Monday, September 29, 2008
Sunday, September 28, 2008
I'm for all sorts of immigration, but you do have to wonder about the long-run impact of tacitly allowing large-scale immigration of relatively poorly educated Hispanics. It's in their best economic interest and helps many people here as well. But you also have the Heckman result that family environments matter for educational attainment, and then the Godin-Katz result that education is driving trends in the distribution of income. I once asked Heckman about the implications of his research on immigration policy, but he was a bit evasive. Well, America will be home to a large number of people with sub-optimal education and income levels persisting across generations. Again, this is probably an optimal welfare transfer, but it's out of synch with the policy for foreign professionals and calls for some public policy (like early childhood intervention).
There's some debate over the ideal capital gains tax rate is. Charles Gibson and a WSJ editorial I once read make the supply-side argument that lowering this rate increases revenue. I'm skeptical, but in any case the variation in taxes gives Clinton an undervedly good reputation for managing the economy and Bush a worse reputation than he deserves. In reality, the rate of economic growth and the pace of tax revenues vary more or less randomly and place huge constraints on what Presidents can do. This fact tends to be ignored by people who expect elected officials to both not overstep their Constitutional boundaries and wield absolutist power to revive the economy.
Basically, I want to stop reading pointless articles on how some things are correlated to other things, because the world is basically random and few people have any influence on or understanding of the events that go on. Okay, that's a little extreme, but at least come up with a defense that (though it may raise an interesting point connecting inequality and women's relative wages) justifies blatant political pandering.
Friday, September 26, 2008
Thursday, September 25, 2008
I just came from a talk by Markus Brunnermeier, who circulated the ideas I've discussed before. Much of the talk was focused on the amplification methods that turn a drop in asset prices into a financial meltdown, with some commentary on potential regulatory solutions. The idea is that the old agent-based macroeconomic models really fail to get at the connectedness of modern finance; but he suggested some tools for understanding those links. One was a measure of spillover risk across institutions, measuring by looking at past performance during crises. These turns out to be significant, and there were all sorts of interesting comments.
But Brunnermeier also examined the impact of taking these "tail risks" into account on manager alphas. It makes them disappear. That is, paper gains achieved by hedge funds--which have presumably hedged against shifts in the overall market--come through neglecting the counterparty risk associated with the occasional collapse of financial institutions. That's not to say hedge funds are useless--you would like to have the wealthiest people bear crisis risk, and it might be profitable for them--but it implies that hedge funds as a class rely on undisclosed crisis arbitrage for their profits.
Of course, hedge funds have not peformed as badly as markets in general this crisis, so perhaps this is a phenomenon particularly concentrated among certain strategies (or an artifact of old data, or not yet apparent). But it's more support of the claim that modern profit machines rely more on frauding investors than ouwitting markets.
Wednesday, September 24, 2008
It's easy to question whether the best marginal talents headed to Wall Street are really worth their paycheck. Not too long ago, about 40% of corporate profits among companies in the S&P 500 went to the financial setor--a figure which surely represents the extraordinary level of leverage going on, combined with various asset bubbles. This share will certainly go down. But it's also true that finance is an important and value-adding portion of the economy.
Consider an economy without a robust capital market. One of Indira Gandhi's more disastrous policies was nationalizing India's banks. Lending was no longer conducted on the basis of profit, and was rather directed at unprofitable but politically sensitive areas of the economy. India also maintained very high interest rates for a long time. From one perspective, economic development is all about expanding the productive part of the economy, and an efficient financial system is necessary to funnel capital towards the productive sectors and firms. McKinsey estimates that there is a massive gap between India's most and last productive firms, and that closing the gap would yield enormous results. They also find large gains in financial sector reforms. See the Rajan proposal for what that might look like.
