After a year of nearly-nonstop travel, I've flown airlines ranging from American to SATA, to airports as large as Shanghai's Pudong International Airport and as small as Ithaca's Tompkins Regional Airport.  Which ones can I recommend?  Which ones should be avoided?  My long-awaited picks:

Best Airline: It's Virgin Atlantic, and whichever airline finished second ain't close.  Admittedly, I was flying in their "Upper Class" cabin. Still, their airport lounges are far and away the most pleasant places to be in an airport, and their planes are quite comfortable as well.  The food on the plane was tasty, the food in the airline loundes was exceptional, and the service was impeccable.  These were the only flights I can honestly say I enjoyed this year.  Besides, their commercials are just so darn kicky.   

Worst Airline:  I'm tempted to just say "all the rest," but I will put Lufthansa in its own inner concentric circle of hell.  Old planes, grumbly service, and really, really bad food.  The low point was when they showed a Golden Girls episode on hour 5 of The Longest Transatlantic Flight I've Ever Taken. 

Worst Airport:  My criteria here is very simple:  How easy is it for me to get from the curb to my airplane seat with a minimum of time and a maximum of choices to feed myself?  Using these criteria, I will be trying to avoid Dubai International Airport fot a spell.  The security checks there are the more onerous I've seen in any airport anywhere -- and I'm including trying to fly in and out of Ben-Gurion Airport in this assessment.  The Dubai security personnel were all nice, and I understand that they have a job to do, but this was a wretched experience.

Best Airport:  I'm surprised to come to this conclusion, but I have to award this to Reagan National Airport.  I fly in and out of this airport a lot, and I realized that I have never once had a bad TSA experience there.  This is surprising, given the kind of travelers they encounter.  Plus, they have a Five Guys.   

Hey, remember my last bloggingheads, when I went to the 1930s analogy to describe the current problems in the global political economy?  Well, that was a few days ago, and my, how things have changed -- to make that 1930's analogy even more powerful.  The eurogoggles metahor may be coming to an end -- because the situation is so dire that even the cheeriest summit won't alter perceptions in financial markets. 

After a week of gyrating europolitics on the Greek bailout and meaningless G-20 summitry, markets and media will be focused on Italy this week.  This matters -- for both Europe and the world, Greece is a diverting sideshow compared to a major financial collaspse in Italy.  The pressure on Italian PM Sylvio Berlusconi to resign have gotten so loud that he had to take to his Facebook page to say, "The rumors of my resignation are groundless."   New rule of thumb:  any time a politician follows Sarah Palin's lead, there's going to be a problem. 

The Daily Telegraph's Ambrose Evans-Pritchard explains the eurofarce that is currently playing out: 

As of late Friday, the yield spread on Italian 10-year bonds over German Bunds was a post-EMU record of 458 basis points. This is dangerously close to the point where cascade-selling begins and matters spiral out of control.

The European Central Bank has so far bought time by holding a series of retreating lines but either it has reached its intervention limits after accumulating nearly €80bn of Italian debt, or it is holding fire to force Silvio Berlusconi to resign – if so, a foolish game.

The ECB’s hands are tied. A German veto and EU treaty constraints stop it intervening with overwhelming force as a genuine lender of last resort. The bank is itself at risk of massive over-extension without an EU treasury and single sovereign entity to back it up.

This lack of a back-stop guarantor is an unforgivable failing in the institutional structure of monetary union....

The spreads on EFSF 5-year bonds have already tripled to 151 above German debt, leaving Japan and other early buyers nursing a big loss. The fund suffered a failed auction last week, cutting the issue from €5bn to €3bn on lack of demand.

Gary Jenkins from Evolution Securities said the “frightening” development is that the EFSF is itself being shut out of the capital markets. “If it continues to perform like that then the bailout fund might need a bail out,” he said.

Europe’s attempt to widen the creditor net by drawing in the world’s reserve states evoked near universal scorn in Cannes and a damning put-down by Brazil’s Dilma Rousseff. “I have not the slightest intention of contributing directly to the EFSF; if they are not willing to do it, why should I?”

Europe is resorting to such antics because its richer states – above all Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital.

Simon Johnson is, er.... less than optimistic about these developments: 

MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment. “We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund. “We must step back and reform the system.”

Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.”  (emphasis added) 

I've said it before and I'll say it again:  any time the global economy is counting on Sylvio Berlusconi to do the right thing is not a good time. 

Developing.... 

You humble blogger has been skeptical but not dismissive of the Occupy Wall Street phenomenon.  My general assessment was that it did reflect ongoing frustrations about trendlines in the American and global economy, but that in all likelihood the decisions of a few banking bureaucrats would have more of an effect than these protests. 

As I've noted before, the big problem with networked movements of this kind is what happens over time: 

What happens when the coalition of like-minded individuals stop being of like mind? These sorts of protests can be very powerful on single-issue questions where a single policy change is desired. Maintaining this level of activism to affect the ongoing quotidian grubbiness of politics, however, is a far more difficult undertaking. Even if people can be mobilized behind the concept of "Policy X is Stupid!" getting the same consensus on "Policy Y is the Answer!" is harder. Over time, these kind of mass movements have an excellent chance of withering away or fracturing from within. See, for example, the Tahrir Square movement in Egypt.

Another thing, and this is important: unless the people in these movements actually vote in elections, then their agenda will be thwarted in the long run. Even if these kinds of networked movements are new, the political imperative to get elected and re-elected is not. If they don't vote, then officials have a pretty powerful incentive to curry favor with the people who do vote, don't take to the streets and don't like these young whippersnappers with their interwebs have different policy preferences.

