Do economic sanctions work? And a poem by Bertolt Brecht.

A convoy of military trucks speeds past. Armed men are disgorged outside parliament. TVs play patriotic music. Facebook goes down. Men in uniform grace local street corners. People are arrested. The patriotic music is interrupted to announce that General so-and-so is dissolving parliament to protect the constitution/democracy/the people. Condemnation follows from the democratic world.

Image result for military coup in myanmar

There has just been a military coup in Myanmar. In addition to widespread condemnation, the US and some of its allies are also discussing sanctions.

Economic sanctions are an attractive proposition. They apply pressure to the leadership by closing their Swiss bank accounts, and cutting their economy off from the world. The resulting economic decline causes people to vent their frustration at the regime, who then presumably restore the constitution/democracy the people. All this without any shooting or bombing!

Critics argue sanctions often leave the leadership unscathed while the population struggles with rising prices and goods shortages. The people with guns still eat well and live in nice houses, while the rest are pushed into poverty – and they still can’t vote.

What does the research on sanctions say? I’ve read through the papers so you don’t have to.

Here are some key points:

  • It can be difficult to determine if a sanction has worked or not, especially since they are often combined with other policy tools. It can be difficult to disentangle whether the target state changed their behavior because of an economic sanction, diplomatic effort, or the threat of a military intervention? A classic work in the field – Economic Sanctions Reconsidered – argued that between 1914 to 1990, sanctions worked in 40 of 115 cases, for a 34% success rate. Critic Robert Pape argues they incorrectly coded many examples, and the true figure is more like 5 of 115.
  • For Pape, sanctions cause enormous human suffering, and can increase the likelihood of conflict because policymakers “may escalate in order to rescue their own prestige.”
  • What about “smart sanctions,” those that narrowly target elites and their power base? Reviewing the use of specialized financial sanctions against Sudan, Russia, and China, the authors said: “rarely has so powerful a force been harnessed by so many interests with such passion to so little effect.”

    The consensus is that smart sanctions are relatively ineffective, but are an easy political option for countries which want to act, but do not want to go to war, or be accused of causing mass suffering in target countries.

What is the international community to do then? Diplomacy, perhaps through those states best positioned to exert pressure, like China. Humanitarian support, to the degree that it can be provided without simply enriching elites. Otherwise, the outlook is rather grim for those hoping for a quick solution.

In the words of Robert Pape:

Finally, I am reminded of Bertolt Brecht’s famous poem, The Solution, following the 1953 uprising in East Germany

After the uprising of the 17th of June
The Secretary of the Writers’ Union
Had leaflets distributed on the Stalinallee
Stating that the people
Had forfeited the confidence of the government
And could only win it back
By increased work quotas. Would it not in that case be simpler
for the government
To dissolve the people
And elect another?

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China’s Youth

The Economist has a new special report out on China’s youth. It is fully of anecdotes and analysis on: “the jiulinghou, or “post-90s”, a shorthand term for those born between 1990 and 1999. They number 188m—more than the combined populations of Australia, Britain and Germany.

The question lurking beneath the special report is why the jiulinghou show little interest in the liberal ideas that boiled over into Tian’anmen Square only a generation ago. The answer is a combination of renewed national pride, economic growth, repression, and diversion into socially progressive (but politically inoffensive) causes like the environment or LGBTIQ rights.

Its a compelling explanation of the status quo, but one The Economist thinks is unlikely to persist:

The Communist Party has shown a remarkable ability to adapt. Yet its tacit deal appears to be morphing into one that leans more heavily on brute repression and nationalism. If that is the bargain, self-assured young Chinese will at some point balk. Participants in every pro-democracy outburst in China have raised high the banner of patriotism, from 1919 to 1989. This tendency is not lost on Mr Xi, as much a manipulator of nationalism as he is afraid of it. But the party sees a useful distraction in teeth-baring patriotism. One day this may come back to bite it

Two deep assumptions power this familiar call and response. First, that political liberalisation follows economic liberalisation – perhaps we possess an innate urge to freedom. Second, regimes which resist that dynamic are fundamentally unstable.

I’m not so sure. History is surprise, and the more time that passes, the less comfortable I feel with analogies from the past. What would even constitute a falsification of those hypotheses?

I am reminded of a line from Adam Tooze’s chartbook on Chinese state capitalism:

A few other snippets I enjoyed:

Close to one in two red-tourism trips [trips related to China’s communist past] are made by Chinese under 30, says Ctrip, China’s biggest travel firm.

Women in Shanghai marry on average at 29, later than Americans and a jump of six years in a decade. Even in rural areas the age is 25 and rising.

A survey in 2019 by China Youth Daily, a state organ, found that three in four of those born after 1995 think China is “not perfect, but always improving”

Finally there is a Chinese show which look like “who wants to be a millionaire,” where all the questions are about Xi Jinping.

Its well worth reading.

Beware the fair-weather fiscal friend

As I’ve discussed before, a change is in the air for fiscal policy. The FT has done a mea culpa and said “the aim of balancing the budget can, at least temporarily, be dropped.” This is good news for those who have waged the long and lonely war against the fiscal hawks, but I want to urge caution about over-interpreting the new shift in fiscal policy.

There are two ways ideas can shift. First, the assumptions and/or internal logic of an idea can be rejected wholesale; the idea’s core can be negated. Ptolemaic astronomy, which held the Earth was the center of the universe, is gone without reservation, caveat, or condition.

