Who, Exactly, Is Getting Away With What, Exactly? And Why?

In an recent article in the NY Review of Books, Paul Krugman and Robin Wells review three recent books that attempt to diagnose just how American political economy got so screwed up after 2008*. Noam Scheiber blames Obama's choices of economic advisors, and in particular the reliance on acolytes of the Rubin-Summers faction of Clinton administration vets who have a predilection towards getting into bed with Wall Street. Next comes Thomas Frank, demonstrating yet again that he understands nothing about American politics or political history (and in particular the politics and political history of the American right wing). Frank claims to have observed "something unique in the history of American social movements: a mass conversion to free-market theory as a response to hard times" that is buttressed by hermitically-sealed stupidity. If this is indeed a first then what exactly was "morning in America" all about? And how to explain the rise of right-wing parties throughout the industrialized (and industrializing) world since 2008, much less the landslide victory of Obama in the 2008 election? Thomas Edsal's thesis -- which Krugman and Wells reject as incorrect on its face -- is that America does not have enough resources to accommodate conflicting social goals, which has led to in uptick in partisanship.

So we have three theories: Scheiber's leadership failure cum rent-capture critique, Frank's vast right-wing conspiracy cum ignorance critique, and Edsall's scarcity leads to nasty politics critique. While showing signs of sympathy for all three, particularly the first two, Krugman and Wells end up with their own conclusion:

But ultimately the deep problem isn’t about personalities or individual leadership, it’s about the nation as a whole. Something has gone very wrong with America, not just its economy, but its ability to function as a democratic nation. And it’s hard to see when or how that wrongness will get fixed.

Let's leave (mostly) aside that this political narrative is opposite in emphasis of the tale Krugman was telling a year ago (cf) -- then it was about personalities and leadership -- and note the defeated tone. While some of Krugman's friends believe that the only way the wrongness will get fixed is through the destruction of the Republican Party (eg), that isn't going to happen so there must be some other way out of the malaise. The problem is that Krugman and Wells seem to have few answers on that score. I believe that is because they don't have a clear conception of politics.

Each of these three concluding sentences contains a distinct phrase of dissatisfaction. The first asserts that there is a "deep problem" in American politics; the second identifies that problem as the lack of an "ability to function"; the third summarizes these first two components as culminating in "wrongness". These are vague, even non-descript, but let's try to parse each of them.

Given the context of this essay within their other writings, the "deep problem" would seem to be persistently high unemployment and growing inequality. How do I know that Krugman and Wells think this is the problem? Mostly from the context of their other writings, but in this essay the refer to parallels between today and the 1930s, a period of high unemployment that followed a rise in inequality and significant financial crisis. The cause of these problems would seemingly be both ideational -- capture of elites in government (Congress, the Fed) and the commentariat, as well as much of the public, by right-wing laissez-faire orthodoxy -- and material -- capture of the government  (the Obama administration, the Fed) by Wall Street. Both of these phenomena have been discussed in the political economy literature, of which Krugman and Wells are completely unfamiliar**.  

The next sentence indicates that this problem is not limited to economic outcomes: there is also a political problem, the "(in)ability to function as a democratic nation". It is not at all clear what he means by this. I think he means that democratic nations are supposed to always and everywhere and at all times generate egalitarian outcomes, and pursue policies that maximize some deduced social welfare function that just so happens to map onto Krugman's ideological preferences more or less perfectly. Other than vague intimations that bankers control the country through their puppets in the Obama administration, it's not clear why Krugman thinks that the U.S. doesn't function as a democracy. Because it hasn't generated a particular set of outcomes in a given time and place? What a priori reason do we have to think that this should happen? Why should we think that the U.S.'s version of democracy is somehow superior to other democracies that have similarly depressed economies, e.g. Europe?

The fact is that "democracy" is a catch-all word that describes a host of political institutions which are similar only in that they aggregate the preferences of their citizens through some type of electoral process which is guided (and constrained) by previously established law. "Democracy" is decidedly not
a description of a set of particular outcomes favored by the technocratic center-left, a group of which Krugman is a member. It is even less a description of a political system dedicated to pursuing an Old Keynesian version of technocracy. Given that, it is not completely clear to me that the U.S. has lost its ability to function; conflicting interests, partisanship, gamesmanship, interest group lobbying, rent capture, and vituperative campaigns are all par for this course, not evidence that things have gone horribly awry.

Which leads us to the very end. This "wrongness" -- essentially the existence of distributive interest group politics -- is only a "wrongness" if you expect particular (and exceptional) moments of national unity (such as the bipartisan passage of the Social Security Act that Krugman and Wells reference at the top of the piece) to be the norm. But they are not the norm, and we should not expect them to be. Democratic politics is generally messy, generally contentious, and generally fought along lines demarcated by interests and ideology. Any particular individual -- and in fact all particular individuals -- will be upset with roughly 50% of the political decisions made. This is just how it works. There is no sense in bemoaning this, as it is a fact of life. It is not a "coup", it is not a systemic collapse of everything we hold dear.

It's not clear to me why the NY Review of Books would ask non-political economists to write about political economy. Had they not they not done so, they might have been able to publish an article with a better ending then "We don't like this but we don't know how to fix it."