I bring this up because n+1 relays some of the internal deliberations among the Occupy Wall Streeters.*  Let's take a peek, shall we? 

Friends, mediation with the drummers has been called off. It has gone on for more than 2 weeks and it has reached a dead end. The drummers formed a working group called Pulse and agreed to 2 hrs/day at times during the mediation, and more recently that changed to 4 hrs/day. It’s my feeling that we may have a fighting chance with the community board if we could indeed limit drumming and loud instrumentation to 12-2 PM and 4-6 PM, however that isn’t what’s happening.

Last night the drumming was near continuous until 10:30 PM at night. Today it began again at 11 AM. The drummers are fighting among themselves, there is no cohesive group. There is one assemblage called Pulse that organized most of the drummers into a group and went to GA for formal recognition and with a proposal.

Unfortunately there is one individual who is NOT a drummer but who claims to speak for the drummers who has been a deeply disruptive force, attacking the drumming rep during the GA and derailing his proposal, and disrupting the community board meeting, as well as the OWS community relations meeting. She has also created strife and divisions within the POC caucus, calling many members who are not ‘on her side’ “Uncle Tom”, “the 1%”, “Barbie” “not Palestinian enough” “Wall Street politicians” “not black enough” “sell-outs”, etc. People have been documenting her disruptions, and her campaign of misinformation, and instigations. She also has a documented history online of defamatory, divisive and disruptive behavior within the LGBT (esp. transgender) communities. Her disruptions have made it hard to have constructive conversations and productive resolutions to conflicts in a variety of forums in the past several days.

At this point we have lost the support of allies in the Community Board and the state senator and city electeds who have been fighting the city to stave off our eviction, get us toilets, etc. On Tuesday there is a Community Board vote, which will be packed with media cameras and community members with real grievances. We have sadly demonstrated to them that we are unable to collectively 1) keep our space and surrounding areas clean and sanitary, 2) keep the park safe, 3) deal with internal conflict and enforce the Good Neighbor Policy that was passed by the General Assembly.

This description sounded faintly familiar, and then I remembered -- it was a replay of every dorm meeting I attended when I was a first-year in college. 

Don't worry, OWS sympathizers -- a few hours after this was posted, there was the following update: 

Crisis averted: tonight at the General Assembly, the working group of drummers, Pulse, in a spirit of conciliation and generosity, brought forward a proposal to limit their drumming from 12 to 2 and 4 to 6 PM only. The proposal had been worked out through weeks of mediation with the direct action working group. It was considered a first step toward showing the community board that the community in Zuccotti Park can regulate itself. The proposal was approved by consensus by the General Assembly, with applause and rejoicing on all sides.

Good on OWS for resolving some conflict, but this little window into their internal deliberations suggest the hard limits on their movement.  If the transaction costs of  regulating drumming are this massive, I'm extremely dubious about their ability to agree on concrete policy proposals and articulate them effectively to anyone outside their band of sympathizers -- especially since I'm not sure that all of their views will resonate within the mainstream of American public opinion. 

Am I missing anything? 

*I confess that part of me is still wondering if this is satire. 

Centrist pollster Douglas Schoen has an op-ed in today's Wall Street Journal that reports on some polling his firm did of the Occupy Wall Street protestors: 

The protesters have a distinct ideology and are bound by a deep commitment to radical left-wing policies. On Oct. 10 and 11, Arielle Alter Confino, a senior researcher at my polling firm, interviewed nearly 200 protesters in New York's Zuccotti Park. Our findings probably represent the first systematic random sample of Occupy Wall Street opinion.

Our research shows clearly that the movement doesn't represent unemployed America and is not ideologically diverse. Rather, it comprises an unrepresentative segment of the electorate that believes in radical redistribution of wealth, civil disobedience and, in some instances, violence. Half (52%) have participated in a political movement before, virtually all (98%) say they would support civil disobedience to achieve their goals, and nearly one-third (31%) would support violence to advance their agenda....

What binds a large majority of the protesters together—regardless of age, socioeconomic status or education—is a deep commitment to left-wing policies: opposition to free-market capitalism and support for radical redistribution of wealth, intense regulation of the private sector, and protectionist policies to keep American jobs from going overseas.

Sixty-five percent say that government has a moral responsibility to guarantee all citizens access to affordable health care, a college education, and a secure retirement—no matter the cost. By a large margin (77%-22%), they support raising taxes on the wealthiest Americans, but 58% oppose raising taxes for everybody, with only 36% in favor. And by a close margin, protesters are divided on whether the bank bailouts were necessary (49%) or unnecessary (51%).

Thus Occupy Wall Street is a group of engaged progressives who are disillusioned with the capitalist system and have a distinct activist orientation.

Now there are two ways to look at this data.  The first, as many sympathizers with the movement have done, is to impugn the pollster's politics, his methods, and the ways in which he's inferring broad political generalizatiions from the data. 

These points are worth considering, though looking at the precise questions asked compared to his inferences, I'm not seeing all that much conceptual stretching.  Plus, Schoen's results seem to jibe pretty strongly with a smaller New York poll of 100 protestors conducted earlier this month. 

Furthermore, consider Nate Silver's analysis of the protests that took place over the weekend across the globe.  In looking at turnout, Silver arrives at a similar -- thouugh not identical -- conclusion: 

The nascent movement known as Occupy Wall Street had its largest single day of protests on Saturday. And a funny thing happened: most of the action was far from Wall Street itself....

