Globalization and the "One World Currency"

I want to apologize in advance for the brevity of my thoughts this week.

First, I want to remark on something Evan said. Often we challenge or butress each other's arguments, but when I read: "if globalization is present and increasing at the pace it currently exhibits" I just had to chuckle a little. If only! I understand Evan's point, of course. The broad trajectory is one of globalization and integration, and hopefully it will continue that way. But this is not the situation right now. International trade is imploding, racking up unemployment figures in export-oriented economies like China not in intervals of hundreds of thousands (as in the U.S.) but in millions.


Another thing that may or may not be on the table at the G-20 meeting is this nebulous prospect of a "one world currency". I want to caution people on exactly what is being proposed here. They're not going to throw national currencies out the window; nobody is talking about that. They're discussing the prospect of replacing the dollar as the world reserve currency. Right now, the Chinese central bank and other central banks hold a large amount of dollars because most world trade is conducted in dollars. It's easier for trade to be denominated in a single currency (like the dollar) than many currencies - and to support trade, central banks must hold that reserves of that currency so that importers and exporters can finance their transactions. This is where we get the term "reserve currency". The problem is, the global supply of dollars is governed by the Federal Reserve Board, in Washington D.C.. The Federal Reserve's charter dedicates it to the task of price stability, presumably in the United States.

However, the Fed's activities also influence the value of the dollar reserves held by central banks all over the world. The result is a fundamental conflict of interest. The Fed is often left with a tradeoff between global macroeconomic stability and national macroeconomic stability. Right now, the U.S. economy is under the pressure of a great deal of debt. The Fed (theoretically) has an incentive to increase the money supply and induce inflation to lower the burden of those debts. However, that would also dilute the value of China's massive dollar reserves, and impoverish the Chinese central bank at a stroke of Ben Bernanke's pen. This is why China is pushing for a new international monetary system, and this is why that monetary system is aimed at decoupling central bank reserves from the dollar.

I still don't know what I think about this. Barry Eichengreen has long advocated not a new reserve currency, but a "basket" of multiple reserve currencies. This seems sensible to me, because it would promote stability and not make the same mistake of putting price stability in the hands of a single decision maker.

To bring this full circle, I think any discussion of reforming the international monetary system is a great step forward towards erecting what Evan calls a "deeper pluralism". Sometimes economic policymaking eschews these more fundamental philosophical concerns - but it doesn't have to. Replacing the dollar as the world's reserve currency with a currency basket governed by multiple central banks, or a new IMF currency governed by a committee that is representative of all major powers introduces a great deal of pluralism into the global economy. In Europe, we've already seen how monetary coordination and the "deep pluralism" of the European central bank (which has to balance the needs of Eastern Europe, Western Europe, the Mediterranean, Scandanavia, and the Balkans) has led to greater political integration, cooperation, and peace.

A lot of people fear the world of monetary policymaking and banking. It's mysterious and shadowy. Those concerns may or may not hold water. I think the nature of both conspiracy theories and prophecies is that we don't really know until we know (you know?). I try to be a little more trusting of the situation in general, and optimistic about the direction we're heading. Money is just a neat human invention that has made our lives easier. I don't know too much about monetary economics or monetary policy, but I think the dialogue that's going on now is a great step forward towards a global polity that incorporates the very best from both "cosmopolitan" and "communitarian" visions for the future.

Risky Behavior and Morals

I spent the better part of the last three days in the Washington Plaza Hotel at a conference held by IZA, a German labor economics group, on the "economics of risky behavior".

The National Bureau of Economic Research held a similarly themed conference a couple years back. Broadly speaking, the conclusion of the NBER conference was "risk is rational". "Rational addiction models" were popular and common. People engaged in risky behaviors as a part of an explicit decision to maximize lifetime utility. It's not that crazy of a story - certainly we weigh the costs and benefits of some risks and choose a risky course of action. So I don't mean to belittle the NBER conclusions.

To a large extent, though, the IZA came to this conclusion too - but with more nuance and qualification. Empirical work on some risk behavior concluded that it was irrational some of the time. I also don't think this should be hard to accept for most economists, much less most people in general.