*By "screwed up" the authors seem to all mean something along the lines of "President Obama only getting to fulfill most of his campaign promises". These being provision of universal health care, no tax increases on those making under $250k/year, an aggressively militaristic anti-terrorism policy, re-regulation of the financial sector at both the domestic and international levels, the repeal of DADT, and increased investment in green technologies. Or by "screwed up" maybe they mean the continuing existence of an opposition party, or the fact that Obama was always insufficiently left. Anyway, Krugman and Wells just take it for granted that something is screwed up, and the impression they leave of the books they review is that the other authors do the same thing. I haven't read any of those books so I can't be sure whether that's a fair characterization or not.


**I can be quite sure of this, having read them both extensively over the years. The closest thing to a political economist to whom Krugman gives credence is Larry Bartels, an American politics scholar who has studied some politics of inequality.  

Democracy and Development

Xavier Marquez has a very interesting series of posts on the relationship between democracy and economic growth since the end of WWII:

The basics of this relationship in the post-WWII era seem pretty well understood: basically, the richer the country, the more “democratic” it appears to be (in the sense I’ve discussed here and here, where democracy is conceived as a system of normatively regulated competition for control of states including the usual paraphernalia of elections, freedoms of speech and assembly, etc.), though the reasons for why this is the case remain disputed, and there are obvious and significant exceptions to this pattern. Conversely, the academic literature suggests that democratic regimes have a slight and indirect long-term development advantage, though the evidence for this claim is much more controversial, and there is no consensus on how this particular advantage operates, if it exists at all

There are links to literature describing all of these assertions in the original post. Marquez then runs down some simple data (and presents it very well) and notes:

The median income of democratic regimes has been higher than the median income of both hybrid and fully authoritarian regimes since at least the 1950s, and the gap has in general widened, not narrowed, even as the number of democratic countries has increased. (From this graph we cannot tell, however, whether the gap has widened because democratic countries have grown faster, or because non-democratic countries that grew fast turned into democracies; from the graphs below, we may infer that it was a mixture of both). The gap was highest during “peak authoritarianism” in the late 1970s and early 1980s, when most poor and newly independent countries were either hybrid regimes or dictatorships, but it stopped growing after the end of the cold war, when a number of relatively poor countries became democratic. ...

What about growth? Is any particular regime type consistently associated with economic growth? ...

The answer is "not really" or at least "not very much". Dictatorships and hybrid regimes have more variability -- some grow very quickly, at least for awhile, but also go bust more frequently -- but averaging across regime types shows very little difference in central tendency:

To the extent that we can ignore these confidence intervals and focus only on the trend performance, democracies have not always done better than these other regimes. In the early post-war era it seems that dictatorships did better (though most did about as well as democracies), but then decolonization came along and the growth performance of dictatorships basically cratered. Indeed, the 80s, when the so-called “third wave” of democratization began, was also (not coincidentally perhaps?) the time when the “growth gap” between democracies and hybrid and dictatorial regimes was at its widest. Ominously, the last decade has seen a reversal of this pattern, which explains much of the (not very well thought out) commentary about the rise of the “Chinese model.”

He has a very cool motion chart at his blog (that I can't find the embed code for) that maps out the null effect, so click through to watch it.

Conflict Scholars Should Learn Political Economy If They Want to Talk About Political Economy

First off, apologies for the light posting. A confluence of events have prohibited more activity here. I hope to get going more regularly.

I want to call brief attention to this post from LFC at Howl of Pluto, an excellent and under-appreciated IR/FP blog. Here's the meat:

Maybe Phil [Arena] could consider taking an occasional break from criticizing Reiter and Stam's enthusiasm about democracy and focus on the particular forces that drive bad, suboptimal policy in the particular democracy known as the United States. There are, after all, varieties of democracy, just as there varieties of capitalism. The problem isn't so much democracy per se as the particular form it is taking in the U.S. today.

You don't have to agree with the conclusion to see a problem with the logic. I've consistently followed Phil's postings, and a regular theme is that he is skeptical of claims in the academic literature that "democracy" does this or "democracy" does that. Part of Phil's whole point, as I read him (and I hope/expect that he'll comment on his own at some point) is precisely that "there are varieties of democracy". Moreover, that democracy does not always lead to peaceful, warm, open, transparent outcomes that track to some utilitarian ideal. So when he picks on Reiter and Stam he's doing it from that perspective: a general skepticism of the way that much IR literature talks about democracy, attributes unidirectional causal properties to it, and generally over-idealizes a regime category that -- as LFC notes -- retains plenty of space for all sorts of varying outcomes.

In other words, I imagine Phil would be fine with the bureaucratic-politics-plus-interest-groups story that LFC puts forward, and nothing he wrote contradicts it. (Unlike me, Phil's pretty good about remaining agnostic about things he doesn't possess extensive knowledge about.) The problem is that quite a lot of the IR conflict literature wouldn't be okay with a story where narrow interest groups within a democratic society skew policy in a suboptimal way. Including Reiter and Stam, at least if you give them a literal reading.

Of course, because I'm self-interested, it's easy for me to sum all this up and conclude that the problem is that conflict scholars don't understand political economy.

