Economists have it easy (I assume... or so my model tells me)

This quote, by a prominent (albeit rather heterodox) development economist, also has a shorter rendering that makes sense in light of Ben Atnipp's post: "an economic transaction is a solved political problem".

Resolutions for the WTO

Per liberi comercii, libertas

Lexington Virginia USA

December 2014

Be it resolved in this plenary session of the Whirled Trade Organization (heretofore WTO) convened in Lexington, Virginia, USA, that:

I>        Agricultural products and automobiles, and all materials involved in the production of agriculture or automobiles, shall be traded freely, without prejudice to country of origin. 

II>       No member nation of the WTO shall impose non-tariff barriers (NTBs) to trade on products in the areas of agriculture, automobile production, or finance. 

III>      NTBs in the areas of agriculture that are prohibited include, but are not limited to, restrictions on genetically-modified organisms (GMOs) and any other production processes that are not demonstrated to be unsafe for human consumption.

           

IV>       In the interest of free trade and competition, no member nation shall provide direct subsidies or financial support to the agricultural, automobile, or financial industries.  

V>       No member nation of the WTO shall place restrictions on capital investment flows into or out of their country. 

VI>     All member nations of the WTO shall allow currency exchange rates to be determined by market mechanisms.

           

VII>    All member nations hereby commit themselves to furthering the goals of universal free trade in all goods and services by the year 2020.

Collective action problem

Question of the day: Can I be bothered?

Today's illustration of the Tragedy of the Commons

Remember this guy? (Colbert does.)

Posted without comment

Ha!

Vermonters just don't buy it when Virginians claim...

U.S.-China climate deal (!?)

Big news (maybe) yesterday about a potential U.S.-China climate deal. Interesting to see how what was seen as an irreconcilable difference has suddenly been turned on its head (somewhat). So why the (doubt-laden) parentheticals?

Well, not everyone thinks the deal is worth the recycled paper it's printed on. And they have something to say about it.  

Implications of Low Inflation for Monetary Policy (Eric Rosengren, Pres., Boston Fed)

Here is a link to the speech and the materials from yesterday's lecture.

Bailouts, crises, and ... DUDE.

This one is for those of you who find yourself getting too sympathetic with the overextended borrowers of the world.

Republican Majority and Official Obama Lame Duck Period

What do you think? Open thread here.

Feel free to post in comments

Krugman apologizes and admits he was wrong!*

* - sort of.

He says he's mostly right, but was once (sort of half-)wrong a while ago in ways that prove he's even more right now.

Brazil and the markets

I vividly remember being in Brazil when Lula (the previous president, and a former leftist) was inaugurated. One of the first things he announced: he would be raising the budget surplus target in the first year of his presidency - I believe from 3.75% to 4.25%. The idea was that the former Marxist president as first action wanted to send a clear message to international capital: We are going to be fiscally conservative.

On a similar note, see Lindsey's recent post, and now note this from today. Note that this is a monetary rather than a fiscal move, but the effect (or at least the intended effect) is very similar.

A spectre is haunting Europe...

The spectre of deflation.

The fear is back.

We will talk about this at some length in class today, because some of the crisis issues we have been talking about recently seem to be playing out in real time. The real worry is deflation in Europe, though other countries (including the U.S.) present concern as well. And it is beginning to re-appear in the popular press, whether it's in Krugman's op-ed yesterday, this week's issue of The Economist, or this morning's top story on CNBC.

Kudos to the first person who can identify in the comments the reference made in the title of this blog post.

Quote from Wolf, for consideration

On banks and financial institutions, consider how the following might have applied to the "too big to fail" financial institutions in the U.S. a few years ago:

"The management of any systemically important bank that has to be rescued by the state should be disbarred, as a matter of course, from further work in the financial industry. A substantial fine should also be levied. Remember the fundamental point. Big banks have consistently operated in the knowledge that their profits are private and losses, if large enough, public. In other words, the institutions they run are underpinned by the state. Managers are, in an important sense, public servants. If they abuse that trust, they should be treated accordingly."

Digest that. Now consider this list. Discuss!

For now, I will say only this: enforcing Wolf's recommendation certainly could open up lots of job opportunities in finance!

(Of course, the more general equilibrium might instead just result in a much-shrunken financial industry... but that's for discussion.)

On debt and its "relief". Sort of.

We will talk today about Stiglitz, debt, and defaults. We have talked about Argentina several times. [Insert obligatory "Don't Cry for Argentina" joke here. Or reference to this...] 

Being a contrarian, I almost got in a big argument with some recent W&L alums (in finance) at a recent wedding. Then I realized I was at a wedding. 