Over all, about 38,000 protesters — more than half of the documented total — turned out in the Western Census Bureau Region, which accounts for about 23 percent of the country’s population. On a per-capita basis, the West drew about two-and-a-half times more protesters than the Northeast, four times more than the Midwest, and five times more than the South. And it wasn’t necessarily in large cities — although places like Los Angeles and Seattle had large crowds, so did the wine-and-cheese town of Santa Rosa, Calif., and the college town of Eugene, Ore. among others.....

 

This could be due to a number of factors. Perhaps it has something to do with race, for instance. Cities where African-Americans make up a majority of the population, like Detroit, New Orleans and Cleveland, have tended to have underwhelming numbers of protesters and poorly organized Occupy groups. (There are plenty of those cities in the South, the Northeast and even the Midwest — but not really in the western United States).

Or maybe it has something to do with technology: Much of the organizational activity for the Occupy movement has taken place online, and the West Coast is particularly tech-savvy.

I suspect that more than anything, however, it reflects the politics of the protesters. Specifically, they tend to be more liberal than they are Democratic partisans. Take liberalism, subtract the Democratic Party, and the remainder might look something like Occupy Wall Street (emphasis added).

There needs to be more data, but Schoen's results don't seem out of line with the other data points. 

While Occupy Wall Street has been garnering many headlines with outrage about the financial sector, the Bank of International Settlements just released a paper that's likely to have more actual impact on said financial sector.  The paper is an effort to estimate the costs and benefits from requiring global systemically important banks (G-SIB's) to increase their capital buffers.  From the executive summary: 

[R]aising capital requirements on the top 30 potential G-SIBs by 1 percentage point over eight years leads to only a modest slowdown in growth. GDP falls to a level 0.06% below its baseline forecast, followed by a recovery. This represents an additional drag on growth of less than 0.01 percentage points per year during the phase-in period. The primary driver of this macroeconomic impact is an increase of lending spreads of 5-6 basis points. Soon after implementation is complete, growth is forecast to be somewhat faster than trend until GDP returns to its baseline. The aggregate figures conceal significant differences across countries, which reflect differences in the role of G-SIBs in the domestic financial system and in current levels of bank capital buffers. International spillovers are also important, and in some countries are likely to be the dominant source of macroeconomic effects.

The overall results are robust to variations in key assumptions. Using a longer list of banks, scaling by assets rather than lending, shortening the implementation period, or limiting the ability of authorities to offset slower growth with monetary or macroprudential policy were all found to increase the growth impact, but not markedly.

What will be the effect of the full package of the Basel Committee's proposals for stronger capital requirements - the set of buffers that will be required of all banks under Basel III, combined with the additional buffers to be carried by G-SIBs? The impact of the Basel III proposals, using the end-2009 global capital levels as a starting point, was calculated by the MAG [Macroeconomic Assessment Group] in 2010. On top of this, we assume for illustrative purposes that the top 30 G-SIBs will need to raise their capital ratios by an additional 2 percentage points, and that both parts of the reform are implemented over eight years. Adding together these two components, we find that the impact is again quite small, with GDP at the point of peak impact forecast to have fallen 0.34% relative to its baseline level. Roughly 0.04 percentage points are subtracted from annual growth during this period, while lending spreads rise by around 31 basis points. As before, different assumptions lead to different effects, with faster implementation or a weaker monetary policy response increasing the impact on GDP.

The benefits of the G-SIB framework relate primarily to the reduction in the exposure of the financial system to systemic crises that can have long-lasting effects on the economy. The LEI estimated the benefits of Basel III by multiplying the degree to which it reduces the annual probability of a systemic crisis, by an estimate of the overall cost of a typical crisis in terms of lost output. Drawing on the [Basel Committee Long-term Economic Impact Study's] results, the MAG estimated that raising capital ratios on G-SIBs could produce an annual benefit in the order of 0.5% of GDP, while the Basel III and G-SIB proposals combined contribute an annual benefit of up to 2.5% of GDP - many times the costs of the reforms in terms of temporarily slower annual growth.

Let me just translate how the BIS would put this to a lay audience:

Hey, you know how Jaime Dimon and all the other bankers who contribute to the Institute for International Finance, American Bankers Association, and Financial Services Forum keep saying that raising their capital requirement is "anti-American" and will lead to catastrophic economic consequences?  Yeah, well, they don't know what the f**k they're talking about.  Raising their capital requirements causes a extremely small dip in expected growth -- and by small we mean less than one tenth of one percent of GDP.  This is massively outweighed by preventing the expected lost output that would result from recessions triggered by another financial crisis. 

Now, it's not terribly surprising that global regulators will say that they're right and the banks are wrong.  One would expect that the interest group power of Wall Street, however, would have the upper hand.  What is surprising, as the Wall Street Journal's Sara Schaefer Munoz notes, is that the banks seem to be losing their battle with regulators:

The tug-of-war between banks and regulators over post-crisis financial rules has so far moved in the watchdogs' favor with banks largely failing to upend the tougher proposals in the U.S. and Europe....

Even before Monday's report, regulators didn't seem responsive to the industry's arguments. In the U.S., lawmakers have already determined that the country's big banks must hold more capital, but haven't yet specified how much.

The Dodd-Frank financial overhaul law, enacted more than a year ago, mandated many new restrictions on banks but left it to regulatory agencies to write the rules. Wall Street and the financial industry have spent millions of dollars lobbying to shape the rules, with little success so far.

They lost in their efforts to block new limits on the fees they can charge merchants when consumers use debit cards. Regulators are expected to vote Tuesday to issue a proposed "Volcker Rule," a part of the Dodd-Frank law designed to curtail trading activities at bank. Now they appear likely to fail in their efforts to block or water down a rule requiring them to hold extra capital.

