The Ireland Bailout, Animated

Via everybody. I also found this analysis of the Euro situation by Ryan Avent to be pretty good.

Who Says We've Got Economics Envy?

Cowen Tabarrok says it should be the other way around:

(Economics, and perhaps social science in general, seems behind its time compared say with political science.)

That is mostly (I think) in reference to the incorporation of psychology and experimental methods into political science. The post is about what ideas are behind their time.

(Updated to note correct MR writer. Thanks Anon.)

Korea

A former student e-mailed me and asked for advice on a paper he was writing about the Korea situation. Up until last week he had been focusing on China's role as facilitator of negotiations. He wanted my take on last's week attack, and the responses from the South, China, and the US since then. A few days late, but this was my off-the-cuff response:

I'm not sure how to read China right now. On the one hand, there is a long history of N Korea doing belligerent things to get attention, and then negotiating some agreement that gets them some aid or something in exchange for them not being stupid anymore. My first reaction is to consider their more recent actions in the same vein, given that history. In that case, you could maybe interpret China's nonplussed reaction as buying into that strategy to get all sides back to the negotiating table.

On the other hand, this recent action is more serious than past actions, and occurs in a different context: succession of power from Kim Jong Il to his son. I don't think this is going to lead to war necessarily, but I do think that it signals that the current status quo is likely untenable. The likelihood of a resumption of fighting has certainly gone way up, and S Korea appears to be losing patience. China also said (I think yesterday) that joint US-S Korean military exercises in the Pacific violated China's economic sovereignty (b/c China uses that water for shipping), which is a sign that China is not interested in marginalizing N Korea to get closer to the US and S Korea right now. Again... this could be a negotiating ploy, but then you'd have to think that both N Korea and China are bluffing. That could be correct, but I'm not very confident that it is.

Certainly the security dilemma is present, and there is some risk of spiraling. You can also think about how deterrence can have negative side effects... the US' security guarantee for S Korea could make S Korea *more* likely to retaliate and escalate the conflict. They know they have a powerful ally, so that will give them much more confidence than they'd have otherwise.

The US obviously does not guarantee N Korea's security, but China might. If so, then you might have a situation in which neither side (US or China) wants to escalate and both sides know it. In that case, N Korea might think that it can act with impunity. Think of it this way: N Korea knows that neither the US nor China want war, and will do whatever it takes to prevent it. The N Korean leadership is also going through a power shift, and the new leaders will want to demonstrate to their citizens that they are strong leaders, and worthy of support. What better way to do it than to attack S Korea in a limited fashion, and not suffer any repercussions? It's true that the only reason there won't be repercussions is because of China and the US, but the N Korean citizens don't know that. (There's a domestic politics information asymmetry too.)

Anyway, that's how I'm reading the situation right now.

FOTD

But despite its best efforts, the Fed has only succeeded in raising America’s broad money supply (as measured by seasonally-adjusted M2) to about $8.8 trillion. China’s central bankers, on the other hand, have increased China’s M2 to almost 70 trillion yuan, or $10.5 trillion. As Mr Kroeber points out, China has a greater quantity of money circulating in an economy a third of the size. Who is calling whom easy?

Via.

Using Network Theory to Understand Crises

(Click for larger image. The U.S. economy as a network, divided by sectors: Technology (blue), oil (dark gray), other basic materials (light gray), finance linked to real estate (dark green), other finance (light green))

Brandon Keim at Wired covered some new work in which researchers are examining the U.S. economy as a network in order to better understand the 2008 financial crisis and why it had such a devastating effect on the real economy.

From this analysis came two striking figures. The first is a map [above] of links between companies in five key economic sectors: technology, oil, other basic materials, finance linked to real estate and other finance. As of 2003, the sectors are relatively distinct, with real estate isolated. By 2008, they’re a tightly linked jumble, with finance at the center. ...

Other research on network dynamics has shown that interdependence can promote stability, but eventually reaches a point of reversing returns (see “Networked Networks Are Prone to Epic Failure“).

