Monday, January 30, 2012

Definitely Not Expansionary, Maybe Not Even Austerity

. Monday, January 30, 2012

Dan Drezner has a post on whether we are now at a focal point that will discredit the idea of expansionary austerity:

The Greek sovereign debt crisis was another such focal point. Greek profligacy seemed to be a synecdoche for excessive government borrowing and lax fiscal discipline. With the global economy seemingly still in the doldrums, a lot of Europrean governments climbed on the "expansionary austerity" bandwagon. By the Toronto G-20 summit in June 2010, the consensus had switched from Keynesian stimulus to fiscal rectitude. Oh, sure there were mutterings about "short-term austerity makes no macroeconomic sense whatsoever in a slack economy" but even Barack Obama started talking about slashing government spending. 
Are we at another focal point? Consider the following: 

1) According to the New York Times' Stephen Castle, European leaders now seem to recognize that austerity on its own ain't working... 

2) The data is starting to come in on governments that have embraced austerity whole-heartedly, and it's pretty grim. Cue Paul Krugman on Great Britain:... 

3) Even commentators who would be tempermentally sympathetic with austerity are starting to bash Germany question whether it's a solution. Consider Walter Russell Mead:...  
4) U.S. 4th quarter data reveals that, consistent with GOP criticisms, the government has been the real drag on the U.S. economy. Not quite consistent with GOP criticisms: the reason why the government is dragging down the U.S. economy. Cue Mark Thoma:...

Before I get into this too deep, I should just note that I've always thought the accusations of belief in "expansionary austerity" from the Krugman/DeLong wing have always been something of a strawman.  The strongest view I've seen regularly expressed is that fiscal policy has essentially a null effect on growth because of forward-looking rational expectations, or because the central bank moves last, not that austerity will actually lead to expansion. I haven't even seen much supply-side voodoo being expressed lately. Can't recall the last time, actually.

First of all, I'd quibble with the claim that the G-20 ever climbed on the "expansionary austerity" bandwagon. Look at the Toronto Summit Declaration that Drezner mentions. No seriously, read it. There's a lot of language like "Unprecedented and globally coordinated fiscal and monetary stimulus is playing a major role in helping to restore private demand and lending" and "To sustain recovery, we need to follow through on delivering existing stimulus plans". Here's the first thing it says about budget deficits (emph added): "At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances."

To be fair, the next sentence advocates "consolidation" for countries with "serious fiscal challenges", but does that sound like doctrinaire Treasury View economics? Not to me, and certainly not for anyone outside of Club Med. And while Obama started talking about cutting government spending as Drezner notes -- not sure "slashing" is at all the right word -- other than token cuts all of the significant stuff was reserved for a few years down the road when the recovery was expected to well in progress. The Obama administration also thought in 2010 that growth was taking off; remember "Recovery Summer"? If they'd been right, it would be time to start thinking about cuts in the shortish-run future.

As for European views, it's possible that some people thought Greece's short run growth potential would benefit from austerity, but I don't remember much of that. After all, austerity is called austerity for a reason. All the talk I heard was about austerity as a sufficiently strong commitment mechanism that donors from the EFSF and IMF could be convinced that their transfers to Greece wouldn't be squandered, nor that they would be embedding moral hazard into the EMU that would encourage future profligacy. Now that may not be the best possible economic strategy, but this is a political game not an optimization problem, and in any case it doesn't follow from this observation that anyone believed that austerity would lead to expansion. The Germans cared about getting their money back, not generating growth in Greece, except to the extent that the two are related (and maybe not even that much). My recollection of the early discussions was that if European leaders believed in any of Krugman's oft-mentioned myths it was the "Confidence Fairy", not expansionary austerity.

And, while we're on the subject, the most recent proposal is for lots more austerity for Greece, with Germany taking over Greece's political system if they can't manage that themselves. It doesn't sound like the austerity consensus is at risk of breaking.

