Category: Political Science
*First Principles*
That is the new book by John Taylor (not Herbert Spencer) and the subtitle is Five Keys to Restoring America’s Prosperity. I predict Taylor will play a leading role in a new Republican administration, should there be one. He advocates, among other things, the use of the Taylor rule.
It is finally being recognized that the eurozone made a major policy breakthrough
Yields on short-term peripheral sovereign bonds are plunging, despite the fact that EU leaders appeared to make little progress at their highly-anticipated summit last week.
Pundits continue to expound on the flaws of the eurozone but markets are telling a different tale.
That’s because the European Central Bank may have already introduced roundabout measures that will solve some of Europe’s big problems—it’s making investing in peripheral sovereign debt a huge profit opportunity for banks.
Theoretically, financial institutions will be able coin money by borrowing ultra-cheap from the ECB and buying higher yielding sovereign debt.
Here is the story, and you will recall my earlier post here. Karl Smith asks how this fits in with the treatment of collateral, and here is also a more skeptical take on the arbitrage. My view is not that banks will find the arbitrage opportunity overwhelming (that is unclear), rather my view is that public choice mechanisms will operate so that desperate governments commandeer their banks to make this move, whether the banks ideally would wish to or not. Make no mistake about it, this is doubling down and raising the stakes. It’s funding debt through more debt. It’s wrong to say the summit accomplished nothing, or consisted merely of empty, unenforceable pledges of austerity, although it did that too.
At this point you have to be asking whether it is better to simply end the eurozone now, no matter how painful that may be. Unless of course you are an optimist about Italy reaching two percent growth, or Germany becoming fully cosmopolitan. As a politician I probably could not bring myself to pull the plug, but as a blogger I wonder if that might not, at this point, be the wiser thing to do. Current crisis aside, does anyone out there see the euro’s governance structure — even with reforms — as even vaguely workable?
Addendum: Do note also that the ECB has made no strong promise to continue this program, and indeed it is not in a position to make a credible commitment, most of all on the quality of collateral issue. That means a lot of ups and downs, shifting credibility, and the gains could well collapse quickly.
It’s already dead in the water
“Right now, there is not much more than a blank sheet of paper and even the name of the future treaty might still change,” said Petr Necas, the prime minister of the Czech Republic. “I think that it would be politically short-sighted to come out with strong statements that we should sign that piece of paper.”
There is so much more at the FT link, and from numerous countries. Of course on day one they were all going to say it is great and that they support it. Then the new equilibrium is revealed.
Rising in status: Timur Kuran’s theory of preference falsification, Buchanan and Tullock’s Calculus of Consent, Thomas Schelling’s Strategy of Conflict.
Falling in status: French rationalist constructivism, claiming that the failures of social democratic multinational collective governance stem mainly from a misguided belief in fiscal austerity.
Will there be a charter city in Honduras?
Paul Romer hopes so, here is an update:
Much will depend on the transparency commission. The first batch of members appointed this week comprise George Akerlof, another economist and Nobel laureate; Nancy Birdsall, formerly at the Inter-American Development Bank, who now runs the Centre for Global Development, a think-tank; Ong Boon Hwee, a former senior executive at Temasek Holdings and Singapore Power; and Harry Strachan, an investor who used to run INCAE, a leading Latin American business school, with Mr Romer himself in the chair.
The article is interesting throughout, the pointer is from Michael Clemens.
Good as gold
Or should I have titled this post “The Show So Far”? How about “Meet the New Boss, Same as the Old Boss”?
Under their compromise, each eurozone government will have to adopt in its constitution a “golden rule” that prevents it from persistently running budget deficits.
An FT summary is here. Here is WSJ coverage. Here is NYT coverage. Here is the relevant Monty Python skit. And there is more, all from the annals of time inconsistency:
The changes will include more “automaticity” in the process of punishing states that breach the EU’s 3 per cent public deficit limits. A move to fine a country will in future only be overturned if a qualified majority of eurozone countries agrees to overturn it.
Merkel says the bondholders of the troubled nations won’t bear losses, although there is no German or other guarantee of the debt. It is hinting at the prospect of a guarantee without actually making one. The NYT summarizes the whole thing:
The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.
Only the last one on that list means anything. They might as well try to fool the markets this way. The positive scenario is: 1) fool the markets, 2) give Italy breathing room, 3) Monti restores growth and sound finances in Italy, and 4) things aren’t so bad anymore.
