The 2013 Warwick/RIPE Debate

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.

When Is Reductionism Not Appropriate in Theory?

In "The Reductionist Gamble" Oatley actually makes a weak argument: we can't know when outcomes we observe are independent from each other (what he calls data-generating process (DGP) "A") and when they are not ("DGP B"). In Oatley's framework assumptions regarding the DGP may be trivial in many cases even if they are not always trivial. Oatley, in other words, is arguing that our inability to directly observe the data-generating process should make us humble and encourage us to investigate international politics under a range of assumptions regarding the DGP. Instead, IPE -- at least as it is represented in the APSR and IO -- has honed in on one: the Open Economy Politics (OEP) paradigm, which he calls "reductionist" because it assumes independence of observations, both theoretically and methodologically, and because it recommends beginning analysis at the lowest unit-level (individuals or firms), while bringing in systemic effects only when necessary. Oatley argues, persuasively, that in some cases the assumption of independence will be false, and when it is false the reported empirical results are not reliable.

In my view this argument should be uncontroversial. Oatley is not saying that all OEP research is wrong, nor that most of it is; he's merely saying that OEP contains a critical assumption which ought to be justified more regularly than it is. This is Research Design 101. Since it is not, there is a strong likelihood that some unknown percentage of OEP research has been done under false premises, and is therefore biased in an unknown direction. Oatley re-estimates several empirical models central to the literature, while adding terms which allow for conditional "systemic" effects, and finds that the reported results are called into question.

I'm going to make a stronger argument, in speculative form (i.e. I'm trying to be a bit sensational): almost all of the theoretical traditions in IR/IPE suggest DGP A is not a trivial assumption, but most of our research designs go on to assume DGP A anyway. My argument is that, in the typical case, our empirical design does not match our theoretical structure.

Regarding Oatley's post (and article), it might be helpful to think of some of the major theoretical orientations in IPE -- within which mid-level theories are ostensibly embedded -- and place them into different bins: those which assume independence of observations (DGP A) and those which assume non-independence of observations (DGP B). For these purposes, "observations" refers to realizations of some outcome at a given unit of analysis. The outcome could be "amount of trade" or "incidence of war" or "occurrence of a financial crisis". The unit of analysis could be states, firms, or advocacy groups. To greater or lesser extent, all of the prominent grand theories involve an assumption of non-independence: DGP B. David Lake (and presumably other OEPers) hate isms so this might not be of interest to them, but it's useful as a starting exercise.

1. Various realist theories suggest that states will modify their behavior in response to the international environment within which they operate. In particular, state behavior is conditional upon the underlying distribution of power in the system. If that is the case, then treating states as if they are realizations of independent and identically distributed observations is not theoretically sound: the behavior of state A is reactive to the behavior of state B, and is contingent upon the underlying distribution of power in the international system. Economic coercion, "redistributive cooperation", the structure of trade, and other outcomes are responsive to interactions between states.

2. Institutionalists argue that the behavior of international actors is modified by the ways in which they interact. Membership in common organizations -- e.g. the WTO -- can have an impact on common outcomes -- e.g. increased dyadic trade -- even after controlling for domestic factors. The US, for example, does not decide how much it should trade based solely on local factors; how much the US trades depends at least partially on its ability to find willing trading partners. This logic is easily extended from dyadic relationships to systemic relationships: the amount that the US trades with France may not be independent of the amount that the US trades with the UK, by virtue of the common membership of the US, UK, and France in organizations which are designed to facilitate trade. In this way, we are starting to understand that even pairs of states are not independent from other pairs of states, much less individual states. Indeed, even the most vigorous findings in a dyadic context -- such as the democratic peace -- often have trouble holding up in a systemic analysis.

3. Varieties of constructivism also think in terms of DGP B. The identities, beliefs, and actions of agents cannot be understood outside of the social structure within which they exist. For constructivists, interests are not assigned according to immutable materialist Laws of the Cosmos, but emerge via processes of interaction. Thus, it is nearly impossible for constructivists to theorize about social actors and entities as if they existed independently from one another.

4. In its most basic form, which has obviously been complicated in thousands of ways, Marxists believe that the material conditions of society lead to exploitation and imperialism, and that this is a global phenomenon. E.g., the exploitation of labor in the global South is a necessary component of the enrichment of capital in the global North. It is thus impossible to explain the outcomes in the "base" of society -- e.g., employer-employee relations -- without reference to the "superstructure" of society -- its organization of political power. Because capitalism is a global phenomenon, the superstructure is itself global in nature. Therefore, employer-employee relations in Britain are not independent of the British imperial exploitation of the Indian subcontinent. Treating the two as if they were same misses the entire point of the theory.


5. First wave IPE was concerned with "complex interdependence". The name itself implies that an assumption of independence of observations is not warranted (even though its authors didn't generally argue in those terms), and that patterns of dependency will not be simple or monotonic. There were varying types of interdependence that Keohane and Nye were concerned with. Among them was the non-independence of the economic system from the political system; the impact of transnational nonstate actors in influencing power politics; the effect of international integration on the formation of states' perception of interests, the effectual nature of international institutions, etc. There is no contemporary research paradigm centered on complex interdependence (yet), but this rhetoric has colored IPE theory ever since the 1960s. In a recent essay, Robert Keohane professed some nostalgia for the "Old IPE", which focused on complex interdependence, over the new IPE which assumes it away (at least methodologically). He expresses hope for the future by way of diffusion and network analyses; methods which do not assume unit independence:

[T]he null hypothesis that national governments make decisions independently is not sufficient to explain the spread of liberalism or of convergence in certain sectors. Competitive pressures seem to play a major role, and there is some evidence, less clear, that coercion, learning and emulation also are significant factors. In other words, the distinctively international and transnational processes studied by IPE have to be brought back into the picture. 

