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! 

Colin Bradford has written a lot of useful and interesting material on global economic governance.  I say this because I'm not really sure that his latest FP contribution meets the high standard of his prior work. 

In "Seven New Laws of the G-20 Era," Bradford seems to be arguing that even if there are disagreements within the G-20, it's still an effective public policy forum.  Here's a sample "law":

1. Visible disagreements can have positive side effects

Some commentators have argued that, because the G-20 reveals differences and divisions, the group itself must be a failure. Yet gone are the days when we could categorize a summit as a success or a failure based on the outcome document. Dichotomous thinking doesn't really work anymore. So if G-20 meetings display more tension than consensus, that might actually be a good thing. In its discord, the G-20 merely reflects the landscape of this dynamic 21st century. There is order and disorder in our world today, competition and coordination, conflict and consensus -- all going on at the same time. The G-20 is flushing those issues up not only for leaders to deal with but for publics to deal with as well. Unlike the G-8, the G-20 is creating stronger linkages between leaders and publics, because -- not in spite of -- the fact that the conflicts are visible.

Hmmmm..... nope, not buying this spin.  Bradford's basic argument is that the G-20 exposes the fundamental disagreements  so that the global public sphere can better understand the fundamental faultlines of global economic governance.  The publicist that resides inside my brain can appreciate the virtue of this spin, but it's just that. 

It's true that governance structures can serve as arenas of contestation.  The problem with this logic is threefiold, however. 

First, as a general rule, mass publics don't pay too much attention to high-falutin' economic summits.  The issues are too arcane and the remove from daily life seems to large.  So the only thing the public will digest from G-20 deadlock is that leaders can't agree on something. 

Which leads to the second point -- in the end, publics usually want to see outputs from governance structures.  There can be virtues from policy deadlock, but I'm thinking that if an issue makes it to the G-20 agendas it's because a lot of people want concrete policy action rather than additioonal bloviation.   Continued disagreement will lead to mounting public frustration.

Which leads to the third point -- many national governments can endure long-lasting policy deadlocks because their domestic legitimacy is unquesioned.  In the United States, for example, despite mounting frustration with a sclerotic policy process, there's not a huge groundswell for amending the Constitution to make it easier to pass laws.  That's because both the Constitution and the U.S. government have been around for a while. 

The G-20 doesn't have this legitimacy "cushion" to fall back on.  It's not a national government with a monopoly on authority within its bailiwick.  It's not a treaty body like the WTO or IMF.  Unlike even the G-8, it can't point to decades of existence as a justification for its continued relevance.  The G-20 rises and falls with its perceived effectiveness.  While the forum had a good 2008 and a decent 2009, last year was a friggin' disaster.  If the trend of policy gridlock continues, it won't matter what Nicolas Sarkozy proposes, the G-20 will be a dead forum walking. 

Unfortunately, Bradford's essay sounds like a marriage counselor telling a troubled couple to "own your problems... embrace the discord."  Sorry, not buying it. 

Am I missing anything? 

Your humble blogger is taking a brief break from teaching and zombie book-whoring publicizing recently-released research to start work on new research.  This requires me to be in Europe for the week.  So, for some local color, it's worth asking how things are in the land of the euro, the eurozone, and the eurocracy. 

Last year, during the epth of the Greek crisis, I argued that, "When going backwards isn't an option, and muddling through is no longer viable, the only thing left to do is move further along the integration project." 

Last week, it seemed that France and Germany had come to the same conclusion.  The Guardian's John Palmer provided a cogent summary on the deal that was being negotiated at Friday's European leaders' summit:

Angela Merkel, Nicolas Sarkozy and the other EU chiefs will sound out the parameters of a breakthrough deal which could take the euro area – at the heart of the EU – towards a de facto economic government. The deal will offer massive financial support for countries under the currency market cosh in return for governments accepting that national economic policy in future will first have to secure the broad approval of the rest of the euro area.

[You must be feeling sooooo vindicated right now!!--ed.]  Oh, you betcha, got this one right on the money... wait, what's this Financial Times story by Peggy Hollinger and Peter Spiegel saying? 

