Month: March 2014

Do economic sanctions work?

There is talk that the United States will, within days, apply some kind of sanctions to Russia.  For some analysis, shall we not turn to the work of Daniel Drezner?  Here is his piece (pdf) on cooperation and multilateral sanctions:

Intuitively, the link between international cooperation and sanctions success seems obvious.  Empirically, however, the results are rather surprising.  Repeated statistical tests show either no link or a negative link between cooperation and sanctions success.  At least four studies conclude that successful episodes of economic coercion exhibit the least levels of coercion among the sanctioning states.  No statistical test has shown a significant positive correlation between policy success and international cooperation among the sanctioning states.

This Drezner piece (pdf) indicates that applied sanctions don’t usually work, but the threat of sanctions can be effective.  Here is Dan on “smart sanctions,” (pdf)  which are not in general effective.  Here is Dan’s book The Sanctions Paradox.  Here is Dan on Twitter.  I hereby request a new article from Dan on sanctions, as they might be applied to Russia.  Here is a short BBC piece on the possible economic impact of sanctions today.

Here is a 2013 paper (pdf) which tests the Drezner sanctions model on the territories of the former Soviet Union.  Here is a piece on how zombie studies are gaining ground.

Money, Status, and the Ovulatory Cycle (politically incorrect paper of the month)

That is a new research paper by Kristina M. Durante, Vladas Griskevicius, Stephanie M. Cantú , and Jeffry A. Simpson, and the abstract is here:

Each month, millions of women experience an ovulatory cycle that regulates fertility. Previous consumer research has found that this cycle influences women’s clothing and food preferences. The authors propose that the ovulatory cycle actually has a much broader effect on women’s economic behavior. Drawing on theory in evolutionary psychology, the authors hypothesize that the week-long period near ovulation should boost women’s desire for relative status, which should alter their economic decisions. Findings from three studies show that women near ovulation seek positional goods to improve their social standing. Additional findings reveal that ovulation leads women to pursue positional goods when doing so improves relative standing compared with other women but not compared with men. When playing the dictator game, for example, ovulating women gave smaller offers to a female partner but not to a male partner. Overall, women’s monthly hormonal fluctuations seem to have a substantial effect on consumer behavior by systematically altering their positional concerns, a finding that has important implications for marketers, consumers, and researchers.

Here is some popular coverage of the piece.  For the pointer I thank C.

Megan McArdle dialogue at AEI

You will find the video here, the dialogue is with me and Tim Carney.

The underlying question behind the book is when the general possibility of error helps you learn and when it leads you off the precipice, never to return.  As I understand Megan’s argument, additional error-making propensity has positive individual and social returns at the margin, which means we should offer implicit or sometimes explicit subsidies to experimentation.  That means a liberal bankruptcy law, relatively easy divorce, and a focus of subsidies on areas with high fixed costs.  In other words, the National Science Foundation should worry more about labs and less about individual researchers.

As I had predicted, this is proving to be a breakout book for Megan.  You can buy her book here.  There is more on the book here.

Recommended reading

Anatol Lieven, Ukraine and Russia: A Fraternal Rivalry.  And here is a short essay of his on Ukraine today.

Orlando Figes, A Crimean War.

Vassily Aksyonov, The Island of Crimea, discussed here: “Written in 1979, Vassily Aksyonov’s “The Island of Crimea” imagines an alternative history (abetted by alternative geography—the Crimea is a peninsula) wherein the Russian civil war ends with the tsarist forces able to hold onto this southern scrap of the old empire. “

*Getting a Ph.D. in Economics*

That is a new and highly useful book by Stuart J. Hillmon, here is one bit from it:

Truthfully, majoring in economics is not really all that helpful for your admissions prospects.  This is true for two reasons.  First, knowing who does well in undergraduate economics is not terribly helpful in identifying who will be a good academic economist.  Unlike other fields such as chemistry or physics, what happens in undergraduate courses bears little relation to what happens in graduate courses.  For this reason, the committee cannot predict how well you will do as an academic economist based on your doing well in your undergraduate econ courses.  Consequently, they don’t give too much weight to your stellar performance in the usual undergraduate classes.

For this book, I would have asked for greater length, more discussion of government and private sector careers, and more discussion of non-orthodox paths through academic economics, or for that matter seeking employment at a teaching school or attending a Ph.D. program below the top tier.  You will note “Stuart J. Hillmon is the pseudonym for an academic economist who graduated from a top five doctoral program in economics and currently teaches courses in policy and economics.”  The book is structured accordingly and perhaps that will frighten some of you away.  If everyone were like Hillmon, I would not myself today be an economist.

