The term "inflection point" has become one of those overused bits of meaningless jargon in political discourse.  I'm rather more fond of the notion of a "focal point" -- that is to say, an event or cluster of events in which everyone that cares about a particular problem focuses on the same set of stylized facts -- after which, they conclude that, gee, maybe the status quo set of policies ain't working so well and there should be a new status quo. 

The fall of 2008 was one such focal point, during which there was remarkable consensus that a Keynesian boost in public spending was the only way to avert another Great Depression.  At the fiirst G-20 leaders summit in  Washington, there was consensus on expansionary fiscal policy.  Oh, sure, there were grumblings about "crass Keynesianism," but even Germany reluctantly went along. 

The Greek sovereign debt crisis was another such focal point.  Greek profligacy seemed to be a synecdoche for excessive government borrowing and lax fiscal discipline.  With the global economy seemingly still in the doldrums, a lot of Europrean governments climbed on the "expansionary austerity" bandwagon.  By the Toronto G-20 summit in June 2010, the consensus had switched from Keynesian stimulus to fiscal rectitude.  Oh, sure there were mutterings about "short-term austerity makes no macroeconomic sense whatsoever in a slack economy" but even Barack Obama started talking about slashing government spending. 

Are we at another focal point?  Consider the following:

1)  According to the New York Times' Stephen Castle, European leaders now seem to recognize that austerity on its own ain't working: 

Bowing to mounting evidence that  austerity alone cannot solve the debt crisis, European leaders are expected to conclude  this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.

A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders  have come to realize that austerity measures, like those being put in countries like Greece and Italy,  risk stoking a recession and plunging fragile economies into a  downward spiral.

2)  The data is starting to come in on governments that have embraced austerity whole-heartedly, and it's pretty grim.  Cue Paul Krugman on Great Britain:

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

3)  Even commentators who would be tempermentally sympathetic with austerity are starting to bash Germany question whether it's a solution.  Consider Walter Russell Mead

It takes some truly talented screw ups to come up with a worse plan for Greece than the one the Greeks have developed for themselves, but the Germans have risen to occasion in fine form....

Deep reform is needed if Greece is to stay in the euro, and so far the Greek political establishment — firmly backed by public opinion — is digging in its heels.  Much whining, much talk, many promises and precious little action seems to be the favored Greek approach to the crisis.  On the other hand, the austerity policies the Germans favor are hopelessly biased in favor of German banking interests and are aimed more at the preservation of the reputations of German politicians than at helping Greece.

The German political establishment seems willing to destroy Europe to avoid telling German voters the truth about how stupid it has been. 

[UPDATE:  For exhibit B of this trend, see this Niall Ferguson interview with Henry Blodget.  My favorite part of the interview is this quotation:  "I think the reason that I was off on that was that I hadn't actually thought hard enough about my own work.... My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago."]

4)  U.S. 4th quarter data reveals that, consistent with GOP criticisms, the government has been the real drag on the U.S. economy.  Not quite consistent with GOP criticisms:  the reason why the government is dragging down the U.S. economy.  Cue Mark Thoma

[P]remature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent. 

This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.

We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary.

5)  Central banks are acting more gung-ho on expansionary monetary policy.  The unspoken quid pro quo in Europe seems to the that the ECB will expand its balance sheet and turn on the monetary taps in return for some kind of fiscal compact.  The U.S. Federal Reserve announced a zero-interest rate policy for the next three years.  Even China is showing (halting) signs that its reverted back to monetary easing. 

Given that the United States has been the country to move the slowest on austerity, and given that the United States is doing the best job among the OECD economies (an admittedly low bar) of restoring confidence among investors and paying down non-governmental debt, have we reached another focal point? 

One could argue that Krugman and Thoma are just biased in favor of Keynesianism, that Greece and the other Club Med countries haven't really embraced austerity, that the Euromess is dragging down British economic growth, and that the long-term numbers on developed country debt are really very scary.  There are some large grains of truth in many of those statements. 

It doesn't necessarily matter, however.  Greece was not a genuine harbinger of the fiscal problems of large markets -- but it was a useful hook for austerity advocates to spread their gospel.  What matters now is not whether these perceptions about the failure of austerity are 100% accurate, but whether they are accurate enough to become the new conventional wisdom. 

What do you think? 