Regarding Great Britain and the United States, I'm not sure that the "austerity has failed" line is all that accurate. Here's Scott Sumner:
Here are the three biggest budget deficits of 2011: 
1. Egypt 10% of GDP 
2. Greece: 9.5% of GDP 
3. Britain: 8.8% of GDP 
A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.) But that shouldn’t cause a recession. Think about the Keynesian model you studied in school. If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession? That’s not the model I studied. ...

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP). Lots of people blame ECB policies for the recession, but Britain is not in the eurozone. Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).
In other words, any "cuts" in spending have to be considered in context. Britain's cuts were from an insanely-high (and completely unsustainable) level to an exceptionally-high (and completely unsustainable) level. You can call that "austerity" if you like, and blame the lack of recovery on it if you like, or you could say that Britain has run historically high deficits in each of the last few years. Which is, pretty much, the opposite of austerity. (In any case, Cameron's administration knew that these cuts would not be expansionary, estimating that they'd cost more than a million jobs over five years.)

Similarly, with regards to the United States, Kevin Grier notes that "Federal spending is still [sic] than 30% higher than it was in January of 2007. State and Local spending is still around 12% higher than it was in January 2007. Is this really austerity? ... Can we really run a trillion dollar deficit and bemoan austerity simultaneously?"

I would tend to answer that question with a loud "No".* "Austerity" does not mean "not spending more on infrastructure". "Austerity" does not mean "not enacting a major jobs program". The U.S. did not continue to use fiscal stimulus at the same rate as the emergency measures taken in 2009, but that doesn't mean there's been all that much retrenchment. We haven't stopped mailing the food stamps. We haven't cut off Social Security payments. We haven't raised any taxes, and have cut quite a few. How is that austerity? Maybe that's not enough for Krugman's your taste -- and in fact I'd support higher deficits right now -- but fiscal transfers are political choices, subject to political pressures. Doing more now implies a greater burden for certain segments of the population later, and Obama's continued pursuit of a "millionaire's tax" and "Buffett rule" and "TBTF tax" and corporate tax reform and international corporate minimum tax just drives that point home.

So upper-income Americans don't have to believe in expansionary austerity to oppose further deficit spending; they just have to realize that when the bill does come due they'll be the ones paying it. They couldn't care less whether the fiscal multiplier is greater than 1 or not, because they won't be getting most of the benefit but will be paying almost all of the cost. Substitute "Germans" for "Upper-income Americans" and you're describing the Euro-crisis as well.

Drezner refers to an austerity "gospel", but I'm not seeing all that many true believers. I see it more as a competition between interests.

*Perhaps ironically, so does Krugman. From the article Drezner links: "True, the federal government has avoided all-out austerity" although he contradicts Grier by saying right after "But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy". Grier provides data, so I'd tend to believe that he's more right, but Krugman usually doesn't make that sort of error so maybe a more nuanced perspective is needed.

Global Financial Markets FOTD


Major U.S. banks have about $80bn in exposure to troubled European sovereigns, about $30bn of which is protected via CDS. Think $50-80bn is a lot? It is. But remember that TARP was a $700bn program. Remember that the Fed will hold interest rates at zero percent through 2014. Remember that these same five banks control over $9tn (with a 't') in assets. $50-80bn isn't very much for these companies.

Yes, there is still secondary risk from a sovereign default tipping over European banks, which then hold up U.S. banks. That's not nothing at all, but isn't everything either: unless it's a huge event, large enough to take down all the big banks in Europe, then I wouldn't be exceptionally worried about it. And if it's that big then there's likely nothing you can do about it anyway.

The European mess is mostly a European mess. We're not nearly as susceptible to them as they were/are to us.

