Thursday, March 31, 2011

Winter's Officially Over

. Thursday, March 31, 2011

Will Barclays Leave London?


Dealbook plays gossip columnist:

An analyst report has renewed speculation among some investors that the British bank Barclays might leave London for New York.

The report, published by two UBS analysts on Tuesday and titled “The first to leave?”, gives a list of reasons why there apparently is “little option for Barclays but to reconsider domicile.”

Executives of large British banks, including HSBC, Standard Chartered and Barclays, had been threatening to move their headquarters abroad ever since a government-appointed banking commission here hinted it would consider splitting investment and retail banking to make Britain’s financial sector more stable.

The warnings were widely seen as a tactic by the banks to scare the government into abandoning plans for stricter financial regulation.

This is interesting on a number of levels. First of all, the report is by UBS -- not Barclays, who's CEO Bob Diamond has recently said that he is committed to keeping Barclays headquartered in the U.K. UBS is based in Switzerland, but it has major operations internationally (including the U.K.), so perhaps this report really says more about UBS's preferences than Barclays'. What do I mean by that? If the U.K. tightens up its regulations, all firms that operate in that country will have to comply, whether they are based there or not. The effectively functions as a barrier to entry for new firms, since better-established firms will have an easier time complying with stricter regulations. The net effect of this is that firms with a large market share -- like Barclays -- will be in a better competitive position relative to emerging challengers -- like UBS. This is pure speculation on my part, but remember that regulation is about competition first and foremost, and that means that regulatory structures are political creations.

Another interesting aspect is that the U.S. is not necessarily a laxer regulator than the U.K. Prior to the crisis it definitely was not: the U.S. required higher capital ratios to be considered "well-capitalized" than the U.K., which operated under a "light touch" regime. Additionally, the U.S. has already placed some limits on the extent to which commercial banks can engage in investment banking activities under the so-called "Volcker rule". To this point, neither the U.K. nor most continental European countries have similar restrictions. The U.S. has also conducted much more rigorous "stress tests" of systemically-important financial institutions than their European counterparts, and the U.S. (with the U.K.) pushed for stronger capital, liquidity, and leverage requirements in the new Basel accord revision. In other words, relocating to the U.S. isn't necessarily beneficial from the perspective of trying to evade regulations.

But this type of talk also speaks to a process that is not very well understood by political scientists: when and why some national governments regulate their financial systems more strictly than international regulations require, since that would seemingly put their firms at a competitive disadvantage vis-a-vis foreign competitors in internationalized markets. I presented some preliminary research on this question at ISA a few weeks ago. While I've still got quite a bit of work to do on the question, my tentative conclusion is that most official regulations are well below the levels of prudence that markets demand, and function primarily as a way to prevent free-riding behavior by opportunistic firms. Given that, some governments can signal credibility to markets by having stricter rules than the international minima. This can, in turn, benefit firms by reducing their cost of finance. I'll probably post a working version of that paper online pretty soon, but until then interested parties can read some similar work by Thomas Bernauer and Vally Koubi here.

Anyway, I don't think there's a snowball's chance in hell that Barclays is moving to the U.S. But then I don't think that's really the point.

ht: Felix Salmon, who somewhat surprisingly doesn't dwell long on the point.

P.S. Here's your FOTD, from the same Dealbook piece: "Barclays’ gross balance sheet is 100 percent of Britain’s gross domestic product."

Tuesday, March 29, 2011

Insane Price Point of the Day

. Tuesday, March 29, 2011

The Kindle edition of Golden Fetters, by Barry Eichengreen, is $42.38. That is way too much for a good with a marginal cost of zero. Used paperbacks can be had for nearly half that, but still.

Some Politics of Debt, Default, and the EMU


Tyler Cowen notes that Irish (and Portuguese and I'd add Spanish) are not yet out of the clear, and writes:

The first country which can, with no shame, credibly threaten to leave the eurozone or outright default can blackmail Brussels and Berlin into further aid, due to fear of contagion effects. Some are arguing that Portugal is already assuming that strategic stance.

Let's try to tease this out a little bit. One of the first rules of bargaining theory is that the side with the best outside options has quite a lot of negotiating leverage. Eric Voeten has looked at this dynamic in the context of international institutions, where there is an asymmetric power distribution among the members. Specifically, he looked at the UNSC and found that the presence of strong outside options makes multilateral agreements more likely, so long as there is some incentive not to exercise them. But, and this is key, Voeten argues that "the first condition for multilateral action is the [most powerful state] be willing to act alone or with close allies" (p. 856). In other words, thinking only about how the PIGS have leverage over Berlin is probably not the best way to go about it.

