Category: Political Science

Here is my latest NYT column, which they titled "The Pendulum Swings Back to Austerity."  Excerpt:

The unfolding of the financial crisis has also changed the public’s sense of where change is needed, both in the United States and Europe. The tragedies of 2008 were represented by Bear Stearns and Lehman Brothers – both private-sector institutions. In 2010, the financial crisis has spread to sovereign debt, with Greece as the most obvious example.

All of these developments are part of one broader story of overreach and complacency. Yet the 2008 crises were attached more directly to market institutions, while the 2010 crises are more closely linked to governments. Because politicians and voters are more influenced by the latest developments than by news from two or three years earlier, a cautious attitude toward public-sector spending has been further cemented.

And this:

Democracies, like markets, have some self-correcting mechanisms, and we are now seeing those at work in the United States and many European countries. (Spain and Britain, for example, are pursuing fiscal austerity aggressively.)

The lessons are straightforward. First, to paraphrase the French moralist La Rochefoucauld, things are never as good, or as bad, as they seem. Second, the Obama reforms, like the Reagan revolution, are turning out to be radically incomplete, which should come as no surprise.

Finally, effective political ideas are those that can still do good in half-baked form. We have neglected this insight in designing financial reform, and it remains to be seen if we can apply it successfully to climate change.

Overall, I believe we are headed toward slower growth and a larger public sector, but I do not believe we are headed down the road to serfdom.  At the same time, I am aiming at a different target.  Critics of incrementalism are usually too focused on the single issue at hand — where they are sure they know best — and not sufficiently aware of the efficiency properties of the broader system, which introduces self-correction mechanisms to counter or limit most major changes.

If I had to stress one sentence from the piece, it would be this one:

Finally, effective political ideas are those that can still do good in half-baked form.

New Environmental Protection Agency regulations treat spilled milk like oil, requiring farmers to build extra storage tanks and form emergency spill plans.

Local farming advocates says it’s ridiculous to regulate a liquid with a small percentage of butter fat the same way as the now-infamous BP oil spill.

“It’s just another, unnecessary over-regulation by the government just lacking any common sense,” said Bill Robb, dairy educator for Michigan State University Extension…

The EPA regulations state that “milk typically contains a percentage of animal fat, which is a non-petroleum oil. Thus, containers storing milk are subject to the Oil Spill Prevention, Control and Countermeasure Program rule when they meet the applicability criteria…"

Seriously, this is not from The Onion.

Do note that the issue is not even regulation of milk spills it's regulation of milk under the oil spill prevention law.  Given the power of farmers, my bet is that these laws will not go into effect; even so I do not expect a milk gusher.

Hat tip to Joshua Hedlund.

Via Menzie Chinn, Mark Copelovich writes:

As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality. I find strong evidence that these patterns hold both within countries over time (I focus on IMF lending to Korea and Mexico from 1983-1997 in the book), as well as more systematically over time and across cases for the universe of IMF loans from 1984-2003.

Most of the post concerns what will happen with Spain; can you predict Chinn's answer?

On the House Agriculture Committee, which holds sway over farm policies and subsidies, members had farming and agribusiness investments worth five times on average the amount held by other colleagues in the House.

There is much more here.

The focus of this feature article, from The Atlantic, is charter cities.  Here is one good excerpt:

Ever since the setback in Madagascar, Romer has been coy, for obvious reasons, about which governments are interested in his plan. But he remains optimistic. “I revived growth theory. I made technology work in higher ed. I am two for two, and I think the impossible can be done,” he told me cheerfully. He added that the Daewoo deal might not have been the main impetus for the coup in Madagascar; the real reasons for Ravalomanana’s downfall lay in idiosyncratic local rivalries, even if the opposition exploited sensitivities over land to incite antigovernment protests. I suggested that the fact that land concessions could trigger such emotions was still not a good sign. Romer stopped, considered, and chose his words carefully.

“Anything that involves land can be manipulated by people who want to rise up against a leader,” he began. “You have to find a place where there’s a strong enough leader with enough legitimacy to do this knowing that he’s going to get attacked. It narrows the options quite a bit. But we shouldn’t give up without trying a few more places.” In short, a disappointment with one client is no excuse for failing to pitch other ones. Any entrepreneur knows that.

