Tuesday, October 8, 2013

Why US Financial Hegemony Will Endure

. Tuesday, October 8, 2013

Will and I have a piece, now ungated, over at a fantastic new online magazine called Symposium. Our article translates much of the main points of our Perspectives Piece (co-authored with Thomas and Andy Pennock) for popular consumption. We are also blogging over there this week in support of the article. Please do check out our writing this week on the magazine's website, as well as the other great content on the site.

Tuesday, September 24, 2013

Foreign Direct Investment, Human Rights, INGOs

. Tuesday, September 24, 2013

One of the major areas of underdeveloped research within political science is the interaction between non-state actors. From an international political economy perspective, the literature has largely ignored the interaction of various non-state actors that are growing in importance, and its effects on different forms of trade. In a recently published article "Avoiding the Spotlight: Human Rights Shaming and Foreign Direct Investment" by Colin Barry, Chad Clay and Michael Flynn, they lay the foundation for examining this interaction. They examine the interaction between non-state actors (INGOs) and multinational corporations (MNCs) and the extent to which private actors' choices to invest in countries are affected by the reputational costs of doing business in those countries who have been targeted by human rights activists. In particular, they analyze how INGOs "naming and shaming" actions affect the level of FDI. Their results suggest that the naming and shaming approach by INGOs tends to reduce the amount of FDI received by developing states, thus providing evidence for INGO efforts affecting the behavior of MNCs.

While this research is certainly innovative it does leave open a couple of issues regarding the type of human rights needing to be examined. First, when focusing on foreign direct investment and human rights in general, is physical integrity rights the correct "form" of human rights abuse to look at in-depth. In particular, why is there no labor rights measure incorporated into the research design? If we are trying to determine the conditions under which multinational corporations will become concerned with a country's human rights record, it would certainly make sense that labor rights is probably the most important human rights issue to MNCs. That is, these would be the types of issues that MNCs would be cited and given numerous media attention by the international community.

As a human rights researcher from a political economy perspective, I am very excited to see the direction of our field moving down this route and examining the interactions between different non-state actors. I think these interactions will certainly reveal more of the underlying mechanisms at work in determining the conditions under which MNCs and other non-state actors choose to invest abroad.

Wednesday, September 4, 2013

Verizon, Vodafone, and Measuring FDI

. Wednesday, September 4, 2013

Recently back from APSA in Chicago, I've been reflecting on the state of our knowledge about FDI (or perhaps more accurately, cross-border management stakes in enterprises). That, and working on my dissertation, applying for academic jobs, and teaching. Oh, and telling everyone who'll listen about my Optimus Prime sighting on Michigan Ave.

Anyway, I find a post-conference review of the discipline is generally a good way to consider potentially fruitful lines of new inquiry. In my experience, the quality of papers at conferences can be rather hit-or-miss. This generally fits into my view of conferences as important sources of external deadlines for getting drafts done as well as interacting with other scholars in more informal settings such as the hotel bar/lobby/over-crowded coffee shop. And, I think that's enough to ask out of a conference.

However, there are generally one or two papers every conference that catch my eye in meaningful ways. They are often more conceptual pieces that challenge traditional approaches to measurement or quantitative analysis. Andrew Kerner's "What we talk about when we talk about foreign direct investment" was the stand out paper for me this year. According to his website the paper is under review and I'm not sure if he's widely circulating a draft at this time. Hopefully this piece will be published somewhere good soon because its well worth the read. The gist is that measures of FDI derived from balance of payment measures are grossly inadequate measures of the kinds of economic activity political scientists are generally interested in when we study the phenomenon frequently referred to as FDI. Not only do countries often have different definitions of FDI, but FDI flows bounce around for all sorts of reasons that are far removed from decision over making fixed, long-term investments in capital stock. Even worse, FDI flow data are reported in net terms, which makes it impossible to differentiate between a country that experienced a lot of inward direct investment concurrent with an equal amount of outward investment and a country that experienced no direct investment flows at all.

The recent news about Verizon's buy-out of Vodafone nicely illustrates some of the problems with current measures of FDI. Vodafone is a British company, so Verizon's decision to buy out Vodafone's share will register as a massive repatriation to the UK. The size of the deal is so large ($130B!) that it's going to influence measures of global FDI flows for 2013. For context, UNCTAD reports global FDI inflows last year were $1.35 trillion. That means this one mega deal is worth 10% of all total FDI net inflows last year! I doubt any political scientists would argue the Verizon-Vodafone deal reflects any underlying change in assessment of political risk in the US. But, that one deal will dominate 2013 measures of global FDI.

Kerner's entreaty is to use data sources that differentiate between flows of cash and real fixed capital investments. One limitation of such as strategy is that it limits us to modeling the investment decisions of either US or Japanese firms (since the US and Japan are really the only countries that make available such detailed data about the investment decisions of their foreign affiliates), and the investment behavior of firms from these countries might differ in important ways from firms headquartered in other countries.

Given the tendencies of those writing on this blog, as well as our co-authored academic work elsewhere, it may not be surprising that I'm partial to another tactic. It seems that all this semi-liquid investment caught up in measures of FDI might not be so easily captured through an obsolescing bargaining mechanisms (though, as Rachel Wellhausen pointed out in discussion, even cash can be effectively illiquid if there are restrictions on repatriation), but the flow of these investments across borders does influence banking systems, the growth of the money supply, the availability of credit both globally and domestically, and therefore the propensity for crisis. Perhaps one way forward here is to consider more explicitly the relationship between different kinds of financial flows and how their interaction affects both political and economic outcomes.

Tuesday, August 27, 2013

UNC Everywhere

. Tuesday, August 27, 2013

In a recent article in Slate, Matthew Yglesias, cites research done by UNC political scientists-- Stephen Gent, Reed Wood, Jason Kathman. Their findings demonstrate that intervening on behalf of rebels increases the number of civilians killed by increasing the desperation of the government.

Wednesday, August 14, 2013

Shameless Self-Promotion

. Wednesday, August 14, 2013

Adam Elkus was kind enough to interview me for the Abu Muquwama blog at CNAS. He asks about my use of network methods in my research, my thoughts on IPE more generally, and some experiences blogging. You can find it here.

Sunday, August 11, 2013

Global Trends in Militarization Needs Global Explanations

. Sunday, August 11, 2013

In my opinion, James Fearon misses an opportunity to link theories together in a productive way. Of the global decline of military spending (% GDP) and mobilization (soldiers per 1,000 citizens) in the postwar era:
On the domestic side of things, there is pretty good evidence that the spread of democracy has been a significant factor. Not worth getting into the details here, but if you look at the data country by country you find that on average, when countries transition to democracy their military spending and army sizes go down, quite substantially.* In fact they tend to go down when they transition from very autocratic to only somewhat autocratic (that is, to “anocracies”, or semi-democracies using the Polity data). The effect of a democratic transition on arms levels in the state in which the transition occurs looks to be larger than the effect of transitions in neighbors on a state’s own military spending, although this is hard to be sure about statistically due to endogeneity issues. I would guess that most of the democracy effect is a domestic matter—for instance, autocracies want bigger militaries to help put down domestic opposition or to pay off cronies, or democracies want smaller militaries to lower coup threats—but some of it might also be an international effect. That is, if democracies want smaller militaries then this could reduce the demand for big armies in their neighbors.
Fearon is reporting a trend, not advancing a well-formulated argument, but I still think this is fairly weak. Here are some other things we know about violence in the postwar era:

-- Interstate violence is at the lowest point in the capitalist era. Given that, it makes perfect sense for military burdens to be at a low point as well. We do not know for certain why the world is so peaceful, but quite a lot of IR theory suggests that American hegemony (which Fearon does not mention) and nuclear weapons (which he does) may have something to do with it. Regarding the former, the American security umbrella covers other democracies and (sometimes) extends to countries transitioning to democracy -- the pacification and democratization of Europe since 1945 is obviously the most pronounced example -- so that could help explain the domestic patterns without telling a ad hoc story about democracies being worried about coup threats (which strikes me as being ahistorical and is in contradiction to the best evidence). Regarding the latter, technology should push down military cost burdens and personnel needed as more and more security mechanisms become computerized and/or automated, at least during times of peace. Nukes are part of that but so are drones, missile technology, cyber capabilities, etc. Given the decline of international conflict and the lower marginal costs of defense why wouldn't we expect the military burden to decrease?

