The ‘Nuclear Option’: Currency Edition

As someone who follows international economics pretty closely, I’m surprised I didn’t find this Dean Baker op-ed until today. I’ve previously asked what the United States could do to convince the Chinese government to let the yuan appreciate. Baker doesn’t so much want to convince China, but rather beat China at its own game. He suggests that the US Treasury set a dollar-yuan exchange rate higher than the Chinese government and creating an incentive for Chinese firms and other individuals to use the new exchange rate.

I’m going to file this one under “interesting wonky idea that would NEVER, EVER happen”. The Chinese government flipped when the United States imposed a tariff on tires; imagine the reaction to the United States creating a new exchange rate. I’m highlighting Baker’s op-ed not because I think it’s a good idea, but proof that the problem of the yuan peg is not an easy one to solve and will require some creative thinking. Even if some thoughts won’t work.

 

Soccer, Marginal Tax Rates and Game Theory

Republicans have called Democrats “socialist” for wanting to raise the top marginal tax rate. Imagine the epithet they would hurl if a new tax code threatened professional sports.

The Spanish government has proposed reforming the “Beckham law”, named after the British star, that taxes foreign soccer players at a lower rate than domestic athletes. La Liga and its players claim a repeal of the law would cause foreign stars to leave the Spanish league. The players have even threatened to strike. The English Premier league also flipped a lip when the UK government proposed a new tax plan earlier this year. Ironically, English fans feared the tax rate would drive Christiano Ronaldo from Manchester United to Real Madrid. Ronaldo is now on Real Madrid and may see his tax rate increase anyway.

Now this tax problem could be easily solved if all European governments decided to cooperate a set a standard tax rate for soccer players across countries and leagues. But of course, this situation is an example of the prisoner’s dilemma. There is no supra-national organization that can force European countries to set a standard tax rate. So instead we are left with a world in which tax policy can affect the outcome of the Champions League

Yuan a bubble?

It’s everyone favorite time of the year: the Asia-Pacific Economic Cooperation Economic Leaders’ Meetin!* President Obama heads to the summit and his first official visit to China next week. Obama’s trip will be dominated by economic concerns especially trade, and in the case of China, exchange rates. Simon Johnston thinks Obama can convince the Chinese to drop the peg of the yuan to the dollar. Basically, China could end up with a destabilizing capital bubble:

This can have beneficial aspects in any country that is trying to grow fast, but it can also be profoundly destabilizing. Mr. Obama should talk gently about the experience of Japan in the 1980s, the United States this decade, and almost all emerging markets pretty much every decade.

For all the bluster about the Chinese exchange rate problem, I’ve never heard a convincing proposal for how to convince the Chinese government to let the yuan appreciate but I think Johnston has stumbled upon something here. Definitely something for the President, Tim Geithner, Hillary to think about on the flight to Singapore.

*Ok, maybe not everyone’s. But really do check out the Wikipedia section on the photo-ops. Medvedev in a poncho! High comedy.

The People’s Republic After 60

Dan Drezner links to himself* contemplating the future of China:

I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America’s rise to global economic greatness during the late 19th and early 20th centuries. From an outsider’s vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.

I have to agree with Professor Drezner on this one. For all the talk about China’s emergence as a global power, you’d expect the country to be a perfect “harmonious” society. In reality, China is pretty tumultuous, full of ethnic tension, uneven economic growth and shifting societal norms. One of the many reasons I’m glad China’s economic growth is still so high is I’m terrified to see what would happen without improving economic conditions.

*In a way I’m doing this too. I’m the first comment. I really do recommend China: Fragile Superpower. Check it out

Yes they can, but what will they do?

Change is coming to Japan

Or at least it’s very likely. The Financial Times has a poll projecting a landslide for Japan’s opposition Democratic Party. The DPJ is expected to win 321 of the Diet’s 480 seats. So a party that has never been in power is close to having an overwhelming majority. So what exactly does this the prospect of a new ruling party mean for foreign policy?

Before we continue, I have to add this necessary caveat: these prognostications are really staps in the dark since the DPJ has never been in power and we really don’t know what they will do. Remember the AK was going to turn Turkey into Iran and the BJP was going to start a nuclear war with Pakistan. Power tempers ideology and dampens idealism.