Moving to theoretical orientations which are often thought of as being "middle range", and thus in the wheelhouse of OEP, we can consider:

6. Theories of globalization posit non-independence in many ways. "Golden straightjacket" and "race to the bottom" models believe that global forces coerce national governments to behave differently than they otherwise would, largely in response to market structures and the nature of strategic interactions with other states as well as market actors. Even careful studies which have complicated these accounts have concluded that policymaking at the national level responds to international developments in strong, if narrow, ways. Other theories of globalization focused on cultural hegemony, homogeneity/"Americanization", and a diffusion of norms and practices across countries all argue that what happens in Country B is not independent of what happens in Country A. That assumption is a necessary component of DGP A.

7. The long tradition of dependency theory obviously requires non-independence. Some read Oatley's "Reductionist Gamble" (and a subsequent article forthcoming in Perspectives on Politics) and thought he was advocating for a return to dependency theory, because of language like "core" and "periphery". That's not unreasonable, although I don't know if Oatley would claim the mantle. Dependency theory has been making a comeback in other corners of mainstream IPE as well.

8. Many developments in trade theory suggest that a focus on domestic factor endowments and political institutions (as exogenously-given) are missing a lot of the picture. New trade theory in economics suggests that scale economies play a major role in determining the type and size of trade, quantum trade theory argues that "beachhead costs" and other factors influence how and why governments might invest in trade-generating policies. We've employed gravity models which explicitly assume that the probability of trade relationships forming is not equal across all observations (while only allowing for several forms of dependence, especially proximity and the size of a state's internal market. We're beginning to look at how the structure of trade networks impacts the establishment of future trade. All of the major advancements in economic and political theories of trade over the past three decades have been at the expense of an assumption of independent and identically distributed observations. All of our theoretical improvements, in other words, make it harder and harder to assume DGP A.

9. Transnational financial flows also involve complex processes which make independence a questionable assumption. How do countries get "lumped in" to categories by investors, so that what happens in Thailand has an effect on Indonesia? How does petrodollar recycling lead to a crisis in Brazil? How might US Federal Reserve policy have influenced the Arab Spring? How could a collapse in home prices in the US threaten the existence of the European Union? All of these questions require a theoretical structure which assumes non-independence: DGP B.

I could go on, but I'll stop here. The point is that it's hard to think of a major theoretical orientation -- whether "grand theory" or "mid-range theory" -- in IPE that establishes DGP A. And yet the dominate research paradigm -- open economy politics -- explicitly argues in favor of such an assumption. There is a disjuncture here.

I believe this is why does an article like "The Reductionist Gamble" resonates with some and infuriates (or confuses) others. Why should such an article exist in the first place? How did we get to this point? That will be the subject of my next post.

Room to Move (Redux)

Layna Mosley, one of my professors at UNC, has a piece in Foreign Affairs on the European sovereign debt crisis. In a sense she's come back around to her dissertation work, in which she argued that international investors care much more about outcomes than the particular policies used to generate those outcomes, or things like the partisan composition of governments. Turns out that she was pretty much right about that, at least in the case of Europe.

She has two primary points. The first is that the composition of debt maturity matters quite a lot; a lot of short-term debt means a lot of servicing, which means a greater sensitivity to short-run developments. The second is that investors don't have nearly as much influence on government policies as most commentators ascribe to them. What influence they do have is, again, over outcomes rather than the particular decisions used to reach them. So yes, investors prefer lower debt levels, but they don't particularly care whether fiscal probity is achieved via spending reductions or taxation. Mosley previously referred to this relationship as giving governments "room to move": so long as they stay within certain parameters -- mostly relatively low/stable inflation and relatively low/stable debt levels -- governments have quite a lot of latitude to pursue other policies without being punished by investors.

It's a good piece with valuable lessons. Read it.

Being Relatively Unconcerned About Concerning Things

Blogging has been non-existent the past few days because more pressing work has taken precedence. One such thing was an essay (with Thomas) for ForeignPolicy.com on why we should all be more blase about the Greek situation. It's very counter to the sort of convention wisdom that you can find here (other examples cited in our article).You can read it here. Our central claim:

Further economic and financial deterioration in Greece would certainly have negative impacts there and might adversely affect Greece's southern European neighbors, who are facing similar circumstances. But financial weakness in Greece is unlikely to spark a global crisis analogous to the one triggered by Lehman Brothers' collapse in September 2008 -- even if economic woes eventually force Greece to exit the monetary union. Instead, the global consequences of southern Europe's debt crisis are more likely to resemble the Latin American sovereign debt crises of the early 1980s, the East Asian crises of 1997-1998, and Argentina's crisis at the turn of the millennium. Each of these had significant local effects -- widespread bank failures, sharp increases in unemployment, large exchange-rate devaluations, deep recessions -- that were not transmitted globally. Indeed, in each of these cases the global economy continued to grow, major world equity markets held their value, and world trade expanded. None had the dramatic global consequences sparked by Lehman's collapse.

We're already getting some pushback -- as we have from the underlying research that informed this piece -- such as this from Dan Drezner:

I think you understated the global impact of the 1997 East Asian crisis. I'd rather avoid another one of those.

On the one hand, I agree: I'd rather avoid another one of those, although I don't know how that's possible. On the other, I don't think we understate the global impact of the E. Asia crisis. I think many people dramatically overstate it. The period during which the E. Asian crisis occurred -- the late 1990s -- is associated with one of the largest periods of global economic growth ever. These days we look back on it with nostalgia, and wonder how we can do it again. The E. Asian crisis was a crisis for E. Asia, but not so much for everyone else. I think it's likely that the S. European crisis will be the same. Actually, given the slow-motion nature of the thing, I think it's likely that the S. European crisis will be even less of an event.

We may soon see. I hope we don't. 

There Is No Technocracy, Bank of Japan Edition

Scott Sumner:

My view (and that of many other market monetarists) is that the Bank of Japan acted as if it didn’t want inflation, tightening policy in 2000 and 2006, despite no inflation. In my view the press and many economists were somewhat naive in accepting the BOJ’s claim that there was little they could do to end deflation. After all, the yen is a floating fiat currency. ... 