Which most needs a Euro that includes Ireland, Greece, and Portugal: those countries, or Germany? Well, departure from the Euro (and ensuing debt restructuring/default) will massively impair those countries' abilities to engage international credit markets for a long while to come. Michael Tomz has written about the reputational effects of debt defaults, and it's not pretty. Defaults not only adversely affect countries access to foreign credit in the short-run, thus making austerity inevitable, but these effects persist. In other words, possible EMU defaulters have two choices: austerity with devaluation (which reduces real wealth but boosts competitiveness) but no external finance, or austerity without devaluation but with external finance (in the form of ECB/EFSF plus continued access to bond markets in at least some form). The question is which benefit is greater: access to foreign finance that can help smooth out the pain from austerity, or the shock treatment of devaluation. So far the answer appears to be the former.

What about Germany? Now that it's in a currency union it's better to keep it. The EMU is very good for German exporters. If the union splits, and peripheral European economies devalue, Germany's exports become much more expensive for those economies. Additionally, if some of the weaker members left the Euro the currency's value would likely increase against other international currencies. That, too, would bad for German exports. So Germany has incentives for keeping the EMU intact, and thus fulfills one of Voeten's criteria. On the other hand, Germany would do fine under a narrower Eurozone. The value of EMU membership that accrues to Germany is significant, but limited. There is a price tag that is simply too high for it to pay. That should give Germany quite a lot of leverage in Voeten's framework.

This is where Cowen's mention of contagion could come in. I'm not sure what he means by that; it could be Asia1997-style currency contagion across the PIGS, or it could be the fact that German (and French) banks are heavily exposed to PIGS' debt, so a sovereign default could have large knock-on effects for the financial systems at the core of the Eurozone. From Germany's perspective, the latter is much more salient. It increases the costs associated with a break-up in the EMU, and thus provides incentives to keep the union intact. But these costs, too, are not infinite. At some point it might be easier to bail out the financial sector than to bail out Europe's periphery, especially if domestic polities in the PIGs revolt against austerity or demand better terms from the EFSF.

So Cowen's right: the PIGS have some blackmail room, but only until the German and French banking sectors recapitalize. Meanwhile, Berlin has the nuclear option. If it comes to blows, Germany will end up in far better shape than the PIGS. So given what we know about the ways that powerful states use international institutions to help them achieve their goals, the most likely outcome seems to be either that the PIGS pay up, or that there is an intermediate period where the ECB/EFSF provides some funding to the periphery basically as a stalling tactic, buying time for the banks, and then pulls out the rug. The former seems to describe Ireland, the latter may end up being the story of Greece and Portugal.

Sunday, March 27, 2011

Krugman vs. Krugman

. Sunday, March 27, 2011

I don't get Krugman's logic here:

Things are different for a country that shares a currency with other countries. Ireland can raise employment by cutting wages of Irish workers relative to German workers. But America, with its floating dollar, gains nothing — nothing at all — from overall wage cuts. All we get is a magnified real debt burden.

If that's the case, then why worry about China's currency peg, as he has done for years now? Either their peg helps boost American employment (at the zero lower bound), or it's of no concern for employment. Or Krugman is wrong.

More on Libya and the U.S.


Phil Arena adds to my recent posts on Libya, social science, and (non) American decline. All of his points are great. Better than mine. The key takeaway is that it's really important to think about political motivations, not just optics. And when you do that, it's pretty clear that the political story is much more interesting than "U.S. in decline" or "France is taking control" or whatever other narrative you're seeing.



For anyone interested in reading about the organizational politics of NATO's intervention into Libya, Steve Saideman's your guy. See, e.g., this post on who has influence in NATO decision-making, which concludes:

Handy tip--keep track of the number of sorties (each individual plane flying a mission related to the campaign--bombers, fighters, early warning, coordinators, refuelers). As long as the number is near or over 100, the concept of the Americans turning the mission over to the Europeans is much more symbolic than not.

Saturday, March 26, 2011

The Post-American World? Not Yet.

. Saturday, March 26, 2011

Let's see what Peter Beinart has to say about Libya:

Some commentators love the Libya war; others hate it. But most agree that it’s profoundly unnatural that we were pushed into it by… France. Welcome to the post-American world.

Oh, my. An inauspicious beginning. Does it get any better?

America’s fiscal condition is terrifying and the Pentagon is fighting wars in Afghanistan and Iraq, trying to stay out of one with Iran, and keeping one eye on a rising China. I don’t know what it took to convince an obviously reluctant Robert Gates to permit American involvement in the Libyan no-fly zone, but it’s a reasonable bet that had Barack Obama not been able to promise that it would be a mostly European affair, Gates would now be a military analyst on Fox News.

Not so far. Dare I peek ahead?