-- As for the fact that the drop in military burden has happened most in democracies I'd note several things. First, it appears from Fearon's description that many democracies were quite heavily armed in the middle of the 20th century. In Fearon's graph at the link above this is quickly seen by the number of people per 1,000 that were in the military in 1945-1950 in "the West". Given that, I don't think a regime-type explanation works very well. Second, democracies are richer, and richer countries should (on average) spend less on their militaries as a percentage of GDP. That is, there is a almost certainly diminishing returns to spending on security: the 10 trillionth dollar spent on national defense will not get you as much security as the 10 millionth. Among consolidated democracies only the U.S. and Israel spend more than 3% of their GDP on their militaries, and I think there is general agreement that much of the American spending is due to rent-seeking, bureaucratic politics, and its ongoing hegemonic project rather than its regime type.

-- Almost all conflict which does occur in the international system is intra-state. Intra-state violence tends to happen more in non-democracies than in democracies. Countries in a state of conflict should dedicate more of their resources towards the military than countries in a state of peace. Therefore, because they are more peaceful, democracies should spend fewer resources on the military. The only wrinkle in this involves transitions to democracy, which often involve conflict. The way I read Fearon he's saying that after transitioning to democracy the military burden decreases; I'm not sure if his data could tell us what's happening during democratic transitions, but it would be interesting to know.

I'm nit-picking a bit here, albeit for a reason. Fearon found some interesting trends, reported them, and then thought-aloud about what might be causing them. There's nothing wrong with that. But the quick-reflex pivot to explanations based on local factors such as regime type is, for me, unsatisfying. Once one takes that step it makes it difficult to think about broader systems, and makes committing an ecological fallacy much more likely. If we're seeing a systemic trend -- lower military burdens everywhere -- then we should seek to make systemic arguments which can account for the trends. Too frequently we try to explain global phenomena by reference to local factors.

Friday, July 19, 2013

Walmart Workers Can't Be Paid Much More

. Friday, July 19, 2013

Sorry for the quiet around here. We've been busy with real projects. But to keep the lights on I thought I'd re-post something I wrote on Facebook that got long enough to be of bloggish length. It's not normal subject matter for us, but it is related to some these we discuss from time to time. It concerns Justin Fox's claim that low wages for employees of corporations like Walmart are a "social decision" distinct from economic logic. I think he's right, but not really in the way that he means.

There's a much better way to get at this. Walmart and other low-end retailers are both producers (of goods/distribution of goods) and consumers (of labor). Their business model is to forego some of their producer surplus (hence the very low profit margin, around 3% of revenues) in order to boost volume. Per store, Walmart makes around $1.4 million/year... it's just that they have over 10,500 stores so their overall profits (~$15bn) sound impressive and their revenues (~$450bn) are astounding.

If you considered each store as its own "small business" you'd wonder what the hell they were doing, because to staff those stores they have to hire a ton of people to accommodate all that volume. That's why this model only works at scale. To maintain even a 3% profit margin they have to extract some of their workers' producer surplus to make up for the surplus they have given to consumers to capture market share. This is what a high volume/low margin business looks like. It's even more severe at Amazon. But they don't capture as much of their workers' surplus as people think.

Walmart's stores are staffed on average by about 300 people who make on average $12.67 per hour or ~$25k/year if they work full-time and take two weeks of unpaid vacation. $1.4mn profit per store /300 workers = ~$4,500. So that's how much surplus value Walmart is "extracting" from labor, if you don't factor in anything else like retaining earnings, paying shareholders, investing in new stores/products, etc. That's a lot of trouble to make a measly $1.4mn! The only way it makes sense (for shareholders) is if volume is HUGE. Which it is. Since the shareholders are relatively concentrated -- six Waltons own nearly half of the shares -- they make a killing. But it's practically all volume.

Anyway, $3k or so is the upper limit of how much more each worker could earn under the current business model. Say it's the difference between $25k and $30k. That's certainly not nothing, but it does not represent such a qualitative difference in standard of living that anyone would consider Walmart employees to be well-paid if they all got the full $4,500.

So what else could be done other to increase that $4,500/year? Walmart could claw back some of their producer surplus from consumers by raising prices and using the proceeds to raise wages, which would constitute a simple redistribution from customers to employees assuming no money taken by management/ownership and completely inelastic consumer demand. Both assumptions are pretty heroic in this case. That would basically just shuffle cash from some poor people (Walmart's customers) to other poor people (Walmart's employees). Or they could reduce margins even further, but 3% is already pretty thin. Or they could raise margins by paying their suppliers (e.g. poor Chinese workers) even less, and give the extra profits to their American workers. They could redistribute salaries from management -- their CEO makes $20 million to manage a company with $450 billion in revenues -- but Walmart employs over 2 million people... we're talking 10 bucks per worker per year if the CEO was paid nothing at all.

So any redistributionary choice that would fundamentally change the situation would seem to involve deciding which group of poor people are made worse off: Walmart's customers, its employees, or its suppliers. The political equilibrium right now is a mix of employees and suppliers. Changing policy -- say, by raising the minimum wage -- involves changing two of those variables: one goes up, one goes down. There's just not enough cash which can be taken from management to make all that much of a difference on a per worker basis, even if you reduced managements' salaries to $0 and retained no profits for future investments or any other purpose. And per-worker profit is so low that there's a pretty firm limit on how much more they can be paid.

Now, Walmart's business model of extremely high volume at very low margins does not represent the entire economy, although I see a number of trends pushing more and more of the retail economy in that direction, so this logic won't always apply. But it's about as close to the competitive equilibrium models of econ 101 as contemporary markets get. So if there was ever a case to be made that wages are social decisions rather than economic decisions -- and there is, although I'd prefer "political decisions" over who captures the producer and consumer surplus to "social decisions", which just sounds slippery -- Walmart probably isn't the best example for Fox to use.

UPDATE: Tyler Cowen's column today speaks to a related issue: the politics of wealth vs income.

Sunday, June 30, 2013

Distributional Politics of the Ice Cream Parable

. Sunday, June 30, 2013

Tyler Cowen is thinking out loud:

This parable assumes that [monetary] injection effects are important, namely where the new money goes first. This Austrian-like view is unfashionable, has weak theoretical foundations, and violates the Modigliani-Miller theorem, but at the moment markets seem to believe it. Should we believe it too?
Yes we should. Or at least we shouldn't let Modigliani-Miller stop us. In his 2011 Presidential Address to the American Finance Association, John Cochrane said the following:
Discount rates vary a lot more than we thought. Most of the puzzles and anomalies that we face amount to discount-rate variation we do not understand. Our theoretical controversies are about how discount rates are formed. We need to recognize and incorporate discount-rate variation in applied procedures.
If discount rates are varying a lot -- across time, space, and actors -- then a representative agent model such as Modigliani-Miller is not going to perform very well. And, as it turns out, it doesn't. I have paper, while I'll be sending out for review soon, which drills down at banks' activities (at the firm level) across countries and time. It turns out that there is all kinds of variation being driven by a whole host of variables at multiple levels of analysis. Which, you know, we all know intuitively... but it's not what our models expect. So let's ditch Modigliani-Miller. Capital structure is clearly not irrelevant in the real world.

