Economics

President Obama didn't get any concessions during his recent visit to the People's Republic of China, and no one should be surprised. One of the most important lessons in life is that if you make a series of big mistakes, you should expect to pay a price for them. Back in 2000, the United States was running a budget surplus, our military was second-to-none, our image in most parts of the world was quite positive, and our economy had been growing steadily for nearly a decade. Some of that growth may have been illusory, however, and the next eight years featured a daunting combination of misfortunes (9/11, Hurricane Katrina), and self-inflicted wounds (e.g., the financial crisis, the invasion of Iraq, the endless war in Afghanistan, the abandonment of any sense of fiscal responsibility, etc.). There's no magic button or clever diplomatic sleight of hand that will allow the United States to retrieve its former position without some real sacrifices, and so far, nobody seems eager to make the changes that might be necessary.

Hence Obama's modest demeanor in Beijing. No president is going to be able to lay down the law on human rights, exchange rates, or sanctions on Iran when China owns over a trillion dollars in U.S. assets, when the U.S. economy is on life support, and when the American military Is mired in two losing wars. Until we get our house in order over here, nobody should expect China to be especially responsive to our wishes or expect its leaders to view the "American model" as especially appealing. An wide-open marketplace of ideas hardly looks attractive when the result is the intellectual ascendancy of Glenn Beck and Rush Limbaugh.  

The follies of the past eight years were the greatest gift the United States could have given Beijing, and Obama's conduct in Beijing was the inevitable result. And if we keep doing what we've been doing (see under: Afghanistan, Middle East, etc.), I wouldn't expect things to change.

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Professional economists may be dismayed, but scholars and students of international politics should be delighted by the decision to award this year's Sveriges Riksbank Prize in Economic Sciences (aka the "Nobel Prize in Economics") to Elinor Ostrom of Indiana University.  She is not only the first woman to win the economics prize, she's also the first political scientist.  She holds a Ph.D. in the subject from UCLA and is a past president of the American Political Science Association.

Ostrom's main research is pretty far from my own concerns, but I did list her book Governing the Commons on one of my "top-ten" lists earlier this year.  She is primarily known for her work on institutional solutions to collective action problems, most notably in the area of resources and environment.  Via a combination of "soft" rational choice theory and careful empirical work, she shows that common resources can be shared and managed through various institutional mechanisms, but also shows that there is nothing inevitable about this outcome, due to familiar dilemmas of collective action (that's why we call them dilemmas!), and the complex interactions of humans, institutions, and larger ecosystems.

Ostrom (and the co-winner, organization theorist Oliver Williamson) join a group of recent winners chosen more for theoretical insight and real-world relevance than for mathematical scholasticism.  Others in this same group would include economic historians Douglass North and Robert Fogel, behavioral economist Daniel Kahneman, game theorist/strategist Thomas Schelling, and economist-philosopher Amartya Sen.  Scholars with an international orientation have been doing pretty well in recent years too: Schelling was awarded for game-theoretic work on international conflict, Paul Krugman for his work on international trade, and Sen's work on poverty and famines has clear international implications.  Kudos to the prize committee for their eclectic approach to the award--if only more economics departments thought this way.

One more thing: need I mention that Ostrom received the award for work she had already done, as opposed to some other Nobel Prize winners I can think of?

Photo: Indiana University via Getty Images

Not my favorite line from last night's speech, but it still caught my eye....

...the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration.

Keep that in mind when your local school district is forced to cut a few more programs or lay off a few more teachers, when your car hits another pothole on a bridge that needs repair, when your public transit system cuts service or raises fares, and when the federal budget deficit continues to rise. Stupid foreign policy decisions don't just cause problems overseas; they undermine our quality of life here at home. And as I said once before, it remains a puzzle why the GOP is eager to tax us to pay for ambitious social engineering projects in faraway lands, yet loathe to fund programs designed to benefit Americans here at home. It's equally puzzling (to me at least), why Americans have gone along with this idea. So far.

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Riffing on Greenwald, Andrew Sullivan nails it:

Late empires are known for several things: a self-obsessed, self-serving governing class, small over-reaching wars that bankrupt the Treasury, debt that balloons until retreat from global power becomes not a choice but a necessity, and a polity unable to address reasonably any of these questions -- or how the increasing corruption of the media enables them all.

Obama is, in some ways, a test-case.

He was elected on a clear platform of reform and change; and yet the only real achievement Washington has allowed him so far is a massive stimulus package to prevent a Second Great Depression (and even on that emergency measure, no Republicans would support him). On that he succeeded. But that wasn't reform; it was a crash landing after one of the worst administrations in America's history.