But ideas can also change in a more gentle fashion. The core remains, and where it fails to explain, special caveats, a long list of “buts” “ifs,” and asterisks, are appended. Circumstantial reasons are proposed for why the idea does not work; perhaps the idea only works in “normal times,” and today is not; perhaps it only works when people behave a certain way, and today they are not. At some point, it is presumed, reality will again dance to theory’s tune.

This second type of change is fragile and skin-deep. The special conditions and circumstances can be jettisoned to reveal the original core. If Ptolemaic astronomy were only wrong because we were temporarily passing through a heliocentric phase, we should not be surprised to see its advocates return once they deemed the phase over.

Much of the change in fiscal policy is of this second kind. Exceptionally low interest rates, overextended monetary policy, and a pandemic induced slump are special circumstances that temporarily waive the normal logic, but they do not challenge it. The logic of balanced budgets and restrained fiscal policy still holds in “normal times” (oh those halcyon days!), we are just living through a special period that allows us to temporarily deviate from the optimum.

This colors the attitude of new converts to other parts of the consensus. As the FT’s article makes clear, a temporary shift in circumstances is no reason to change other parts of the consensus, for example changes to central banks are out of the question – “The facts have changed, but not everything else should.”

The danger is these temporary changes can be reversed quickly, at which point the old logic lurking in the background will return in force.

We should not be naïve about these processes being purely fact-based. Facts do not speak for themselves, and interpretation is complex. The US fell below estimates of full employment in 2015, but it took another four years for the Fed to change its approach to unemployment. The FT made much about sensible people changing their minds with the facts, but as Robert Skidelsky’s letter makes clear, the facts haven’t changed, it is only the FT’s interpretation which has.

Low rates, low growth, and low inflation have relaxed many of the distributional and political tensions around macroeconomic policy, and made this entente possible. Subdued inflation has allowed the financial sector to acquiesce to expansionary policy, but do not expect that to last should it pick up again.

Take last week’s fiscal framework from Orszag, Rubin, and Stiglitz (here). While they agreed on what should be done now, they were divided about the post-recovery period – “once we’re at full employment” (never mind that no one knows where it is). Rubin trotted out the warning he has been telling for thirty years, about how out-of-control US debt will cause a crisis of confidence, and a massive currency crisis. Never mind that the opposite has happened. He sounded like the old Marxists, who, when asked why the forces of history had not yet delivered the inevitable revolution, would say “just wait.”

It is a good thing that fiscal policy is experiencing this renaissance, but we should remember that many of its new friends are fair-weather.

And in Europe…

Its been a big news week in Europe.

The entire Dutch cabinet has resigned following a scandal where the tax authorities unfairly targeted minorities with demands to repay childcare benefits. This, in one of Europe’s biggest corporate tax havens. The government was already in caretaker mode thanks to elections in March, which Prime Minister Mark Rutte’s party is still expected to win.

Because its the Netherlands, he rode his bicycle over to see the King and hand in his resignation.

Elsewhere, Angela Merkel’s 16 year reign is coming to an end. She will not be contesting the coming elections in October, and her party has just selected its new leader, a candidate who promises to continue her centrist legacy.

Intel, chip manufacturing, and power

The FT reports that hedge fund investor Third Point wants Intel to divest its microchip manufacturing business. Today Intel both designs and manufactures chips, but is increasingly falling behind new chip manufacturers in Taiwan and Korea.

Why should we care about arcane maneuvering in the chip industry?

Two points to take note of:

  • The design and manufacture of advanced semiconductor chips are an important front in the ongoing tech/trade war between China and the US. Even were Intel to divest, the immediate geopolitical consequences may be mild. The cutting edge manufacturers are still located in allies like Korea and Taiwan, allowing the US to use political pressure to block access for Chinese companies, forcing them to rely on technologically inferior domestic chip manufacturers.

    In the longer term however, China’s efforts to bootstrap its own semiconductor industry will probably bear fruit. This could make the US vulnerable to disruptions, for example in the event of an invasion of Taiwan.

  • Markets reacted positively to the prospect of Intel divesting itself of manufacturing, pointing to tensions between the respective approaches of corporate America and Congress over China. Even as geopolitical competition becomes a bi-partisan norm, parts of American industry continue to see a future in China. Apple has kept manufacturing there, while the financial industry is desperate to get a foothold.

    The fact that this tension has resolved itself almost entirely in favor of the state’s new belligerent policy suggests a shift in the relationship with capital. At a minimum, we may need to reconsider the familiar narrative of unlimited corporate power – at least when it comes to aspects of geopolitics.

    What could be an explanation? As this insightful piece on Brexit argued, as ‘national capital’ is increasingly foreign owned, its interests may diverge from the more parochial interests of the state. Does the transformation of conservative parties downwards, into vehicles for parochial nationalism, have a causal parallel in the upwards dissipation of ‘national capital’ into a global network?
Do we need to rethink this familiar image?
(See more here)

The first Keynesian?

It is the fate of famous thinkers to be reduced to caricature. Those outside the limelight at least keep their nuance.

Since reading Zachary Carter’s biography of Keynes earlier this year, I’ve been exploring more of the great man’s nuance. ‘Keynesian’ is now synonymous with massive crisis spending programs, but this characterisation both fails to adequately describe the practicalities of a Keynesian program, while omitting entirely the Keynesian political project.

A more complete interrogation is the goal of this 2018 book review in the LRB by Adam Tooze. This passage in particular was striking: