Friday, October 2, 2015

The time-inconsistency of a referendum on independence

I have done work (with Paul Levine, Jon Stern, Jordi Gual and M.A. Montoya, in different papers) on time-inconsistency in regulation as compared for example with time-inconsistency in monetary policy. A decision is time-inconsistent when the decision maker would have taken another decision if she had been able to take and maintain that decision ex ante, before other players had made long lasting decisions. The following situations would be described as time inconsistent behaviour by a regulator:  a regulatory decision is made that could not have been predicted, is the opposite of what had previously been decided (and communicated), and sunk investments had taken place based on the previous decision. For example, a national government expropriating a foreign-owned electricity firm without sufficient compensation would be time-inconsistent.  Or a regulator fixing motorway tolls lower than those that had been committed to at the time of contracting with third party construction/operators, would be time-inconsistent. I would argue that the idea of time-inconsistency can be applied much more generally, and that it is a risk inherent in majoritarian decision-making. Unanimity or super-majorities are required in most democracies to avoid reneging on important commitments. For example, as I argue here, a secession referendum of a relatively rich region divided across ethnolingüistic lines is not necessarily a good idea, despite its popularity. It creates the risks of reneging on the investments by potential losers on human capital, and other assets whose value depend on the stability of institutions. Given a flat-out choice between “yes” and “no” to independence, Catalans for example would be forced to choose between extremes. This would unfairly eradicate the significant middle ground that exists between the two black and white options. Under a federalized system, Spain and Catalonia could continue to enjoy the benefits of union, and Catalans could operate with the enhanced autonomy they desire, without breaching any explicit or implicit contract. By forcing voters to choose between two extreme views, an independence referendum favors extremist thinkers and movements, rather than those seeking to compromise. This will empower those who are intolerant of the opposing side, raising tensions within Catalonia, further creating uncertainty, as well as those between Catalonia and the Spanish state. In addition, by being forced to choose sides, anti-secessionist leftists are pushed into an uncomfortable alliance with rightists who partially share their views on the issue. A referendum on independence is a democratic tool. A deliberative process that ends in a broad compromise, followed by a referendum, is as democratic as that, and scores much higher in terms of commitment and stability. You might be tempted to think that I am like those that when they have a hammer, they think everything is a nail, but I learn these arguments from the readings of great economists and social scientists. Weingast argues here that "unfettered democracy fails to provide the conditions for democratic stability." And Silvestre vindicates the virtues of unanimity or at least qualified majorities as a principle of social justice as defended long ago by Wicksell.

Tuesday, September 29, 2015

Europe urgently needs a stronger narrative

There is a growing consensus among intellectual and political elites that Europe, and especially the euro zone, should make progress towards a more federal structure. The European Union has already many federal features, like a common currency for most of the countries and an elected European Parliament. But progress to a fiscal and political union is slow, and some specific social policies badly need a European dimension, non the least a common asylum-refugees-immigration policy. As a consequence, a number of policy and institutional proposals are being circulated to accelerate the federalization of Europe. I welcome all this. However, this is not enough on the ground to fight the forces of populism and nationalism that threaten to divert our energies towards a further fragmentation of sovereignty, instead of working towards a better democratic organization with reasonable transfers of powers to a democratic European government. We need more than policy and institutional proposals. We need a narrative. We need to win the battle not only of the minds but also of the hearts. At the end of the day, people have to vote, and if they are only mobilized by nationalism we will see how Europe becomes a struggle between those that want to create new sovereign-states and those that want to save the current ones. Instead, we should reinvigorate the ideas of peace, solidarity and tolerance, the idea of strength in the unity and diversity that are at the core of the founding fathers of the European Union. We need to go beyond a Europe made only of strong sovereign states, and accept a Europe of institutional diversity. Before 1500, Europe was characterized by institutional diversity: there were city-states, leagues of cities, empires, monarchies, chrurches. Then the sovereign state won the battle for supremacy, because it was functional to the new world of increasing market economies. But nation states have ceased to be functional. We should go back to a world of institutional diversity, with peaceful diversity below a united Europe, this time in a democratic context (which is much more than voting). When most people are asked to think about this, they agree, it is just that they are not even asked to do so. If they were, perhaps the battle against nationalism would be less uphill.