Posted By Daniel W. Drezner

I was never formally introduced to either Vaclav Havel or Christopher Hitchens, but I encountered both of them exactly once.  I was lucky enough to hear Havel deliver a speech at Stanford University in the fall of 1994.  I don't remember much about the speech itself beyond a vaguely metaphysical theme.  What I do remember is a specific physical gesture.  At one point during the proceedings, at Havel's request, Joan Baez came on stage, played her guitar, and sang a song.  After Havel spoke, everyone exited the stage, Havel last.  He noticed Baez's guitar, and picked it up.  As he left the stage, he looked over his shoulder and raised the guitar over his head.  The expression on his face screamed, "can you believe I'm holding Joan Baez's friggin' guitar??!!!

My encounter with Hitchens was a little more mundane -- we were both participating at an AEI panel in early 2001 on international law.  I was on a morning panel, and afterwards, Hitchens gave the lunch keynote.  I can recall the standard Hitchens attributes:  him reeking of cigarettes and alcohol, but nevertheless giving a very good speech.  What I also remember is talking with one of the AEI assistants who was tasked with "handling" Hitchens for the day.  We started chatting, and at one point she said plainly, "the minute he leaves here will not be soon enough for me." 

I'd love to be able to divine some deeper meaning from their deaths, but I'm not quite as inspired a writer as either of them.  It's funny to think that Hitchens started out politically to the left of Havel, swerving a bit to his right about a decade ago, but that's not a theme.  Rather, this being a blog, I have two unrelated thoughts. 

First, as someone who has written a thing or two about public intellectuals, Havel really was extraordinary as someone who could be trusted with power.  As Mark Lilla noted in his excellent The Reckless Mind, intellectuals don't really have a distinguished track record when they actually acquire power.  Havel was a notable exception -- perhaps because he never really thought he should have it.  In David Remnick's New Yorker write-up of the end of Havel's (politically successful) presidency, the politics of doubt that I like so much shines through quite clearly: 

At times, Havel felt thoroughly insufficient, a fraud. A familiar Prague voice, the voice of Kafka, told him what anyone who has grown up in a police state knows instinctually—that it could all end as easily as it started.

"I am the kind of person who would not be in the least surprised if, in the very middle of my Presidency, I were to be summoned and led off to stand trial before some shadowy tribunal, or taken straight to a quarry to break rocks," he told a startled audience at Hebrew University, in Jerusalem, less than six months after taking office. "Nor would I be surprised if I were to suddenly hear the reveille and wake up in my prison cell, and then, with great bemusement, proceed to tell my fellow-prisoners everything that had happened to me in the past six months. The lower I am, the more proper my place seems; and the higher I am the stronger my suspicion is that there has been some mistake."

In Havel's thirteen years as President—first of Czechoslovakia and then, after the Slovaks and the Czechs divided into two states, in 1993, of the Czech Republic—many of his advisers repeatedly begged him to delete, or at least soften, these public moments of self-doubt. What effect would they have on an exhausted people waiting for the radical transformation of their country? (Imagine Chirac or Blair, Bush or Schröder beginning a national address with an ode to his midnight dread!) Havel, however, would not be edited. The Presidential speech was the only literary genre left to him now, his most direct means of expressing not only his personal feelings but also the spirit of the distinctively human politics he wanted to encourage after so many decades of inhuman ideology. "Some aides tried to stop him, but these speeches had a therapeutic value for him," Havel's closest aide, Vladimír Hanzel, told me.

As Ta-Nehisi Coates observed recently, most people are mediocre and, if they were given power, would likely not exercise it all that benevolently.   Havel was about as far away from mediocre as one could be. 

Hitchens was not mediocre, but neither was he gentle, and so his passing generated a more variegated response.  There was the eruption of fond memories from fellow writers at his ability to consume and produce prodigious amounts of prose and other substances -- this one is my favorite.  It's also led Glenn Greenwald to grouse about the hagiography that the death of public figures ostensibly produces: 

We are all taught that it is impolite to speak ill of the dead, particularly in the immediate aftermath of someone’s death. For a private person, in a private setting, that makes perfect sense. Most human beings are complex and shaped by conflicting drives, defined by both good and bad acts. That’s more or less what it means to be human. And — when it comes to private individuals — it’s entirely appropriate to emphasize the positives of someone’s life and avoid criticisms upon their death: it comforts their grieving loved ones and honors their memory. In that context, there’s just no reason, no benefit, to highlight their flaws.