State lawmakers approved $775 million in cuts and other savings from New York’s health care budget on Monday after Gov. David A. Paterson inserted the reductions into emergency spending legislation submitted to the Legislature to keep the state government from shutting down.

If it is the case that the Obama reforms provided more health care than voters wanted, we can expect a partial clawback at the state and local levels.  The full article is here.

Matt and Ezra both comment on my post that most of the largest Chinese firms are state-owned or controlled by state-owned banks.  (Both blogs, by the way, have interesting running coverage of the same China trip.)  How can this be the case in the world's greatest economic growth miracle?  How come it works (sort of, there were lots of privatizations, starting in the 1980s) in France too?

Yet state-owned industries do not have a fantastic record overall; ask England.

In part this is a puzzle but in part France and China have one important feature in common: it's high status to be a ruler.  Very smart Frenchmen often grow up wanting to work for the government.  Hardly anyone in France thinks that is weird and so the French bureaucracy has some of the best talent in the country.

There is also a long-standing tradition of the prestige of the Chinese mandarin.  Furthermore, and perhaps more importantly, the Chinese Communist Party is the ultimate source of control and prestige for the entire society and it too attracts many talented people. 

It's not enough to attract talented people, however.  Unlike in the former communist Soviet Union, the Chinese government is (somewhat) dedicated to improving the nation.  At least at a ten percent rate of growth, this political equilibrium works.  And the state-controlled enterprises have to compete in a commercial environment, again unlike many former socialist experiments with state ownership.  Most of all, China is grabbing the low-hanging fruit by moving smart, hard-working individuals from rural jobs to highly productive jobs and when you are grabbing the low-hanging fruit many things are possible.  A lot of systems work OK until you get near the "you ought to shut down" constraint.

It's also possible that the successes of state ownership "decay" with time, as was arguably the case with the French model before the privatizations and has been the case with NASA in the United States.

The United States is far from having the right pieces to make public ownership work on a widespread basis and of all the major capitalist economies we have experimented with it about the least.  Federalism, a regionalist Congress, separation of powers, and a high proportion of political appointees all militate against successful government ownership.  Plus we are a large economy with relatively little external discipline in the form of international trade.

We could "respect" our bureaucrats much more than we do, yet they still would not have the real status they enjoy in France.  It's simply not built into our culture, which worships wealthy businessmen and also the so-called "common man."

Imagine if everyone wrote a tweet: "Hey guys, over at the Department of Education.  You're awesome. Luv ya!"  It wouldn't much matter because still not many people deeply and sincerely wish to emulate them.

I also prefer to live in a society where the public sector does not have so much prestige.  Very often governmental prestige stifles innovation and implies a series of more general insider, elitist, and sometimes authoritarian attitudes.  It's also worth a quick look at the histories of what France and China had to do to build up so much governmental prestige; not pretty.

We should recognize that the public ownership model has worked for China, but I don't want to see it widely copied.  I don't want to see it in Venezuela, Argentina, Turkey, Pakistan, Sri Lanka, Cuba, India, the Philippines, Nigeria, Central African Republic, or anywhere in Eastern Europe, to name a few other candidate countries.  Do you?

Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks.

There is more here.

Here is an interview with Joshua Coval, of Harvard Business School, about his current research.  I would urge caution on interpreting these results, but this is what the data toss back out at us:

Q: One of your findings was that the chairs of powerful congressional committees truly bring home the bacon to their states in the forms of earmark spending. Can you give a sense of how large this effect is?

A: Sure. The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees. In the House, the average is around 20 percent. For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.

Q: Perhaps the most intriguing finding, at least for me, was the degree and consistency to which federal spending at the state level seemed to be connected with a decrease in corporate spending and employment. Did you suspect this was the case when you started the study?

A: We began by examining how the average firm in a chairman's state was impacted by his ascension. The idea was that this would provide a lower bound on the benefits from being politically connected. It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending.

For the pointer I thank Alex Prado.

Addendum: Megan McArdle comments on the difficulty of interpretation.