Anyway, the topic of discussion that I didn't discuss at the wedding reception was the latest Argentine default. Sort of an echo of the previous one we talked about in class. Several finance folks were furious about Argentina's legal machinations that amounted to a default on some of its debts (though it has resources to continue to pay other debts, which is what makes it odd). Good luck trying to find anything in the American press (Bloomberg, Forbes, etc.) that takes Argentina's side in this case. You won't find anyone crying for Argentina, as the saying goes. And you shouldn't and I won't. The point here is not to stick up for Argentina. It's rather that I also don't cry for the creditors who are getting stiffed. 

The purchasers of Argentina's debt bought it why? Because it yielded more return (higher interest) than the measly amount you get on US investments nowadays. But why the higher return? Because it was riskier. Period. The financial community thought it had legal backing that would secure payment, and it is up in arms that Argentina proved to be an unreliable borrower, using devious legal mechanisms to avoid paying certain lenders. Why does Argentina do this? The point is that Argentina's sovereign financial management for a long time has been - and I apologize for the highly technical terminology: batsh*t crazy.     

This craziness came as an infuriating surprise to some. But not to a lot of people who look at history. Buyers of Argentine debt thought they were getting Argentina-debt returns for something closer to U.S.-level risk. Argentina's response was populist and long-run-economically-stupid-but-politically-rational. It is a reminder that when taking risks in finance, sometimes you get what you're paid for.  

Economists and their politics (in historical context)

In our discussions, the Great Depression (and the recent "Great Recession") has come up several times. So have the names of a few famous economists. And it may be worthwhile to put some of this in context - both intellectual/theoretical and historical.

We will have talked about four economists (e.g., from class, from things like Tommy Joe's recent posts, and upcoming with Stewart's book choice) and it is worth noting that they emphasize slightly different things. I will oversimplify at the outset, and we will complicate the story further as we go along.

In doing so, late me make a note about historical context. Keynes, Hayek, and Friedman were all deeply preoccupied with one historical moment: the Great Depression. It weighed on their minds, and the question was how to respond to such profound crises. (It is probably not too much of an exaggeration, though I hesitate to mention it, due to the corollaries of Godwin's Law: the Great Depression was THE central problem in 20th Century economic debates, much like the rise of totalitarianism became THE central problem of many debates in political philosophy at the same time: the interwar/Depression through WWII period was so morally/economically/politically catastrophic that it dominated much mid-century thinking across politics, philosophy, and economics.) So how to respond to such a depression?

Let's start with Milton Friedman, actually, even though he comes out of chronological order. Friedman saw inflation and deflation as (almost definitionally) monetary problems, and by extension they had monetary solutions. Inflation? Cut the money supply (or raise interest rates). Deflation? Expand the money supply (or lower interest rates). Let the free market work out the rest in the "real economy" we have discussed. This approach is called "monetarism", and Friedman suggested that the central bank could essentially be replaced with a computer. This minimizes active government intervention by avoiding more government spending, and it defends economic freedom; keep in mind, much of this debate is going on in the context of the Cold War and anti-Communism.

Keynes (who wrote before Friedman) had a different answer: sometimes monetary expansion is not enough (remember Japan's liquidity trap?), and you need the government to step in and stimulate the economy through fiscal means - especially by spending when others won't (call it a "spender of last resort"?), even if that implies borrowing and deficits, though Keynes would also have favored stimulative tax cuts in some circumstances.

Generally speaking, Hayek would have favored neither form of expansion, because the problem is that the booms that come before the busts are created by too much money. Let the real economy work it out with stable prices, even if that means short-term pain.  

Krugman would largely follow Keynes (and he considers himself a Keynesian), though his writing has given us a bit more on the importance of monetary policy, whereas the context for Keynes was about instances where fiscal policy was required.

Economist	Expansionary policy response?
Keynes	Fiscal
Hayek	Neither
Friedman	Monetary
Krugman	Both

One short-hand has been to put the Keynesians on the left and Hayek and Friedman on the right. Krugman is a Democrat and Friedman aligned with Republican economics (such as in the Reagan era), and you will find more contemporary liberals favoring Keynes and conservatives favoring Hayek. So if you prefer, herre is another way (which happens to align left and right) of looking at what types of intervention would these four favor when facing a depression or deep recession?   

		Fiscal expansion?
		Yes	No
Monetary expansion?	Yes	Krugman	Friedman
	No	Keynes*	Hayek*

* - [long asterisked note with necessary caveats:] Again, this is “what they are known for”, not the entirety of what they argued. Keynes was primarily known for advocating for expansionary fiscal policy (especially government spending) when monetary policy fails, but was not averse to expansionary monetary policy. Almost no daylight between him and Krugman on this; the distinction here is simply that Krugman has spoken more in our readings about the need for monetary policy, whereas the context for Keynes was much more about the need for fiscal stimulus. Also, do not take Hayek for being solely a libertarian that wants laissez-faire; he occasionally offered somewhat more nuance in his understanding of government involvement than that. Similarly, do not take Friedman (or anyone else, for that matter) to be simply in favor of expanding the money supply in all circumstances. Far from it - it is only in circumstances like depressions and deep recessions that the monetary "computer" would print more money. 