(ht: @EconOfContempt)

Sunday, January 29, 2012

A Debate I'd Like to See

. Sunday, January 29, 2012

I haven't yet had a chance to read Alex Tabarrok's new e-book, Launching the Innovation Revolution, but judging from this Atlantic precis of it as well as a number of blog posts I'm wondering if we can goad him into a debate with Tyler Cowen. The debate could be had either at MR or some other forum (Bloggingheads?), and could be conducted along the following lines:

The sort of infrastructure investment that Tabarrok wishes to see -- e.g. nationwide wi-fi, more/better airports, a smarter electricity grid -- are intended to harness human capital in an effort to spur innovation. Cowen argues that the innovations we see right now, particularly in the area of information technology, may improve the human condition but do not boost material resources. Given that, it is unwise to invest more of our stagnating resource base on infrastructure investments that will not replenish it.
If Cowen agreed with something close to this proposition he could affirm it and Tabarrok could adopt the opposing side. Cowen has argued that he expects innovation to resume in the future; perhaps as part of the discussion he could more clearly articulate what policies he would adopt to hasten that day.

I'm less interested in the areas where the two agree, e.g. over a massive revision of the regulatory code. I'm more interested in where they do not agree, which seems to include their macro views of the economy and the relative likelihoods of different possible futures.

Saturday, January 28, 2012

There Is No Great Stagnation, Only Great Integration

. Saturday, January 28, 2012

There are a lot of ways to think about what's happened to the flattening of median American income growth. One of the most interesting is Cowen's stagnation hypothesis, which attributes the lack of wage growth to not generating enough job-creating innovation. I like some parts of that hypothesis -- although I prefer to look at changes to political systems and developments in the global economy -- but there have been other things going on as well. One of them is this:

I want to focus on the period ending around 2000. If you go from the early-1970s trough to the late-1990s peak, the U.S. added about 9 percentage points of its labor to the workforce in about 30 years. At current population levels, that's about 30 million people. Even if you go from 1970 peak to the 2000s average, it's about 15 million people or so. Often these would be members of disadvantaged groups, such as women and minorities, whose wage potential would be lower than that of white males that were already in the workforce, so we're adding a bunch of relatively low salaries to our statistics over that stretch.

Looked at that way, it's almost impressive that median wages have been flat. If there had actually been stagnation, median wages would have gone down as more people got added to the labor force at low wages.

Or, instead of looking at median individual wages, we could look at median household wages:

As you can see, until the 2000s we had pretty strong growth that was actually accelerating over time. This doesn't consider everything -- more two-worker households means greater expenses for child care, etc. -- but we generally think employment is good for its own sake. It yields psychological benefits, allows greater flexibility for satisfying preferences and tastes, etc. In terms of social justice, excluding fewer women and minorities from pursuing the good life is also a good thing.

If we're thinking about trends in the U.S. economy over the past few decades we might consider it good news that we've been able to integrate more people into the workforce and that household incomes have increased. That's not stagnation. That's improvement.

This only gets us up to the 2000s, and it doesn't tell us anything about the future, but it's a component of the U.S.'s postwar economic history that doesn't get talked about enough.

Wednesday, January 25, 2012

It's A System, Not a Dyad

. Wednesday, January 25, 2012

There's a lot of discussion of China's rise and it's implications for the U.S. Michael Beckley published an article in International Security arguing that China's rise over the past two decades has been dramatically overstated. Phil Arena and Eric Voeten criticize Beckley's thinking -- although not conclusively, I don't think -- while Dan Drezner argues that things is looking up for the U.S., Roubini and Pettis argue that things is looking down for China, Chang (again) says China is gonna collapse, while Liu and Chen think China will democratize. Joffe thinks that the U.S. still has time to act to prevent its slide into "Just Another Country" status, while Subramanian thinks that China has already surpassed the U.S. and Rodrik demurs.

That's a lot of different views being espoused by a lot of different people, most of who are pretty smart, all from the past month or two (and most from the past week!). And while I could quibble with a lot of individual points being made by most of them, I'd like to instead shift the focus a little bit. All of these discussions have either been monadic -- focused on internal aspects of either the U.S. or China -- or dyadic -- the relationship between the two and/or the relative gap between them. While these examinations have their uses, in terms of importance for geopolitics we should think of the systemic as well as the monadic and dyadic.