There aren’t really any better (and feasible) ideas on the table.
My eurozone podcast with Russ Roberts
You will find it here, I was happy with how it turned out.
Wolfgang Münchau has a nice update:
Contrary to what is being reported, Ms Merkel is not proposing a fiscal union. She is proposing an austerity club, a stability pact on steroids. The goal is to enforce life-long austerity, with balanced budget rules enshrined in every national constitution. She also proposes automatic sanctions with a judicially administered regime of compliance. She rejects eurobonds on the grounds that they reduce pressure on fiscal discipline.
That is another absurd “solution” that has no chance of working, unless of course the critical countries simply recover on their own. (Why does it remind me of “Don’t mistreat the Abos! (if anybody’s watching)”? Don’t forget this:
Andrew Duff, a member of the European Parliament, last week provided a very useful guide to the distance the eurozone is from where it would have to be if it were a proper fiscal union. He drew up a list of all the changes in the European Treaties that would need to be amended to achieve that. It includes changes to 23 articles and five protocols.
And this is from MR comments, Ryan Cooper:
Thinking in the short term, obviously the solution involving the least collective misery for everyone is for Germany to bite the bullet and backstop the whole continent’s debt in one way or another. But just past the immediate crisis I don’t see any reason for optimism. If recession really does hit, how are the SPIIG crowd going to get out of the “debt -> austerity -> crap growth -> more debt (or at least not much extra money to pay down the principal) -> more austerity” cycle? It seems like a 1918-style suicide pact.
The SPIIG governments have to be weighing the costs of cutting their losses and getting out. (Right?) People seem to agree that would be another devastating financial crisis, and thinking selfishly that would be bad, but if I were Spain and it’s a choice between 2-3 years of total chaos and 20-30 years of grinding hopeless misery, I think I’d go with the first option.
Solve for the equilibrium…
Addendum: Ezra Klein offers observations from Germany; they focus on the real side of the economies!
Claims about Germany and Europe which I disagree with
I’ll put a few of these under the fold…Karl Smith writes:
…the worse case endgame for a Euro failure is collapse of the global capitalist system, the political collapse of the West and the end of the Enlightenment. That’s fairly bad as things go and it could indeed happen.
I can imagine parts of eastern Europe or the Balkans going Fascist, but not Western Europe. The consequences of a euro collapse would be dire, but not nearly that dire. A few nice countries have nuclear weapons and battles over territory are no longer going to happen in that part of Europe. A cynic would add that fascism was also a part of the Enlightenment.
Ezra Klein writes:
…it [the morality play] only works if you think of the European debt crisis as a crisis of Greece, where the governance really was terrible, the economic institutions weak and the labor market coddled. It doesn’t work for Ireland. Or for Spain, which was running a budget surplus as recently as 2005. And is anyone in this conversation really pretending to have deep knowledge of the character of Portugal?
Germans will perceive a moral issue in guaranteeing the solvency of these countries, whether or not they think those countries have “done anything wrong.” My moral view is not exactly theirs (if I may generalize about various German views), but I hardly think such a German response is beyond the pale. You can believe “we are not obliged to bail out a country that won’t pay us back, and with whom we wrote a no bail-out agreement,” without believing “they are morally culpable.”
Matt Yglesias tweets:
If there’s a “reasonable probability” euro crisis will “crush the german economy” that’s a sufficient case for action
Not necessarily, not if the action raises risk and raises the badness of a bad outcome, which indeed it does. Have any of us actually done the decision analysis here? I don’t see it. Note also that Matt has been critical of Merkel in the past; now he is asking her to undertake a course of action which a bad politician would be incapable of seeing through. We will need maestros, and maestras, to get this one right.
Ryan Avent writes:
Sometimes a bank run is just a bank run, and a moralising approach that fails to stop it does nothing but harm millions of innocent bystanders. The desire to stick with the moralising approach may nonetheless prove attractive in Germany and elsewhere.
I think solvency problems are very much on the line here, and a perpetual guarantee of the debts of other economies is not a trivial no-brainer, morally or otherwise. It is doing much more than stopping a bank run, and once the guarantees are issued, through what credible mechanism can the plug ever be pulled on a country such as Italy, given the economic carnage which would result?