Going back to Cowen, here's something with which we might be concerned. Central banks act by trading debt instruments for others at price. In normal times the swap is either short-term sovereign debt for cash or present dollars for future dollars plus interest. In our current environment, it's practically anything for cash. Who benefits from this situation? Those who can create debt that can be sold to the central bank for cash. In normal times this has primarily been governments, but governments are doing everything they can to stop creating debt. So who does that leave? Banks.

Because central banks want to be active they have been broadening the range of debt instruments that they will conduct business in. So here's a worrisome dynamic: governments are trying to reduce debt, while banks are being encouraged by central banks to create debt instruments which they can trade for cash. Karl Whelan may be correct that traditional solvency concerns don't apply to central banks, but that doesn't mean that there aren't knock-on effects from this.

The upshot is that expansionist central bank policy requires somebody to lever up. If governments won't do it and households can't do it then banks and large corporations pretty much have to. The more activist the central bank wants to be and the less indebted the government wants to be, the more banks have to create debt instruments however they can. Possibly that could mean loans to individuals and smaller firms, which could be stimulative, but households and firms are deleveraging. Meanwhile, bank regulators are telling banks to stop lending to risky groups. So where's the debt going to come from?

Banks and big credit-worthy firms are going to do very well. They're getting debt finance for free, so their equity can be deployed elsewhere or held in reserve. This is why stock markets are up so much. This is why Apple and other corporations are taking out loans when they don't even need the cash and have no real plans to do much of anything with it in the short run. Everyone else is not going to do very well, because the traditional mechanisms for distributing from central banks to the citizenry -- fiscal policy plus bank loans to individuals and small firms -- is being cut out of the story. In one sense that might be okay if the future costs of debt servicing are higher than the expected return folks would get from borrowing. But the distributional implications of this are clear: the economy is going to become more unequal and less efficient. Credit is not being allocated to facilitate productive investment -- there might not be many -- but to create debt instruments to sell to central banks for cash. The policy mix we have right now practically requires inequality to go up, which is a sign that the economy is seriously imbalanced.

One alternative is to let risk back into the system but I don't hear anybody calling for that right now.

At some point central banks will be pressured to tighten. It looks very likely that this will be under conditions of steady but slowish growth. This is where the Big Unknown comes in. When that day comes will banks (and corporations) start using their cash productively or keep hoarding it? Given the experience of the past decade or so, will there be many people who even want to borrow in order to build a McMansion or buy a luxury car or MBA? If they did, will regulators let banks lend to them? Will the originate-securities-and-distribute-to-surplus-countries market come back as strong as before?

Thursday, June 27, 2013

Plus ça change, plus c'est la même chose

. Thursday, June 27, 2013

Dan Drezner is kicking Britain -- and the American foreign policy commentariat -- while they're down. The essay is mostly good, although regular readers of this blog probably won't find much of it new, but I must disagree with part of his conclusion:

There is no denying that the relative power of the United States is less now than it was a decade ago.
I think that is deniable. A decade ago the U.S. had alienated many of its allies, the United Nations, and all of the BRICs by invading Iraq with a "coalition of the willing" led by a president which half of the country believe did not actually win the 2000 election. Some suggested that American democracy was at risk at home, while its foreign partnerships -- especially NATO -- were similarly endangered. A decade ago the U.S. was still recoiling from the 9/11 attacks and was braced for a very dangerous future. A decade ago the European Union was resurgent, Iran was less isolated (and more recalcitrant), and China was building up its "Beijing Consensus". All of the talk in IR/FP circles was about decoupling, anti-American balancing, the end of legitimacy of American economic leadership via multilateral institutions like the IMF, WTO, and World Bank, and the end of security leadership via the UN and NATO. For all of George W. Bush's posturing, the U.S. faced some very severe challenges, and handled almost all of them pretty poorly.

Some of these persist, but Drezner is correct to note that at this point all of the potential challengers to U.S. primacy have faltered, while the U.S. is picking itself back up. We're talking about "relative" power, remember, so let's just ask who is on the other side of the U.S. in this equation. The E.U.? The BRICs?

Sean Starrs has a very interesting paper out on "early view" in International Studies Quarterly making the case that American economic superiority hasn't slipped at all since the crisis. Here's the abstract:
This paper argues that a fundamental failing in the debate on the decline of American economic power is not taking globalization seriously. With the rise of transnational corporations (TNCs), transnational modular production networks, and the globalization of corporate ownership, we can no longer give the same relevance to national accounts such as balance of trade and GDP in the twenty-first century as we did in the mid-twentieth. Rather, we must summon data on the TNCs themselves to encompass their transnational operations. This will reveal, for example, that despite the declining global share of United States GDP from 40% in 1960 to below a quarter from 2008 onward, American corporations continue to dominate sector after sector. In fact, in certain advanced sectors such as aerospace and software—even in financial services—American dominance has increased since 2008. There are no serious contenders, including China. By looking at the wrong data, many have failed to see that American economic power has not declined—it has globalized.
This paper is interesting in two ways. First, it recasts the discussion away from monadic attributes -- GDP share, say -- towards global categories -- market share of American multinational corporations. Second, it suggests that the old "relative power" discussions, which tend to be cast in dyadic terms, is also inappropriate. Instead we need to think globally. If China increases its GDP share relative to the U.S. but does so by importing American technology, adding a small amount of value, then exporting a finished product, the statistics will show a big GDP boost from exports but can we really say China has gained on the U.S. in any meaningful way? As Susan Strange once wrote, becoming a blue collar worker in service to American white collar management does not make you more powerful than the Americans. The old dependency theorists understood this quite well even if they got some other things wrong. Add to this Benjamin Cohen's recent work (with Tabitha Benney) showing that the US dollar has not slipped in importance in the monetary system (recent events have demonstrated this), and my dissertation (recently defended) showing that American prominence in global banking has increased since the crisis, and the overall picture looks clear: relative to recent history, the U.S.'s power position has not changed and has in some ways improved.

At the same time, China's immaturity has made many of its neighbors nervous. Japan, Korea, and Australia have increased security and economic ties with the U.S. which had slipped a bit a decade ago. The Transpacific Partnership will likely extend these gains. China's inability to encourage others to bandwagon with it is evidence that it has not gained much, if any, leverage on the United States. China's increasing reliance on the world's baddies -- which are increasingly under threat -- as sources of raw materials and markets for trade and FDI is not an indication that it is moving it into a position at the core of the global system. The inability of China to make ASEAN+3 a meaningful institution -- or develop any other -- is another weak spot, as is its recent growth slowdown, financial instability, and the fact that it faces 250-500 domestic protests per day.

Or perhaps I could put it another way. If, in 2003, I had told you that the Iraq and Afghanistan wars would be a disaster, the U.S. would propagate the worst global financial crisis since the 1930s, the Middle East would be in utter turmoil, the biggest development in American politics is the rise of right- and left-wing protest movements, China would grow at 10%/year over the course of the decade and that the net result of all of this is that the U.S. has become more prominent in the global economic and security systems... you'd probably think I was insane.

But that's what's happened.

Wednesday, June 19, 2013

UNC Everywhere

. Wednesday, June 19, 2013

A friend of mine -- a student at the Kenan-Flagler Business School -- is profiled in the Financial Times.

Monday, June 17, 2013

Expecting the Unexpected

. Monday, June 17, 2013

Here's David Beckworth explaining a "foolproof" mix of monetary and fiscal policy (bold added):

In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits. ...

If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed. ...

What is there not to like about it?
I have eliminated most of the substance of his post because those 'ifs' are just too big for it to really matter what comes after. The public does not, cannot, and will not understand why an NGDP target is superior to an inflation target. Hell, most economists don't buy this, a big percentage of financial market actors don't either, and plenty of central bankers are at best skeptical. Meanwhile, 30% of the public doesn't know who the Vice President is. (I couldn't easily find a statistic on the % of Americans who know who Ben Bernanke is, but it's gotta be less than 20%.)