So Obama is trying to do it on the sly, to reduce the costs of American foreign policy without reining in our ambition. In Afghanistan, he’s moving inexorably toward greater reliance on drones—just as Nixon turned to air power in the latter stages of Vietnam—because it’s cheaper in blood and treasure. And he’s trying to burden-share, just as Nixon tried to get regional allies like South Vietnam and the shah’s Iran to do more of the work of containing the USSR. The Libya operation is a good example of this. The White House’s humanitarian hawks don’t want a Srebrenica on their watch, but they know they need other countries to bear more of the load. Enter Nicolas Sarkozy.

Wait a second. Did using air power in Vietnam signal the "post-American world"? How about getting regional allies to help contain the USSR (whatever that means)? It seems like Beinart is abandoning his argument several paragraphs after he's made it.

What to make of this. Let's do some mental exercises to consider the plausible explanations for the patterns of foreign intervention in Libya. One is what Beinart has suggested: the US is being bullied by France into intervention, and the US's role in international affairs is now effectively over. That's one possibility. Another possibility is that Obama -- motivated perhaps by his advisors Samantha Power, Susan Rice, and Hillary Clinton, all of whom learned a lot from Bosnia/Kosovo and Rwanda -- wants to avoid another Srebrenica but isn't sure he has the domestic support for more interventions (although non-Rasmussan polls show more support for intervention), especially in the recalcitrant Congress. He also doesn't want to jeopardize the improved view of the U.S. (and himself personally) around the world, where citizens now approve of U.S.'s policy more than all other major powers.

How might he achieve that goal? Well, to appease domestic audiences he could push for other countries to share more of the costs of intervention, as well as let them make the loudest noises in favor of intervention. Enter Sarkozy. To get those countries to share more of the costs, he can give them some symbolic concessions -- like letting a Canadian head up the NATO command -- despite the fact that operations have been coordinated at US/NATO bases in Germany and Naples, Italy. To keep international approval high, he could push for UN and Arab League support for intervention rather than building an ad hoc coalition. To appease Congress he can frame this as a UN operation, rather than a US operation, and can point to the fact that no US troops will be in harm's way and the costs will be shared.

In other words, Obama can try to satisfy multiple audiences by working through the UN, NATO, and other allies. Does that mean the US's influence is waning? Maybe. But consider that the transition of operations to NATO is a victory for Obama. In the early days of the conflict, the U.S. flew the majority of sorties ("well more than half"). I read somewhere (but can't find the link now) that of the first 124 Tomahawk missiles fired by coalition forces, 122 of them came from the U.S. The other two were British. The French moved their aircraft carrier off the coast of Libya three days ago; the U.S. has had a carrier there since February. (The U.K. doesn't have any carriers to mobilize, although this is probably a rational choice.) The U.S., not NATO, is still conducting the airstrikes that protect civilians; NATO is just enforcing the no-fly zone, which is perhaps less difficult.

What does all this mean? It means that, in this particular case, Obama had a lot of reasons for letting Sarkozy speak the loudest. He had a lot of reasons for getting the UN and Arab League on board. He had a lot of reasons for pushing for other NATO members to share the costs of interventions. But that just demonstrates that he's politically savvy. Much of the heavy-lifting is still being done by the US, and that is likely to continue, although the Obama administration has made it clear that it wants to transition more of the costs onto France and the rest of NATO in the coming days. (Of course that, too, could be taken as evidence of the US's influence, although that's certainly not the only explanation.)

But there's no way to say that this represents the end of US influence. Instead, it's important to look at the political dynamics: Obama's domestic constraints, his desire to appease foreign as well as domestic audiences, and his wish to shift the costs of intervention onto others. It's a pretty clever play by Obama.

Friday, March 25, 2011

"Social science and the Libyan adventure", Rebutted

. Friday, March 25, 2011

This post from Stephen Walt obfuscates some things:

Before France, Britain, and the United States stumbled into its current attempt to dislodge Muammar al-Qaddafi from power in Libya -- and let's not kid ourselves, that's what they are trying to do -- did anyone bother to ask what recent social science tells us about the likely results of our intervention?

I doubt it, because recent research suggests that we are likely to be disappointed by the outcome.

He then surveys some of the high points of the literature. The basic takeaway is:

We should all hope that Libya proves to be an exception to this tendency, but these various scholarly studies suggest that the probability that our intervention will yield a stable democracy is low, and that our decision to intervene has increased the likelihood of civil war. Heading off that possibility is likely to require a costly and extended international commitment, which is precisely what the people who launched this operation promised they would not do. We'll see.