Reflecting on these responses in toto, I view these writers are wanting to make it a moral issue: “why can’t the mighty Germany simply solve this problem? What is wrong with them and their moral views?” I view these writers as reacting to my original post — written in multiple voices and with parentheses in the title I should stress — with a bit of mood affiliation. I view myself as trying to explain why moralizing perspectives miss the real difficulties in crafting a solution.
Has the Tea Party movement been electorally effective?
There is a new paper (pdf) from Harvard, by Andreas Madestam, Daniel Shoag, Stan Veuger, and David Yanagizawa-Drott, and it seems the answer is yes, the Tea Party has been effective in electoral terms:
This paper examines the impact of political protests on citizens’ political behavior and policy. We study the effect of the Tea Party movement protests in the United States on voting in elections and on legislation by representatives. To identify the causal effect of protests, we use an instrumental variables approach that exploits variation in weather on the rally day. We find that the protests increase turnout in favor of the Republicans in congressional elections, and decreases the likelihood that incumbent Democratic representatives run for reelection. Incumbent policymaking is also affected: representatives respond to large protests in their district by voting more conservatively in Congress. In addition, we provide evidence that these effects are driven by a persistent increase in the movement’s strength. Protests lead to subsequent protests, as well as an increase in membership, monetary contributions, and media coverage. Finally, the estimates imply significant multiplier effects: for every protester Republican votes increase by at least eight votes. Together our results show that political protests can build political movements that ultimately affect policy.
How this translates into policy outcomes, of course, is another story. And this is effectiveness at a very micro level. It is entirely possible to believe these results about local mobilization, and think that the Tea Party overall makes Republicans less electable or less effective once in office.
Addendum: A revised and improved version of the paper is here.
Will the new eurodeal work?
Sarkozy and Merkel are already prepping their electorates for a pending deal, the usual media sources give some varying summaries of what is up, plus it will evolve anyway. A few of you have written in and asked me if it will work.
I have a simple formula for assessing euro-deals, and it goes as follows:
1. Can Italy grow at two percent a year, more or less sustainably?
2. Will/can the market regard the actions of the seventeen eurozone nations as more or less unified?
If you can add up those two questions to about 1.7 worth of “yes,” then the deal can work. Otherwise not.
You might also wonder, if the answers to those two questions come in at 1.8, is the deal needed in the first place? Probably, to get #2 up to a quasi-yes. (By the way, the Irish seem to think a treaty change and thus a referendum is on the way.)
It is my best judgment — and I stress that word — that the sum answer to those two questions, even with an announced deal by Dec.9, and looser monetary policy, comes in at about 1.16. Which isn’t enough.
Asking for 1.7 worth of yes seems quite modest, doesn’t it?
Addendum: Do not think that Germany has merely to waive a magic wand, or incur a one-time cost, to set things right in the eurozone. Any “set things right” action on Germany’s part is, one way or another, a form of doubling down. If it fails it means a bigger eurozone implosion in the future than would happen now, including much higher costs for Germany. The choice is not “German action vs. doom now,” it is “German action and some chance of even bigger doom later on vs. doom now.” That’s a tough call. The Germans understand that one better than do most of the bloggers I’ve been reading on the topic.
By the way, here is an interesting article on German geopolitics, though I don’t agree with much of it I recommend giving it a read.
“The moral superiority of the Germans”
Ryan Avent tweeted:
Dear
@tylercowen, Germany and the periphery ARE morally equivalent.
How might a response go? Not an argument that German citizens are morally superior to other Europeans; that would be false and indeed repugnant. I mean the kind of “system-wide” moral judgments that progressives offer up when they judge the institutions of Denmark to be superior to the institutions of Mexico, of course without ever judging the residing individuals per se. Let’s play at intellectual Turing test — with no commitment to endorsing these views — and draw up a short list of, dare I so label them, (ostensible) German moral superiorities:
1. When it comes to default, there is no moral equivalence of debtor and creditor. The debtor is the one breaking the agreement and breaking his word.
2. When it comes to debt, the periphery countries simply don’t want to pay up. Their national wealth is many times their gdp and thus much much greater than their debts, even for Greece. It’s amazing how many people won’t come out and utter or recognize this simple truth. Italy for instance doesn’t have to make a huge fiscal adjustment.