In 2010, securities and investment firms spent a record $101.6 million on lobbying, up from $92.3 million in 2009, according to the Center for Responsive Politics. Through early October 2011, the firms had shelled out $49.5 million.

There are plenty of ways in which large banks can continue to fight the suggested rules, particularly on the implementation side.  Still, this is not how open economy politics traditionally works.  Traditionally, bank preferences are communicated to national governments, which then get expressed in BIS/Basle Committee meetings.  This certainly happened in the actual Basel III negotiations.   This kind of back and forth, in which regulators appear to trump the arguments of the financial sector, is highly unusual. 

I confidently predict that this post will not generate the kind of comments that, say, an Occupy Wall Street post has in the past week.  That's kind of a tragedy, because this ongoing tug of war between the BIS and IIF will likely have more far-reaching consequences than anything those protestors achieve. 

Developing....

I was fortunate enough to give a talk at my alma mater over the weekend and chat informally with some of the political science undergraduates over some food from an Indian restaurant that didn't exist when I was in school and I can't believe how much greater their range of ethnic food choices are than when I was in school and their life is great and college life was much tougher back in my day while we broke bread. Inevitably, the question of Occupy Wall Street came up and whether it would go anywhere.

Now, in many ways, this phenomenon has many of the features of networked movements that have been at the center of The Slaughter-Drezner Debates (although in this case Slaughter seems a bit more disdainful of the movement's potential). If you read here or here or here, you'll see all the advantages of a networked structure outlined in painstaking detail. This ragtag group of rebels has managed to get coverage on The Daily Show, generate associated online movements like the "We Are the 99%" Tumblr, generate headlines through mass arrests over the weekend, and inspire similar movements in other cities.

So … what did I say to these impressionable young adults?

I said two things. First, I said the moment was ripe for this kind of movement. You have an ample supply of network technologies to start a movement, and rising economic inequality to create the necessary social purpose for such a movement. Indeed, the surprising thing about Occupy Wall Street isn't that it's happening -- it's that it took three years for it to happen.

The other thing I said was that for this group to generate more than a thousand people or so out in the streets, however, their message has to resonate culturally with people who would otherwise not want to go out onto the streets. And here's where I start to be a bit more skeptical. I'm not sure the latest manifesto is really cogent enough -- beyond a rejection of corporations as we know them -- to generate much sympathy with broad swaths of the American people. And, as I've said before, unless you attract people who vote, this kind of thing will generate news coverage and not much else.

Could they attract a larger crowd? After reading Time's Nate Rawlings, I'm skeptical:

While "Occupy Wall Street" has become more organized, its demands haven't coalesced into a coherent message. The only thing its various constituent groups appear to have in common is a deep-seated anger at inequality in this country. For them Wall Street symbolizes that unfairness, but the groups have other concerns as well. Many want to redistribute wealth; others want to enlarge government social programs. Some are protesting against the wars in Iraq and Afghanistan. Daniel Levine, a journalism student from upstate New York, said he was taking a stand against the controversial method of natural gas extraction known as hydrofracking in his hometown – but also noted that the practice can bring jobs to economically disadvantaged regions.

Just as it lacks a single message, the "Occupy Wall Street" movement has been defined by the absence of a clear leader. Participants say that is by design, and point to the committees that have sprung up to tend to the daily needs of those camped in Zuccotti Park. It isn't clear that they want a single leader, and many think the movement is better of[f] without one. “It's kind of cool how it's growing organically,” one said. “People just need to give it time and it'll come together.”

Maybe, over time, that will happen. There's a political paradox, however, that Occupy Wall Street faces. Without clear and coherent demands, there will be little to inspire ordinary citizens to take to the streets. Articulating clear and coherent demands, however, will destroy the very gestalt that the people currently on the streets seem to like some much.

Still, unions have started to come out in support of this movement. The U.S. economy is in a bad way, and the festering eurocrisis could make it really bad. So maybe external conditions will eliminate this paradox for the protesters.

So that's what I think. What do you think?

Your humble blogger will be hitting the road early in the morrow to Shanghai. I'll be attending a conference co-sponsored by the Shanghai Institutes for International Studies, Stanley Foundation and the Munk School of Global Affairs University of Toronto on "Global and Collaborative Asian & Pacific Leadership for the G20."

Note to citizens of the PRC:  I too will be toting my own luggage.

I'll certainly try to avoid catching Friedman's Disease during this China trip.*  I'll also try to avoid a related management consulting syndrome, which is the belief that a few days in another country somehow endows me with "street cred" when discussing said country. This seems particularly prevalent with respect to China.

Since the topic is the state of the G-20, and I've made my feelings about that forum pretty plain on this blog, I hereby challenge readers to persuade my mind in the 48 hours before I present. The G-20 performed best when the sense of crisis seemed most acute. As the eurozone melts down, and the United States doesn't look much better, is the G-20 capable of jumpstarting a bout of policy coordination that looks more robust than, say, this totally anemic statement?

What do you think?

*If Gwyneth Paltrow is coughing anywhere near me, on the other hand, I'm... I'm.... probably going to be the Index Patient Plus One. 

Remember that global political economy funk I was feeling about ten days ago?  I think Felix Salmon caught it, and caught it bad.  Riffing off of a George Magnus research note for UBS, Salmon thinks that we're currently experiecing, "the most uncertain outlook, in terms of the global political economy, since World War II ended and the era of the welfare state began." 