Similar discussions were being had in the 1980s. Back then it wasn't China's rise that threatened the U.S.'s position, but the advance of Japan and other rapidly-industrializing countries. In response to the prognosticators of the day, Susan Strange wrote a series of articles (e.g. here and here) arguing that many folks were missing the point. In response to those complaining that the U.S. was losing its manufacturing base Strange wrote (second link, p. 5), "Is it more desirable that Americans should wear blue collars and mind the machines or that they should wear white collars and design, direct, and finance the whole operation?" To ask that question is to answer it, but then why has everyone lost their breath over the disclosure that Apple products are assembled in outside of the United States? As Strange noted, what it's important is controlling the information and collecting the profit. In fact, the spread of influence of American corporations outside of the U.S. borders and into other countries actually strengthened American power, according to Strange. Think of it as more fingers in more pies.

Rather than focusing on short-term trends in simple metrics like GDP, Strange was concerned with the "structural power" rather than "relational power". Structural power contained four metrics: the ability to exercise control over others' security; control the system of production and trade; determine the structure of global finance and credit; have the most influence over the global stock of knowledge.

Regarding the first, a forthcoming paper in Conflict Management and Peace Science by Cranmer, Desmarais, and Menninga (all UNC folks) analyzes "Complex Dependencies in the Alliance Network" and confirms what one Chinese official recently said (from memory; can't find the reference now), that China has "only one ally" and it's the one that no one would want: North Korea. The United States, by contrast, has robust ties to nearly every major power in the world and is a central member of NATO, perhaps the strongest defense relationship in the history of the world. (In the Cranmer et al paper, see Figure 4.) In terms of traditional capabilities the U.S. far out-paces everyone else too, but it's the structural relationships that really give the U.S. significant influence.

Regarding production and trade, a recent study looking at networks of corporate ownership found a highly-skewed distribution: 147 firms control nearly 40% of corporations worldwide. Of the top 50 firms in terms of "corporate control", nearly half (24/50) are U.S. firms; exactly one is from China, and it's the last on the list (#50). China is the world's largest exporter, but that is an indication of its dependence on the rest of the world for growth rather than the opposite. And remember that U.S. equities have out-performed China's during the past few years. Is China an important global actor in terms of production and trade? Yes of course. Have they become as embedded into knowledge and production as the U.S.? Not yet.

In terms of the structure of global finance and credit, I have a paper (with Thomas, Sarah, and Andy Pennock) that deals with some of this, currently in the revise and resubmit stage. We've blogged about this before too, so I'll refer you to those rather than re-write the whole thing. (Some other relevant past posts are here.) The gist is that China has surprisingly little presence in the global financial system -- as in, almost none at all -- while the structural position of the U.S. is unparalleled. That's one lesson from Eichengreen's Exorbitant Privilege as well, applied to the monetary/currency systems.

Regarding the fourth of Strange criteria -- control of the global stock of knowledge -- it is true that China has been churning out many more students than the U.S. in STEM majors, and that the quality of Chinese education has improved dramatically, but China remains well behind more developed economies in terms of innovation: Of the 100 most innovative firms in a recent study, 40% are in the U.S.; none are in China. In terms of military technology, the U.S. has a lead of decades on China, and continues to dramatically out-spend China in military R&D. That, coupled with the embeddedness of the U.S. within the global security system, provides a huge structural advantage over China.

I could go on, but this should be enough to give you the gist. It's not enough to just look at recent trends in GDP growth rates and conclude that China will eclipse the U.S. within the next decade. The U.S. has spent decades deeply integrating itself into the global economy, financial system, security apparatus, and knowledge networks. Those positions will likely privilege the U.S. for the foreseeable future. It seems likely that China recognizes this, which is why it hasn't begun challenging the U.S. on any significant dimension yet.

Tuesday, January 24, 2012

SOTU Bingo

. Tuesday, January 24, 2012

Jon Kropko -- UNC poli sci PhD, now at a postdoc at Columbia -- puts together bingo sheets every year for the State of the Union address. Here ya go, but be forewarned: it usually doesn't take all that long for someone to line 'em up, so it pays to be familiar with your layout ahead of time.