Another historical moment worth noting, as I think it informs this debate. The U.S. inflation of the late 1970s was a case that encouraged Friedman to argue for more restrictive monetary and fiscal policy (as happened under Reagan, and to a forgotten extent, under the late Carter presidency). That moment was one that continues to impact the thinking of inflation "hawks", much like the Great Depression haunted earlier generations. (To wrap the debate back around: people like Krugman would say that we are too beholden to anti-inflationary thinking today, much like the Great Depression itself was caused by several countries fearing inflation so much due to their post-WWI experiences that they allowed destructive deflation.)  

We could add into this mix a few other names that have come up, and figure out where they stand. Where would former Fed chair Ben Bernanke (or current Fed chair Janet Yellen, who has similar views) fit in this? And what about the guy we watched on video the other day: Rick Santelli? Hints: note there is only one of the four economists above that is alive, and that person long praised Bernanke for doing "whatever it takes" from the position of Fed chair to stimulate the economy, while the video link should give you some sense of where Santelli comes down.

There is much more to say on this, and I think talking it through will allow more of the nuance to come out. It will also allow us to get rather more into the contemporary politics of economic policy. Which is always fun.

Herd behavior and individualism

In honor of blog posts that get at panics, animal spirits, groupthink, and how people tend to engage in herd behavior... thereby producing the conditions for crises.

As context: Monty Python's The Life of Brian is a switched-at-birth comedy about a baby (named Brian) who is placed in the manger next to Baby Jesus. Which leads to some people mistaking Brian for the Messiah. Here is Brian as a grown-up, trying to discourage his adoring followers.

Markets are full of individuals making highly individualuized decisions.

(All together now: "Yes, we ALL make individual decisions.")

Side note on comedic theory: your garden-variety everyday decent comic writers could come up with the central joke here. The genius of Monty Python, if you ask me, is the joke echo, the extra little clever punch line. That is, the last two lines.

Brainstorm/pondering of the day

Especially for those of you interested in Europe, the Euro, and the contemporary crisis. As I was re-reading Bernanke and James last night, I found myself wondering about an analogy between the Great Depression (which obviously is a huge historical memory that hangs over global monetary and fiscal policy) and the Euro crisis.

Take France and the U.S. in the early 1930s gold standard and put them in the position of exporters that don't want to loosen monetary policy, largely because they fear domestic inflation. Take the UK as the country that has an overvalued currency in the system, relative to other countries, and is exhibiting current account deficits (buying more imports and having to deplete its gold reserves).

The idea is that the strong exporter.should allow a bit of inflation to rebalance the system in this fixed exchange rate environment. That's what "playing by the rules" meant.

Now substitute above: "Germany" for "France and the U.S.", "Spain and Portugal" for "UK", and "Euro" for "gold standard"

We can think about how well the analogy works, and limitations on it. Just a thought.

On the interest rate(s)

Ben Atnipp makes a good point about interest rates: we talk about them as if there is one, but there are many. It's a good thing to keep in mind. 

For the record, when talking about the interest rate that is "set" or "controlled" by the Federal Reserve, we are generally referring to the Fed funds rate, or actually the "Fed funds target rate", which is currently targeted in the range of 0.00% - 0.25%. (The Fed doesn't exactly "control" most interest rates in the economy - it only provides a sort of anchor for them - which begins to address why I asked on the previous handout "How can the central bank “set an interest rate” and still have us talk about being a free market, capitalist economy?")

In his post, Ben mentioned a bunch of other interest rates. One way to think about domestic rates in the U.S. (and many rates around the world) is basically to think of the short-term US Treasury as virtually risk-free debt. That is, loan the money to the US government and you will get your money back. (This is why the idea of breaching the debt ceiling was such a worry - because it would violate the basic principle on which so much of modern global finance is based.) The interest rate on corporate debt will be higher than the interest rate on Treasury bills, precisely because they are riskier. If you are going to loan your money to someone riskier than the US government, you will want to be compensated with a higher return in the form of higher rates. Longer-term US government bonds will generally also pay higher interest (or have higher rates) than short-term, for several reasons that have to do with the risks of inflation and the expected growth of the economy over time. Basically, if you loan the US government money for a few months, don't expect much interest (especially nowadays); if you are willing to loan for longer, you will be able to command a slightly higher return, though still rather modest nowadays. 

More on this in class, upon request. 

