Great essay on Republicanism, 2011.

Fave quote: "Some call this the closing of the conservative mind. Alas, the conservative mind has proved itself only too open, these past years, to all manner of intellectual pollen. "

Went to see We Need To Talk About Kevin last night

1. Tilda Swinton is ridiculously good.

2. Lynne Ramsay: still the master.

3. ...And people say there is a dearth of great right-wing art.

Links

Voxeu explains some Eurozone central banking mechanics: http://voxeu.org/index.php?q=node/7391
At the same place, Charles Wyplosz argues for decentralised discipline: http://voxeu.org/index.php?q=node/7387

Immigration: ordure approaching fan

If the Eurozone does collapse, or if there is just a second European credit crunch, then Britain will be relatively insulated. We will still suffer a lot, but less than the Eurozone itself. However, the EU has a useful mechanism for sharing the pain: labour migration, guaranteed by freedom of movement within Europe. Although it is low compared to the US, it has still been high enough over the past decade to make immigration a big political issue in Britain. The government has pledged to cut immigration to the tens of thousands. Good luck with that when Eurozone unemployment increases above its already high level. There will be increasing pressure to pull up the drawbridges.

On the Euro crisis

Mainstream opinion seems to be as follows:

1. Creating the Euro was a mistake.
2. We should save the Euro at all costs.

“At all costs” means:

• In the short run, the ECB to buy member states' bonds, or to issue Eurobonds.
• In the long run, centralized budgetary discipline in the Eurozone...
• … and perhaps much greater transfers to provide “automatic stabilizers”

On the face of it (1) and (2) do not sit well together. The argument for combining them is that the alternative is disastrous: government default, one or more countries leaving the Euro, bank runs which governments can no longer prevent, and perhaps a second Great Depression.

Almost anything would be justified to avoid a really serious depression, because events on that scale do not just impose economic hardship – they also risk devolving into political chaos. For instance, I have heard the Great Depression and the collapse of world trade cited as a cause of World War Two, though I don't know enough history to evaluate that claim.

On the other hand, the argument is not completely obvious.

First, it isn't necessary to leave the Euro in order to default. Greece, for example, is keen to stay in the Euro. The cost of staying in the Euro is being stuck with an uncompetitive exchange rate. But countries have survived that. By defaulting they would at least rid themselves of the debt overhang that is forcing them to cut, cut, cut government spending in the midst of a recession. The cost of leaving the Euro is being stuck with a less credible currency, and probably facing bank runs as a result.

On the other hand, if countries do leave the Euro, that may not be disastrous for them. (Or why would they do it voluntarily?) Britain was forced to float its currency 20 years ago; the Conservative government was humiliated, but the economic results were actually beneficial, weren't they? There is a trade-off: chaos at exit versus increased competitiveness with your own currency afterwards.

At the very least, the economic tail is wagging the political dog. European government structures are being created as a panicked response to a crisis. These structures are likely to be less democratic, more centralized (with Germany being the centre), and also to set in stone the Eurozone's problems, as follows:

• There will still be a single currency without the integrated labour markets that would help it to work.
• There will still be the temptation to fiscal indiscipline, which will have to be prevented by centralized control.

Fans of democracy, freedom and responsible politics should not find this an appealing prospect. It would also be a national defeat for Britain, because we would be on the periphery of a large centralized Eurozone with very different economic interests and values to our own.

If the alternative is really a global economic collapse then perhaps this is the best choice of a bad bunch. My personal nightmare is different:

• Europe centralizes;
• Established parties, and elites more generally, face an ever-stronger backlash from their “angry and defrauded young”;
• A new generation of populists enters national governments. They offer fantasy solutions, play fast and loose with deficits, and fail to exercise mutual discipline at European level.
• We have a century of Argentina-style distributive politics, relative decline, and domination by a resurgent Russia.

My instinct is that failed ideas should be discarded; but if we are going to have the Euro, it seems better to have fiscal discipline and a hard budget constraint – a core condition for “market-preserving federalism”. The US has achieved this, so why can't Europe?

Perhaps I am missing something and there's an obvious reason that a default means a Euro collapse, and that Euro breakup must inevitably be an economic catastrophe. Certainly lots of people think so. However, perhaps some of the current panic comes from businessmen and bankers who naturally confuse short-term harm to themselves with the end of civilization.

Ezra Klein explains the Euro crisis

in eight graphs.

Christina Romer shifts my priors

 ... a speech on estimating the economic effects of austerity and/or expansion. Her conclusion: there is solid evidence that fiscal stimulus works, and that austerity is painful. Not something I' naturally am inclined to believe, but when the evidence is gathered so carefully, it shifts my priors.

Dodgy science

Alex Tabarrok spanks the BMJ over an article on the brain drain.

The BMJ and Lancet are publishing a lot of social science these days. The slant is usually Left-ish; more importantly, the methodology is often weak. When did social science overtake medical science in analytical rigour?

Blame the economists!

It is widely thought that the financial crisis shows up the flaws of neoclassical economists, who were so immersed in nerdy mathematical theory that they forgot about the real world.

However, many economists did predict aspects of the crisis. Not all were marginal voices, either. Some were very distinguished figures from the mainstream.

Here is Marty Feldstein in 1997 (ungated link), arguing that the Euro is an economic liability.

Here are Obstfeld and Rogoff in 2005 (ungated link), worrying about opaque networks of cross-holdings and counterparty risk (in the context of the US current account deficit).

Economists probably are not blameless, and certainly there were naïve optimists – I read a fabulous article recently, from about 2005, which said [re the strength of the dollar, but it seems to typify that era] “the markets can be wrong, but they can't be wrong for a decade”. But as a group, macroeconomists probably had a clearer and earlier sense of the dangers than anyone else. The problem is that their knowledge did not percolate to the wider public.

This seems like a growing problem. Social science has been getting better and stronger in the past two decades – we have rigorous techniques for untangling multiple causes, ever better datasets and now the possibility to integrate field and laboratory experiments into our theory. But very little of this knowledge has spread to the world in general. Popular social science (Freakonomics or The Tipping Point) has been in fashion recently, but we are still far from the point where people turn to social scientists for ideas about what is going on. For example, think of the referendum on the Alternative Vote in the UK this May. There is a lot of research on how electoral systems shape political and economic outcomes – not enough to decide definitively either way, but certainly relevant evidence. This research never got mentioned in the debate. (There was some very simple stuff, like simulations of how the 2010 election would have gone, but nothing of modern research in political economy.)

I am not sure how this could be fixed. We definitely need more Levitts and Harfords. Perhaps we need more social scientists blogging.