UNC Everywhere

UNC poli sci Prof Andy Reynolds has an informed op-ed on the challenges facing Libya in the News & Observer.

ht: Layna

The Selectorate in Theory and Practice

Bueno de Mesquita and Smith continue their guest-posting at the Monkey Cage with this, which basically describes how time inconsistency problems can affect politics. (Michael Lewis recently wrote a case study of this process in California which, for all its faults, is better than his essays on Europe.) Before I get into my criticism, let me say that I value their work on selectorate theory, even though I think it has some problems. I value it for a few reasons: because I think the dynamics they are trying to model (basically a formalization of a strand of public choice econ) are very important for the study of politics even if their theory isn't a finished product, and because they provide a central theoretical paradigm for other scholars to use as a foil for their own research.

Anyway, enough throat-clearing. As this post, and the titles of their books on selectorate theory -- The Logic of Political Survival and The Dictator's Handbook -- make clear, theirs is a theory of comparative politics, not international relations. Nothing wrong with that, but it leaves them susceptible to problems that scholars who primarily operate in one subfield often have when crossing over into another. Specifically, they tend to make assumptions that seem reasonable but are nevertheless highly contentious. This post illustrates one of them. BdM and Smith write:

It is certainly true that bankers and businessmen wrote loans they suspected would not be repaid; they buried debt on the balance sheet; and, in extreme cases, committed outright fraud. These actions, and hundreds of others like them, provide rewards today, accruing costs that must be paid in the future. Why run up so much debt? Easy, paying costs in the future is someone else’s problem. It certainly won’t be the executive’s problem if she does not survive at the top today. Business leaders happily – and smartly – mortgage their firm’s future to ensure that they retain control now. Lavish payments even when performance is poor is the norm, not the exception.  

As much as politicians chide business leaders, they too love debt. It lets them buy loyalty now. Repayment is some future leader’s problem. Politicians hate to pay as they go. They love to make expensive promises that they don’t have to fund. For instance, politicians love to pay public sector employees with modest wages and fantastic defined pension benefits. This means less to pay today on their watch and more to pay on someone else’s tomorrow. What could be better!

On the one hand this seems more or less incontestable: politicians would prefer to buy support now and have someone else pay later. As the theorize later in the post, autocracies are more prone towards debt accumulation than democracies. I'm sure this is true in many contexts, and Oatley has some recent research that backs it up, but the example they introduce as illustrative of the broader phenomenon -- the actions of bankers -- gives us reason to question their narrative. Bankers acted the way they did in part because of policies that rewarded this behavior. The financial sector profited enormously from the legal and regulatory structures in the United States and around the world over the past few decades, and there was always an expectation that the government would support them in times of trouble. The Fed made that guarantee via the Greenspan/Bernanke "put", and the fiscal authorities did as well, setting a clear precedent of interventionism through a series of fiscal interventions from 1980s-2000s.

In democracies the "selectorate" -- the group whose support politicians must maintain to stay in office -- is assumed by BdM/Smith to be 50% of the population, or near that number. And yet the most energized political movements on both sides of the ideological spectrum right now, the #OccupyWallStreet and Tea Party groups, both formed in large part in reaction to policies that benefited bankers over the masses. These policies were enacted by both major political parties in two different presidential administrations, and do not benefit 50% of the population. They benefit a very small minority of it, hence the "We are the 99%" slogan of #OWS. In general the economy of the US and other industrialized democracies has become much more unequal over the past several decades, and  there has been little or no movement towards redistribution to mitigate the trend. A more progressive tax system would definitely benefit more than 50% of the population, yet the government finds it very difficult to pass a several percentage point marginal tax increase on millionaires.

Not only can selectorate theory not explain this, it would predict the opposite. More generally it would expect the majority of the population in an increasingly-unequal society to favor highly redistributive policies, and it would expect politicians to respond to this demand. BdM/Smith might be on stronger footing if they adopted the Rajan thesis that the government countered stagnating median wages by expanding credit access, but even this would depend on the claim that 50% would prefer more credit to more income. This seems dubious.

It seems more likely, to me, that the idealized account of democracy that selectorate theory provides is incomplete. The strength of selectorate theory is that it can accomodate more complex accounts of preference creation and aggregation relatively painlessly, but the weakness of the BdM/Smith application of selectorate theory is that they seldom take the more complicated steps that are necessary to reach conclusions that match our empirical understanding of the world. That leaves us in a place where selectorate theory is potentially valuable if used with care, but the primary proponents of selectorate theory -- in emphasizing parsimony over accuracy -- end up reaching conclusions that are pretty clearly wrong.

Wanna Bet?

“Politics cannot and will not simply follow the markets,” [Merkel] told German public television on Sunday in her first interview after returning from holiday a week ago. “The markets want to force us into doing certain things - and that we won’t do.”

That is in reference to eurobonds, which Merkel (along with 75% of German citizens) does not support. She understandably does not want to share Germany's credit rating with heavily indebted countries. But markets have been making Germany make political decisions for several years now, and that will continue. Merkel never wanted the EFSF. Merkel never wanted the compromising of the ECB. Merkel never wanted Germany to be on the hook for the whole eurozone. But markets have forced her hand at every juncture, and is still.

The current EU policy of muddling through is precisely about "following the markets". Intervention is only done when markets force the hands of EU leaders. This makes perfect sense in game theory where every intervention is unpopular with at least one set of voters. In such a model markets would not only influence politics, politics would be very difficult without them. The fact that markets can alter the equilibrium makes it a very important political actor. Anti-neoliberals may view this as a tragedy ("markets undermining democracy"), but recall that the problem has arguably gotten this dire because of too little bond market discipline during the 2000s, not too much.