If you think that's dramatic, consider this paragraph: 

Most fundamentally, what I’m seeing as I look around the world is a massive decrease of trust in the institutions of government. Where those institutions are oppressive and totalitarian, the ability of popular uprisings to bring them down is a joyous and welcome sight. But on the other side of the coin, when I look at rioters in England, I see a huge middle finger being waved at basic norms of lawfulness and civilized society, and an enthusiastic embrace of “going on the rob” as some kind of hugely enjoyable participation sport. The glue holding society together is dissolving, whether it’s made of fear or whether it’s made of enlightened self-interest.

Magnus says something similar in his note, lamenting the "malaise in politics and policymaking," albeit conceding that, "While there is plenty of talk about endgames of war and conflict, muddling through and the rediscovery of good politics are just as, if not more likely."  Walter Russell Mead nods along sagely, while John Sides is more skeptical. 

In part for reasons proffered here, I'm more sympathetic to Sides than Salmon.  Another reason is that Salmon's gloominess seems to be swamping the data.  Edelman's 2011 Trust Barometer, for example, suggests that Salmon is exaggerating the "massive decrease of trust" across-the-world claim juuust a wee bit.  That survey is not perfect (it's targeted at the top 25% of income-earners).  It's also not all good news -- the advanced industrialized democracies are not strong reservoirs of trust right now.  That said, the increase in trust -- not to mention the continued decrease in crime in kep places --  is broad-based enough to suggest that perception is overwhelming reality. 

I'm not without concerns -- the disconnect at the global economic governance level is pretty disconcerting, and even G-20 optimists are starting to sound like me.  Furthermore, the longer that sluggish growth and anemic job creation persists in the advanced industrialized democracies, the gloomier things get.  If Reinhart and Rogoff are correct,  Salmon is just demonstrating rational expectations. 

Still, given the general suckiness of the global political economy over the past few years, what's striking is not the signs that the world is falling apart, but rather the dogs that haven't barked. 

What do you think? 

[WARNING:  THE FOLLOWING IS AN OPTIMISTIC GLOBAL POLITICAL ECONOMY POST]

Note:  in my last blog post, I might have sounded juuuuust a wee bit pessimistic about the state of the global political economy.  That was my intent, but it wasn't necessarily how I actually felt.  My aim was to assemble as negative a brief as possible about the state of the global political economy.  The aim of this post is to argue that, despite all the recent bad news, the fundamentals of the global political economy are surprisingly sound.  I'm not actually as optimistic as the rest of this post suggests, either -- but I do lean more in this direction.  The fact that I'm blogging this from a zombie-proof vacation redoubt should in no way affect your evaluation of the following few paragraphs.  

So, when we last left off this debate, things were looking grim.  My concern in the last post was that the persistence of hard times would cause governments to take actions that would lead to a collapse of the open global economy, a spike in general riots and disturbances, and eerie echoes of the Great Depression.  Let's assume that the global economy persists in sputtering for a while, because that's what happens after major financial shocks.    Why won't these other bad things happen?  Why isn't it 1931? 

Let's start with the obvious -- it's not gonna be 1931 because there's some passing familiarity with how 1931 played out.  The Chairman of the Federal Reserve has devoted much of his academic career to studying the Great Depression.  I'm gonna go out on a limb therefore and assert that if the world plunges into a another severe downturn, it's not gonna be because central bank heads replay the same set of mistakes. 

The legacy of the Great Depression has also affected public attitudes and institutions that provide much stronger cement for the current system.  In terms of publuc attitudes, compare the results of this mid-2007 poll with this mid-2010 poll about which economic system is best.  I'll just reproduce the key charts below: 

The headline of the 2010 results is that there's eroding U.S. support for the global economy,  but a few other things stand out.  U.S. support has declined, but it's declined from a very high level.  In contrast, support for free markets has increased in other major powers, such as Germany and China.  On the whole, despite the worst global economic crisis since the Great Depression, public attitudes have not changed all that much.  While there might be populist demands to "do something," that something is not a return to autarky or anything so drastc. 

Another big difference is that multilateral economic institutions are much more robust now than they were in 1931.  On trade matters, even if the Doha round is dead, the rest of the World Trade Organization's corpus of trade-liberalizing measures are still working quite well.  Even beyond the WTO, the complaint about trade is not the deficit of free-trade agreements but the surfeit of them.  The IMF's resources have been strengthened as a result of the 2008 financial crisis.  The Basle Committee on Banking Supervision has already promulgated a plan to strengthen capital requirements for banks.  True, it's a slow, weak-assed plan, but it would be an improvement over the status quo. 

As for the G-20, I've been pretty skeptical about that group's abilities to collectively address serious macroeconomic problems.  That is setting the bar rather high, however.  One could argue that the G-20's most useful function is reassurance.  Even if there are disagreements, communication can prevent them from growing into anything worse. 

Finally, a note about the possibility of riots and other general social unrest.  The working paper cited in my previous post noted the links between austerity measures and increases in disturbances.  However, that paper contains the following important paragraph on page 19: 

[I]n countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative -- more spending buys a lot of social peace. In countries with Polity-2 scores above zero, the coefficient is about half in size, and less significant. As we limit the sample to ever more democratic countries, the size of the coefficient declines. For full democracies with a complete range of civil rights, the coefficient is still negative, but no longer significant.

This is good news!!  The world has a hell of a lot more democratic governments now than it did in 1931.  What happened in London, in other words, might prove to be the exception more than the rule. 