Krugman post #1

We are getting close to the point in the course when we will read Paul Krugman's book. Perhaps the time has come to do the first link to one of his New York Times op-eds, which will typically be on point for us. And they are also polemical and partisan enough - often enough - to make them worth arguing about!

Shock and Aw!

We have read a couple of pieces published by the St. Louis Fed. Its president, James Bullard, has been one of the more centrist-to-hawkish regional presidents. This means that he has been more willing than some Fed regional presidents to "taper", or end the Fed's bond-buying program (which, keep in mind, is designed to keep interest rates very low).

So it came as a surprise to the markets when he wondered aloud if the Fed's bond-buying programs (aka, "quantitative easing") should continue. Why would he say that? Well, a key economic indicator came in lower than expectations. From our discussion the other day, see if you can guess which one (though there a few possible "correct" answers to this).

Once you've made your guess, go here and see the video clip and story.

National security protectionism: Nationalize the hotels!

International trade and protectionism makes for strange bedfellows and unpredictable policy positions. Take this video, for example.

Larry Kudlow is one of the most vocal libertarian, free market advocates on cable news. Barney Frank was one of the most vocal liberal Democrats in Congress. Guess which one wants sanctions on the China as Chinese capital tries to spend nearly $2 billion to buy New York's Waldorf-Astoria Hotel?

Now, to be clear, the issue is not solely capital flows for the person advocating sanctions - it is linked to cybersecurity and punishing China for hacking incidents. Recall the St. Louis Fed piece on the slippery slope of protectionism using "national security" logics? Ask yourself if it is playing out in real time.

[Random W&L reference: the host of the discussion is now-rather-famous (in financial journalism circles) recent grad Kelly Evans, '07.]

Compare and contrast

Paul Krugman is an author we will be reading soon enough. He is also a New York Times columnist. Today's column - if you read closely enough - reflects not only a discussion of the Federal Reserve's preoccupations today, but also has echoes of the 1896 presidential election. As The Wizard of Oz could show us.

It can be interesting to compare and contrast the late 1800s - 1930s period with the contemporary Great Recession.

History doesn't repeat itself, but it does rhyme.

Edge of your seats stuff...

You know you were all waiting.


FWIW, I would say: great call. Influential not only on content, but on some important methodological issues in game theory. My first instinct was, why didn't this guy get to join in the fun, but they have their reasons.

Thirty years on from FDI in the American auto industry

Here's an interesting story on FDI that I went looking for when I thought about "market-seeking". I want to remind you of the "voluntary export restraint" undertaken by Japanese automakers in the early 1980s. Much derided by economists for being a tariff without the revenue.

Fast forward thirty years:


Evidence that pressure on Japanese automakers (i.e., protectionism) worked? Discuss!

Book List (not exhaustive)

A partial and non-exhaustive list of books on financial and economic crisis that you might choose to read and write about for later in the course [reposted and updated from 2009 & 2012].

Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World.

Akerlof, George & Robert Shiller. Animal Spirits.

Bagus, Philip. Tragedy of the Euro.

Bernanke, Ben. Essays on the Great Depression.

Blinder, Alan. After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead

Cooper, George. The Origin of Financial Crises.

Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System

Fox, Justin. The Myth of the Rational Market

Friedman, Milton. The Great Contraction, 1929-1933.

Galbraith, John Kenneth. The Great Crash of 1929.

Gorton, Gary. Misunderstanding Financial Crises: Why We Don't See Them Coming

Irwin, Neil. The Alchemists: Three Central Bankers and the World on Fire

James, Harold. The Creation and Destruction of Value: The Globalization Cycle

James, Harold. The End of Globalization: Lessons from the Great Depression

Keynes, John Maynard. The General Theory of Employment, Interest, and Money

Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises.

Kindleberger, Charles. The World in Depression, 1929-1939

Lewis, Michael. Flash Boys

Lewis, Michael. Panic: The Story of Modern Financial Insanity

Lynn, Matthew. Bust: Greece, The Euro, and the Sovereign Debt Crisis

Marsh, David. The Euro: The Battle for the New Global Currency

Minsky, Hyman. Can 'It' Happen Again? Essays on Instability and Finance

Minsky, Hyman. Stabilizing an Unstable Economy

Morris, Charles. The Two Trillion Dollar Meltdown

Onaran, Yalman. Zombie Banks: How Broken Banks and Debtor Nations are Crippling the Global Economy

Piketty, Thomas. Capital in the Twenty-First Century

Reinhart, Carmen and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly

Shiller, Robert. The Subprime Solution

Sorkin, Andrew Ross. Too Big to Fail

Stiglitz, Joseph. The Price of Inequality

van Overtveldt, Johan. The End of the Euro: The Uneasy Future of the European Union

Wapshot, Nicholas. Keynes Hayek: The Clash that Defined Modern Economics

Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic

Wolf, Martin. Fixing Global Finance

Wolf, Martin. The Shifts and the Shocks

Zandi, Mark. Financial Shock

Chernobyl and that other one

Rereading Stiglitz reminded me: The Chernobyl disaster of 1985 and its aftermath was seen as a damning indictment of the communist system. Rightly so, I might add.

