Political Economy

“Martin Wolf in the FT today”:http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

bq. Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

I’m not sure I agree (or more precisely: your level of agreement with this statement will depend on exactly how you want to define Keynesianism) – but it’s worth pointing out that this is at the least quite consonant with Tyler Cowen’s “arguments about Germany”:http://www.nytimes.com/2010/07/18/business/18view.html?_r=1&scp=1&sq=tyler%20cowen&st=cse. On the one hand, this intellectual convergence could be taken as suggesting that Tyler’s case suggests that German-style social democracy works better than US style Keynesianism (an argument which I _think_ Tyler agrees with, at least with respect to Germans). On the other, it could be taken as suggesting that despite Wolf’s frequent minatory statements about the external consequences of the German model, he believes that it works better in relative terms than US-style Keynesianism in providing _internal_ economic security and political stability. Certainly, he is quite skeptical about the prospects of the US economic system given Republicans’ role as a blocking minority and perhaps majority in the near future (his most provocative suggestion is that Republicans are a perverted species of Keynesians).

_Politics and Society,_ which is my favorite journal, has a special issue centered on Jacob Hacker and Paul Pierson’s “Winner Take-All Politics” argument. They’ve made it “freely available”:http://pas.sagepub.com/content/current for a couple of months, and I recommend people read it, not only for the “Hacker and Pierson piece”:http://pas.sagepub.com/content/38/2/152.full.pdf, but for the responses from Lane Kenworthy, Neil Fligstein and others. I’ll be writing a few posts on this, and wanted to start out by pointing to Hacker and Pierson’s discussion of one interesting and not immediately obvious implication of the Senate filibuster and other forms of veto. Very obviously, they make it harder for new pieces of legislation to get through. But they also lead to problems with existing legislation. Over time, legislation can become increasingly unmoored from its supposed purposes, as society changes. Alternatively, existing legislation can turn out to have quite unexpected loopholes. But reorienting legislation or closing loopholes will be very difficult when there are veto points such as super-majoritarian requirements. Hacker and Pierson give the example of an obscure loophole dating back decades, which has been used in a quite unanticipated way to allow hedge fund managers to have their management fees counted as capital gains rather than income (and thus taxed at a much lower rate). Recent efforts to amend the tax code to get rid of this loophole failed in the Senate, and are (as best as I know) unlikely to be revived. This kind of “drift” is also advantageous to politicians who want to favor influential interest groups, because it means that they can protect their interests through inaction (which is often politically invisible) rather than direct action.

It is worth noting though that this mechanism cuts against some of Hacker and Pierson’s previous arguments in _Off-Center._ There, they suggested that the Republican use of sunset clauses to get tax cuts through were likely to lead to long run change.

bq. it means that future politicians will face a fundamental political quandary: Should they allow enacted provisions of the tax code to expire, explicitly taking from (for the most part, wealthy) taxpayers benefits that they already enjoy? Or should they extend these provisions, incurring the $4 trillion in lost revenue and additional debt service that the sunset provisions of the tax cuts represent? The sunsets, in short, create an unprecedented new political environment – one that is highly favorable to tax-cutters’ core goals. … Republicans reasonably predict that the pressure to extend the tax cuts will be intense, not least because well-off folks who receive the big tax provisions that take effect just before the sunsets kick in will be unusually well poised to make their voices heard. They also expect, no doubt, that the need to protect these provisions will provide a powerful motivation for the wealthy to bankroll Republican reelection effects in the future.

Here, the putative mechanism of policy change was _not_ drift (there is some status quo bias but it is not caused by institutional lock in and veto points). Indeed, it was precisely because of the likelihood that the legislation would be blocked by a Senate filibuster that the Republicans had to pass the bill through reconciliation and jiggery-pokery with the numbers. There is a current debate about the tax cuts’ expiration – but this doesn’t look to me to be a “highly favorable environment” for their retention – and not only because of the economic crisis. There is a substantial minority of Republicans and conservative Democrats who can try to block major efforts to increase taxes on the rich, but (pending the elections), it is probably not be enough to pass new legislation to re-enact the taxes. While we still haven’t seen whether the tax cuts will or will not be renewed, it seems to me plausible that Republicans were too smart for their own good. They might have been smarter to settle for more limited cuts without a sunset clause (putting the future burden of change on those who wanted to repeal the cuts, rather than those who wanted to renew them).