But that is completely inapplicable to the death of a public person, especially one who is political. When someone dies who is a public figure by virtue of their political acts — like Ronald Reagan — discussions of them upon death will be inherently politicized. How they are remembered is not strictly a matter of the sensitivities of their loved ones, but has substantial impact on the culture which discusses their lives. To allow significant political figures to be heralded with purely one-sided requiems — enforced by misguided (even if well-intentioned) notions of private etiquette that bar discussions of their bad acts — is not a matter of politeness; it’s deceitful and propagandistic. To exploit the sentiments of sympathy produced by death to enshrine a political figure as Great and Noble is to sanction, or at best minimize, their sins. Misapplying private death etiquette to public figures creates false history and glorifies the ignoble.

Meh.  I read a lot of the Hitchens write-ups, and a fair number of them were pretty blunt about his personal and political dark sides.  Even critics like Corey Robin acknowledge the  "consistent line" of “Yes, he was wrong on Iraq, but…”  in the public responses to his death.  This suggests that Hitchens has not, in fact, been a subject of one-sided requiems. even by those who liked him. 

I suspect two things are going on in the public reaction to Hitchens' death, one unique to him and one that's more general.  What was unique about Hitchens was that he was an archetype brought to life.  Here was a real, honest-to-goodness heavy drinking, heavy smoking, occasionally rude Brit who could nevertheless dash off excellent writing on a daily basis.  Where do you actually see that outside of the movies nowadays? 

The more general trend is that in an age of self-publishing, perhaps the personal and the public are more fused than Greenwald realizes or comprehends.  Hitchens hung around with a lot of writers, and as friends it's not shocking that their initial responses will be to talk about the private individual behind the public persona.  As time passess, more strangers will push back, there will be more sober reassessments, and eventually some kind of perspective is achieved.  The thing about the internet is that it amplifies these cycles of reactions and counterreactions for all to see.   

Posted By Daniel W. Drezner

Your humble blogger is down in Washington DC to attend FP's Global Thinkers gala, in honor of the magazine's annual Top 100 Global Thinker list.  I look forward to seeing some of the thinkers I know (Tyler Cowen, Joseph Nye) and meeting the many that I don't know. 

This list tends to beget a lot of carping from my friends who erroneously believe that I contol the entire FP-verse like a Muppeteer in the Twitterverse  about who's on the list, and in some ways, that's kind of the point -- to foster debate.  I'd like to ask my readers a slightly different question:  who got overlooked?  Who are the BigThinkers  that FP missed? 

Put your answer in the comments!

So the eurozone crisis is metastasizing from really bad to even worse.  Over at The New Yorker,  James Surowiecki blogs that what's so frustrating about the situation is that the impediments to a solution are easily surmountable: 

[W]hat’s easy to miss, amid the market tremors and the political brinksmanship, is that this is that rarest of problems—one that you really can solve just by throwing money at it....

The frustrating thing about all this is that there is a ready-made solution. If the European Central Bank were to commit publicly to backstopping Italian and Spanish debt, by buying as many of their bonds as needed, the worries about default would recede and interest rates would fall. This wouldn’t cure the weakness of the Italian economy or eliminate the hangover from the housing bubble in Spain, but it would avert a Lehman-style meltdown, buy time for economic reforms to work, and let these countries avoid the kind of over-the-top austerity measures that will worsen the debt crisis by killing any prospect of economic growth....

So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological.

As someone who agrees with Surowiecki on the economic diagnosis, the political scientist in me is forced to call a flagrant foul on this kind of analysis.  In labeling the problem as one of "ideology" or "psychology," Surowiecki is explicitly arguing that it's just so absurd that the correct policy is not being pursued.  If only someone could talk some sense into the key policymakers, then -- snap! -- the crisis would be resolved. 

As someone who studies this stuff for a living, simply saying that political ideology, interest, or institutions can be easily changed borders on the comical.  Ideas, interests and institutions are the bread and butter of politics, and all of them are far stickier than economists would like you to believe.  There's more than seven decades of entrenched thinking that would require the Bundesbank and the ECB to alter their approach.  Crisis or no crisis, that's not just easily dismissed. 

Furthermore, looking at the Franco-German crisis bargaining, any actual deal to bolster EFSF resources, empower the ECB, and/or create something approximating a fiscal union would require that Southern Europe agree to remake their domestic economies to more closely resemble the German model.  This has always been Merkel's bargain:  she's been willing to cede greater power to the EU provided that EU policy preferences looks more like Germany.  This makes sense for Germany, but the kind of wrenching changes and adjustments that will be asked of Spain and Italy are massive.  The fact that Berlin -- rather than Brussels -- is the source of this diktat will add a fun new level of political difficulties as well. 

