When a country experiences a democratic or non-democratic event, what can one expect from their financial markets? Max Miller, an assistant professor in the Finance Unit at Harvard Business School, has some answers. We asked Max about his work, how he goes about it, and the interesting way he got into this intersection of finance, macroeconomics, and political economy.
What is your area of research, and how did you become interested in it?
Broadly what I do would be considered politics and finance. The big picture is that politics in virtually every country in the world is becoming an increasingly important part of our lives. If you really want to understand the dynamics of financial markets and the macro economy, you have to understand the political underworkings of society.
Aside from being an interesting topic, the truth is that I also stumbled into it. I needed to write a second-year paper in my PhD program, and I found some interesting results that I didn’t think were going to go anywhere, but worked out. That ended up being my job market paper and it set me on this path of trying to understand questions around politics and finance. This particular paper was trying to understand what happens in stock markets when countries transition from autocracy to democracy and vice versa.
Tell us more about the stumbling!
I originally set out to write about stock market returns in war times. I found some stuff, but none of it really pointed anywhere—it was kind of a mess. I decided to recollect and rethink. I took two weeks off to decompress and wanted to read something totally unrelated to finance, so I picked up the Economic Origins of Dictatorship and Democracy—the authors [Daron Acemoglu and James A. Robinson] actually just won the Nobel Prize in economics! It had this cool economic model, and I realized that it made a lot of interesting predictions about what could happen in financial markets around these events. I already had the data from the wars project, so I started estimating stuff and it all pointed toward this story. It’s one reason why I think it’s super important for prospective researchers to read outside their field.
What did you find?
The paper finds that stock markets don’t like democratization episodes in autocratic societies—such as when more people are allowed to vote. Prices tank. It’s similar magnitude to what you’d find in financial crises—large declines in stock market valuations. It’s surprising. You’d think that because democracy is generally considered good, it should lead the stock market to go up—and it is good within a certain framework, but not necessarily for everyone. In autocratic societies, not everyone participates in the stock market. There’s a group of elites that benefit from the current policies and how the system is organized. If they own a lot of economic and financial wealth, then democratization can be a bad thing.
There’s a positive broad social welfare effect: wages go up, inequality comes down, taxes rise, economic competition goes up, and corruption goes down a bit. But all of these things tend to make the incumbents worse-off and contribute to this negative stock market effect. That’s sort of the surprise result, but it makes a lot of sense when you think about it.
What are some possible applications of your research?
These findings are important for a couple of reasons. There’s a conversation around how institutions, and changes in institutions, create growth, and what we should focus on to foster an inclusive and rapidly growing economy. My paper is one of the first that highlights that this economic competition channel seems to be key in these democratization events. If you want to understand how democracy might create more opportunities for growth, you can look at economic competition as being one of the central driving forces. This helps us understand what might be going on in papers that point to higher economic growth after institutional change.
Another is understanding what some of the barriers to these transitions are. My paper quantifies which of these channels are the most important—if we’re trying to make a country more democratic, what are some things we might want to compromise on? That quantification exercise is useful for policy makers trying to understand how to make democracy consolidate in certain places.
How do you go about this work?
I’m more of an empirical researcher, so I spend a lot of time working with and trying to gather data. The papers that I’m working on now are all fairly large data efforts. One I’m getting ready to submit is on foreign lobbying and influence in the US—how the firms that are connected to these countries, and the countries themselves, benefit from the relationship.
Foreign lobbying requires detailed disclosures for anything done on behalf of a client, such as schedules of meetings they have with policy makers. They’re all public records, but are scanned PDFs, so there’s no search option—and there are more than 30,000 of them. For this paper we digitized all of them from 2000-2018, and additionally have now processed those up to 2021 and are making our way back to 1967 when the reporting amendment was passed.
So this is what I work on, gathering data to do a big data project to answer a question that I hope is interesting to policy makers. We’re going to make the data publicly available once the paper is published in the journal. We think the data on their own will be interesting to people who want to understand which foreign governments are lobbying in the US and which legislators are meeting with various countries. We hope it makes a useful splash.
What do you like to do in your spare time?
I’m a big sports fan. I played basketball growing up and like playing it in my free time. I’m a huge NBA and NFL nerd. I hang out a lot with my wife and two-month-old son—they’re great, so there’s a lot of TV time with family right now. I like reading fiction. I finally finished the Lord of the Rings books and I absolutely loved them. I’ve read most of Ernest Hemingway’s books—I find a lot of comfort in his simplicity and I find his writing to be extremely powerful.
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