Using Social Science in Russia

In Russia, social scientists use competing metrics to try to influence policy:

Social science was part of that from early on; one factor in Mr. Putin’s selection as president was a survey that showed that Russians’ most-admired figures were fictional tough guys — the undercover spy Max Otto von Stirlitz and the homicide detective Gleb Zheglov, said Igor V. Zadorin, who headed the Kremlin’s in-house sociology department at the time. ...

The opposite argument is coming from a liberal set of social scientists, who say the data shows the public is demanding a more open and competitive political model.

The economist Mikhail E. Dmitriyev — whose research group was originally founded to shape Mr. Putin’s economic platform— began warning of a “pretty abnormal” spike in dissatisfaction he observed in political focus groups, first among middle-class Muscovites and then appearing in other large cities.

This brings to mind Fabio Rojas' post from the other day. In this case social science is being used to undermine democracy, but only by making Russia's "competitive autocracy" more responsive to citizens. Which is supposedly a key element of democracy. Interesting stuff.

Trouble in Egypt

Or is this "UNC Everywhere"? Poli-sci professor Andy Reynolds is not optimistic about Egypt's coming election:

“This is the most opaque process we’ve seen,” said Andrew Reynolds, an associate professor of political science at the University of North Carolina at Chapel Hill who studies and advises on electoral systems in new democracies. “No one, not the political parties, the United Nations” or non-governmental organizations “knows who’s even writing the law,” he said. ...

The bottom line is that this system advantages the old parties,” he said. “The people who are going to lose out are the Tahrir Square groups and the liberal movements.”

The rest of the article is also good. The consensus (from the article) seems to be that the election should be postponed to give time for groups/parties to organize properly and for mechanical electoral institutions (rules, monitors, logistics) to be constructed, but the article cites a poll in which 75% of the population think the elections should go ahead as scheduled. This certainly bears watching. I'm not especially optimistic.

(ht: Layna)

There Will Be Politics

UPDATE: Henry Farrell and Dan Nexon have taken their shots at me, at least partly deserved, but I didn't say the things I said. A more fleshed out version of my thought is here.

Paul Krugman thinks that democratic politics does not exist:

Well, what I’ve been hearing with growing frequency from members of the policy elite — self-appointed wise men, officials, and pundits in good standing — is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing, and weak-minded politicians catered to the electorate’s foolishness.

So this seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.

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.

If Greenspan's "with notably rare exceptions" deserves internet infamy, and it does, then surely Krugman's less notable exceptions should too. As Drezner notes, Krugman's examples -- the Bush tax cuts and the Iraq war, mainly -- were supported by majorities of the population. Bush campaigned on a platform of tax cuts too, so it's not as if he tricked the public once elected.

What interests me about this isn't that Krugman is playing fast and loose with his factual claims, or even stacking the deck in a blatantly partisan way. That's par for his course. It's that he thinks that a simple political explanation is just not feasible. Instead, some moral lesson is needed. If something bad happens, it must be because bad people are doing it. This is the political sophistication of a six year old. The specific bad people in this case -- "self-appointed wise men, officials, and pundits in good standing" -- are less interesting than his usual coterie of sado-masochists, mythical creatures, and conspirators, but at least this time Krugman manages to indict a category of people that includes himself.

Occam's Razor can help us here. If there are tax cuts, maybe it's because people wanted tax cuts. If there is Medicare Part D, maybe it's because people wanted Medicare Part D. If there is a housing bubble, maybe it's because public policy was skewed in ways that home ownership attractive, because that's what people want*. This might not work all the time, but as a first approximation this sort of thinking holds up fairly well. In the examples Krugman gives, it's batting 1.000**. Saying that democratic polities have problems with time inconsistency and preference aggregation isn't exactly a new insight.

Krugman closes with this:

But the larger answer, I’d argue, is that by making up stories about our current predicament that absolve the people who put us here there, we cut off any chance to learn from the crisis. We need to place the blame where it belongs, to chasten our policy elites. Otherwise, they’ll do even more damage in the years ahead.

Amen, I suppose, but there's plenty of blame to go around. We all played a role in this crisis. Not an equal role of course, but a part nonetheless. Might as well own up to it.

*Mortgage interest tax deductions, subsidized subprime (and prime) loans, lower capital requirements for MBS, etc.

**Drezner wonders about public support for financial deregulation. I challenge Krugman to name the deregulatory act that led to the financial crisis. If he can't, and he hasn't, then his example fails and Drezner doesn't have to worry about it.

Politics as Reality TV

One of my good friends (and grad school colleagues) asks Tyler Cowen a question:

By email, from Joshua Miller:

Do you think there is an audience for a public policy game show? The idea would be to ask contestants to solve policy problems instead of asking them to navigate obstacle courses or eat spiders.

Much of my research is on deliberative democracy and civic engagement, but though Obama used that rhetoric in his campaign there haven’t been any major policy moves to increase civic engagement. So I wondered:

What would the world look like if people talked as much about financial regulatory reform as they do about American Idol?
If you have any comments, I’d appreciate them. I don’t imagine this as some sort of televised town hall meeting; rather, I envision judging contestants’ policy choices according to realistic projections of their impact.

