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A Fond Farewell

Attorney General Eric Holder Jr. is on his way out the door, and the New York Times Editorial Board has a lengthy farewell. Please read it in its entirety, because you will need to work through ten paragraphs before you arrive at this:

Under Mr. Holder, the Justice Department approved the targeted killing of civilians, including Americans, without judicial review, and the Obama administration fought for years to keep the justifications for such efforts secret. In the zeal to stop leaks of government information, Mr. Holder brought more prosecutions under the Espionage Act than during all previous presidencies combined. In tracking the sources of leaks, prosecutors seized phone and email records of journalists who were doing their jobs.

Maybe it’s just me, but I think this should have been the opening paragraph. Of course, after that paragraph little else would have–or should have–mattered.

Number 7

Glenn Greenwald notes that the bombing targets in Syria marks something of a new record:

Syria becomes the 7th predominantly Muslim country bombed by the 2009 Nobel Peace Laureate – after Afghanistan, Pakistan, Yemen, Somalia, Libya and Iraq.

The utter lack of interest in what possible legal authority Obama has to bomb Syria is telling indeed: empires bomb who they want, when they want, for whatever reason (indeed, recall that Obama bombed Libya even after Congress explicitly voted against authorization to use force, and very few people seemed to mind that abject act of lawlessness; constitutional constraints are not for warriors and emperors).

President Obama gave a stirring speech when he accepted the Nobel Peace Prize. He proclaimed:

I believe that all nations—strong and weak alike—must adhere to standards that govern the use of force.  I—like any head of state—reserve the right to act unilaterally if necessary to defend my nation.  Nevertheless, I am convinced that adhering to standards, international standards, strengthens those who do, and isolates and weakens those who don’t.

And

America—in fact, no nation—can insist that others follow the rules of the road if we refuse to follow them ourselves.  For when we don’t, our actions appear arbitrary and undercut the legitimacy of future interventions, no matter how justified.

For those who do not recall President Obama’s remarks at the acceptance of the Nobel Peace Prize, you can read them in their entirety here.

Marc earlier noted the depressing state of political literacy in the US.  However, I was pleasantly surprised to see a remarkable statement of economic literacy in the news today – and by someone who isn’t a trade economist.  In this case, the example came from entrepreneur Elon Musk (who was seconded by fellow businessman Lyndon Rive). He, unlike most Americans, seems to totally get one of the reasons why protectionism designed to offset foreign “external” subsidies (subsidies allegedly aimed at helping domestic – in this case Chinese – companies compete in a foreign market) is unwise:

When asked whether or not the U.S. should erect trade barriers designed to protect American solar-panel manufacturers, Mr. Musk said: “If the Chinese government wants to subsidize the rollout of solar power in America, OK, it is kind of like ‘thank you’ is what we should be saying.”

Now I’m not sure the Chinese people would want to thank the government for such actions!

Vox Populi

This week we celebrated Constitution Day, by among other things, watching Congress authorize funding for a war that is not a war, and allowing it to be waged on the basis of a 2001 use-of-force resolution that authorized military actions against parties involved with the 9/11 attacks (conveniently, it did not have an expiration date).

Every year, it seems, there are poll results released on Constitution Day that suggest that the majority may not even know that a constitution exists (or if it does, what it might say). A survey conducted by the Annenberg Public Policy Center found that:

While little more than a third of respondents (36 percent) could name all three branches of the U.S. government, just as many (35 percent) could not name a single one.

With respect to the Congress—which, we are told repeatedly, is held in remarkably low esteem by the public:

Asked which party has the most members in the House of Representatives, 38 percent said they knew the Republicans are the majority, but 17 percent responded the Democrats, and 44 percent reported that they did not know (up from 27 percent who said they did not know in 2011).

Asked which party controls the Senate, 38 percent correctly said the Democrats, 20 percent said the Republicans, and 42 percent said they did not know (also up from 27 percent who said they did not know in 2011).