I think academics and maybe some policymakers vastly overstate the value of the expectations channel. People are not so forward-looking as they are in models. Here's what they (sometimes) know: Do I have a job? Does it pay well? Is that job threatened? Do I have a bunch of debt? Can I service that debt? If the answers to any of these questions (and perhaps many others) is "no" then the public will "hoard cash", where "hoard cash" actually probably means using any excess income to pay down debt.

It gets even worse. The Paradox of Thrift is a paradox because what is individually rational is not collectively rational. The expectations channel doesn't make that go away even if there is a functioning expectations channel. Which there isn't, or at least not one that the Fed can so easily manage.

We can't base policies on the presumption that people are 100% informed and intelligent. If we want folks to spend money we have to just find a way to give them a bunch of money. If they have money, they'll spend it. If they don't, they won't. I personally think that monetary mechanisms are generally better for this than fiscal mechanisms, but I also think the jury is still out on that one.

More importantly, monetary policy benefits banks while fiscal policy (in the form of spending) benefits subcontractors, unions, urbanites, and public sector employees. Fiscal policy in the form of tax cuts benefits the top 10%, i.e. the ones who overwhelmingly pay the federal tax burden. So these questions are political.


Sunday, June 16, 2013

Atomic Bombs and Audiences

. Sunday, June 16, 2013

LFC points to an article by Ward Wilson suggesting that the Japanese did not surrender in WWII because of the bombs dropped on Hiroshima and Nagasaki, but because the USSR dropped its neutrality with Japan. This argument presumes that the USSR's policy change was independent of the US's decision to drop the bombs, and the US's decision to drop the bombs when it did was independent of any consideration other than motivating Japanese surrender. Given what was going on in Europe (and China) at the time this seems exceptionally unlikely. Stalin had bigger fish to fry than securing marginally better terms of surrender for the Japanese Emperor, and he had agreed at Yalta to declare war on Japan within three months. The US had already conceded half of Europe but was determined to keep the USSR out of Asia. Given the rapidly-expanding US/USSR rivalry and the US's technological advantage it was in Stalin's interest to mollify the US at least until the USSR could also develop atomic weaponry.

I.e., just move the question back a step: why did the USSR pick precisely that moment to revisit their position as a potential intermediary between the US and Japan? There are two candidates. First is the Yalta agreement. Second is the deployment of the atomic bombs. Here the timing of the US dropping the bombs becomes important. The US could have dropped the bomb at any time from July 15th forward. August 8th was the deadline for the Soviets to enter the Pacific theater per the Yalta agreement. Hiroshima was August 6th. The USSR entered on August 8th by invading Manchuria (it was still the 7th in Moscow, but the time difference meant it was the 8th in Tokyo). Nagasaki was August 9th.

There is quite a lot of evidence that Stalin did not recognize the significance of atomic weaponry until it was used, and some good reasons to think that the bombs were in fact dropped primarily for the benefit of Soviet audiences, not Japanese. Stalin believed this anyway. The bombs -- or at least the second one -- were probably dropped to keep the Soviets out of E. Asia. There is no other good explanation for why the first bomb was dropped just before the deadline for Soviet intervention on the terms agreed at Yalta, or for why the second bomb was dropped at all.

From hindsight this makes the use of atomic weapons less justifiable on strategic as well as moral grounds. The Soviets obviously took from this experience that the Americans were quite dangerous and were in fact imperial. The dropping of the bombs hardened Stalin and perhaps made the Cold War more dangerous than it needed to be. This was made clear by the Bolshoi speech in 1946. Whether or not the bombings had any deterrent effect from 1945-1949 (the period before the USSR successfully detonated a bomb) is difficult to discern, but once the Soviets had achieved nuclear parity (or close enough to it) competitive brinksmanship was probably inevitable. It may have been anyway, but the U.S. took the first step by bombing Hiroshima and Nagasaki. Any other possible paths of history were cut off at that moment.

Another example of why we should be wary of Ceteris Paribus Theories of International Relations.

Friday, June 14, 2013

A Brief Theory of the Great Stagnation

. Friday, June 14, 2013

World War II left industrialized societies with two main features: a lot of industrial capacity, and a lot of dead men. These combined to drive up wages for workers, and for cultural and pragmatic (high wages mean no need for dual income households; high fertility was encouraged to replenish the population) reasons workers were overwhelmingly men. The marginal unit of labor was thus very valuable and labor supply was restricted since the baby boom generation needed twenty or so years to grow up.

By the end of the 1960s the baby boomers were entering the workforce but industrial capacity had not grown at the same rate as the population. Thus, new entrants into labor markets -- which increasingly included women and minorities as well as young white men -- put downward pressure on wages. The marginal unit of labor was no longer very valuable. Median wages began to stagnate at the same time that over-crowding of cities was leading to social unrest. Governments did not do a good job of managing these duel pressures. The 1970s are a period of stagflation and urban decline.

The post-baby boom economy has lots of labor, so income gains are not broadly shared. Who benefits? Those who can sell the product of their labor into the biggest markets. That means the heads of major corporations, financiers, professional atheletes. The rise of information technology increases these opportunities, but only for a minority. Think of these as the prominent nodes in a network.

This isn't so much capital-versus-labor anymore. The beneficiaries aren't the landed elite or the factory owner. Instead, the beneficiaries are those in managerial positions in large corporations, those who are able to leverage technical education to create consumer products that are popular, and those who are very good (or not so good, as the case may be) at managing peoples' money. That is... it's labor. It's labor that has put itself in a central position in the economic network of late-capitalism. Michael Jordan didn't become a multimillionaire by extracting the surplus value of anyone else's labor. He did it by selling his own labor to millions of people simultaneously, and then leveraging his celebrity to move into high positions in the corporate hierarchy. Mark Zuckerberg became a billionaire by giving his product away for free. Steven Spielberg gets rich on volume, not margin, and has made more from Dreamworks than from directorial fees. And some dude at Goldman Sachs gets rich by making sure all of their money doesn't go away.

The political left and right do not understand this. This is not a dynamic that will lead to wealth trickling down, nor will increasing the strength of labor unions be able to alter it. This is a new economy, but we're treating it like it's the old economy.

Wednesday, June 12, 2013

Tree Don't Care What A Little Bird Sings

. Wednesday, June 12, 2013

I have not read much of Robert Fogel's work, not much at all, but I may need to read more of it. A Fine Theorem, one of the more under-appreciated blogs, has a summary of Fogel's Without Consent or Contract. Here's part of it:

... the paradox rests on the widely held assumption that technological efficiency is inherently good. It is this beguiling assumption that is false and, when applied to [American] slavery, insidious.”  

Roughly, it was political change alone, not economic change, which could have led to the end of slavery in America. The plantation system was, in fact, a fairly efficient system in the economic sense, and was not in danger of petering out on its own accord.
Here's the rest.

There are multiple views of the politics of technology. (Technology is, at its core, information aggregation.) One says that technology is liberating. Another says that technology is enslaving. Another says that technology is fueled by the state for purposes of control. (Oddly, skeptics of markets often make the first point of that point without understanding that the second point is the corollary.) Technology can destabilize the political equilibrium (but does that only apply if it goes in one direction? I doubt it). It's worth googling a bit for the views of Farrell, Drezner, and Lynch on this. It's worth noting that modern authoritarian regimes try to get to the technological frontier as rapidly as possible but they tend to have a tough time managing it. Francis Spufford's Red Plenty is on sale at Amazon right now, if you don't mind probably giving some of your metadata to the NSA.