I’m grateful to commenters Lemuel Pitkin and Bill Gardner, who pointed me towards Rodrik’s trilemma the other day. In his latest Project Syndicate piece, Rodrik represents the trilemma thus:

bq. economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

Possibly for pedantic reasons, I’m not all that happy with this formulation. After all, national sovereignty is pre-eminently a legal concept and democracy might be defined merely in procedural terms, and it isn’t at all obvious why regular elections, legal sovereignty and globalization would be incompatible in the way Rodrik suggests. However, there’s a more careful version in his 2000 paper “How far will international economic integration go?” (J. Econ Perspectives 14:1) where the trilemma is expressed as being between international economic integration, the nation state, and “mass politics”, where the latter refers to

bq. political systems where: a) the franchise is unrestricted; b) there is a high degree of political mobilization; and c) political institutions are responsive to moblized groups. (p.180)

In the 2000 article, Rodrik discusses Friedman’s “Golden Straitjacket” where “mass politics” is the disappearing bit:

bq. the shrinkage of politics would get reflected in the insulation of economic policy-making bodies (central banks, fiscal authorities, and so on) from political participation and debate …. (p. 183)

Cue Stephanie Flanders on the UK’s new Office for Budget Responsibility.

Just about every article in this morning’s _Financial Times_ seems to include a paragraph or two about how governments need to “deliver” debt reduction, to satisfy the markets, investor expectations etc. They then typically note that said investors are anxious about whether democratic politicians can “deliver” the austerity measures that the markets “require”. So here’s the question: how long before the _Economist_, the Murdoch press and similar give up on democracy on the grounds of its incapacity to “deliver” firm government? We’ve been here before, of course, in the 1970s, when the _Economist_ and the _Times_ backed the Pinochet coup in Chile. Of the PIIGS, only Ireland has escaped dictatorship in living memory and some of the southern European countries still contain contain authoritarian rumps (with special strength in the armed forces and law enforcement). My guess is that we’ll be reading op-eds pretty soon that raise the spectre of “ungovernability” and espouse “temporary” authoritarian solutions. Maybe such columns are already being written? Feel free to provide examples in comments.

“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2010/03/assorted-links-12.html links to a post on a blog that I had hitherto been unaware of, “True Economics”:http://trueeconomics.blogspot.com/2010/03/economics-11032010-replying-to-prof.html (proprietor: Constantin Gurdgiev, Adjunct Lecturer in Finance with Trinity College, Dublin and Chairman of the Ireland-Russia Business Association), asking the question “How much did the Irish government subsidize housing?” I’m writing a review of Fintan O’Toole’s “Ship of Fools” which speaks specifically to this question, and the answer is ‘not very much at all.’

Gurdgiev’s post is both quite mad and oddly charming, combining denunciations of the ‘Stalinesque schemes’ to provide development funds for Western Ireland and a railway link thereto, with quite sincere-sounding suggestions that he wants to engage with his critics. His intent is to rebut Paul Krugman’s “recent column”:http://www.nytimes.com/2010/03/08/opinion/08krugman.html on the Irish economic collapse (Krugman builds explicitly on this “recent report”:http://www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf by three Irish economists). But his post, entertaining though it is, cannot be taken as a reliable guide to housing policy in Ireland, or indeed to Ireland’s economic crisis.
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I now have in front of me the final issue (vol. 10 no. 3) of Imprints, currently subtitled “egalitarian theory and practice” but originally “a journal of analytical socialism”. Conceived in Dunkin Donuts Piccadilly Circus branch in 1995, and launched in London during Euro 96 (we crowded round a small radio after the launch conference to hear the England-Spain penalty shoot-out), Imprints has been an important part of my life for nearly 15 years. We’ve interviewed many of the important intellectual figures of the left: Cohens Joshua and G.A., Philippe Van Parijs, John Roemer, Ruth Lister, Carole Pateman, Martha Nussbaum, Nancy Fraser … there’s a long list, and published some good and interesting work. But circulation was always small, and the effort involved in a small group self-publishing was large. A couple of years ago we believed we had a deal with a publisher to take the grind off our hands, but it all fell through at the last minute and it has been hard to rally the troops ever since. Many thanks to all our readers and contributors: it has been fun to work with you. Subscribers should get their final copies within the next month.

I posted recently on The paradoxical politics of credible commitment, noting the excellent analysis of Gordon Brown’s politics by Sebastian Dellepiane.  He argues that the Labour government did not make the Bank of England independent simply in order to defuse City suspicions of them. This self-binding policy was also in fact enabling, because it made it possible for Brown to adopt a classic Keynesian economic strategy by about 2000.

