The Atypicality of U.S. Power and Influence, Again

Can you guess the source?

I shall argue that it is high time indeed that we pay much more attention to the sociology of international studies, and especially to the reasons why one particular myth -- that of America's lost hegemony -- took root so strongly in the United States academic community about fifteen years ago and why it has been so generally and unquestioningly accepted since-so much so that it has even gained credence in the world beyond North America. ...

In its extreme form, the myth that the United States today is just a little old country much like any other and has, in some sudden and miraculous way, lost its hegemonic power may seem more plausible than do some of these other myths. But when it is subjected to close and searching scrutiny, it is just as far from truth. And unless cool and rational analysis undermines its power to move minds and shape attitudes, it can be every bit as dangerous. In living memory, the optimism of the United States gave Americans and others a vision of a new, better and attainable future for the world; today, the myth of lost hegemony is apt to induce in everybody only pessimism, despair, and the conviction that, in these inauspicious circumstances, the only thing to do is to ignore everyone else and look after your own individual or national interest. Thus, some of the same American contributors to International Organization who are personally persuaded of the benefits of more international cooperation and conflict resolution, may paradoxically be contributing to a less cooperative environment by subscribing to and perpetuating the myth of lost American power.

That is Susan Strange, in her 1987 IO article "The Persistent Myth of Lost Hegemony" (ungated), which I just read for the first time. It's very good, and certainly still relevant twenty-five years on.

She argued (contra Krasner, Keohane, and others) that the U.S. in the mid-1980s was still a hegemonic state, because it controlled the four elements of structural power (which she distinguishes from relational power):

1. The ability to deny or increase other peoples' security from violence.

2. The ability to control the system of production of goods and services.

3. The ability to determine the structure of finance and credit, and therefore acquire purchasing power without producing or trading for it.

4. The ability to influence knowledge creation, whether technical or ideological, and the ability to acquire, communicate, and store that knowledge and information.

Strange argued that by those four metrics, the US was clearly a hegemonic power in the mid-1980s. Here's what she wrote about the US's persistent current account deficit:

Indeed, to run a persistent deficit for a quarter of a century with impunity indicates not American weakness, but rather American power in the system. To decide one August morning that dollars can no longer be converted into gold was a progression from exorbitant privilege to super-exorbitant privilege; the U.S. government was exercising the unconstrained right to print money that others could not (save at unacceptable cost) refuse to accept in payment.

How much of this remains true? Arguably the US is at a greater security advantage now than in 1987, and still controls quite a lot of the globe's system of production. The ability to determine the structure of finance and credit is certainly still in the US's hands, and the US is still a global leader in knowledge creation and dissemination. While some countries have narrowed the gap in one or two of these categories, none can challenge across all of them.

Has the subprime crisis changed any of this? It's certainly illustrated aspects of it. It remains to be seen whether the crisis was a transformative event.

But, as Strange noted, previous "transformative events" (such as the collapse of the Bretton Woods system and 1970s economic malaise) ended up not being nearly so transformative as many thought they would be. According to Strange, that's because the structural conditions didn't change.

Strange also argues, prefiguring folks like Zakaria, that international disorder stems from US political instability rather than a decline in capability, which itself is a result of constitutional design (separation of powers, checks and balances), the role of interest groups in coalition-building, and a tendency to suddenly reverse course mid-stream. As Strange put it: "It is not easy for [American academics and policymakers] to admit that the conduct of American policy towards the rest of the world has been inconsistent, fickle, and unpredictable, and that United States administrations have often acted in flat contradiction to their own rhetoric."

It's a very good article.

We Are All Mostly Irrelevant QOTD

Tim Harford:

Approximately 3,000 scientific articles are published per day – roughly one every 10 seconds of a working day. We can now expect that these papers will, each year, cite around five million previous publications. And the rate of production of scientific papers is quadrupling every generation. (All these estimates are based on data from the Institute for Scientific Information.) The percentage of human knowledge that one scientist can absorb is rapidly heading towards zero. This side of a new Dark Age, there will never be another Da Vinci.

Whenever Tom Coburn proposes cutting NSF funding and everyone squeals something like this comes to my mind. And, like Harford, I support public (and private!) research funding, but we need to be realistic about what exactly the return to that investment is. The old romantic ideal of scholar-polymath is over, and that was inevitable. Moreover, it's a good thing; it means that knowledge has progressed massively, to the point where no single person can absorb it all. We all have to fill our niches, and then try to make our niche-work known so it has some relevance for the outside world. So let's just recognize that we're working on the margins and try to do the best with that that we can.