What's the difference between those two claims? In the first, Walt alleges that the goal is to remove Gaddafi. In the second, he claims the goal is to establish democracy. Meanwhile, UN/NATO claims the goal of the intervention is to protect civilians, although it certainly hasn't hid its preference for a Gaddafi-free Libya. These goals are hardly the same, and some may be more achievable than others. So what is likely?*

As Walt says, those hoping for the UN/NATO intervention to provide a clear path to democracy are likely to be disappointed. The Downs/Bueno de Mesquita (2006) paper (ungated) that Walt mentions is a classic study. But that is not a stated goal of either NATO or the UN. Sarkozy, Cameron, and Obama may like to see a democracy in Libya, and they'll certainly pay some lip service to democracy over the coming months, but the primary goal is to stop the killing of civilians and the secondary goal is the removal of Gaddafi. This is evidenced by the fact that the intervention only occurred after Gaddafi started killing civilians. So while the installation of a liberal, secular democracy might be the ideal outcome, the coalition leaders may be willing to accept something less than that.

I haven't carefully read the study by Downes that Walt mentions, but it seems to not quite say what Walt thinks it says. It's an analysis of "foreign-imposed regime change (FIRC)" that concludes that the likelihood of civil war onset increases following FIRC. But in Libya there is already a civil war underway, so if Gaddafi falls, it really can't be considered a "foreign-imposed" overthrow in the sense Downes appears to be describing. Indeed, the intervention is a response to the civil conflict that is already underway, and appears to be largely intended to tip the scales in favor of the rebels.

So what we should be doing is asking what the literature has to say about interventions into civil wars. I'm not super-up on this literature, but Andrew Kydd wrote a survey of it in the most recent Annual Review of Political Science. (Sorry, I don't see an ungated version.) He draws a distinction in the academic literature between conflict prevention and conflict resolution, and says that third parties can affect civil conflicts through material incentives (including military intervention) and information provision. At this point I think we can agree that we're past the "prevention" possibility, and the UN/NATO intervention is probably more about material support than information revelation, so let's hone in on those corners of the literature.

The first thing that intervention can do is dramatically change the costs of fighting. If this cost-increase is large enough that it will off-set any benefits from continuing to fight (Kydd says this "expand(s) the bargaining space", sorry SBD), then conflict resolution may become more likely. Centinyan (2002) finds that the threat of intervention does not affect the probability of conflict, only the terms of the bargaining process. Favretto (2009) argues that the effect is nonmonotonic: highly-biased and unbiased third-party interveners can help the warring factions reach a settlement, while weakly-biased interveners exacerbate the situation. Regan (2002) finds that biased interventions shorten the length of conflict, by altering the costs associated with continuing to fight. Collier, Hoeffler, and Soderbom (2004) find that rebel-biased interventions shorten the duration of civil conflicts. Thyne (2009) finds that UN interventions likely do not lengthen the duration of conflict. Gent (2008) argues that interventions are not about the duration of conflict, but about the outcome of it, and finds that third-party interveners do effect these outcomes.

With the caveat that this is bit out of my realm of expertise, what does this literature sum to? Third-party interventions are often able to successfully shorten the duration of the civil conflict, and to alter the outcome of it. These effects are most pronounced when the interveners are biased in favor of one of the sides in the conflict. So to the extent that the UN/NATO intervention in Libya is interested in both shortening the conflict and advantaging the rebels seeking overthrow Gaddafi, there is reason to be optimistic that they'll be successful. To the extent that the UN/NATO interveners are primarily concerned with installing a democratic regime after the conflict is over, there is less cause for optimism.

In other words, Walt is only correct about his view of the likely outcomes if he's correct that the interveners are primarily concerned with promoting democracy, as opposed to other goals. But I'm not sure that's a reasonable assumption, especially coming from an unreconstructed realist, since normative concerns like democracy-promotion are assumed to be irrelevant for states' foreign policies.

*Of course, the preferences of the U.S., U.K., and France may not be same, and other NATO and UN members might have other interests as well. UNC's Stephen Gent has explored this relationship in his research. See here, e.g.

UPDATE: This post by Saideman, and this one by Carvin, say a lot of good stuff about politics of the UN/NATO mandate and command structure.

Wednesday, March 23, 2011

Real-Life Laffer Curve (or, Arbitraging International Travel)

. Wednesday, March 23, 2011

So, last week I traveled from Chapel Hill to Montreal. But I did not fly to Montreal. I flew to Burlington, VT and then took a Greyhound bus to Montreal. The total cost of the roundtrip, including all fares and taxes, was approximately $290. Why didn't I just fly into Montreal? Because it would've cost around $500-600, or 66-100% more, depending on the days/times we chose to fly. And why is that? Apparently, a big chunk of it is airport fees, traveler's taxes, security taxes, etc. Here is a list of some of them on the Canadian side, but the U.S. has its own "international arrivals" tax, among others. The long and short of it is that it was much cheaper for me to fly domestically and then drive -- even if I'd had to rent a car for a day -- than to simply fly.