So an explosion and aftermath with even worse consequences in a capitalist system should be seen as a damning indictment too... of something? Or not?

Special Report in The Economist

This week's issue of The Economist has a great special report on the challenges facing labor (or, rather, labour) in the current global economy.

It is the sort of analysis for which I admire the magazine: it is even-handed in terms of looking at evidence rather comprehensively, regardless of the fact that the publication itself has a clear editorial position of being pro-trade and pro-market. (Note that this is not the same as being pro-corporation or anti-labor.) The Economist dismisses a lot of nonsensical arguments, but takes seriously any challenges to their own world view.

The special report has several linked articles, and much of it is behind a subscription wall. If you would like to access it, you can do so through Leyburn. I won't distribute copies for copyright reasons, but you can borrow my copy of the magazine if you want a look.  

Globalization and inequality (between and within countries)

An interesting review in The Economist about changes in global inequality over time. Complete with some discussion of big moments of globalization and reversal at the end.

It's not all trade

As seen also on outlets ranging from pro-business CNBC to left-leaning Huffington Post: the Robocalypse!

See also... uh, this.

Barriers to Trade and Borders

We should probably do a study of whether trade is hindered by natural barriers such as linguistic boundaries like these.

Just FYI, Prof. Anderson could help us with measuring how various forms of "distance", which could probably be linguistic as well as geographic affect the degree of trade (as measured by price dispersion between places). Have a look if you are inspired.

Trade and Factors of Production, the sequel

As we have discussed a few times in class, one of the main running themes (of this first part of understanding IPE) is the linkage between trade and factors of production. In particular, how patterns of trade are affected by the relative abundance of factors of production.

The point of departure was comparative advantage. Opening trade tends to lead labor-rich countries to produce labor-intensive goods and capital-rich countries to produce capital-intensive goods. That is, you tend to produce in things that make use of your most abundant factors of production. (This is known in economics as the Heckscher-Ohlin theorem.) As an example to support your intuition, think of China and the U.S. trading. The expectation would be that China will produce goods that make use of lots of labor, because China has lots of labor and by extension, labor in China is rather cheap compared to the U.S. (At least low- to moderately-skilled labor. The story is less clear when we get to high-skilled labor. Of course, even the definition of what "high-skilled" means will be changing over time, and so on. But in general, think of China producing non-high-tech goods in big factories, using lots of labor to do so.)

We can summarize another main conversation item thus far in the same terms: objections to free trade in industrialized countries like the U.S. tend to focus on trade's impact on the factor of production that is relatively scarce in rich countries: low- to moderately-skilled labor. Those are the people likeliest to be hurt by trade. All your economists' theories and studies of aggregate gains and consumer surplus and comparative advantage and long-run equilibrium sound a bit ivory-towerish to someone who lost their job. Especially those for whom, as Stiglitz worried, adequate protection or social support never really happened. (Considering labor and capital as the two main factors of production, there is a profound moral and philosophical question about whether we should be concerned primarily about opportunities for laborers and consumers - because workers are human and capital is not - or also about opportunities for non-human capital, which ultimately is the basis for human wealth, but I will not address that at length here.)

So in a sense, our conversation has very much been about trade and factors of production. Think about how Ronald Rogowski.builds on this. He makes reference to the Stolper-Samuelson theorem, which builds upon our discussion of factor price equalization and extends the logic above:
* When trade increases, returns to a country's abundant factor of production increase.
Ex.: Trade increases, wages for Chinese workers increase
Ex.: Trade increases, returns to American capital increase
* By the same logic, decreasing trade (or protectionism of various kinds) advantages the scarce factor of production.
Ex.: American laborers seek protection from goods made by Chinese laborers
Ex.: Chinese capital might want not to compete with American capital (in several ways we can discuss)

The issue for Rogowski is not only the trade theory dynamics, but the political effects or consequences of these dynamics. Notice that he considers three factors of production: labor, capital, and land. Pay attention to his evidence. Look at what he claims to be able to explain historically, using little more than the trade theory we have discussed thus far.

News out of Hong Kong

A couple of people have picked up on the news out of Hong Kong today. Julia and HeeJu have both written on it, and perhaps others as we speak. Several things to consider relate to the discussions we have had. On a very general level, one of the pressing questions about China is whether it will be subjected to the "folk laws" of what we call modernization theory. Basically, as it gets rich and as a middle class emerges, will pressures for democracy arise? Plenty of history suggests yes. And it is amazing to think that the Tiananmen Square uprising was now 25 years ago - a whole generation.