Making financial markets ever more efficient brings diminishing returns, but even some of the newer complex products are useful. In general, derivatives allow people to manage the uncertainty and risk inherent in dealing with goods traded on a macro level. The markets for currency, interest rates, equities, and commodities are highly volatile, yet firms and individuals are able to use derivatives to limit potential losses, amplify gains, hedge risks, or guarantee a solid stream of income. Airlines rely on fuel derivatives to control costs, while extraction companies ensure consistent profits amid large shifts in the prices of commodities. Credit default swaps enable people to make investments in corporate and government bonds--giving funding to risky companies and governments that would never otherwise raise capital. Argentina is getting funding exactly because complex finance exists--no one would fund them without protection in the case of default. Even Shiller envisions more complex mortgages--ones that would automatically forgive payments in bad times--as a way to prevent future mortgage crises. Sulpur trading schemes dramatically reduced their emissions in America, and a financial marketplace for carbon is one of the few feasible ways to deal with global warming.
But Warren Buffett calls them weapons of destruction. Well, he also holds long-term equity puts, some credit default swaps, as well as currency positions on his books. Their collapse in market value destroyed his recent profits, but he is likely to profit significantly from them in the long-term. It's long been more profitable to do as Buffett says rather than follow his statements.
Tuesday, September 23, 2008
I was excited to see this idea, because Universities are generally such poor stewards of their endowments and intellectual capital. Compare, as Brad DeLong once did, the decisions made by the heads of the University of California system and Harvard during the 1960s. Harvard increased in size, but not by much, becoming essentially a highly profitable hedge fund with some land in Cambridge for tax purposes. The Cal system drastically expanded to cover over a hundred thousand people with high-quality college education. It's hard to imagine that Harvard made the better choice from the point of view of the public, but it's their viewpoint which is universal. If you believe that higher education is worthwhile, then it's bad that top institutions are doing so little to spread knowledge, improve teaching, or jump-start massive research projects (MIT's OCW aside). Are the liberals who run these places so elitist that they believe that knowledge should be restricted? Or are they unable to seriously consider educating more than a few thousand souls a year?
In any case, the MFI was a great way to capitalize on one of the University's core strength's--economics--and dramatically advance the cause of outreach and research (and at low cost to the University, too). You can disagree with the choice of naming it after Friedman, but it was a natural fit given his stature and connection with the University.
This move caused a wave of ill-will and poorly reasoned diatribes. Supposedly the plan would "reinforce among the public a perception that the university’s faculty lacks intellectual and ideological diversity." So the University should not develop one of the few right-of-center departments in economics, let alone academia, out of concerns for perceived intellectual diversity? Set aside for the moment issues of the quality of output (if work is done by University faculty and the charter written by prominent economists--unlike Hoover--then I personally have few concerns). What entitles academics the right to silence the research of others? Have any of the points the critics made justify that?
I don't want to be a scold on this issue. Others do that better than me anyway. I just want to point out the ways in which this employer-run institution fails students, teachers, and the public. Administration is hampered in promoting their key function--research and teaching--by faculty for whom the allocation of power and money between disciplines is more important than agumenting and disseminating knowledge. Expanding college education is essential to reducing inequality, and research is also useful. Unfortunately, we can expect no large initiatives on these goals as long as Administrators cater to the needs of entrenched academic interests. What about Chicago campuses overseas to spread a distinctive form of thinking? The focus could even be on Humanities subjects that are often overlooked elsewhere, or on contructing "Cores" for cultures other than the Western European. Why should it be that expansion and innovation are not even an option for a Chicago-based University, but basically required for a Chicago-based firm? Maybe the people over at the MFI could figure this out.
I am more hopeful for Colleges in the developing world, where hope is more audacious and the do-nothing dons fewer. The Gulf has many proposed institutions and is attracting a lot of interest, there are some interesting Indian proposals, and many Chinese Universities lack the tenure model. And that's not even getting to practices inside the classroom. As Matt Yglesias points out, either lectures are effective at imparting knowledge--in which case we should find the best professors and have them reach the most people --or they're not, in which case we should find a better way.
And so you have the well-chronicled fact that India's growth is regionally unbalanced. This is often sold as the claim "western and southern states do well" but there's a bit more to it. This map (blue and red are good, brown and yellow bad) is a little dated--from the 1991 census--and so does not capture recent unequal growth, but does look at some measure of development at a district level.