Real reform -- tackling health care costs and access, finding a way to head off massive changes in the world's climate, ending torture as the lynchpin of the war on terror, getting out of Iraq, preventing an Israeli-led Third World War in the Middle East, and reforming entitlements and defense spending to prevent 21st century America from becoming 17th Century Spain: these are being resisted by those who have power and do not want to relinquish it -- except to their own families and cronies.

Nepotism is part of the problem; media corruption is also part; the total uselessness of the Democratic party and the nihilism of the Republicans doesn't help. But something is rotten in America at this moment in time; and those of us who supported Obama to try and change this decay and decline should use this fall to get off our butts and fight for change."

Wish I'd said that. And it makes me wonder: would Obama agree with the above (meaning he is a reluctant prisoner of well-entrenched interests), or is he is part of the problem too?

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I don't want to be a killjoy, but a troubling thought occurred to me last night. If -- repeat, if -- Obama's economic team has in fact managed to ward off a major depression -- even at the price of greatly increased long-term debt -- will that make it harder for them to institute various long-term reforms that really ought to be considered?  

Don't get me wrong: unlike some rightwing critics like Rush Limbaugh, I’m not hoping for failure. Avoiding a lasting depression is a very good thing for all sorts of obvious reasons, not least of which is reducing the suffering of Americans who would be poorer the longer the downturn lasted. But if you are one of those people who think that the United States had been living beyond its means for some time, and that certain aspects of our society need more fundamental rethinking (and here I'd include an overly ambitious foreign policy), then there's a black cloud in this potential silver lining.   

A few months ago, support for major reforms was enhanced by the sense that the United States really was in serious trouble. Obama's team clearly hoped to take advantage of this perception, just as the Bush administration took advantage of 9/11. As Rahm Emanuel famously put it, "no crisis should go unexploited." But if people start thinking that the United States is out of the woods, business-as-usual priorities and the politics of gridlock will quickly reemerge.  

My concern, as you might expect, is that a new sense of complacency will derail any attempt to rethink U.S. foreign policy priorities and bring long-term commitments back in line with resources. Trade and budget deficits will persist, important domestic priorities will be neglected, and eventually other countries will wake up and realize that U.S. foreign policy didn’t change that much after all. And the opportunity to move toward a more realistic foreign policy will have been lost. We'll get there eventually, of course, but more slowly and painfully than we should.

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A while back I commented on the two imbalances of power that drive American grand strategy. The first is the gap between the United States and the other major powers, which makes Americans think they are responsible for managing much of the world and convinces them that they can do so with near-impunity. The second imbalance is the strength and political clout of a host of different institutions and interest groups whose common agenda is encouraging greater international activism on the part of the United States. In recent decades, the forces in favor of "doing more" have been better-funded and better-organized than those who favor greater restraint, which is one reason why we spend so much on defense and why we find ourselves entangled in intractable conflicts on several continents.

But when I read some early reports about the Obama administration’s health care plans, I began to wonder if the various forces that favor global activism are going to face stiffer opposition in the future. We are likely to have a sluggish economy for some time to come and the U.S. population is getting older. Virtually everyone agrees that serious health care reform is badly needed but will cost a lot. Plus, Obama's various economic recovery measures are going to saddle us all with record deficit levels. Us baby boomers are not exactly noted for our altruism, and my generation is going to put a lot of pressure on politicians to deliver the entitlements we've been promised. All of this means that budget dollars are going to be very tight, and the Pentagon is going to face tougher scrutiny when it brings in gold-plated requests. The Nation and Mother Jones may not be all that formidable a political opponent, but what about the AARP?

One of the great triumphs of Reagan-era conservatism was to convince Americans that paying taxes so that the government could spend the money at home was foolish and wrong, but paying taxes so that the government could spend the money defending other people around the world was patriotic. Ever since Reagan, in short, neoconservatives supported paying taxes to promote a U.S.-dominated world order, while denouncing anyone who wanted to spend the money on roads, bridges, schools, parks, and health care for Americans as a “tax and spend liberal." But if I'm right about the emerging fiscal environment, that situation may be about to change.

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In my last post, I argued that the U.S. policy of "don't ask don't tell" is contrary to a realist view of world politics, because it excludes qualified people from military service and thus makes it harder for the United States to field the most effective forces in a competitive international environment. I think there are other objections to the policy as well, but I was primarily concerned in that post with the strategic implications. The policy obviously doesn't prevent the United States from producing highly capable fighting forces, but restricting the talent pool in this way means our forces will cost more than they have to and/or be less effective than they could be.