I used to wonder why the BOJ tightened so much in late 2006, raising interest rates and reducing the monetary base by 20%. Another Financial Times story gives us the answer: 

In recent years, the bank has tended to shrug off overt political pressure. A 1998 revision of the BoJ law strengthened its operational autonomy by removing the government’s authority to dismiss the governor and deputy chiefs.  

Only under prime ministers with very solid popular support, such as Junichiro Koizumi between 2001 and 2006, has the BoJ appeared to bend to the government’s will. It has put up a particularly strong defence of its independence under Mr Shirakawa, promoted from deputy governor in 2008.

This is a common theme on this blog. Hopefully others are starting to internalize it. For some reason this particular post and discussion reminded me of this old article (pdf) of Oatley's on the politics of central banks. For my money the best articles on the politics of "technocratic" institutions have yet to be written. There's a good bit of fruit still to be harvested from there.

Paradigms in Political Science

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.

We Won An Award!

Well, not "we". Thomas did. And not an "award" per se, in that there's no cash or statue or anything. But Thomas was just given a prestigious "Albie", named in memory of the great Albert Hirschman (whether A. H. would approve or not), by Dan Drezner, for his article "The Reductionist Gamble". In Drezner's words:

The Albies are awarded to the best writing in global political economy for the past calendar year. The writing can be in a book, journal article, think tank report, or blog post -- the key is that the article makes you reconsider the way the world works.

Thomas's article was listed second in the "no particular order" list, but it was the only article published in a top academic journal on his list -- there was a think tank paper and a UP book as well -- so in terms of importance for the discipline of IPE it in some sense stands alone. Last year, I believe, no academic IPE pieces made Drezner's list.

In my opinion this article should be on every IPE syllabus from the advanced undergrad level on up.

The link Drezner provided to the article is gated; an ungated pdf is here. The logical extension of that article is to forge a new IPE paradigm. Or, as I believe, to try to re-unify the open economy politics paradigm with the "complex interdependence" focus from IPE's early days, using more rigorous empirical tools. I think that's the track that Thomas is currently pursuing in his work, and it's the primary epistemological motivation for my dissertation as well.

So, congrats Thomas!

Why Hasn't Academic IPE Had Anything to Say About the Crisis?

Thomas Oatley, who started this blog and still contributes every other month or so, has a guest-post at the Duck of Minerva answering Dan Nexon's question of why no articles of relevance to the global financial crisis have been published in International Organization, the flagship IPE journal. Here's his conclusion:

In short, I would argue that no articles directly relevant to the financial crisis have appeared in IO because the field attaches little value to studying the US crisis in isolation, and the banking crises with which it might share common properties are so infrequent that statistical techniques are unlikely to identify general relationships. As a result, an event of supreme global importance gains very little attention from American IPE scholars.

Kate Weaver -- editor at RIPE -- posted Thomas' contribution at DoM and had some good thoughts of her own. Mark Blyth also had a response. Gist:

Others can talk about intellectual hegemony and the like, but as someone who has sat on a board for many years, I can say its the submissions or lack thereof the is the real killer. Why aren't IPE journals publishing crisis work? Possibly because no one is submitting it? Or because its much more bang for the buck and much faster to publish in Foreign Affairs or on line? ...

The fundamental problem is that IPE imagines a world quite unlike the one we actually inhabit much of the time. As a consequence when we are asked to comment on the world we actually inhabit, we have little to say.

My comment on Nexon's original post was basically what Blyth said: according to Louis Pauly, one of IO's editors speaking at this year's ISA meeting, there haven't been any submissions related to the GFC. It's hard to publish on a topic when you don't have any submissions. In comments to Nexon's original post, Len Seabrooke -- also an editor at RIPE -- said that the lack of submissions is self-selection, and that academics interested in influencing policy are unlikely to look for publication in an academic outlet like IO first.

More generally, this is a marked shift from IPE's early days when the field was focused around questions of complex interdependence. The shift away from that sort of research has been mostly pragmatic and for mostly good reasons, but it isn't unreasonable to think that something has been lost. Robert Keohane called this the "suppression of the 'I' in IPE", and views it with a "gnawing sense of dissatisfaction". It seems that a growing number of scholars feel similarly.

*Capitalizing on Crisis*

I'm going to try to stay with OrgTheory's book forum on Greta Krippner's book. This appears to be an article version. Krippner has been doing research on this since at least 2005. Here's the author's book summary:

In the context of the current economic crisis, the extent to which the U.S. economy has become dependent on financial activities has been made abundantly clear. The conventional explanation for this development – a process I refer to as “financialization” – is that the U.S. economy has been in the grip of a speculative mania that has swept firms and households alike into its vortex. In my book, I take a somewhat different perspective, suggesting that recent developments in U.S. financial markets rest on a broader transformation of the U.S. economy, with deeper historical roots, than a focus on speculative bubbles allows. This is not to deny that a financial bubble developed in the U.S. economy in the 1990s and 2000s, and that it has shaped (or more aptly, distorted) patterns of accumulation in the U.S. economy. But I argue that an examination of processes internal to financial markets is incomplete as an account of the turn to finance, and that these processes must be understood in the context of wider shifts in the political, economic, and social environment. In this regard, my central thesis is that our own era of free-flowing credit, financial manias and panics is the result of a state-organized response to the economic crisis of the late 1960s and 1970s. More specifically, I argue that state policies that promoted the turn to finance allowed the state to (at least temporarily) avoid the economic, social, and political difficulties that observers at the time believed would soon overwhelm policymakers. Thus, the creation of a policy environment conducive to financialization was not a deliberate outcome sought by policymakers but rather an inadvertent result of the state’s attempts to solve other problems.

