Here's something you don't see every day in the global political economy

Posted By Daniel W. Drezner Tuesday, October 11, 2011 - 1:16 PM

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....

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EXPLORE:GLOBALIZATION, EXPERTS, FINANCIAL MELTDOWN, FINANCIAL REFORM, FINANCIAL STATECRAFT, INTEREST GROUP POLITICS

Five lessons from Three Cups of Tea

Posted By Daniel W. Drezner Wednesday, April 20, 2011 - 1:22 PM

I confess to being fascinated by academic or literary downfalls, so I've been spending the past few days catching up on the imbroglio over Greg Mortenson, his Central Asia Institute (CAI), and his bestsellers Three Cups of Tea and Stones Into Schools.

To sum up: through his books and CAI, Mortenson has popularized his mission to build schools and educate children (particularly girls) in Pakistan and Afghanistan as a way of reducing extremism in that region. Investigative reports by 60 Minutes and Jon Krakauer strongly suggest the following:

1) Mortenson either fudged or flat-out lied about some of the more gripping anecdotes in both books.

2) Mortenson used CAI as a vehicle to promote his books and subsidize his income. CAI covered his travel expenses for book tours and purchased books in such a way to boost royalties for Mortenson. According to financial statenments, CAI devoted more of its budget to Mortenson's promotional tours than actually building schools in Central Asia. Mortenson rebuffed efforts by other CAI employees to impose financial controls on his expenditures.

3) CAI/Mortenson exaggerated the number of schools that were built, and in many cases even if the schools were built, they have been left unused due to a variety of logistical and organizational failures.

Mortenson and CAI have responded with a plethora of media interviews, direct responses and open missives to supporters. Most of these seem pretty feeble to me. When Mortenson says that, "It is important to know that Balti people have a completely different notion about time," you kinda wonder if Mortenson isn't talking about himself.) Official investigations are now under way, publishers are belatedly fact-checking, and some prize committees are very busy wiping egg off of their face.

To be fair, Mortenson has actually built schools in Afghanistan and Pakistan. On my personal Scandal-O-Meter, this rates far below Bernie Madoff -- but pretty far above, say, Doris Kearns Goodwin.

So, what are the takeaway lessons from all this? Five thoughts:

1) Reading through Krakauer's story, the striking thing is not the extent of Mortenson's deception but rather the fact that it took so long for this to come to light. Mortenson has been a celebrity since Parade profiled him in April 2003. The fact that Mortenson was able to write two best-sellers and enjoy the lecture circuit for eight years despite the surprising number of people who knew there were issues with Mortenson's narrative. The moral of the story is that , even in a transparent Web 2.0 era, myths can trump reality for a looooong time.

2) Even Mortenson's detractors make it clear that they think he's done much good in Central Asia, so this realy isn't a Bernie Madoff-style scam. It does suggest, however, that political analysts who think of NGOs and celebrity activists as pursuing humane policy ends only for altruistic purposes are living in Fantasyland. It's a world of complex and overlapping motives, and no influential actor in international relations is a saint.

3) What's interesting to me about the inaccuracies/fabrications in Three Cups of Tea is that, by and large, they are irrelevant to the larger policy question of whether schools can help reduce violent extremism. Whether Greg Mortenson was kidnapped by the Taliban or not, whether he wandered into a village or not don't really matter from a policy perspective. Based on the amount of ~~ink~~ pixels being ~~spilled~~ used on these questions, however, it's quite clear that these narrative elements really do matter. As Laura Miller has pointed out in Salon, however, greater attention is being paid to those details than the NGO mismanagement.

This suggests, in many ways, the power that creation or origin narratives have in developing politically alluring policies. CAI ain't lying when they say that, "Greg’s speeches, books and public appearances are the primary means of educating the American people on behalf of the Institute." Coming up with a compelling policy is not always enough to generate action -- narratives matter one whole hell of a lot.