But one thing that occasionally came up that is talked about more often in other circles was the role of social norms and morals in risky behavior. The IZA conference covered lots of material, including infidelity, prostitution, murder, binge drinking, drug use, etc. etc. An outsider may have been surprised by the extent to which the group discussed these behaviors in very clinical, value-neutral terms. We talked about crack markets and sex markets as if they were markets for sandwiches or shoes. But occasionally, somebody brought up the constraining influence of morals.

I think economists could explore morals more thoroughly. Usually, economists think about maximizing something like utility or profit based on some decision set available to an actor. Morality could simply be understood as an institutional restriction on the available decision set, or perhaps excessively punitive costs associated certain decisions.

Another important question about the "optimality" of morals is to start to consider where morals come from. Let's assume for the moment that there are two types of morals: (1.) transcendent morals that universally restrict decision sets, and (2.) institutional rules that were created to minimize the costs and externalities of certain decisions. I include type 1 morals so that we don't have to argue about the most divisive and really the most important morals out there. By type 2 morals, I'm thinking about everything from the Jewish restrictions on pork to keep the Hebrews strong and healthy in the desert, to the myth of the evils of marijuana that was concocted in the 1930s. Insofar as type 1 morals are universally applicable and important, we're not especially concerned about any sub-optimality associated with them. If it is always excessively costly to the individual and society to murder, then the moral prohibition on murder that acts as a restriction on the decision set is always going to be optimal.

But what about those residual, type 2 morals that are inherited from the trade offs faced by bygone generations? These types of morals in all likelihood are forcing current generations into sub-optimal decisions.

My question is - if a sub-set of morals and norms really are just leftovers that distort the decision making process today, how do we deal with them? Are ethicists policing this at all? Is there a process for reevaluation? I think people naturally reevaluate morals in their own lives, but that process can be slow (not necessarily a bad thing).

I think it's nice to qualify the NBER assumption that risky behaviors are perfectly rational. Norms and morals do exist for humans, so they should exist in the science of human action. But the broader point of NBER rings true as well. We have rational faculties to weigh risky decisions. Morals inform those faculties. But if morals distort those faculties unnecessarily, what is to be done?

Production vs. Prosperity

I want to explore a little bit of Evan's query:

"Do those who provide goods and services contribute to useful cultivation, or do they perpetuate a practice of commoditization, either of ideas, tools, or resources?"

It's a reasonable question. Many have opined that the GDP statistics we collect are a poor measure of the true "wealth" of society precisely because this summation of values doesn't necessarily correspond to the creation of actual value in society. A homeless shelter may purchase paper plates and spaghetti from the store, and those purchases will show up in GDP statistics - but the couple of bucks that they contribute to GDP will far underestimate the "value" of that purchase to society when the spaghetti is served with a friendly face, an open ear, and a safe atmosphere.

But as Christopher Hitchens has recently pointed out: "There’s also the not-inconsiderable question of capitalism’s ability to decide, if not on the value of a commodity, at least on some sort of price for the damn thing." We need not assume that GDP encompasses all value to admit that there is value to the idea of GDP (and the products that it measures).

If we set up a straw man of modern production as some monstrous, commoditizing, corrosive influence then of course we will be able to vanquish that straw man and banish it to oblivion. But that would be a hollow victory, because that straw man doesn't really represent the "modern economy" as an idea.

Something like GDP is useful if we are realistic about what exactly it is: Gross (i.e. - after subtracting off imports) Domestic (a fundamentally political concept) Product (those things which are produced for sale in a particular jurisdiction). "Production" is a much more humble thing than "culture" or "happiness" or "value". Production includes the plows and tractors that make cultivation possible, as well as the proverbial pick up truck, farm windowsill, and apple pie (perhaps the apples are home-grown, but the flour is most likely ground somewhere else and the baking tin is almost certainly made elsewhere). This is what GDP is - production that is brought forth in the context of a market. And a market is nothing if not a social collective, and therefore absolutely relevant to "culture".

But Berry and Evan have a point that is illustrated in my example of the spaghetti and paper plates used in a homeless shelter. These contribute to GDP, but they only contribute prices - i.e., market values - and not social values. A great deal of social value is produced that is totally omitted from the GDP statistic.