Bold added. The book is sociology, but the interesting thing to me is how much the central argument dovetails with research in other disciplines. For instance, Cowen's "Great Stagnation" hypothesis, Rajan's political economy of credit access as inequality palliative, the divergence between income and consumption inequality (pre-crisis at least) that was partially due to increased credit access. Herman Schwartz has a book chapter in Konings' Beyond the Subprime Headlines. Here's one selection:

Put simply, America’s ability to securitize large quantities of mortgage debt and sell it into global markets enabled the US economy to temporarily escape the normal economic constraints, to grow faster than its peer competitors, and to expand its firms’ control over global production chains. These three conditions restored US global economic power after the troubling 1970s and 1980s.

His book expounds on the argument. All of these narratives complement the Blyth/Taleb argument that moderating risk by shifting it into the tail compounds crisis in the end. It also is reconcilable with various accounts of how the "Greenspan put" interacted with loose monetary policy in bad ways.

The story that appears to be emerging is one in which policy makers try to mitigate the effects of a stagnating economy, in which real income growth is low and unequally distributed, by encouraging improved standards of living through financialization. In essence, the government encourages the levering up of the economy, and financiers are happy to go along because it means big profits for them. The Greenspan put gives them some security, too. Citizens may have preferred broad real wage growth, but access to cheap credit provides opportunities for increased standards of living in the absence of that growth.

As I said, I haven't read the book yet, but I'm looking forward to seeing how well it pulls strands like the above together.

7 Year Old Politics

Henry Farrell goes after me over this post, and says he'd rather be an unsophisticated 6 year old than... whatever I am. Dan Nexon seconds the motion. Really Farrell's making a much bigger point about IPE and is using me as an illustrative case. He's written about this before.

This puts me in a weird position. I tossed off that post, mostly because I was short of time and because Krugman perpetually annoys me. The point of the post was intended to be that Krugman's constant moralizing doesn't get us anywhere, not even as far as the most basic view of democratic politics. The point was not that the most basic view is the right one. I tried to caveat a bit ("first approximation", "doesn't always work"), but that obviously didn't get across. So I guess Farrell's response is just desserts for being lazy. I'll try to flesh out what I meant better in this post. While I don't want to run away from what I wrote, much less what I intended to convey, I also don't want to get the shit kicked out of me for something I don't really think. So this will be at least as long as Farrell's post, and much longer than Nexon's.

As (I think) Farrell knows, I agree with many of his points about IPE in general. I agree that IPE does a very poor job of explaining preference aggregation, and a pretty poor job of preference formation (although, ideally, we could just import at least some of that from comparative politics). In fact, I'd extend it: I think IPE has a generally poor view of the political space, and like other subfields of political science is too reductionist. I agree that IPE does not have a very good sense of how interest groups and elites influence policy in democracies. I agree that we should pay more attention to subfields that examine these questions in detail. As he says, IPE generally infers preferences from economic theory, then applies some crude form of the median voter theorem (if that) to explain outcomes*. IPE generally assumes (implicitly) that voters are fully informed, and actually care about whatever issue we happen to be studying.

This is lazy even when it's not entirely wrong, and a big part of my dissertation is dedicated to more rigorously exploring how interest groups shape policy in a global context. So, as a jumping-off point, I don't mind him taking me to the rails. Except. He's writing this in defense of Krugman's purely elite-driven take. Here's what Krugman says:

The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious. And by trying to shift the blame to the general populace, elites are ducking some much-needed reflection on their own catastrophic mistakes.

Here's what Farrell says:

On many important policy issues, the public has no preferences whatsoever. On others, it has preferences that largely maps onto partisan identifications rather than actual interests, and that reflect claims made by political elites (e.g. global warming). On others yet, the public has a set of contradictory preferences that politicians can pick and choose from. In some broad sense, public opinion does provide a brake on elite policy making – but the boundaries are both relatively loose and weakly defined. Policy elites can get away with a hell of a lot if they want to.

These are two very different statements. On the issues we're talking about -- tax cuts, Iraq war, prescription drugs covered by Medicare, housing policy -- the public did have pretty clearly identifiable preferences about policy, and those happen to map onto policy debates (and resulting legislation) fairly well**. As I linked in the prior post (via Drezner), a majority of the public supported the Bush tax cuts and the Iraq war. The former represented the biggest policy proposal of Bush's 2000 campaign, the latter represented the biggest policy proposal of his 2004 campaign. He won both of them. (Okay, only kind of won in 2000.) Moreover, the public's representatives in the House and Senate voted for both policies.

Now we could believe that public preferences had nothing to do with the Bush tax cuts becoming law and the Iraq war being prosecuted. But then how to explain how a number of other policies supported by the same elites but not the public during the same period -- Social Security privatization, immigration reform, invading Iran -- did not become law or practice? If we're to discard polls and the votes of representatives, how else are we going to get at the public's preferences to know whether they're relevant?

That's not to say that elites don't have a huge role in shaping public opinion, crafting the specific nuances of policy, or even that they have quite a lot of flexibility to shape policy to their own ends. Of course they do. Legislation is written by elected elites, who are influenced by unelected elites and interest groups within their states/districts. One casual glance at trade law is enough to convince anyone of that. Medicare Part D gets closer to Farrell's last sentence. The public supported coverage of prescription drugs by Medicare. It seems likely to me that the public did not have strong preferences over precisely how that happened, other than that they would prefer not to have to pay higher taxes. So what we got was an unfunded bill that catered strongly to the interests of the drug industry. Similarly, the public supported tax cuts. The particulars of the Bush tax cuts met that demand, but in a way that also privileged powerful interest groups and likely Republican voters (see the cartoon in the Bartels paper Farrell links to). There is nothing in the Hacker/Pierson or Bartels studies that Farrell cites that disputes this interpretation***.

