Friday, 10 May 2019

Obama, FDR, and the Fed

Eric Rauchway has written an excellent review of Reed Hundt’s new book about the missed opportunity of Obama’s early presidency, framed around a topic he’s exceedingly well qualified to discuss: the contrast between Obama and FDR. As Rauchway writes, 

While many voters hoped Obama’s policies might represent a dramatic change along the lines of the New Deal, instead Obama acquiesced to emergency considerations and ideological blandishments aimed at tempering expectations and a return to “normalcy.”

So why did things work out this way? Rauchway suggests one reason was the Obama team’s dubious interpretation of the transition from Hoover to FDR (under the then-operative rules, it was not until March 1933 that FDR took office after his election in November 1932). During this transition—described in Rauchway’s outstanding Winter War and in less detail but larger context in his equally indispensable Money Makers—Hoover argued that the worsening financial panic stemmed from fears of radical measures, including renunciation of the gold standard, that might follow FDR’s assumption of office. As Rauchway shows, by refusing any active policy to fight the panic, such as declaring a national banking holiday, unless FDR would formally proclaim his support, Hoover sought to bounce FDR into renouncing the New Deal and endorsing liquidationist orthodoxy. FDR did not play along. In his memoirs, Hoover decried FDR’s supposed irresponsibility in allowing the panic to worsen for political advantage (though this amounts to projection—nothing prevented Hoover from acting on his own). Hundt quotes a key member of Obama’s economic team invoking Hoover’s self-serving version of history to defend cooperation with the Bush administration in the autumn of 2008, and Rauchway writes that Geithner and Obama himself have made the same argument. 

Hoover’s effort to use inaction in the face of a raging financial panic as a means of political coercion to constrain democratic choices regarding economic policy is hardly unique. Following Karl Polanyi, I’ve called it “governing by panic,” and it’s a kind of politics that needs much more analysis. Though Polanyi was not a fan of the economic reasoning that led FDR to break with the gold standard in 1933, he saw its political significance as enormous precisely because it weakened the power of financiers to dictate policy by threatening a market meltdown. 

The situation was somewhat different in 2008-2009, though. One can’t say that in late 2008, Obama tied his hands and made the sort of surrender that FDR avoided in the winter of 1932-1933. Scope remained for much more decisive and radical action, on restructuring banking, on fighting foreclosures, and on fiscal stimulus, than was in fact adopted. Indeed, it is explaining the decisions made in this period that is the focus of Hundt’s book. 

In understanding these decisions, I would certainly not gainsay the importance of Obama’s choice to rely on economic advice from neoliberal establishment figures, and the political timorousness of his team when it came to stimulus spending. However, to explain the contrast between the Hoover-FDR period and the Bush-Obama one, I would argue that the role of the Federal Reserve was crucial. From 1929-1932, the Fed’s monetary policy was staggeringly passive (a picture persuasively drawn in Friedman and Schwartz’s Monetary History and which is thoroughly borne out by more recent research). Key Fed officials did not view its role as serving as a lender of last resort for failing banks, nor did they believe they had much capacity to improve the economic situation through monetary easing. Unlike Hoover, Fed officials did not try to use withholding of panic-fighting measures as an instrument of political pressure (though some of their reluctance to buy government bonds in open-market purchases derived from fear that this would encourage deficit spending), since this approach would have required them to believe that they could do something about it in the first place. Indeed, the Fed’s most active panic-fighting measure was to entreat Hoover to declare a bank holiday.