Cowen responds by pointing to Alex Tabarrok's years-old post discussing a hypothetical game show -- "So You Think You Can Be President?" -- that would be structured in ways similar to those Josh proposes. Well, I can play that game too. We've discussed similar things, e.g. here and here.

More seriously, this taps into a larger running conversation that Josh and I have had over the years. He argues that deliberative democracy is a Very Good Thing, and has focused a lot of his research on how to create space in the public sphere for more of it. I argue that unicorns are also Very Good Things, and are about as realistic as a robust deliberative democracy in the sense that he'd like to see. For most people politics is much more like sports (or American Idol) than an ideal academy: it's about winners and losers, backstories and narratives. It's not about a high-minded struggle with the contradictions inherent in political and economic systems and trying to build consensus according to some sort of egalitarian principles.

In short, I think a reality show (or actual society) in which people debated financial regulatory reform would be roughly as vapid and empty of serious discussion in popular culture as the real world is. Rather than elevating society towards the heavens, it would quickly descend into name-calling and reputation-smearing. If you think of cable "news" networks as a microcosm of how this would work in practice, you'll see what I mean.

UPDATE: Welp, just talked to my friend Joshua Miller, and he didn't write that e-mail to Cowen. Eerie, because it reads like him, and both Josh Millers seem to be researching similar things. Anyway, the rest of the post stands.

Stop Pretending People Shouldn't Have Interests

Andrew Gelman:

Jonathan Chait mocks former senator Evan Bayh for taking a job as a D.C. lobbyist. ...

But hink of this from Bayh's point of view. After being one of 100 U.S. senators (and near the median, at that), it's natural to want to stay near the action and have some effect on policy. Lobbying is a natural way to do this. From this perspective, it's a direct extension of what he's been doing before. And if it pays well, so be it. I'm not one to turn down free money and I don't expect that others will do so either.

Jonathan Chait isn't being especially nasty about this, as these criticisms go. But he is a paid partisan, who spends every day of his professional life advancing the policy goals of himself and his employer. Why does he think that's purer than what Bayh is doing? Because he gets paid less, or has less influence?

Note that I don't think this is a character flaw, in Chait or Bayh. Instead I view it as, erm, politics. Which is definitionally about people and groups seeking to influence policy to their advantange by whatever means are at their disposal. It ain't a morality play, folks.

Disaster Politics and Civil Strife

From a new paper by Cullen Hendrix and Idean Solehyan:

This paper examines the relationship between rainfall, water, and socio-political unrest in Africa. In particular, we are interested in how deviations from normal rainfall patterns, and extreme events such as flooding and drought, affect the propensity for individuals and groups to engage in disruptive activities such as demonstrations, riots, strikes, communal conflict, and anti-government violence. In contrast to much of the environmental security literature, we use a much broader definition of conflict that includes, but is not is not limited to, organized rebellion. Using a new database of over 6,000 instances of social conflict in the past 20 years - the Social Conflict in Africa Database (SCAD) - we examine the effect of deviations from normal rainfall patterns on various types of conflict. Our results indicate that rainfall variability has a significant effect on both large-scale and smaller-scale instances of political conflict. We find that rainfall is correlated with civil war and insurgency, although wetter years are more likely to suffer from violent events. Extreme deviations in rainfall - particularly dry and wet years - are associated with all types of political conflict (violent and nonviolent, government-targeted and non/government-targeted), though the relationship is strongest with respect to violent events, which are more responsive to abundant rather than scarce rainfall. By looking at a broader spectrum of social conflict, rather than limiting the analysis to civil war, we demonstrate a robust relationship between environmental shocks and violence.

This is part of a growing body of research on how natural disasters and environmental changes affect politics. A recent article by Alastair Smith and Alejandro Quiroz Flores looked at how democracies perform relative to autocracies in mitigating the effects of disasters, and of course Amartya Sen famously showed that the worst famine in Indian history was a result of poor government response to a drought. (Johann Hari argues that this was at least partially Winston Churchill's fault.) Keep this in mind when reading about the ongoing flooding in Pakistan, the the fires in Russia, and the Chinese mudslides.

Democracy and Economic Growth

Emmanuel noticed the Dani Rodrik op-ed I quoted the other day, and went off:

It honestly bothers me that I was the first to notice this factual error. On the aforementioned webpage, there are supposedly 134 Facebook shares and 41 retweets, yet nobody bothered to flag this up. What worries me is that few folks are really that familiar with the literature or do not read closely enough.

This subject matter--the relationship between democracy and economic growth--has been researched to the point of becoming a cliche, but overall, econometric analysis yields a null result. There is, statistically speaking, no evidence that democracy has a direct impact on economic growth. None. Nada. Zip. Zilch. A paper that I can suggest for those unfamiliar with this area is Doucouliagos and Olubasoglu's meta-analysis--or an econometric study of studies--that provides a similar conclusion. (There's also a non-gated earlier version.) At best, democracy only has positive "indirect" effects, but it alone doesn't make it significantly more likely that economic growth will occur.

As for the freedom-and-growth shtick, save it for Wolfowitz, Perle, and Feith. To state things correctly, authoritarianism may not necessarily be conducive to economic growth, but neither is democracy. There are many political recipes for economic growth, period.