A deal could be reached, but no one should be kidding themselves -- it is fantastically difficult, and saying that just "politics" or "ideology" or "psychology" is getting in the way doesn't make it any easier. 

Posted By Daniel W. Drezner

My National Interest review of finance books has provoked a few blog responses.  Actually, it's one paragraph in particular of that review that's sparked some discussion: 

[John] Quiggin thinks he’s only writing [in Zombie Economics] about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.

Now, this point is not original to me -- this was a combination of Thomas Kuhn's Structure of Scientificd Revolutions, with a dash of Alan Blinder's Hard Heads, Soft Hearts.   But it's prompted something of a blog kerfuffle. 

Tyler Cowen agrees with me.  Quiggin himself* thinks I'm too slanted in my take, though in a follow-up post he allows that, "there are some zombie ideas on the Keynesian side of the fence as well."  

Henry Farrell in particular takes me to task: 

I don’t buy Dan’s arguments here. As with most stage theories (not only Marx, but also Kuhn), the mechanisms of institutional reproduction and change in his account are sorely underspecified. ‘Contradictions accumulate’ isn’t a much more helpful empirical claim than ‘shit happens.’ To really understand what is happening, you need a proper theory of the underlying conditions for ideational retention and reproduction. Why do some ideas decay into self-parody, while others do not? After all – not all ideas decay (or at least: not all ideas decay at the same rate). Some economic ideas have continued for centuries (the limited liability corporation), while others have disappeared completely, while others yet have disappeared and reappeared. We don’t know why – but if we want to make the kinds of claim that Dan is making, we need to know why, or at the least, have some rough idea. Otherwise, what we have is at best a sometimes-observed empirical regularity melded to a smidgen of intuition, which is not enough (in my book at least) to dismiss a counter-claim (that one particular idea may have a longer shelf life than previous versions) out of hand.

I'm not sure that the idea of the limited liability corporation falls into the same category as ideas like Keynesianism or the Chicago school of economics.  The former is an institutional innovation that was designed to solve a well-defined problem limited in scope; the latter set of ideas address a fuzzier but more intellectually ambitious domain of how a national economy functions.  Still, Farrell makes a interesting observation.   

This is a blog and not an academic journal, so I'm not going to be able to satisfy all of Henry's criteria, but here goes: 

First, I do wonder if ideas in political economy function a bit like self-similarity in a Mandlebrot set, in that different sets of ideas have different lifespans but nevertheless follow roughly the same arc.  It is possible that some ideas that appear to persist indefinitely are merely slower-moving in their half-life than the macroeconomic paradigms that Quiggin discussed in Zombie Economics.  Now, that's just intuition -- I have no idea if it's true.  But I think it's an interesting intuition. 

Now, Farrell wants "a proper theory of the underlying conditions for ideational retention and reproduction."  OK, if I were to sketch this out, I'd assume that the demand for ideas comes from living in a causally complex world in which intellectuals and policymakers want cognitive road maps to provide some clarity about what to do and what to say.  I'd further assume that the political and social world in which we live is in a constant state of change, making it difficult to develop "timeless" theories of political economy. 

With those assumptions, I'd postulate the following: 

First, ideas in political economy are more likely to survive birth pangs when:

A)  The theory's predicted effects appear to hold -- not necessarily via causal mechanisms internal to the theory, but the outcome is nevertheless consistent with the theoretial predictions.

B)  The theory yields policy implications favorable to at least one important interest group.  In other words, there's a political incentive for at least one power bloc to support this particular model. 

Second, the longer the predicted effects of the theory appear to hold up, the more entrenched the idea becomes in intellectual and policy discourse.  There are path dependent effects to ideas.  The ones with longer pedigrees will have greater ideational power -- even if the initial conditions that led to the original theory no longer apply. 

Third, the longer that a particular idea appears to explain its particular domain, the greater the incentive for intellectuals to engage in ideational arbitrage and apply the idea to more disparate phenomena.  Indeed, Quiggin's book demonstrates this trend within the Chicago School, in which ideas that seemed to hold up pretty well in microeconomic price theory get applied to a whole range of other range of economic behavior. 