The Euro started out as a self-binding credibility-gaining mechanism for Eurozone member states. But the Euro also turned to have an ‘enabling’ side to it. It contributed to new kinds of instability by facilitating the extension of cheap credit and by permitting increasingly risky lending practices to spread throughout the European financial system, in Germany and France as well as in the weaker peripheral economies.

This has led me to think some more about the relevance of the logic of credibility gains in the current European crisis.

The self-binding austerity politics now under way in the Eurozone also has some paradoxical features. The crisis has produced an explosion of fiscal deficits and an accumulation of sovereign debt. The ECB favours fiscal austerity to restore stability, and so does German public opinion. This means that every other member state must adjust to low demand conditions and domestic deflation. But while Gordon Brown’s self-binding monetary policy proved to be enabling, Eurozone governments’ self-binding fiscal policy might be seen as self-disabling, because it involves commitment to a strategy that may prove self-defeating. There are two reasons for this.

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I just listened to an EconTalk podcast interview with Richard Posner about his new book, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression [amazon]. The book has gotten a bit of buzz for the way in which Posner semi-recants certain libertarian or Chicago-style economics positions he is known for. But certain other positions he has not recanted, such as his narrow view of economic actors’ duties to consider negative externalities of their activities (discussed at CT before here and here). In the podcast, Posner basically asserts that those actors in the financial sector who almost crashed the world economy were right to do so, in the sense that it was rational for them, individually, to be massive ‘risk polluters’ (to coin a phrase someone else has probably coined already.) He would probably go further, although he isn’t actually asked to in the podcast: some of these actors were obliged to take the risk. In at least some cases it would have been their strong, positive fiduciary duty, under the circumstances, to do something which – taking a larger view – seriously threatened to run the whole world economy off a cliff. Because that was the apparent route of profit-maximization. It was their job not to take the larger view. Posner blames regulators, not these profit-maximizing actors, for the market failure; for not seeing that the damage to everyone downwind of all that toxic risk was so great that it should not have been permitted. [click to continue…]

[self-promotion]My first book is out from Cambridge (and has been for a few weeks). Entitled _The Political Economy of Trust: Interests, Institutions and Inter-Firm Cooperation in Italy and Germany_, it sets out a rational choice account of how institutions affect the ways in which people do or do not trust each other, and applies it to explain cooperation among firms in Italy and Germany, as the title suggests, as well as among Sicilian mafiosi. I received some help from CT readers on Sicilian dialect, which is duly acknowledged in the book itself. I’ve set up a basic website for the book at “http://www.explainingtrust.com”:http://www.explainingtrust.com with information, blurbs and the book’s introductory chapter. The book is an academic hardback, and hence not cheap, but those with (a) an interest in the topic, and (b) a research budget/substantial discretionary income, or (c ) a friendly institutional librarian are warmly encouraged to take all appropriate steps (if it sells well, it will then go into paperback). If you order “directly through Cambridge”:http://www.cambridge.org/catalogue/catalogue.asp?isbn=9780521886499 before the end of the year, you can use the discount code E09FARRELL which will get you 20% off the book, and indeed any other purchases you make (as far as I can make out, this is the cheapest source). Alternatively, you can buy it at “Powells”:http://www.powells.com/partner/29956/biblio/9780521886499?p_cv%27%20rel=%27powells-9780521886499, “Amazon”:http://www.amazon.com/gp/product/052188649X?ie=UTF8&tag=henryfarrell-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=052188649X, “Barnes and Noble”:http://search.barnesandnoble.com/The-Political-Economy-of-Trust/Henry-Farrell/e/9780521886499/?itm=1&USRI=henry+farrell+political+economy+of+trust or “Amazon UK”:http://www.amazon.co.uk/Political-Economy-Trust-Institutions-Cooperation/dp/052188649X/ref=sr_1_1?ie=UTF8&s=books&qid=1257452790&sr=8-1. And if you do read it, comments, rejoinders etc are all warmly welcomed.[/self-promotion]

I wrote a “review”:http://www.timeshighereducation.co.uk/story.asp?storycode=408555 a couple of weeks ago of Viktor Mayer-Schoenberger’s “Delete: The Virtue of Forgetting in the Digital Age” (“Powells”:http://www.powells.com/partner/29956/biblio/9780691138619, Amazon)

Information technology has grown so entwined with our lives that it is easy to overlook the marvels flowering forth from it. … But if Viktor Mayer-Schonberger is right, these technologies may grow to entangle and choke us. They create a kind of external memory, recording our actions and interactions in digital video footage and thousands upon thousands of digital photographs. … Mayer-Schonberger argues that these developments challenge how we organise society and how we understand ourselves. … At its heart, his case against digital memory is humanist. He worries that it will not only change the way we organise society, but it will damage our identities. Identity and memory interact in complicated ways. Our ability to forget may be as important to our social relationships as our ability to remember. To forgive may be to forget; when we forgive someone for serious transgressions we in effect forget how angry we once were at them. … Delete argues that digital memory has the capacity both to trap us in the past and to damage our trust in our own memories.