How does that relate to IPE? In many ways we can discuss. Not least is that the basis for legitimacy of the Chinese Communist Party has been rooted in delivering the economic goods. The CCP has claimed that it is uniquely capable of presiding over an economy that features "harmonious development" and the like. This has meant rising wages and increasing consumerism, but also inflation that is kept in check (among many other things), and rather importantly... no political challenge to the CCP's rule.

What is going on in Hong Kong will be a fascinating (albeit tense and nervewracking) test that just may tell us something about where China is going politically and economically... stay tuned.

Wal-Mart and Poverty

Here is a link to the original article noted in class the other day. It is by Sebastian Mallaby. For econ types, this is where the "consumer surplus" hits the "income distribution" argument.

Much more to say about WalMart, and this is not the final word on it, by any stretch, but one worth considering - whether you ultimately agree or not.

Comparative advantage and the mobility of factors of production (a follow-up)

In the Wolf-Stiglitz trade discussion the other day, there were several threads going, and in that I lost sight of (or time for) some of the questions others had posed. I will begin today with some observations to bring together some key themes from Wolf and Stiglitz, then we'll move onto the context for the discussion today. Specifically, the impacts of trade on domestic economies in "rich" countries like the U.S.

Two questions from the other day that deserve more than the half-treatment they got the other day. Both are linked to comparative advantage and factors of production. Robert and Amanda raised these questions. Let's discuss them a bit. 

Robert asked about page 83 in Wolf. The crux of that quote is the following. If you think about it, comparative advantage matters most when the factors of production (capital and labor) are not really free to spill across borders. That is, when they are confined to their home country. Imagine capital and labor could "flow" anywhere. Capital would move wherever the best profit opportunities are, and if we had totally free migration, laborers could move wherever the best wage-earning opportunities are.

At the extreme, for reasons I can explain in class, we would expect labor's wages (for instance) to converge in all different countries to some global average. No longer would US wages be high and Burkinabe wages be low; Burkinabe and other people would flock to the US, driving down US wages and making labor more scarce in Burkina (thereby raising wages in Burkina) until the wages averaged out (or the "market cleared" or global "equilibrium" was reacted). Again, that's an extreme example, but you see the logic. Similar story with capital. People would put their money wherever the opportunities are, and in the long run (hopefully before "we are all dead") the returns to capital should converge across countries. (There is actually a wrinkle here that takes into account the "Silicon Valley" phenomenon we discussed the other day, and that Ben hinted at on his blog, which is that returns should converge towards the actual productivity of inputs, but let's set that aside momentarily and discuss it in class.) What Wolf is getting at is that comparative advantage matters mainly because these "extreme" conditions do not hold. Labor and (to a lesser extent) capital tend to be somewhat more confined to their homes, for reasons ranging from government policies to language barriers to the fact that geography still matters and it still costs something to move things around (see again Ben's comments). We can follow up as needed.

Amanda asked a question (on p. 81) that is related, or has a related answer. Keep in your head the observation above: totally free flow of factors of production (capital and labor) would tend to equalize the returns to each (profits and wages, respectively). As a term of art, you can call this "factor price equalization", a phrase we will see down the line. So what about this, from Wolf: "The shrinking import-competing industry is not competing with imports from foreigners, but with what its own domestic export industry can pay." Let's go to an example to illustrate. North Carolina used to make lots of furniture (around Hickory, e.g.), but now has to compete with Malaysia. It is a "shrinking import-competing industry". You might think, of course North Carolina furniture makers compete with Malaysian furniture makers. (Fair enough.) But Wolf's point is that North Carolina furniture makers fundamentally compete with other American industries for workers. A central issue is that workers in the U.S. command and expect certain average wages, and this is part of what makes North Carolina furniture less competitive. It's not only low wages in Malaysia, it's high wages in the U.S. Look at the previous sentence on p. 81 and fill in some blanks "Opening [the U.S.] to trade moves output in the direction of activities that offer domestic factors of production the highest returns. Read: freer trade with Malaysia will lead the U.S. to produce less furniture and more jet engines because furniture makers can't compete with Boeing in one of two ways:
a) They can't compete in terms of the wages they can pay American workers and still compete with the Malaysians, or
b) If they do pay the same wages as a Malaysian furniture maker, they won't attract capital (Because, well... where would you invest your hard-earned money if you want a return? A Malaysian furniture maker with low costs or an American one with high costs?)
 Thus, "industries compete inside countries for the services of [labor and capital]". 

We can talk about this more in class, but I wanted to follow up since I left this conversation underdeveloped the other day.