Much more at the links, so please click through. To me, there are two ways of looking at this. The first is the conclusion reached by Keim, that interdependence on its own can be stabilizing, until it reaches a critical mass, at which point increased interdependence destabilizes the system. Interdependence obviously went up throughout the 2000s. But another way to look at it is to examine the pattern of interdependence, rather than the occurrence of interdependence.

It is clear that the financial sector became much more central to the economy, so the economy as a whole became much more susceptible to trouble in the financial sector. In this way, the U.S. economy appears to display a feature of non-random, hierarchical networks, which is that they are robust to shocks in peripheral parts of the network, but fragile to shocks at the center. In other words, if a shock had hit the peripheral oil sector (as happened, in fact, in the middle part of the decade), the increased interlinkages with finance would make the economy more resilient. But once a shock hit finance, the central sector, everything else was prone to collapse as well.

All of us at IPE@UNC (plus Andy Pennock, who's on the job market this year, as hiring departments should note) are working on a project in a somewhat-similar vein, but in an international context. I'm sure we'll be blogging much more along these lines in the coming months. In any case, it's fascinating stuff and is being used more and more to try to understand the complex interdependencies in the global economy. The political implications of this work is also important, though I haven't much mentioned them here.

(ht: Josh Miller)

Break

In case you hadn't noticed, blogging will be slow over Thanksgiving break. Which, for us, means paper writing, paper grading, exam grading, traveling and recovering from illness. We'll be back... whenever we're able.

The Honest Version of the G-20 Communiqué

Here.

Via Clive Crook

Just Who Exactly Is Being Bailed Out in Europe?

(link to bigger image here)

Remember when I said that Greece wouldn't default, because Germany and France would bail them out in order to keep German and French banks solvent? The same is true of Ireland. The above table shows exposure of major banks in Europe's core to sovereign debt in Europe's periphery. The EU will continue to use the EFSF and IMF to bail out its members as long as that is necessary to preserve the stability of the banking system in the core EU countries. The EU is essentially going through it's own version of the 1980s Latin American debt crisis. The only difference is that in this case the periphery shares a common currency with the core. For now.

In short, it isn't Greece or Ireland that's being bailed out; it's German and French banks.

It gets interesting if/when Spain, which is probably too big to bail out, gets into trouble.

Realism =/= American Exceptionalism

Where does this stuff come from?

It’s very simple. Did you ever study international relations?

To my misfortune.

Har har. From an interview by David Samuels (bold) of Noam Chomsky, referring to Walt & Mearsheimer's Israel book. Pretty vapid interview. They don't dwell on IR for long, but they still manage to get an impressive number of things dead wrong. For example, they dislike Walt/Mearsheimer because it is realist IR when they should dislike it because it neither realist nor IR. Or take this part from Chomsky:

American innocence is built into international relations theory. That’s what American exceptionalism means. If you read the founders of the theory, like Hans Morgenthau, it’s very straightforward. Hans Morgenthau was a smart guy, a very decent guy, incidentally. He has a book called The Purpose of America. He said the historical record doesn’t conform with the purpose of America, but that doesn’t mean we don’t have the purpose. In fact he says, this is like atheists criticizing religion because people do bad things. The truths are still there, even if the record conflicts with them. That is the foundation of realist international relations theory.

How to parse this? Nearly all of it is wrong. (For all I know, Morgenthau actually was a decent guy.) American innocence is built into realist IR? Tell that to this guy. Or this guy. Morgenthau himself wasn't an American, and opposed American adventurism in Vietnam (a stance taken after the publication of The Purpose of America). Waltz claimed that states are functionally undifferentiated, which doesn't sound like American innocence or exceptionalism to me. Mearsheimer and Walt are certainly not alleging American innocence. In short, realism is the opposite of American exceptionalism or innocence.

This kind of makes me happy. Chomsky is wrong about basically everything these days, so it's comforting to know that comes from garden-variety ignorance. He just doesn't have even a rudimentary understanding of the topics he's discussing, and it sounds like he hasn't read an IR book since the 1960s. But it is depressing that both interviewer and interviewee view studying international relations to be a misfortune.

