Wednesday, February 22, 2017

Behavioral economics, public policy and regulation

I'm trying to add material and improve the way I teach behavioral aspects of public economics. I have been teaching that in an undergraduate optional course on Public Economics and in a master's course at my university, and it also interacts with my research, as I try to analyze how behavioral issues impact on regulators. I am now dealing with this for my undergraduate course, and I divide my presentations in three parts:
-An initial part on introducing behavioral economics (for example, ways to classify biases) and the main ideas that affect public economics. On this, I have found very useful the 2015 article by Raj Chetty on "Behavioral Economics and Public Policy", which offers a common structure and useful examples especially on policies to promote savings and policies that help neighborhood choice.
-A second part on the specific topic of how relaxing traditional assumptions about homo economicus helps understand why sometimes humans manage to find solutions to social dilemmas, including the free-rider problem. There is an important experimental literature on this that I would like my students to be aware of. At some point, I would like to run simple experiments in class and I am collecting material on how to do this, but I am not ready to do it yet (I need to talk more with Jordi Brandts about this).
-A final part on behavioral political economy and social choice, collecting my own preliminary research, existing surveys on behavioral political economy and the ideas of Sen, Olstrom and Putterman on how Arrow (who sadly just passed away) was too pessimistic about the ability of groups to make reasonable collective decisions.
Hopefully, better preparing my teaching on this will be a good complement to improving my research on behavioral aspects of regulatory institutions.

Sunday, February 19, 2017

This is what happens when nation-states affirm their sovereignty

I know of academics that are reconsidering travelling to the US for fear of immigration officers. Police raids go after undocumented migrants, sometimes including those that entered as children and that were protected by Obama period legislation. There are rumours of police agents asking for your smartphone password in the airport to check your whatsapp chats. EU nationals living in Britain worry about their future in the UK. Today The Observer reports about these citizens living in an uncertain legal limbo: "EU nationals say that to obtain permanent residency cards they have to complete an 85-page form requiring huge files of documentation, including P60s for five years, historical utility bills and a diary of all the occasions they have left the country since settling in the UK. Some have received letters inviting them to prepare to leave the country after failing to tick a box on a form." In another article, they report about an orchestra leaving Britain because a clampdown on immigration: "The European Union Baroque Orchestra has been based in Oxfordshire since 1985, but will give its last UK concert in its current form at St John’s Smith Square, London, on 19 May, before moving to Antwerp. The critically acclaimed orchestra, described last month as “brilliant” and “the blooming excitement of youth” by Radio 3’s Sean Rafferty, auditions about 100 students a year, including young British musicians, and chooses between 20 and 25 for intensive training and performance. Alumni have gone on to fill posts in major baroque orchestras around the world." Meanwhile, I just watched an interview with Dutch politician Geert Wilders, favourite to be the first party in the next Parliament, speaking, in the name of freedom, democracy, and the people, about voting for him to stop the wave of Muslim Africans that will swallow his country if nothing is done. I don't know what Dani Rodrik is thinking about when he proposes to solve his famous trilemma by affirming the sovereignty of the nation-states. It looks more like a dilemma today, because globalization is already out of the bottle: freedom or nation-state.

