World Economy

Cato Unbound is currently carrying an interesting contribution from Leif Wenar on how to combat the “resource curse”. Leif proposes a two-stage strategy for attacking the problem of kleptocrats who use the state monopoly of violence to extract resource revenues whilst their population lives in poverty. The first step is to prosecute (in American, and presumably also European courts) traders in goods stolen from peoples by their rulers. The second step is to go after stolen natural resources that get incorporated into manufactured goods elsewhere (say in China) and then imported into the US. Here Wenar advocates a tariff on those goods, the proceeds of which would be paid into a fund to be held for the benefit of the people whose resources have been stolen, with the fund to be disbursed to them when their government meets minimally acceptable standards.

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Surfing over to Charles Dodgson’s site yesterday, I happened upon Elizabeth Warren’s lecture on the squeeze on the American middle class since the 1970s. Then you could bring up a family on one income; now you can’t. Then non-discretionary spending made up a smaller proportion of household spending; now, it dominates. Result: if a parent loses their job or gets sick, bankruptcy looms. I didn’t expect to sit watching a YouTube video for whole hour but I was riveted by the story Warren tells with the consumption statistics.

I was kind of reluctant to blog this too. After all, there are others at CT who do sociology or economics or family policy and I don’t do those things. And I’m not an American resident either. Still, it struck me as pretty compelling. I wonder how similar the change has been in the other OECD countries?

Over at our joint I’ve been doing a fair bit of “this day seventy-five years ago” because of the anniversary of Roosevelt’s hundred days and, well, because. This one may hold some interest for an international readership:

On this day in 1933, British Prime Minister Ramsay MacDonald delivered an address from the National Press Club in Washington, DC, discussing the common problems of the US and UK: “In America at this moment and in Great Britain there are millions of men who want work and can’t get it…. Governments cannot be indifferent to a state of things like that.”

MacDonald looked forward to “wise international government action,” to be established at the upcoming international economic conference. He hoped it would revive “a freely flowing international exchange,” i.e., trade—“Self-sufficiency in the economic field on the part of nations ultimately ends in the poverty of their own people.”

He was mindful of the apparent irony in Britain’s having taken the nationalist, defensive action of going off the gold standard: “Can you imagine that in the early days of that crisis we said gayly and light-heartedly, ‘Let it rip. Let it rip. We will go off gold. There are benefits in being off gold, and we will reap them.’” Obviously he meant the answer to be “no.”—“And so on this currency question, agreement is the only protection.”¹
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note: I originally wrote this for the Dani Rodrik seminar. As it grew, though, it became apparent that it didn’t really have much to do with “One Economics, Many Recipes” and that it was thus a bit unfair to ask Dani to comment on it. On the other hand, I liked it too much to kill it altogether – dd

“One Economics, Many Recipes” makes a lot of useful and constructive suggestions about how to attack the central problems of economic development. However I don’t think it gives enough emphasis (fundamentally because I don’t think it’s possible to give enough emphasis) to international debt as a constraint on development. Nearly all of the success stories in the book relate to countries which started their periods of development without a large debt burden, and the presence or absence of large net external debt is certainly one characteristic which matches up well to the motivating stylised fact in the book – the distinction between those countries like Argentina which followed all the standard policy recommendations but didn’t develop and those like China which ignored them and did. In this essay, I’ll try and flesh out a few provocative views on the financial aspects of development policy, which in my view are just as important real-world constraints as the institutional real-economy factors that are the main subject matter of the book.

Actually, just as I don’t think it’s sensible to carry out international comparisons of crime rates without taking demographics and urbanisation into account, I don’t think that any kind of comparative analysis of developing economies can be carried out at all without conditioning on the debt burden. It’s that important. When you have a situation in which a country’s capital account is dominated by contractual flows payable in foreign exchange, that is far and away the most important fact about that country’s economy. This is because as long as the debt service constraint is binding (and I discuss what happens when it isn’t, below), then unless the country is receiving massive net transfers from abroad, the entire economic development program is going to end up being twisted toward a capital account constraint which almost certainly has nothing to do with a sensible locally-based development plan of the kind that Dani advocates.
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We’ll be doing a seminar on Dani Rodrik’s new book One Economics, Many Recipes in the nearish future. Originally, the seminar was going to go upshortly after the book’s launch, but the book got out into the stores earlier than originally planned. Those who have an interest in buying the book so as better to follow the discussion can do so at Powells or Amazon.

