I rejoice in learning something new every day. Today I learned about the Triffin Dilemma. The Triffin Dilemma, first posed by Belgian-American economist Robert Triffin, is the idea that there’s an intrinsic conflict of interest between a country’s national interest and a country’s international interests that arise from that country’s currency also being the international reserve currency. The country must be willing to provide for the world an extra supply of its currency which, in turn, inherently produces a trade imbalance for that country.
I think that can only work as long as a) the country’s ability to produce new jobs as a result of technological, educational, and social development exceeds the jobs it loses due to the imbalances that are created and b) other countries don’t game the system to accelerate the process to their advantage.
As I’ve been trying to explain for some time, my view of the economic problem we face is that our inability to create enough new jobs has been masked for decades by a series of bubbles which have now collapsed and exposed the long term problem. The Triffin Dilemma fits in nicely with that notion.
I’m not so sure. Sure, you can point to the relatively low unemployment rates in the late 1990s and 2000s and say, “Those were the dot.com and housing bubbles creating demand”, but what about periods like the 5% unemployment in the late 1980s? I don’t think you can call that a bubble. In fact, it was when part of the financial sector imploded.
The system ate my comment.
I’m skeptical that you can say that it’s a case of unemployment being masked by bubbles. Sure, there are periods like the late 1990s and early 2000s where you can say that there were probably bubbles in effect creating demand, but there are other periods (like the late 1980s) where unemployment was low, trade exposure was high, and a bubble didn’t really exist (in fact, it happened amidst the implosion of the Savings and Loans sector).
I think the problems we’re having now date from the mid to late 1980s and they didn’t reach their present degree overnight.
It’s an interesting point, and I agree with the predicate in paragraph two.
Where I depart is paragraph three. If you know you are the country who produces the worlds reserve currency you would, therefore, adopt policies designed to maintain technological, educational and social advancement, and punish, or at least not expose yourself unduly to, countries taking advantage. (Read China)
But what have we done? Regulated, taxed, destroyed the education system. Decided to make wealth transfer a bedrock policy instead of push the accelerator of freedom, growth and innovation. Coddle the wealth transferees and tell them they have been wronged in return for their vote. Oh, and to finance all that, exposé ourselves to the currency pegger.
You couldn’t draw up a worse policy prescription. But that is our current a presidents view- and MORE!
This is a case in point.
http://www.nytimes.com/2012/08/06/business/fear-of-fiscal-cliff-has-industry-pulling-back.html?_r=2&pagewanted=all
It’s large company oriented, but smallco has been on the case for several years now. Why? They are more fragile; less room for error.
Of course, I know this is all a bald faced lie. It’s really demand and Europe. The commenters at OTB tell me so.
There you go again, implicitly assuming politics is a rational process. :p
I think politics is non-rational and as a result national policies would not have to align with the idea of “adopt policies designed to maintain technological, educational and social advancement, and punish, or at least not expose yourself unduly to, countries taking advantage.”
Consider this example, yes it is simplistic, and yes it doesn’t have any real world application, but it high lights how even with perfectly rational politicians you can have a non-rational outcome.
Suppose we have three politicians, call them 1, 3, and 3. And suppose we have 3 proposals for a policy, call them A, B and C. Suppose the preference ordering of our politicians are:
1. A > B > C
2. B > C > A
3. C > A > B
Now if our three politicians simply vote for their preferred policy there is no clear winner as each policy gets 1 vote each. So, they decide to do sequential voting. First is A v. B. In this case politicians 1 and 3 vote for A and it wins and faces C. But in the second round 2 and 3 prefer C to A so C wins. But suppose we change the first round to A v. C. Now C wins and faces B. But in the second round 1 and 2 prefer B so it wins and becomes policy.
The result of voting process is a preference ordering that is non-transitive. Transitive preferences are of the type, A > B and B > C therefore A > C. It would be weird if a person said, I prefer A to B, and B to C but C to A. Transitivity is one of the axioms of rationality in economics.
Now we add in things like various institutions such as chairmanships. If the chairman can control which policies are voted on first in the sequential voting then in effect we just have the chairman’s preferences (i.e. a dictatorship). While this is rational, it maybe suboptimal from a policy stand point (e.g. what if the chairmen gets lots of donations from people doing business with the importing country?). IIRC it was the Gibbard-Satterthwaite theorem that dealt with manipulation of outcome, that the outcome is dictatorial, or that some outcomes will never win. If you get rid of the dictatorial and prohibition of winning then the system must be manipulable. So much for the wonders of democracy….is this where I should put a suitable H. L. Mencken quote…something about running the circus from the monkey cage maybe?