The Fed’s passivity was bad for the economy, but it was probably good for democracy. The case for monetary expansionism, if it was going to carry the day, needed to do so in the court of public opinion. During Hoover’s presidency, schemes for monetary expansion were proposed in Congress and remained a matter of broad public debate, continuing a stream of non-technocratic deliberation on monetary policy that stretched back to the monetary populism of the late 19th century. In Money Makers, Rauchway shows that in early 1933 FDR stage-managed a showing of strong Congressional support for monetisation of silver as a way of building support for his own less radical policy, but there’s no question that FDR’s monetary innovations drew on a tradition of economic thinking nourished by its engagement with popular politics and that did have substantial currency (so to speak) in Congress. Congress subsequently passed broader banking reforms and a revision of the Fed Reserve statutes that included provisions that proved crucial to giving the Fed flexibility in the crisis of 2008. Congress also supported FDR in his casting aside of the budget-balancing orthodoxy that was prominent in his election campaign. Whether to credit the post-1933 recovery to fiscal policy, to monetary policy, or simply to the broad optimism FDR was able to promote is a matter of some scholarly controversy. However, there is no question that FDR’s administration and Democrats in Congress felt it their right and duty to shape a comprehensive crisis-fighting policy; no one else was going to do it for them. When the Fed did not act to contain the crisis, it was tackled through the democratic process.

The early 21st century situation was strikingly different. As a leading scholar of the Great Depression, Bernanke was very determined to avoid a repetition of the Fed’s notorious passivity. Unlike the leaders of the ECB, he did not consider it his place to use financial meltdown as a bargaining tool to promote political ends. (Those untroubled by the place of central bank independence in a democratic order ought to consider this contrast—the personal qualities and economic philosophies of individual central bankers made an enormous difference to policy in the crisis; they had huge scope for discretion and were very distant from accountability.) Had it not been for unprecedented discretionary Fed action, the financial crisis would have become catastrophic well before September 2007, when the ill-fated decision to allow Lehman to fail set off a global financial implosion. Immediately thereafter, the Fed resumed pulling out all the stops to do what it could to mitigate the effects. It was clear, though, it could not do enough. Congress was brought into the crisis-fighting effort only at this point, and presented with in effect a binary choice—approve TARP or watch the meltdown spread. The best way to win a game of chicken is not to have any brakes; with the Fed and other central bankers overwhelmed, that was in effect Paulson’s situation in bargaining with Congress. It is fair enough to argue, as Rauchway does in his review, that the Democrats could and should have used the threat of withholding support for TARP to extract more serious concessions. Perhaps the mythology of FDR’s irresponsibility did contribute here. However, the broader issue is that Congress was involved only when a Fed-led effort to address the crisis had broken down, and asked in an atmosphere of incredible tension to offer the executive the discretion and financial means needed to patch that effort up. Precisely because the Fed had the power and independence to be a plausible headquarters for fighting the financial crisis, the democratic process was sidelined.

Hundt apparently offers new details on the early 2008 decision of the Obama administration to request a fiscal stimulus far smaller than administration economist Christina Romer had advised. (Romer had made her reputation in part by arguing that FDR’s fiscal stimulus was too small to reverse the Great Depression, and that it was monetary policy, fortuitously eased by international capital inflows, that did the trick; in 2009, with the Fed already stimulating for all it was worth, this was not going to happen again.) The basic picture has been clear for a long time: Obama’s advisers thought a larger stimulus could not have made it through Congress. But why not? Christopher Adolph, in an important essay, invites us to
imagine a historical counterfactual: suppose that in 2008–2012, central banks had either suddenly ceased to exist or somehow credibly committed to take no further monetary policy action once the zero-bound had been reached. Would elected governments have remained so reluctant to order fiscal stimulus if there were no hope of a central banker ex machina waiting in the wings? Or would the divided and conservative governments of the time been forced to turn—as so many did in the twentieth century—to Dr. Keynes’ usual remedy? A broad increase in spending and tax breaks surely would have reduced economic inequality, in sharp contrast to the persistent and rising inequality that followed the policy leadership of the Fed and the ECB.
Does the existence of a politically-insulated central bank savior crowd out more redistributive fiscal alternatives? Could it, in fact, foreclose public debates on the role of government in a recession because an actor with no electoral connection stands ready to staunch the bleeding?

The passivity of the Depression-era Fed means that we don’t entirely have to imagine the counterfactual. With the central bank out of the picture, the  democratic process delivered in both fiscal and monetary terms. Recent scholarship has emphasized, properly, the racially exclusionary character of much of the New Deal, deriving from FDR’s desire to keep Congressional Democrats from the South on side. This is deeply distressing, and the long-term consequences were dire, but it also serves to reinforce the point that the New Deal was made possible through political bargaining processed through the electoral institutions. 

Tuesday, 19 March 2019

JS Mill on Brexit

Back in the 19th century, John Stuart Mill worried about a danger to democracy built into the institution of majority rule itself. Suppose almost all potential voters for a party view (Group A) view failing to win just over 50% of the vote as catastrophic, but know that their party cannot reach this threshold without the support of a much smaller Group B. If Group B can believably insist that it will not vote for the party unless it accepts their candidate as head of the party, it has wide scope for effective extortion, invoking the catastrophic prospect of a win by the other party (Group C) . As Mill put it:
Any section [Group B] which holds out more obstinately than the rest can compel all the others to adopt its nominee; and this superior pertinacity is unhappily more likely to be found among those who are holding out for their own interest than for that of the public. The choice of the majority [Group A] is, therefore, very likely to be determined by that portion of the body who are the most timid, the most narrow-minded and prejudiced, or who cling most tenaciously to the exclusive class-interest; in which case the electoral rights of the minority [that is, Group C], while useless for the purposes for which votes are given, serve only for compelling the majority [Group A+Group B] to accept the candidate of the weakest or worst portion of themselves [Group B].
     Mill’s words, especially the bolded ones, have kept coming back to me over the past few months as the Brexit process has lurched along. What are the votes of Remainers/BINOs/soft-Brexiteers useful for, in the present situation? Not for “the purposes for which votes are given,” if this these purposes are to shape policy, or to ensure that voters’ voice is attended to. Rather, the views of this group just shape the field of play for the contest between Theresa May and and the ERG over who can display the most obstinacy. 

     Mill hoped that proportional representation would overcome this problem, but of course this might simply move the just-over-50% cliff edge, and the disproportionate power of the obstinate small group, into Parliament. More elaborate institutional fixes are definitely worth thinking on. But for the moment I think partisans of democracy need to promote a strong norm against brinkmanship (aka brinksmanship). Brinkmanship is an effort to use a looming catastrophe to force someone to accept an outcome they don’t like (here’s an overview of the Brexit endgame that makes use of the concept). Brinkmanship only works if the person pursuing this strategy is able to convince others that she personally finds the catastrophe tolerable. In other words, as game theorists have argued for a very long time, brinkmanship often relies on ‘preference falsification’—politicians pretend they prefer catastrophe to not getting their own way. Even worse, the most effective practitioners of brinkmanship are those who authentically and obviously prefer something everyone else finds catastrophic to not getting their own way. In other words, situations in which brinkmanship comes into play foster deception, while rewarding intransigence and manifest scorn for others’ reasoned opinions.  

Democracy cannot possibly lead to positive effects in such circumstances. We get only a politics of winners and losers; what used to be widely known as the politics of kto kogo . Deliberately engineering a looming catastrophe for political purposes isn’t just reckless. It implies a contempt for democracy itself.  Those who practice extortion, whether with guile or without it, should not be permitted to use the machinery of democracy to facilitate it. 