The dollar will collapse no later than one week from today. As of noon on October 15, you will not be able to buy a loaf of bread for $100,000. That’s the optimistic scenario. The crash may come sooner than that. It might be Thursday. It sounds like Thursday will be bad.

Yeah, things are heating up again in LaRouche-land. The Youth Movement kids haven’t been out in force singing on Capitol Hill much over the past two or three months. But it’s clear that supporters are now being pushed into a frenzied state, more even than usual. At the website where ex-members get together, plans are being made to send one true believer a loaf of bread as soon as the deadline for disaster passes.

No doubt it is an utter and total coincidence that The Washington Monthly will soon publish an in-depth article on recent developments in the organization.
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Matt Yglesias agrees for once with Airmiles Friedman.

It’s really baffling that we would give someone a visa to pursue high-level education in the United States and then do anything other than automatically give them a visa to work here. If we’re going to be stingy with anything, it should be with spots at our universities (in practice, there tend not to be Americans clamoring to get graduate schooled in technical disciplines), not spots in our labor force. Unlike the immigration of unskilled workers, immigration of highly skilled people is a totally uncomplicated balance of considerations. It’s good for the immigrant, it boosts the American economy as a whole, and instead of putting mild downward pressure on the wages of the least-fortunate native born people, the costs are borne by better-off Americans. It’s a total no-brainer.

Not so. It may be a total no-brainer for US economic wellbeing. It isn’t a no-brainer for the home country of the workers in question. Cue Dani Rodrik, who thinks that a guest worker program would be ‘terrific,’ a point that he has developed at greater length in an earlier paper (PDF).

To ensure that labor mobility produces benefits for developing nations it is imperative that the regime be designed in a way that generates incentives for return to home countries.
While remittances can be an important source of income support for poor families, they are generally unable to spark and sustain long-term economic development. Designing contract labor schemes that are truly temporary is tricky, but it can be done.

This is the reason why, for example, people who come to the US to do advanced degrees with support from Fulbright scholarships (such as meself once upon a time) are obliged to return to their home countries (or, in the case of EU citizens, the EU) for a period of two years before they can apply for a proper work visa or permanent residency. Speaking from my personal experience, this can be a considerable pain in the ass, but it has an undeniable logic. The home country in question isn’t going to benefit very much from its most economically productive citizens (which category doesn’t include me; I was always likely to be a net drain on the Irish economy) going to the US to study, if they don’t ever come home. This point applies with especial force to people coming over to study for advanced degrees in technical subjects. I think it’s possible to construct a slightly convoluted cosmopolitanish case against temporary worker programs (this would have to do with labour standards and the need for strong unions in the US to mitigate the global deregulatory impact of US preferences on the world economic regime; I may lay this out in a later post). But I don’t think it’s possible to construct one against the kinds of programs that Matt favors here. So if you are solely concerned with the economic benefit of the US, it’s indeed a no-brainer. If you’re worried about the rest of the world too (or instead), it’s anything but.

Brad DeLong links approvingly to Thomas Barnett’s attack on James Mann and other China ‘fearmongers.’ Insofar as I can read through Barnett’s self-created jargon of “the Gap” etc, I don’t find this critique to be insightful, compelling, or indeed particularly accurate. [click to continue…]

There’s a useful blog covering l’affaire Wolfowitz here . So far as I can see the Wall Street Journal is almost alone in spinning a pro-W line (what a surprise!).