But here's the key point: the policy space that elites use to manipulate for their own ends does not exist without the broad support of mass publics****. Or, as Farrell says, "It is fair to say that the Medicare changes began in a shift in partisan patterns of competition over issues. However, it surely didn’t end there." No argument from me. That, however, is not what Krugman argues. He claims that the public had nothing to do with it at all. That this is purely a top-down disaster. This view is disputed by the Campbell and Morgan quote that Farrell reproduces:

More generally, gaining the support of powerful interest groups was essential in passing a reform that was likely to garner little Democratic support and was viewed skeptically by more conservative Republicans.

Right, but this was only important because the public wanted Medicare to cover prescription drugs in the first place. If they hadn't, a bill that both Republicans and Democrats were ambivalent about is unlikely to have become law. To gain passage, and thus satisfy the public demand, it became necessary to craft a bill in such a way as to get the necessary support from powerful interest groups. But that doesn't negate the public's interest in reform along the broad lines that reform occurred. A very similar process occurred during the PPACA ("Obamacare") deliberations.

Near the end Farrell writes:

One can certainly make a reasonable case that electoral politics plays a more important role than Krugman acknowledges. But one cannot make a good case that policies of the kind that Winecoff describes are a simple reflection of public preferences.

This where Farrell is misreading me. (And, I think, Drezner.) We're not saying that the public was perfectly represented, much less "reflected". Indeed, I think such a statement is all but meaningless. Drezner has written a book about how interest groups dominate regulation of the economy, particularly in highly-technical areas in which the public is unlikely to have much information or strong preferences. We're both very interested in how power and influence is filtered through political institutions/interactions. I'm just saying, contra Krugman, that mass publics are part of that equation. After linking to a bunch of surveys showing that the public broadly supported the policies Krugman says they had nothing to do with, I wrote in my post, "This [reference to public opinion] might not work all the time, but as a first approximation this sort of thinking holds up fairly well". Or, at least, to entirely excuse the public from the outcomes of policy you should first have to show that they didn't create the political space for those policies to be enacted. Krugman can't do that. That's the point.

(As for housing policy, I'd refer Farrell (and anyone else interested) to the CPE/IPE research done by Seabrooke and Schwartz (also here and this special issue of Comparative European Politics). Ragu Rajan has argued that the rise of credit was encouraged by policymakers to offset stagnating median wages. Oatley has an argument that "what we're experiencing right now" is a result of a number of macro policies, operating within an international context, that both elites and the public broadly supported, culminating in disaster. I think, though I've done no research to back it up, that home ownership was encouraged by major public policies -- including the mortgage interest deduction and Fannie/Freddie -- supported through a host public policies by administrations and majority Congresses from both major parties across several decades, and that the most recent housing crisis is only the most recent, not the only. In many cases, bipartisan elite opinion is/was that these policies distort the economy and should be abandoned. Which mass publics wanted less access to credit and higher interest rates? Sure, finance liked it also, but they weren't the only ones. I.e., We got the housing finance we got because the public wanted credit, the politicians wanted votes, and the financiers wanted profits. NOTE: I slightly modified this parenthetical after initial posting to improve clarity and fix typos.)

*Usually IPE just pumps POLITY into a regression and mumbles something about transparency or checks and balances and then moves on.

**As for "On other [issues], [the public] has preferences that largely maps onto partisan identifications rather than actual interests"... Who's lazily inferring interests now? Why can't partisan identification be an interest?

***The dearly departed George Rabinowitz used to befuddle his Intro to American Politics students every year by assigning Showdown at Gucci Gulch, a journalistic account of the passage of the 1986 tax reform act. It does a great job of explaining how the pressure for tax reform was generated by the mass public, but how the vagaries of getting it passed heavily involved elites and interest groups.

****For one thing, saying "elites did it" doesn't actually tell us anything at all. There are elites on both sides of every issue. Krugman himself is an elite now, as he was during all of the 2000s, and yet he disagreed with most major policies enacted during that period. Which elites get to control policy is decided, among other things, by the publics.

Modeling Global Financial Integration

In the interest of shameless self-promotion, take a look at a cool animation that Kindred assembled from quarterly BIS banking data between 1999 and 2010. This network depiction stems from our first joint effort (and the "our" here includes Sarah Bauerle and Andrew Pennock as well as Will and me) to apply complex network theory to international financial integration (you can read the full paper here). The single frame above is one of 43 quarterly observations.

Some explanation. Ties between countries are weighted and directed. If country i holds bank assets in country j, a black curved line connecting the two nodes marks that tie. In this way, the out-degree of i is the in-degree of j. If j holds bank assets in i, a gray curved line marks that tie, and the out-degree of j is the in-degree of i. The thickness of a tie represents the size of the bank holdings. Node size is the sum of a country’s in-degrees originating from all other countries in the network. White nodes have a higher in-degree than out-degree, meaning that they are net recipients of financial assets. Gray nodes have a higher out-degree than in-degree, meaning the opposite.

The animation nicely illustrates the deepening of financial interdependence, as measured by cross-border banking deposits, in the first decade of the 21st century. It illustrates the accumulation of the financial imbalances that lay at the base of the 2008 crisis. It also highlights the centrality of the United States in the contemporary global financial system, even in spite of the United States' role as originator of the largest global financial crisis since the early 1930s.

UPDATE: [Credit where it's due: for the animation I worked off some basic code from Kieran Healy, found here. I modified it for our purposes of course, but without his basic gifpipe code I wouldn't've been able to put it together with my limited programming skills. So thanks, Kieran, for making your stuff publicly available.

Also, a nerdy request: I wasn't able to find a way to put the country labels outside the graph, next to the nodes. I.e., I can move all the labels up or down, left or right, some constant distance. But I want to move them all outward so they sit next to their respective nodes, rather than above/below/to the side of the node. They would be more clearly visible that way. Any suggestions? I'm using igraph, because it supports tnet, so it would have to be something that works with those packages. -wkw]

UPDATE II: [This is the best data available. So, the small number of nodes isn't a modeling choice, but rather an artifact of data limitations. This is all discussed in more detail in the actual paper. -wkw]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Shout It From The Rooftops

Phil Arena says that we need to take political economy seriously (bold added):

What does concern me, though, is the cult of democracy worship that pervades IR (and much of political science, though IR scholars seem to be the worst about this). And this has come to rest heavily, in recent years, on the claim that democratic leaders have an incentive to provide public goods while leaders of other regimes do not. Unfortunately, the evidence that this is the case comes almost entirely from statistical analysis of data that is non-randomly missing and pertains to goods that are not public goods (see this paper for more details). The difference is important if you want to make claims about democracy working for everyone, not just the winners of the political process. There's good evidence that it does not (see here, or of course, virtually all of the public choice literature, which I truly wish more IR people would read -- a great primer for which can be found here).