Sarah Jaffe (on Twitter) asked for a political economy of the surveillance state. (Here's a short take, not very good.) I haven't got the time or background knowledge to build a real model, but if I was going to I'd start with Tilly and Scott and Weber at the foundation and ask what purpose this really serves. Knowledge is power, is it not? Power is needed for protection (in the Tillian sense), is it not? After that I'd go to Orwell like everyone already is, but not the dystopian cliches. Remember in 1984 that Winston Smith was pretty much the only one in society bothered by Big Brother. (Probably not, if you've read your Timur Kuran, but as far as Smith could tell he nearly enough was.) Everybody else just got on with it. The proles sang their songs and read their magazines. Sure, Julia was a bit inconvenienced by the whole thing, but it's not like she really had principles.

Now think about Havel. Now think about samizdat. Is information so easily controllable? Can the state not oppress on the basis of allegation, innuendo, or missing data? Can the citizenry not resist simply by living? Does the state need all information to "keep the locals in line" or just a vague threat -- the vaguer the better? Corey Robin addresses this and gives a precis of his book on the politics of fear. Stalin didn't have Bukharin's metadata... just the ability to credibly say "we know where your kids are". That hasn't changed. Yglesias is right: the biggest thing to fear from the surveillance state isn't the state, per se. But that's a micro story, and micro stories can dictate macro policies.

The U.S. public is not concerned about this. To the extent they are it's for partisan reasons, not out of principle. Note that this is not new. Note that, so far, it appears that these programs are legal at least in broad terms. Intellectuals are more concerned that the median pollee, as they should be, since they are much more likely to be targeted than a randomly-selected person. (If I was Glenn Greenwald I'd go back to snail mail and pay phones for a good long while.) But so? Democratic politics does not guarantee puppies and roses. As we debate whether or not this is constitutional we should remember that James Buchanon's insights do not only apply to economic policy. We should also remember that politicians and celebrities have been subject to heavier levels of scrutiny than this for as long as there has been human society.

Data, even metadata, can be used for ill. (Or good, as the case may be, since the 21st century version of Paul Revere is probably someone Healy wouldn't meet for a beer at Ye Olde Tavern. Possibly this isn't what Healy's driving at.) But let's not get carried away. The U.S. government is sophisticated in many ways, but this program has only $20mn in funding. Let's say they spend $5mn of that on high-powered computers (that's probably less than what the supercomputer I ran a bunch of my dissertation on cost), and the rest on twenty-somethings making $200k/year each (as Snowden apparently did). That's 75 guys trying to make sense of the 2.5 quintillion bytes of data created each day. Good luck with that. (No I don't believe only $20mn was funneled into this. Not for a moment do I believe that. But I'm not sure how much $20bn could really do absent some good old fashioned police work.)

So after you've read the Spufford (or even before) you might want to read some of the discussion at Crooked Timber on the book. See especially this wonderclass by Shalizi which has as much to say about social science theory and methods as it does about historical political systems or the contemporary political economy of the surveillance state or novels. The key question is Shalizi's first one: what is being optimized?

Then recall that Hayek's slippery slope is a logical fallacy to which the historical record is not kind. Should we be less concerned? Probably depends on how concerned you were in the first place... anonymity is a myth.

Remember too that the government oppresses and kills and makes terrible decisions when it doesn't have good intelligence. Given that, is the expected utility of (American or other) society better or worse with PRISM or without it? Apparently this program stopped one or more attacks at the London Olympics. What would the cost of those attacks have been? Was preventing them worth $20mn dollars plus some false positives? (The TSA spends $6.5 billion a year and probably gets almost nothing for it.) Could PRISM have stopped Nidal Hasan had it been better-implemented? If it could have, would it be worth it? We are quite literally behind the veil of ignorance at the moment (just a bit less in the wake of Snowden's leaks), but if we take engaged citzenry to be a desirable normative end in itself we need to put our Bayesian caps on now and start updating our priors.

What tail event has a greater probability: that this program is abused in such a way that it devastates liberal society, or that it prevents a significant attack the fallout from which would devastate the same society?

In the end the biggest repercussions of NSA spying might be felt in the US-EU trade negotiations.

Nevertheless, I oppose PRISM and related programs very strongly. I do so because I am not risk-averse.

I believe this is the most Cowen-esque thing I've ever written. I also believe that every link in this post is worth clicking on.

Monday, June 10, 2013

Canadian (and maybe Mexican) Trade Retaliation?

. Monday, June 10, 2013

I often think that retaliatory measures taken by aggrieved parties in the WTO dispute settlement process are among the most interesting aspects of trade politics.*  US industry/policymakers may have to deal with retaliation from Canada, after the WTO ruled against the US in a dispute over mandatory meat labeling requirements.  Canada (and Mexico too, see here) has suggested that the US has not complied with the WTO’s ruling, justifying authorized trade retaliation against US products.
This kind of policy response is far from arbitrary or scattershot.  Countries deliberately identify industries that are politically important, and then they target them for retaliation by threatening to impose higher tariffs on their products.  The idea, of course, is that these industries will complain to the offending government to convince their representatives to implement the WTO decision, thus preventing the imposition of the punitive tariffs.  Here, because the Canadian government has determined that the US failed to implement the WTO ruling, it released a list of potential commodities that it might select for trade retaliation, including beef, pork, cheese, corn, steel pipes, wood furniture, cherries, rice, potatoes, maple syrup, chocolate and others (see here and here and here).**  Absent steps by the US to implement the WTO decision, or otherwise come to a settlement with Canada, the new tariffs could (eventually) come into effect.  The value of this disrupted trade would be pretty substantial, as one estimate sugggests that Canadian livestock producers have "lost $640 million annually because of COOL [i.e., the US labeling regulation], with similar losses in pork- approximately $500 million per year." (Here).
This list contains a lot of products that probably sound familiar if you follow trade disputes between the US and other countries.  Many of the products have previously been the subject of various “trade remedies” such as antidumping orders.  That such sensitive industries are being targeted is not surprising . . . after all, that’s kind of the point.  But what is also pretty interesting is that trade representatives might even target specific legislators at particular times.  As the US Congress debates amendments to the 2013 Farm Bill, we might see legislators that are instrumental to this process targeted -- maybe in an effort to get them to add an amendment to the Bill modifying the current US labeling regime.  In any case, it’ll be fun to watch this play out the next 18+ months to see if/how tariffs end up getting imposed on these products. 

* A while back I noted that Antigua threatened to ignore copyright protection to the detriment of US firms in response to the US failure to abide by a WTO ruling.  
**  full list from Canadian Ministry of Int'l Trade: 

Thursday, June 6, 2013

The Tiananman Square Protests Weren't Liberal

. Thursday, June 6, 2013

One of my favorite blogs is Echoes, subtitle "Dispatches from Economic History", at Bloomberg. There isn't a unifying theme other than contextualizing current events by looking to past episodes. The authors are experts on each topic -- i.e. there aren't just one or several folks writing every day -- and I almost always learn something from the post.

For example, that the Tiananman Square protests weren't exactly liberal. The author of the piece is a sociologist as Kansas State who has studied Chinese development since 1949, and he says that the protesters were "radical reactionaries". This atypical conjunction means that they were anti-authoritarian but also anti-capitalism.

The story goes like so. The early reforms economic reforms in China benefited rural farmers and initially urban consumers as well, but after awhile industrialization efforts and a plateau in farm production increased price inflation. At the same time corruption increased. This hit urbanites particularly hard. They demanded more political access, but mostly so that they could reverse economic reforms. Thus, they urbanites were "radical reactionaries". I guess that means the rural farmers were "conservative revolutionaries".

Deng refused to yield, but had the protests been successful China might've ended up with the opposite of what they've had over the past generation: political reform without economic reform. Ironically this would have hurt urban dwellers in the long run, since the economic reforms Deng undertook eventually benefited them the most.

Anyway, it's certainly not the textbook version of the story. But elements of this still resonate, as this Dissent article about the contemporary anti-reform movement in China illustrates.