I should say that I too noticed the part he's talking about, but didn't comment on it for two reasons: first, it wasn't related to the substance of my post; second, that the relationship between democracy and economic performance is controversial. While it may be true that democracy is not "directly" responsible for economic growth as Emmanuel says above, that does not preclude it from having an indirect effect. If growth comes from stable institutions that emphasize things like property rights, free markets, and rule of law. Consider this influential paper by Barro:

Growth and democracy (subjective indexes of political freedom) are analyzed for a panel of about 100 countries from 1960 to 1990. The favorable effects on growth include maintenance of the rule of law, free markets, small government consumption, and high human capital. Once these kinds of variables and the initial level of real per capita GDP are held constant, the overall effect of democracy on growth is weakly negative.

So after controlling for other effects, democracy does not tend to have an independent effect on growth. But where do those other things -- rule of law, free markets, small government consumption, high human capital -- come from? In general, they are strongly associated with democracy. Democracy could be working indirectly through those other variables to have an effect on growth. Perhaps that is why there is little evidence that democracy directly impacts economic growth rates but ample evidence that democracy and levels of economic development are very highly correlated. (In other words, richer countries tend to be the most democratic.)

There are other ways to read this, including dependency theory and other variants of Marxism, but the correlation remains. Perhaps to that end Rodrik amended the wording in his argument (see above link), but left this part in:

[Democracies] provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies.

If democracies generally produce those kinds of institutions, and those institutions produce economic growth, then is it really right to conclude that there is no relationship between democracy and growth? Probably not. In fact, that is the precise argument of Baum and Lake:

Democracy is more than just another brake or booster for the economy. We argue that there are significant indirect effects of democracy on growth through public health and education. Where economists use life expectancy and education as proxies for human capital, we expect democracy will be an important determinant of the level of public services manifested in these indicators. In addition to whatever direct effect democracy may have on growth, we predict an important indirect effect through public policies that condition the level of human capital in different societies. We conduct statistical investigations into the direct and indirect effects of democracy on growth using a data set consisting of a 30-year panel of 128 countries. We find that democracy has no statistically significant direct effect on growth. Rather, we discover that the effect of democracy is largely indirect through increased life expectancy in poor countries and increased secondary education in nonpoor countries.

This is also the conclusion of the meta-analysis Emmanuel cites above. None of that says that authoritarian governments cannot promote public health, property rights, rule of law, etc. Some authoritarian regimes, like Singapore, have done very well in this regard. China has obviously moved quite far in that direction as well. But if nothing else it appears that democratic regimes have been better able to build and maintain stable growth-promoting institutions over times. As a result, the richest countries in the world are all democratic.

At least that's my take. As I said I before, this stuff is controversial among social scientists. There are multiple ways to read the massive literature. But to claim without caveat that there is no relationship ("None. Nada. Zip. Zilch.") between democracy and economic growth is misleading at best.

Yet Another Post on Sovereign Debt and Democracy

Dr. Oatley disagreed with my post on democracy and sovereign debt, and cited some of his own recent research to smack me down. I don't disagree with a word of what he wrote. (And believe it or not, I noticed that that paper -- which I had previously read -- had just come out, but was waiting to post on it until he had a chance to.) I also don't think anything he wrote contradicts anything I wrote.

Why does he think it does? It's my fault. I used the phrase "democracies are exceptionally prone to the sort of time inconsistency problems that lead to things like debt crises" but didn't clarify what I meant by "exceptionally prone" (although "the sort of time inconsistency problems" was intended to temper the statement). I did not mean that democracies have the same perverse incentives that autocracies have with regards to accumulation of sovereign debt. In fact, I meant the opposite: democracies have completely different perverse incentives to accumulate sovereign debt than do autocracies, and this leads to different kinds of debt problems. What does that mean? For one thing, it means that democracies should be less prone to massive accumulation of sovereign debt than autocracies, but they should be more prone to debt shocks. Let's flesh this out.

Democracies face time-inconsistency problems stemming from the fact that democratic leaders are in principle-agent relationships with their constituents. Autocracies are not. So when autocracies increase sovereign debt it is often to confer rents to autocratic leaders and their cronies. An autocratic leader will have no trouble committing his citizens to austerity if necessary to pay down debt (or attract more loans) so long as he is safe in power, because those costs are not borne by him. Even if he defaults and is unable to secure future loans he may draw down funds funneled into Swiss bank accounts while the credit was flowing and live well. Or he may massively inflate his currency in an attempt to service his debts, which is another form of austerity. Indeed, autocratic leaders may wish to promote austerity, according to Acemoglu & Robinson (2006), if it will help maintain their domestic position.

Democratic leaders face incentives to spend in deficit, but also to not accumulate so much debt that austerity or default is required. Citizens in democracies are able to demand (and receive) social welfare spending programs that have automatic stabilizers built in. So in the event of a revenue shock like a major recession or demographic shift, democracies will be prone to a sudden debt crisis. Citizens accustomed to welfare spending (and the public sector employment that entails) will be loathe to give it up and may punish politicians that attempt to impose austerity (see Greece and Iceland right now, and Latin American democracies in the 1980s). They may be less concerned with the long-run effects that default will bring, or they may be better able to get "bridge loans" that tide them over until economic recovery without requiring austerity conditions.

Dr. Oatley acknowledges that Greece was not in his sample, but how about the other countries under discussion: Italy, Ireland, Spain, Portugal? No, because they aren't developing countries. The Baltic states? No, because during most of the sample period they were still part of the USSR. On the other hand, the Latin American countries that experienced debt crises in the 1980s and 1990s, many of which were democracies, were included in his analysis.