(The link is to a pdf containing 30 sheets, with randomized placements of key words likely to be spoken by Obama tonight. Instructions for making your own sheets can be found at Jon's web site.)

Sunday, January 22, 2012

Paradigms in Political Science

. Sunday, January 22, 2012

It may not be easy to see (click here for a bigger image, and here for some discussion at TMC), but the above graph shows the probability that a political scientist will think that the eurozone will split up versus stay together. The group in the top left are IPE scholars, the middle are International Org scholars, and the bottom are comparativists who study Europe. I'm not a big fan of this graphing style, as it seems to obscure nearly as much information as it illuminates, but it's fairly easy to see that IPE folks are the most convinced that at least one country will leave the euro. More than half of us. Meanwhile, only about 37% of IO folks and 30% of Europeanists think a country will exit the common currency.

I find this interesting for a lot of reasons, but mostly because I think provides a pretty stark reminder that political scientists think very differently about politics. This could break down along paradigmatic lines -- the authors of the report note that constructivists tend to be comparativists, while realists tend to be in IR. I still think that a materialist conception of politics carries me farthest down the road I wish to be on, so I think it is fairly likely that a country will drop the euro if things continue to deteriorate.

I've had many conversations with Europeanists on this point. All of them are enamored of the EU. For them the collapse of the EU is unthinkable. I can't understand why. It's not as if fixed exchange rate regimes -- and political unions -- haven't collapsed before, particularly when subjected to this level of stress. That said, they certainly know more about Europe and the European identity than I do, and they take it very seriously.

I don't really have an answer here. I hope that conditions in the EU improve enough that we don't have to test these paradigms this time. A confederal Europe is good for the world, on net, particularly if they can figure out how to manage the broader economy in ways that don't lead to periodic crises. But I have my doubts about that.

Saturday, January 21, 2012

Interests, Ideas, and MIT Economists

. Saturday, January 21, 2012

Over at Bloomberg, Rich Miller and Jennifer Ryan have an article that should make constructivists smile:

At MIT, [Mervyn] King, 63, and then-professor Ben S. Bernanke, 58, had adjoining offices in 1983, spending the early days of their academic careers in an environment where economics was viewed as a tool to set policy. Earlier, Bernanke and European Central Bank President Mario Draghi, 64, earned their doctorates from the university in the late 1970s, Draghi with a thesis entitled “Essays on Economic Theory and Applications.” 
[Stanley] Fischer, 68, advised Bernanke’s thesis on “Long-Term Commitments, Dynamic Optimization and the Business Cycle,” and taught Draghi. Greek Prime Minister and former ECB vice president Lucas Papademos and Olivier Blanchard, now chief economist for the International Monetary Fund in Washington, earned their doctorates from MIT at about the same time. 
Other monetary policy makers who have passed through MIT’s doors include Athanasios Orphanides, head of the Central Bank of Cyprus, Duvvuri Subbarao, governor of the Reserve Bank of India and Charles Bean, King’s deputy in the U.K.
This almost immediately brought to mind Jeffrey Chwieroth's 2007 article -- expanded in his book Capital Ideas -- "Neoliberal Economists and Capital Account Liberalization in Emerging Markets" (ungated). Chwieroth analyzed the behavior of IMF staffers and argued that their policy recommendations was highly influence by where they received their postgraduate education: economists that came from "neoliberal" economics departments advocated for neoliberal policies.

When I first read the paper I focused a lot on what constituted a "neoliberal" economics department. It seemed a bit arbitrary. Chwieroth's list of neoliberal departments included eight important schools: Cal-Berkeley, Brown, Carnegie Mellon, Chicago, Harvard, Hebrew (Jerusalem), Johns Hopkins, NYU, Northwestern, Penn, Princeton, Stanford, Wisconsin, and Yale. These came from a previous article by Chwieroth, in which he presents a methodology for linking abstract concepts to empirical identities.

