billion people. To put that in perspective, the same number of attacks was committed by the Comite d'Action Viticole, a French group that wants to stop the importation of foreign wine.

Obviously the trend is similar in the U.S. We've just had an act of domestic terrorism that (apparently) had nothing to do with Islam. And despite several feeble, failed attempts, we've had almost zero attacks from Islamist groups in nearly a decade. This does not match with the rhetoric we often here.

Gardner also gets a good one in on Mark Steyn:

But half a decade has passed since Steyn declared the outbreak of the "Eurabian civil war."

And yet, there are no waves of bombings. No armies of bug-eyed jihadis. No pale-faced boat people bobbing about the North Atlantic in rusty scows. ...

Mark Steyn has a new book in the works, apparently. Something to do with the end of civilization. Given his track record, this is grounds for optimism.

Contrast that with the ongoing drug wars in Latin America. Twenty-seven people were killed in Acapulco just yesterday, including fourteen beheadings. Since 2006, there have been more than 30,000 drug killings in Mexico alone. And of course that doesn't include other countries where illicit drug activity is high, especially Columbia.

As for ETA... they've officially laid down their arms.

Obviously many more people die from Islamist groups in the Middle East and Asia than in the Americas or Europe, but that fact does not bode well for "clash of civilizations" hypotheses like Steyn's.

The point is not to minimize real threats, or to ignore problems of assimilation in Europe (and the U.S.). The point is to have a more realistic understanding of what's going on. Despite many warnings, a wave of Islamist violence has just not infected the West.

International Political Economy at the University of North Carolina: January 2011




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