Fourth, the longer a theory stays in circulation and the more cultural cachet it acquires, the greater the incentive for political institutions to appropriate the idea -- and in the process, adjust the content of the idea to fit their own preferences. 

Fifth, the longer a theory stays in circulation, the more likely that propagandists will simplify the content and causal mechanisms of the idea.  This allows for a greater spread of the model beyond intellectuals to more powerful actors:  policymakers with actual line authority, journalists who write about said policymakers, etc. 

Sixth, the longer a theory stays in circulation, the greater the likelihood of underlying conditions in the real world shifting to the point where the original model's empirical claims do not hold up.  This will necessarily require the development of auxiliary hypotheses that might contradict some of the original arguments made in the paradigm. 

The third through sixth postulates increase the likelihood that, over time, an idea's explanatory power will erode to the point when new challengers can potentially overtake it. 

Now, a fully-fleshed theory of ideational change would need to state the conditions under which these dynamics are likely to be more or less powerful.  Some theorie, for example, might develop expectations and behaviors that reinforce the original hypotheses.  These theories would be expected to last longer.  That said, I will leave this part of the model to the commenters. 

*As an aside, I find it fascinating that, of all my book reviews, it's the ones when I provide a largely favorable review with a soupcon of criticism that provokes the author (click here for one past example).  I've also written some not-so-nice book reviews in my day -- but never heard a peep from those authors. 

Posted By Daniel W. Drezner

This is an interesting press release

In response to the policy challenges presented by the economic crisis and the need to develop fresh approaches to economic theory, a group of top academics, policy-makers, and private sector leaders today announced the creation of the Institute for New Economic Thinking (INET)....

The Institute was established with a pledge of $5 million per year for 10 years from Open Society Institute Chairman George Soros, a long-time critic of classical economic theory, who will fund the effort through the Central European University (CEU).

The Institute will make research grants, convene symposia, and establish a journal. A first conference will be at King's College, Cambridge on April 9-11. Scholars will explore the implications of the financial crisis for regulatory policy. The first round of research grants will be made before the end of the year to cutting-edge scholars working with leading universities around the world. INET’s Executive Director will be Robert Johnson, an economist with long experience in government, academia, and the private sector....

Speaking in Budapest at the CEU, through which INET will be funded and which will be a hub of the INET network, Soros said, “The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm and rebuild from the ground up. I decided to sponsor INET to facilitate the process. I hope others will join me.” Because he is both an INET benefactor and proponent of a particular theory, Reflexivity, Soros will recuse himself from the grant-making process.  “While I hope reflexivity will be one of the concepts examined, there are numerous alternatives to the prevailing dogma that must be explored.” Soros added. 

Based on his track record, Soros is not very good at influencing political movements, but he is quite good at influencing the world of ideas.  So, it's quite possible that this new institute will wean economists from the neoclassical paradigm. 

Over at Newsweek, Michael Hirsch certainly thinks this is important

It might be tempting to dismiss all this as a war of words among brainiacs. It's not. The critical issues being discussed in Washington about the future regulation and control of the financial industry—the very nature of Wall Street and the health of the economy—depend on this battle of ideas. What led to wholesale deregulation in the '90s and '00s wasn't just Wall Street lobbying money. It was also that key legislators and policymakers, among them Larry Summers, persuaded themselves that deregulation was sound economics and good policy, and that markets and Wall Street institutions could take care of themselves. Many of those views have been discredited by the crisis. But in the absence of a new paradigm of economics, confusion still reigns in Washington. With no new concept of the proper role of government and regulation in the economy, of the proper balance between the markets and their minders, the old school still dominates.

Similarly, Veronique de Rugy is freaked out by this Soros initiative, which suggests it might actually matter.   

I think Hirsch is correct about the persistence of market-friendly ideas contained in Washington Consensus.  Let's call this the zombie Washington Consensus, because it keeps moving on even after suffering politically fatal blows. 

That said, real shifts in ideas only take place when one dominant idea is replaced by another dominant idea that has both intellectual and political cachet.  Looking at Soros' Board of Advisors, I'm not sure there is a consensus about what paradigm should replace a free market approach. 

Hopefully, this institute will lead to a mess of heterodox work that forces everyone to bring their "A" game to the problems at hand -- includind free market enthusiasts.  The worst-case scenario is that George Soros is funding the economic equivalent of Ross Perot's Reform Party.    

Developing....

Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

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