New cracks emerged at a summit of European leaders on Friday, as the prime ministers of several countries raised strong objections to a Franco-German plan that would commit all 17 users of the single currency to co-ordinating their economic policies....

[T]heir initiative triggered a backlash from other European Union leaders anxious to defend their national economic, labour and welfare policies.

In the summit’s concluding communiqué, European leaders also appeared to back off a commitment to give the eurozone’s €440bn bail-out fund new tools to help shore up struggling “peripheral” economies.

An initial version of the conclusions committed the EU to giving the fund more “flexibility” – a code word for new authorities such as buying sovereign bonds of struggling countries on the open market. After extensive debate, that language was taken out, however, and now only binds members to give the fund “necessary effectiveness”, a clear watering-down.

What happened?  The Wall Street Journal's Irwin Stelzer explains:

Most countries profess broad agreement of the need for reforms along the lines Germany is demanding. Yet when confronted with the German-French package—the French have always favored some form of centralized economic management of the EU, including strict regulation and heavy taxation of the financial services sector that is centered in Britain—they balked.

Austria, with one of the lowest effective retirement ages in the euro zone, won't go along with an increase in the retirement age. Portugal won't buy into the end of wage indexation with inflation because it wants to offer a sop to public-sector workers whose wages have been cut by 5%. Neither will Belgium, Spain and Luxembourg. All in all, almost 20 countries at Friday's EU summit objected to the Germanization of their countries for one reason or another. So Germany refused to sign on to an increase in the size of the euro-zone bailout fund. "It was truly a surreal summit," commented Yves Leterme, Belgium's prime minister.

Stezler goes on to predict that there will be yet more Euro-muddling as a result of this deadlock.  I'm sticking to my original prediction, however.  As much as the European periphery dislikes the proposed grand bargain, some form of it will likely be accepted because  the alternative outcomes seem even more unappetizing. 

Developing....

One week into 2011, there's already a lot of really interesting stuff to read on the global political economy -- which means I better announce the 2010 Albies right now!! 

The Albies -- inspired by David Brooks' Sydney awards and named in honor of Albert Hirschman, represent the best writing in the global political economy of the past year -- in other words: 

Any book, journal article, magazine piece, op-ed, or blog post published in the last calendar year that made you rethink how the world works in such a way that you will never be able "unthink" the argument.

The 2008 financial crisis and its aftermath are still topic numero uno.  As I told the editors of FP when they asked me for my favorite books of the past year, "If last year's crop of books was about the tick tock of what happened, this year's harvest was more about why it happened."  Topic numero duo for me was the future of Sino-American relations in the global political economy.  These two topics govern my list: 

1)   Michael Lewis, The Big Short:  Inside The Doomsday Machine, Norton.  By honing in on the few people who bet against the subprime mortgage boom, Lewis's book nicely demonstrates the myriad ways in which the bubble was allowed to inflate for so long -- and why the people who got it right were, to be blunt, too socially awkward to help the markets correct sooner. 

2)  Raghuram Rajan, Fault Lines, Princeton University Press.  The best combined political economy take on the underlying domestic and international factors that contributed to the crisis.

3)  John Quiggin, Zombie Economics, Princeton University Press.   Quiggin ruthlessly deconstructs the ways in which market-friendly ideas devolved from rigorous theory into caricature.  Free market advocates won't want to read this book, but they should. 

4)  Yu Yongding, "A Different Road Forward," China Daily, December 23, 2010.  Anyone who thinks that it's possible to extrapolate China's recent growth trends indefinitely into the future needs to read this, like, now.  Yu's brutally candid assessment of what's wrong with China's current growth model could easily be written off as the musings of a crank -- if it wasn't for the fact that the guy was a former member of the monetary policy committee of the Peoples' Bank of China, and that China Daily printed the op-ed in the first place.    

5)  McKinsey Global Institute, "Farewell to Cheap Capital," December 2010,  and Goldman Sachs Global Economics Paper No. 204, "EM Equity in Two Decades:  A Changing Landscape," September 2010 (tie).  Both of these reports make a similar point -- a lot of the action in capital markets over the next two decades will be taking place in the developing world.  The McKinsey report is particularly intriguing on this point:  it suggests that United States will stop seeing historically low interest rates very soon, and won't see them again for at least a generation.   