One thing to note is that the landlocked northern "bimaru" states in the Hindi belt--Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh are not doing so great. Most inland areas in general are doing fairly poorly as well. Development is largely clustered into two sets of districts: Those near the coast and those along the far northern Delhi-Punjab corridor. Of course, there are some cities here and there that do well, and the whole of Maharashtra appears well-run. Coastal Andhra and Orissa are not uniformly great, but those two states have made a lot of progress in the last fifteen years not seen on the map.
This disparity is a little striking as northern India was for a long time the richest portion of India. It was the seat of the Mauryan, Gupta, and Mughal Empires and home to the British Raj. This wealth persisted even after independence.
Political mismanagment goes a long way towards explaining this gap: National Congress rule tried to eliminate regional imbalances, which involved neglecting the richer states. On the state level, coastal and far Northern states are simply run better than those in the center. Geographical size seems to matter, as smaller states tend to be better run, while the bimaru states are all massive (Though Maharashtra is rather large as well). This was the rationale for breaking off some states from the larger ones, a policy that seems to have worked rather well.
You also have to wonder if being landlocked is a curse, as per Sachs and Collier. State-level variation in GDP in America does not seem to be especially correlated to distance from the coast, but that also reflects massive investments in infrastructure that reduce transportation costs. Those inland states in India that got rich did so by exporting crop surpluses on highways and railways.
Increasing the ties betwen inland India--which includes the bimaru states as well as rural portions of coastal states--into the part of India which is growing rapidly is obviously important. It's also essential to tapping into India's "demographic divididend"--India's relatively youthful workforce. It turns out that this bonanza is largely expected in the high-fertility bimaru states--which already contain about 40% of India's population between them. For labor-intensive industry to take advantage of these workers, inland states will need to be as investment-ready as coastal states. Otherwise, the rich parts of India will see large wage inflation and the poorer parts significant unemployment.
Massive investments in human capital and infrastructure are necessary to close this gap, and accountable governance in smaller states is the way there. Plans for a freight corridor between Delhi and Mumbai along Tokyo-Osaka lines are promising, and the Golden Quadrangle linking major Indian metros is working well. Another corridor from Delhi to Calcutta along the Grand Trunk Road could hit another quarter of the population.
Monday, September 22, 2008
Before the crisis, this fact was evident to many people. Several hedge funds attempted to short the market for such loans, and were destroyed. I know of at least one person, however, who managed to time his trades right and made quite a few billion dollars. However, most people did not face the responsibility that those traders did and continued to buy and sell worthless paper. It's not the "models" that are at fault; other models that actually corrected for the unique credit qualities of recent borrowers would give you higher predicted defaults. Rather, the originate and distribute model reduced the incentives to model correctly and allowed mortgage originators to hand out loans to poor borrowers and resell them into a global savings glut.
So again, the losses from handing out such loans is high. But it's perhaps on the order of $500 billion--severe, but similar to the asset collapse from any bubble. The problems from this crisis, however, have spread into many parts of the finance industry and into the real economy as well. It's a big question how a relatively manageable loss nearly broke down the entire financial system.
One explanation I gave earlier is that marking assets to market overstated the problems for certain firms and caused a crisis in confidence. That's a part of the answer to why there was a spiral, though such transparency is good in general. Here at my day job, many people are interested in this question and I came across other ways to get from "manageable loss" to "end of the world".
A key factor is the extraordinary extent to which modern finance relies on debt. Many people imagine that you can show up on Wall Street and easily make money if you have flexible ethics. Generally though, most people face very efficient markets and thus need to ramp up on leverage to amplify any small inefficiency they find. Investment Banks were among the worst offenders, and their debt was very short-term to boot. As banks faced continual deterioration in their balance sheets, financial requirements forced them to raise more capital. An interesting solution to this problem is Rajan's proposal to replace required capital deposits with catastrophe insurance for banks. The idea is that forcing banks to keep a certain amount of liquidity on the books prevents that capital from being used precisely at the hour of need, so instead banks could contract out for funding conditional on facing a crisis.