I don't know what is an appropriate test of the validity of this methodology, but a list that includes both Chicago and Berkeley as normatively similar raises an eyebrow. As does one that includes Harvard and Princeton but not MIT. This certainly cuts against the "saltwater vs. freshwater" story that folks like Krugman tell. (Krugman was also at MIT during this period.) Perhaps Chwieroth's classification works for the specific issue he's considering -- capital account liberalization -- and not more generally.

In any case, the Bloomberg piece also made me recall Krugman's talk of the "Dark Age of Macroeconomics", in which freshwater economists have forgotten everything they were supposed to know about how the economy works. Krugman complains about the belief in "confidence fairies" and "expansionary austerity", and about how "wise men" who are setting policy are making such significant mistakes that we are doomed to at least one lost decade and maybe more.

As the article points out, in an impressive number of cases these policymakers are saltwater economists, from MIT, who think of economics in the same way that Krugman does and received the same education from the same people at roughly the same time as he did. What does this tell us?

It could be that everyone in the world except for Krugman is an idiot, or it could be that everyone in the world but Krugman is a vicious liar. Or it could be that policymakers are highly constrained by the fact that economic issues are highly contentious. Particularly in democracies, political interests and ideas are often much more important than economic training or even ideology. In the end, it matters much less that some central bankers went to MIT in the 1970s than that the interests of the median Greek are divergent from the interests of the median German.

And if that's true, then why does everyone spend so much time talking to economists about political dynamics?

Wednesday, January 18, 2012

(Terrible, No Good) GOTD

. Wednesday, January 18, 2012

This, apparently, was Bloomberg's "Chart of the Day" (via, and HT to Leigh Caldwell on Twitter). In case you can't tell, the orange line is the U.S.'s legal debt ceiling, the white line is the spot price of gold.

It is a very bad, no good, terrible, very bad graph. Misleading at best. Can you tell why?

Here's a clue, but it won't work until tomorrow.

Tuesday, January 17, 2012

Why Theories of Regulation Are Inadequate

. Tuesday, January 17, 2012

Here are some assumptions shared by the most prominent theories of regulatory politics*:

1.a. Strict regulations in one country will generally hurt the competitiveness of firms in that country.  
1.b. Unless those regulations confer rents to domestic firms. 
2. Because banks are a concentrated, influential interest group, this means that states will generally not unilaterally regulate. Therefore, new regulations must come in the form of a credible international standard -- generally originated by a powerful state with agenda-setting power -- that ensures that foreign competitors will have to abide by the same restrictions. 
3. States attempt to use their power and influence to affect the parameters of regulations in ways that benefit their firms. This may involve an international redistribution of rents, from firms in a less-powerful country to firms in a more-powerful country. Such a redistribution may, but does not have to, fall along the Pareto frontier.
Now let's look at some news from the past month:

-- Philipp Hildebrand, head of the Swiss central bank, is enforcing stricter capital standards for Swiss firms than those required in the international Basel III agreement.

-- Japan and Canada are asking U.S. regulators to not regulate U.S. firms more strictly.

-- Joe Nocera -- no lackey for the financial sector -- joins JP MorganChase CEO Jamie Dimon in protesting that the number of new regulations is potentially destabilizing and will lead to arbitrage opportunities for the type of large firms they are supposed to curtail, while agreeing with Dimon that simple rules like capital standards should be strengthened.

None of these would be expected by the dominant theories in the literature, despite the fact that none of these dynamics are especially new. In 2006, more than 40% of the governments surveyed by World Bank researchers reported that their capital regulations were stricter than the Basel requirements. There were similar responses in two previous surveys, conducted in 1999 and 2003. Only a handful (I believe it was three or four) of countries reported that their regulations were weaker than the Basel minima, despite the fact that accession to the Basel accords has not been mandatory outside of the G-10 (and later the EU). That means that, if existing theory is to be believed, 40% of the world's governments were putting their firms at a competitive disadvantage by having stronger regulations than the international standard. That means that, if existing theory is to be believed, nearly 100% of governments responding to the World Bank survey were refusing to take an opportunity to give their firms a competitive advantage by staying out of Basel**.

