Politics of Hard Times - Macroeconomic Imbalances Edition

Yesterday morning I attended a panel at the annual American Political Science Association meeting on the macroeconomic and global responses to the financial crisis. Organized by Jeff Frieden of Harvard, the purpose of this panel was to discuss ways to revitalize theory building around the political economy of adjustment. Speakers included former chief IMF economist Raghuram Rajan , former Mexican president Ernesto Zedillo, and UNC professor Layna Mosley (MA thesis advisor to Will, Alex, and me). Overall, I found the discussion fascinating, although I wish that there had been more discussion about whether current conceptual and methodological tools are adequate for this task. Here's a quick run down of some main themes that emerged:

1) Current explanations of the Great Recession tend either to be mainly a macroeconomic imbalance story (without much political economy) OR a political story about regulatory failure due to rent seeking at the domestic political level. IPE scholars need to spend more time thinking about the political economy behind macro imbalances, and the complex interests and institutions that lead to variation in national economic policies. The question hear is why do some structurally important states become borrowers and why do others become lenders? Why do some governments adjust in time to structural imbalances and why don't others?

2) What are the political and economic consequences of an international political economy characterized by some states running persistent current account deficits while others run persistent current account surpluses? Rajan is particularly worried that an increased focus on export-oriented growth is creating a vicious cycle in which countries that would normally be in the best position to stimulate counter-cyclical AD can't because of enduring weakness in the domestic market. If I'm not mistaken, this point speaks to a running debate between Will and Thomas. (Perhaps someone wants to weigh in?)

3) How does growing inequality affect the politics of adjustment? Discussion on inequality focused mostly on the US and stems from Rajan's argument in his recent book, Fault Lines: How Hidden Fractures Still Threaten the World Economy. Rajan argues that technological changes are decreasing the wage advantages traditionally afforded by a college education, and that this effect is particularly important in thinking about inequality more around the 80/20 divide (I have no data on this - I'm assume this is in his book which I'm planning on reading after taking my Methods Comp). For him, the story here is that politicians have dealt with this growing inequality in the most politically expedient way - extending credit to those down the bottom of the distribution. Of course, the point here is that dealing with inequality this way leads to asset bubbles as we saw this time around. (This is the response to Will's post yesterday about performance pay and wage inequality. Rajan's take on this would be that democratic governments have to deal with inequality some way (even if some of rising inequality is merit based, as the 2007 NBER working paper suggests), and the problem is that the quick fix for elected officials is to pursue policies that do not change underlying structural inequality but also lead to increased demand for imports and financial instability.)

4) How has the Great Recession changed the way we study how governments choose to engage markets? This is Layna's main question and speaks to questions about how governments manage their debt, the role of official entities that hold sovereign debt on the rates states must pay to borrow, and whether the idea that advanced industrial countries have "room to move" still holds.

5) What are the prospects for macroeconomic policy coordination and global governance of capital markets when governments are dealing with the domestic politics of adjustment? Zedillo is particularly pessimistic about the future of economic interactions, especially between the US, the Eurozone, and China. Audience member Dan Drezner voiced concern about the politics of fiscal policy as more politically insulated monetary policy tools become less effective at managing downturns.

From my perspective, the take-away from this panel was that we just don't have a robust understand of the political implications of an international political economy with such deep structural macroeconomic imbalances. In order for IPE gain some explanatory purchase over the question panel members raised, we really have to re-conceptualize how to study IPE as a complex dynamic system. It is too easy to revert to a domestic political explanation. What states can do is constrained both by domestic and international politics and economics.