6)  Nicholas Eberstadt, "The Demographic Future," Foreign Affairs, November/December 2010.  Eberstadt's essay provides a cogent summary of the demographic future of every great power in the world, and the challenges each country -- including the United States -- faces in confronting its demographic future.   

7)  Pew Global Attitudes Survey responses to "economic power" question, April 2010.   In their surveys, Pew asked respondents to identify "the world's leading economic power."  Compare and contrast the countries where the plurality response was "The United States" versus those responding "China."  

8)  The Wikileaks' economics cables.   The cables I've read that touch on economic policy are revealing, not because they say anything different from what one could read from open sources, but because they say the exact same thing as what one could divine from open sources.  Now, there are important caveats that need to be kept in mind when interpreting these cables -- but I find this observation to be veeeeeerrrrry interesting.   

9)  GOP, "A Pledge To America," September 2010.  When the GOP disappoints deficit hawks and Tea Party activists in 2011 -- and they will, they so, so will  -- go back and look at this craptastic document to understand why.  Marvel at a document that pledges to cut America's deficit while not touching Social Security, Medicare, Medicaid, defense, or raise taxes.  After reading this, I stopped taking GOP economic policy pronouncements seriously. 

10) Linda Jakobson and Dean Knox, "New Foreign Policy Actors in China," SIPRI Policy Paper No. 26, September 2010.  This isn't just about foreign economic policy, but it provides a very useful lens into the fotreign policymaking machine of the Chinese government and the Chinese Communist Party. 

I have to close with the depressing observation that there was no single peer-reviewed scholarly article in this bunch.  Now, in fairness, it's very difficult to get something through the peer-review mechanism and have it still be au courant.  Still, I'd be happy to hear from among the academics in the audience if there was any peer-reviewed scholarship that belongs on this list. 

You know, as insults go, this one is pretty bush league:

China's credit-rating agency on Tuesday downgraded its rating for U.S. sovereign debt and warned of further cuts, in a pointed move ahead of this week's Group of 20 major economies meeting.

Dagong Global Credit Rating Co. Ltd., the only wholly Chinese-owned rating agency, cut its rating on U.S. debt to A from AA, citing the Federal Reserve's move last week to initiate another round of asset buying, worth $600 billion. It also placed the U.S. sovereign credit rating on negative watch.

"The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar and the continuation and deepening of credit crisis in the U.S.," Dagong said.

"Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government's intention of debt repayment," the agency said.

Sounds very, very serious, until we get to this part of the story:

The downgrade of the U.S. rating by Dagong comes just over a month after the U.S. Securities and Exchange Commission denied the firm's application to officially rate bonds in the U.S.

At that time, Dagong called the SEC's move discriminatory and said it was considering legal action.

The SEC said in denying the application that "it does not appear possible at this time for Dagong to comply with the record keeping, production and examination requirements of the federal securities laws."

Indeed, even the New York Times' now-thrice-weekly story about rising Sino-American tensions observes:

In the rest of the world, the United States is still the strongest of credit risks, and the Chinese downgrade is not expected to have much real impact....

[T]hose critics, mostly countries that fear that recent American policy will devalue the dollar and undercut their competitiveness, do not appear poised to offer an alternative to an economic order that has been led by the United States since the end of World War II, or to the role the dollar has played for decades as the de facto world gold standard.

The Chinese, who have protested that the Federal Reserve is trying to unilaterally manipulate the dollar for the purpose of creating jobs at home, have been accused of doing exactly that for years - the root of many of the world's economic tensions today, in the eyes of Mr. Obama and his economic aides.

Look, clearly China is suffering from... an insult gap. Americans have been leading the world in trash-talking for decades now. China is trying hard to catch up, but I think the authorities in Beijing need some assistance in their game of catch-up.