There are other liquidity spirals that amplify original shocks. The complexity of the financial toxins spread around induced significant asymmetric information and constraints on knowledge. People don't know what's going on and can't find out, so they reject entire asset classes as worthless in bad times. Finally you end up with classic bank runs when people lose faith in financial institutions altogether. This happened not just in the case of Northern Rock and IndyMac, but was a factor in Bear Sterns, Lehman Brothers, and the rest of the Investment Banks. Tightly linked financial markets run on trust between counterparties, so you have giant network effects that blow up any perceived risk. See James Surowiecki on this point.
The financial system was so highly leveraged and tied together that blaming subprime mortgages is a little besides the point. The entire financial system was in something of a bubble, and was one asset collapse away from destruction. Much smarter regulation will be required to fix and prevent future crises, and that's unlikely to materialize.
Sunday, September 21, 2008
Saturday, September 20, 2008
Friday, September 19, 2008
The speaker's idea was to combine rational agents (with potential differing apetites for risk) with Bayesian agents who lean about the economy. The Bayesians are stupid, but through their learning converge the economy over time to the rational model. There are a few rational agents in this economy--the Warren Buffets--who know what's going on. Over time, these guys get richer and richer. The main conclusion of the paper is that the market can put a high price on risk, one that converges over time to a reasonable price, in an economy populated by smart people and stupid people who are quick learners.
There is a distributional aspect to this model as well, however. The smart people raise their share of income over time, due to their superior knowledge. Of course, in economic shock periods, as now, they do not do so well, but in the long run, under normal economic conditions they make out like bandits. I've discussed before the education model of inequality, which explains how the educated do better than the non-educated. This model, in which there are super-educated people, plausibly explains the movement at the very top of the distribution. This is happening in an institutional setting where it's harder and harder to deny the smartest and most productive people the proper value of their labor. You can wonder what is the optimal tax to apply to this group, but you should also wonder how to join it.
As with all idealized images, this is not quite true. Ancient societies were considerably more violent, both to each other and neighboring tribes, and were probably responsible for many mega-fauna extinctions. They were probably more prosperous than following agricultural societies, and possibly many contemporary societies.
This idealization extends to ancient Americans, who were thought either savages unfit to manage land or else the best people who ever lived--a standard to which we can compare and degrade our own unsustainable follies. As it turns out, civilization in pre-contact America was extensive, long-lasting, highly urban, highly dependent on agriculture, and had a dramatic impact on the landscape from the Amazonian jungle to the North American plains. The vast herds of buffalo and birds encountered in the 19th century are not a legacy of a pristine past, but a direct result of the deaths of countless residents due to Old World diseases. Ancient societies managed the landscape at will, with many destructive consequences and other good ones. Contemporary societies are doing the same.
It's also interesting that new discoveries are pushing back the dates of the earliest American finds to be contemporary with the earliest Asian river-based civilizations. Somehow, human societies independently discovered parallel technologies and social organizations at around the same time. I guess there is some rate of mental evolution necessary to make these advances which hit a threshold worldwide around that time, aided by global climate trends.
However, the basic idea has been taken too far, perhaps most extremely in the Washinton Consensus. As this Economist article shows, poorer countries tend to have a higher cost of firing workers, but differences in position don't seem to be great in explaining per capita growth or income. The BRICs have relatively poor governance, as does Germany. Yet the BRICs also have great growth, even relative to other poor countries. In Rodik terms, large income differences between countries imply high expected growth rates through convergence, which are occasionally realized when countries remove binding constraints. That is, poor countries have a lot of potential, which can be tapped not through a wholescale upgrading institutions on social democratic lines (though that is good), but through eliminating context-specific roadblocks.
Thursday, September 18, 2008
Obviously, the crisis will be blamed on poor "regulation" and free market practices. For why that's not the best way of looking at it, see Cowen. But the outrage against corporate overlords will be strong, and there will be a strong push towards greater federal oversight. My guess is that retroactive analysis will emphasize the powerful and beneficial role of the Federal Reserve and Treasury in stopping the crisis, and people will demand similar action elsewhere. After all, we bailed out Bear Sterns, so why not bail out the little guy as well? It's easy to look at the situation and see failing markets and effective federal regulators.
Government manipulations of the housing market--tax credits for capital gains and mortgage payments--are likely to continue.