The biggest takeaway is the DPJ is more interested in Asian regionalism than the US-Japan relationship. Yukio Hatoyama, the man most likely to become Prime Minister, has predicted the end of American unilateralism and presented the European Union as a positive role model for regionalism. However, the Japanese-American relationship is so strong that America will continue to be a major player in Japanese foreign policy. At the same time Japan may become a key ally on climate change since the DPJ is much stronger on environmental issues.

Picture courtesy of the Economist

Walt: Townhall Crazies Worse than Taliban?

Okay, my heading is definitely sensationalist, but over at Stephen Walt’s FP blog, he has two recent posts that should really get people questioning the blinders that go hand in hand with committing oneself to a particular IR theory.

Last Friday, he wondered about the international implications of the messy healthcare debate going on in the U.S. this August.  Walt wrote, “When I see some of these folks in action, even a realist like me begins to question the validity of the ‘rational actor’ assumption.”  Whenever a realist talks that way, it grabs my attention.   And he’s right, but then of course, that’s why I’m not a committed realist and why I am a fan of behavioral economics and any discipline embracing advances in psychology. 

But then Tuesday,  Walt really stirred up a debate by questioning the “safe haven” argument for the U.S. commitment in Afghanistan.  He made a number of points, but one in particular relied on the assumption that the Taliban, if it were to regain control of the country or a significant portion of it, would act rationally.  Essentially, Taliban leaders would be unlikely to provide extensive refuge to al-Qaeda because they would be assured of military defeat, just like after 9/11. 

On FP’s new AfPak channel, two scholars– Peter Berg and Paul Cruickshank– quickly pounced on Walt’s post.  It’s remarkable how similar their rebuttals of Walt’s six major points are, and I think it’s fair to say that they demolished his argument.   Both emphasized, however, that neither history nor current trends give credence to the notion that the Taliban should be considered a rational actor in any future scenario. 

I think another of Walt’s points demonstrates not merely a problem with realism but with the exercise of analyzing current events through a single theoretical prism.  Simplifying for the sake of modeling is not what I’m attacking.  It’s necessary in economics, IR, and other fields.  But when applying a model to a given topic, an analyst has to be careful not to force departures from the model to fit.  Walt was not with his first point, that the Taliban was not, is not, and will not likely be an ideologically unified force.  Both responses to Walt emphasized that the current trend among the Taliban fighters is unification, exactly the opposite.  Walt ignored this. 

Challenging widely accepted notions of strategy is a valuable exercise to force policymakers to rethink and defend foundational assumptions.  I made an effort, though admittedly not one from an expert, to do that with respect to the administration’s Russia/Ukraine/Georgia strategies. But it becomes something entirely different when a scholar overplays his hand.  It becomes advocacy. 

My final question, though, is this.  Do realists live up to the rational actor assumption if uninformed, screaming Americans receive more skeptical treatment than the Taliban? This week, at least, Stephen Walt didn’t make a great case in the affirmative.

Photo from CNN.

The U.S. Doesn’t Need Congress for Cophenhagan…for Politics or Policy

I’ve read mentions of EPA regulating GHG emissions before, but I hadn’t ever found a comprehensive explanation of what exactly EPA has the power to do.  Most articles and blogs dismiss EPA regulation as a second-best solution to legislation passed by Congress.  The only reason why most pundits will defend EPA regulation is that it will give the U.S. something, anything, to show for itself at talks to devise a Kyoto successor in Copenhagan.  I assumed this critique had economic grounds: Congress can pass cap-and-trade, but the best EPA can do is traditional and horribly inefficient command-and-control.

But according to a report from NYU Law School, that’s not really the case.  In fact, EPA could use is authority under the Clean Air Act (CAA) to establish a well functioning cap-and-trade system.  There a few problems in cases in which the CAA would force EPA to issue separate regulations outside of cap-and-trade (like automobile emissions, for instance.) Overall, though, a fine system could be worked out. 

A Marshall Plan for Africa (And Not Just a Good Speech Line This Time)

Everytime someone wants to propose a new major aid initiative, it seems throwing around the term “Marshall Plan” is necessary.  Gordon Brown applied the term quite a bit several years ago in arguing for a big aid push to Africa from the G8.  Thabo Mbeki somewhat nonsensically used the term when he called for Africa to develop independenty.

Most of the time, references to the post-WWII reconstruction of Western Europe simply mean somebody wants the rich world to take out its checkbook. 

