Tag: economics (page 1 of 2)

“There was something missing from scholars’ models of political and economic life: ideas”

The Chronicle of Higher Education has a longish write-up on Pinar Dogan and Dani Rodrik’s efforts to exonerate Dogan’s father after he had been caught up in then Turkish Prime Minister Recep Tayyip Erdogan’s efforts to push Turkey’s generals out of the political arena. At the heart of this effort was the publication in 2010 of documents detailing an alleged plot—Operation Sledgehammer—by Turkish military leaders in 2003 to overthrow the government by undertaking a massive campaign of state terrorism. Dogan’s father was a general in 2003 and was, according to the documents, the leader of the coup that did not happen. Rodrik and Dogan undertook to demonstrate her father’s innocence and, in the process, pretty conclusively showed that the documents detailing Operation Sledgehammer were fake.

So far, just an interesting example of an economist venturing over into politics. Continue reading

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Classroom Activity: Globalization and Inequality Within and Between Countries

This activity comes after students are to have listened to a lecture (slides) on political economy, a considerable focus of which was on identifying the winners and losers from economic cooperation.

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Abenomics is Not more Dangerous than the North Korean Missile Program

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I continue to be amazed at how the Korean government won’t admit that Japan’s revival is really good for democracy in Asia and the prevention of Chinese regional primacy. No less than the SK finance minister (pic) actually said Abenomics is more dangerous to SK than the NK missile program. Wait, what?? The worst totalitarianism in history gets a pass when the Bank of Japan prints a lot of cheap money? Come on. That’s unbelievably irresponsible. Are Korean officials so deeply bought by the chaebol that they actually have to say stuff like that? Honestly if Minister Hyun really believes that (I doubt that though, see below), he should probably resign. This is just an embarrassment.

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5 Fox News Myths about the Fiscal Cliff – and no more ‘Cliff’ Metaphors either… please! stop!

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Does anyone else find Fox News strangely appealing to watch? For some reason I watch it all the time. As ideology that is inadvertently entertaining, interwoven with a veneer of ‘news,’ it’s a freaky, terrifying wonder to behold. It is vastly more interesting – maybe because it’s akin to experiencing an alternate reality –  than it’s-so-bland-what’s-the-point-anymore CNN. Watching Fox is like watching yourself become dumber, all while being shamelessly entertained by gorgeous teleprompter-readers and militant American nationalism. It’s like the news + ‘Call of Duty’ + ‘Baywatch.’

As a news station it is, of course, preposterous. Its presentations are astonishingly partisan. Even after 15 years, I am amazed at what Hannity, O’Reilly, etc. can get away with (try here or here in just the last few weeks). It does very little investigative/reportorial work itself. It generally repackages what other outlets have produced, or presents lengthy ‘Crossfire’-style opinionating, which is not really journalism. And it’s Michael Bay-style presentations, particularly its graphics and swooping necklines, make the news look like an action movie, not like, you know, the news.

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When the Asian Growth Model Starts to Stumble, or how Korea could go like Japan if it’s not careful

Newsweek

Newsweek Japan asked me for an long-form essay on Korea’s economy for its December 5 issue (cover story to the left). Here is the link in Japanese, but I thought it would be useful to publish the original, untranslated version as well. (If you actually want the Japanese language version, email me for it please.)

The essay broadly argues that Korea needs to move beyond ‘developmentalism’ toward economic liberalism, as a lot of Asia does in my opinion. Regular readers will see themes I have emphasized before. This was intended for the print edition, so there are no hyperlinks included in the text. Here we go:

“As Korea’s presidential election moves into the home stretch (December 19), the local economic discussion is sharpening. Inequality, demographic collapse, massive concentration of economic weight in a few mega-conglomerates, weak consumer purchasing power, growing trade friction over intellectual property rights, and a chronically under-powered small- and medium-enterprise sector (SME) are among the major problems this outwardly very successful economy must confront. Unfortunately, none of the major candidates are pushing the deep reform needed to fix these underlying issues. As with China’s leadership transition, things seem so good at the moment that elites are wary of rocking the boat; as with the recent American election, tough choices will likely once again be kicked down the road. In Korea’s case, that means moving away from its ‘developmentalist’ growth model before encountering troubles similar to Japan’s.

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Economist 2012 Conference on Korea: Foreign Ownership in Korea

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Each year in September, the Economist holds a conference on the Korea economy (a part of its Bellwether series on Asian economies). They invite me to come, and then I try to write up my thoughts on it in the JoongAng Daily (which I think is the best newspaper in Korea) as an op-ed. Each year, unfortunately, we seem to argue about the same things – a proper, untweaked float of the won and the openness of the Korean economy to foreign products and owners. Here are my thoughts from 2010 and 2011. I was so busy in the last few months blogging about the US election and other stuff, that I didn’t get a chance to reprint the JAD op-ed. But I like it, so here is the link a few months late, and here is the text itself:

“Last week the Economist magazine held its annual conference on Korea’s economy. This series is rapidly becoming the most important regular discussion in Korea for Korea’s foreign investors. Last year in these pages, I was critical of the Korean speakers’ response to foreign concerns. This year was an improvement. The finance minister particularly fielded a tough question about foreign investors’ rights in Korea in the wake of the Lone Star debacle. To his credit, he admitted what many already know from that case – that the Korean public is deeply ambivalent about substantial foreign profit-taking and ownership of major Korean assets.

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More on Abusing America’s ‘Exorbitant Privilege’: Will the Bond Market Turn on the US at a 100% Debt-to-GDP ratio?

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As part of a now lengthy chain (one, two, three, four) on US allies and the likelihood of US retrenchment, I argued that American hegemony, despite America’s huge debt and deficit, is more financially stable than almost anyone expected. Because foreigners’ appetite for dollars seems unquenchable and because we print the global reserve currency, borrow in it, and face no serious reserve challengers (the euro and RMB maybe, see below), US can exploit this ‘exorbitant privilege’ far worse than anyone ever thought.

For example, I think almost everyone expected the bond-market to turn against the US in the last decade given: exploding debt and deficits, huge welfare state expansions like Medicare part D and ObamaCare, the expensive and financially-unplanned GWoT, China’s relentless ascent, the Great Recession, and two rounds of quantitative easing. Wow – that’s a helluva list. Despite all that, interest rates and inflation are low, because we can exploit (and have) that exorbitant privilege. Stein’s Law says there must be a limit, but I think almost everyone is amazed at just how deep confidence in the dollar goes.

More simply put, foreigners so want dollars, that America can just print more and more dollars without consequent inflation, and borrow a lot from foreigners very cheaply (because they want those dollars so much). This means America can borrow and/or just print huge amounts of money at very low interest and inflation rates. That is ‘exorbitant,’ I presume, because no one else can do that without Greece-style financial trouble. We can borrow at low interest rates (the rate on the US ten-year bond is around 1.5% right now) and print lots of money (the recent quantitative easings, e.g.) without suffering like so many others who over-borrow and run the printing press. I find Barry Eichengreen’s book on this is helpful.

Vikash gave such good commentary on this tangle, that I have reposted our full debate on US borrowing and hegemony below. It gets fairly wonky, so please read the OP. Also, comments from anyone in IPE is much desired. Specifically, can someone tell me please when the US will finally hit the ‘soaring’ inflation and interest rates regularly predicted by deficit hawks at the WSJ or CNBC? This is what Romney means when he says we will become Greece, but I just don’t see any evidence of that. Does anyone have a good guess on the timeline for exploiting the exorbitant privilege? When does it finally give way? When do foreigners turn against us in the bond market? As I said in the OP, I think it (super cheap US borrowing) has gone on already far longer than anyone expected. But I also think that a 100% debt-to-GDP ratio might be the bond-market turning point. That is a pretty big psychological benchmark. And we’ll probably get there before the end of the decade.
So here is our debate on this:

Vikash Yadav: “While I generally agree with your argument about America’s exorbitant privilege (and I can just see DeGaulle and D’Estaing spinning in their graves) there may be some other ways to read the data on international reserves.