These empirical patterns suggest that we need to do more hard thinking about what regulations actually do and how they impact markets. Once we have a better understanding of these, we might be able to get a better sense of how interest groups form preferences over regulatory policy and how comparative and international political processes work.

I have some ideas along these lines, but this is getting long enough already. If you're interested stay tuned; I'll be posting somewhat regularly on this topic over the next year.

*I'm most familiar with theories specifically applied to financial regulation, but I believe these hold true more generally. The two main categories of regulatory theory in the political science and economic literatures are joint-gains functionalism and rent-seeking public choice. Despite having different conclusions about the outcomes of regulatory policies, they share many fundamental assumptions about the ways that regulations work and different interest groups' attitudes over regulations.

**There is certainly some "mock" compliance, where states claim to be in compliance but are not. Since Basel has no monitoring or enforcement mechanism other than market discipline, this may happen quite a bit. Indeed, Andrew Walter extensively documented some examples in East Asia. Still, the World Bank surveys have been public for years, and the researchers actively encourage people to report discrepancies between de facto and de jure policies. To my knowledge few revisions have been necessary.

Monday, January 16, 2012

Economists Are Not Doctors

. Monday, January 16, 2012

So says Ryan Avent, reporting from the annual meeting of the American Economics Association:

THE annual meeting of the American Economic Association (AEA) functions a bit like a large, rumbustious diagnosis session. The world economy is rolled in on a gurney, prodded and poked, and declared to be suffering from a host of conditions. Yet the awareness that economists are not doctors has been rather slow to creep into the profession. Doctors may order a treatment (even the wrong one) and feel reasonably confident it will be administered. Economists cannot. The crisis in the euro zone is an acute case. Ideas for fixing the problem are plentiful. But the best economic policies may never see the light of day because of the brittle and baffling world of European politics.
I would say it's even worse than that. For doctors, there is a clear separation between patient and disease. With economies every "treatment" harms a patient even as it helps another. A policy that benefits debtors over creditors is... benefiting debtors over creditors. There may be instances in which policies are Pareto-improving, but they are rarer than economists (or political scientists, for that matter) care to admit. Even if we find a policy that will move us to the Pareto frontier, there is still the matter of where along the curve we're going to end up.

This is not an optimization problem.

Academic Publishers Are Evil


Yeah, nothing new. There seems to have been a recent uptick in people getting angry about it. This rant in particular was pretty satisfying. And while there are some positive trends towards increasing access to research -- e.g. JSTOR is moving towards open access -- in general the barriers to dissemination of research are silly.

Because I have access to university facilities, usually I find things like journal access to be more of an annoyance than anything. I have to log onto the university's library's web page, navigate through five or six screens, enter passwords a few times, and then I get the article. That's annoying, but at the end of the day I get access to almost everything for free.

Almost everything. I currently want to read an article in the newest issue of Political Science Quarterly, but my university's library only has online access for PSQ issues that are at least six months old. So I can't read this article. And I can't find an ungated version anywhere else. I guess I could go to the physical library and try to navigate the hundreds of journals on the racks, but by the time I find it (assuming I do), check it out, and get back to my office I will have spent half an hour or more of my time, which is probably about as long as it would take me to read the article. Plus I won't be able to keep an electronic copy to reference in the future unless I scan it.

In this case making their material difficult to read is bad for the author and publisher as well, because I likely would have blogged the article. That's (a very small amount of) free publicity, now lost. I might have assigned it to my class, as I'm looking for one more current reading to add to the syllabus on this topic. But not if my students can't find it. And -- not that they really care -- I can't imagine ever submitting any of my own work to a journal where I know that no one will be able to read it until it's lost currency.

Perhaps the intention of the policy is to motivate me to pay for a subscription to PSQ. Instead it's motivated me to ignore it entirely. It's not like I don't have other things to read.

Saturday, January 14, 2012

Baking Banking Instability into the European Cake

. Saturday, January 14, 2012

Apologies for the long absence. The past few weeks have been extraordinarily busy on several fronts. I think I'll be able to get this place back into fighting shape pretty quickly.