Wednesday, June 5, 2013

Another ISD Follow Up

. Wednesday, June 5, 2013

Since I seem to only blog about investor-state dispute related issues, I thought I pass along a recent UNCTAD policy note about reforming the ISD system.

UNCTAD's summary of the report's key findings:

Concerns with the current ISDS system relate, among others things, to a perceived deficit of legitimacy and transparency; contradictions between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about the independence and impartiality of arbitrators; and the length and the costs of arbitral procedures. These challenges have given rise to a broad discussion about the need to reform the current system of investment arbitration. To give shape to this debate, the Note puts forward five main reform paths:
  1. Promoting alternative dispute resolution.
  2. Tailoring the existing system through individual IIAs.
  3. Limiting investor access to ISDS.
  4. Introducing an appeals facility.
  5. Creating a standing investment court.
Each of the five proposed reform options comes with its specific advantages and disadvantages and responds to the main concerns in a distinctive way. Some of the options can be implemented via actions by individual governments, while others require joint action by a larger group. The options that require collective action would go further in addressing the existing problems, but would also face more difficulties in implementation. The Note calls for a multilateral policy dialogue on ISDS to search for a consensus about the preferred course for reform and ways to put it into action.

Follow Up to Acryonym Monday - ISD and TTIP


On Monday Will pointed to some indication that an investor-state dispute clause may be a sticking point in the much anticipated Transatlantic Trade and Investment Partnership (TTIP). As Simon Lester points out, it's not quite clear from the EU TTIP negotiating mandate whether the EU wants to strengthen any ISD or weaken it (ungated version here). Civil society groups are already decrying any ISD as an "assault on democracy, human rights, and the public interest," citing a rise of "expropriation trolls" and that an ISD would prevent the eurozone from having the policy flexibility needed to effectively deal with crises. (see also similar critiques of the Trans Pacific Partnership here)

Typically, discussions of ISDs focus on the preferences and bargaining power of potential investors and potential host governments. The stereotypical case of a potential treaty with an ISD is between an advanced industrialized country and an emerging economy. Therefore most commentators focus on the extent to which host governments are able to resist pressure from rich countries to cede jurisdiction of investment matters to an international arbitral board. Developing countries that need foreign investment are typically in weak bargaining position vis-a-vie large multinationals who have great powers negotiation on their behalf.

Of course, the power asymmetries that so clearly define most ISD negotiations do not obtain in the US-EU case. What is particularly interesting about these negotiations is the relative parity of negotiation partners. Simon wonders if the EU wants a weak ISD or a strong one. I'd argue that it depends on what sorts of rules an ISD would enforce. Business interests in the EU want the TTIP to export European standards to the US, as this would provide them with an advantage. Of course, US firms want an ISD to protect American investors from European regulations. There's a bunch of political science work that examines how the US and EU compete over regulatory authority: see here, here, here, and here for examples. The bottom line, I think, is that an ISD is going to be a very, very tough sell in the context of a US-EU deal. The EU negotiating mandate still maintains its preference for the inclusion of an ISD clause, but I would not be surprised if a final deal severely restricts the ISD mandate or removes it entirely.

Monday, June 3, 2013

A Bunch of Acronyms and Some Trade Politics

. Monday, June 3, 2013

Last February Sarah and I* speculated in a short National Interest article that a EU-US trade deal (Transatlantic Trade and Investment Partnership, or TTIP) could put pressure on the recent prevalence of investor-state dispute clauses (ISDs):

While ISD clauses are widespread, they usually exist within the context of treaties between states characterized by economic asymmetries. For instance, of the more than 2000 bilateral investment treaties (BITs) worldwide, none exist between two advanced industrial countries. The United States generally embraces investor-state dispute clauses; both their model free-trade agreement (FTA) and BIT contain such language. However, it is far from certain that a US-EU treaty would include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" multinationals while they are less willing to cede jurisdiction over investment disputes in which they might be defendants.
Today, via Simon Lester, we see that the EU is not super-thrilled with the idea of having an ISD in TTIP that is typical of US ISDs, although it's tough to know from the formal language exactly what the EU is after. Or as Lester puts it: 

What are the authors saying here? Are they saying: 
1. Investment protection and investor-state will only be included if high EU standards for investment protection, as opposed to the weaker U.S./Canadian standards, are met? 
or are they saying: 
2. Investment protection and investor-state will only be included if the usual provisions are weakened so as to ensure that public policy objectives can be pursued? 

I don't know the answer (perhaps Sarah could chime in?), but it seems clear that any ISD in TTIP will have to be different than that in the model US bilateral investment treaty. So far our article is holding up pretty well.

Meanwhile, Eyes on Trade doesn't like Obama's secrecy on another potential trade deal, the Trans-Pacific Partnership (TPP)**. They also nail the reason for the secrecy:
So why keep it a secret? Because Mr. Obama wants the agreement to be given fast-track treatment on Capitol Hill. Under this extraordinary and rarely used procedure, he could sign the agreement before Congress voted on it. And Congress’s post-facto vote would be under rules limiting debate, banning all amendments and forcing a quick vote.
Eyes on Trade think all of this is severely crippling democracy. In a way it is, it by "democracy" you mean legislators favoring parochial interests over the good of the nation as a whole. The Congress has often given the President fast-track authority. Clinton had it for part of his terms. George W Bush had it for most of his. The reason for this is so that individual Congresspeople can't fiddle with the deal in order to privilege local constituencies after its been agreed to by the negotiators of both sides. It's basically a legal way to curtail rent-seeking exceptions and other Congressional shenanigans. These are generally questionable on welfare grounds when things like tax bills are being debated, but when negotiating a trade deal they can be deadly: each new Congressional exception has to be approved by the foreign party, which will likely demand further concessions in exchange, which would have to be approved by Congress in turn, etc. Each iteration of this lowers the chance of any deal being reached. Fast track authority cuts that process out. Interested groups can still lobby the US Trade Representative, and Congress still has to approve any deal, so it's not exactly undemocratic. But fast track makes the policy process more efficient.

Obama hasn't been given fast track authority. Democrats have typically been skeptical of trade deals -- remember that renegotiating NAFTA was a big issue during the 2008 Democratic primary -- and Republicans seem intent on blocking anything Obama chooses to do on grounds of principle. It doesn't seem to have been a major priority for Obama until now, as he's preferred to focus on health care, immigration, and other issues first. But without fast track trade deals are much more difficult to complete. So much so that foreign countries often prefer not to negotiate at all because they know that whatever agreement they reach will end up being altered by Congress. Given that, what's the point of negotiating in the first place?

Although they are fairly obscure these issues are quite important. I continue to think there's a decent chance that Obama gets fast track, and if he does that some deals will get done. The business community is very interested in seeing agreements made, so they will likely push the GOP to give in to Obama. Democrats are a bit less enthusiastic, but are more likely to give Obama authority than they would be to lengthen Romney's leash. And if Sarah and my article is correct, there are not many important interest groups that oppose a EU-US deal. The TPP makes sense in a number of ways as well.

All of this remains to be seen of course, but I'm still pretty optimistic that we'll see some movement on trade during Obama's second term.

*Really Sarah. She knows much more about ISDs than me and wrote that part of the article more or less on her own.

**Yes I know. TPP and TTIP and ISDs, oh my.

Wednesday, May 29, 2013

Was Stalin Necessary for Russia's Economic Development?

. Wednesday, May 29, 2013

Some of the he-was-a-baddie-but-at-least-he-modernized-the-place say "yes"*. New research by a team of Russian economists says "no":

This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets during the two periods. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections under these estimated wedges imply that Stalin's economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of the Stalin's policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. The projected performance under both Tsarist' and Stalin's wedges is much worse than the economic performance of Japan, which in 1885-1913 had similar levels of per capita GDP and distortions as Tsarist Russia, but experienced a rapid acceleration of non-agricultural TFP during the interwar period. Relative to this benchmark, the welfare loss of Stalin's policies are about -31 percent of consumption.
Via Cheap Talk, who notes that one of the economists -- Sergei Guriev -- has just left the country under duress from public officials.