Meanwhile human progress marches on.

Minimum Wage 101

Kevin Drum and Karl Smith are having a go-around about the effect of minimum wages on employment. There is the famous Card/Krueger study (and others) showing that increases in the minimum wage do not adversely affect employment rates, and a bunch of other studies plus basic economic reasoning suggesting that they do. Drum weights the former more heavily, Smith weights the latter more heavily, but they can both be right. The effect of a price floor of any kind depends on where the floor is set relative to the competitive equilibrium. In the graph above (originally used to depict a basic relationship between capital ratio regulations and bank behavior, but the same principle works here), a floor below the equilibrium has no effect on behavior. Think of this as a minimum wage below the market wage, or (perhaps) the Card/Krueger finding. In the graph below, the floor is above the market equilibrium, so behavior is altered.



The point is that the effect of a minimum wage change will depend on many factors besides the minimum wage itself. In a depressed labor market, with many potential low (or zero) marginal product workers, the demand curve for labor shifts left, the equilibrium price falls, and a minimum wage increase is more likely to retard employment rates than it would in a robust labor market where the demand curve shifts right and equilibrium price rises.

Many people argue that a relaxation of payroll taxes would help boost employment. If that is true, then a minimum wage increase would decrease employment, at least for workers at the margin where any of this is relevant. That may not be many workers (as Drum claims), but given the depressed labor market today it is probably a lot more than it would have been in 2005.

Also keep this in mind: if a minimum wage is successful it must set a floor above the competitive equilibrium, and therefore must reduce employment. Maybe that shows up in hours worked or price increases rather than crude employment rates but it has to be there somewhere. A wage floor below the equilibrium doesn't change anything, and is therefore unsuccessful.

Salam on the US Economy

QOTD:

This is why it is so damn frustrating when people say, “Hey, Barack Obama has been great for the private sector economy. Check out those huge corporate profits!” Huge corporate profits reflect product markets that are not sufficiently competitive. Product markets become less competitive in economies defined by high barriers to entry, including costly labor market regulations. This isn’t about President Obama. Rather, it is about the accretions that happen in any stable, affluent society.

And this:

I really want to live in a world in which center-right types would say, “Yes, enormous corporate profits are a bad thing — they’re bad because they’re a symptom of crony capitalism. The solution isn’t to tax away profits and use them to expand an inefficient public sector. Rather, it is to facilitate exploratory innovation by reducing barriers to firm entry.”

This is something that center-left folks (and progressives) also do not understand. The TBTF problem and huge profits in finance are reinforced by regulations. Regulations, even the well-crafted and necessary, will tend to support large incumbent firms almost all the time. And not just because they can lobby more effectively, but because they have the resources and market base to comply more easily than new competitors would. The fact that our financial sector is so profitable and so top-heavy is a strong sign that our regulatory code is seriously screwed up. As is the rise of the shadow banking system.

Although perhaps desirable for other reasons, raising taxes does not solve this problem and could even exacerbate it, by reducing the gains to entry even further.

I would like to see a program along the lines that Salam suggests later in the post, including an overhaul of the tax code using Simpson-Bowles as a starting point. The swiss cheese system of deductions, depreciation write-downs, loopholes, and credits is distortionary and generally benefits those who don't need much help rather than those that do. I would like to see policies designed to reward innovators rather than incumbents, and that will mean less regulation in some areas. I would like to see a program of work supports similar to what Salam describes, which sounds (to me) like something similar to the German system. I do not want to see major cuts in entitlement programs, as Salam does, as I believe a stronger safety net is more important in a more-competitive and more skills-driven economic system.

In short, at the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem*, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.

*And, at the global level, it isn't a problem at all. Competing away US rents is a good thing for the world.

The Case for Kicking the Can in Greece

It's been my operating assumption for quite some time that this was the intended endgame:

In other words, new net lending to Greece, from the EU, IMF and/or EFSF to finance the current deficit, is just pushing down the eventual recovery rate on all debt. The marginal rate of writedown on new credit extended to Greece is one hundred per cent. ...