So I guess this is just saying that the country will shift left, which is what many people expected anyway. It's not the worst thing in the world. As Lawrence Summers said recently, markets have worked well in delivering people tradable goods and services, while problems lie in the delivery of social services such as healthcare, education, and poverty assistance.
Intellectually I have to imagine that there will be a, well, malaise. It's been close to a decade now of stagnant growth in GDP and equity prices; combine that with a global crisis, a housing collapse, one war that's seen as failed (Iraq) and another that's seen as misguided (terror), higher commodity prices, and failures in leadership from politics and economics. Everyone talks about the iconic status of Jon Stewart in this generation, but maybe we'll see the more disaffected and hopeless side of that. Timewise, I'm thinking late '80s-early '90s, or mid to late '70s as a model. I suspect a new narcotic will become popular. If nothing else, people will start to spend all of their time on the internet. People will associate with others on finer and finer gradiations; trust and community will collapse as xenophobia rises. Materially, it will be the best time ever in human history.
Looking back, this doesn't make a lot of sense, but predicting things is hard.
But here's Obama economist Furman on the impact of ending the tax exclusion:
Virtually any way of replacing the health exclusion with tax credits or tax deductions is likely to increase coverage. The current exclusion provides an incentive to go from no insurance to some insurance and from some insurance to more insurance. A reformed system would eliminate the incentive to go from some insurance to more insurance, and put much or all of those dollars into increasing the incentive to go from no insurance to some insurance. The direct effects of the tax incentive would be reinforced by the indirect effects on health spending. Over time, these effects on health spending could be quite large – lowering premiums and further increasing the demand for health insurance.
Furman goes on to describe how other policy, such as pooling mechanisms, can combine with this one to fully insure everyone. Some of these policies are included in the Obama plan, and it seems to me that intersecting the two candidates' plans is better than either individually.
Wednesday, September 17, 2008
In my ideal world, the government would use its public status as the sole means of revenue. As in the AIG case, that involves acting like a hedge fund specializing in catastrophe arbitrage. A simple cyclical rule--buy low, sell high--could presumably yield large profits and generate a social return too. Market actors can't do this as well due to liquidity constraints. Also, property rents from energy extraction, externality taxes, and wireless spectrum auctions could contribute money as well. Maybe a war here and there that paid for itself.
Tuesday, September 16, 2008
Rodrik's book is written as a series of self-contained articles, greatly lowering the fat count as each chapter makes stand alone claims. These are grouped into three sets, the third of which, on global institutional frameworks and similar esoterica, I will ignore.
The first set of arguments concern the failure of successive iterations of development policy. Rodrick concludes that a basic framework--proper competitive incentives, a good macroeconomic situation, globalized outlook, and social insurance--is common to all successful economies, but that particular institutional designs vary. Instead of the Washington Consensus transplant approach of grafting overseas best-practices over every local organ, Rodrik adopts an "optimize what you optimize" mentality; use diagnostics to identify the functional hurdles preventing the rise of the productive sector of the economy, and improvise local solutions. This is great stuff, worth more than the cumulative total of all economic randomized trials ever conducted.
The second bit covers industrial policy. As Tyler Cowen notes, the substance of his proposals is actually fairly limited, while the rhetoric of railing against fundamentalist economists is overblown and against the humble spirit of the book. This is because Rodrik has a strong agenda of normalizing industrial policy as another piece of the government tool-box.
Rodrik presents a sophisticated case for viable government interventions in a complicated world, but I am skeptical. The historical examples rely heavily on East Asian examples. It's fair to say that the debate over industrial policy is basically a debate over government practices between 1950-1970 in East Asian economies. Of course, in this period virtually every other developing country attempted industrial policy in some form or another and all of them failed. The key counterfactual is to what degree the peninsulas and islands of Asia would have prospered without industrial policy, and the pressing policy question is to what degree other developing countries can replicate such planning institutions.