First, I believe the US dollar as a percent of international reserves kept by other countries has actually fallen from about 72% in 2000 to somewhere around 62% in 2011. It will tick back up a bit after this year, but certainly not back to what it was a decade ago. So there does seem to be a slow decline if we look at the composition of foreign exchange reserves. Of course, since there has been a dramatic increase in the amount of reserves being kept in the last decade, the US can borrow very easily.

Second, the dramatic growth in the amount of reserves being accumulated, particularly in Asian emerging markets since the Asian financial crisis, most likely represents a form of insurance against reliance on the IMF in crisis situations. As such, this somewhat weakens the ability of the IMF to advance a stark ideological agenda (through conditional lending in the context of a crisis) which has largely been shaped and spread by American trained economists (in what James Boughton rightly described as the Silent Revolution) and the US government since the 1982 debt crisis. If global hegemony consists of more than just the ability to project military power, then American hegemony is not rolling along all that smoothly. It is also worth noting that a very large chunk of the reserve holdings is probably attributable to two Asian countries, Japan and China. My hunch (and I haven’t checked the numbers) is that around three quarters of world reserves can be attributed to about seven or eight Asian countries (particularly if we include sovereign wealth funds in the mix). So I think it is inaccurate to imply that foreigners in general have an unquenchable desire to hold dollars.

Finally, to your point about China slowing down and thereby giving the US a breather or a chance to “recover in a way”… China is currently set to surpass US GDP in 2018 if it grows at 7.75% in real terms and the US grows at around 2.5%. Let’s say the Chinese growth rate slows to 5% because it fails to make serious reforms, the US won’t get more than three years of a breather b/c Chinese would still surpass the US in 2021 (for underlying assumptions see:
https://www.economist.com/blogs… ). It is in the realm of possibility that China could derail in the next decade, but China does not really need to make major reforms to surpass the US. And since the neo-liberal American state has squandered its borrowing on wars and consumption, it hardly has made the kind of infrastructural and human capital investments that could spark a resurgence in the next decade. Meanwhile, if China does reform at least its monetary policies and shore up its banking sector by injecting its banks with capital, Christine Lagarde has stated that the Yuan could become an international reserve currency in the future – a prospect not wholly threatening to the Chinese government.”

Robert Kelly (me): “Stein’s Law – if something cannot go on forever, it will stop – was conceived with exactly this current account imbalance problem in mind, but printing the reserve currency seems to let it go on and on, long past what everyone ever thought. My inclination is to agree with you, and originally I thought a lot about retrenchment because of this concern. But US borrowing costs are going down (1.44%), not up; foreign ownership of US assets is going up, not down: https://www.cfr.org/content/pub… and informal dollarization is widespread: https://www.imf.org/external/pu…. Not even the GWoT-Great Recession-QE three-step – cue the Ron Paul freak-out over the gold standard – lead the bond-market to turn against the US. Wow. I just can’t figure that out…

I used to believe folks like Niall Ferguson or Barry Eichengreen on this: https://online.wsj.com/article/…. But these inaccurate predictions have been made since Nixon closed the gold window unilaterally – 40 years ago!

This tells me that there is a lot of confidence in the dollar, or to be more specific, there is little confidence in other fiat currencies, which is all the dollar really needs. The euro-zone crisis particularly is a huge boost for the US. And I am pretty skeptical of the internationalization of the RMB. Exchange rate manipulation has been a pretty central element in the ‘Asian miracle’ formula since 50s. Japan has never really permitted proper internationalization of the yen even though people talked about that a lot in the 80s and 90s. And given how much poorer and poorly governed China is by comparison, I have large doubts that China will internationalize the RMB properly or soon. Maybe, but just consider the amount of corporate governance improvement (all the sunlight in dark corners of the banking system) required for China’s banks to really open up. That could get really ugly and even threaten CCP rule because of the sheer scale of corruption I am almost positive it would unveil.

Finally, there is a problem in just comparing raw GDP sizes. As Wohlforth and Brooks argued in World Out of Balance, simply adding more and more poor people will eventually give any state the world’s largest GDP. Instead, absolute GDP must be cross-referenced against GDP per capita. What exactly is the right ratio of GDP vs GDP-per-capita in making the calculation of whether a state is great power or not, is actually a really good question. I.e., China won’t displace the US superpower when its GDP is larger absolutely, but it is also so demographically big, that it probably doesn’t need to equal US GDP per capita to displace the US either. What would a reasonable GDP per capita threshold be – 50%?”

VY: “First, like you, I don’t think the current account situation will force retrenchment of alliance partners. What we are seeing instead is a continued hollowing out of the state over time but this may be unrelated to the dollar’s status as the premier international reserve currency (a status propped up not so much by faith in the US economy as rational attempts by emerging markets to shield their sovereignty from American economic imperialism) except to the extent that the dollar’s status facilitates easy credit to continue the trend. An economically neo-liberal state stakes its claim to sovereignty mainly on the provision of (domestic and cross-border) security and opportunities for unrestrained consumer consumption. The evidence of US decline will not be found in military sector or in the prison industry; decline is evident in the neglect of infrastructure, education, healthcare, etc. while inequality grows and democratic governance fades. The state will still be able to project power for decades to come but it will gradually erode the basis for internally regenerating that power and it will have to rely more and more upon poaching talent, financing, and resources from other countries.

Second, the establishment of the Yuan as a reserve currency would take at least a decade, probably two — as it did for the US near the start of the 20th century. But I would not be too concerned about transparency in the banking sector. The US financial sector is clearly non-transparent, over leveraged, excessively inter-dependent, and brittle as the last crisis showed. Some reform is necessary to be sure in both countries, but the banking sector is not the main barrier to the Yuan becoming a reserve currency.Third, I think GDP at market rate is the appropriate comparison for our purposes. Measuring GDP per capita (particularly at PPP) is more useful as a rough indicator of economic development (if it is coupled with data on income distribution and broader indicators of human development). Aggregate GDP comparisons are more useful for our purposes because this tells us something about what the state can tax and use to build or purchase military resources.

The new great powers will be different from those of the last century, they will be characterized by the persistence of mass poverty alongside the accumulation of massive revenue — as great powers were before the industrial revolution. What is important to note is that China is on track to surpass the US and once it does it will continue to generate ever greater GDP even if it only increases productivity by a little bit each year. It will take about four decades before China catches up in per capita terms, but the Chinese state will gain significant resources well before then. Of course, (and as you noted) China has long since realized the pitfalls of translating economic power into military power too quickly — so I don’t think it will aim to displace the US so much as to assume its rightful place a major power.”

RK (me): “Our comments are becoming more dense than the post itself. I guess we are fairly close. I would add a few final points.

1. I am not sure how neoliberalism or the economic sovereignty of LDCs plays into this.

2. When it comes to hollowing out, I don’t actually see that so much. Borrowing allows the US to put off choosing between guns and butter, and that ‘putting off’ has lasted far, far longer than anyone ever thought possible. That is what is remarkable and what motivated the post. The last decade expanded, not hollowed out, the welfare state with Medicare Part D and ObamaCare. The real welfare question at home, IMO, is not raw levels of funding declining under the weight of defense spending, but distributional issues; i.e., transfers are increasingly upward, from poorer healthier workers, to wealthier, unhealthier retirees.