I hereby call on all readers to offer, in the comments, ways that Chinese authorities can really sharpen their rhetorical jabs at the United States. In the spirit of kicking off the conversation, here are a few suggestions:

"Chinese Halitosis Institute Downgrades American Fresh Breath Index to BB: 'Seriously, What's The Deal With All The BBQ,' Asks Agency Head"

"Chinese Election Monitors Accuse Obama Administration of Rampant Ballot Fraud During Midterm Elections: 'It's No Myanmar, I'll Say That' According to Chief Monitor"

"Chinese Dietary Institute says American Food Leaves Them Hungry After Only 12 Hours"

Go to it.

Keith Bradsher reports on the latest move in Chinese economic statecraft:

China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week.

The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.

"The embargo is expanding" beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.

They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions....

The signals of a tougher Chinese trade stance come after American trade officials announced on Friday that they would investigate whether China was violating World Trade Organization rules by subsidizing its clean energy exports and limiting clean energy imports. The inquiry includes whether China's steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, are illegal attempts to force multinational companies to produce more of their high-technology goods in China.

Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.

Industry executives and analysts have interpreted that official denial as a way to wield an undeclared trade weapon without creating a policy trail that could make it easier for other countries to bring a case against China at the World Trade Organization.

So far, China seems to be taking a similar approach in expanding the embargo to the West.

Hat tip to Will Winecoff, who asks, quite reasonably, "What in samhell is China thinking?"

Assuming that the New York Times story is accurate, there are three ways to think about what Beijing is doing. First, this could just be all about domestic politics. Bradsher notes that the decision was made after a Central Committee meeting. It's possible that as the currency wars heat up, and as the U.S. starts complaining to the WTO, there was a need to assuage some nationalist outrage. Of course, no one really knows what Chinese domestic politics looks like, so who the hell knows how much validity to give to this argument.

The second way to look at it is that China's leaders have been reading The Sanctions Paradox. I argued in that book that high expectations of future conflict between the sanctioning and the sanctioned state would lead to frequent episodes of economic coercion, but each attempt would yield only minimal concessions. So far, this model holds up: the past month of China's rare earth export controls have yielded them exactly one returned fishing boat captain. Maybe they are hoping that extending the ban to the United States will force Washington to back down in their WTO complaints. Given rising conflict expectations, that's about the most they're going to get from this action.

The third way to think about it is that China is being ridiculously short-sighted in their use of economic coercion. As Patrick Chovanec notes at Seeking Alpha:

[China] really shot itself in the foot. By flexing its muscles so eagerly, over a relatively minor incident, it alarmed its customers and possibly frightened them off, when a softer approach might have lulled them into continued and deepening dependence. There's no question that China can extract rare earths at the cheapest price, in purely monetary terms. But now China's trading partners must be seriously wondering, what could the real price amount to, when the bill eventually comes due?

China's foreign economic policies with respect to raw materials suggests that Beijing doesn't think market forces matter all that much -- what matters is physical control over the resources. This is a pretty stupid way of thinking about how raw materials markets function, and it's going to encourage some obvious policy responses by the rest of the world. Non-Chinese production of rare earths will explode over the next five years as countries throw subsidy after subsidy at spurring production. Given China's behavior, not even the most ardent free-market advocate will be in a position to argue otherwise.

More importantly, China's perception of how economic power is wielded in the global political economy is going to have ripple effects across other capitals. If enough governments start reacting to China's economic statecraft by taking similar steps to reduce interdependence with that country, then China will have created a self-fulfilling prophecy in which geopolitics trumps economics. Another possibility is that the rest of the world will operate as before in dealing with each other, but treat China differently, developing CoCom-like structures and fostering the creation of explicit economic blocs.

That really would be the worst of both worlds for Beijing. China is growing, but the economic weight of countries that prefer market-oriented ways of doing business is still much, much larger.

In going for the short-term gain, China is inviting a long-term containment policy. That might allow for some rally-round-the-flag support at home, but it's going to be a massive net loss for their economy.

The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.