BTW, nice find Dave, it was not something I new about either. Thanks.
The uncertainty is Europe and the fiscal cliff. Not sure we can do anything about Europe. The fiscal cliff is a threat since we know what happened in the last budget showdown. I dont think that was driven by our current president, but by our current Congress.
“instead of push the accelerator of freedom, growth and innovation.”
Put that into policy. What policies would be enacted that we have not engaged in before? I think we all know what was done over the last 30 years and how those policies have failed, so what would be done differently?
I keep looking for efforts to quantify uncertainty. The latest paper i found suggests that uncertainty about tax and monetary policy may be affecting output. Concerns about regulation, health care issues and financial regulation are of lower concern.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000734
Steve
You can’t quantify uncertainty Steve. If you could then it becomes risk, not uncertianty,
Well…if you are a Knightian, that is.
Which is why uncertainty talk always bother me. But, I dont think it unreasonable to try to figure out what people might be uncertain about, though I suspect there will be lots of bias.
Steve
Steve,
Uncertainty can exist even in very simple experiments, try looking at the Ellsberg paradox. I understand your qualms about something that is immeasurable, but I think to ignore it is to court disaster.
@Steve Verdon
This is why I have such disdain for Economics. I looked at the Wikipedia entry for Ellsberg paradox. I am not certain if it is correct, but if so, a lot of energy is spent on a simple explanation.
Gamble A is 30/90, and Gamble B is 1/90 – 59/90. If black = yellow, Gamble B is 30/90, and it is no different from Gamble A. As the difference between black/yellow increases, Gamble A remains the middle choice. For Gamble B to be the better choice, there would need to be >30 black balls, and the ball drawn must be black. Most people will choose Gamble A, but most gamblers would choose Gamble B.
I did like the “deceit aversion mechanism”. I would call it hustle avoidance. This seems like Three-card Monte.
TasyBits,
Ok, so which would you choose, A or B?
And then for C and D which would you chose?
If it is all so easy that is.
@Steve Verdon
If I have nothing to lose, I would take A and D. If I have something to lose, I usually do not gamble. I have found that the best way to win gambling is to avoid it, but poker seems to allow more control of outcomes by the players. It might be my inner hustler.
To be clear here Tasty, it sounds like you read half the page, and don’t fully understand the paradox.
If you prefer A, then to maintain the axioms of expected utility you must prefer gamble C to D. But, when the question was asked of people, often including people who specialized in expected utility and decision theory, they would select A then D which violated the axioms of expected utility theory. That last part, that is the paradox.
Congrats Tasty you just violated the axioms of expected utility theory. You believe both,
R > B, and
B > R.
Like I said, smart people often mess this one up…that that is the paradox.
Thanks for playing. :p
One last post, this isn’t to suggest people are irrational, but that expected utility theory is deficient. Is it unreasonable that when given an urn where they don’t know the proportion of balls in the urn people make assumptions such as a uniform distribution? No. Is it unreasonable, that when given a choice between an urn with an unknown distribution and a known distribution people chose what is known? Again no. But expected utility theory does not allow for that. The paradox does not show that people are irrational, but that one of our theories for how we model and describe how people make choices in the face of random events is lacking. That is how many if not all researchers look at paradoxes like Ellsberg and Allais. That the theory is deficient…not that humans should change their behavior to be consistent with some theory.
@Steve Verdon
I did see it, but I reject the premise.
The drawn ball can be red, black, or yellow. Gamble A is not a choice between red and black. It is a choice between red (medium chance) and black or yellow (low or high chance). The red ball is not chosen because it is believed to be more likely than the black ball. It is chosen because it has a medium chance of being drawn.
The black ball has a low or high chance of being drawn. If you think that the black ball has a high chance, Gamble B would be chosen. If you think that the black ball has a low chance, Gamble A would be chosen. If you are not sure or refuse to decide, Gamble A would be chosen by most people, but if the reward for Gamble B were double, the calculus would change.
The Gamble A is a negative choice because it is the least bad. Gamble D is a positive choice the best choice because it is the most good.
If the theory does not match behavior, the theory needs to be modified or thrown out. Epicycles are a sign the theory cannot be sustained.
@Steve Verdon
post 08-06-2012 5:08 pm
I think we agree if I understand you correctly.
Balls.
Uh, er, just saying.
Steve
You can continue to cite your papers. Papers no doubt with an ax to grind. I talk to real live businessmen making decisions day to day. That’s all I care about. Call it risk, call it in certainty. It’s really called “I’m not playing right now.”. And it will continue until the political environment changes.
I do have an idea, though, on how to create utility with your academic papers, and cutting down on your toilet paper expenditures…….