Amen. Even true public goods have to be paid for by somebody; politics is about who pays for them, and who enjoys them. But the bigger point is that what many think of as public goods (e.g. roads, schools, health care) are definitionally not. It seems like many people confuse public goods with egalitarianism, but they are not at all the same. Many in IPE make the same mistake.

My impression that comparative politics may have some of the same democracy-worship proclivities as IR, for the same (misguided) reasons. Selectorate theory is, after all, a comparative theory before it's an IR theory. This type of question doesn't seem to be high on the American politics research agenda either.

All politics is about distribution. Whatever it's other faults, at least Acemoglu and Robinson get that part right.

The Effect of the Unholy Trilemma on the International System

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

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

1) Maintain a fixed exchange rate

2) Maintain an open capital market

3) Run an independent monetary policy

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

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

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

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

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

My money is on the former response, however.

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

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

G-20 Trouble

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

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

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

Much Ado About China

Dan Drezner hits the road to hawk his new book at ZomBcon, but drops a challenge on his way out the door:

Question to readers: if you had to engineer the U.S. strategy in the Pacific Rim, what would you do to deal with a rising China? In your answer, be sure to acknowledge the risks and costs, as well as the benefits of your strategy.

Well, I'm at least as (un)qualified as everyone else writing on the subject, so why not?

1. Don't freak out. This is very important. Do not give credence to anything that Thomas Friedman heard in a cab in Beijing. Do not assume that China intends to be an evil empire. Do not assume that China has a masterplan at all. Do not assume that even if China had a masterplan that it would be able to carry it out. Do not assume that the U.S. has entered its autumn while China is beginning to bloom. As Jon Western writes:

[M]y broader objection to this discussion and to the broader debate on relative decline, power transition, and the "rise of China and India," is the failure to understand or examine the complexities and challenges that both China and India face. No one can dispute the extraordinary economic transitions and growth rates realized by China and India over the past twenty-five years. But most of the political discourse on power transition (and the lament of American decline) seems to assume linear trends over the next twenty-five to fifty years. ...

With all due respect to the challenges facing the United States, both China and India face far greater obstacles in terms of internal political challenges and vulnerabilities, in terms of the relative disparities in the distribution of wealth, in terms of dealing with abject poverty, in terms of rural to urban migration and the subsequent social and cultural dislocations, as well as in terms of environmental degradation and resource scarcity. Given these challenges, I'm not sure I see China's rise as inevitable -- we may see it, but we may not.

2. Remember the security dilemma. The traditional realist security security dilemma, yes, but also the economic security dilemma. Unless proven otherwise, our first interpretation of China's economic policies should be that they are intended to appease China's domestic audience, not global domination. Right now China's internal audience demands employment-boosting policies, and they are willing to suppress consumption and make really lousy investment decisions to get that. As Brad DeLong writes:

Look. China has 900 million rural dwellers who are still living at a standard of living not that far above subsistence. The pressure to migrate from the countryside to the coastal cities is enormous. China needs to grow at more than 8% per year in order to avoid mass unemployment in the coastal cities. And mass unemployment in the coastal cities is likely to be followed by political collapse and turmoil on a gigantic scale.

Part of growing at 8% per year is to continue to rapidly expand exports to the North Atlantic core of the world economy. But in order to expand exports Chinese-produced goods must look like good values. And if demand for dollar-denominated assets falls and the value of the dollar falls, Chinese-produced goods will no longer look like good values. We [China] know very well that when we unwind these purchases of dollar-denominated assets a generation from now the financial rate of return on our investments will be lousy. But in the meantime we get something much more important to us--export growth, full employment in Shanghai, and societal stability.

Right now it does not appear that China is interested in expending the resources necessary to become a global leader. And it likely will not for quite some time, even if recent growth rates persist.

3. Remember recent history. This isn't the first that Americans have gone all ZOMG! when another country's economy started growing. There was similar hysteria over 1950s-USSR, 1980s-Japan, 1990s-Russia, and others. Recent history suggests that underdeveloped economies will have periods of rapid growth, but this will not result in the overtaking of the U.S. in any worrisome timeframe. To this point, rumors of America's decline have been greatly exaggerated. As Kevin Drum notes:

[I]n relative terms America has declined since World War II. How could it not? There's simply no possible world in which a single country could retain the kind of power and influence that America held over a shattered world in 1945. As other countries rebuilt and grew, the inevitable consequence was that their power would grow relatively faster than ours.

But what's remarkable, really, is how little America has declined. We are perpetually astounded that our military might doesn't guarantee us instant victory anywhere we go and that other countries are routinely able to make trouble for us, but that says more about our national psyche than about our actual global influence or military power. If anything, our ability to project power may be greater today than it's ever been, and it's certainly greater relative to other countries than it was 50 years ago. Economically, our share of GDP fell surprisingly little in the postwar era, from 28% to about 22%, and has stayed very nearly flat since 1980. And political idiocy aside, our ability to lead the world in a rebound from a world historical financial crash has actually been pretty impressive.

The crisis has also caused all potential challengers to U.S. hegemony to turn inward. Germany and France are trying to somehow resolve the mess that is the E.U., the U.K. is intentionally contracting via austerity, China is acting like a bratty child rather than a mature power, and... that's it. Russia is still a mess, Japan hasn't recovered from a 15-year economic slump, India is still finding its footing, and there really aren't any other contenders.

