What the Hell Is Happening In Ukraine?

I have some friends in Ukraine who might disagree with me on this, and I have other Eurasian expert friends who are better at this than me, but here's the gist of my impression of this:

1) The events in Ukraine are related to a very long political struggle about the future regional direction of the country. The struggle has been flaring up ever since the Orange Revolution 2004. But its roots stretch back hundreds of years, connecting to the fights between the Russian, Ottoman and Holy Roman Empires for control of the region.

Catholic Ukrainian speakers in the West feel closer to Poland, Lithuania and the rest of Europe. Orthodox Russian speakers in the East, along with people strongly affiliated with the USSR (like the Tatars in the South), obviously want strong ties to Russia.

There are lots of fun ways to visualize these challenges. WaPo shows some of these maps here, along with a good explanation of the situation.

While the challenges are not necessarily historically determined, there are obvious historical trends at play. Kiev is the ancient home of the Russian people, but the Ukraine has always been a battle ground between Turks, Slavs and Catholics. These historical tensions are reflected in the country's current political challenges.

2) Ukraine is a mess economically and the government is corrupt and ineffective. The latter isn't necessarily new to the region (KZ is no different), but the citizens of post-Soviet states are more tolerant of the BS and the bribes when everyone is seeing some sort of progress. In that way, they're no different than the citizens of Western countries, who's citizens tend to ignore government failings when times are good, but they get a little crazier during economic struggles (enter Tea Party).

Ukraine is essentially broke and owes a lot of money to all of the usual international institutions. The most important issue in Ukraine right now is finding some way to get economic growth. This frame needs to be placed on any other discussion of the crisis.

3) The EU started this mess. You don't need to mince words. Politics in Ukraine is about balancing the aspirations of both the East and West of the country. The EU threw a bad trade deal at Ukraine that would have been harmful economically in the short term (subjecting them to IMF austerity terms) while waving a giant middle finger at the East who still wants strong ties with Russia. It would have been crippling politically for Yanukovich and the interests he represents. He had to turn it down.

Worse, Ukraine was expected to get take on very harsh terms for what was barely better than nothing from the EU. They continue on their "way" to trade integration, but they got nothing in the line of things like immigration rights. The Spectator sums it up well.

In spite of stringing Kiev along with pretty words about a European future, the EU could offer only $800 million , via the IMF, and that came at the price of exceptionally painfully economic reforms. Ukraine would have been subjected to the same devastation of its agriculture, on which it depends, as Romania and Bulgaria were in their pre-accession period. Its industry would have collapsed as well. Russia, by contrast, has been able to offer nearly 20 times this sum in loans to prevent Ukraine from becoming insolvent, and it is the biggest market for Ukrainian exports – bigger than the whole of the EU put together.

Which deal would you choose? The EU probably recognized this too, which is why they played their trump card. By creating a crisis (calling off all EU integration talks in one fell swoop), they can hope to force Yanukovich out of power undemocratically, putting in the other, more favorable part of the elite. Not surprising, the EU is now forcing sanctions on Ukraine, furthering the crisis.

4) During calm moments, the people in the streets are largely average Western Ukrainians who hope that some sort of European integration will reduce the corruption, impotency and insanity of the Ukrainian political system. Honestly, it's a little naive, but their intentions (liberal, transparent, just) are good.

But the real power behind the protest is a bunch of extreme right neo-Nazi parties. The Russian press has covered this well, and these groups are quite prominent in Ukraine, going by names like Far Right Sector and Trident. Russia tends to throw around this term a little too liberally (since this is ultimately the conflict that defines modern Russia), but it is mostly apt here.

Svoboda (the right political party that is the most moderate of the groups involved and actually has ministers in Parliament) marched around new year celebrating a Ukrainian nationalist leader that fought along side the Nazis against the Soviets. This is pretty typical of the group; their former name is the “Social-National Party of Ukraine” (ring a bell?). You hear lots of nationalist chants in the squares, along with insults about how the current government consists of "Jews."

To be fair, racist thugs are being employed by the government to counter the protests too. (The Berkut has pep talks where it calls the protesters a bunch of Jews). But it's important to remember that either side would act appallingly regardless of who was in political power.

5) Yulia Tymoshenko was just released from jail, which should make the lead up to the snap elections really nuts. Like everyone else in Ukrainian politics, she's corrupt and her party was pretty terrible while in government. But she is an obvious unifying figurehead for the movement (more than Klitschko or any of the other politicians in "talks"), and she is certainly liked by the West. We'll get to watch her propped up on a pedestal for awhile even though she's incredibly unpopular back home. It's not a coincidence that essentially no one was actually protesting in favor of her release.