So yes, the recent economic news might seem grim.  Unless political institutions and public attitudes buckle, however, we're unlikely to repeat the mistakes of the 1930's.  And, based on the data we've got, that's not going to happen. 

After last night's stunningly useless set of speeches, I'd put the odds of the U.S. not raising the debt ceiling by August 2nd at 1 in 2. Like many other observers, I'm finding it increasingly difficult to envision a deal that would get through the Senate while attracting a majority of House Republicans [You meant a majority of the House of Representatives, right?--ed. No, I meant a majority of House Republicans. I'm pretty sure that Boehner and the rest of the House GOP leadership will refuse to pass any debt ceiling plan that relies too much on House Democrats.]

So, it's gonna be a fun few weeks for those of us who study the global political economy. Let's start by thinking the unthinkable -- what will happen if there is a default?

I've expressed my feelings on the matter already, and I'm hardly the only one. That said, I've also hedged my bets been flummoxed by the lack of market reaction to the DC stalemate. The lack of market reaction to date has emboldened House GOP members to stand fast. Could they be right?

Tom Oatley, who pooh-poohed my fears of the debtpocalypse last week, makes an interesting point about the composition of U.S. debt-holders:

By these figures, about 63% of US government debt is owned by central banks (foreign and domestic) and/sovereign wealth funds. Most of these entities are American friends and allies. Another 4% is owned by US state and local governments. That leaves 33%--about $4.8 trillion--in private hands. Of this, the financial institutions with the most restrictive regulations regarding asset ownership (depository institutions) own only 2% of the total ($290 billion). Mutual Funds, who may or may not have to dump downgraded debt, hold another 9% ($1.35 trillion).

What's the point? The discussion about the impact of US default revolves around the market response to default. Useful to recognize that most of the US government debt is held by public-sector agents who are much less sensitive to balance sheet pressures and regulatory constraints. These public sector agents are also substantially more sensitive to "moral suasion" and direct appeal than private financial institutions. The structure of ownership of US debt might dampen the negative impact of any default that does occur.

This is pretty interesting. Oatley focuses on "moral suasion," but there's also a national-interest motive for many U.S. debtholders. Most of the official holders of U.S. debt have a strong incentive for a) the value of their holdings not to plummet; and b) the United States economy to continue to snap up other their exports. If China, for example, is buying up U.S. debt to sustain its own growth, then neither a technical default nor a ratings downgrade should deter China or other export engines from continuing to buy U.S. debt even if there's a spot of trouble.

So it appears that complex interdependence will force America's rivals to continue to hold U.S. debt even after the debtpocalypse!! The United States in the clear, right?

Not so fast. Here are five "known unknowns" I can think of that might complicate Oatley's analysis:

1) What if the creditors form a cartel? In my 2009 paper, this was the one scenario that gave me the heebie-jeebies, because it's the one scenario under which creditors can wring geopolitical gains from debtor states. Any kind of default can act as a focal point moment in which U.S. creditors decide it's time to apply a haircut to American power and influence.

I don't think this is going to happen, because the national interests of American debtholders remain divergent. That said, if U.S. allies interpret default as a signal of U.S. unreliability in times of crisis, then all bets are off.

2) What about the economic nationalism of China? China is the largest foreign debtholder, which gives it a certain agenda-setting power in moments of crisis. There are a lot of compelling reasons why China would decide to try to minimize the economic disruptions . On the other hand, there's a lot of resentment on Chinese Internet boards already about the Chinese purchases of U.S. debt. During a period in which the CCP is already concerned about domestic instability, one could envision a scenario whereby they try to mollify nationalists at home by acting out against the United States.

3) What would be the effect of a mild market reaction on the House of Representatives? The less the markets react, the less that the House GOP will feel a need to do anything. There will come a point, therefore, when official debtholders might need to signal to the House that, in IPE lingo, "s**t needs to get done." That signal would in and of itself roil markets, not to mention the effects the current uncertainty is already having on the real economy.

4) What is the fiscal shock from a default? There are two causal mechanisms through which a default could affect the global economy. The first is through panic and uncertainty roiling financial markets. The second, however, is from a dramatic fiscal contraction due to limited government spending. Given the lackluster state of the current recovery, it wouldn't take much to tip the United States back into recession.

5) What if there's another AAA bubble? FT Alphaville's Tracy Alloway provided another interesting chart earlier this month on the distribution of AAA securities:

As Alloway warns:

[W]atch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It’s one reason why the sovereign crisis is well and truly painful.

It’s a global repricing of risk, again, but one that has the potential for a much largerpop, so to speak.

We know that a downgrade of U.S. Treasuries would likely lead to a downgrade of state and municipal bond ratings as well. We also know that the ripple effects from the collapse of asset-backed securities were much larger than anticipated before the 2008 crisis. This is why the possible knock-on effects of downgrade so many AAA asserts makes me itchy. Even if banks and other financial institutions have minimal exposure to U.S. Treasuries, I don't think it's possible for them to have minimal exposure to all U.S.-based AAA sovereign debt.

These are just the five known unknowns that I could think of in the past hour -- there are probably many, many more. Readers are strongly encouraged to add them in the comments.

Your humble blogger is taking a short vacation, because so much friggin' stuff has happened in the past half-year.  Indeed, in 2011 to date, the planet has lived up to FP's motto:  the world is not a boring place.  Wars, revolutions, natural disasters, non-natural disasters, the possibility of sovereign defaults -- for a world politics junkie, it's been very exciting

Does exciting mean the coming of end-times, however?  I ask because the New York Times' Azam Ahmed observes the latest trendy investment --  Armageddon funds:

Since the financial crisis, many investors have prospered from a rebound in the markets. But recent events have led some to brace for the worst.