Still, this is a good place to start if you are considering whether to get a Ph.D. in economics.

How much does credibility matter in foreign affairs?

Under one view, credibility is like a chain.  If the United States does not keep one of its public promises, the credibility of the chain falls apart.  In essence observers are using the behavior of the American government to draw inferences about its true underlying type.  A single act of breaking a promise or failing to honor a commitment would show we really cannot be trusted, or that we are weak and craven, and so that characterization of our true type would be applied more generally to all or most of our commitments.

Under a second view, we don’t have that much credibility in the first place.  To be sure, we can be trusted to do what is in our self-interest.  But there is not much underlying uncertainty about our true type.  So we can promise Ruritania the moon, and fail to deliver it, and still the world thinks we would defend Canada if we had to, simply because such a course of action makes sense for us.  In this setting, our violation of a single promise changes estimates of our true scope of concern, but it does not much change anyone’s estimate of the true type of the American government.

Insofar as you believe in the first view, our inability/unwillingness to honor our commitment to the territorial integrity of Ukraine is a disaster.  Insofar as you hold the second view, our other commitments remain mostly credible.

For the most part, I see the second view as more relevant to understanding U.S. foreign policy than the first.  We’ve broken promises and commitments for centuries, and yet still we have some underlying credibility.  Remember those helicopters evacuating Saigon rooftops in 1975?

Still, when it comes to Taiwan, or those Japanese islands, or other Pacific islands, I think the first view plays a role.  That is, I think the world does not know our true type.  How much are we willing to risk conflict to limit Chinese influence in the Pacific?  Whatever you think should be the case, what is the case is not clear, perhaps not clear even to our policymakers themselves.  (In contrast there are plenty of data on the parameters of American preferences toward Middle East and Israel-linked outcomes, and our willingness to incur costs to alter those outcomes.)

That is another way of thinking about why the Ukraine crisis is scary for the Pacific.  It is one reason why the Nikkei was down 2.5% shortly after market opening Monday morning (Asia time) and ended up 1.3% down for the day.  The Chinese stock market did just fine.

The Great Reset and the scope of inherited egalitarianism

We all know there is nominal wage stickiness, but there is some real wage stickiness as well.  Employers are reluctant to cut real wages for fear of damaging worker morale.  Bryan Caplan also has written about “firing aversion,” which you can think of as an extreme case of real wage stickiness.

In many cases employers might prefer some entirely different way of organizing production and staffing their organizations.  Yet they cannot get from here to there, in part because of real wage stickiness.  Workers do not take kindly to the dissembly and reassembly of a firm and indeed of a big part of their lives.  And so employers remain stuck.  They’re still making profits, however, but the profit maximization is local rather than global.

My question is this: imagine an (admittedly impossible) thought experiment where all of the capital and labor resources are temporarily released and employers can rebuild their firms from scratch, recontracting for new wages, new personnel pools, new implicit promises to workers, new capital investments, new market positionings, and so on.

After this reshuffle, how much will income inequality have gone up?  (Is there any case it might go down?  I don’t see that, but feel free to make that argument in the comments.)

Given your answer, how much will income inequality go up, not because of any new cause, but simply because any economy slowly, over time, rebuilds its contractual relationships?

And what does that say about the effects of policies designed to stem growing inequality?

#TheGreatReset

*The System Worked*

That is the new and excellent book by Daniel W. Drezner and the subtitle is How the World Stopped Another Great Depression.  It is largely if not entirely correct, here is a summary excerpt:

A closer look at the global response to the financial crisis reveals a more optimistic assessment.  Despite initial shocks that were more severe than the 1929 financial crisis, global economic governance responded in a nimble and robust fashion.  Whether one looks at economic outcomes, policy outputs, or institutional operations, these governance structures either reinforced or improved upon the pre-crisis status quo.  The global economy bounced back from the 2008 financial crisis with relative alacrity.

I would myself stress two additional points, whether you call them addenda or qualifications is up to you.  First, we now know that the Fed could have done much more in 2008.  I consider this a mistake rather than a mistake in governance, and later the Fed did a great deal to try to make up for this error.  Second, the performance of the eurozone is hardly spectacular, to say the least, and the ECB should have moved to a much looser monetary policy in 2009 if not sooner.  Still, given what a screwy, seventeen-nation system had been set up, and given the severe distributional consequences of four percent inflation in the eurozone, I am surprised the system performed as well as it did.

China emerges as India’s #1 trade partner

India’s eastern neighbour China has emerged as its biggest trading partner in the current fiscal replacing the UAE and pushing it to the third spot, according to a study conducted by PHD Chamber of Commerce.