Of course, that means that both Canada and the U.S. got zero of these extra taxes from me and my travel companions. We would have been willing to pay some extra to avoid the hassle of a 2-hour bus ride (although, in the end, it was a comfortable trip that allowed us to see some nice landscape that none of us had seen before), and the cost of the bus tickets ($23 per person each way). But by setting the fees so high that the cost of the trip effectively doubled, we were much better off by taking the Burlington-Montreal bus route. The three of us ended up saving nearly $1,000 in aggregate. We were on the wrong side of the Laffer curve: higher taxes drove us out of the market, and Canada and the U.S. got zero extra revenue from our trip.

Now this may not be true for the overall public. My impression from ISA is that most of those traveling from the U.S. flew straight in, and obviously those traveling from Europe or elsewhere did the same. Some of them didn't really care how much it cost, because someone else was paying for it. But many U.S. travelers would have taken the Burlington route if they'd known about it in advance. And if we know anything about arbitrage opportunities, it's that they don't tend to last very long: word gets around. Next time more people will likely choose that option. Of course, if too many people do this the governments may just put a tax on the Greyhounds, but considering that the purposes of the airport taxes -- extra security, airport improvements, etc. -- are airport-specific, such moves may not be politically appealing.

The upshot? If you travel to Montreal, fly into Burlington and take the bus. And if you set tax policy, take incentives into account.

Tuesday, March 22, 2011

George Rabinowitz

. Tuesday, March 22, 2011

I just wanted to pass along a few links memorializing George. Here is the original Daily Tarheel report of his death, and here is their obituary. An undergraduate student pays tribute here. John Sides and Eric Voeten paid their respects at The Monkey Cage here and here. Here are the Twitter results for "Rabinowitz". Lots of former students and colleagues have posted tributes there, as well as in comment threads and Facebook posts across the web. My previous post on George's passing is the most-visited in this blog's history, just one small testament to the impact he had on his students, the university, and the broader discipline.

International Relations, 1980-2006


A very interesting, very detailed, network graph of citations, presented at ISA. Via Charli Carpenter, who presented some very interesting network research of her own. About which, and other ISA things, hopefully more later.

Sunday, March 20, 2011

RIP, George Rabinowitz

. Sunday, March 20, 2011

The UNC political science department lost a valued faculty member, colleague, and friend this weekend. George Rabinowitz, Burton Craige Distinguished Professor, died suddenly of a heart attack on Friday in Norway, where he was spending a semester. (Prof. Rabinowitz was elected member of the Royal Norwegian Society of Science and Letters in 2003, and frequently spent time teaching and researching in that country.)

I TA'd for Prof. Rabinowitz last semester, and can testify to his dedication to rigor in his teaching. He had a similar discipline in his research. He is probably best known for developing the directional model of issue voting, which complicated traditional proximity voting models, but contributed many other notable works as well. He served on the editorial board of AJPS and JoP. Here is his CV. Here is his seminal APSR paper on directional theory, with Stuart Macdonald. Here is a Google search on directional theory, which gets 163,000 hits.

He is survived by his wife Stuart Macdonald, also a UNC political science professor, and several children.

Saturday, March 19, 2011

Quick Note on Trade

. Saturday, March 19, 2011

I'm still in Montreal, and behind the curve, but I don't want this place to be completely dormant so I'm going to pick on Emmanuel once again. Here he says "the US trade representative is tasked with promoting trade liberalization first and foremost". That is not true, and a political economist should know better. The US trade rep is first and foremost tasked with promoting American business interests. There is no ex ante reason to believe that always or even usually involves liberalization. In this case, it means "we're not liberalizing any more until China agrees to play by the same rules as everyone else". Remember that when China joined the WTO in 2001 it was given all sorts of exceptions that allowed it to get access to developed markets for its exports, without having to allow equal access to its markets in exchange. Given large U.S. trade deficits and high unemployment, the USTR is saying "no mas": either there's some reciprocity, or no new deal.

Tuesday, March 15, 2011

This Is What Adjustment Looks Like (An Ongoing Series)

. Tuesday, March 15, 2011

Wen Jiabao gave a long press conference at the end of China's national legislative conference, at which the new five year plan was approved. Some highlights:

Its strategy promises a surge in government spending on domestic security and social programs like medical insurance, but offers little in the way of legal, political or banking reform. One principal goal, the government has said, is to lessen economic dependence on factory exports and build up innovation and domestic consumption.

Mr. Wen described the war on inflation as the government’s top priority. Figures released three days earlier showed that consumer prices rose 4.9 percent in February compared with the same month a year before, the latest in a series of indications that China’s economy is beginning to overheat.