The Greek government should be trying to borrow as much as anyone will lend them, since the repayment terms don’t matter if you’re planning to default. It is analogous to the practice of “trading while insolvent” for a company; this is an illegal thing to do for a corporation, but countries aren’t corporations.

With that in mind, we realise we are under no time constraint at all, and we can organise the eventual bailout at our leisure and for our political convenience. Particularly, we can stick it out past 2013, by which time the German Presidential elections will be out of the way, and a raft of new European legislation will be in place with respect to sovereign and bank debt restructuring, allowing the whole business to be carried out on a more civilised basis.

There's much more here about how the situation can be resolved in a relatively painless way. The conclusion:

The idea is so simple (as JK Galbraith said about the creation of money in a fractional reserve banking system) that it repels the mind. To repeat – all we need is the existing Euro, the existing EFSF, and a legal opinion that this would not constitute monetisation of the Greek national debt, which as far as I can see it wouldn’t. But there is no rush.

Misc IPE Developments and Research...

... That I won't properly blog.

-- US and Mexico finally reach agreement on cross-border trucking. This issue has been festering since NAFTA's beginning, but came to a head a few years ago when Mexico got fed up and enacted retaliatory tariffs. To be clear: the US has been in the wrong here all along. Via Greg Weeks on Twitter, who also noticed Chomsky criticizing Chavez.

-- US, EU, and Mexico win case against China in the WTO over Chinese restrictions of exports of rare earth metals. China said the restrictions were for environmental reasons, but they were pretty clearly intended to benefit domestic manufacturers by subsidizing the price of an important input into production.

-- Brazil's real continues to rise, and they don't like it. Is this what adjustment looks like? And is it just me, or do all of Latin America's major economies look fairly fragile right now?

-- John Quiggin has an excellent series of posts [1, 2, 3] on what remains of Marxism if we ditch the assumption that revolution is both necessary and sufficient for positive social change. The answer, it seems to me, is very little that we can't get elsewhere. I've been thinking about this a lot lately, prompted by this awful book by Terry Eagleton (and even worse promo essay). I will probably be returning to the topic eventually.

-- Chinn, Eichengreen, and Ito do a "forensic analysis" on global macro imbalances in the run-up to the crisis. They aren't very optimistic about corrections in the near future. And Chinn describes an important-looking paper by Rose and Eichengreen on the effects of abandoning currency pegs for gaining policy flexibility elsewhere.

-- Tim Harford explains what all the fuss about bank capital is about. Excellent intro for those unfamiliar with the topic.

-- An aggravated take on the current US political economy of banking and bailouts.

-- The BIS compares the internationalization of the 2008 banking crisis, as compared to the 1931 banking crisis. The takeaway is that we only got a Great Recession (Little Depression? What are we calling this?) in 2008 because the lack of a gold standard allowed large liquidity injections.

-- Ha-Joon Chang and Jagdish Bhagwati debate the merits of a strong manufacturing base in The Economist. I wonder if the vote tally is a sign of the times? Ryan Avent adds some levity.

-- Cosma Shalizi reviews the new Easley-Kleinberg book on networks in The American Scientist. A free pre-print of the book is still available here (very large pdf).

I'll See Your Somalia and Raise You Afghanistan

Phil Arena interrupts his hiatus with this delicious piece of snark:

I'm sure by now you've heard someone point out that Libertopia has already arrived, and its name is Somalia.

Well, in the same vein, I'd like to inform you that there is a country where the average person's carbon footprint is a negligible (at less than one tenth of one percent what the per capita carbon emissions in the US, based on carbon emission data here and 2010 population levels), obesity rates are enviably low (standing at 15% of the population, lower than is true of 178 other countries in the world, compared to roughly 75% in the US, which is one of the ten most obese nations in the world), population growth is eminently sustainable (at 3.8%, the third lowest in the world), and almost all trade is local.

What is this magical land, you ask?

Afghanistan. A glorious place to which US progressives are emigrating in droves.

This silly exercise in no way demonstrates that it would be a bad idea for the government to adopt ambitious new policies to try to reduce carbon emissions, obesity, and population growth while encouraging people to buy local? Really? You don't say?

I suppose then that perhaps...well, I'm sure you see where I'm going with this.

I feel the same way about any argument -- deontological or consequentialist -- that involves a state of nature, whether as a historical claim or for-instance. So take that, Western philosophical tradition.