Quantitative Queasing

UNCer Karl Smith linked to this piece by Allan Sloan, which is strange and hysterical in a number of ways. I want to highlight one small part of it:

Even before the Republican attack, our central bank was rapidly losing influence in the world, relative to other players.

Can that really be so? What other players? If it is, how can we explain the rest of the world's reaction to QE2, which is a fairly small plan by the Fed to lower medium-run interest rates in the face of massive unemployment and a large output gap? In other words, it's standard AD-boosting monetary policy, except on medium-run interest rates rather than short-run interest rates. If the Fed's influence is in "rapid" decline, why should Germany, Japan, China, Brazil, and other leading states care what Fed policy is? The Republicans who are suspicious of the Fed are worried that it has too much influence, not too little. Same with Democrats who think the Fed exists solely to benefit Goldman Sachs.

Since the subprime crisis hit, and even before, we've been hearing about how much power and influence the U.S. has lost over the past decade. And yet whenever the U.S. central bank bats an eyelid the rest of the world goes ballistic. We clearly need to think more seriously about the role of the U.S. in the international system.

What Causes Deficits, Ezra?

"Basically, deficits happen when recessions happen. Anytime GDP shrinks, deficits explode. Sustained growth, by contrast, tends to bring the budget into balance. That's not to say policy doesn't matter... But policy -- and even control of the White House -- matters a lot less than the economy does."

Maybe policy matters more than Ezra thinks. Check out the pattern evident in two simple plots of tax and spending data. We all know that the two previous largest peacetime deficits came in the 1980s and the 2000s. Both seem quite related to policy. Military spending is defense department spending as a share of GDP. The two sharp against trend rises occur under Reagan and Bush. Legislated tax revenues is the estimated impact of congressional tax legislation on tax revenues* (because it measures the impact of tax legislation on tax revenues rather than actual revenue, values aren't driven by GDP growth.) Budget deficits seem to correlate strongly with congressional decisions to cut taxes and increase military expenditures. One is tempted to use the word "cause" here.

Of course, this could just be a coincidence.

<*Romer, C. and D. Romer (2008). A Narrative Analysis of Postwar Tax Changes. Berkeley, University of California, Berkeley.

Bapat on Terrorism

UNC political science professor Navin Bapat, who taught me bargaining models last year, is the subject of this WWNorton interview. In it, he discusses his work on terrorism, the value of formal and quantitative IR more generally, and other topics.

Via The Monkey Cage.

Making Quant IR Credible

Phil Arena, IR assistant professor at SUNY-Buffalo, has a new blog. He focuses on the security side of IR, but some of it crosses over. For example, this post on the difficulty of isolating causal processes from associative stats analysis. Basically the idea is this: Suppose there are two possible states of the world, one in which A causes B and one in which C causes both A and B but is not directly observable. Standard stats methods would not be able to distinguish between the two.

I think he does a pretty good job of describing the problem, so I'm not going to rehash his post. Just go read it. And I think we're seeing an increased use of Bayesian stats, instrumental variables, experimental approaches, and network analysis to try to mitigate the problem. In other words, I think things might be improving as the discipline matures. I completely disagree with this, however:

If you ask Jas Sekhon, one of the most talented methodologists we have in political science, he'll tell you that the answer for IR scholars is to give up on quantitative work altogether, learn how to do credible qualitative, and start asking more policy relevant questions.

An argument for better stats (or better theory) is not an argument for qualitative methods, which must be made on its own merit. I like qualitative methods and value their inclusion in the discipline, but it's not as if qualitative analysis is definitionally error-free, and "policy relevant" is very much in the eye of the beholder.

I also think that his suggestion that we focus more on theory -- which is unsurprising, since he does formal theoretical work -- is pablum. True pablum, but pablum nonetheless. Of course creating credible, rigorous theory is important and perhaps under-valued in IR, but the whole point of using stats is to evaluate theory. We don't know if a theory is credible or rigorous until we put it to some evidence-based test. Internal logic is important, but is not the end of the story.

Nevertheless it's a good post, and worth thinking about.

Note: Updated slightly for clarity shortly after posting.