The prime minister partly blamed international factors for the soaring costs, among them spiking oil prices because of the unrest in the Middle East and North Africa. He also pointed to looser monetary policy in the United States, where the Federal Reserve had expanded monetary supply in recent months — a policy known as quantitative easing — in an effort to assist the economy. ...

Mr. Wen promised that the increase in the renminbi’s value would continue. But he added: “It should be a gradual process because we must bear in mind its impact on Chinese businesses and the employment situation.”

He stressed that China’s five-year target of a 7 percent annual rise in the gross domestic product should not be considered low, insisting, “it will not be easy for us to achieve.”

High Chinese inflation + nominal remnimbi appreciation = fairly significant real exchange rate appreciation.



The IPE@UNC crew is headed to Montreal for the ISA annual meeting. I'm presenting Wed. morning at 10:30 and Fri. morning at 8:15. Sarah is presenting Wed. at 4. Anyway, we'll be there the whole week, so blogging may be light. And if you're at the conference, find us and say 'hi'.

Monday, March 14, 2011

On the Dollar, Euro, and RMB

. Monday, March 14, 2011

I had been planning on blogging about Barry Eichengreen's recent book-hype talk -- about the coming decline of the dollar as pre-eminent global currency (see here and here, for examples), and the rise of the Euro and RMB as its replacements -- but I haven't had the time. Thankfully, Michael Pettis wrote a characteristically long, thorough post on why that won't be true (for the RMB at least) any time in the foreseeable future. Highly recommended. The gist:

1. In order for China's currency to become a significant international reserve currency, even at the level of the yen, its internal economy would have to go through wrenching reforms.

2. China's financial system cannot handle the international competition that would come from capital account liberalization.

3. China has no reason to want the RMB to be a reserve currency, at least as long as it thinks it can benefit from the export-led growth that comes from a low peg to the dollar.

Pettis also notes that everyone was saying the same things about the yen knocking off the dollar 20-30 years ago. And while the yen is an important international currency, it's just not in the same league as the dollar. Pettis is higher on the Euro (I'm not, at least not for another decade), but acknowledges that for that to happen the Euro will likely need to first kick some members out. Right now, dollar holdings are about 250% higher than Euro holdings despite the fact that the EU has a larger cumulative economy, and obviously the Euro has things to work out before full confidence is restored.

Pettis also explains why having the world's reserve currency isn't always good for the U.S., and can be very good for other countries, especially those that pursue growth via exports. Which then begs a question: if the U.S. is willing to provide a public good at its own expense, and other countries benefit from that, then why wouldn't the dollar persist as the pre-eminent global currency? A move away from the dollar would represent a redistribution to the U.S. from other countries relative to the status quo. It seems like those countries would be happy to take advantage of that situation as long as they are able. It's true that the U.S. is able to fund its debt cheaply because of the high demand for dollars, but that would be true even if it didn't issue the largest reserve currency. Other advanced industrialized countries pay the same rates, or in some cases less, on their bonds than the U.S. does, and they are able to borrow in their own currencies as well.

In other words, there isn't any particular reason to expect the international monetary system to change much, especially in the short run, most likely because of positive feedback loops. The dollar's status as reserve currency isn't primarily an indication of the U.S.'s current or future economic performance, it's an remnant of its past role at the center of Bretton Woods. And while the U.S. gets some privilege from issuing the reserve currency, it isn't all that exorbitant. The international monetary system benefits from having a universally convertible currency, no matter what it is. So the dollar is the reserve currency, and will remain the reserve currency, mostly because it has been the reserve currency.

If that's the case, then the dollar's role as the pre-eminent reserve currency is likely a stable equilibrium for some time to come.



Dan Nexon, I think, closes the argument that I'd had with Quiggin a few weeks back:

Consider that the United States is currently engaged in two major military operations and yet it has significant forces converging on the Libyan coast and on Japan. Puts John Quiggin's insistence that the US is now one of a number of major powers into perspective, but not necessary in a way that speaks well of current US budget priorities.

Aside from the that I'm not quite sure what the last clause means, this is exactly right. The US, half a world away from both Libya and Japan, is both closer and more able to intervene in both places than the other significant powers in Western/Southern Europe or Asia are to intervene in either. And is able to intervene in variable ways.

Friday, March 11, 2011

Cake! And Eat it Too!

. Friday, March 11, 2011

Clyde Prestowitz is again propagating nonsense about trade. Having been spectacularly wrong the first time, he returns for a second effort. This time he wants to explain why the US doesn't produce iphones. His explanation seems to miss the point of trade entirely, which is that the US consumes far more iphones (and for one whole lot less money) than it would if it did produce them at home. On the other hand, Prestowitz seems to think that the US doesn't have a production possibility frontier (PPF). This is the only reason I can think of for why he fails to consider what the US would stop producing in order that it might begin to produce iphones.