Stiglitz on the P in IPE

Page 63: "In principle, the winners could compensate the losers; in practice, this almost never happens."

An important quote to keep in mind if you are trying to figure out why some scholars (economists and/or political scientists) seem to talk past one another on the politics and policy of international trade. We got at this a bit in class the other day: there is a big difference between arguments for what trade might do in terms of aggregate income and what it might do in terms of the distribution of income. Put in other terms familiar to some of you, it is akin to the difference between the two sides of the "efficiency-equity" tradeoff, with Wolf (most often) focused on the former, and Stiglitz (often, but not always) on the latter.  

Just to be clear: this difference in emphasis is not simply to concede one or the other side of this debate. In fact, historical evidence that we can discuss suggests that free trade might not always maximize aggregate income, and evidence might also suggest that free trade often does improve the distribution of income. So the distinction above between aggregate income and income distribution does not simply mean that free traders win on the former count and free trade skeptics win on the latter. But it is worth noting that they are often talking about slightly different outcomes. 

Inequality and Irrationality

Having settled into a discussion about two contrasting views on globalization - by Martin Wolf and Joseph Stiglitz - I am struck by the variety of ways that several people are questioning the underpinnings of Wolf's argument. I say this understanding that many are raising these questions even as they may be fundamentally sympathetic to Wolf's pro-market perspective that advocates for liberalism and its economic corollaries (such as open trade, private markets and exchange with limits on government intervention, and the like).

There are two themes that emerge across several blogs today. The first draws on Stiglitz's concern and is about inequality in outcomes between countries. This is raised in distinct - yet related - ways. HeeJu saying that Wolf is "tolerant of the disparity" between countries, Lauren's worries about the "magnitude of loss", and Robert's thoughts about a "deadly cycle" due to a number of conditions. (And again, each of these three also has words to the effect that globalization is or can be beneficial, so these are not one-sided positions.) This question about inequality, incidentally, is also evoked by Stewart's title to her previous post, which is a clear allusion to a recent major book by Thomas Piketty about inequality. (It's 600+ pages, but if anyone wants to pick it up as your book for week 8, be my guest!) We can talk somewhat more about the extent to which inequality constitutes a damning critique of globalization - I hinted at the idea of Pareto optimality in class the other day, and you can probably imagine that there are quite distinct well-grounded moral perspectives on the salience of inequality as a critique of modern capitalist economies.  

The second theme I want to draw out is one that Julia has addressed the most directly in a recent post. It is the question that gets to the validity of some of the basic theoretical underpinnings of the free-market argument, namely arguments about rationality. As she notes, recent research in economics (along with neuroscience and psychology) has really questioned whether we can operate on the assumption that human beings act rationally. Or conversely, if their behaviors and choices are shaped by other processes (such as "irrational" worries about "not losing" or simply using heuristics and mental short cuts). The "invisible hand", operating on each person making their own rational self-interested decision, is clearly not the whole story (as Adam Smith knew well).

There is also much to say about this, of course. Note that scholarship in economics and politics as disciplines often depart from the rationalist assumption as a "first pass" in explaining why human beings do what they do (whether it's someone making a private economic decision about buying or selling or investing, or someone making a choice about the costs and benefits of different votes or deciding how to run for office). "Rationalist" thinking is clearly a useful theoretical tool to understand how "many" people behave "often" (not "all" people behave "always"). And prominent economist Milton Friedman famously argued that we don't need the assumption of rationality to actually describe how we make decisions, but rather we build a theory upon it because it is a good approximation that allows us to predict how people will typically behave. In any event, it is clear that rationality describes only a part of our thinking and decision making. And it is also clear - as Stiglitz has shown, among others - that markets do not operate seamlessly under ideal conditions of transparency and free flows of information, costless transactions, and so on. This should lead us to question the premise that free markets and individual rationality (as captured by the "invisible hand") leads inevitably to betterment for all. We are well-served to question not simply with a view to reject, but rather to test the limitations of the theories offered by Wolf and other advocates of free market economics. When it comes to the role of market economics, suffice it to say, other things matter too.

IPE is pretty much passe

See, this is the type of thing that just needs a one line post.

Aye or Nae?

Much to say today, and I know many people are following the referendum in Scotland. We can talk a bit about that in class. In Scotland recently, as I mentioned briefly, I was struck by the ways in which economic arguments and historical-cultural arguments "talked past" one another to an extent. Many people engaged in the politics of persuasion - especially on the side of "No" (or "Better Together", i.e., stay in the UK) - simply use a logic and rhetoric that is on a different register than the one many people are voting on.