The story that Russia's development was impossible or unlikely absent Stalin's repression always seemed unlikely to me. Other places have developed without those levels of repression (e.g. Japan, as the authers note, but not just), or have had repression without growth. The repression-growth relationship is not strictly positive and linear, in other words, so any story about Stalin and development has to be particular to Russia. And, frankly, I've yet to hear one that's had any solid theory behind it. (Perhaps someone could point one out to me in the comments.) I've heard mumblings that "Russia was a backwater hellhole" -- this was more or less Marx's view, although it's not true that Marx believed that socialism could not work there -- but every place is a backwater hellhole before they develop. Yes, Tsarism was bad, but plenty of regimes were bad in the 19th century.

I'd never really considered the possibility that all those supposed gains under Stalin didn't actually happen and in fact made things worse. It puts a new spin on the Cold War races for economic, military, and technological superiority.

I'm not sure I fully believe the two-sector growth model the authors use, which is pretty standard as these things go, but even the descriptive evidence is useful.

P.S. Here are some pictures of Soviet life in the 1950s.

*Terry Eagleton is of this sort, in his execrable recent book which manages to both misunderstand Marx and his critics at the same time. One relevant bit is quoted here.

Tuesday, May 28, 2013

The 2013 Warwick/RIPE Debate

. Tuesday, May 28, 2013

You can find the video here. The main figures are Cornelia Woll -- one of the editors of the Review of International Political Economy -- and John Hobson -- who has two historiographical articles [1, 2] on IPE in the 20th anniversary issue of RIPE.*

It's an interesting discussion of the sort that you would never hear in most mainstream American IPE departments. Perhaps for that reason they could have done more to highlight criticisms of OEP from within the American IPE tradition (other than Cohen), especially since the stated mission of RIPE is to promote a dialogue among the various strands of IPE. Obviously the Reductionist Gamble is what I have in mind, but it's not the only one. This "debate" did basically none of that.

One of the questioners kind of got at this. If RIPE is going to be heterodox, then what does that mean? Just a constructivist alternative to the rationalist approaches published in IO? Woll said that she didn't know what the orthodox was so she couldn't be sure of what the heterodox would be, but earlier she singled out OEP particularly. Hobson drove that nail in. So then the heterodox would just be anything that isn't OEP? It's not clear.

Neither Woll nor Hobson even hinted at the possibility that a broadly positivist alternative to OEP was conceivable, or that it could be an ally for non-positivist approaches. This is (a) problematic.

On Hobson's presentation I have two thoughts: a) He is almost surely correct about the history; b) I'm not really sure how much that matters for forward-looking analyses. But I'll need to read the articles first to be sure.

*The issue has not been released yet, I don't think, but Hobson's contributions are available on early view at the links above.

Friday, May 24, 2013

US-EU Trade Negotiations Are Not Driven by Ideational Factors

. Friday, May 24, 2013

Reading this update on the possible US-EU trade deal that Sarah and I wrote about previously, I am struck by two things:

1. French film subsidies are not going to ruin the chances of a deal, particularly since the US film industry takes advantage of tax credits and other subsidies as well (albeit at the state level, not the federal level). I have no idea why the FT led with that, except that . The biggest potential roadblock for this deal has always been agriculture, and it remains agriculture. That said, even these issues can be overcome. US agriculture wants to sell GMOs and hormone-pumped meat to Europe. Europe doesn't want that, and is unlikely to change its mind. So? Currently, EU law bans European growth of GMOs, but allows some imports. This is an okay position to be in for American farmers which grow GMOs. So all that has to happen is that the status quo is maintained, and this issue can be resolved as well.

Some of the rest of this just sounds silly. US wants Europe to not insist on "geographical indications" being allowed on cheese? I presume this means labels such as "A Product of France". This, again, is an issue which can be overcome fairly easily: just remind American cattlemen that if this becomes a precedent they won't be able to advertise "U.S. beef" and they'll balance the cheesemakers' right out.

2. Nothing in the proceedings suggests that the ideational turn in IPE studies of trade politics is beneficial for understanding real-world events. Instead, we see interest groups lobbying their representatives to get their concerns on the agenda, while the broader public barely notices. We see these groups forming along factoral and sectoral grounds, just as we'd expect. The standard materialist story works far better than... whatever sociotropic story is supposed to have replaced it.

*Yes, the link in that sentence goes to something called Beef Magazine. No, I wasn't aware that existed until now.

Thursday, May 23, 2013

A National Disgrace

. Thursday, May 23, 2013

How is this even possible? Canada is advertising in Silicon Valley the fact that they're giving away visas and otherwise incentivizing highly-skilled immigrants to go to the land of milk and honey doughnuts and syrup, while the U.S. refuses entry. And the "pivot" language indicates that they are targeting Asians particularly, which is a part of the trans-Pacific diplomatic project.

So, so stupid.

P.S. In case it isn't clear, this post should be read as complimenting Canada.

(Ht somebody on Twitter.)

Monday, May 20, 2013


. Monday, May 20, 2013

Corey Robin has written a long article arguing that Austrian economic thought and marginalism in general is descended from Nietzsche. Hence, Hayek et al are a bunch of aristocrats dedicated to oppressing society. I'd be happy to be persuaded that the marginalists -- at least as Robin uses the term, which isn't the only way -- are Nietzschean, but Robin's article didn't do it. Too many strong assertions based on tenuous evidence, and Robin is not exactly an impartial observer. This follow-on John Holbo post -- while exceptional in many ways -- doesn't do it either. Partially because it rests so heavily on a peculiar (I think) reading of this quote from Hayek in The Constitution of Liberty:

To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.

This does not have to mean that "some people’s freedom is a lot more valuable than other people’s freedom", as Holbo wrote in a previous post and quotes here. In light of the rest of Hayek's work (or even the rest of the passage from which this quote is pulled: see below) it is strange to argue that this passage means anything like what Holbo thinks it means: "Ideally, we would find that one man and even make all others his slaves, if that is what it took to let him exercise his freedom to the fullest. Hayek thus affirms a freedom monster argument somehat analogous to the classic pleasure monster reductio."

The Hayek quote refers to the exercise of liberty, which may not be universal even if the liberty is extended universally. Hayek is arguing that it does not follow from the fact that the exercise may be non-universal that the liberty should be restricted. Instead, those who would exercise their liberty should be free to do so. In fact, there are a million liberties. None of us can act on all them, but all of us will act on some of them. Restricting liberties that the majority isn't exercising may be tempting, but it would be wrong to do so since the exercise of liberties leads to the improvement of society. That's the argument.

To get from Hayek to Holbo's interpretation of Hayek you have to take a few steps. First you'd have to ignore the footnote on the very passage Holbo pulls, which contains this quote (from some people I've never heard of): "If there is to be freedom for the few who will take advantage of it, freedom must be offered to the many." How does that imply enslavement of the masses for the benefit of one? Suppose I proposed universal suffrage while acknowledging that many people will stay home on election day. Would that make me anti-democratic? It's a strange argument.

Hayek believes that social progress occurs partially through experimentation, the results of which are ex ante unknowable. The "unknowable" part is extremely important for Hayek. It's how he can simultaneously support a welfare state and public provision of public goods while opposing egalitarian redistribution and social ownership of the means of production. "Knowable" advances can be socially planned, and Hayek was fine with using the power of the state to do so. ("It is the character rather than the volume of government activity that is important.") Unknowable advances cannot be planned but are nevertheless desirable, thus experimentation must be allowed through constitutionalization and encouraged by the preservation of (market) reward for experiments that succeed. Holbo is correct that this is Millian -- J.S. Mill's "utilitarianism" is dynamic, not static: society benefits at time t+1 from the exercise of individual liberty at time t. Whether this is actual utilitarianism or something else is, I suppose, the question -- but wrong when he implies that Mill, by way of Hayek, was Nietzschean.