“Clients are suddenly realizing the world isn’t as rosy as it’s been,” said Ahmed Fattouh, a hedge fund executive. “It makes a lot of sense to have these tail protections on.”

That is, protections against what Wall Street calls “tail risk” — a disaster that is estimated to have less than half a percent chance of happening....

So how do such Armageddon funds work? Take a situation like the collapse of China’s economy, an event considered highly unlikely. While most American investors do not own Chinese stocks, real estate or currency, the fear is that a shock to China would spread to the rest of the world. As the stock markets fell, a tail risk or black swan fund would profit because it owned the options to sell shares in the Standard & Poor’s 500-stock index at far higher levels. The more the index dropped, the more valuable those options would become.

On a related note, Jay Ulfelder looks at the release of the 2011 Failed States Index and Admiral Mike Mullen's worries about a possible increase in the number of failed states.  Ulfelder is more sanguine than Mullen:

So, is the world falling apart, or is it settling down? I’m cautiously confident that the optimists have this one right. To my mind, the trends Alan Taylor identifies are the start of the big development story of the 21st century. After a century in which the global political economy was primarily characterized by the yawning gap in wealth and power between the so-called First and Third Worlds, that gap is finally narrowing. Economic growth is accelerating in countries long mired in a “poverty trap,” and the economic and political benefits of that trend are extending to more and more of the world’s human population. Hundreds of millions of people still live in abject poverty, under authoritarian rule, or both, but the share of the global population living in deep poverty is notably lower than it was just a couple of decades ago (see the chart below, from the World Bank), and the economic takeoffs occurring in many long-poor countries suggest that trend is only broadening....

If things are generally looking up, why are people like Adm. Mullen (if I haven’t misunderstood his remarks) still so worried about the coming anarchy? In a bit of armchair psychology, I wonder if the admiral’s gloomy prognosis is partly a result of confusing uncertainty with risk. The encouraging development trends mentioned above are reordering politics at the international and national levels to a degree not seen in several generations, and no one knows when this turbulent period will end and what its results will be. People are inherently uncomfortable with uncertainty, and it seems like that discomfort often inflates our sense of the risk that worst-case scenarios will come to pass. In other words, our fear of dire outcomes seems to cause us to overestimate the probability that they will occur. In this particular case, I sure hope that’s right.

As pessimistic as I am about the ability of great powers to handle end times, I have to side with Ulfelder here.  Nicholas Taleb made a lot of coin by pointing out the ways in which tail risk events happened far more frequently than expected, but I do wonder if expectations of these events are now biased in the opposite direction.  There is a lot of uncertainty in the world -- but uncertainty and catastrophic outcomes are not the same thing. 

That said, there is another possibility to consider.  From 1945 onewards, one could argue that the chief sources of uncertainty were located in the developing world.  The developing world is becoming more developed, and the developed world is becoming more politically sclerotic.  It's possible that, moving forward, the OECD economies become the primary source of uncertainty -- but this uncertainty doesn't faze developing markets all that much. 

What do you think? 

I'm going to go out on a limb and state unequivocally that I think civil liberties and gender equality are Very Good Things.  All else equal, I'd much rather live in a society in which freedom of speech is protected and women have all of the rights and opportunities afforded to men. 

I bring this up because a common assumption that guides much of global economic policy is that as developing countries get richer, they will start valuing these qualities as well.  There's a belief that regardless of the sequencing, political modernization will not trail too far behind economic modernization.  Even in anomalous countries like Singapore, for example, there are trends suggesting that richer societies start demanding all those political and personal freedoms that many in the West take for granted.  Crudely and simply put, a guiding assumption behind much Western policymaking (as well as many foes of the West writ large) is that modernization = Westernization.

I bring this up because China and India are, at the present moment, trying to prove this assumption is wrong.   China has been getting very rich very fast, and yet the Chinese government seems more repressive than ever.  So much for political liberties.

In some ways, India is even more troubling, as the New York Times'  Jim Yardley report:  

India's increasing wealth and improving literacy are apparently contributing to a national crisis of “missing girls,” with the number of sex-selective abortions up sharply among more affluent, educated families during the past two decades, according to a new study.

The study found the problem of sex-selective abortions of girls has spread steadily across India after once being confined largely to a handful of conservative northern states. Researchers also found that women from higher-income, better-educated families were far more likely than poorer women to abort a girl, especially during a second pregnancy if the firstborn was a girl....

The study, being published in the British medical journal The Lancet, is the latest evidence of India’s worsening imbalance in the ratio of boys to girls. The 2011 Indian census found 914 girls for every 1,000 boys among children 6 six or younger, the lowest ratio of girls since the country gained independence in 1947. The new study estimated that 4 million to 12 million selective abortions of girls have occurred in India in the past three decades....

Dr. Prabhat Jha, a lead author of the study, noted that the use of sex-selective abortions expanded throughout the country as the use of ultrasound equipment became more widespread. Typically, women from wealthier, better-educated families are more likely to undergo an ultrasound, Mr. Jha said, and researchers found that these families are far more likely to abort a girl if the firstborn is a daughter.

“This is really a phenomenon of the educated and the wealthy that we are seeing in India,” said Mr. Jha, director of the Center for Global Health Research at the University of Toronto.

Census data has already confirmed that the problem has accelerated since 2001. The 2011 census found about 7.1 million fewer girls than boys under the age of 6, compared with a gap of roughly 6 million girls a decade earlier (emphasis added).  