In any event, we can discuss, but since Tommy Joe posted a video that was "in favor" (ahem...) of independence, I thought I would bring equity to the debate with a video below that articulates some arguments against independence. (To be fair, he gave a hearing to such arguments himself, though he was surely won over by the rhetorical appeals of the great Scot statesman and orator whose video he posted.) Not exactly from leaving the UK, but I think you will see the analogy. I am also trying to mind the gap in this debate, thinking not only about what the future holds for the Scottish economy, but also what its history has been.

Sant'lli tore the New York Times up into pieces...

One of the three books we are looking at together this term is by Paul Krugman. As the cover of the book notes, he was a Nobel-Prize winning economist before he became a New York Times columnist. (Actually, he may have won the Prize after becoming a columnist, but the point is his research earned the prize before he went into more regular punditry.)

It may be worth following his op-eds, which come out a couple of times a week. Fortunately, perhaps, he almost always writes on the same things. Over and over. (I am only half-critical of this, because given our national attention span and rapidly-spinning news cycles, there is a good case for repeatedly stressing the same fundamentals with some frequency.)

Main themes of his work include monetary policy and fiscal policy, both of which we will discuss at length. (He is also partisan in his politics, in ways I will leave to you to reflect upon.)

A fascinating thing is how overtly political monetary policy has become in recent years. As we will discuss later, this is basically the amount of "money" that circulates in the economy, as shaped in lage part by the rate of interest charged by the central bank (the Federal Reserve) uses to anchor the banking system. Sounds like relatively technical stuff that won't keep many Americans up at night. Except it is hugely influential and hugely divisive.

Krugman has been a big proponent of very "loose" monetary policy and has been critical of many others (famously, Rick Santelli of CNBC, though he is not the only one) who have been critical of the Federal Reserve for begin too loose. This means basically that Krugman favors very low interest rates and substantial action by the Fed to respond to economic weakness, while Santelli and others would favor interest rates being increased (preferably yesterday, if not earlier). Have a look at Krugman's post today. There is more we could say about this, but maybe the best is just to discuss on Tuesday.

Handy quick reference

I used to maintain a list of different "terms" in IPE: actors, concepts, and the like. We can still do that, but it has occurred to me recently that there are already plenty of other handy quick reference sources online, and that I may be reinventing the wheel. So here is something for those of you who may be new to the study of economics, politics, and the interactions between the two. It is a primer from the Federal Reserve Bank of Dallas (one of 12 branches of the country's central bank), simply called "Globalization".

On a related note, I have sometimes thought that if I had to remake this into a 100- or 200-level course, "Globalization" might be a decent alternative name. But "International Political Economy" - while having less of a ring, perhaps - probably signals more of what we want to talk about and how.

- jtd

IPE Fall 2014 - Initial Thoughts

Greetings all.  I thought I would start out with a few thoughts on the way we will approach "IPE" in the coming weeks. One way to do that is to illustrate a main point that I want to make over the course of the term, using a few major items from the news today. My point to follow... 

The first item is what is going on in Ukraine, where pro-Russian (and by most indications, Russian-backed) rebels in the east are fighting the central government, in the hopes of either independence or annexation by Russia. This follows the actual annexation by Russia of the historically important and culturally Russian Crimean Peninsula earlier this year. My initial point about this event is that it looks simply like old fashioned power politics, focused on security rather than economics, yet... notice that much of the actual debate between the US, the European Union, and Russia is taking place in the economic sphere. It is all about sanctions and counter-sanctions, import bans and export bans, and so on. That is, it is really difficult to disentangle the international relations of power politics from the role of the international economy in this day and age.

The second item might seem even more tenuously related to "political economy" (whatever that is, and we will discuss in class). It is the activity of the Islamic State in Iraq and Syria (ISIS or ISIL). Yet a case can be made that this too loops back pretty quickly to economic relations, from oil investment conditioning much politics in the Middle East to the role of Russia (again) and France in Syria. This is not to deny the primacy of issues that are not purely political-economic, such as the Sunni-Shia split in Islam or the simple reaction to Islamist fundamentalism (among other major issues), but it is again to say that there are few issues where economics doesn't enter the picture quickly and with some degree of decisiveness.

The third item: I am just back last night from Scotland...

...where on September 18th, the Scots will tell the Brits once and for all that for centuries, they may have taken their lives, but they will never take our Freeeeeeeeeeeeedom. (Or maybe not.) Anyway. The fascinating thing about the debate there, for me, was the combination of two things: on the one hand, raw emotion about identity and who people are (Scottish, British, or both); and on the other, massively important conversations about implications for monetary policy, fiscal transfers, membership in the European Union, and so on.  In other words, two different sides of "who will we be?" and "what will our country be like?"

The unifying factor is clear by this point. "IPE" is never - at least in my view - far from the surface of virtually anything going on in current events around the world today. We can talk another time about how this is true of American domestic politics, as well, of course. But that in due time.

- jtd