Saturday, 29 April 2017

Germany's trade unions and its export surplus: Streeck's mistake

In the latest LRB, Wolfgang Streeck asserts the following:
German prosperity has depended historically on the export of manufactured goods and, later, the non-export of manufacturing jobs. Appeals to German unions to help rectify the obscene trade imbalance between Germany and other euro countries – by demanding higher wages and thereby raising unit labour costs – therefore fall on deaf ears. For the unions the euro is an ideal solution to the employment problem that hit them in the 1990s with the return of price competition and the internationalisation of production. Monetary union gives German manufacturing a captive market in Europe, as well as an edge over European competitors that have to operate in more inflationary institutional settings. On top of that, it equips German firms with an undervalued currency in markets outside the Eurozone, especially at a time when the ECB’s quantitative easing keeps pumping up the bloc’s money supply. To restrain the competitiveness of German industries in order to save the single currency, as outsiders sometimes suggest, would from the perspective of the unions be committing suicide for fear of death. It would also break up their alliance with employers and the government, held together no longer by trade union power but by the constraints and opportunities of the Eurozone. And it isn’t only the unions for whom the competitiveness of German manufacturing is of paramount importance. Their priorities are shared by the government, currently a grand coalition of the centre-right, representing industry, and the centre-left, where the SPD is basically the political arm of IG Metall. 
While I quail a bit at contradicting a German leftist regarding German unions, the publicly available evidence suggests this is flatly wrong.  German unions would be very happy to see increased wages as part of a package to reduce the export surplus.  In fact, just yesterday the website of the German Trade Union Confederation (DGB), an organisation including the aforementioned pre-eminent German union IG Metall, had this to say:
Export surplus: We need more domestic demand!
Strengthen purchasing power, support imports 
[Despite its claims to the contrary] the German government can and must act: It can dry up the low-wage sector and support centralised wage bargaining [Tarifbindung] and thus contribute to ensuring that employees here have more money to demand products.  This supports imports and pushes enterprises to invest more domestically for a growing market.
Similarly, an economics think-tank that's part of the DGB-affiliated Hans-Bockler-Stiftung recently argued that the best policy against the export surplus would combine higher wages with increased government spending for investment purposes.

Hmm, maybe an exception? How about this, from a 2010 IG Metall analysis (page 12):
German wage policy has European responsibilities. In the sectors which in the past lagged behind, we need further wage rises that make use of the room for manoeuvre in distribution...
There's no doubt that German unions supports a high-value-added industrial model that relies on substantial exports. But the idea that they reject wage rises that would permit these exports to be matched better by substantial imports is just wrong. 

One could say a lot more about the wrong-headed supply-side economics in Streeck's piece, but it's certainly clear that German unions don't share this viewpoint.


Just one more piece of evidence, from the report adopted by the 485 delegates to IG Metall's 2015 congress ("Gewerkschaftstag"), as an authoritative a statement of official union policy as I can find (pp. 77-78):
The economy based essentially on exports exacerbates the trade imbalances in Europe. In Germany the unit wage costs over the last 15 years have risen much less than in other European countries. This leads to export surpluses, while other other countries are forced to finance their demand through credit. ...
Our struggle for a better Europe also means supporting the struggles for higher wages and against precarious employment domestically. Success in the struggle against the extremely unjust distribution domestically will help people in all of Europe. 

Wednesday, 5 October 2016

Constitutions, Credible Commitment, and Brexit

In a famous paper, North and Weingast linked the security of property rights to constitutional government. They argue that the 17th century Glorious Revolution in England created a “credible commitment” by the English state to property rights by giving property owners’ Parliamentary representatives a veto over legal changes infringing those rights. 

For this argument, it is an embarrassing circumstance that the separation of powers between Crown and Parliament N&W described was a transient feature of English and later British institutions. Once the monarch’s role dwindled to a mere formality, the UK’s government was characterised by a hyper-centralisation of power in the Prime Minister and the ruling party, a centralisation usually known as the “Westminster model.” Especially given the absence of a formal written constitution, a British PM has extraordinary scope for discretionary action, including action damaging to property rights. The N&W argument would imply that this lack of constitutional constraint should undermine property rights, which on the contrary are generally seen as being quite secure in Britain.

The Brexit referendum and associated policy initiatives recently announced, however, go some way to rehabilitating the importance of the causal mechanism North and Weingast proposed.  N&W argued that when English property owners became secure in their rights, they were more willing to invest. The causal pathway runs from constitutional constraint to the ability to rely on a stable institutional framework, and thence to the readiness to make investments. Now, property rights don’t have to be conceived narrowly as the sort of rights explicitly specified in legal title or contractual arrangements.  In fact, an ancient common-law doctrine (known as “promissory estoppel” or “reasonable reliance”) suggests that someone who has undertaken costly actions while relying on another’s promise is entitled to legally enforced compensation if that promise is violated.