The study can be accessed at The Lancet's website (registration required).  In an accompanying commentary, S.V. Subramanian and Daniel Corsi explain exactly why this is so friggin' depressing:

The steady decline in the ratio is surprising, and counterintuitive, in view of India's progress in recent decades in improving the levels of female literacy and increases in income per person....

the value of the analysis by Jha and colleagues is mainly independent confirmation of two important aspects of the sex ratio in India that have been reported previously with different data. The first is that sex imbalance at birth seems to be particularly concentrated in households with high education and wealth. This pattern suggests that dominance of the son-preference norm is unlikely to be offset, at least in the short term, by socioeconomic development. Second is that the overall problem of sex imbalance seems to arise throughout India, including in Kerala, which has often been characterised as a model state for social development and gender equality. The problem of sex imbalance seems to be a function of socioeconomic status, not geography.

As India gets richer, this problem will only get worse. 

Now, this might be one of those "it's always darhest before the dawn" kind of trends, in which after a certain wealth threshhold, trends will shift back towards a more classical liberal direction.  Maybe.  I don't know, and anyone else who tells you that they know is bulls**tting you.  Based on this study, however, the question of whether China and India will ever embrace liberal political and cultural norms is not going to go away anytime soon.

What do you think? 

Your humble blogger is in Brussels recovering from jet lag to discuss Very Important Questions about the future of global trade.  Since I'm thinking about this topic, it's worth noting that former U.S. Trade Representative Susan Schwab wrote, by trade policy standards, a rather provocative Foreign Affairs essay on the Doha round.  The first paragraph:

It is time for the international community to recognize that the Doha Round is doomed. Started in November 2001 as the ninth multilateral trade negotiation under the auspices of the General Agreement on Tariffs and Trade and its successor, the World Trade Organization (WTO), the talks have sought to promote economic growth and improve living standards across the globe -- especially in developing countries -- through trade liberalization and reforms. Yet after countless attempts to achieve a resolution, the talks have dragged on into their tenth year, with no end in sight.

Schwab suggests that negotiatiors admit defeat on Doha, agree on whatever has been agreed, and ditch the bargaining round template that's governed most GATT/WTO trade talks in favor of more plurilateral approaches. 

I confess to mixed feelings about this argument.  On the one haand, Schwab is correct that Doha is deader than a doornail, and the G-20 loses just a little credibility every time it pledges to finish the round in a communique.  That said, I'm dubious of what plurilateral measures can do on their own, and in the absence of forward momentum at the WTO, more and more trade action will take place outside WTO auspices. 

What do you think?  Should Doha just be declared dead? 

Today is Patriots Day in Massachusetts, which means it's a school holiday, which means I'm at home with the Official Blog Children.  Because I don't have much time to blog in-depth about much, I'd like to address a shallow topic this AM -- Donald Trump. 

The current frontrunner for the 2012 GOP presidential nomination has made a few comments hinting at how he would approach foreign economic policy.  Let's take a look, shall we? 

From the Wall Street Journal: 

As for foreign policy, Mr. Trump said he is "only interested in Libya if we take the oil," and that if he were President, "I would not leave Iraq and let Iran take over the oil." He remains sharply critical of the Chinese, asserting that as President, "I would tell China that you're either going to shape up, or I'm going to tax you at 25% for all the products you send into this country."

"I'm all for free trade, but it's got to be fair trade," he said. "China has taken advantage of this country for a long time." Regarding the $300 billion he said China stands to make from trade with the U.S. this year, Mr. Trump said, "What's protectionism? ...I want to be protected if that's the case." As for pending trade deals with Colombia, Korea and other countries, he said he would only sign them if they were the right deals for the U.S. "If it's a bad deal, I wouldn't sign it," he said.

Here's a fun little project for the commenters:  predict what would happen to the global political economy if, in fact, President Trump seized all of Iraq's oil reserves and slapped a 25% tariff on Chinese exports.  Hint:  I don't think it ends well. 

As for the trade deals, given that almost all of Panamanian and Colimbian exports come into the United States duty-free, I'm dying to hear how the Donald is going to improve upon them. 

The stuff from the WSJ is boilerplate economic populism mixed with a healthy dollop of ignorance about the global economy --  but then there's this exchange with CNN's Candy Crowley:   

Donald Trump says that the "right messenger" could tell OPEC to lower crude oil prices, insisting that prices "will go down if you say it properly."....

Asked on by CNN host Candy Crowley what his idea would be to get OPEC to lower crude oil prices, Trump said: "It's the messenger."

"I can send two executives into a room. They can say the same things; one guy comes home with the bacon and the other guy doesn't," Trump said. "I've seen it a thousand times. ... We don't have the right messenger. [President Barack] Obama is not the right messenger. We are not a respected nation anymore and the world is laughing at us."

Well, I agree with Trump that the world is laughing at someone. 

The statement that the U.S. is "not a respected nation anymore" is flatly false.  As for whether the "right messenger" can convince OPEC to lower crude oil prices, methinks that Trump is vastly exaggerating the ability of any messenger to tell countries to act against their economic and political self-interest (not to mention OPEC's influence over oil prices).  Well, that or he's been watching this scene way too many times. 

According to Politico's Maggie Haberman and Ben Smith:

More than anything else, according to those who’ve spoken to [Trump], he doesn’t want to be seen as the butt of this particular joke.

“He gets mad that people aren’t taking him seriously,“ said one Republican who’s spoken with him.

So, just for the record , this is me trying to take Donald Trump's policy pronouncements seriously.  That said, I'd like to thank the Donald for providing such easy blog fodder on a holiday!