The point is that even if I can't generalize from Greece to the whole world, I may be able to generalize from Greece to other similar countries. Like those Muir suggests, and I was referring to originally, that are relatively new democracies, were recently autocracies and often have violent civil conflict within recent memory.

Off the top of my head I can't recall any research that addresses this question directly (perhaps readers can illuminate), but it seems like it maps fairly well to me and is congruent with Dr. Oatley's research because it asks a somewhat different question.

Sovereign Debt As Social Contract

The Economist blogger Charlamagne has written an insightful post on Greece:

The Greek civil war, and the bloody score-settling that followed, is a living memory for many Greeks. Any consideration of Greek nepotism or clientelism needs to be seen in that light. So for example, it is not enough to say that Greek civil servants enjoy jobs for life, and that is a big problem. (Though it is a big problem, not least because many Greek civil servants are paid pitiful wages—partly because there are so many of them. That means they will resist austerity measures all the harder, because they feel like victims in this crisis, not fat cats.) But the bloated public sector is also a function of history. ...

Newspapers here in Belgium talk all the time about the government needing to "buy social peace" by paying off some interest group or other. In Belgium, the alternative to "paix sociale" is a strike. In Greece, plenty of grown-ups remember when the alternative to social peace was their neighbour, or their loved-one, vanishing in the night into a jail cell or worse. The current clientelist truce between right and left is the price (albeit a horrible, wasteful price) established for the current version of social peace enjoyed in Greece.

Douglas Muir adds to it:

I’ve always had a very low opinion of Papandreou pere; it hadn’t occurred to me to think of him as a post-conflict figure, trying to restore social comity to a country still riven by its past. I’m still not sure that was really the case, but it’s an interesting perspective. ...

Here’s a random thought: this blog has seen a lot of posts recently talking about economic problems in Greece, Spain and the Baltic States. All of these are countries that were, within living memory, governed by brutal non-democratic authoritarian regimes. Accident? Or is there something else at work here?

It is an interesting question and maybe there's something to it. On the other hand, almost all of Europe and much of the rest of the world has been governed by brutal non-democratic regimes within living memory, yet not all countries are at risk of sovereign debt default. It seems like there's a missing variable somewhere, and I think it's incentives built into the EMU.

More generally I think it's worth thinking about how the evolution of the concept of "liberal democracy" since the end of World War II has left many states in difficult positions. All democratic states have embedded liberalism in a web of social welfare institutions in order to build consensus and maintain social stability, but the price of those compromises has varied cross-nationally. As I've argued before, democracies are exceptionally prone to the sort of time inconsistency problems that lead to things like debt crises. As such, there is a huge potential for moral hazard built in if states are able to escape their debt obligations without pain. Just ask California. It's an internal contradiction of democracy, if you like.

I have empathy for the citizens of Greece and other states that find themselves in difficult positions. But I have even more empathy for the future citizens of Greece and other states who will surely suffer more if their governments cannot get their house in order. I'm not quite sure how to escape this trap without austerity.

What Do Americans Want?

Will Wilkinson argues that Americans don't value the type of government spending that we get:

My sense is that, despite the U.S.’s historically relatively modest level of government spending, the composition of U.S. spending is such that U.S. taxpayers get less of value in return for their tax dollars than do taxpayers in many places with higher taxes and higher levels of government spending. Which is to say that when using GDP per capita as a proxy for welfare, the U.S. comes off better than it should relative to, say, Canada or Sweden. ...

The U.S. is an notable anomaly in the happiness data. Average self-reported life satisfaction rose with GDP per capita over the last several decades in almost all wealthy liberal democracies, but not so much in the U.S. The idea that the unusual composition of U.S. government spending gives Americans unusually poor value for their tax dollars might help explain this.

I think this is exactly wrong. Americans constantly complain about nebulous government waste, true, but they complain even more loudly whenever anyone proposes cutting anything. Wilkinson cites military spending, airport security, and education as examples of wasteful spending that make Americans unhappy. Does he think that a politician could be elected running on a platform of decreasing American military spending, cutting education, and slashing airport security? Of course not. If Americans truly didn't value those things, then this should not be so.

How this compares cross-nationally I don't know. I don't think it's implausible that different polities demand different types of government spending from their governments, but that to me that backs up my point: in democracies, the level of and composition of public expenditure is roughly what the media voter prefers. Is there any reason to expect the median voter in Canada to demand the same things as the median voter in America? Is there any reason to expect the median voter in America to be happier if the US government changed its budget to reflect Canadian preferences? Why does Wilkinson think that the French get what they want out of government spending but that Americans do not? What sort of model of politics is he using? These are not things that Wilkinson wants, of course, but his very next post is about how democracy means never getting everything you want.

I think a better explanation is that Americans do value security, military predominance, and public education very highly, and the reason why self-reported happiness is lower is because the country has had a very rough decade pretty much across the board. Terrorist attacks, two wars, a lost decade economically, increasing income inequality, rapidly deteriorating public and private finances... the naughties were hard on America, especially after the post-Cold War euphoria and economic boom of the 1990s.

Who Wants to Elect a President?