The Difficulty of Explaining Normative Politics

Clifford Bob has a new book, and here's how he's selling it:

Political scientists including myself have focused too much on “agenda setting.” Certainly it can be a major accomplishment to draw media attention to an issue and even more so to put it on a governmental decision agenda. But there is of course no guarantee that this will lead to anything--or at least anything anytime soon. In fact getting one’s issue onto an agenda, invariably mobilizes contrary forces who work hard to get it off the agenda and their own ideas back on.

Political scientists and sociologists, including myself, have focused too much attention on “framing” as key to understanding policy change. Yet there are a huge variety of frames out there, even within a single polity—and many of them are equally compelling (at least if one looks at them objectively). Consider the supposed “master frame” of human rights. It is so broad as to make it possible for all sides in many policy battles to tap it for their own uses. Even more specific frames such as “harm to bodily integrity” often remain available for multiple sides to take up.

Political scientists, including myself, have focused too much attention on “persuasion” as the mechanism by which policy change happens. Unless that term is given a broader meaning than normal, “persuasion” fails to capture the concrete combat that dwarfs most rhetorical efforts, even if it is often harder to see and study. This includes efforts at excluding the other side from key institutions, at silencing opponents, at keeping others' ideas off the agenda, at fighting back even after a policy has been established (see the continuing court battles over California’s Prop 8), and of course at raising money.

Finally, political scientists, in this case not including myself, have put too much faith in the power of deliberation to elevate the decision processes of leaders and citizens. Recent work on deliberative democracy finally seems to be getting this criticism. Many "target" audiences are beyond persuasion, due to self-interest or ideology. And few promoters of ideas, whether new or old, truly want a free and fair debate. Obviously such debate would be optimal--if it were possible to establish agreement on what that would mean, not in the abstract, but in an actual political conflict. In reality, decisions are invariably made in the absence of the kind of deliberation political philosophers would prefer.

Well, now that that's settled...

Seriously, his focus on "network vs. network conflict" sounds promising, and I look forward to the book.

IR Nerdcore - Tinker, Tailor, Soldier, Spy

I loved the Beeb's mini-series adaption of LeCarre's Tinker, Tailor, Soldier, Spy. It's a Cold War espionage classic, and Alec Guinness is fantastic as Smiley. This one will have to be different -- it must move more quickly, and keep theater audiences engaged -- but I'm still pretty excited. Such a great cast, plus the director from Let the Right One In.

S&P Fires Shot Across the Bow

They'll downgrade US debt from AAA to D if the US misses a payment:

"If the U.S. government misses a payment, it goes to D. ... That would happen right after August 4, when the bills mature, because they don't have a grace period." The company would downgrade Treasury bills unaffected by the blown deadline, but not as much.

If you thought it was bad when AAA mortgage-backed securities turned out not to be AAA, just wait to see what happens when the full faith and credit of the US government is no longer credible. At that point, banking regulations under current definitions become essentially meaningless, since capital weights and risk-pricing models use "risk-less" Treasuries as their baseline. Using Treasuries as highest-quality collateral ends, and balance sheet accounting becomes a bloodbath. Under current capital requirements, which banks wouldn't be immediately insolvent if Treasuries went to D? I can't imagine a scenario in which this would not lead to a bigger financial crisis than 2008.

The international dimension is also important. China will be very, very unhappy, as you would be if your "safe" $1tn+ investment turned out to be not-so-safe; battered banking sectors in Europe and elsewhere would take another (bigger) hit; if the US banking system goes, everything else goes with it. This could be Creditanstalt times a thousand. Or a million. I don't even want to think about it.

Republicans seem to be worried that continued deficits will weaken the credibility of the US, eventually leading to higher bond rates. However, a default would guarantee that outcome immediately and catastrophically. It's like shooting yourself in the face today to prevent your future self from being mugged.

I'm not as pessimistic as many others concerning the US political system, so I still believe that a deal will get done*. And I understand that dancing closer to the edge of the cliff can be a good negotiation strategy**. But it's also perilous.

*Surely the GOP realizes that if they blow up the global economy not a single one of them will win re-election for a generation.

**All those people who said that IR work on nuclear deterrence was irrelevant post-Cold War might want to reconsider; this is the nuclear option.

[UPDATE: Here's Geithner's letter to the GOP. Nice invocation of Reagan. Nice job of telling them that they either don't know what they're are talking about, or are gambling recklessly with a precious resource.]