3. It is a privilege for a poorer country to be in an economic union with Germany, France, the Netherlands, and other wealthy EU countries, just as you might feel privileged to co-author a piece with a great scholar. If the poorer countries have to engage in some economic sacrifice to stay on good terms in such a union, so be it. There is also such a thing as catch-up growth, and it is robust in the broader world today, at least if a country is willing, like the East Asian countries have been, or for that matter Turkey and Brazil these days. The sacrifices being asked from the periphery countries are quite small in comparison.
4. We did a deal with East Germany, and the terms of that deal violated a lot of precepts of economic theory. It even included an overvalued currency for the poorer region and a long period of adjustment. Yet we insisted up front that all dealings be done on the terms of the more successful region and culture, with very little compromise. This transition, for all of its short-term flaws, will go down in the history books as a great long-run success. In part it succeeded because it was all done on the terms of the values of the successful nations of northwestern Europe. (I am surprised that this angle is not discussed more in the press, given Merkel’s own story.)
5. Economic unions do not succeed by lowering all members to the standards of the economically less successful and less responsible members.
6. If it wasn’t for us, would Greece, Spain, and Italy (plus Ireland and Belgium) all currently have technocratic, reform-oriented governments as they do?
7. If you are trying to estimate the future economic fate of a country, shouldn’t you put aside a bit gdp drops and the like, and instead look at what do people in that country esteem and which values are transmitted by their system of education? Do read the Estonia story at the previous link.
8. The German emphasis on rules, and the attachment to the idea of an abstract order, worthy of loyalty in its own right, above and beyond any immediate personal connection or loyalty, is exactly what makes them able to run such a successful economy and successful social welfare state. When it says “Don’t Walk,” they don’t cross the street, even if no cars are coming. An economic union should be set up to support those principles, not tear them down, and social democrats should value this most of all.
Even if you disagree with these perspectives, they shape real world behavior. And might you still bet on a country which stuck to them? Be honest now. Let’s go back into intellectual Turing test mode:
9. One clear warning sign of trouble is when you see “trade imbalances” put at the center of the argument, as if “being very productive” and “not being productive enough” were somehow the same kind of disease.
10. There is a view something like “Germany has benefited from the eurozone, and therefore it is obliged to…”, as if those arguments were stronger than the nine principles outlined above. By the way, might left-wing American intellectuals occasionally engage in a bit of transference and view Germany as a stand-in for the American top earners, the American financial system, and so on? It isn’t.
11. Another doozy is to think the problem is due to some weird German obsession with Weimar-era inflation, as if there is a need to apologize for an elderly uncle who went bonkers. I would instead start with the simpler point that Germany does not want to transfer resources to countries which do not wish to pay back their creditors, and which will not commit to good economic policy in the future.
Let’s move out of Turing mode and back to Tyler. I believe that the Germans have approached this crisis with some bad economic theories, a lack of understanding of how government spending cuts can be self-defeating in the short run, and a good deal of more or less deliberate self-deception about its partners in the union, not to mention Germany’s own ability and willingness to act “fully European.” I’m also not sure that Germany has a path out of this which leaves their own financial system intact. You can rack up the moral and practical minus points there in considerable number. That said, I see a lot of intellectuals dismissing the perspective outlined above, rather than figuring out why it makes so much sense to so many people, not just in Germany. I think the financial elites in the periphery countries themselves actually see it quite clearly.
The result is significant misunderstandings about what can happen and will happen in the eurozone. Germany cannot and will not drop its moral perspective, even if there is some theory — and yes theory is the right word here, because no one knows these broad guarantees will work — of how a broader and far more costly commitment can set things right.
In reading American discussions of the eurozone, I am frequently reminded of earlier discussions of the Soviet Union. Most outsiders simply didn’t realize how little social capital was left in the system, though some of the Soviet insiders did. Might the same be true of the eurozone? I’m not calling these countries corrupt, rather there may be remarkably little cross-national cultural capital, and remarkably little deep public support for a costly EU bargain, so little that many German (and other) insiders know that no grand bargain can be sustained or even seriously attempted.
I believe we need to be exposed to this moral perspective, and this intellectual Turing test, as a bracing slap in the face, as a wake-up call, and I see our unwillingness to do anything with this perspective, other than summarily dismiss it as a kind of tragic juvenile moralizing, as a sign of our own decline, right here in the USofA.
Addendum: This piece is actually pretty good.
Did “race” cost Obama many votes?