The other day I drank a few glasses of red wine and worried about time inconsistency problems inherent in democracies. Today, Jamie Whyte (guest-blogging at Steven Landsburg's digs) suggests replacing democracy with a "jury system" of appointing leaders. The thought's not without merit, but it immediately made me think of a lesser (i.e. one that isn't centered around baseball or golf) Kevin Costner movie. That's not good.

A few years ago Marginal Revolution proposed electing presidents via reality show. Could it really be any worse?

Tragedy of the Day

From Easterly and Freschi:

Multiple critics have protested ever since the US government, hoping to force President Andry Rajoelina’s questionable government to hold elections, first threatened to remove preferential trading rights for Madagascar.

The Malagasy textile industry was a clear success story of the US African Growth and Opportunity Act (AGOA), which removed US quotas and duties from thousands of products from eligible African countries. Madagascar’s exports tripled in the first three years of the program, and the textile sector, which made up 60 percent of Malagasy exports, accounted directly for 50,000 jobs and indirectly at least 100,000 more.

The US pulled the plug on AGOA at the end of December and import duties of up to 34 percent were reintroduced. ...

Among the effects we are NOT seeing: signs of increased interest in arriving at a power-sharing agreement or instating democratic governance on the part of Rajoelina’s government.

Ineffective sanctions, effective job destruction. An unaccountable branch of the US government hurts poor people far away who have no voice in US politics. Deeply saddened…we don’t know what more to say.

Seconded.

I wonder what pro-democracy/anti-trade "public citizens" think of this? A month ago they loved it, on the grounds that it would improve the state of Madagascar's democracy. So far that doesn't seem to be happening. Maybe it's too soon to tell, but I predicted this then, and issued a challenge playing off of Aid Watch's motto... all I ask is that democracy-promotion actually promote democracy.

Let's move beyond knee-jerk "trade = good/bad" ideology and get to facts: what are the reasonable odds that this policy is successful in promoting democracy in Madascar? Economic growth? Anything good? I think those odds are very slim, and so far the evidence bears that out. And if you don't get your Platonic ideal of unencumbered democracy, these sanctions are just needlessly impoverishing some of the world's poorest people.

Pardon me, but I don't see how advocating for horrible outcomes is acting like a responsible global citizen.

Inconsistent Thoughts on Time-Inconsistency Problems

Since the financial crisis, many have argued that we need to restructure the incentives that bankers face by extending their time horizons. See, e.g., this post by Brad DeLong. In its best manifestation it's not a principle-agent argument, but rather the opposite: shareholders incentivize management to maximize short run profit at the expense of long run stability. Bankers respond to those incentives by maximizing short run profit, sacrificing long run stability in the process if necessary, and reap large rewards for doing so. All fine and good, except this creates systemic risk, which is a negative social externality. If taxpayers are going to give the banking sector an implicit explicit bailout guarantee, then we should be able to legislate the way that banks behave -- including how bankers are compensated -- in order to bring private interests in the banking sector more in line with the public interests of society to not have to pay for their mistakes. This, in effect, means limiting the input of shareholders and management.

The wisdom of this is not apparent to me, since the "public interest" in the run up to the recent crisis seemed to be extending credit to everyone everywhere, which is why policy and practice shifted in that direction, but right now I'm more interested in extending the logic to other contexts to see where it leads. Let's assume that the public is purely interested in maximizing long run stability over short run profits. Is this a laudable goal?

The same logic could be used to argue against democracy. Democratic leaders also must balance short run incentives against long run interests. After all, if a politician loses an election it doesn't matter what her long run policy preferences are, since she won't be in office to enact them. Political scientists don't agree about much, especially across subfields, but I imagine that we could get a large majority to agree that politicians privilege short run constraints over long run outcomes, especially in democracies. So we often see spikes in government spending before elections, even if this causes fiscal problems in the longer run. Greece We often see leaders fail to slash inflation near elections, despite the adverse consequences of inflation on long run economic health, because the resulting economic decline will hurt their re-election chances. Episodes of trade protectionism often follow a similar logic, where long run inefficiencies are entrenched because of short run political incentives. I know that Dr. Oatley is developing an argument along these lines with regards to American macroeconomic policy; he can elaborate if he likes.

Yet I rarely hear calls to limit or abandon democracy. True, we often pay lip-service to checks and balances, but generally not for the reasons I've described. (And even that is subject to preference; witness the "Abolish the Senate" movement.) This begs a question: Why would we demand something of the private sector that we wouldn't even consider for the public sector? Is there an implicit positive model of politics that explains the separation? Or a normative model of justice? I'm having difficulty seeing it. To me it looks more like cognitive dissonance.

Some have called for CEO compensation to be dependent on the performance of a firm over the medium run. Suppose we did the same with laws? Any significant change in policy must first be subject to a 5-10 year review process. If it hasn't been revoked in that period, then it becomes law. Obviously we'd have to exempt some policy areas, like natural security, from such a long lag. But the debate over energy policy or health care policy would look a lot different if lawmakers weren't subject to immediate pressures that track the election cycle.

This is probably a really bad idea, and I'm not actually endorsing it. (For evidence of how bad it is, here's Thomas Friedman endorsing its logical extreme: technocratic authoritarianism.) But I am thinking about it. After all, we try to depoliticize some aspects of social management, like monetary policy, for precisely this reason.

The point is to think more seriously about why we want to shift incentives along time horizons in some situations but not others. What is the justification for treating some issue areas differently from others?