I suspect that the success of Asian economies is due more to government success in human and physical capital, oppenness to foreign trade, and competitive markets rather than successful industrial policy; and that more pluralistic, democratic countries will find it difficult to replicate their institutional structures (these countries find it hard enough to deliver basic government goods) . Here are some critical assessments of Eas Asian industrial policy. In several cases, the bulk of government subsidy was not directed at the most productive sectors but rather the more politically sensitive ones. So in Taiwan you have government subsidized heavy industry while the small and medium scale firms did the bulk of the production, and in Japan you see large subsidies for rural development and the postal banks. Korean policy was perhaps the most extensive, but some people disagree that it was effective relative to doing nothing.
It's also worth pointing out that all East Asian post-WWII successes were ethnically homogeneous, and were either city-states with strong British influence (Singapore, Hong Kong) or former Japanese colonies (Korea, Taiwan), giving these countries strong legacy institutions.
Rodrik also commends China and India's gradualism. But, given their large disparity in income relative to developed countries, convergence was inevitable and the question is how much did gradualism help economically, even if it was great politically. In China, much of the federal outlay was directed at Soviet-style large industry, while the small and medium size firms that drove the economy were more independent (though they maintained close ties to local Party officials). Indian industrial policy was absolutely catastrophic, and success in biotech and information technology is due greatly to the fact that these sectors did not exist when regulations were drawn up. The scope of Asian markets will continue to attract business regardless of failure or success of government policy.
I do see the potential for market failure, and Rodrik details some plausible scenarios. Much like how the path of immigrant migrations follows the intitial migrants rather than the fundamentals, corporate development tends to follow the path set by the first-movers. But the potential for government failure is also strong, and I am skeptical of the degree to which future governments can target the money properly. Broad-based, universally accessible policy such as research, investments in education and infrastructure, and a pro-growth, low tax environment lift all boats, but is perhaps better discussed under the label of "good governance" than "industrial policy."
Monday, September 15, 2008
Her greatest hypocrisy is in her pretense that she is a woman. The Republican party's cynical calculation that because she has a womb and makes lots and lots of babies (and drives them to school! wow!) she speaks for the women of America, and will capture their hearts and their votes, has driven thousands of real women to take to their computers in outrage. She does not speak for women; she has no sympathy for the problems of other women, particularly working class women.
And as for religion, I'd love to know precisely how the Good Lord conveyed to her so clearly his intention to destroy the environment (global warming, she thinks, is not the work of human hands, so it must be the work of You Know Who), the lives of untold thousands of soldiers and innocent bystanders (He is apparently rooting for this, too, she says), and, incidentally, a lot of polar bears and wolves, not to mention all the people who will be shot with the guns that she thinks other people ought to have.
Wow. I'm no Palin fanatic, but I can at least understand how people in good faith can admire someone like Palin. Remember, this is all written under the name of "not forcing beliefs on others." This attempt to deny womanhood and dismiss a rather common set of beliefs as claptrap would really annoy me were I in a different demographic.
One reason I bring is up is in regards to the infamous Doniger egg-fly incident and related charges. The backstory is that Western Hinduism scholars analyze some texts in Freudian fashion, many people make idle threats, and reasonable people lose respect for everyone involved. Many of the critics have no idea what they are talking about, but a few make interesting arguments that Freudian analysis doesn't really make sense when applied to Vedic scripture. Doniger and company never really respond beyond "psychoanalysis is the most sophisticated language we have to talk about questions" (really?) but go on to link every online hooligan with a vast right-wing Hindu conspiracy arrayed against their academic freedom.
I just want to note that the commentators on Doniger's page are every bit as vile as her detractors elsewhere; this is just something people do when they feel their beliefs are threatened. That's why you shouldn't take their empty threats too seriously, and why you should disagree with your political opponents--as Obama does--without openly disrespecting them.
Sunday, September 14, 2008
Saturday, September 13, 2008
Friday, September 12, 2008
Thursday, September 11, 2008
Wednesday, September 10, 2008
Tuesday, September 9, 2008
Take the example of France. As has been pointed out, though France overwhelmingly supports Obama, they made a different choice in their own curiously familiar election. A forceful, pro-American conservative from the unpopular ruling party battles a hopeful liberal in an election focused on transition and the economy. Sarkozy's success was based on his talking point that both parties want change, but conservative change is better and he can deliver it. Several people have pointed out that McCain needs to do something similar, and his convention speech was a step in this direction. But to the extent we care about the French, we should care about how they behaved when it come to a decision for which they bore consequences. On that choice, the French choose McCain.