Seth Stephens-Davidowitz, job market candidate from Harvard, has an interesting paper on this question:
Abstract: Traditional surveys struggle to capture socially unacceptable attitudes such as racial animus. This paper uses Google searches including racially charged language as a proxy for a local area’s racial animus. I use the Google-search proxy, available for roughly 200 media markets in the United States, to reassess the impact of racial attitudes on voting for a black candidate in the United States. I compare an area’s racially charged search volume to its votes for Barack Obama, the 2008 black Democratic presidential candidate, controlling for its votes for John Kerry, the 2004 white Democratic presidential candidate. Other studies using a similar empirical specification and standard state-level survey measures of racial attitudes yield little evidence that racial animus had a major impact in recent U.S. elections. Using the Google-search proxy, I find significant and robust effects in the 2008 presidential election. The estimates imply that racial animus in the United States cost Obama three to five percentage points in the national popular vote in the 2008 election.
The question and method of this paper are excellent. I cannot in polite company reproduce the Google key word used to proxy for negative attitudes about Obama. What Google key word might you try if you were looking for districts were the race factor boosted his vote total? Laredo, Texas is the area with the least interest in the negative search word, but I am not sure that is the best proxy for “support because of race.” (See the author’s p.19 for a discussion of related topics.) How about searches for the title of his autobiography?
Page 29 ranks the states by their interest in “racially charged searches.” West Virginia is the worst, Utah is the best, and Pennsylvania and Michigan and New Jersey are the worst northern states, coming in at #3, #6 and #10, respectively. The graphs and charts at the end of the paper are all interesting, including p.36.
Addendum: You might think I got the pointer from @RovingBandit, but actually the paper led me to him rather than vice versa.
From the comments (pleasing David Wright)
There seem to be an awful lot of arguments floating around the economic blogosphere lately that try to use “credibility” as a kind of magic trick to claim that some institution can get some desired result without having to do the yucky things it would have to do to, you know, actually get that result. I would love to see a post on this topic from our host.
That was from David Wright…and now he has his post.
*Destiny of the Republic*
The author is Candice Millard, the subtitle is A Tale of Madness, Medicine, and the Murder of a President, and the topic is James Garfield, with good bits on Alexander Graham Bell. Excerpt:
Garfield realized with a sinking heart that a large portion of his day, every day, would be devoured by office seekers. His calling hours were 10:30 a.m. to 1:30 p.m., Monday through Friday, and he faced about a hundred callers every day.
…Those who waited outside the White House, moreover, did not want simply to apply for a position. They wanted to make their case directly to Garfield himself. As the leader of a democratic nation, the president of the United States was expected to see everyone who wanted to see him.
And I had not known this:
To the astonishment of the members of Congress, Bliss [the doctor who cared for Garfield and possibly killed him] confidently presented them with a bill for $25,000 — more than half a million dollars in today’s currency…Congress agreed to pay Bliss $6,500, and not a penny more.
Recommended.
Sentences to ponder
Newly appointed Prime Minister Mario Monti must reform a country where free-market ideas don’t have a political base. Labor laws are, along with pensions, the third rail of Italian politics—literally deadly. Pietro Ichino, the senator who has spoken out strongly for labor reform, has lived under police protection ever since two professors of industrial relations were assassinated by left-wing terrorists because they advised the government on how to cut through the tangled labor laws.
Here is more, interesting throughout, hat tip goes to @GeekStats.
*Pacific Crucible*
The author is Ian W. Toll and the subtitle is War at Sea in the Pacific, 1941-1942. I loved this book and it should join my list of the very best books of the year. Every page was gripping and instructive. Here is an excerpt on “how to leave the dollar zone”:
The word HAWAII was overprinted on all paper currency — in the event of invasion the U.S. Treasury would declare the bills worthless.
I very much liked this passage:
Holmes added that a cryptanalyst “needs only time, patience, an infinite capacity for work, a mind that can focus on one problem to the exclusion of everything else, a photographic memory, the inability to drop an unsolved problem, and a large volume of traffic.”
I learned that Hawaii never interned its Japanese (with no problems), why the Japanese didn’t go after Australia and why they should have, and why the Japanese failed in the Battle of Midway. I had not known that MacArthur received a payment of $500,000 from the Philippine Treasury in 1942, and the U.S. knew about it and let him keep it.
Highly recommended, even if you don’t care about naval warfare per se. I am now ordering Toll’s other book.