The Brexit campaign, and especially its aftermath, have shone a spotlight on many such promises made by the British state that it now proposes to violate. Immigrants from the EU, for instance, relied on the assumption they would have freedom of movement and that it made sense to pursue a career (for instance in academia or the medical profession) within Britain. Prospective university students around the world invested time, effort, and often money in study choices premised on the prospect of admission to British universities and the possibility of working here after graduation. Corporations sited operations in the UK, relying on its integration with the EU and access to the EU’s single market. Some people in Northern Ireland probably acquiesced in continued British rule because they relied on membership of the EU rendering the internal Irish border less significant.    

From the perspective of the doctrine of reasonable reliance, all these groups are having ‘property rights’ expropriated. And this is an expropriation facilitated precisely by the Westminster model and the absence of a written constitution. It was the Westminster model that made the calling of a referendum with such profound constitutional significance subject only to the internal decision of the Conservative majority in Parliament. The continuing relevance of limited constitutional constraints is shown vividly in discussions about the role of Scotland or the claim that the Government can rely on “royal prerogative” to invoke Article 50 to leave the EU without Parliamentary approval. With no-one constitutionally empowered to veto them, the Conservatives can act at will to shred what the morality embedded in common law (and what could be more English than that?) would unambiguously regard as property rights—just the sort of scenario North and Weingast describe.

One of the central arguments N&W make is that for absolute monarchs, a reputation for protecting property rights is an inadequate substitute for constitutional constraint, since monarchs’ royal prerogative always includes changing their minds. A reputation, though, is better than nothing. There’s probably little hope that the Tories will recognize how particularly dangerous it is for a government with so much legal discretion to display such contempt for promises on which so many have relied.  


Some lawyers and scholars think the present Government’s beliefs about the scope of its legal discretion are mistaken. Many interesting arguments about the bearing of the UK (unwritten) constitution on Brexit’s admissibility can be found here.

Joseph Singer wrote a great article seeking to extend the notion of property rights building on the idea of reliance.

Sunday, 25 September 2016

Independent central banks, democracy, and Skcolidlog

Goldilocks’ ideal porridge, you may recall, was neither too hot nor too cold, but rather just right. A lot of people think this ideal has been reached in the relationship between central banks and democracy. The operational autonomy of central banks’ personnel and policy ensures there’s not too much democracy, while the ultimate authority of elected officials over personnel selection and policy goals mean there’s not too little democracy either. Just right? 

Not at all, I argue in this post. Experience demonstrates that the ‘operational independence in pursuit of democratically established goals’ formula creates fundamental and disruptive tensions in democratic polities (including and especially the EU/Eurozone, which I class among them). These tensions primarily affect the coordination of fiscal policy and monetary policy. And instead of Goldilocks, we have Skcolidlog: either central banks have too much power to dictate fiscal policy, or too little.

That the ECB enjoyed from early 2010 through the middle of 2012 an influence on Eurozone fiscal policy so immoderate as to fundamentally contradict democracy is a point I have argued before (and at length here). The ECB threat that government bond markets would be abandoned to self-fulfilling market perceptions of fiscal collapse compelled many governments to moderate or reverse programmes of fiscal stimulus and overrode electoral politics.

But lately, the shoe may seem to be on the other foot. Consider this exchange at Draghi’s September 2016 press conference
Question: You've been urging governments to act for some time, and I'm wondering if there's a sense that maybe they might now be a little more willing to act and that the ECB could encourage that willingness by not raising excessive expectations about future monetary policy measures, hence the tone today.
Draghi: The ECB can't be in a sort of – let me say, what the ECB can do is to basically flag what is needed for monetary policy to be even more effective than it is at the present time.
In effect, the journalist asked whether Draghi could threaten to limit monetary stimulus in order to compel action by the fiscal authorities, probably hinting toward further fiscal stimulus. Draghi replied that he had only verbal persuasion at his disposal. (Draghi went on to demonstrate once again how low fiscal stimulus is on his list of priorities, but that is beside the point for now). 