Hayek seems to believe that the majority of society will choose not to experiment because they are risk averse -- "The freedom that will be used by only one man in a million..." emphasis added -- or because they are exercising some other liberty, but it is socially optimal to have somebody doing some experimenting. Those who are interested in doing so, those who will exercise their liberties while others do not, should be allowed to do so, since society will benefit if they succeed. The rest of the passage in The Constitution of Liberty quote above goes:

The less likely the opportunity, the more serious will it be to miss it when it arises, for the experience that it offers will be nearly unique. It is also probably true that the majority are not directly interested in most of the important things that any one person should de free to do. It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of of freedom could also be achieved by the majority’s deciding what should be done by the individuals. But the majority action is, of necessity, confined to the already tried and ascertained, to issues on which agreement has already been reached in that process of discussion that must be preceded by different experiences and actions on the part of different individuals. 
The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important for me. It is certainly more important that anything can be tried by somebody than that all can do the same things… What is important is not the freedom that I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.

How can one (e.g. Holbo) read this and come away thinking Overman? It's more like the open source movement. Which makes sense, since Hayek's view on this goes back to his 1945 essay "The Uses of Knowledge in Society". He argues there that because much knowledge is local, and centralized planning cannot incorporate local knowledge, that centralized planning will fail. This argument is what he's drawing from to say that the exercise of liberty by some -- who are in possession of local knowledge not available to all -- is not suboptimal.

Now, possibly you could argue that Hayek's view of the masses is too dim (even though he includes himself in them) and that is where the aristocracy comes in and takes us to Nietzsche. Or possibly you could argue that the "knowable" advances are greater than the "unknowable" advances. Indeed, this is the argument against which Hayek dedicated himself to in writing The Constitution of Liberty, which was published in 1960 -- a time after Sputnik when Paul Samuelson was predicting that the USSR's GNP per capita would surpass the US's within a generation or so -- so you'd at least be meeting him where he is. The question Hayek is trying to address is whether society will benefit more from planning or from spontaneous emergence. He obviously believes it is the latter. He may be wrong, but not because he's a Nietzschean.

The better argument is the one made by Amartya Sen: it is not necessarily local knowledge which precludes some from exercising certain liberties, but rather material opportunity. It may not be that some will not exercise their ability but that they cannot do so. In this case they are not free. Hayek says almost nothing about this directly, but does say that just because some are free does not mean that all should be enslaved. Those who can exercise their freedom should do so, as this will provide benefit for society.

This is the point, I think, that Hayek goes astray. His argument about the importance of local knowledge and decentralization falls apart when those with local knowledge cannot employ it and opportunity is centralized. His claim that innovations by the few will benefit the many is empirical: sometimes they do, often they do not. His argument that order is spontaneous is contingent, in other words, not a law of nature. Complex systems can, and do, break down. To simply admit does not require giving anything else up.

But, again, this is not Nietzschean. Which is why Objectivists do not like Hayek. This is an argument that Hayek should revise his beliefs to include a role for a marginally bigger -- although not fundamentally different -- state, or some other redistributionary apparatus. This is doable using Hayekian language, even if Hayek himself and many of his supporters recommend a minimalist state. Hayek is reconcilable with somewhat-modest forms of social democracy, in other words, and social democracy is reconcilable with a deregulated-but-redistributionary political economy.

But to do that you'd have to admit that Hayek was not quite a moral monster. Corey Robin is dedicated to showing that the right wing is authoritarian in all its guises. He believes that when Hayek writes "Why I Am Not A Conservative" he simply cannot be trusted: he's a reactionary like all the rest, and all the rest are motivated first and foremost by a lust for exploitation and oppression. There is nothing inherently wrong with this intellectual project, and I've learned a lot by following it. But it is inherently limiting at the same time, and it commits one to answers before questions have even been asked.

Friday, May 10, 2013

The Conservative Left

. Friday, May 10, 2013

Henry Farrell's article on the plight of European democracy in the face of "technocratic" management is very good reading. 

Tangentially related is this bit from Thatcher making a similar argument ex ante

Which is not to say she was anti-Europe. She wasn't. Alex Harrowell put it well:
[T]he European Union has not turned out to be the nice alternative to Thatcherism it was sold as in the 1990s. ... 
The policies it delivers – open trade, austeritarian macro-economics, open capital flows, no real redistributive budget, and a permanent war on inflation – are basically nothing Margaret Thatcher would not have welcomed. ... 
Thatcher was a European; it’s Europe that’s the problem.
Except that Thatcher rejected the central bank, which is Europe and thus the problem. Harrowell says truthfully that the UK was pegging to the German mark for much of Thatcher's tenure, but that was a choice which was easily reversible (and was in fact reversed) as soon as it became disadvantageous.

The longstanding left political project -- internationalism plus a strong welfare state funded by capitalism -- contains as many contradictions as capitalism itself. So what's the left to do? It's adopting the tone of the right. By the end of his life Tony Judt couldn't really be more conservative. Farrell's essay suggests that this is the only plausible path forward, and it's not a good one.

Tuesday, May 7, 2013

There Is No Technocracy: Stop Worrying About Aggregate Demand

. Tuesday, May 7, 2013

Is "aggregate demand" really what anyone cares about? I don't think so. We care about the quality of peoples' lives. And new research is starting to look at what sorts of fiscal policies matter for improving well-being whatever the macroeconomic aggregates say. Evan Soltas describes some of this work and interviews the authors:

Tax revenues fall automatically in recessions, and governments back that up with lower tax rates and/ or new credits and deductions. On the spending side, extra outlays on unemployment benefits and other transfers greatly exceed extra outlays on infrastructure and other purchases. This modern kind of fiscal stimulus is supposed to work by stabilizing disposable income. Stabilize that, the thinking goes, and you stabilize output and employment. 
But is that right? In a new working paper, Ricardo Reis of Columbia University and Alisdair McKay of Boston University say no. They find that stabilizing aggregate disposable income plays a “negligible role” in stabilizing the economy as a whole. Transfer payments can indeed stabilize output, they find, but mainly through a different channel -- not by changing disposable income in the aggregate, but by changing its distribution. Fiscal policy, in other words, is all about inequality.

“It’s the redistribution that has a lot of kick,” Reis said in an interview. “The usual argument for transfers is basically Keynesian. We find that has very low impact in our model.”
More on the fiscal side here. What about the monetary side? Marc Chandler, a Wall Street manager writing in the Jacobin, describes the relationship between monetary policy and distribution.
Central bank independence was never what it was cracked up to be. During “normal” times, central banks protected the interests of the owners of capital. Paul Volcker is often cited as the epitome of the independent central banker, but surely his tight monetary policy, justified in terms of some technocratic money supply target created winners and losers. The owners of capital were among the winners, while those who did not own capital were losers (through such things as higher unemployment and downward pressure on real wages). ... 
The setting of monetary policy was never simply a technocratic exercise as the [central bank independence theory] pretends. There were always those interests that benefited and those who did less well. Few cried of a loss of central bank independence, for example, when the Bundesbank would threaten tighter monetary policy in reaction to unions seeking a sharp increase in wages.
Much more here. Both the commentariat and academia have focused too long on the supposed technocratic features of policy: whether unemployment is at its "natural" rate, whether output is at "potential", whether central banks are "independent", whether inflation is "low and stable". None of these concepts exist in nature. None of them are even definable quantitatively, although they may be described quantitatively. Hence, they are not scientific concepts but terms of art with important distributional ramifications.
I have a paper forthcoming which looks at how banks respond to monetary arrangements. It turns out that monetary politics goes well beyond central bank independence. I'll post a link when it's available.

International Political Economy at the University of North Carolina: 2013




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