4) Does Mortenson's myths and mismanagement undercut the policy message? To tell the truth, I'm not blown away by Mortenson's policy message -- indeed, it's pretty weak. As Alanna Shaikh points out in FP:

Its focus was on building schools -- and that's it. Not a thought was spared for education quality, access, or sustainability. But building schools has never been the answer to improving education. If it were, then the millions of dollars poured into international education over the last half-century would have already solved Afghanistan's -- and the rest of the world's -- education deficit by now.

Over the last 50 years of studying international development, scholars have built a large body of research and theory on how to improve education in the developing world. None of it has recommended providing more school buildings, because according to decades of research, buildings aren't what matter. Teachers matter. Curriculum matters. Funding for education matters. Where classes actually take place? Not really.

Spencer Ackerman has a detailed, link-rich post at Wired detailing the ways in which U.S. military's COINistas have drunk way too deeply from Mortenson's magical teacup.

In the best defense of Mortenson I've seen, Daniel Glick blogs the following:

But here’s the crux for me. As somebody who has worked in a Muslim country (I was a Knight International Press Fellow working in Algeria in 2006), I know that Americans need a lot of bridge building in the Islamic world. Mortenson has gone where few others have gone, and has put in incredible time and energy to raise awareness, seed schools, and give girls opportunities for education that would not be theirs otherwise. I have no doubt he has done orders of magnitude more good than harm. The same cannot be said for a lot of NGOs doing development work around the world, much less our military involvement in Iraq and Afghanistan.

Hmmm.... maybe. At a minimum, I'd like to see the costs and the benefits of Mortenson's activities weighed very carefully right now.

5) I, for one, look forward to the day when 60 Minutes and Jon Krakauer start looking into the living dead. I will hereby defend every fact, every citation in Theories of International Politics and Zombies to the end of my days, or the end of days, whichever comes first.

Am I missing anything?

COMMENTS (9)

EXPLORE:BOOK CLUB, AFGHANISTAN, BOOKS, CELEBRITY ACTIVISTS, CENTRAL ASIA, EXPERTS, STUPIDITY SO STRONG IT BURNS

So you want to become an expert.....

Posted By Daniel W. Drezner Thursday, August 19, 2010 - 11:26 PM

I received the following e-mail query today:

What I am wondering is; how did you become an expert in your field? I understand that you obviously went to college and probably got all sorts of degrees but how did you know when you were an expert in your field of knowledge?... So did you get all of your knowledge from your research while in school, or do you just read a large amount of books on whatever interests you?

This is one of those questions that sounds incredibly simplistic and yet is impossible to answer in a pithy manner.

I mean, sure, I got a few degrees. And I suppose getting a Ph.D. allows you to call yourself an expert over a very limited domain of knowledge. In truth, however, I've met many, many people with doctorates who are truly quite dim about great many things (important safety tip: never buy a book from someone who puts "Ph.D." after their name in a book). I'm dim about a spectacular number of things. So even expertise is quite limited in its domain.

That said, how does one become an expert without going to the Dagobah system? There's no one way and there's no one answer. Here are ten ways to acquire expertise about world politics (WARNING: does not necessarily apply to other fields of knowledge):

1) Go to school. There are people out there who are self-taught wunderkinds, capable of long, brilliant disquisitions about the intricacies of international relations after reading Thucydides just once. There's a 99% chance that you are not one of these people. For you and almost everyone else, the path to expertise is paved through college and graduate school. So go forth and take courses on these subjects.

2) Read a lot. I mean, read a whole damn lot. Don't just read the books and articles that are assigned to you in class. Read the stuff that you notice popping up repeatedly in the footnotes and bibliographies of your assigned reading. Read the classics. Read cutting edge work. Read anything that seems of value. When you get to the point where you think you're seeing recurring arguments, then you're approaching the cusp of expertise.

3) Read a newspaper every day and a magazine every week. World politics and current events are intertwined. The more you read about daily events, the larger your mental database of interesting events that can be used as raw data when considering various puzzles in world politics.