Via Ezra Klein, I see that Jonah Goldberg has lapsed into what Ezra describes as a “weird revery over how the rugged individualism of Americans makes them totally unsuitable for social welfare programs.” In Goldberg’s own words:

I find interesting about the liberal defense of European welfare states (They really work! No Really!) is how they leave culture out of the equation almost entirely. … liberals are uncomfortable discussing the reality and constraints of culture for a host of reasons, from multiculturalism to vestigial hangups about seeing the world through prisms of class. … Maybe, just maybe, France and Denmark can handle the systems they have because they have long traditions of sucking-up to the state and throne? Marty Lipset wrote stacks of books on how Canadians and Americans have different forms of government because the Royalist, throne-kissing, swine left America for Canada during the Revolutionary War and that’s why they don’t mind big government, switched to the metric system when ordered and will wait on line like good little subjects…. If government systems are the only variable, or even the most important and decisive one, then how come it’s so damn hard bringing third world countries into the first world?

Now it’s a bit rich for a National Review hack to be talking smack about “long traditions of sucking-up to to the state and throne.” But even if we were to pretend for a moment that Goldberg’s argument is serious, it’s terrible. First of all, it gets Lipset’s thesis badly wrong. While Lipset was keen on enduring American values, he didn’t pretend for a moment that they were the only force shaping US politics. Indeed, he explicitly documented how American values became more ‘European’ as a result of the institutional innovations of the New Deal (funnily enough, Goldberg seems to have missed that bit in his doubtless extensive reading on the topic). But more generally, sweeping claims about the all-determining-power of fixed national cultures have a godawful reputation in the social sciences these days. Values change, and sometimes change dramatically. Individuals are more than the passive bearers of cultural traits; they, like, make choices, and sometimes change their minds about things. The institutions that surround them change, and when these institutions change, so too, very often, do political beliefs, values etc.

There are respectable and serious scholars out there, who make more limited and specific contentions about how culture matters to politics (I tend not to agree with many of their arguments, but I obviously don’t have a monopoly on the truth). However, sweeping, half-assed claims that Culture is Destiny simply don’t feature in serious argument any more. Instead, they enjoy a sort of zombie-like half-life in some corners of the rightwing punditocracy, where their explanatory deficiencies are outweighed by their political usefulness in providing a higher justification for selfishness. Which is what seems to me to be happening here.

A new bloggingheads between Dan Drezner and meself is up, in which, as the blurb puts it, “Dan and Henry analyze Bh.tv’s new business model and then defy it by failing to yell at each other.” One of the topics we discuss is the economic future of the EU, and Andy Moravcsik’s recent article on it. As a slightly belated EU 50th birthday post, and an addendum to my previous disagreement with Andy, I’d like to point to this brand new paper (pdf) by Martin Höpner and Armin Schäfer at the Max-Planck Institut in Cologne. The take home point is that the EU’s market integration processes aren’t neutral and technical, as they are often described as being, but are instead highly political, and have adverse consequences for coordinated market economies. This feeds into the EU’s legitimation problems.

Deregulating the economy is a genuinely political decision that cannot be left to independent agents. … Whether the member states need a ‘neo-liberal’ corrective is not for the observer to choose but must be the result of public deliberation and parliamentary decisions – otherwise, the price to pay is a serious democratic deficit. However, instead of a strengthening of input-oriented legitimacy, we witness ongoing – yet increasingly unsuccessful – attempts to de-politicize EU politics. European-level actors transform essentially political matters into apparently technical ones. An extensive interpretation of the ‘four freedoms’ of the European Treaty allows Commission and Court to enforce
liberalization measures juridically. The law shields these attempts from political resistance especially in organized economies.

Which leads me to wonder, after having read Dani Rodrik’s critique of the cheerleaders of globalization in the FT yesterday whether the EU isn’t being badly misinterpreted by outside observers, especially in the US. The usual claim that one reads is that the EU’s problems are the problems of creaking economies refusing to modernize, rejecting sensible proposals such as the original, tougher form of the Services Directive etc. But can’t this be interpreted from the other direction? Couldn’t one reasonably argue that the near-stalling of the EU’s market integration process demonstrates how over-strident efforts to deregulate are liable to result in political stalemate and backlash from an increasingly truculent public? In short, can’t the EU’s political problems be interpreted not as a failure of the European social state, but as a demonstration of the political limits of attempts to introduce global deregulation, free trade in services und so weiter without real public discussion?