India-China trade has reached USD 49.5 billion with 8.7 per cent share in India’s total trade, while the US comes second at USD 46 billion with 8.1 per cent share and the UAE third at USD 45.4 billion with 8 per cent share during the first nine months of the current fiscal, the study revealed.

The UAE was India’s biggest trading partner in the 2012-13 fiscal.

The story is here, and hat tip goes to the essential www.macrodigest.com.

Assorted links

1. The Bento box culture that is Japan.

2. The Funeral Law Blog.

3. Timothy Lee on the usefulness of Bitcoin.

4. The smart toothbrush: “A new smart toothbrush unveiled this week could monitor how well you brush your teeth, and could one day be used to send data back to your dentist. Oral B’s Smartseries toothbrush, which launched in the UK in June priced at £199, sends data back to a smartphone app recording how many brushstrokes are used, targeting problem areas and following personalised brushing routines.”

5. Tongue-controlled ear computer, Japan.

6. Jack Matlock posts about Ukraine.

7. What PBOC is up to.

John Mearsheimer on Ukraine and nuclear weapons, in 1993

This Foreign Affairs piece (pdf) is interesting and prescient thoughout, here is one excerpt:

Despite some testy moments, relations between Russia and Ukraine have generally been stable since the Soviet break-up.  There are, however, good reasons to fear these relations might deteriorate.  First, the situation between Ukraine and Russia is ripe for the outbreak of security competition between them.  Great powers that share a long and unprotected common border, like that between Russia and Ukraine, often lapse into competition driven by security fears.  Russia and Ukraine might overcome this competition and learn to live together in harmony, but it would be unusual if they do.

Most of all, Mearsheimer argues that Ukraine should have kept its nuclear deterrent.  Here is my previous post on that topic.

For the pointer I thank Shivaji Sondhi.

Japan facts of the day (Edward Hugh is bearish on Abenomics)

…roughly half of the current inflation in consumer products is due to the dramatic drop in the value of the yen. The drop has sharply inflated the costs of imports, especially energy imports, and these have partly been passed on to consumers. While many consumers in developed countries have been benefiting from lower energy costs, in Japan the costs of liquid natural gas — now a main source of power generation — were up 17% over a year earlier. In addition, “the Japanese also saw sharp rises in prices of foreign-made home electronics, which they increasingly import: Prices of washing machines were up 13%, while prices of audio equipment and refrigerators both rose 16%”.

Even the 0.7% annual rise in core-core inflation isn’t all it seems to be, since some 40% of the increase is accounted for by a one-off rise last year in charges for accident insurance and public services. The key point to grasp in all this is that the rise is due to what we could call “cost push” rather than “demand pull”. As Takeshi Minami, chief economist at the Norinchukin Research Institute put it,“Those increases had little to do with demand and supply.”

There is this bit too:

In the words of former Bank of Japan governor Masaaki Shirakawa, “Seemingly, there would be no linkage between demography and deflation. But it may not be the case. A cross-country comparison among advanced economies reveals intriguing evidence: Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24 advanced economies. That finding shows a sharp contrast with the recently waning correlation between money growth and inflation.”

That is from Edward Hugh, who predicts Abenomics will leave behind a big mess.  The post is speculative but sobering throughout.

The expected rate of return from denuclearization has fallen

Right?  That is just one piece of fallout from the current crisis.  As an American, with little at stake in Ukraine per se, I am glad the country gave up its nuclear weapons, so as to limit the risk of broader conflict.  But if I were a Ukrainian citizen, my view would be somewhat different.

Here is an interesting study by Robert Stephen Mathers (pdf) on the denuclearization of Ukraine.  It appears to have been written as a term paper for Martin Felstein in 2003.  Excerpt:

The back and forth negotiations about Ukraine’s nuclear status would finally end in Moscow in January 1994 with the signing of the Trilateral Statement by Presidents Clinton, Yeltsin and Kravchuk.  The agreement held Ukraine to the promise of “the elimination of all nuclear weapons, including strategic offensive arms, located in its territory.”  In exchange for these concessions, the U.S. and Russia agreed to preserve Ukraine’s territorial integrity (a primary concern for Ukraine) and ensured that no state would use or threaten to use military force or coercion against it…Ukraine’s main concerns were finally met.

It seems the value of a formal NATO guarantee is falling as well.  Rapidly.  Various Eastern European countries are asking for stronger or clarified U.S. guarantees.  What are they thinking in Latvia?  Taiwan?  Japan?  How about the Israelis negotiating with John Kerry?

For the pointer I thank Bill Badrick.