4. Know your role. Right now the job of the U.S. is to act like a hegemon. It is to stabilize the global economy by keeping markets open and preventing tit-for-tat behavior. It is to not act selfishly by beggaring its neighbors. It is to strengthen and support institutions that foster cooperation rather than discord. It is to provide liquidity to the international system, and provide a market for distress goods. If there are going to be devaluations against the dollar, rather than fight them try to coordinate them so that exchange rates are somewhat stable. Some of these may slow the U.S.' internal recovery by a bit, but not as much as allowing the international system to collapse around it will. We want this to be more like the 1980s and less like the 1930s.

5. Build and maintain coalitions. The U.S. needs to reassure a skeptical international system that it is willing to do what is necessary to maintain a global recovery. That means it needs to credibly signal that intention to other countries. It needs to stress that it is in the interests of the United States to help emerging markets develop, and then follow up that rhetoric with actions. It needs to get stalled trade agreements moving. It needs to push -- hard -- for the elimination of agricultural subsidies in the U.S. and E.U. in order to get Doha going again. It needs to make short-run commitments to domestic growth (that is welcoming towards imports) and medium-run commitments to fiscal rectitude. It needs to build closer relationships in the Pacific Rim and elsewhere, but not for the purpose of frightening China. Rather, it should do it in a way that encourages further Chinese integration into the global economy.

Admittedly, much of this is difficult and likely cannot happen overnight. But China's recent belligerence towards Japan, South Korea, internal dissidents, and other groups has already drawn many of those countries closer to the U.S. If America can welcome that development without putting China too much on the defensive, then it could lead to better cooperation in the future.

I didn't spend too much time discussing potential costs and benefits of each of these, for two reasons. First, they are very hard to assess with any precision. Two, this post is already long enough. But my inclination is to say that none of these are especially costly, while the downside risk of neglecting them is great indeed. Just as TARP has ended up costing very little (or nothing) for the benefit it provided, any short-run expenditures in the service of the stability of the international economic system will be well worth it. Some of these have already been done, or are already being done, but I do fear that the Obama administration has been so focused on domestic issues that they've put some important international issues on the back-burner. That cannot go on too much longer.

The Merits and Demerits of Relative Decline

Matt Yglesias comments on all the worry about America's decline (put into perspective succintly by Kevin Drum here):

Something to note here is that relative [American] decline would almost certainly be a good thing. America’s share of world population is pretty small, so far and away the most likely scenario for American relative decline would be “catch up” growth in large poor countries such as China, India, Brazil, Indonesia, Pakistan, Bangladesh, and Nigeria. And I hope it happens! A lot of third world countries adopted staggering bad policies in the postwar era. That bolstered America’s relative standing in the world, but it was a human tragedy. Besides which, even if faster growth in those places leads to relative decline in American dominance, it would almost certainly boost our living standards in absolute terms. Healthier, better-educated, freer, richer, more productive people in all those other countries would invent marvelous things, produce great works of art, etc. and we’d all win.

What Yglesias is saying here is that there are two ways for American prestige to decline in relative terms: 1. the numerator (American affluence) can decrease; 2. the denominator (global affluence) can increase. Both would lead to a smaller quotient, but #1 would be bad for global well-being while #2 would be good for it.

I'm with him, as far as it goes. But there's a but: Power Transition/ Hegemonic Stability Theory predicts rising geopolitical instability as the relative position of the leading state declines. Basically the idea is that security dilemmas are mitigated when one state has a preponderance of power, but are exacerbated when other states approach parity (if the rising state is dissatisfied with the international order). Robert Keohane, one of IPE's founding fathers, argued that multilateral institutions might be sufficient to ease those pressures, but that theory has yet to be put to a strong test. The recent record of the major multilateral institutions doesn't leave me with too much hope.

That doesn't mean that we shouldn't strongly encourage the continued development of the rest of the world. We should. But we need to be wary to not fall into the spiraling trap. So when we read people like Fred Bergsten laying the groundwork for a trade war we should run as fast as we can in the opposite direction. (Anyone want to bet that Krugman won't link approvingly to that Bergsten post within 24 hours?)

It's a shame, but it seems that today's international economists don't remember the basic lessons of Charles Kindleberger. Everyone has gone back to Keynes and Minsky in the past few years, but Kindleberger is just as worthy of a re-read. Today's protectionists too often have partial equilibrium (domestic) economic models in mind when what's needed is general equilibrium (international) political economy models. And so they advocate instability when the world desperately needs stability.

Don't listen to them. They preach destruction.

Austerity Politics. Kind Of.

WatsonMedia presents Mark Blyth on Austerity from The Global Conversation on Vimeo.

Mark Blyth gets animated in the literal sense, which as far as I know is a first in the history of IPE. Beyond the novelty, I recommend watching this short video on austerity. I agree with about half off it: the part where he emphasizes the distributional implications of austerity. Unfortunately, he merely toys with idea before regressing into demagoguery. Surely he doesn't believe that living standards have not improved for the bottom 40% of Americans in the past 40 years. And he completely misses the international dimension of austerity politics. The domestic dimension too, really.

I part ways when he passes off value judgments as objective observations. That's not to say that his value judgments aren't reasonable or maybe even valid; just that his conclusions don't follow from his premises. He seems to argue that austerity, if and where and when it happens, should be borne entirely by bankers. That's an understandable position. But it ignores the obvious complication: if bankers are made to suffer, then so are those who seek credit from them. This is especially true of the less-credit-worthy among us. If we want to punish the banks by limiting their risk-taking, then that means we are restricting the ability of the lower classes to access credit. We can have a world in which financial entities are heavily restricted in their activities, but the distributional effects of such a policy are not likely to be favored by the class warriors.

I will say that Blyth is correct in saying that austerity everywhere all the time is not the right reflex. Some states truly do need to consolidate. Others have more room. But by taking a reflexive position, Blyth is missing the really interesting (and important) dynamics. It's a short video that's apparently based on an upcoming book, so maybe he'll deal with these issues in a more nuanced way in print. I hope so.