4) Hang around smart people. Anyone who's been to graduate school knows that the best education comes from your peers. While the image of the lonely, eccentric, brlliant grad student is a compelling narrative, it's also much more common in film than in real life. You can pick up an awful lot from osmosis by hanging around smart people.

5) Never be afraid to ask a question that betrays your ignorance. One of the smartest political scientists I ever met told me that if I didn't understand a concept or presentation, odds were good that the majority of other people in the room didn't understand either. People who don't ask questions don't learn anything.

6) Walk the earth. ~~You know,~~ like Cain in Kung Fu. As recent events suggest, there is an appalling lack of knowledge about how politics function in other countries. If you can develop a good working knowledge of another country's language/culture/polity, then you can claim a relative amount of expertise.

7) Get a job. There are oceans of knowledge that cannot be acquired via books, coursework, or peers. Michael Polanyi labeled these kinds of knowledge as "tacit" - they have to be experienced to be learned. In world politics, sometimes the best way to learn is to do.

8) Grow older. Aging doesn't have a lot of upside, but one of the benefits is that you've probably done a lot more of items 1-7 than ~~those young whippersnappers~~ people younger than you. Expertise has a relative quality to it, and as you grow older, you're likely to have more of it than younger generations.

9) Recognize your limits. True experts don't just know a lot -- they are also aware of the vast oceans of knowledge that they don't know.

10) Quit reading blogs. They rot your brain and give you cooties.

Cate Gillon/Getty Images

COMMENTS (9)

EXPLORE:ACADEMIA, EXPERT OPINION, EXPERTS, FOREIGN POLICY COMMUNITY, POLITICAL SCIENCE

Politics and science, sitting as far away from the tree as possible

Posted By Daniel W. Drezner Wednesday, February 3, 2010 - 1:53 PM

Yesterday The Lancet retracted a controversial 1998 study that linked a British vaccine for measles/mumps/rubella to the onset of autism. This comes on the heels of multiple scientific studies that have failed to replicate the 1998 study's results, as well as the revelation that the paper's lead author, Andrew Wakefield, had failed to disclose commercial conflicts of interest.

So, this should put an end to the whole debate then, right? Well, New York Times reporter Gardiner Harris gets some quotes that suggest otherwise.

the retraction may do little to tarnish Dr. Wakefield’s reputation among parents’ groups in the United States. Despite a wealth of scientific studies that have failed to find any link between vaccines and autism, the parents fervently believe that their children’s mental problems resulted from vaccinations....

Jim Moody, a director of SafeMinds, a parents’ group that advances the notion the vaccines cause autism, said the retraction would strengthen Dr. Wakefield’s credibility with many parents.

“Attacking scientists and attacking doctors is dangerous,” he said. “This is about suppressing research, and it will fuel the controversy by bringing it all up again.”

Unfortunately, Moody's statement does seem to evoke Drezner's Eleventh Commandment of Policy Wonks. Activists will argue that this is an example of Big Science suppressing counterintuitive research. And in a public battle between the Jenny McCarthy/Oprah media-industrial complex and a bunch of science nerds, I'm putting my money on Mustard Girl. And I'm not the only one.

In my prior research, I've seen this kind of dynamic play out in the debates over genetically modified foods, and we're still seeing it play out in the debate over climate change. Furthermore, because scientists are not perfect., it's becoming easier to point out flaws that don't necessarily compromise the basic science but do tarnish the image of scientists as neutral arbiters of fact.

To be fair, it's true that individual scientists aren't really completely neutral -- especially when it comes to politicized debates. The scientific method, on the other hand, is about as neutral as you can get. But that's not as sexy a sell to the public.

Question to readers: is there a way to make scientific consensus more acceptable to a public that doesn't want to hear the results?