While ECB leaders’ protestations of their limited influence in promoting austerity are unconvincing, Draghi’s assertion that in present circumstances he has little leverage on policy is far more believable. The difference between the two situations turns on the nature of the ECB’s mandate. When amidst the government bond market panics of 2010-2012 it was the ECB’s readiness to play a lender of last resort role that was the axis of contention, it was a plausible assertion that this role lay outside the ECB’s mandate. This was one reason a threat to permit bond-market meltdowns was credible. But in the present situation, where the ECB is dramatically failing to meet its clearly specified mandate to attain price stability (which it has defined as inflation ‘close to, but below 2% per year’), it has almost no flexibility: no matter how unhelpful fiscal policy is, the ECB must continue to stimulate, including via policies many find extreme, such as negative interest rates and a massive quantitative easing programme. The ECB has no threat to deploy.

Thus, the discretion created by the lack of a clear mandate to play a lender-of-last-resort role left the ECB with ‘too much’ power, but the presence of such a clear mandate in the case of fighting deflation left it with ‘too little’, at least from the perspective of those who believe further fiscal stimulus is urgently necessary.  

That a Goldilocksian balance remains elusive is not just an idiosyncratic result of current economic conditions. In fact, we are faced with a quite general limitation of the the present formula for reconciling democracy with independent central banking. Lorenzo Bin Smaghi recently likened the situation now facing central banks, in which they must soldier on despite a lack of supportive fiscal policy, to that facing central banks in the 1970s and early 1980s, when the challenge was inflation, not deflation. Most notoriously, Reagan’s budget deficits in the face of the inflation of the early 1980s pushed Fed chair Paul Volcker to maintain extremely high interest rates. In both cases, central bank policy in service of a price-stability mandate had to go to extremes to compensate for unsupportive fiscal policy. 

A very simple game-theoretic analysis (which builds on Blinder’s 1982 discussion of the Reagan-Volcker episode) helps to illustrate the generality of the Skcolidlog pattern in central bank-fiscal authority relations. The diagram above depicts policy choices by fiscal authorities followed by policy choices by central bankers. What it means to ‘reinforce market trends’ is contextual: this could be to contribute to a market panic by explicitly repudiating lender-of-last-resort actions, or to contribute to inflation through fiscal and monetary expansion, or to contribute to deflation or ‘lowflation’ via fiscal and monetary resriction. To counteract market trends is to adopt the opposite policies in each of these circumstances. Case I, “joint irresponsbility,” is the outcome fear of which drove much of the enthusiasm for central bank independence in an inflationary environment, where it would represent both fiscal and monetary authorities adopting expansive policies. But it could equally reflect both the central bank and the government failing to act in the face of a market panic. Case II is the one Smaghi discusses, where the central bank compensates for inappropriate government policy. Case III would involve a central bank pushing in a direction opposite to government policy, where as case IV is coordinated policy to counteract market trends.

This diagram helps clarify when fiscal and when monetary authorities have the preponderance of bargaining power. When the central bank is constrained to fulfil an inflation mandate, the boxes shaded in gray are not available to it. Thus, the fiscal authorities unilaterally choose between options II and IV. Very often it has turned out that fiscal authorities have preferred to force central banks to go it alone instead of coordinating policy, even when the latter would have arguably generated better growth outcomes and more effective attainment of the goals expressed in the central bank’s mandate. The reason for this is that governments have other agendas for fiscal policy. Reagan wanted to “starve the beast,” Cameron to cut back the size of the state. Fiscal authorities arguably did not have to bear the full political costs of these macroeconomically inappropriate policies because central banks compensated for some of their negative economic effects. I think a good case could be made that the ability of elected governments to compel such compensatory action by central banks does serious damage to mechanisms of electoral accountability that are usually held to be at the heart of democracy’s advantages. 

On the other hand, when the central bank does have discretion, and the gray boxes are open to it, as in the lender-of-last-resort case, it can often impose its will on government policy. In particular, if the CB prefers case II to case III, and case III to case IV, then fiscal authorities fearful of their policies being undermined may have to choose to reinforce market trends as a condition of central bank action. This is what happened to some European governments when the ECB was willing to rescue government bond markets only on condition of austerity. 
The diagram above shows some empirical cases of each outcome, with ‘1970s’ standing in however approximately for joint monetary and fiscal irresponsibility. What all of this implies to me is that the idea that independent central banks bound by a policy mandate can serve as a useful check on elected governments depends, in fact, on an unrealistic conception of the circumstances in which central banks act (they will sometimes be called upon to act in areas beyond their mandate) and on the preferences of democratically elected governments (who may use mandates to force central banks to deal with the consequences of their inappropriate policies). The cases suggest that the Skcolidolg pattern has some real empirical relevance. 

