Tagged: wealth

Vincent Dreher

Seven years in crisis: Some questions for the Eurozone

DER SPIEGEL 29 2015Recently, German media entered uncharted territory. While conservative newspapers have always identified the Greek government’s profligacy as root cause of the ongoing crisis, the liberal press had maintained more balanced positions. Yet on July 9, 2015, the weekly DIE ZEIT asked: ‘The Greek trap – the crisis-ridden country has a culture inimical to achievement. How can it be overcome?’ DER SPIEGEL proclaimed (in its July 11 issue) the necessity of ending the German romanticization of its arcadia in Attica. The title read: ‘Our Greeks – rapprochement with a strange people’.

Since when has culture advanced as main explanation for a country’s (economic) misery? How can shortcomings in a state bureaucracy be taken to explain an entire people’s failure of achieving prosperity and societal welfare?

In logical consequence of this narrative, the subsequent Eurozone-Greece agreement of July 13, 2015 figured as ‘the most intrusive economic supervision program ever mounted in the EU’ (FT). The drastic measures alongside the required ‘ownership’ of reforms revealed the deep mistrust in Greek institutions. The source of most, if not of all, failures was located in the Greek government’s incapacity, or reluctance, to accept conditionalities and implement reforms.

Unit labor costs and competitiveness in the Eurozone

This is yet another instance of misinterpreting the symptoms of a disease rooted in the fundamental misalignments within the Eurozone. There have been idiosyncratic issues in Greece (reporting failures, unsustainable debt since 2010), just as there have been home-grown issues in other crisis-hit member states contributing to the current escalation. However, these problems represent only the tip of the iceberg. It is not the misbehavior of individual governments, let alone cultures, which underlie the seven-year-old crisis. It is persistent failures in the economic governance of the Eurozone. Recent data from other Southern members are hailed as heralding the end of misery (EC, Reuters, FT, WSJ). The following discussion will demonstrate to the contrary: as long as the shortcomings in the institutional set-up of the Euro and the failures of member state coordination of fiscal policies persist, the crisis will continue. Greece today, who tomorrow?

Unit labor costs, the ratio of total labor costs to productivity, are interpreted as the best approximation of an economy’s competitiveness. Judged by these standards, today’s Germany is competitive. This is not merely due to its superior productivity though. German multinationals as well as the famed Mittelstand are very capable. But the great divergence of unit labor costs compared to Southern European economies was due to wage restraints and welfare cuts, beginning with Schröder’s Agenda 2010 in the early 2000s (Mickey Levy, Flassbeck, Spiecker, The Economist). Addressing ‘the sick man of the Euro’, the reforms (and other factors) put the German economy ahead. This was achieved, however, at the cost of society’s lower strata and its Euro partners, as evidenced by subsequent divergences in balance of payments across the Eurozone (Gavin Davies). Bound by the Euro, others could no longer devalue their national currencies to improve competitiveness. During the decade of the European boom, no one seemed to worry. Southern economies expanded strongly, while Northern capital was flowing in and financed investments and consumption. Consumption of Northern, of German goods for that matter. Apparently unnoticed, Eurozone’s North and South diverged.

Since the onset of adjustment programs across Europe, however, unit labor cost convergence has moved center stage. Yet this is not a joint effort – i.e. via wage restraint, reforms and export-orientation in the South combined with wage increases, fiscal expansion and domestic consumption in the North. Instead, the benchmark has been set by Germany and Northern Europe, and the others are asked to adjust. During the past years, Southern economies have undertaken enormous efforts. Greece, above all, is the star pupil (OECD, Economonitor). But to little avail. And even if the recent recovery across Europe (except Greece) proved sustainable – when every Eurozone member strives to become  ‘competitive’, who will act as counterpart? The German ‘Sparpolitik’ in the 2000s was offset by Southern expansion. Who is buying now, when everyone is saving?