Friday, February 17, 2017

Maitreesh Ghatak's bus

We have enjoyed this week the presence of London School of Economics scholar Maitreesh Ghatak at my UAB department's seminar series. He presented a paper on intrinsic motivation, extrinsic incentives and social distance, which is part of his research agenda on non-conventional incentive issues. Professor Ghatak not only has a very ambitious and fascinating research agenda, but has been increasingly involved in making his voice heard on a number of issues that have to to with the rise of national-populism in many regions of the world, including his country of origin, India. His opinions on issues that combine concerns of income distribution and concerns about identities are shaped by his personal experience as a young left-wing activist in India who went to study a PhD in Harvard and had a first academic job at the Chicago economics department. He then moved to London, where he has gone through the sad experience of the Brexit referendum. He is a vocal critic of Indian Prime Minister Modi, another nationalist that shares some features with other national-populists. Maitreesh Ghatak told us an interesting metaphor at lunch time about identities and scapegoats. I have seen that he wrote about it in an article before: "Consider the following example. Suppose you are waiting at the bus-stop, along with some people who are visibly different from you. If buses keep on coming, whether you feel positively towards these outsiders or not, you will mind your own business and focus on your journey. Now consider a scenario where buses come infrequently, and when they do, they are terribly crowded. The bus stop will get more and more congested and you are going to get more and more frustrated and ready to vent your anger if you found a target. If everyone around you looks the same, then you are more likely to blame the bus company rather than fight among yourselves. However, if there is a small but visibly different group of “outsiders,” then as a member of the majority group, you might begin to find their presence highly annoying.
If we take the arrival of buses as a metaphor for economic opportunities, so long as the buses keep coming – or as long as there is the prospect of economic mobility -- you do not want to disrupt the system even though you do not necessarily like people who are visibly different from you. But as growth slows down, you are likely to get angrier at visible scapegoats whose ethnic and cultural differences now seem more salient than their class affinities with you. The immigrants then become symbolic of all that is wrong with the “system”. Not just that; earlier, you may have tolerated the rich driving in cars while you waited for a bus, thinking one day you or your kids will have cars. When that possibility becomes increasingly remote, other than being upset with the “others” at the bus-stop, you also become angry at those driving cars since you feel the whole system is unfair."

Tuesday, February 14, 2017

Against panaceas

Some academic thinking and especially the translation of academic thinking into policy is very prone to what Elinor Ostrom used to call "panacea thinking." There is a very interesting special issue in the Proceedings of the National Academy of Sciences in 2007 devoted to the risks of panaceas. Ostrom focuses on the failure of applying panaceas to solving collective action problems to manage "commons." The so-called "tragedy of the commons" predicted by Hardin can be overcome in a number of ways, but the precise mechanisms depend on local conditions, history and culture. Hardin himself thought that the panacea was state ownership of rival but non-excludable goods. Others suggested that the panacea would be property rights, meaning privatization of the common property so that a single owner would internalize all the relevant externalities. Still others, perhaps believing that they were interpreting the work of Ostrom, thought that the panacea would be management by user groups. In fact, different solutions apply to different cases, and sometimes complex jurisdictional systems combine different solutions at different scales in an overlapping way. For some time, one of the panaceas was to rely on insulated expert agencies, but as we know even this panacea is also in crisis. This is what William Easterly had to say in the Financial Times about this in his review of the book "Thinking, fast and slow" by Daniel Kahneman: "Kahneman regards even the experts as prone to the mistakes of System 1 listed above, and cheerfully admits that he is no exception. But he wants to know whether this view can be reconciled with cases such as that of the firefighting captain. So he engages one of his vehement critics on this issue and they debate their way to a joint paper. Their answer is that expertise can be learnt by prolonged exposure to situations that are “sufficiently regular to be predictable”, and in which the expert gets quick and decisive feedback on whether he did the right or the wrong thing. Experts can thus train their unconscious “pattern recognition” mechanism to produce the right answer quickly. So this certainly applies to chess, and it certainly does not apply to predicting the course of Middle East politics. Another classic bias is called the “halo effect”, when somebody very good at some things is falsely assumed to be good at everything. This book itself could benefit from something similar, as amid its general excellence a few stumbles are easily overlooked. The main flaw comes predictably in the final section in which, according to some mysterious universal law, all authors in the social sciences are required to produce a public policy fix for the problems they have identified. Kahneman’s endorsement of “libertarian paternalism” contains many good ideas for nudging people in the right direction, such as default savings plans or organ donations. But his case here is much too sweeping, because it overlooks everything the rest of the book says about how the experts are as prone to cognitive biases as the rest of us. Those at the top will be overly confident in their ability to predict the system-wide effects of paternalistic policy-making – and the combination of democratic politics and market economics is precisely the kind of complex and spontaneous order that does not lend itself to expert intuition."

Sunday, February 12, 2017

Is it possible to fight Trump with grace?