What, then, is to be done? Some people argue for giving central banks more power over fiscal policy, especially in near-deflationary circumstances like at present. But it seems to me—I won’t try to defend the point in this already over-long post—that this runs the risk of exacerbating the problem of electoral accountability that has hindered electorates from understanding the impact of the macroeconomically inappropriate policies that right-wing governments seem so prone to run. Nearly two decades ago, Berman and McNamara argued that insofar as the case for the economic advantages of independent central banking was dubious, it provided no grounds for overriding the usual preference for favour of democratic governance in the case of central banking. When one looks at how central banking has interacted with democracy in practice, their case only gets stronger. It’s time to bring central banks back under the direct control of elected officials, so that they bear the responsibility for both good and bad choices about monetary policy. Ultimately, there’s no way to get the porridge right unless you make it yourself. 

Friday, 3 June 2016

Experiments in political science and the Cartwright critique

Over the course of the last couple of years, the political science discipline has twice hit the headlines for scandals linked to "field experiments." Maybe this isn't surprising: such experiments have become incredibly fashionable. Success in an academically fashionable endeavour can bring large rewards, and it's certainly plausible this has created incentives making fraud or poor judgement more likely.

To the extent that bad behaviour reflects incentives, one can always try to to police against it more vigorously. But changing incentives may be more effective. In this spirit, I'd like to encourage political scientists to stop being so damned excited by experiments and offering such big reputational rewards for them!

As a reason to calm down, consider some arguments (or great lecture version) from the brilliant philosopher of science Nancy Cartwright. Experiments (of the presently fashionable sort) rely on the logic of randomly assigning groups to "treatment" and "no treatment," so that any difference in outcome between the two groups can confidently be ascribed to the treatment. Yay, science!

Cartwright's core insight is that what such experiments can establish is only the role of a particular link in what might be a complicated, and highly context-dependent, causal chain. To build on an example she uses: Suppose you had a set of toilets, and assigned each of them randomly to have the lever attached to its side pressed or not. On completion of the experiment, you could confidently assert the relationship "lever pressing leads to water release." This formulation, though, would entirely obscure the point that these levers only release water because they are part of a mechanism to open a chamber supplied with water by pipes, etc.

Thus, if you went off to deploy your exciting new experimental result to solve California's drought by having everyone push the levers attached to the sides of their toasters, you'd be disappointed by the results. As Cartwright says (p.102), "Once stated this is an obvious and familiar point," but nonetheless one too often overlooked. This she effectively demonstrates with empirical examples of the disappointing performance of 'experimentally validated' policy interventions in new contexts.

So why is it that experimentalists are overlooking this obvious and highly consequential point?  [I'm not going to defend in detail the claim that they are, but will assert that the discussions about 'external validity' from experiment evangelists are not nearly searching enough.]  Let's use a little notation to make the argument more compact: the causes of an outcome O of an experiment are the experimental intervention I (such as lever pushing) + the rest of the mechanism M.  

So the question becomes, why the emphasis on I rather than M?

  • A lot of the methodological backdrop for political science experiments is drawn from experimental medical trials. In these, the common features of human organisms are regarded as similar enough that M will function in the same way. This assumption can be criticised even in a medical context, but for social scientists the issue is orders of magnitude more significant. 
  • Unlike pressing a lever, field experiments in political science are difficult to organise and often quite expensive. After all that effort to demonstrate the role of I, it's hard to remember that the M is important too.
  • I will often have been chosen precisely because it's the aspect of a broader mechanism that is easiest to manipulate. If the effects of M cannot be assessed via randomised controlled trials, then experiment absolutists will deny the possibility of making any meaningful claims about those effects. They haven't faced up to the fact that this means that they will never have any basis sanctioned by their own methodological precepts to assert that the results of one experiment have any generalisable implications whatsoever.