On the third hand, Prestowitz seems to miss entirely that what the US does (and it does it quite well, thank you) is invent iphones. And even given his silly economies of scale argument (the US doesn't produce iphones because of EU subsidies to Airbus?), he doesn't seem to understand where value lies. In the interest of clarity, let me repeat: the US INVENTS iphones. The iphone is a monopoloy. Monopolies generate rents. The US thus captures rents from inventing stuff that consumers are desperate to buy (the ipad sold 4.5 million units in its first 3 months). It maximizes those rents by making the actual products as cheaply as possible. Hence, it manufactures iphones in Asia. This division of labor makes the US rich (it is also a pretty good arrangement for highly populous and very poor Asian countries).

Prestowitz must be blogging on a legal pad because I don't know how else one could believe that the value of high tech products lies in their manufacture. If he really believes that the US would be wealthier if it let China invent stuff and we did the manufacturing why isn't he moving to China to make a fortune in manufacturing rather than staying here and inventing stupid arguments about trade? I don't think he believes this. But then he must want us to both invent iphones and manufacture them, which suggests that he thinks we don't face a PPF. Which is just silly.

As much as Clyde might refuse to admit it, the US, like any society, can't do everything. It has to choose. We have chosen higher value-added activities and thus allowed lower-value added manufacturing activities to migrate to Asia (where they have enriched Asians). On the aggregate, this seems to be the right choice for us and for Asia. I don't know why this is so difficult for people to accept.

Wednesday, March 9, 2011

Deep Thoughts

. Wednesday, March 9, 2011

Tyler Cowen has two posts up about bad tendencies of economists, one for right-leaning and one for left-leaning. But really both are the same post, and all the items in them sum up to two things:

1. Economists don't understand politics.

Therefore (or also),

2. Economists don't understand economics.

The problem is that economists study how to maximize aggregate utility in a social environment in which that is literally no one's priority. There is some value in understanding the realm of the possible, but it needs to be tempered by context.

Tuesday, March 8, 2011

#Winning the Future

. Tuesday, March 8, 2011

We'll do it by befuddling the rest of the world:

China does not know quite what to make of Charlie Sheen.
The Chinese Communist newspaper Global Times, is running an amazing op-ed by a person named Hao Leifeng listing all the ways in which Sheen is a "classic example of the difference in Western and Eastern values and norms. ... Is he too poor to set up his wives and mistresses in different houses?"

Also: "He ignored his own father's advice to keep quiet, who was once the president of the US. Sheen is a disgrace, unfilial to his father and his fatherland."

More at the link. I do find it somewhat unnerving that China's press thinks "The West Wing" was real. Maybe something was lost in translation. Anyway, I think this represents a good opportunity for American diplomacy. We should make Charlie Sheen a roving ambassador, sent into whatever country we're having trouble with in order to bewilder them into acquiescence. Imagine how Gaddafi would react if he was told a warlock with tigerblood was coming to Tripoli? (And with a his own army of female attendants) Or what if we told him that the youth of Libya actually were on drugs... the drug called "Charlie Sheen" that is so powerful that if normal humans try it once they die. Gaddafi would definitely cede power and leave the country, pronto.

Or imagine how the Taliban would respond if they heard a "total bitchin' rock star from Mars" was the new American secret weapon against terror? They'd quake in their boots. The Taliban can't even handle Earth music... Mars rock and roll would make their heads literally explode.

Just imagine the possibilities. We could get the globe cleaned up in no time. Boom. Winning.

(Pop culture is usually Drezner's beat, I know, but I couldn't pass this one up. HT to somebody on Twitter.)

Who's Winning the Future? Someone's Gotta Keep Score


Now it looks like someone will be. Clyde Prestowitz, former US trade negotiator (among other things), has a new blog dedicated to globalization and trade. Very interesting so far. This is from the introduction:

I hope with this blog to contribute to better understanding of the conflicts and ultimately to contribute to a future of truly win-win globalization for all players. In particular, I'll be watching the strategic trade and industrial policies of Asia and Europe and at how they interact with the more laissez-faire American approach in determining the shape of the future.

My approach will be somewhat contrarian. I am firmly convinced that globalization is not always a win-win proposition, that countries do compete economically, and that there are winners and losers in this competition. So I'll be keeping score. But most importantly, I'll be trying to take my readers beyond the knee jerk orthodoxies and mythologies of globalization to show them what is really happening. I look forward to receiving, learning from, and responding to lots of criticism.

And here is a very good post on the iPhone:

But quick, let me ask you where these iconic Apple products really are made.

If you said China (and I know most of you did), you were wrong, and thereby hang a number of tales. ...