I probably should have linked to it before, but didn’t, because I wanted to combine the link with a short review of Tyler Cowen’s recent book “Create Your Own Economy: The Path to Prosperity in a Disordered World” (Powells, Amazon) As I mention in the review, Tyler’s book presents a very interesting contrast to Viktor’s. What Tyler sees as evidence of individual empowerment, Viktor sees as as a serious threat to personal identity. Viktor fears that technologies will undermine our sense of self, and our ability to remake ourselves in order to respond to a changing social environment. Tyler sees new technologies as valuable precisely _because_ they allow us to remake ourselves and our identities, creating our own ‘economies’ (here, I think he is harking back to the Greek origins of the term) or internally ordered environments by picking and choosing “small cultural bits” and assembling them according to our own personal hierarchies.
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To amplify what Kieran has just said – political scientists are going to be very, very happy today. I had seen Lin cited as a 50-1 outsider by one betting agency a few days ago, and had been surprised that she was at the races at all, given that economists tend (like the rest of us) to be possessive of their field’s collective goodies. I’m delighted to see that my cynicism was completely misplaced. But this is also a very interesting statement of what the Nobel committee see as important in economics.

Lin’s work focuses on the empirical analysis of collective goods problems – how it is that people can come up with their own solutions to problems of the commons if they are given enough room to do so. Her landmark book, _Governing the Commons_, provides an empirical rejoinder to the pessimism of Garret Hardin and others about the tragedy of the commons – it documents how people can and do solve these problems in e.g the management of water resources, forestry, pasturage and fishing rights. She and her colleagues gather large sets of data on the conditions under which people are or are not able to solve these problems, and the kinds of rules that they come up with in order to solve them.
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“Cory Doctorow in the Guardian”:http://www.guardian.co.uk/technology/2009/sep/15/cory-doctorow-3d-movies:

bq. Somewhere in the past year or so, it seems as though every studio exec has decided to greenlight one or more blockbuster in 3D, using a pretty impressive technology that employs polarised glasses to give a reasonably convincing illusion of depth. … And the 3D is … nice. … But I’m sceptical. … Up is a tremendous movie; it made me laugh and cry, and was intended to be seen in 3D … Nothing was obviously missing from the 2D experience that made me feel like the 3D was a must-have.

bq. And of course, that’s true of all 3D movies. Movies, after all, rely on the aftermarket of satellite, broadcast and cable licenses, of home DVD releases and releases to airline entertainment systems and hotel room video-on-demand services – none of which are in 3D. If the movie couldn’t be properly enjoyed in boring old 2D, the economics of filmmaking would collapse … he economics just don’t support it: a truly 3D movie would be one where the 3D was so integral to the storytelling and the visuals and the experience that seeing it in 2D would be like seeing a giant-robots-throwing-buildings-at-each-other blockbuster as a flipbook while a hyperactive eight-year-old supplied the sound effects by shouting “BANG!” and “CRASH!” in your ear. Such a film would be expensive to produce and market and could never hope to recoup.

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Reading the current US debate on health care from the outside is pretty dispiriting. It is an example of what happens to rational debate in circumstances of inequality where vested interests and partisan pundits can distort discussion by throwing loads of noise, fear and disinformation into the conversation. Still, that’s no reason not to try to have a conversation about which principles ought to obtain, and I think for that it is hard to beat Ronald Dworkin’s paper “Justice in the Distribution of Heath Care”, _McGill Law Journal_, 38 (1993), pp. 883-98 (though I’m looking at the reprint in Clayton and Williams eds _The Ideal of Equality_ ).

Dworkin’s “central idea”:

bq. … we should aim to make collective, social decisions about the quantity and distribution of health care so as to match, as closely as possible, the decisions that people in the community would make for themselves, one by one, in the appropriate circumstances, if they were looking from youth down the course of their lives and trying to decide what risks were worth running in return for not running other kinds of risks. (C&W, 209)

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