Whatever its origins, the mania for measuring the effects of interventions, and the corresponding neglect of the causal import of the context of these interventions, strikes me as very bad thing for many reasons, on which I hope to expand on another occasion.

PS: Cartwright's is not the only impressive critique of experimentalism on offer; I especially recommend Dawn Teele's edited volume. But so far, the critiques don't seem to have made much of a dent in the popularity of field experiments. Political science as a discipline seems to have an almost congenital need to affirm its 'scientific status'. But we should be suspicious of anything we need so much. How much did that ring really help Gollum?

Thursday, 10 December 2015

Puffing the magic Draghi

Mario Draghi had a rough time last week.  The extension of QE he announced disappointed markets, who were apparently expecting him to exceed expectations.  (Sounds oxymoronic to me, but I'm just a political scientist, not clever like a bond trader.) The upshot was a sharp rise in the value of the euro, which is a problem for a Eurozone demand model heavily reliant on exports.

Maybe Mario will be cheered up after Politico published a puff piece about him today. I wasn't; the article veered from the uninformative to actively misleading, reporting inter alia:  
Draghi ... [took] bold steps that enabled him to save the euro. Now that the danger of a disintegration of the eurozone has abated, the ECB president is embarking on an even tougher political task: to convince Europe’s governments that they must do their part of the heavy lifting to take the continent out of the slump. ... 
He is prodding EU governments to boost spending to put the European recovery back on a path to growth. ... 
For the moment, Draghi is happy to let Coeuré [ECB board member] and Praet [ECB chief economist] push the message that Germany in particular needs to splash out more on public infrastructure, to address what one ECB executive board member called an “absurd situation” where spending is so subdued that the fiscal deficit of the eurozone is much lower than the 3 percent allowed by the Stability and Growth Pact.
This a reiteration the myth that Draghi is an active supporter of a demand-stimulus approach to resolving Europe's growth crisis. However, all of the arguments I made against this myth more than a year ago remain valid. Above all, Draghi's shown not the slightest inclination to use his ample sources of political leverage to push for increased spending stimulus.  Nor has he repudiated his key role (see pp.34-38) in pushing for an austerity-led reaction to the Eurozone bond crisis, continuing to imply that no other choice was possible. As he recently put it, "don’t blame the fire damage on the fire brigade."

Perhaps, though, Draghi is beating the drums for demand stimulus behind the scenes? He is, after all, somewhat constrained as the public face of the ECB leadership.  Consider this exchange from the latest ECB press conference
Question: Last year in Jackson Hole, you advocated for a policy mix with monetary policy reforms, investment and fiscal policy, and today you have emphasised the role of fiscal policy. Do you miss more fiscal stimulus in countries with margin, like Germany, for example, and do you consider that the neutral fiscal stance that the European Commission is advocating for the eurozone as a whole is adequate now, in a sort of liquidity trap?
Draghi: We had a brief exchange on this issue, and our conclusion now is that, first of all, the first answer should be given by the Commission. The second point is that we'll continue reflecting on this, and we will have a view on what is the degree of appropriateness of the fiscal stance; whether we have a view about the aggregate fiscal stance; what is the degree of compliance with existing rules; whether the flexibility which has been exercised before all the terrible happenings of this year – so before the recent terrorist attacks, but also before the refugees events – whether that flexibility would be justified. So there are lots of factors in play altogether. How do we assess the fiscal stance today given the presence of the previous flexibility, the refugees, the need for security of the euro area? It's a very complicated question, so we are going to reflect on that.
One might read this as a sign that political conflict at the top of the ECB is limiting what Draghi can do by way of advocating fiscal sanity.  However:

  • Draghi has more than once found ways to move beyond the consensus of the bank's leadership, and there's no evidence he's trying to do so on this issue.
  • There is likewise no evidence that he personally views austerity as a crucial component of the growth catastrophe.  Asked at a November Europarliament meeting about what was needed to promote growth, Draghi had literally not a single word to say about government spending (see p.11).