3. Obviously spending of any kind is fungible, so defense spending obviously leaves less for everything else. In that general sense, one could argue for hollowing out. But I think a better question is, if we can no longer borrow to have both guns and butter, what will be choose? One read of the GOP’s effort to delegitimize ObamaCare, SS, and Medicare is to pre-set the ground for this debate. If the GOP convinces Americans that the welfare state is for lazy slacker wimps, that makes it easier to ring-fence defense and so keep hegemony rolling along.

4. But I don’t honestly think Americans will choose guns over butter. No matter what the GOP says, SS, Medicare, and Medicaid are part of the US social contract now. They’ve been around a long time, and people have come to expect them; they feel they are ‘rights,’ not ‘programs.’ Norquist may think ‘starving the beast’ will work, but so far it hasn’t, because the government borrows, not cuts, when taxes short-fall. The GOP is fundamentally out of step with American expectations of government assistance, but it has (very destructively) convinced the median voter that he shouldn’t have to pay for such assistance (hence we borrow). So when Perry and others call SS/M/M ‘ponzi schemes,’ people worry, just like W’s second-term effort to privatize SS failed miserably. In fact, I think if Americans were really forced to choose between more aircraft carriers and checks for grandma, they would choose the latter. This is one reason I find the DC foreign policy consensus for hegemony so toxic and support retrenchment. I don’t think most Americans want ‘empire;’ they want welfare and safety nets (in part because exceptionalist, ‘foreign-aid-is-for-third-world-socialists’ Americans generally couldn’t care less about foreigners. It’s DC elites who get teary-eyed comparing the US to Pericles Funeral Oration and say we must be the ‘weary titan’ who sacrifices at home for a ‘national greatness’ cause abroad.

5. On RMB internationalization, I am far more skeptical than you. Agreed, the US banking sector is a mess, but comparable to China, really? The difference is still vast to my mind – can foreigners even list on Chinese stock markets? I wonder how many people would really be prepared to hold serious savings and value in a currency from a still technically communist state whose banking and corporate governance ‘rules’ are shot through with famialism, corruption, and informal political manipulation. These problems still plague the won and the yen, and Japan and SK are decades ahead of China in terms of openness and development. Is China really ready for serious, long-term foreign ownership of major assets and to allow the market to set the RMB’s value without tinkering? I doubt it; no one else in Asia does that and never has. I still think currency manipulation and other gimmicky nationalist barriers are central to the Asian growth model. Here is a nice example of just how bad this can be, even in supposedly-open Korea.

6. And that brings me to my last point on Asian self-insurance. I agree that some of Asian stockpiling is to prevent IMF ‘imperialism,’ but Japanese, Korean, and Chinese stockpiles go far, far beyond what is needed for reasonable exchange rate defense. In fact, all three purposely and regularly intervene to make their currencies even softer, making me wonder what ‘defense’ is needed. IMO, these reserves really reflect, 1) Asian mercantilism, the very deep social belief in these states that they absolutely must run a trade surplus, and 2) the enormous political power of mega-exporters in these states. Asian consumers are punished with insane foreign reserve levels and exorbitant prices because the kereitsu, chaebol, and Chinese super-exporters are deeply tied at the highest levels to political elites in tight collusive circles of corruption. The bizarre side-effect of this East Asian crony corporatism is massive US dollars holdings which the US can then borrow at insanely low rates – hence the point of the OP.”

Cross-posted at Asian Security Blog.

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America’s ‘Exorbitant Privilege’ means it can Borrow to Sustain Hegemony Longer than Anyone Ever Expected

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Two of my posts this week (one, two) on hypothetical retrenchment under Ron Paul got a lot of traffic and comments. (H/t to Stephen Walt and Andrew Sullivan.) So here is some follow-up.

The OP was intended as an emergency exercise if the US were to face a truly significant crisis that forced retrenchment. The purpose was to ask who are the most important US allies and commitments if we were forced to choose. Right now, the US is not choosing. We are all over the place; if anything, we are taking on more commitments (Iraq, Afghanistan, Pakistan, Yemen, the Asian pivot). As I tried to say in the second post, I don’t think we are about to pull out of Japan or Egypt, but if we get to the point where we really can’t afford globe-spanning hegemony anymore, it would be help to try to prioritize what is genuinely strategically necessary, from what are ‘extras.’ One doesn’t hear this much, except for Ron Paul, whose debate performances motivated the post.

On this point, I should say that the bifurcation of the OP into two parts was not to indicate that those in part 2 should get the axe; it was just a matter of convenience. The point of the OP was to try to force a ranking – who is more important to the US than who? This is why I tried to limit the listees to a conventional ‘top 10.’ To go beyond that tight focus, would get us back into the global alliance sprawl the US is in now.

The above point raises the next, obvious question about whether we are therefore getting to a point of forced US retrenchment. There is a whole declinist literature that emphasizes long-term US problems, like atrocious public finances, too many wars, bad public schools, political gridlock, rising anti-Americanism in the world, etc. Zakaria’s ‘post-American world’ captures are lot of this, and apparently the Chinese believe the US is in decline too. A good quick version is Gideon Rachman’s take at FP.

I go back and forth on this myself. The economist in me finds it hard to imagine how the US can borrow $1-1.5T a year and stay on top. We’re borrowing around 9% (!) of GDP per annum, and the IMF calculates America’s debt-to-GDP ratio is 100% already (if you include state debts; it’s 75% now at just the federal level.) I wonder how we can fight so many wars without national exhaustion and diversion of investment from domestic priorities like infrastructure or health care. Signal markers in the decline and fall of empires are heavy borrowing and lots of wars, which sounds a lot like us, no?


That said, I am constantly amazed (and intellectually perplexed) that foreigners seem to have an unquenchable thirst for dollars. This is the big reason why all those claims that the US would collapse under its debt burden have never materialized. Longstanding lefty critics of US foreign policy, like Noam Chomsky, Johann Galtung, or Walter LaFeber, have been saying this stuff since Vietnam, and it doesn’t happen. (Continental Europeans particularly seem to relish predicting US decline.) I am genuinely amazed the catastrophic one-two punch of the Great Recession and the flown-badly-off-the-rails GWoT in less than a decade did not dramatically set-back US power. Remember when S&P downgraded the US last summer, and yet the very next day, US interest rates went down as everyone fled to the greenback safe-haven? America’sexorbitant privilege’ of printing the reserve currency is even more exorbitant than anyone ever expected.

I remember last decade, when people said the Bush administration’s $400B annual borrowing was unsustainable. Yet for the last 5 years, we borrowed triple that, with another decade projected at that level – but with the lowest interest rates in US history. If your head feels like it is about to explode for sheer perplexity, yes – me too.

America’s ability to borrow, and thereby forestall retrenchment, is simply astonishing. The rate on the US 10-year T-bill is at an all-time low of 1.44%. If you factor in inflation across the ten-year maturity life-span, the borrower actually loses money! So If you want to know one big reason why the US fights so many wars, here you go: because we can, because foreigners make it so easy by practically begging us to take their money. It’s surreal how cheap we can borrow.

Krugman makes this really good point in his latest op-ed: “none of the disasters Republicans predicted have come to pass. Remember all those assertions that budget deficits would lead to soaring interest rates? Well, U.S. borrowing costs have just hit a record low. And remember those dire warnings about inflation and the “debasement” of the dollar? Well, inflation remains low, and the dollar has been stronger than it was in the Bush years.” My own deficit-hawk instincts say conservatives are right about the debt build-up, but in fact, Krugman has been borne out. So why not fight more wars (at least by economic criteria) when they are so cheap? Foreigners seem endlessly willing to fund our wars, which I find so bizarre and inexplicable that I wouldn’t believe it unless it were the reality around us right now.