Thursday, September 24, 2015

Nordhaus, the Pope and the Market

William Nordhaus has criticized the hostility of Pope Francis to the market mechanism in his last encyclical, in an article in the New York Review of Books. This article explains to the Pope that markets are certainly not perfect, but they have more potential than that acknowledged by Francis. Markets and public intervention sometimes are complementary, as in cap and trade to fight climate change. A good aspect of the encyclical is that the Pope acknowledges the scientific reality of climate change. I had an interesting discussion of this article with my students at UAB's Master in Economics and Business Administration. One of them defended the attack of the Pope on consumerism, and said that he should accordingly recommend influencing the demand curve as a way to reduce negative externalities as well. A good point. Here's how Nordhaus' articles ends:
"Given the successes of cap-and-trade and other market mechanisms to improve the environment, it is unfortunate that they are the target of Pope Francis’s criticism. Permits for emissions are traded like other financial assets, and indeed they are often highly volatile; but there is no evidence that they are the favored instrument of financial speculators. Rather, they are volatile because future economic conditions (such as electricity demand or natural gas prices) are uncertain.
Perhaps no one will attend to Pope Francis’s attack on trade in permits and implicitly on carbon pricing. Perhaps his endorsement of climate science and the reality of warming and environmental damage will be effective in turning the tide toward strong actions.
But he has missed a unique opportunity to endorse one of the two crucial elements of an effective strategy for slowing climate change. He does indeed acknowledge the soundness of the science and the reality of global warming. It is unfortunate that he does not endorse a market-based solution, particularly carbon pricing, as the only practical policy tool we have to bend down the dangerous curves of climate change and the damages they cause".

Tuesday, September 22, 2015

The impressive article in The Guardian by Timothy Snyder

The historian Timothy Snyder has published an impressive article in The Guardian. Those who feel morally superior or very distant from the worst disasters of humanity should read it. Here's a selection:
"It was 20 years after I chose to become a historian that I first saw a photograph of the woman who made my career possible. In the small photograph that my doctoral supervisor, her son, showed me in his Warsaw apartment, Wanda J radiates self-possession, a quality that stood her in good stead during the Nazi occupation. She was a Jewish mother who protected herself and her two sons from the German campaign of mass murder that killed almost all of her fellow Warsaw Jews. When her family was summoned to the ghetto, she refused to go. She moved her children from place to place, relying upon the help of friends, acquaintances and strangers. When first the ghetto and then the rest of the city of Warsaw were burned to the ground, what counted, she thought, was the “faultless moral instinct” of the people who chose to help Jews.
Most of us would like to think that we possess a “moral instinct”. Perhaps we imagine that we would be rescuers in some future catastrophe. Yet if states were destroyed, local institutions corrupted and economic incentives directed towards murder, few of us would behave well. There is little reason to think that we are ethically superior to the Europeans of the 1930s and 1940s, or for that matter less vulnerable to the kind of ideas that Hitler so successfully promulgated and realised. A historian must be grateful to Wanda J for her courage and for the trace of herself that she left behind. But a historian must also consider why rescuers were so few. It is all too easy to fantasise that we, too, would have aided Wanda J. Separated from National Socialism by time and luck, we can dismiss Nazi ideas without contemplating how they functioned. It is our very forgetfulness of the circumstances of the Holocaust that convinces us that we are different from Nazis and shrouds the ways that we are the same. We share Hitler’s planet and some of his preoccupations; we have perhaps changed less than we think.(...)
States should invest in science so that the future can be calmly contemplated. The study of the past suggests why this would be a wise course. Time supports thought, thought supports time; structure supports plurality, and plurality, structure. This line of reasoning is less glamorous than waiting for general disaster and dreaming of personal redemption. Effective prevention of mass killings is incremental and its heroes are invisible. No conception of a durable state can compete with visions of totality. No green politics will ever be as exciting as red blood on black earth.
But opposing evil requires inspiration by what is sound rather than by what is resonant. The pluralities of nature and politics, order and freedom, past and future, are not as intoxicating as the totalitarian utopias of the last century. Every unity is beautiful as image but circular as logic and tyrannical as politics. The answer to those who seek totality is not anarchy, which is not totality’s enemy but its handmaiden. The answer is thoughtful, plural institutions: an unending labour of differentiated creation. This is a matter of imagination, maturity and survival".