IPE and The Security Dilemma

The other day Stephen Walt wrote this about the U.S./Saudi arms deal (that Alex blogged about here):

But my real question is this: if our primary goal is to discourage Iran from developing nuclear weapons, then might this new initiative be counter-productive? Doesn't it just give Iran an even bigger incentive to get a nuclear deterrent of its own? Think about it: if you had a bad relationship with the world's most powerful country, if you knew (or just suspected) that it was still backing anti-government forces in your country, if its president kept telling people that "all options were still on the table," and if that same powerful country were now about to sell billions of dollars of weapons to your neighbors, wouldn't you think seriously about obtaining some way to enhance your own security? And that's hard to do with purely conventional means, because your economy is a lot smaller and is already constrained by economic sanctions. Hmmm....so what are your other options.

This is pretty standard IR security analysis, and probably true as far as it goes. (For those interested, there's a very deep body of research on the security dilemma.) But it got me thinking about applications for IPE. A lot of folks are wringing their hands over Sino-American economic brinksmanship along of number of dimensions including trade protections, exchange rate policy, macroeconomic imbalances, sovereign wealth funds, etc. In the news this week is the Sino-Japanese brinksmanship that is partially about economics, and partially about security. See here for one summary of the situation, here for a discussion of how China's perceived belligerence is helping the U.S. make stronger ties with other Asian states, and here for Drezner marveling over how inept the Chinese appear to be.

(Drezner is surprised by this; I'm not, because Thomas Friedman has recently been writing about how wise and capable the Chinese are. Since Friedman is always wrong about everything, I just assumed the Chinese government would make some blunders in short order. Betting against Friedman: Safest play in town.)

Does any of this conform to the logic of the security dilemma? I think it might. Krugman, for example, has encouraged the U.S. to retaliate against China's exchange rate management by threatening to raise tariffs. He's also suggested that the U.S. threaten similar actions if Germany does not pursue looser monetary policy. He suggests that this is necessary for the U.S. to protect itself against negative externalities being generated by those countries. In other words, Krugman is suggesting using tariffs in self-defense. We wrote a series of posts here discussing why Krugman's "get tough with Chermany" attitude was unlikely to benefit the U.S. in any way. We didn't touch on the logic of the security dilemma, so I'll illustrate it briefly here.

Suppose we do make those threats, and suppose those threats are perceived as credible*. Even further, suppose we get multilateral support from Japan, the U.K., and other leading states in an attempt to pressure China from all sides. Krugman believes that this would lead to major concessions from China. If those threats were issued, had multilateral backing, and were somehow made credible, that might be enough to extract concessions from China. But it might not be. If China feels threatened, it might escalate the situation by further manipulating the RMB, adding new protections for domestic firms, or pursuing preferential trade arrangements with other states. In other words, China may try to preemptively shield themselves from the U.S.'s threat. After all, China might think, the U.S. faces stronger domestic political constraints that we do, so they'll be forced to back down first.

Now it's the U.S.'s turn. Rather than drawing down as we had hoped, China has re-upped. Do we respond in kind? Politicians are not very good at letting sunk costs go, so perhaps we'd respond to China's new policies by doubling down on our own. Rinse, lather repeat. There's a reason these things are called trade "wars", and the reason why we've spent so much time constructing and strengthening multilateral institutions like the WTO is to prevent this type of spiraling from occurring.

The logic of the security dilemma also applies to the China-Japan squabble, as China has responded to Japan's detention of a Chinese national by restricting exports of rare earth materials to Japan. This is already having the effect of moving other Asian nations closer to the U.S. as a means of defense, and may prompt Japan to retaliate in other ways.

This is all pretty basic, but I don't often see the security dilemma applied to IPE subjects. Are there other extensions of the logic that I'm missing?

*Two exceedingly unlikely ifs, I know, but just go with it.

Domestic Political Cover, Policy Change and Greek Debt

An absolutely fascinating piece by Michael Lewis in the latest issue of Vanity Fair on Greek debt, Greek monks, Greek civic life, corruption, fraud and how the Greek budget deficit came to be 15% of GDP (and not the reported 3%).

Towards the end, Lewis engages how the new Greek government has sought to implement policy change in the face of a domestic crisis.

The day before I left Greece the Greek Parliament debated and voted on a bill to raise the retirement age, reduce government pensions, and otherwise reduce the spoils of public-sector life. (“I’m all for reducing the number of public-sector employees,” an I.M.F. investigator had said to me. “But how do you do that if you don’t know how many there are to start with?”) Prime Minister Papandreou presented this bill, as he has presented everything since he discovered the hole in the books, not as his own idea but as a non-negotiable demand of the I.M.F. The general idea seems to be that while the Greek people will never listen to any internal call for sacrifice they might listen to calls from outside. That is, they no longer really even want to govern themselves.

It's not necessarily that the Greeks don't want to govern themselves, nor that they will "listen" to calls from the outside. IPE research specifically, and IR research generally, has provided a good explanation of why politicians use this strategy to implement policy change. Political Scientists Todd Allee and Paul Huth discussed how politicians use international courts and other international bodies to push through domestic reform in "Legitimizing Dispute Settlement: International Legal Rulings as Domestic Political Cover" (APSR, 2006 - ungated).

From this research, we can see how politicians strategically use external pressure from intergovernmental organizations like international financial institutions such as the IMF to push through domestic legislation that would otherwise be incredibly unpopular. These politicians claim that "their hands are tied" by these external pressures and that they have no choice but to implement a change in policy (policy that they see as being absolutely necessary, but that the public may not). These international financial institutions provide political cover for politicians and allows them to deflect blame for the policy away from domestic politicians and towards external actors. It's not that the domestic audience will listen to outside actors, but that they will not necessarily blame domestic politicians for implementing these types of policies.