6) Most importantly, keep in mind that the West always has an axe to grind with Russia. Egypt, despite the deaths of hundreds and an actual military coup, is getting more than a billion dollars in military aid from the US. Ukraine, which more than anything just needs some money, is facing sanctions because less than 50 people have died in a political struggle. The hypocrisy and the extreme prejudice are appalling.

The West owes an incredible gratitude to Putin for his pivotal role in stabilizing several political crises over the last few years (Iran and Syria are largely Russian diplomacy efforts). There is a lot to dislike about his politics, but there's a lot to dislike about the politics of any country. We can call Russia corrupt and homophobic, but US politics aren't corrupt? The US isn't homophobic? People really need to stop fighting the Cold War and start looking at the world with a little sense of rationalism.

Similar things can be said about Yanukovich. He is legitimately and democratically elected. We can debate the effects of the centralization of powers under his control, but it is maddening that Western governments are forcing street diplomacy onto Ukraine because they do not like his politics. It is a huge disservice to Ukrainians, who deserve better than to be trapped in the middle of an East-West pissing contest.

7) One of the many paradoxes of the Maidan revolution is the status of Yanukovych. On the one hand, this man is a clown. He was always bad for Ukraine, and he made it worst during his presidency. He deserves almost everything that has happened to him over the last few months. The nearly universal hatred is well deserved.

While he talks about the fascists in the square, it's an unavoidable fact that he is primarily responsible for his ouster. A savvier politician wouldn't have passed the anti-protest laws that got everyone to the street; a better human being wouldn't have had snipers shoot civilians. And yet, despite all of this, Ukraine is worse off for the way that it got rid of him. The Maidan did serious damage to long-term democratic stability. Even if this crisis is resolved soon (and armed seizures of airports in Crimea show that this is only the beginning), this armed revolt have negative effects for many years.

8) Ultimately, recent events nail home a very under-appreciated aspect of Russia's foreign policy: the premium placed on stability. For very good reasons, Russians hate political and social upheaval. They can easily describe the huge human cost of various revolutions.

Most Americans, while perhaps possessing the more justifiable ideals than Putin's Russia, have no sense of proportion, restraint or humility in international affairs. We naively celebrate the fall of tyrants, and cheer on demonstrations for "democracy and freedom." When these situations become chaotic and people starting dying, we shrug our shoulders and foolishly blame "national character" or "lack of civilization" for the obvious effects of our own efforts at destabilization.

I hope for the best in Ukraine, but this is the second time in 10 years that the street has settled political problems. I can't see how this bodes well in the future. In Kyrgyzstan, another fractious Post-Soviet, each successive revolution has been more violent than the last. The negative effects of the instability linger, and you end up with pogroms against ethnic minorities.

I'm sure there are reasons to celebrate the fall of a thoroughly corrupt politician with authoritarian tendencies. But at the same time, I mourn for those people (half the country!) who supported and organized behind him. Russian-speakers should have little faith in the future of democratic Ukraine, as this is the second time that Westerners have overthrown a man that they worked to elect. Where do you go from here?

Almost Everything Jeff Dorfman Says About the Minimum Wage is False

The State of the Union has once again brought up the minimum wage, and the endless debate between economists came back as well. A perfect example this is an article on the minimum wage from Jeff Dorfman, a "professor at the University of Georgia [and] libertarian." Although it should be enough to see the bias from someone who wrote a book against the welfare state publishing an article in Forbes, we can dig into the issue too. For anyone that wants to follow along, here's the OP. It's pretty standard stuff, which makes it a good target.

The Democrats, their union supporters, and liberals in general are making a hard and concerted push for an increase in the minimum wage. President Obama mentioned the subject prominently in his State of the Union address on Tuesday night and even promised to take executive action to increase the minimum wage federal contractors must pay their workers starting in 2015. While Republicans and small business owners are sure to resist this push, it is important that everyone on both sides debates the issue with the correct facts. Much of what you hear about the minimum wage is completely untrue.

Dorfman's article rests on three basic points, we can refute each separately.

1) "First, people should acknowledge that this rather heated policy discussion is over a very small group of people." Statistics don't lie, but you can lie with statistics. Dorfman is inching awfully close to the latter. His definition of low wage people concern only those people making less than 9 dollars an hour. Since most proposals to raise the minimum wage are looking at something from 10-12 dollars an hour, this is a bad arbitrary cut off.

His argument has a lot of this sort of "fuzzy math," which rests mostly upon the reader being lazy or intimidated by numbers. For example, Dorfman writes, "this group of workers is also shrinking. In 1980, 15 percent of hourly workers earned the minimum wage. Today that share is down to only 4.7 percent." This statistic only makes sense if the value of the wage was constant since 1980, which it has not been.