But maybe overseas popularity is important because it suggests that people will like America again and bloodshed will stop. There are several issues with this. One, people just don't like America in general, as it's a unilateral power. People hated America when Bill Clinton was in office, and Obama signs on to the same platform of humanitarian intervention. Two, it doesn't seem like popularity among the masses matters as much as connections with leaders and geopolitics. That article discusses a bit how American policy towards Europe shows significant continuity between Clinton and Bush against popular wishes by local residents. Third, terrorists, like countries, behave on the basis of fundamentals, not Presidential identity. The candidate with better policies will face less animus. Last, Bush has been surprisingly effective in foreign policy his last few years. From improving relations with Japan, to nuclear deals with North Korea, to shoring up relations with China, to signing a Nuclear Deal with India--this is not what reasonable people expected to happen in Bush's lame-duck years. An Obama administration may very well turn out to be more effective on foreign policy than a McCain administration. But there are other issues at play.
The second Gulf War is, of course, very different, and a bustling cottage industry attempts to quantify its consequences. A sign in my liberal hometown (the crowd laughs with Stephen Pinker as he details Republican efforts to scrub profanity from the airwaves) records the number of dead U.S. servicemen, but the last I checked they had given up. As for Iraqis, an influential Lancet study estimated roughly 600,000 additional deaths as a result of the war, a figure that may be too high by a factor of four. By way of comparison, anywhere from 100,000 to 1.5 million Iraqis died as a result of economic sanctions and perhaps a million died during the Iran-Iraq conflict.
Accounting for the economic costs is also popular; though the fate of the Iraqis is given far less weight. Stigliz's estimate is fairly popular--.7-1.5 billion dollars directly, from which it's a hop skip and a jump to 3 trillion in total, indirect costs. There are many things to fault in his accounting--can we really blame the bulk of increase in oil prices entirely to the Iraq War?--but that's a post of its own. However, one of the biggest exclusions is the opportunity cost, since leaving Saddam in power to the present day presents unique costs. The AEI estimates long run net economic costs, taking some of this into account, on the order of one trillion.
One interesting perspective comes from Murphy and company, which tries to explicitly compare containment with intervention from a point of view before the conflict. I'm skeptical of anything Murphy says as he's a genius capable of convincing me of anything, but he makes a good case that containing Hussein bears costs too.
Whatever the case, ex post costs turn out to be large. But though budgeted costs by the Treasury are on the order of two or three hundred million dollars, there appears to be a relative comfort with the costs of Iraq--compare with Black Hawk Down for instance. I certainly expected a greater outcry, but costs relative to GDP and previous wars are low and are either borne by a disproportionate few or financed through debt. Plus there's no chance of a cost-benefit calculation when terrorism is involved.
One lingering puzzle I have is the relative lack of money on politics. By all accounts, this is going to be the most expensive election on record, with campaign spending of, what, 500 million? That's nothing compared with the magnitude of the costs of Iraq. Or of higher corporate profits resulting from the war--Halliburton went from a net loss in 2002 to profits of 3.5 billion in 2007, and also saw around a 300% appreciation in stock price. They would have done well regardless, but clearly the vast discretion given to the Presidency means that getting your guy to the top moves around billions if not trillions of dollars--yet the office itself goes for mere millions? Maybe campaign donations are stricter than I thought, or people are failing to coordinate their political efforts, or money is simply not that valuable in winning an election. Either way, some market is inefficient, and there's probably a successful trading strategy somewhere. At the very least, there should be more bad fiction on this subject beyond The Manchurian Candidate.
Monday, September 8, 2008
Please thank [my mom] for me. Tell her it makes me feel like I am home with family to be with them all. I long to create our Vedic community at Mount Soma where all the people can grow to enlightenment. Also tell her that her son is wonderful and is/will be a great man. The time is coming where he will put everything together for himself. I would love be a part of his journey. The path to God is the path of neti, neti, neti…not that, not that, not that… He is doing very well traversing that path.