The decision of S&P to downgrade more or less the whole of Europe has made a lot of headlines, but I'm not sure how much it matters. The plan for Europe before that happened isn't much affected by the downgrade: the ECB prints money and gives it to the banks, accepting EMU sovereign debt as collateral. The banks use the funds to buy sovereign debt. The banks get financing for sure, and if all goes well so do the governments. As far as I can tell, for regulatory purposes all OECD sovereign debt still counts as "risk-less" -- meaning that banks are not forced to hold any capital against it -- under the Basel accords, so there is a regulatory incentive for banks to buy some of this stuff.

There's something absurd about all of this... every step in the chain is an attempt to hear no evil by sticking fingers in one's ear. But if the eurozone is going to survive the European banking system has to stand upright and be able to finance governments. That requires ECB support.

JP MorganChase CEO Jamie Dimon, who often says things in public that are more revealing than he perhaps realizes, recently claimed to believe that there is no banking problem in Europe:

“It eliminates bank liquidity or funding problems for at least the next year, that’s a pretty powerful statement,” Dimon said today after his company reported a drop in fourth-quarter net income. “That was the biggest single risk of an uncontrollable surprise right there, so if that’s taken off the table, that’s a good thing.” ... 
“Europe is trying mightily to solve its problems. I still think the likely outcome is they will muddle through,” Dimon said. “The longer you wait, the higher you run the risk of something disorderly that you can’t really control. I think the ECB took off the worst outcome, i.e. a bank failure.”
Dimon might be right about Europe being able to muddle through, although I still have my doubts. He might even be right that a bank failure is the "worst outcome" in Europe, although I can think of some worse outcomes. But what he doesn't say, indeed what no one has much talked about, are the negative effects this will likely have in the European banking sector if the plan works.

The problem that the new ECB policy is supposed to resolve is this: banks won't lend to needy European governments except at punitive rates. Why? Because those governments are highly likely to default. This is exactly what we want a responsible, healthy banking sector to do.* What we don't want is what we're now hoping to get, which is to say that we don't want a banking sector whose investment behavior is skewed by political institutions pursuing dubious policy goals. We don't want a banking sector that has an expectation of future support if their investments go bad, and we don't want a banking sector that cannot discipline either itself or those to whom it lends.**

We don't, in short, want a situation in which government interventions make Jamie Dimon smile. (Or interventions that make him rich.)

Is this road less bad than the one Europe was on previously? In short run, surely. In the medium-to-long run it's hard to say. Perhaps we think that once the crisis is resolved the ECB can make a credible future commitment to be more standoffish towards the European banking sector. Perhaps we think that we can rein in banks and national governments in other ways, via strict capital standards for the banks and "Hard Keynesianism" for the governments. But I have little confidence that those things are likely. They cut against almost every identifiable political current.

The only way it works is if this crisis really scares everybody so much that a significant (and durable) shift is made in the regulatory and fiscal infrastructure of Europe. While not impossible, I remain highly skeptical that that will happen. I believe it's more likely that policymakers will conclude that the institutions in place are pretty resilient already -- "How else could we have pulled through this crisis?" -- particularly when coupled with a more activist ECB that will support the banking sector when needed.  I believe the banks will conclude that the ECB is their friend, and will therefore count on support when needed, particularly if the cause of the trouble are the member nations of the EMU. That is a recipe for a lot of future financial instability.

The ECB cannot, and should not, be in the business of resolving Europe's political problems. Forcing it into that role is likely to make things worse in the long run.

*The "we" here being an imagined societal consensus in possession of the general will, which reflects more-or-less center-left neoliberal technocratic principles. Yes, I know this "we" does not exist in nature.

**I have a paper, currently R&R, that argues that when banks expect preferential policies from governments they act less prudently. Simple argument, I know, but it's not in the literature yet. I find statistical support. I'll post it if/when it gets accepted somewhere; if someone wants it sooner e-mail me.

International Political Economy at the University of North Carolina: January 2012




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