If you need to read one article on why things are going down the way they are, it's Alan Beattie's excellent survey in the Financial Times of how countries as responding to this situation: 

Washington is looking for allies -- particularly among the emerging economies, who complain about their own competitiveness and volatility problems -- in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…

Yet despite U.S. claims of broad support, backing appears sporadic…

[S]ome U.S. policymakers privately complain that European backing is patchy and tends to go up and down with the euro. In the first half of the year the euro was pushed lower by the gathering Greek crisis, by early summer falling 17 per cent below its January level. Focused on local difficulties, and with the German export machine powering ahead, European officials saw little need to take on Beijing over currencies and had little energy to do so… 

Across the emerging economies, the plan of attack seems to be to keep quiet and pass the ammunition. Despite widespread recognition of the distortions China’s exchange rate policy appear to be causing, governments have generally preferred unilateral in­tervention to a public slanging match.

True, in April the governors of the Reserve Bank of India and the Central Bank of Brazil complained that Beijing was hurting their exporters.

But recently Celso Amorim, Brazil’s foreign minister, told Reuters: "I be­lieve that this idea of putting pressure on a country is not the right way for finding solutions." Significantly, he added: "We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer…"

With the prospect of diplomatic progress limited, currency policy in the U.S. and Europe may end up being conducted through domestic monetary policy. If, as seems possible, the U.S. Federal Reserve, the Bank of Japan and the European Central Bank return to quantitative easing in order to boost growth, their currencies are likely to weaken -- as the yen briefly did after the Bank of Japan’s announcement of looser monetary policy this week.

So, to sum up: 

1) Every country is free-riding/buckpassing on this issue, hoping that the United States can dislodge China on its own.

2) The international regimes designed to prevent free-riding like this -- namely the G-20 and the IMF -- are not up to this task. [What about the WTO? -- ed. Fuggedaboutit.]

3) The source of China's rising power is not its hard currency reserves or its command over scarce rare earths, but its burgeoning domestic market.

4) Ironically, the United States and other countries want China to accelerate the growth of its domestic market, which would in turn give it more power. Even more ironically, China doesn't want to do this right now.

5) The sum effect of all of this will be a series of uncoordinated interventions into currency markets that will increase market volatility, political posturing, and eventually lead to the erection of capital and/or trade controls. 

Developing… in a very disturbing manner. 

Gideon Rachman notes that the WTO has been denuded of controversy, and wonders why:

It’s strange to recall that - just a decade ago - the World Trade Organisation was a deeply controversial organisation. It was the WTO that was fingered by the anti-globalisation movement as the handmaiden of ruthless western capitalism and oppressor-in-chief of the poor. The WTO summit in Seattle in 1999 degenerated into a street riot.

On Wednesday morning, however, the WTO staged a public forum in Geneva, without the need for riot police - and indeed without much public fuss at all. I chaired the opening session at the organisation’s modest headquarters on the banks of Lac Leman.

I think that one of the main reasons why the WTO is no longer in the line of fire is that the change in the pattern of world trade over the last decade - combined with a slump in the West and a boom in China and India - makes the idea that global free trade is a tool of western domination look increasingly absurd. The world has got a lot more complicated than that; and even the anti-globalisation movement has had to acknowledge that complexity, if only tacitly. These days, it is the developing nations that are pressing for completion of the Doha Round and the rich countries that are dragging their feet.

Hmmmm..... well, let's call Rachman's explanation the optimistic interpretation for why the WTO doesn't attract demonstrators anymore. Let me offer a more pessimistic explanation, which consists of two parts: 

1) Finance is the new bogeyman. The 2008 financial crisis and the subsequent Great Recession were caused by bubbles in financial markets -- trade, at best, played a marginal role. Perhaps it's not that trade has become less controversial so much as finance and capital flows have become way more controversial. 

2) The WTO is no longer liberalizing. The WTO does an impressive job of ensuring that the status quo of a (largely) open trading system keeps functioning. What has exercised protestors in the past however, was the notion that further liberalization was going to take place. Since the Doha round is deader than a doornail. why bother with protesting? 

Now imagine a world where there was forward progress on the Doha round -- do you seriously think there would be no protests associated with the WTO? Oddly enough, in this case, a lack of protest is a bad sign for trade. 

I would much prefer Gideon to be right -- but I'm pretty sure he's wrong.