It was closer to 10 dollars back then (in current currency), and a whopping 30 percent of workers earn about that much or less in today's terms (15,000 dollars or less in annual terms). Looking more closely at the data, clearly Dorfman missed something (probably it was intentional). The liberal side of the argument says that the effects occur on a much broader scale. The Brookings Institute (which is itself not all that liberal) estimates that about 35 million workers would benefit from a minimum wage increase. That's about 30 percent of the workforce, and it's not far off from what the SSA says for earners in the economy.

That's a lot of people getting a raise! And a lot of them will be seeing their salaries increase indirectly. They might make slightly about the new minimum wage, but they'll get a raise anyway. The mechanics of this can be technical from an economic perspective, but the behavioral theory on it is quite nice. It comes from anchoring. People often set their wages in relation to a strong data point, and the minimum wage serves that standard. If the minimum wage goes up, there is strong psychological pressure to raise other wages.

2) "I want to bust one more myth about the minimum wage: the relationship over time between the minimum wage and labor productivity." For the most part in this section, Dorfman is right. The $22 minimum wage report that he references is terrible. It benefits his argument to talk about a terrible report, to make "liberals" seem "out of touch."

I don't support a 22 dollar an hour minimum wage for all of the suppply-side problems that Dorfman is concerned about. But that's a lot different that a 12 dollar an hour minimum wage, indexed to inflation (which is as liberal as any Congressional plan on this issue gets). The US already has the third lowest minimum wage, when compared to other OECD countries, so there is little doubt that we could increase it without large negative consequences.

Even more importantly, as Dorfman roughly gets right, total compensation and productivity are not actually all that different in the US. And the "huge gap" that people reference in the productivity numbers definitely does not seem to be an issue until the aughts. There is obviously a concern over the last few years (where we see a gap), but there was a recession.

This descent into a terrible report on productivity masked what is actually a much larger issue. Income going to capital has begun to accelerate away from income going to labor. This, more broadly, is the reflection of a society growing much more unequal. Pay, when it's going out, is going out in the form of stock options to people alreadly vastly wealthier than everyone else.

From Felix Salmon at Reuters.

This transformation has everything to do with the fact that median income (moving away from wages) is definitely declining. And that brings us to the most important point of all this.

3) Dorfman adopts a completely hysterical tone, but he nails the debate exactly.

These numbers reveal not just the selective statistics employed by the proponents of raising the minimum wage, but also that the debate has little to do with helping the poor. Instead, this is really a debate about income redistribution. Raising the minimum wage is actually just an attempt by liberals to punish a subset of business owners by redistributing a share of their supposed wealth to their employees. It is just another attempt at class warfare.

This is totally true. The minimum wage does not matter as much for poverty, or employment, as it does for wage distribution and a just society. If you do care about those other two things, you should focus on getting back to full employment first (and the minimum wage doesn't matter as much at full employment anyway). The best thing for a poor person is a job.

Given that caveat, there is still plenty of evidence that minimum wages help reduce poverty (a little), when people have jobs. The EITC, which Dorfman endorses, is a complement to the minimum wage, not a substitute. Both policieis work to increase wages and a balanced approach to poverty reduction should include both.

So why care about the minimum wage? Because, before government efforts, the income distribution in the US and Sweden are basically the same.

And while plenty of loveseat economists love to trot out theories about how minimum wages has a disemployment effect, we should keep two things in mind. Full employment depends mostly on broad monetary and fiscal policy. Getting an ideal level of minimum wages is irrelevant when those two factors are driving up employment. People while hire anyway. The conflicting data on employment effects illustrate this, and regardless of the side you fall on, the effect is modest.

So why care about the minimum wage? Because inequality is almost exclusively an issue of public policy. For many, that might seem strange. The debate on inequality often focuses on "global forces" and "technology," but this is a red herring. You know this as soon as you look abroad. Income inequality in Sweden is almost exactly the same as that of the US, before taxes and transfers.

Take a second to digest that, before policy, the most unequal country in the OECD and the most equal look exactly the same.

High levels of inequality is a problem that economists have been concerned about since Adam Smith. It damages growth, since the rich consume less. It corrupts institutions, since it becomes more beneficial to extract wealth than encourage growth. And it causes social instability. As my dad, a noted philosopher often featured in this space, often says, "you don't see big gaps without big revolutions."

And that, more than anything else, is what Dorfman gets wrong. Acemoglu and Robinson wisely pointed out last year that economists and economic theories often focus too strongly "market efficiency" too the harm of political and institutional well-being. No doubt, there are strong theoretical arguments against raising the minimum wage. The minimum wage is not necessarily the most important anti-poverty program either (FULL EMPLOYMENT!!!). But income distribution is critical to the effective functioning of our society and democracy. Raising the minimum wage and indexing it to inflation is a good place to start solving these problems.