But I was intrigued reading a recent proposal by Glenn Hubbard in Foreign Policy.  He focused on the actual mechanics of the Marshall Plan: it provided loans to businesses which then repaid the loans to their home governments which then spent the funds on infrastructure improvements. 

He makes a number of good points.  Microfinance is enough to bring about dramatic transformations in individual lives, but it is not sufficient to jumpstart an economy.  His infrastructure-following-business proposal is also astute: one of the reasons aid-financed infrastructure improvements have been neglected and ineffective is the lack of communication with the people who they are intended to aid. 

Hollywood Wins at the WTO, Chinese Culture Never to be the Same

Today, the WTO released a ruling in favor of the U.S. in its complaint against Chinese restrictions on imports of U.S. entertainment and media products.

The ruling addressed a number of contentious trade issues.  For example, are intellectual goods to be treated as manufactured goods under trade law? Also at stake is the use of “cultural protection” as an excuse for trade restrictions. 

I’m going to focus on the second one for now. 

The WTO has struggled since its inception with “trade and…” issues because trade comes into conflict with other values that certain countries may prioritize.  Environmental goals, food and health regulations, and labor standards are the most commonly discussed.  And there is nothing ostensibly perverse about these pursuits.  However, they often mask protectionism.

So that’s where WTO law comes in.  Members agree to uphold the principles of non discrimination and national treatment, basically not discriminating in favor of domestic producers or certain countries at the disadvantage of others.  

I am not in agreement with (and maybe not in the majority of) other free traders, but I believe that a country is not a threat to the free trading system if it democratically decides to elevate another of these goals ahead of trade so long as it respects the two major planks of WTO law (see the seal trapping case between Canada and the EU.)

But you’ll notice a couple of problems with China’s case.  First of all, the “trade and…” issue is culture.  Culture is different from the other goals I mentioned because by definition it violates the principle of national treatment.  A country is saying that a certain tradable good produced domestically is so integral to a national culture that it desevers protection.  China used the excuse for its entertainment and media restrictions, including one that limits the number of annual Hollywood movie releases to 20 and creates incentives for pirating. 

Read A Good Book (and my quick follow up to Nick’s post on Paul Farmer)

I just read Nick’s post on Paul Farmer at USAID and had to add my quick input (which knowing me turned into something a bit longer.)

As an incoming college freshman, I read MOUNTAINS BEYOND MOUNTAINS, an excellent work of nonfiction on Paul Farmer’s unprecedented HIV/AIDS work in Haiti.  Along with Jeffrey Sach’s END OF POVERTY, this page turner sparked my interest in studying development.

So my first point is that if you haven’t read it yet, check out this book.  It’s inspiring, though admittedly less so with the knowledge that such a noble and experienced individual cannot receive a stamp of approval to run a major government office.

I didn’t know Farmer was on the top of the list for USAID director, but I’ll be honest: if someone asked me to name my top pick for the post, his name would have come first. 

So, despite my general support for President Obama, I have to be frank.

Some foreign policy hands have noted that for Farmer’s visionary and inspiring career, the MacArthur genius, medical doctor and anthropologist wasn’t necessarily an easy fit for running a large government bureaucracy.

Hmm, a policy wonk without experience to command executive authority? That sounds a lot like the McCain/Palin attack on the president.

Remember: during the campaign, Obama promised to doublethe U.S. provision of foreign aid.  With the recession, such lofty plans rapidly flew out the window.   But now, not to even name a USAID director and to the extent that it causes a public rift with the Secretary of State, is simply absurd.

Last February, I sat in a Cape Town classroom and listened as several African students criticized the U.S. in response to a question about how U.S. foreign-aid policy would respond to the financial crisis.  Several railed against U.S. shortsightedness and suggested that China would take advantage of the opening left by an impotent and increasingly isolationist U.S.   And I, being an American on the post-Obama election high, said, “Not so fast.”  Just because the U.S. stalls a doubling of aid does not imply abandonment of the impoverished world.

And it doesn’t.  But Obama’s giving in to Chuck Grassley on tariffs on Brazilian ethanol and the complete failure to appoint a USAID director does indicate that the developing world isn’t a high priority. 

So to President Obama: just because you went through the ridiculous two-year marathon of an American presidential election does not mean that you should subject unprecedentedly worthy appointees to the same bizarre dance.

Photo from Amazon.