COMMENTS (24)

EXPLORE:INTERNATIONAL RELATIONS, EXPERT OPINION, EXPERTS, GLOBAL POLITICAL ECONOMY, INTEREST GROUP POLITICS, SCIENCE

In the lonely crowd of experts

Posted By Daniel W. Drezner Tuesday, September 16, 2008 - 2:59 PM

David Brooks voices concerns that have also been voiced by your humble blogger in his column today:

Conservatism was once a frankly elitist movement. Conservatives stood against radical egalitarianism and the destruction of rigorous standards. They stood up for classical education, hard-earned knowledge, experience and prudence. Wisdom was acquired through immersion in the best that has been thought and said. But, especially in America, there has always been a separate, populist, strain. For those in this school, book knowledge is suspect but practical knowledge is respected. The city is corrupting and the universities are kindergartens for overeducated fools. The elitists favor sophistication, but the common-sense folk favor simplicity. The elitists favor deliberation, but the populists favor instinct.... I would have more sympathy for this view if I hadn’t just lived through the last eight years. For if the Bush administration was anything, it was the anti-establishment attitude put into executive practice. And the problem with this attitude is that, especially in his first term, it made Bush inept at governance. It turns out that governance, the creation and execution of policy, is hard. It requires acquired skills. Most of all, it requires prudence.

This is certainly one reason why the founders wanted a republic and not a democracy -- in republics, leaders do have the ability to resist the populist temptation a little more. What's interesting is how this resistance to experts plays out in campaign tactics. Consider, for example, this Washington Post story by Shamkar Vedantum (hat tip: Kevin Drum):

[A]a series of new experiments show that misinformation can exercise a ghostly influence on people's minds after it has been debunked -- even among people who recognize it as misinformation. In some cases, correcting misinformation serves to increase the power of bad information. In experiments conducted by political scientist John Bullock at Yale University, volunteers were given various items of political misinformation from real life. One group of volunteers was shown a transcript of an ad created by NARAL Pro-Choice America that accused John G. Roberts Jr., President Bush's nominee to the Supreme Court at the time, of "supporting violent fringe groups and a convicted clinic bomber." A variety of psychological experiments have shown that political misinformation primarily works by feeding into people's preexisting views. People who did not like Roberts to begin with, then, ought to have been most receptive to the damaging allegation, and this is exactly what Bullock found. Democrats were far more likely than Republicans to disapprove of Roberts after hearing the allegation. Bullock then showed volunteers a refutation of the ad by abortion-rights supporters. He also told the volunteers that the advocacy group had withdrawn the ad. Although 56 percent of Democrats had originally disapproved of Roberts before hearing the misinformation, 80 percent of Democrats disapproved of the Supreme Court nominee afterward. Upon hearing the refutation, Democratic disapproval of Roberts dropped only to 72 percent. Republican disapproval of Roberts rose after hearing the misinformation but vanished upon hearing the correct information. The damaging charge, in other words, continued to have an effect even after it was debunked among precisely those people predisposed to buy the bad information in the first place.... Political scientists Brendan Nyhan and Jason Reifler provided two groups of volunteers with the Bush administration's prewar claims that Iraq had weapons of mass destruction. One group was given a refutation -- the comprehensive 2004 Duelfer report that concluded that Iraq did not have weapons of mass destruction before the United States invaded in 2003. Thirty-four percent of conservatives told only about the Bush administration's claims thought Iraq had hidden or destroyed its weapons before the U.S. invasion, but 64 percent of conservatives who heard both claim and refutation thought that Iraq really did have the weapons. The refutation, in other words, made the misinformation worse. A similar "backfire effect" also influenced conservatives told about Bush administration assertions that tax cuts increase federal revenue. One group was offered a refutation by prominent economists that included current and former Bush administration officials. About 35 percent of conservatives told about the Bush claim believed it; 67 percent of those provided with both assertion and refutation believed that tax cuts increase revenue.

This suggests:

The Obama strategy of painting McCain as a liar won't improve perceptions of Obama -- at best they'll simply convince people McCain is a liar.
There is a terrible incentive for any "expert" -- i.e., credentialed enough to merit press attention -- to make a wild-ass claim that makes the papers. Since the first claimer apparently has first-mover advantage, refutation becomes irrelevant.
No one gives a flying f%$# what I think about this.