Charles Murray (a real conservative's conservative) used the occasion of his March 11th Irving Kristol Lecture to speak on how a civilization's happiness is grounded in it's cultural institutions, rather than in cold economic calculations alone. On the other side of the aisle the Nobel prize winner responsible for attacking the Clinton administration from it's left flank, Joseph Stiglitz, has been tasked along with Amartya Sen by French President Sarkozy with exploring new ways of measuring growth to capture social happiness.

I think Berry's point is not lost even on those who deal with the modern, competitive market every day. The task is to:

1. Understand how markets both complement and conflict with culture and value, and
2. To be more realistic about exactly what GDP is and what markets can accomplish in the first place, and not penalize them for failing to accomplish something that it was never their task to accomplish.

The Entangled Nature of Equality

This week I want to address the fallacy of trying to separate "equality of opportunity" from "equality of outcomes" - one of the great fetishes of the American public dialogue on political philosophy. I doubt I'll say anything especially new or insightful here. I'm positive it has been considered before (in fact, I was somewhat inspired by an article I read recently by Anthony de Jasay in the Cato Journal). But in light of recent concerns that the administration is "redistributing wealth" and engaging in "social engineering", I do think it's worthwhile to revisit basic questions of whether we should be pursuing "equality of opportunity" only, or "equality of outcomes" as well.

Americans almost universally agree that ideally government should only guarantee "equality of opportunity"; a level playing field, as it were. For example, there is little opposition to anti-discrimination laws, universal K-12 education, or bare bones workplace safety requirements. If pressed, a large portion of Americans would also concede that practically speaking, some extenuating circumstances require the government to guarantee "equality of outcomes". The welfare state emerged out of this practical, but not ideal, response to extenuating circumstances in peoples' lives. The battle lines in the modern ideological debate over domestic economic and social policy are largely drawn based on the strictness with which people adhere to government's mission of only guaranteeing "equality of opportunity".

My thesis is that the distinction between guarantees of "equality of opportunity" and "equality of outcome" is far less distinct than we would like to pretend. The major reason for this is that an individual's success in life is based largely on things outside of his or her control. If a person's success was entirely derived from their own intelligence, talent, effort, and thrift, then relentlessly adhering to a policy of only guaranteeing "equality of opportunity" might be possible. But individual success is also influenced by the monetary and non-monetary endowments bestowed on individuals by their parents. Parental success is a major determinant of the quality of an individual's K-12 education, the availability of higher education, exposure to a strong work ethic, and an interest in advancing oneself.

We cannot make the claim that effort and talent are equally rewarded by the market if a youth that grew up in a broken home in a poor neighborhood needs to exert more effort or show greater talent in order to achieve the same success as another youth that grew up in a supportive home in a wealthy neighborhood.

This fundamental inheritability of success in life is by no means a bad thing. After all, improving your children's life chances is a major motivator for any individual's success in life. Parents would be less productive if there was no prospect that their children would benefit from their efforts. Few people advocate denying children the fruits of their parent's labor. But recognition of the high correlation of parental and child success does highlight the fact that guaranteeing "equality of opportunity" for all individuals is absolutely impossible without considering the "equality of outcomes" of other individuals (primarily parents).

This line of argument could obviously be used to justify any number of redistributive schemes. It could justify such schemes, although I want to emphasize that I don't mean to justify those schemes here.

What I do want is to recognize that:
(1.) "equality of opportunity" may be impossible to guarantee, despite it's place of honor in American political philosophy,
(2.) that if we are serious about at least partially guaranteeing "equality of opportunity" it may be perfectly reasonable to explore some "equality of outcome" efforts, even if we completely reject the goal of equalizing outcomes, and
(3.) that we cannot consider an individual's success to be solely derived from his or her own abilities and efforts; individual success is also a function of the collected series of familial successes and failures, compounded over time.

Abortion, Morality, and the Freedom to Decide Moral Matters

Evan's post revolves around the idea that despite the retro, flash-back images the abortion debate conjures up in the 21st century, there are still important, black-and-white moral questions at the heart of the conflict. Indeed, I sense that a major concern of his is that this moral dimension will be lost as both sides of the question begin to understand that they actually do share common values - that pro-choicers aren't actually "baby killers" and pro-lifers aren't actually "misogynists", and that neither side has any great affinity for the practice of abortion. From what I understand from previous discussions I've had with him, Evan considers the moderation of ad hominem attacks to be fantastic progress in the abortion wars - but he worries that it may dilute the real question at hand. The moral imperative itself still needs to be front and center. In this respect, I agree with him. So long as this is a moral problem with opponents, proponents should stand ready to engage the moral issue, even if their response is quite simply "I don't consider it a moral problem".