Worse, for the declinist, retrenchment-will-be-forced-on-the-US position is that, the euro-crisis continues to make the US dollar a preferred safe-haven (so lowering US borrowing costs), that China must continue to lend to the US in order to hold-up the value of its current $3T+ reserves (yet again pushing down US borrowing costs, no matter how many commitments we take on), and finally that a growing body of evidence suggests that China cannot continue its astonishing growth levels without serious reform. Wen Jiabao himself said that China risks turmoil on the scale of the Cultural Revolution (!) without major changes. I tried to argue this also in the second half of the OP. If China slows, that automatically buys US hegemony a breather, because position in international politics is relative: if China slows, then the US recovers in a way. And it is increasingly obvious that there are lots of ways China could derail in the next 2 decades: whether through tightening environmental and demographic caps on growth, from political or democratic transition turmoil, by scaring its neighbors so much that they line-up to contain it.

In short, US hegemony and alliance sprawl is turning out to be a lot more durable during this period when the US is seemingly on the ropes, than I thought. In fact, I think a lot of people are amazed at the staggering ability of the US to borrow and keep our global hegemony rolling along. The US is exploiting its ‘exorbitant privilege’ worse than at any other time in its history – and the inflation-adjusted cost to us is zero! I just can’t figure that out, or what that means…

Cross-posted at Asian Security Blog.

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Yes, Matt Yglesias, Panem is an extractive, totalitarian empire

[UPDATED] Yglesias asks if “any real country could have an economy like Panem’s?” His answer comes via a synopsis of Daron Acemoglu and James Robinson’s Why Nations Fail:

The places that are rich today were poor then, while those that are poor today were generally rich in the past. This, they argue, is no coincidence. When Spanish conquistadors showed up in the prosperous areas of Latin America, they stole all the gold they could get their hands on and then set about putting the native populations to work. They set up “extractive institutions” whose purpose was to wring as many natural resources (silver, gold, food) from the land as possible while keeping power in the hands of a narrow elite. These institutions discourage savings and investment, since everyone knows any wealth can and will be arbitrarily expropriated. And while the injustice of it all led to periodic revolutions, the typical pattern was for the new boss to simply seize control of the extractive institutions and run them for his own benefit.

In short, Yglesias thinks that Panem makes sense when it comes to raw-materials extraction and agriculture, but less well when it comes to the production of complicated manufactured goods.

Collins wisely avoids going into detail about what life is supposed to be like in Districts specializing in luxury goods or electronics. It’s difficult to have a thriving economy in electronics production without a competitive market featuring multiple buyers and multiple sellers. 

Absent market competition, personal computers never would have disrupted the mainframe market and the iPhone and Android never would have revolutionized telecommunications. Entrenched monopolists have no interest in developing new technologies that shake things up. It’s difficult to get real innovation-oriented competitive markets without secure property rights, and exceedingly difficult to have secure property rights without some diffusion of political power. That needn’t mean real democratic equality—a standard the United States and Europe didn’t meet until relatively recently—but it does mean fairly broad power-sharing, as the U.S. has had from the beginning.

Yglesias’ line of analysis is pretty unobjectionable, but it does run into a few issues.

First, in relative terms, Panem’s core and inner-periphery appear to have developed consumer markets.  Capitol itself is given to conspicuous consumption and its elite enjoy a particularly high standard of living, even by contemporary US standards. The low-numbered Districts, particularly Districts 1 and 2, are far more prosperous than District 12. Just because a polity engages in significant economic extraction does not mean that its metropole and more prosperous peripheries cannot produce market forces that drive at least some innovation, as was the case with European colonial empires and any number of city-state empires.

Second, the more interesting interaction is, as Yglesias touches on but doesn’t give adequate attention to, whether Panem’s totalitarian impulses discourage innovation. This is a much broader topic, but my sense is that we shouldn’t confuse the “innovation gap” between, say, the United States and the USSR with a claim about lack of innovation in the Soviet Union. The Soviet Union was, for much of its life-cycle, reasonably innovative on a number of scientific fronts. Given Panem’s apparent lack of full-fledged international competitors–and hence fears about a technology gap with other states or empires–I don’t see a major problem for Collins on this front.

Indeed, as one of Yglesias’ commentators points out, Panem exists at least a few centuries in our future in a post-collapse environment.

My reading of the technology of Panem is that it is largely stagnant itself, much of it the remnants of a more enlightened time before what seems to have been an somewhat apocalyptic event. What advancement their is is indulgent and trivial. It is implied, for instance, that life in District 12 has not changed much for a long time – no new ways of mining, neither more nor less oppressive than it had been, no indication of technological progression. You can imagine an electronics district that is like Foxconn etc; capable of competently creating electronics with all the necessary precision, but not particularly invested or interested in *what* they are making.

Third, Yglesias misses one of the more important consideration regarding Panem’s plausibility: the size of its population. District 12’s population is around eight thousand. One impressively obsessive estimate places Panem’s entire population at no more than four million–a number that strike me as extremely high from the scattering of information found in the novels. This high estimate would make Panem’s population roughly that of late medieval/early modern England, less than half that of New York City. This is an exceedingly small population, and one dispersed over a territory the stretches from at least modern-day Colorado to to eastern Kentucky. I am not convinced that Panem’s population, which may very well number in the low hundreds of thousands, could sustain its economy.

All of these speculations run into a fundamental problem. We are discussing a society with extraordinarily advanced genetic engineering, let alone other futuristic technologies. Moreover, Panem resides in a world with a much diminished carrying capacity. We should not assume that the economic logic of the present, let alone the premodern past, provides us with clear guidance for assessing Panem’s plausibility.

[UPDATE]: I hope that PM has more to say about this later, but one implication of Panem’s low population should be very expensive labor–which raises questions about the Capitol’s choice of labor-intensive production techniques, most notably in the Districts devoted to raw-material production and basic manufacturing. But this isn’t really much of a mystery once we recognize that Panem’s economic system is subservient to its political structure. The Capitol’s segmentation of the Districts by position in the chain of production, its creation of artificial energy scarcity, and its monopolization of the flow of resources among the Districts… these are classic, if rather extreme, forms of divide and rule. So if we want to assess Panem economics, we need to do so through the lens of political economy. Or as Aristotle might say, politics really is the master science.

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GOP SotU Response Better than SotU (2) – Didn’t Expect that

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Part one of my response to Obama’s 2012 State of the Union is here.

3. The foreign policy section was weaker and more militaristic than usual. The opening bit about the Iraq war making us ‘safer and more respected around the world’ was jaw-dropping. I guess this really is a campaign speech outreach to the right, because I can’t believe any of the president’s 2008 voters actually buy that line. Does anyone believe that anymore, except for the right-wing think-tank set or something? Wow. Didn’t we vote for Obama because of exactly the kind of Bushian American hubris that can read an unjustified, unprovoked, unilateral assault on another state (which would have provoked howls of rejection by Americans if done by any other country in the world) as a great American victory? Veterans too got a pander wishlist – even though even Michelle Bachmann (!) has come to realize that VA benefits will have to be included in any budget deal.


Next came the deeply disturbing comparison of the US democratic body politic to a special forces team. Wow, again. Really? A wildly diverse, sprawling, open, liberal culture should look to JSOC for its model? We are not a nation of armies, and the discipline and anti-individualism of the military is exactly not what we want in our politics. We want our politics to be open, rich, boisterous, a bit chaotic, even fun; we want a social culture open and tolerant enough to create artists and musicians, entrepreneurs and eccentrics, poets and hippies and weirdoes and all that. This is basic Mill here, not Starshship Troopers. This reminds me of Huntington’s infatuation with a military lifestyle compared to pluralism in the Soldier and the State. The militarization of American culture since 9/11 is terrifying, and that even the president would deploy such analogies is all the more reason to end the war on terror and slow the growth of the military-industrial complex.

Finally, I guess Israel now is pretty much a state in the union: our guarantee is ‘iron-clad,’ which sure sounds a lot like a blank-check for Netanyahu to do something erratic. Iran, here we come! And you’ll notice there was nothing on the much-hyped ‘Asian pivot,’ which I am convinced is bogus, because Americans don’t care about Asia.

4. The 2010 GOP response was so reliably jingoistic, shallow, and self-serving, I gave it its own post. But was anyone else really pleased to see how restrained, polite, and professional Daniels was? I was amazed; I expected Tea Party-style hysteria about un-American influences, appeasement on ‘islamofascism,’ incipient erosion of the Constitution under ObamaCare, betrayal of allies, etc. (Where’s Glenn Beck when you need him?)
Instead Daniels was measured and his concerns reasonable. He called the GOP a ‘loyal opposition,’ rejecting the extremism of the GOP presidential debates about Obama as the greatest threat to American since WWII or something. He noted the president’s upright personal life. Ideally this wouldn’t make a difference in a liberal state’s politics. I couldn’t care less how many wives Gingrich has had, but the GOP has become worse than the nuns of my Catholic grade school on sex. The modern GOP wants to regulate the bedroom and the family, so it is nice to see Daniels admit that Obama meets that standard (hint: Gingrich,Limbaugh, and Rove don’t). He also noted how Obama didn’t create the crisis, even if he bucked how much W is actually to blame.
The criticisms that then followed were fairly reasonable. He’s right that we can’t just keep spending like this. Our status as a reserve currency printer does not permanently insure against a Greek-style run (although it does give us a lot more room to misbehave than anyone thought). The math on middle-class entitlements and debt is pretty terrifying over the next generation.
Here’s Sully again on Daniels, saying something similar. See how nice is to have a midwest Republican speaking like a normal guy? Kinda makes you like Ohio after all, huh?
Cross-posted at the Asian Security Blog.

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GOP Response Better than SotU (1) – Wow, How’d that Happen?

Each year I try to write on the SotU (2010, 2011). I know they are preposterously scripted, usually forgettable, and almost meaningless as a guide for the upcoming policy season/budget debate. But the political scientist in me thinks that showing the whole panorama of democratic government in one room is hugely instructive for the both US citizenry and for foreigners interested in the US, as well as a great example of how democracies differ from oligarchies and dictatorships with their sycophantic, faux ‘legislatures.’ Let’s hope that somewhere some Chinese, or Burmese, or Syrians can see this and dream that one day they too can … play their own SotU drinking game.

Further the SotU’s often give insight into the presidential mind (however distorted by focus groups) – what he thinks is important or not, ideal preferences for the country, American ‘exceptionalism,’ etc. In this vein, George W Bush’s 2005 SotU was easily the most important of my lifetime, as W laid out a soaring and terrifying image of the US a global democratic revisionist prepared to war for freedom indefinitely. It scared the pants off the country and the planet, but that in itself made it a major, frightening moment in the W presidency. So I still think we should watch them. But, I will grant that you should probably play one of those drinking games while you’re at it.

1. Domestic’s not my area, but I have to agree with Sullivan that this was just a grab bag of bleh. Instead of the big issues like deficit control, entitlement restraint, broad tax hikes (to actually pay for the government we want), defense spending control, etc., it was a bunch of populist/protectionist tax alterations that, as Sullivan notes, will make the tax code even more impenetrable than it is. Isn’t there pretty much a national consensus now that the tax code needs to be simplified? And the protectionism masquerading as ‘bringing jobs home’ was ridiculous – an unworkable tangle of new law, more government, more lawsuits at the WTO. That’s the last thing the world economy needs in the great recession, and you know MNCs will fight this stuff tooth and nail, move resources even faster, relocate, lawyer up like hell to find the loopholes, etc. If you are one of those conspiracy theorists looking for socialism from Obama, you finally got some evidence. This verged toward old school Democrats-from-the-70s industrial policy.

2. What a lame sop to manufacturing. I understand why, and part of me appreciates it. I’m from Cleveland; I have seen lots of small towns in Ohio get hammered by globalization and contraction of manufacturing (it can be fairly depressing to drive around the state). For decades, I have seen Cleveland slip and slip and slip; the city’s east side is so violent now. But honestly, this is the sort of stuff politicians always say to Ohio and the Midwest when elections come up. Not only is it bad economics (hold that thought), but, as Michael Lind and Thomas Frank have pointed out for years, the Midwest has never seen a big industrial turn-around despite the bi-annual pandering we get as swing-states. The first half felt more like campaign speech on my old street to get the neighborhood out to vote for Democrats, because this is the type of stuff the Ohio Democratic Party has been saying as long as I can remember. I imagine other midwestern listeners would think the same, but this was pretty much the ODP’s playbook, and Obama even mentioned Cleveland.

Part two will go up in two days

Cross-posted at Asian Security Blog.

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Quote of the Day

Krugman:

In short, there’s no reason at all to consider microeconomics the “real” economics and macroeconomics some kind of flaky impostor. Yes, micro is a lot more rigorous — but if it’s rigorously wrong, who cares?

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Raising the Debt Ceiling and Avoiding Economic Catastrophe

I keep meaning to write a follow up post on U.S. public opinion on climate change and how and why it matters for the world. But, the ongoing political posturing over raising the debt ceiling keeps commanding my attention. Everything I’ve read suggests that failure to resolve this by August 2nd would be what Federal Reserve Chairman Ben Bernanke called a “self-inflicted wound” on the part of the United States and potentially send the world in to an economic tailspin of perhaps unprecedented proportions. While we can’t know for sure what would happen, most sane observers of this unfolding catastrophe – Sebastian Mallaby, James Lindsay, Dan Dreznerthe U.S. business community, David Brooks, David Frum – suggest that this is one of those things in life that it would be wiser not to find out by trying our luck.

From an academic perspective, the question a few weeks ago was why weren’t the markets spooked and punishing the United States with higher interest rates and threats of a downgrade in the country’s credit rating. At the time, the somewhat obvious answer was that there simply wasn’t an alternative where investors could take their money. Many European economies are teetering in the face of debt crises of Greece, Ireland, and others. Japan is still recovering from the effects of the earthquake/tsunami/nuclear meltdown and the country had already been in the economic doldrums for more than a decade. Other countries that potentially could absorb global savings Australia and Brazil for example simply do not have markets large enough. Thus, despite the problems and doubts about America, investors still see the United States as the safest bet. Countries like China had too much money invested in the United States. Larger, more sustained efforts to shift to other currencies could do as much damage to China as they would to the United States.

In addition to these forces, markets were not punishing the United States because I think there was this expectation that surely American political leaders would sort this out. Yes, there will be this to and fro of political demagoguery on both sides as the country’s leaders try to position themselves for maximum political advantage. But, in keeping with Winston Churchill’s maxim, the Americans will ultimately do the right thing after trying everything else first.

In this case, the blinkered brinksmanship by both parties, but particularly House Republicans, has brought the country close to what might be an economic apocalypse. I do not write those words lightly, and I do actually mean them. My wife and I are expecting are first child in a matter of weeks, and I seriously worry that these so-called leaders may tempt fate by failing to reach a compromise on the debt ceiling and deficit reduction, one that includes both spending cuts AND new sources of revenue.

With climate change and the world’s increased environmental footprint, I worry about what kind of world our son will come into over the medium- to long-run. With the failure of the United States to raise the debt ceiling, I worry what kind of world he will be born into in three weeks. I am normally not prone to such dystopian thinking, but I hope for the sake of my family, your family, humanity as a whole that our leaders come to their senses and realize that now is not the moment to roll the dice with the global economy.

If you want to read what I’ve read on this, take a look at the last ten days of my Twitter feed

Re-tweets include debt calculators and show what bills we won’t be able to pay with existing funds. Other pieces look at how failure to raise the debt ceiling will drive up our borrowing costs and actually make the deficit worse. Others examine how a balanced budget amendment that House Republicans would like to attach to some final agreement would ultimately be a bad economic straitjacket in tough economic times. I also include links to threatened credit rating downgrades from Moody’s, S&P, and Fitch.
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To explain the origin of exchange, you must explain the origin of trust

I’ve just started reading Matt Ridley’s The Rational Optimist.  So far, it is an excellent, through-provoking read.  A key to Ridley’s argument is that the innovation of exchange–the trading between two parties of separate items or services that both parties value–that led to mankind’s dominance of the planet and the explosion of knowledge and technology.

Ridley explains how exchange–or barter–is qualitatively different from reciprocity (an activity that can be found in other species):

at some point, after millions of years of indulging in reciprocal back-scratching of gradually increasing intensity, one species, and one alone, stumbled upon an entirely different trick. Adam gave Oz an object in exchange for a different object. This is not the same as Adam scratching Oz’s back now and Oz scratching Adam’s back later, or Adam giving Oz some spare food now and Oz giving Adam some spare food tomorrow. The extraordinary promise of this event was that Adam potentially now had access to objects he did not know how to make or find; and so did Oz. And the more they did it, the more valuable it became. For whatever reason, no other animal species ever stumbled upon this trick – at least between unrelated individuals.

As I read this it occurred to me that Ridley is likely right, but also that exchange is just as dangerous an activity as it is a transformative one.  Why?  Because to base one’s existence on exchange means making oneself vulnerable to and dependent on others for what one needs.  As Ridley notes, earlier humans were self-sufficient.  But moving from self-sufficiency to exchange means trusting others that they will provide what you need and will honor the exchange.

In the present, we take this somewhat for granted.  I assume that my local grocer will have the fruits, vegetables, etc, that I need to feed myself and my family.  I don’t worry about the possibility that they either won’t have my food or that they will refuse to provide it to me in exchange for the money that I have.  But imagine back about 100,000 years ago.  At some point, someone had to take a very big leap and become dependent on someone else for what they required for survival.

As a political scientist, my initial reaction is that trust both emerged from repeated interactions with barter partners and was then institutionalized through the emergence of government.  Too often government is derided as an impediment to economic growth, but we often forget that without it one is hard pressed to explain sustained progress.  A capitalist economic system cannot function without a robust legal system that includes rules for exchange and a system that monitors and enforces violators.  How else can a society become so utterly dependent on anonymous, non-local actors to provide that which is crucial for survival?  That isn’t to say that government can’t also play a negative role–often it has.  But ignoring the positive, necessary role that it plays is quite dangerous in my view.  It also requires us to ignore the lessons of history.

I am only up to Chapter 2, and it appears that Ridley will take up this question of how trust emerged in Chapter 3.  I’ll be curious to see how he deals with this question and what answer he proposes.

[Cross-posted at Signal/Noise]

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Would A Few Trillion Dollars Really Help Afghanistan?

It is increasingly becoming evident that the venerable New York Times was played by the Pentagon last week. The announcement by a Pultizer Prize winning journalist that Afghanistan may have up to a trillion dollars worth of mineral resources under its war torn soil made a huge buzz. But this bit of “news” planted by the Pentagon was not very new at all (in fact, as the NY Times article notes even the Soviets knew about some of this) and the timing of the announcement seems very suspicious given the dismal shape of the US-led offensive in the southern provinces.

Nevertheless, the news has created its own reality and Afghan officials have recently announced that there is actually $3 trillion worth of mineral resources in the country. Well you know what they say, earning the first trillion is the hardest…

My hunch is that numbers like a trillion dollars are unfathomable for ordinary individuals. The idea of trillions of dollars is as difficult for the average American to grasp as the depth of poverty in Afghanistan where the current GDP (in terms of Purchasing Power Parity or PPP) is around $800 per person. And while $800 per capita is a dramatic increase over the Taliban era, it simply pales in comparison to GDP per capita in the US, which is $46,400 or nearly $127 per person per day. By contrast, Afghanistan is a country in which 45% of the population is unable to obtain the equivalent of 2,100 calories of food per day; nearly two thirds of the population live on less than the purchasing power of $2 a day.

Thus, I thought it might be useful to think through what these number might actually mean for Afghanistan over the long run. Making some laughably simplistic and linear assumptions, let’s assume that Afghanistan’s economy and population will continue to grow at the same rate over the next ninety years. We will ignore the informal economy altogether. Let us also ignore inequality in the distribution of income so that we can just use a very basic index of wealth and poverty: GDP per capita.

Scenario 1: No Massive Mineral Wealth

Afghanistan’s GDP in terms of PPP was $23.35 billion in 2009 and it grew at 3.5% in real terms (in other words the rate of growth when we subtract inflation). The population of Afghanistan was estimated by the US CIA at 29,121,286 in 2009 and the population growth rate was 2.471% per annum. Thus the GDP (PPP) per capita was about $801.82 in 2009. If I can assume that population and GDP will grow at exactly the same rate every year for ninety years, then it would appear that by 2100 the GDP per capita would only be about $1,822.00 (slightly more than double the current per capita income, and approximately the GDP per capita of Tajikistan or Cote D’Ivoire today).

Scenario 2: Massive Mineral Wealth

Now let’s assume (rather optimistically) that Afghanistan has $3 trillion worth of minerals and it can begin to harness a portion of that immediately and in equal installments every year for a century. We will assume that the price of metals will not fluctuate even though we’re adding to the global supply and we will assume that demand will be constant over a century (i.e. no technological innovation that renders these metals obsolete). So let’s say the economy gets $30 billion added to the GDP every year for 100 years starting this year and that this money is directly distributed to the citizens (by magic of course) instead of being invested in infrastructure and education. (Of course, given the current state of infrastructure and insecurity in the country, it would be optimistic to assume that all of the country’s mineral wealth could be extracted by 2110.) By my calculation that would only make the current GDP per capita $1,859.00. In 90 years, the GDP (PPP) per capita would rise to $1,982.00. (This is slightly more than the current GDP per capita of North Korea or Cambodia).

When we compare the two scenarios, we can see that the addition of $30 billion a year to the Afghan economy would permit the economy to leap over decades of hardship. However in comparison to the developed countries, the end result is still quite pitiful in per capita terms.

By 2100, even if the US economy grew by only 1% per year for 90 years and the population continued to grow at the current rate of 0.97%, the US GDP (PPP) per capita would be about $47,823. If the US Economy grew at a more realistic 2% per year with the same population growth rate, then the GDP per capita would be closer to $117,223 in 2100.

Currently, US income per capita is 58 times greater than in Afghanistan. If we take the better scenario for Afghanistan ($1,982 per capita) and compare it to the least favorable scenario for the US ($47,823) the per capita American income would still be 24 times the per capita income of Afghanistan at the end of this century.

What the scenario points out is the difficulty of catching up to the developed countries. Afghanistan is by far one of the poorest countries on Earth. It has very poor infrastructure and very low levels of human capital. A few trillion dollars in mineral deposits will not make Afghanistan into the Saudi Arabia of South Asia (which is not to imply that Saudi Arabia is a developed country by any means).

Scenario 3: Massive Mineral Wealth and Multiplier Effects

Okay, maybe I am being too pessimistic in this (really, really absurd 90 year) projection. What if the “discovery” of these natural resources spurs massive investment in infrastructure and human capital? Although natural resources tend to produce an enclave economy, corruption, and restricted infrastructure let us pretend that all of this wealth leads to multiplier effects upstream and downstream, that there is no corruption, and that infrastructure is built to serve the nation rather than just extractive mining industries. To factor in this multiplier effect, let us add an additional 2% to GDP per year. This would mean that the GDP (PPP) per capita by 2100 would be about $2,022.07. Of course, this is better than if there were no mineral wealth, but it is still a long way off from a prosperous society.