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A few takeaways from the 55-45% victory for No in the Scottish independence referendum:

  1. The polls overestimated support for independence, just as in the 1995 Quebec referendum. Secession from a well-established democracy is extremely difficult due to voters’ risk-aversion and status quo bias.
  2. Scotland’s right to decide elicited salutary promises of decentralization from the British government. My book found that countries with legal secession saw more decentralization than countries without, and countries with legal secession never recentralized power in the post-World War 2 era, according to the measure of regional autonomy I used.
  3. While Westminster is likely to follow through on some additional powers for Scotland, they are not likely to approach anything like “devolution max.” For one thing, the Barnett formula will continue, suggesting the Scottish government’s budget will remain heavily dependent on transfers. For another, significant powers for Scotland will require wholesale constitutional reform, particularly to deal with the West Lothian Question, and there are many obstacles to a solution to that problem. Finally, the scale of No’s victory will reduce the urgency for British leaders to get something done. I will be very much surprised if a bill is produced to give Scotland autonomy equivalent to that enjoyed by, say, New Hampshire, let alone the Isle of Man.
  4. There’s going to be a lot of ignorant commentary about what this means for Catalonia. It means very little. Catalonia will proceed toward its own vote on independence. Secessionism isn’t contagious across borders, nor is declining secessionism. If anything, the No camp’s victory might persuade the Spanish government to allow a Catalan vote — but I wouldn’t count on it.

To favor creating a new state somewhere is to be a dirty nationalist. To favor keeping all existing national states precisely as they are is very progressive and enlightened and not nationalist at all.

How do these people believe this stuff? Even though independence would be bad for Scotland in the short to medium run, part of me hopes that they vote Yes today just to give the Westminster, Transatlantic, and Eurocratic establishments a good, hard kicking.

Unless the polls are systematically biased or there is a late-breaking surge in support for “Yes,” the “No” campaign looks set to squeak by with a narrow victory in the Scottish independence referendum. On the betting markets, a “Yes” vote has plunged below an implied probability of 20%. What has this decline in the prospects for independence done to capital markets? In my last post on the subject, I found that British firms and the pound were nearly untouched by what was at the time significant momentum for “Yes,” but that a nine-firm Scottish equity index was hit hard. If those losses reflected unease about independence, then the latest news should have caused growth in my Scottish equity index.

The biggest decline in the Yes team’s chances actually came overnight September 11-12, when the chances of Scottish independence abruptly fell about 10 percentage points on the release of new polls in the evening of September 11. (For a full list of recent polls, see Wikipedia.) The Yougov poll showing “No” in the lead (a dramatic reversal from its previous poll) seems to have been leaked just before the closing bell on September 11.

betfair independence odds

Accordingly, I examine the performance of the Scottish equity index on the London Stock Exchange between 4:30 PM and 5:00 PM local time on September 11, when the odds of Scottish independence declined so rapidly. These are the nine stocks I include in the index: SL, SSE, FGP, WEIR, SGC, AGGK, WG, ADN, and MNZS. Of these, eight of nine rose on the poll news. Again, I weight by each stock by its market cap to create the index. The index rose 0.5% on the news, a rather small increase compared to the 1.7% decline after the shock Yougov poll showing “Yes” ahead. The overall patterns were pretty similar, though. The two transportation companies, Firstgroup and Stagecoach Group, were basically unchanged between the two. Energy-linked firms and Standard Life led gainers. Aggreko (temperature control systems) registered a small gain, and Aberdeen Asset Management a somewhat larger one.

Roughly a ten-percentage-point drop in independence likelihood led to a 0.5% gain in the value of Scottish equities, less than a third of the loss in Scottish equities after an eight-percentage-point gain in independence likelihood just a few days prior. On balance, these results suggest we should revise downward the costs of secession suggested by the prior post.

One objection to this interpretation might be that the leak of the Yougov poll just before the closing bell gave traders little time to respond. But this does not appear to be the case. The Scottish equity index was flat at the opening bell on September 12, suggesting that there was no new information for traders to consider.

Here are two more interpretations. First, betting markets are less liquid and well-capitalized than financial markets. The actual gain in the probability of Scottish independence after the first Yougov poll may have been greater than the immediate response on betting markets. Second, the shock of a poll actually showing “Yes” ahead may have led traders to overestimate the likelihood of Scottish independence, and perhaps even the costs of secession (in a moment of panic). Having been inured to the initial shock and its aftermath, traders then took later news with more equanimity.

Overall, though, the results are still suggesting net economic costs to Scottish independence. How much of the emphasis should be put on the “Scottish” part of that phrase and how much on “independence” remains a matter of debate, but clearly energy and financial firms are more affected than transportation and service ones.

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