The structure of the Eurozone and the European Central Bank

Divergences of unit labor costs, clouded by the boom, were further reinforced by the ECB’s single nominal interest rate. Paul de Grauwe and Notre Europe argue that increasing inflation in booming Southern economies lowered real interest rates, thereby rewarding further economic expansion. The reverse was true for the North, which still profited of huge export-gains. Additionally, due to increasing real exchange rate spreads the prices of comparable products across member states diverged, making Northern manufacturing more and more attractive (Vistesen, Dadush, Wyne). Hence economic dynamics pushed states further into imbalances, not merely the often denounced human fallacies. Where is the public discussion about these curious, and obviously significant, dynamics?

A second issue identified by de Grauwe is the lack of a lender of last resort. Since the late 19th century, any central bank’s mandate has included the provision of unlimited liquidity in times of financial panic; not so in the Eurozone. When the financial crisis hit Europe, each member had to clean its own doorstep. Capital fled to presumably safer Northern countries and Southerners dried up. The lack of affordable refinancing forced spending cuts, thereby inducing immediate austerity programs. The cuts diminished GDP, which made servicing debt even harder. And only then the European austerity programs were devised and implemented. The question arises: were state budgets ultimately unsustainable and Southerners righteously punished for profligacy? Or did they simply look weaker relative to Northern neighbors, which were favored by investors in times of uncertainty? Evidence points to the latter. Nevertheless, these are the discussions we Europeans should hold.

The Eurozone is not ready for the challenges ahead

Despite improvements in financial governance, such as the banking union or the ECB’s perennial setting of precedents, the economic structure of the Eurozone has seen little of the desperately needed changes (e.g. Hans Tietmeyer, Euractiv). As long as there is not some kind of fiscal union, as long as there are not some kind of common Eurozone debt instruments, the inherent fragilities persist. Furthermore, the majority of European policymakers remain bound to their national constituencies – why should they care for the whole of Europe, when their electoral mandate stems from a fraction of the people?

We need a European debate. A debate about the flawed narrative that the Greek government’s profligacy is said to have caused the economic and political crises; a debate concerning the interpretation of the crisis as a mere lack of competitiveness (what about the European welfare state by the way?); and a debate with regard to the absurd claims about “cultural” limits to economic growth.

Vincent Dreher is a PhD student at the Berlin Graduate School for Transnational Studies. He works on the Political Economy of International Money and Finance, with a focus on international institutions.

Mathis Lohaus

Predicting the Effects of TTIP, or: Whose Crystal Ball Can We Trust?

In a paper called “TTIP: European Disintegration, Unemployment and Instability”, economist Jeronim Capaldo argues that there are flaws in four prominent studies on the effects of the proposed TTIP agreement between the U.S. and the European Union. The problem is two-fold. First, all studies use similar models and data, which means that they all share the same set of assumptions and should thus not be treated as independently reaching similar conclusions:

Methodologically, the similarities among the four studies are striking. While all use World Bank-style Computable General Equilibrium (CGE) models, the first two studies also use exactly the same CGE. The specific CGE they use is called the Global Trade Analysis Project (GTAP), developed by researchers at Purdue University. All but Bertelsmann use a version of the same database (again from GTAP).

A detailed discussion of the shared heritage of the different CGE models can be found in a paper by Werner Raza and colleagues (pp. 37-49), which Capaldo cites.

He then goes one step further and alleges that the underlying econometric models are simply false, or at least inappropriate. According to him, CGE models rely on several flawed assumptions:

  • High labor mobility is supposed to allow workers in less competitive industries to switch to those that benefit from trade liberalization, which are assumed to grow enough to absorb the new workforce.
  • Overall, the gains for workers with the right skills are supposed to outweigh the losses for others.
  • The model assumes that new trade between countries/regions is created (rather than diverted from elsewhere, which would be a zero-sum result).

While I have no training in economics and don’t know the econometrics literature, I realize that all large-scale models of social science need to rely on simplified assumptions. Nevertheless, it seems to me that Capaldo has a point. If his account is correct, then European policymakers should look for more diverse academic input. More generally, if the most widely used models really are blind to potential downsides for labor, then that goes against the interest of European citizens. (As they ought to be very loss averse when it comes to employment as well as skeptical about the distribution of pay-offs from economic gains.)