There are other ways in which the wealth could assist the state beside improving per capita income. For example, adding $30 billion to the economy each year could substantially reduce the country’s reliance on foreign assistance and the tax burden on ordinary citizens would be very low. Of course, this assumes that the state would not take out any loans and that 100% of the revenue earned from mineral extraction would be harnessed by the state. It also assumes (improbably) that insurgents and warlords will simply lay down their arms rather than starting a struggle to capture the most lucrative areas of the country. In reality, even if peace broke out, Afghanistan would have to invite foreign firms to extract the mineral wealth and the state would have to settle for earning royalties on the amount extracted. Given the massive amount of corruption in the country, I would estimate that the state would be very lucky to see 20% royalties on the value of the minerals extracted. But let’s ignore these inconvenient details.

Thus, even in the most optimistic scenario, there is little chance that $3 trillion worth of natural resources will usher in a new era of prosperity. At best, if there is no war and no corruption, it will multiply per capita income 2.5 times by the end of the century and it might lead to autonomy from foreign financial assistance. At worst … well Afghanistan has already been there before….

[Cross-posted from my Afghan Notebook]

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Does Democracy hinder economic growth?

Riz Khan from Al Jazeera is asking the question today. This is always a question that triggers enormous debate among my students. Many tend to jump on the “look at China” or “look at Chile under Pinochet” bandwagon as evidence that autocratic governments are better at imposing the level of discipline necessary to trigger and sustain economic growth. Michael McFaul’s new book Advancing Democracy Abroad: Why We should and How We Can has an extensive overview of the literature on the question. Notwithstanding the loaded title, McFaul does concede that there is much we still don’t understand in the relationship between regime type and economic development. He also acknowledges that China’s average annual growth rate is historically unprecedented and that no democracy has ever come close to matching China’s growth over the past twenty-five years.

Nonetheless, the book is a defense of democracy and he argues that democracies are better situated to promote stable and sustained growth: 1) democracies often protect societies from the worst forms of economic disasters — the same can not be said for autocratic regimes such as Stalin’s disaster in the 1930s in the USSR or Mao’s catastrophic famine and deprivations of the Cultural Revolution. Amartya Sen has often made the same point that no democracy has experienced a famine. 2) On average, democracies might not perform as well as the strongest growing autocratic regimes, but for every China there is also a number of Zaires, Burmas, or North Koreas. For all the faults, democratic regimes often have higher levels of accountability and policy recalibration. They also tend to have more liberalized trade policies, abilities to accumulate human capital, and incentives for innovation and entrepreneurialism — all of which facilitate development and growth.

Thoughts?

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War and the Economy

Two somewhat parallel stories have emerged, one from Europe the other from the Americas, about political leaders who believe that war fighting may be necessary for a strong economy.

First, according to the Guardian:

In a radio interview given on his return from a tour of German military bases in Afghanistan earlier this month, Köhler, a former head of the International Monetary Fund, said that the largely pacifist German public was finally coming to terms with the concept that their country could no longer avoid involvement in military missions, which helped “protect our interests, for example, free trade routes, or to prevent regional instability, which might certainly have a negative effect on our trade, jobs and income”.

The remarks were seized upon by the German left, who accused Köhler of supporting a type of “gunboat diplomacy” and of betraying the thousands of German soldiers who are currently stationed in Afghanistan.

Second, according to the Huffington Post, President Bush apparently told former Argentine Prime Minister Néstor Kirchner that all of the growth experienced by the US had been based on the different wars it had fought:

Kirchner, in a meeting with Bush, suggested that the United States replicate the successful nation-building strategy it implemented at the end of World War II.

“And he stood up from his chair and got angry. He told me, ‘A Marshall plan! No! That’s a crazy idea from the Democrats. What needs to be done here, and the best way to revitalize the economy is — the United States has grown based on wars,’ he told me. That’s what he told me,” Kirchner recounted.

Bush added, said Kirchner, that “all the economic growth that the U.S. had had, had been based on the different wars it had waged.”

The former Argentine leader, whose wife now heads the country, made the comments in an interview with Oliver Stone for his upcoming documentary “South Of the Border.”

In Germany, President Köhler resigned abruptly because of his comments; in the US, there has not been much reaction beyond the blogosphere that I can detect.

I don’t think that Köhler’s statements would be controversial in non-pacifist countries with large economies (i.e. countries other than Germany or Japan).  The main problem with his remarks was that it did not seem to make much sense when applied to Afghanistan — a country with few resources or markets that Germany needs or wants.  Köhler tried to clarify that his remarks were a reference to the horn of Africa, but apparently he did not convince many of his critics.

Bush’s comments, if Kirchner’s account is correct, seem more controversial.  To say that all of America’s economic growth is based on wars seems rather sweeping.  But I don’t think his idea should be dismissed out of hand. While the outbreak of hositilities often rattles markets, war and preparation for war fighting can stimulate an economy in terms of employment, organization of the factors of production, and technological advancement.  Of these three, my hunch is that technologicial advancement provides the greatest stimulus to growth in a large and generally competitive market economy which no longer relies on conscription for its military.  As technological inventions filter through the economy, they can stimulate growth in a wide range of economic activities (e.g. the Internet).  Innovations which increase efficiency are the major source of economic growth in an economy which has almost fully mobilized capital and labor.  These technological advancements might be possible without massive defense spending, but it would probably take longer to achieve and refine new technologies, particularly given the general impatience of capital in the US.  (But we have to acknowledge that massive defense spending is not always an efficient use of capital and often results in waste and corruption.)  So the issue is whether technological advancements created by defense spending are propelling the economy.  Certainly we can see that in the current war in Afghanistan, defense spending is leading to great leaps in surveillance technologies (e.g., drones and biometrics), and previous inventions in defense related fields are also still filtering through the economy (e.g. telecommunications).  Of course, other major technologies which propel the American economy do not appear to have much relevance to the defense department (e.g. genetically modified foods).  And while the military says it will turn toward greener technologies, I don’t think the Defense Department is the major driver in this technological field.  Finally, there are military technologies which don’t appear to have much relevance to the civilian economy (e.g. stealth technology).  So I don’t think that Bush’s sweeping argument can be validated, but a more moderate version of the argument might be compelling.

For many though the real issue with Bush’s argument is ethical rather than technical.  Some might feel uncomfortable at the realization that much of their country’s prosperity is due to the effects of massive defense spending (and from war fighting).  I don’t think that the current US economy is dependent on defense spending for technological breakthroughs, but I do think it would be foolish to dismiss the notion that massive defense spending does contribute significantly to the economy’s growth. 

This is not at all my area of expertise, so I wonder what those who have studied this issue more carefully think…

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Does Social Science Training make us Selfish and Immoral?

Tim Hartford (whose blog at FT.com you really must read) discusses the results of a recent survey that suggest the answer is yes:

A recent survey by Yoram Bauman and Elaina Rose, two economists from the University of Washington, explains that in experiments, economics students are less generous, more likely to choose an unco-operative approach and more likely to accept bribes.

Bauman and Rose’s survey built upon an earlier study 30 years ago which demonstrated that “postgraduate students of economics were more likely than others to “free ride” in a laboratory game, effectively exploiting other players for their own benefit.”

I tend to agree with Hartford’s supposition that what is really going on here is that economists–as well as political scientists and sociologists–are simply choosing optimal strategies based on the game theoretic models upon which the laboratory experiments are based. Cooperation is not inherently a good strategy, but rather one that is determined by the structure of a game or experiment (e.g. what is the payoff structure of particular combinations of choices, is the game a one-shot deal or is it iterated, etc). Social scientists are trained in, and therefore comfortable with, game theory and the various structures and payoffs that exist. It is reasonable then to assume that if placed in an experiment that mimics those structures and payoffs they are more likely to play the most dominant strategies.