The Canadian academic and politician Stéphane Dion visited Barcelona in 2014 and explained to Catalan federalists his experiences in democratically fighting secessionism (successfully) in Quebec. He told us that we had to fight nationalism with arguments and with grace, meaning that we should never fall into the temptation of using insults even when we are overwhelmed because of our indignation or anger. Is that possible with Donald Trump? It must be very difficult, but there is an ongoing interesting and necessary debate on how to fight him, or how to fight the Brexiters, or how to fight Marine Le Pen: institutional checks and balances? collective action? Among the people I follow, some would like to focus relentlessly on the flaws of the new President and his team (like Paul Krugman?), whereas others seem to be more concerned about scrutinizing the limits of the center and the center-left that have created an opportunity for the national-populists to conquer the vote of the middle and working classes in the developed world (like Branko Milanovic?). I guess both strategies are not incompatible. Two social scientists I have been reading recently come to my mind to qualify or extend both types of arguments. Amartya Sen, in his new expanded edition of his classic book on Social Choice makes an appeal in favor of "government by discussion", as well as an appeal for trying to reach national and international agreements in favor of partial solutions, not necessarily waiting for perfect solutions. I guess that an application of this would be to try to reach out to at least part of the national-populist voters, convincing them constructively (that is, avoiding that they feel insulted) that some of their legitimate fears would be better addressed in a better democracy. Elinor Ostrom joined Sen in her last years in trying to argue that many of the tragedies and impossibility results in economics and social science are not unavoidable results, but to avoid them we should not rely on what she calls "panacea thinking." That is, there are no easy solutions to complex problems, but solutions to social dilemas must come from experimenting with different practices in a modular and polyarchic way. The translation of this to contemporary events is that although we should keep a critical mind with the center and the center-left we should at the same time be aware that liberalism and social-democracy are probably the most successful imperfect ideologies precisely because they do not propose any panacea.

Friday, February 10, 2017

Tragedies and impossibilities in economics

One of the reasons economics is called the dismal science is perhaps its pessimism concerning the possibility of fixing social problems. Welfare economics postulates the existence of a number of market failures in which the free interaction of individuals does not deliver an efficient outcome. Two examples are the presence of collective goods and externalities. In the presence of collective goods (goods that are non-rival and non-excludable) individuals are unable to overcome the "free-rider problem," and they need some costly external authority to help them solve the problem. Mancur Olson suggests that only those that have high stakes will be able to organize themselves and contribute to collective action. In the presence of goods that are non-excludable but rival (commons), then we face Hardin's "tragedy of the commons," because individual agents do not take into account the negative externality that their comsumption imposes on others. Again, only concentrating the property rights in one agent (a kind of dictatorial solution) or delegating the solution of the problem to an external authority, will the problem be mitigated. But if this external authority has to be democratic, then we are confronted with Arrow's Impossibility Theorem, which argues that democracy in the form of majority rule voting is incompatible with some mild conditions of consistency that we would like to impose on social decisions (the alternative is again a dictator, something Arrow would not recommend, being a very reasonable progressive economist). James Buchanan and the authors of the "public choice" critique argue that we cannot expect much from public servants, because they will be as self-interested as consumers. Our hope is that there is an army of economists and social scientists that take these results as motivation to try to find conditions under which they can be overturned. Putterman and other experimentalists show us in their work that humans are not always unable to overcome the free-rider problem, and are even able through their social norms or intrinsic preferences to spend time and resources to monitor the political system and make it work reasonably well (well, not always). Sen reminds us that Arrow's impossibility can be overcome through reasoned dialogue and additional information beyond preference rankings. And Ostrom devoted all her career to show that many communities do overcome the tragedy of the commons without external impositions, although some smart governmental help may be useful.

Tuesday, February 7, 2017

Friends that should hang their heads in shame

Ian Birrell has a nice article in The Guardian about his Brexiter friends that claim to be liberal. I am very sad to say that I have a similar feeling towards many friends of mine that still call themselves progressive and that support national-populism in Catalonia:
"How proud those liberal leavers must be as they survey this new world order, having done so much to foster the nationalist revolts. Still these people pose as optimists and rightly promulgate globalisation; but they must bear some responsibility for hitching themselves to forces of fear, then exploiting the concerns of communities buffeted by global forces and suffering from long-term government failures. These Brexiters played with fire by pandering to populism. And now the world is burning.
Instead of bridges being built, walls are going up around the west. Perhaps the liberal leavers will recant and apologise, but more likely they will find excuses and blame others rather than search their own souls. It pains me to say this, since some are my friends, but the truth is that if they really believed breaking from Brussels would lead to a more open nation and outward-looking world, they should hang their heads in shame for stunning naivety."