Sunday, September 20, 2015

Catalonia: Misleading rhetoric+Scaremongering tactics=Gridlock

As it happened in the Scottish referendum, we are seeing in the electoral campaign in Catalonia that the pro-independence groups are trying to sell an idillic vision of independence, very far away from any objective perspective. They even deny that an independent Catalonia would be automatically left out of the EU and would not even be a country recognized by the United Nations, at least for some time. The response of some of the parties opposed to independence is to try the opposite tactic of saying that everything will be dark and tragic in the case of independence. The thruth is that the prospect of independence creates great uncertainty, but nobody knows very well what independence means in the euro zone, here and now. In Catalonia, we do not have a White Book like in Scotland. We do not have any details about the monetary or military arrangements of the new state. But if the weak pro-independence campaign is only replied by scaremongering tactics what we have is a reinforcement of those that for sentimental reasons tend to support separation. What is needed is a positive project based on the values of federalism. Catalonia would be better in a Spain that improves its already existing federal structures and a Europe that completes its union and also achieves the true characteristics of a democratic federation. Many think that the solution to the gridlock is a yes-no referendum, but there are many reasons against this. The main one is that it would deepen the social division already existing in Catalonia, and it is difficult to think that it would be a good way to make a decision where the final characteristics of a final deal on something similar to independence are very difficult to present to the electorate. Better a new agreement, a federal reform of the current Constitution in the framework of a reformed euro-zone and European Union.

Thursday, September 17, 2015

Behavioural political economy in Catalonia

In the run-up to the regional election of September 27th we are being part in Catalonia of a live experiment in behavioural political economy. The Catalan government has called a snap election that is presented as a plebiscite on independence, although what the voters will be electing is a Parliament with a malapportionment system that benefits the rural, and more pro-independence, areas. As is typical in a plebiscitarian atmosphere, the population is deeply divided. Those in favour of independence are more mobilized and have in their favour the support of Catalan public broadcasters. This climate makes it impossible to democratically discuss about the legacy of the outgoing government, which is a democratic anomaly given that the current Catalan President wants to be President again after the election (and keep using the public resources in favour of his nationalist narrative). One of the arguments against secession is that an independent Catalonia lacks any foreign support, and according to all EU officials who have publicly spoken, it would be left out of the EU. Never mind: pro-secession leaders claim that Europe will find very quickly a way to accommodate the new member. No doubt affected by confirmation bias, many voters seem inclined to believe these leaders. If you try to speak rationally to some pro-secession citizens, in my case endorsing moderate ideas of federalism with important international support, they just do not listen, saying that we (the federalists)  "do not understand anything" or similar arguments. It is like evolutionists against creationists in the US: people have stopped listening to each other, it is gut intuitions first and reasoned arguments after. I believe that many people seem inclined to practice expressive voting. They rationally expect that they will not influence the final vote, and even that if they influenced it independence is not really possible, but they still vote for it because it is their team, like in a soccer game. Perhaps if they believed that there is some real chance of a serious democratic accident, the federalists would have some chance...

European Social Democracy and Federalism

The Federalist Convention that takes place tomorrow in Barcelona will probably not have the historical dimension of the event with a similar name that took place in Philadelphia in 1787.  Nevertheless, it would be a mistake to underestimate the relevance of the Barcelona meeting. Probably for the first time, the main think tanks of the European left (the German Ebert Foundation and the FEPS) organize a high profile event to discuss the relevance of the federalist ideas for the construction of a united Europe and for the solution of institutional and sovereignty problems that affect the internal organization of European member states. Although the word "federalism" resonates more positively in some European countries than in others, it is important that two former presidents of the European Parliament and the president of FEPS and former Italian Prime Minister, Massimo Dalema, support with their presence an effort at the same time to help create a narrative that supports a united Europe and helps member states to deal with their internal tensions. Historically, social democrats have not been at the front of European federalism, perhaps because the construction of welfare states was mainly a national task. However, with increasing capital mobility and the need to complete the eurozone with a fiscal and political union, a modern social democracy sees in its interest to build an institutional architecture that facilitates the solution of problems that go much beyond the current nation states. In the USA, it can be argued that the construction of federalism has made much progress but is still a work in progress more than two centuries after their convention. In Europe, we cannot afford not to accelerate. The alternative is a return to the ghosts of European fragmentation, perhaps this time behind the disguise of a post-modern populism.