For example, if I recognize that the experimental situation is a one-shot, Prisoner’s Dilemma then I am going to defect rather than choose to cooperate. Why? Because the outcome depends on my choice as well as my fellow subject, and the structure of the game dictates that defection is the dominant strategy for both parties–why assume the other subject would choose differently, particularly given the risk I run of a huge loss if they don’t choose to cooperate? Now, if they game is iterated and neither of us know when we will stop having to choose to cooperate, the shadow of the future makes cooperation a more dominant strategy. As Hartford noted:

[P]erhaps the budding economists are not truly mean and selfish, but are simply showing that they have mastered their studies by producing the behaviour described in simple textbook models. Arguably, the students of economics are not doing anything sinister, any more than if they calculated the roots of a quadratic equation.

There is also the possibility that those that choose to enter postgraduate training in the social sciences are simply more jaded, cynical, or “realist” in their worldview. And while they may hold personal views that cooperation and selfless behavior are desirable and moral endpoints, their research and training illustrates to them that in many cases it can be unproductive (or, in some cases, counterproductive) to cooperate oneself without taking into account what others will do.

[Cross-posted at Signal/Noise]

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Applying Social Science Concepts to Business: E-Book Edition

[Cross-posted at bill | petti]

Sunday’s Wall Street Journal reported that Amazon has stopped selling Kindle versions of all Macmillan titles. John Sargent, Macmillian’s CEO, recently went to Amazon’s headquarters to try and negotiate new terms for the sale of e-books published by his company. In general, the publishing industry has been unhappy with Amazon’s insistence that most books be priced at $9.99. Apparently, the discussions resulted in Amazon pulling all Macmillan e-books from it’s website.

I am a firm believer that the historical knock on the social sciences is unwarranted and that many of the theories, frameworks, and concepts found in the various disciplines are widely applicable in the real world, business in particular. So when I read about the Amazon-Macmillan dispute I was struck at how a number of social science concepts shed quite a bit of light on these developments; namely Albert Hirschman’s concepts of exit, voice, and loyalty as well as signaling and the indirect use of force.

So what do these concepts have to do with e-books? Glad you asked.

In his classic Exit, Voice, and Loyalty, political economist Albert Hirschman provided an elegant framework for analyzing the options available to individuals when they become displeased with actions of an organization. According to Hirschman, individuals have three options: they can be loyal to the organization, they can exercise voice (e.g. protest, negotiation), or they can exit the organization (e.g. join a new group, shop at a new story, etc). The framework is quite elegant and can easily be applied to both explain and predict the behavior of consumers in a market or citizens in a political system.

Since the launch of Amazon’s Kindle, book publishers have tried to exercise their voice vis-a-vis Amazon and their pricing requests, but to little avail. Until now, voice and loyalty seemed the only realistic options. Sure, there are other e-book retailers out there, but success of Amazon’s Kindle and the attractive prices they set for their customers provided the retailer with a huge advantage in terms of a distribution channel. However, with the launch of Apple’s iPad, book publishers now have a more realistic exit option. Not only is Apple a potentially powerful sales channel, but they have agreed to pricing terms that are more favorable to publishers than Amazon (Apple will take 30% of whatever price publishers choose to charge, leaving the price point up to individual publishers).

When individuals have the option of exit, we should see typical market dynamics at work–i.e. customers can shop around to various suppliers to find the products they want at the price they want, with competition among those suppliers driving the quality of products higher and the price for goods lower. This is why we generally abhor monopolies, since by nature they stifle market dynamics and leave customers with only the options of loyalty or voice, meaning they lack much leverage. With the launch of a new and potentially powerful sales channel, publishers now have a more realistic exit option that can be brought to the table in negotiations with Amazon.

However, rather than alter the current pricing terms with Macmillan as a result of this new exit option, Amazon stopped distributing Macmillan’s e-books altogether. The question, of course, is why? I would posit that Amazon was trying to send a signal to dissuade other publishers from also trying to renegotiate terms. Now I have no information as to what Sargent may have proposed and if any ultimatums were given, so what follows is purely an intellectual exercise.

We can view Amazon’s move as a deterrent threat to other publishers who, emboldened by Apple’s entry into the market, may attempt a similar renegotiation. By harshly punishing one actor (i.e. refusing Macmillan access to a valuable and dominant sales channel) that attempted to change the status quo (Amazon’s preferred pricing structure), Amazon hopes to send a signal to other potential actors to not attempt something similar. This is a great example of signaling and the indirect use of force, two related concepts that economists (such as Michael Spence and Thomas Schelling) and political scientists (such as Robert Jervis and James Fearon) have fleshed out over the past 40+ years. Rather than having to expend resources forcing every potential adversary to either change their behavior or maintain the status quo, an actor can choose to send a signal to all potential adversaries by making an example of one of them. Not only can an actor make a threat to punish their adversaries, but they can also demonstrate that they have both the capability and the will to do so by carrying out such a punishment on one adversary.

This dynamic is accentuated in systems where one actor faces challenges from many potential actors versus just one. Barbara Walter has looked at why some states decided to deal with separatist groups and factions in a violent manner versus through negotiations. The key variable: the number of potential separatist groups that may also seek self-determination. As the number of potential adversaries increases the probability of solving these disputes through negotiation decreases. When faced will many potential challengers, governments will choose to demonstrate their willingness and ability to put down rebellions in order to deter other separatists groups from similar challenges. In other words, having reputation for resolve when dealing with adversaries becomes more important when you face many potential threats than just one.

In the case of Amazon, it could be that seeing the potential for many actors to attempt to renegotiate the current pricing structure it was decided that they should send a signal to the rest of the publishing world that attempts to change the status quo would not only fail, but would result in sever punishment (i.e. the loss of a popular sales and marketing channel). My guess is that this likely won’t work for two reasons: 1) as mentioned earlier, the publishers actually have someplace else to go–they can exit the current relationship and cast their lot with Apple; and 2) Amazon is heavily reliant on the book publishers. Without their titles the allure of a Kindle decreases. The threat may not be credible, or at least sustainable for long.

Thoughts?

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More Momentum for the Social Sciences–Nobel Edition

For those that have not yet heard, the Nobel Prize for Economics (actually named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was awarded this year to two recipients, one of whom–Elinor Ostrom–is a Political Scientist. As Tyler Cowen of Marginal Revolution notes:

It’s a nod in the direction of social science, rather than economics per se. It’s another homage to the New Institutional Economics and also to Law and Economics. It’s rewarding larger rather than smaller ideas, practical economics rather than abstract theory.

For those interested in a deeper discussion of her work, Henry Farrell at Crooked Timber provides an excellent overview and personal reflection on Ostrom.

As a political scientist, this is especially gratifying and I think reflective of some broader trends in social science, whereby the best insights and research culminate from the cross-fertilization of ideas from multiple disciplines within the social sciences (as well as the hard sciences). If you look at some of the more recent winners, their work transcended the discipline of economics and had a much broader impact on the study of human behavior and social dynamics broadly.

Personally, my research focused on decision-making, signaling & reputation, and conflict. The work of recent winners, such as Thomas Schelling (game theory), Daniel Kahneman (behavioral economics), A. Michael Spence (signaling), John Harsanyi & John Nash (game theory), and Douglass North (path-dependence, neo-institutionalism), all played a role in how I approached (and continue to approach) those issues.

Maybe a day will come when the prize is renamed the Nobel Prize for Social Science–another step towards the social sciences getting their day.

[Cross-posted at bill | petti]

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