In actuality, says the ADBI, China's assembly of the iPhone parts accounts for only about 3 percent, or $6, of the final value and because China actually imports some of the more expensive parts from the United States, it actually has a deficit on iPhone trade with America. ...

That raises more interesting questions. The other Asian countries [that make part of the iPhone] -- particularly Japan, but also Korea and Taiwan -- do not have low labor costs. Indeed, Japan and Korea are members of the Organization for Economic Development (OECD), the long time rich nations club. Furthermore, the parts they supply for the iPhone -- semiconductor chips, displays, lenses, etc. are not labor intensive. They are capital and, above all, technology intensive. Exactly the kind of products in which the United States is supposed to be the leader. So if America actually did produce the stuff it says it is good at producing, it wouldn't have a trade deficit with Asia for which China is the proxy at all. It would have a trade surplus and 20-40,000 more jobs than it has.

Why then, doesn't America make the stuff it says it ought to be good at making?

I look forward to reading more.

(ht: Art Gibb)

Monday, March 7, 2011

Dude, Where's My Government?

. Monday, March 7, 2011

Somewhat lost in the international news -- what with the revolutions and new Irish government and shakeups in Germany, Italy, and Japan, etc. -- is the fact that Belgium keeps extending its record for longest period with a government. By my count it's 267 days. And if you go to, a mock government website, you see this:

Har. Previous entries -- which I've dubbed "When Flemings and Walloons Collide" -- here.

ht: Greg Wolf

Saturday, March 5, 2011

Just Sayin'

. Saturday, March 5, 2011

Wednesday, March 2, 2011

UNC Everywhere

. Wednesday, March 2, 2011

Graeme Robertson, assistant professor in the political science department, explaining how protests succeed and fail on NPR's "The Takeaway".

UPDATE: The audio embed doesn't show up in some RSS feeds, so either click through to IPE@UNC or go to The Takeaway's site here.

Tuesday, March 1, 2011

Digging the Hole Deeper

. Tuesday, March 1, 2011

Nothing like complaining against allegations of anti-Semitism by blaming it on a Jewish conspiracy. Oh, and then asking the reporter to whom you made the accusation to "forget the Jewish thing". Stay classy, Julian Assange.

UPDATE: Henry Farrell points out in comments that the source for this is Ian Hislop, editor of Private Eye. Hislop isn't exactly known as an exemplar of fairness and objectivity, so perhaps take the allegation with a grain or twelve of salt. Hislop has been sued for libel and lost many times; Wikipedia says the most in English history. Of course at this point Assange has credibility issues of his own. So caveat emptor, no matter which side you choose to believe.

Missing the Point


Normally Steven Landsburg is a paragon of (a certain type of narrow) rationality. I enjoy reading him for that reason, even if I often disagree with him. So it confused me to read this:

If you cut the pay of an overpaid worker, he’ll generally scream bloody murder. After all, overpaid workers like to stay overpaid. But if you cut the pay of a non-overpaid worker, you haven’t really damaged him. He just quietly leaves and gets a job elsewhere. After all, the ability to find a comparable job elsewhere is pretty much the definition of not being overpaid.

Now how are the Wisconsin public workers reacting to projected pay and/or benefit cuts? As if the rug’s been pulled out from under them, that’s how. Every time a worker says “These cuts will cause me severe pain”, that worker is saying, in effect, “I can’t get anyone else to pay me at the level I’m accustomed to”, or, in briefer words, “I am overpaid!”.

In normal economic circumstances (perfectly competitive and efficient labor markets) that might be the case. Other explanations -- some brought up by comments to his post -- emphasize that these are not normal circumstances. For one thing, the unemployment rate is near 10% despite a collapsing labor/population ratio, indicating that labor markets are neither perfectly competitive nor efficient at the moment. For another, to the extent that public education resembles a public good, it might be under-provided by the private sector relative to some social ideal, in which case public sector educators should be paid more than they would be in the private sector. So even if you accept Landsburg's premises there is plenty of econologic explaining why public sector workers are not overpaid, or at least why protests of wage and benefit cuts wouldn't necessarily be an indication that they are.

But Landsburg's premises are all wrong. The unions have agreed to wage and benefit cuts, and substantial ones. That's not what the protests are about. The protests are about legally restricting workers' rights to collectively bargain, in perpetuity. That has nothing to do with whether the workers are overpaid or underpaid. It's about a pretty basic principle concerning whether workers will be price-takers in a monopolistic system where the price is set by the state of Wisconsin, or whether they retain some bargaining power in future negotiations. . In my previous post I questioned whether the principle was really worth this sort of brinksmanship. I guess we'll find out soon enough. But to suggest that there is nothing more to the Wisconsin protests than rents being taken away is disingenuous.

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




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