I would take issue with Evan's conclusion that as long as this remains a dilemma, there should be a moratorium. He specifically mentioned a moratorium on funding, but presumably some kind of "time out" on abortions themselves would be consistent with this view as well. The logic is that as long as we all still disagree the state shouldn't take sides.

What I think that position ignores is that as long as you're telling a person what they can and can't do, the state is always taking sides. The question is - what side should the state take?

In the United States, we have traditionally taken very seriously the idea that free people should make moral decisions for themselves; that their own moral compasses are far better equipped for decision making than government fiat. This is not to say that the government never "legislates morality". As Evan suggests, the Civil Rights movement and emancipation, not to mention laws against homicide, rape, and embezzlement are nothing if not "legislating morality". The essential difference, I would argue, is that these laws weren't passed until a critical mass of citizens identified the issue at hand as a moral problem that was worth state involvement. In the case of emancipation, the critical mass was so great that stringent requirements for Constitutional amendment were even met. At the same time, many more "moral problems" - like lying, adultery, etc. - remain free of state legislation, not because there is a disagreement over their moral standing, but because we still place a premium on individual moral decision making - even when the vast majority agree on the immorality of a course of action. Only certain immoralities translate into illegalities.

We aren't even close to a resolution of the moral question of abortion in this country - and I don't think there is any clear momentum in either direction that might justify a heroic court decision on the matter. Roe v. Wade represented such a "heroic" (perhaps "quixotic" is a better word) decision on the question in anticipation of the momentum of public opinion - and many legal scholars agree that while the conclusion of the court may have satisfied the pro-choice movement, the legal justification they provided was flimsy at best. Roe v. Wade, in my mind, was a mistake - but we shouldn't match it with an equally mistaken and equally sweeping national moratorium on abortion.

I think the court should have simply said that there is no precedent or Constitutional justification for a national position on abortion. No national consensus exists to support such a decision, and no Constitutional provision suggests that the federal government has a right to dictate the practice to the people or the states. As such, if the Texas legislature finds abortion to be a criminal offense, it is a criminal offense in the state of Texas. If the state of Massachusetts provides unfettered access to abortion, then unfettered access is legal in Massachusetts. This is how we have always approached contentious moral questions in the United States, and I see no reason not to approach it this way now. I think Roe did more damage to the veracity of federalism in the United States than it did to alter the fundamental position that free individuals should make moral decisions for themselves. It erred insofar as it prevented the several states from exercising their right to curtail individual decision making - but it did not do violence to the underlying sanctity of individual decision making. In that sense, it was bad law but not ultimately unsalvageable.

In the future, there may be a national consensus that passes a Constitutional amendment banning abortion. If that happens, that's fine. In the meantime, the House of Representatives still controls the federal purse strings. If they want to fund abortions, that's something that can be determined by a simple majority. If they want to restrict funding, that too can be done with a simple majority. The President conducts our relations with foreign nations. If he wants to restrict abortion funding from going abroad, that's fine. If he wants to make those funds available that is fine as well - and the voters will hold him accountable for his decisions.

To me, the real audacity of the abortion debate is that both sides have made a habit of assuming that the moral conclusions that they draw are more valid than the moral conclusions of others. One side is more valid than another, obviously. But neither should presume the right to exercise the power of the state on their own behalf unless they can legitimately exercise that power (i.e. - gather the votes or get the amendment).

The default position of the state in the United States is to let the people make decisions freely. Government action - whether in the form of funding, a moratorium, or a ban - should only occur when it garners enough votes. There is no default moratorium on free agency in this system! The default should be to let individuals choose. As bad as Roe v. Wade was, at least it still allows that to happen.

As an olive branch, I would note that because of my position on this, I completely support Montana's right to legislate that life begins at conception. We need to get to the point in this country where that is something that a state is able to decide for itself.