So how do we come up with an estimate that pays more attention to potential negative effects? Capaldo uses the UN Global Policy Model (GPM), which models economic activity as demand-driven, explicitly models different regions, and includes an estimate of employment. (Again, I lack the knowledge to assess how this works and how much sense it makes.) In this model, unemployment and household income are projected to deteriorate in the long term (2025) for several European countries, as aggregate demand is lowered due to trade diversion (see pp. 10-19 for this and other findings).

capaldo-figure4
Jeronim Capaldo, “The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability”, Global Development and Environment Institute Working Paper No. 14-03, October 2014, p. 14.

Capaldo is pretty transparent about the limitations of this approach:

  • the non-TTIP baseline scenario (which serves as a comparison) might be wrong
  • the chosen model might be as ill-specified as the ones he is criticizing
  • policy responses down the road are not included (and that’s hardly possible)
  • …and the paper completely ignores the investment dimension of TTIP (which is a weakness shared by the CGE models, according to Raza et al., p. 49)

So the headline “TTIP will lead to a loss of 600,000 jobs” does not really do the paper justice, although the author himself uses pretty strong language in the conclusion.

No matter which forecast turns out to be better in the end, this discussion shows that policy decisions should not rely on a single strand of academic analysis. There is a lot of uncertainty involved in these negotiations, and I don’t see how there can be a confident forecast of net effects.

One final note for the political debate in general: TTIP opponents should not forget that the status quo will not necessarily be maintained or improved just by inaction. The people likely to lose from TTIP are probably heading for difficult times anyway, leading to questions about how to compensate them. Whether European leaders will decide in favor or against TTIP, they are making high-stakes bets on how globalization will play out over the next decades.

Thanks to Zoe for pointing me to the study. And if anyone can add insight regarding the comparison between the different models, please let me know!

Mathis Lohaus

Links: Data Drama, Coups, France, Cyber Security, Wealth Distribution

Last week, GDELT was suspended and three researchers left the project. This huge data set on media reports (not only) about conflicts got a lot of buzz (here and elsewhere). Now it seems that several parties are arguing about whether or not the underlying data was properly licensed. You can find some of the speculations in this thread on “Political Science Rumors”, page 3 and following.

Kalev Leetaru, the designer of the data set, now seems to have set up a new website and promises that everything will be fine:

While this whole situation would have been easily avoided with just a little communication and avoided a lot of unnecessary angst, the silver lining is that it has demonstrated just how widely-used and important GDELT has really become over the past year and we are tremendously excited to work with all of you in 2014 to really explore the future of “big data” study of human society.

Speaking of big data projects: Jay Ulfelder’s 2014 coup forecasts are up:

Coup forecast 2014 by Jay Ulfelder
Coup forecasts 2014 by Jay Ulfelder. Each shade represents a fifth of the distribution. Historically, you can expect 80% of coups to occur in the dark red countries…

Please read the full post for Jay’s caveat regarding interpretation and information on how the probabilities are calculated.

Somehow I had missed Jeffrey Stacey’s post on France’s “re-emergence as a major power”:

Few noticed several years ago that France conducted the EU operation in Chad almost entirely on its own, and the same for the UN operation in the Ivory Coast (both were largely ignored in Washington). There was an unsuccessful raid of al-Shabbab conducted in Somalia in early 2013, but France intervened in the highly unstable Central African Republic at the end of 2013. In-between France demonstrated particular skill in conducting its Mali intervention, which has been heralded as a successful demonstration of an alternative way to intervene compared to the experience of U.S.-led allies in Iraq and Afghanistan.

The French operation was impressive at the outset in that it took only three months to go from a decision in Paris to achieve operational boots on the ground. French military sustainability was amply demonstrated, with its contingency force growing to 5000 deployed troops midway through the intervention (only 7 troop fatalities occurred). The French with Chadian support accomplished their military objectives with relative ease in harsh field conditions, beyond the gaze of any reporters and therefore less likely that France would suffer diplomatically from any images of its troops killing Islamic fighters (a brigade has remained in Mali after the successful election of a new president). All of this was accomplished with broad and deep support across elite and public opinion.

At the Monkey Cage, Henry Farrell has announced a series of posts on cyber security. The first posts discusses “why people fight so hard over cybersecurity”.

Oxfam: "Working for the Few"
Oxfam: “Working for the Few”

Finally, you will probably have noticed Oxfam’s campaign about how 85 people are as rich as the bottom half of the world’s wealth distribution. This is from a report called “Working for the Few”.

Long-term followers of the IR Blog might remember my skepticism regarding cleverly phrased claims about wealth distribution: As long as you don’t oppose all kinds of capital accumulation, there will always be some small group owning much more than some bigger group.

Still, I think Tim Hartford and Alex Tabarrok miss a couple of important points in the casual way they deal with inequality. (See the comment section at Marginal Revolution for a discussion on how phrasing matters.)

Again, from a moderate perspective, the point here is not ‘expropriate them all‘. But we need to ensure that everyone has a decent income and improve taxation in order to mitigate capitalism’s tendencies to reward capital more than labor. The Economist has a short discussion of Thomas Piketty’s new book on the issue. More here. I have a feeling there will be many heated discussions over the year.

Mathis Lohaus

Links: Long Research Papers in College; EU Citizenship for Sale

http://www.flickr.com/photos/ziamimi/11337400924/
Snow in Jerusalem 2013 (CC-by Miriam Mezzera via flickr)

Unlike Jerusalem, Berlin has not had its share of snow so far. Nonetheless, we’re taking a short Christmas / winter break. Enjoy the holiday season!

My last links for the year:

At the Duck of Minerva, Jon Western replies to a Slate article heralding the “end of the college essay”. He rightly points out that longer papers should not just be a means of testing, but part of the teaching curriculum.

I am a strong believer in the benefits of a lengthy research paper and I regularly assign them for my advanced seminars in international human rights, American foreign policy, and international security. (…)

I assign the paper as part of the course as an exercise to help students develop critical reasoning and thinking skills as well as to help improve their writing. As a result, the research paper assignment must be integrated into the overall course learning objectives, the course content, and the course schedule.

In German political science, Hausarbeiten (long research papers or essays) are an important part of undergraduate and graduate education. It’s nice to read some reflection on why that might be a good idea — and the thought of abolishing this form of testing (and more importantly: learning) seems odd to me. Then again, I am not (yet) required to grade all of these papers…

I am a big fan of Tim Hartford’s columns for the Financial Times, as I find it really hard not to keep reading after a charming opener like the one he used when talking about Cyprus, where EU citizenship is on sale for € 650,000:

That’s outrageous!

I know. There has to be a cheaper deal out there. You can get Portuguese residency with €500,000 in your pocket – and you don’t even have to give the money away. You just have to buy a pad in Portugal.

No, it’s outrageous that Malta is selling passports.

Oh. Well, granted, there is an issue here. Given EU rules on freedom of movement, Malta is in effect selling EU citizenship but pocketing the cash. But this sort of problem is in the nature of the EU. Member states will either have to tolerate it or develop some sort of centralised regulator – just as the European Central Bank regulates the shared currency. That has been a tremendous success.

At the core of this story is an important point that doesn’t receive enough attention from many self-proclaimed economic liberals: “We wring our hands about inequality, but the biggest determinant of your income is your country of birth.”

In case you’re still looking for last-minute Christmas gifts, I highly recommend Ha-Joon Chang’s book “23 Things They Don’t Tell You About Capitalism”, where he makes this point among (as the title suggests) many others. You can find some excerpts at GoodReads, and Chang was recently featured in the Financial Times (in one of their great “lunch with…” interviews).

Unfortunately, I lost track of what else I wanted to post today. My apologies. We’ll be back after the break.

Mathis Lohaus

Links: Big Topics in IR; International Currencies; The Middle Class Is Not What It Used to Be

braumoeller

Phil Arena recommends Bear Braumoeller’s new book Great Powers and the International System. Not just because it’s good, but as a role model for grad students in IR:

[This book] offers a great example of a dissertation (or a project that began its life as one, at any rate) that speaks to questions lying at the center of the field. Yes, you can write Bad Pun: The Thing That’s Happening Now and How None of The Big Names Have Anything to Say About It, 1990–2008. But you could also think a little bigger.

 

Dan Drezner wonders if the recent almost-shutdown of the U.S. government will trigger financial counter-balancing, as IPE realists have been predicting for quite some time:

The question is whether it’s worth being dependent on a growing economy that’s so politically unreliable.  So now we’re gonna see whether incipient U.S. rivals will start making the necessary down payments to act on their increasingly justified complaints.

As Benjamin J. Cohen suggested in a talk here at Freie Universität a couple of months ago, what keeps the dollar strong might be the lack of alternatives (rather than the inherent qualities of the global key currency #1). Drezner says we’ll see soon enough which side is right, but I have the feeling that in the absence of clear predictions or thresholds (how do we know “the end of the dollar” when we see it?), this dicussion will drag on for decades.

 

Speaking of money, and considering that this is a blog written by relatively young people, allow me to point to a non-IR topic: “We’ll never have it so good again.”

Well, in August 2011, [my parents’] former home was placed on the market. The asking price was £2,475,000. So a house that had once been affordable by a young, middle-class couple was now being aimed at buyers who were, by any normal standards, very rich indeed. (…) A similar process of exclusion has taken place in education. (…) So my father went to Eton. I went to Eton. And my son goes to Bishop Luffa Church of England comprehensive.

Of cource, these are still nice problems to have compared to most people, and many aspects of social life are certainly better than a couple of decades ago. Yet the overall trends regarding income and wealth in the rich parts of the world, which I’ve covered here earlier, look worrisome basically for everyone below of the very top of the pyramid.

Mathis Lohaus

Links: On Tomatoes and Careful Phrasing

1024px-Bright_red_tomato_and_cross_section02
(Image CC BY-NC by Fir0002/Flagstaffotos via Wikimedia Commons)
  • Today I overheard colleague A explaining the “Pomodoro” technique of time management to colleague B. In case you’re not familiar with it, please take a minute to enjoy the official website.* Although A claimed that the technique had helped him a lot during the “particularly terrible phases of writing the thesis”, B remained unimpressed. But maybe I should by a kitchen timer…
  • Speaking of time: PHD Comics has an, uhm, improved version of what the U.S. Bureau of Labor Statistics tells us university students are doing…
  • I know it’s not exactly International Relations, but I have been following the Reinhart & Rogoff vs. Herndon et al. skirmish over the weekend (and covered it earlier). Today, Herndon (a PhD student) replied to the last round of replies by R&R (famous economic historians). His wording in response to one of their statements struck me as great example of … being very careful:

This is not our interpretation of our work

* Aforementioned website also tells me that I “may not write an article about the ‘Pomodoro Technique®’ without quoting the author. This may lead the reader to attribute the origin in a misleading way. Obviously, the worst case is an explicit attribution of the technique to someone else other than Francesco Cirillo.” So let me, at this point, state very clearly that Francesco Cirillo has invented this mind-blowing and totally not trivial way of conditioning oneself to get work done with short breaks in between. (Is that even legal?)

Mathis Lohaus

Links: Parenting, R&R, horrible neighbors

Back from California, back to serious work … I mean, blogging. Here we go:

  • Over at the Duck, Amanda Murdie has a great post on doing a PhD as a parent, similar to ours in its positive conclusion
  • A widely cited working paper on public debt and growth by Reinhart & Rogoff is under fire for weird omissions and the weighting of cases as well as mistakes made in MS Excel (R&R paper & the critique by Herndon, Ash and Pollin / coverage on Marginal Revolution & FT Alphaville). Worrying, given how influential R & R are regarding austerity policies!
  • It’s unclear, however, to what degree their findings hold despite the errors — and what their policy advice was in the first place. Which is even more worrying, right? (And maybe I should finally read that book.)
  • The Duck, again: Brian Rathbun’s “enduring rivalry” with his neighbors is a great case of applying IR concepts in real life, and his response (take a look at the pictures!) seems like “naming and shaming” to me.
Mathis Lohaus

Wealth, income, (in)equality

If you have some Facebook or Twitter friends who study social sciences, chances are you have seen a certain video on “Wealth inequality in America” already: Which percentiles of the population own which share of wealth?

wealth-1

I have two problems with this six-minute clip. First, it does not sufficiently explain the underlying data: The poll results are not as clear as it seems, and the video lacks comparisons to other countries. Second, more importantly, the clip fails to acknowledge that wealth is almost per definition distributed in a highly unequal way. Continue reading