This got me thinking: might a similar logic be at work at a more global level? Specifically, does the competitive nature of international politics give some states an advantage because their political systems and social values make it relatively easy to attract and assimilate talented citizens from other countries, thereby enabling them to draw more-or-less selectively on the entire global talent pool? If so, then these states will be able to improve their relative position over time, and to the extent that globalization now facilitates people moving from place to place, that tendency should be increasing. By contrast, states that make assimilation difficult or that discriminate on other areas will tend to be less attractive destinations for highly educated and/or entrepreneurial individuals, and these states will for the most part have to work with the citizenry they've got or pay a very high premium to attract talent from abroad.

One can see this dynamic by comparing Japan and the United States. Japan is an ethnically homogeneous society, with small minority populations who remain objects of discrimination. It is possible for foreigners to become naturalized citizens after five years of continuous residence, but this practice is not widespread. Japan also has a rapidly aging and declining population, which will have significant long-term effects on its power and influence. Yet given Japan's current policies discourage talented foreigners from immigrating and assimilating, thereby making it harder for Japan to attract the best and brightest from around the world and reverse its demographic slide.

The United States, by contrast, is the very model of a melting-pot society. People automatically qualify for citizenship if either parent is a citizen or if they are born on American soil, and naturalization is quite common (about one million people became naturalized citizens last year). Although support for immigration has waxed and waned throughout U.S. history and remains a contested issue today (mostly due to issues pertaining to illegal immigration), the United States has had remarkable success attracting and assimilating some of the best and brightest from all over the world. All I have to do is look at my colleagues, whose ranks include an impressive number of scholars born outside the United States. Each of them was hired as a result of a global talent search, and we'd have a less distinguished faculty if we had looked only at U.S. citizens. Some of my colleagues eventually returned to their countries of origin (such as Andres Velasco, currently Minister of Finance in Chile), but others are likely to spend most if not all of their careers here in the United States.

The success of the American melting pot, as many scholars have commented, is due partly to good fortune (North America was rich in natural resources, arable land, etc.) but also to the particular nature of American civic nationalism (or what Anatol Lieven calls the American Creed): faith in liberty, constitutionalism, democracy, the rule of law, individualism, and political and cultural (but not economic) egalitarianism. Although the United States has hardly been free of racial or ethnic conflicts during its history, these features have made it possible for every new group to integrate itself as full citizens. The United States is an attractive destination not just because it is a wealthy society, but also because many different groups and individuals can become integral parts of that society instead of facing permanent second-class status.

If I'm right, then the pressures of international competition give an advantage to any society that can "cream" some of the smartest and/or hardest working people from all over the world. How? By making that society an attractive place to live and work, mostly by creating an atmosphere of equality and toleration. By contrast, societies that limit their de facto talent pool by defining citizenship narrowly, by treating minorities badly, by discriminating on the basis of race, religion, or other characteristics are placing themselves at a competitive disadvantage vis-à-vis the rest of the world.

Over time, therefore, we should expect a growing gap between "cosmopolitan" societies that develop institutions and cultures in which diversity and tolerance are prized and where potential conflicts between them are managed well, and more restrictive societies that are either attractive only to a fixed population of particular ethnic identity, or who are face recurring internal conflicts between various contending groups. My bet would be that, other things being equal, the former do better over time.

And note that this argument isn't just about ethnic assimilation. In effect, what I'm suggesting is that from a realist perspective, there is a strong case for "small-l" liberal toleration. All else equal, societies that establish strong norms and institutions that protect individual rights and freedoms (including those governing sexual preference, I might add) will become attractive destinations for a wider array of potential citizens than societies that try to maintain a high degree of uniformity. And when you can choose from a bigger talent pool, over time you're going to do better.

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Barry Eichengreen has an excellent piece on how the economics profession went astray in the years before the Great Meltdown (hat tip: Matt Yglesias). I'm not an economist, but it's more nuanced and convincing than some of the other jeremiads I've read on this subject. Money quote:

The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.

In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time."

Of course, I like this line of argument because I once wrote something similar about the imperial tendencies of rational choice theorists in the field of security studies. The point is not to eschew all formal approaches or become atheoretical, however; the point is to maintain a healthy balance between deductive theorizing (whether done with formal tools or not) and various forms of empirical testing (experimental, quantitative and qualitative/historical).