Sunday, May 29, 2016

The Brexit campaign concedes defeat on the economy

According to what I heard today in the BBC, the "Brexit" campaign has conceded defeat on the economy, and they are only focusing on immigration now. In the "Andrew Marr Show" program, the former Greek minister and economist, Iannis Varoufakis, and the former British Primer Minister Tony Blair, who basically hate each other, agreed that there is no economic argument in favour of leaving the EU. Varoufakis claimed that the only winning argument for the Brexit campaign could be about sovereignty and democracy (although he did no go into the details), but that Brexit leaders are not even focusing into that, and instead only talk about immigration, trying to awake xenophobic fears among the voters. It is not surprising that the campaign to leave the UK has conceded defeat on the economy, because according to a poll 9 out of 10 British economists reject leaving the EU. It is very difficult to find a similar level of consensus about any other topic among economists. As for sovereignty, what the British voters and voters all over Europe should care about is how to re-establish sovereignty and democracy at each relevant level, and forget about old notions about monopolistic national sovereignty. This is what newspaper The Observer had to say today: "Those surveyed were members of the profession’s most respected representative bodies, the Royal Economic Society and the Society of Business Economists, and all who replied did so voluntarily. Paul Johnson, director of the independent Institute for Fiscal Studies, said the findings, from a survey unprecedented in its scale, showed an extraordinary level of unity. “For a profession known to agree about little, it is pretty remarkable to see this degree of consensus about anything,” Johnson said. “It no doubt reflects the level of agreement among many economists about the benefits of free trade and the costs of uncertainty for economic growth. The poll also found a majority of respondents – 57% – held the view that a vote for Brexit on 23 June would blow a hole in economic growth, cutting GDP by more than 3% over the next five years. Just 5% thought that there would probably be a positive impact.The economists were also overwhelmingly pessimistic about the long-term economic impact of leaving the EU and the single market. Some 72% said that a vote to leave would most likely have a negative impact on growth for 10-20 years."

Friday, May 27, 2016

Getting to Sweden? Not with a big bang

In Spain it has become fashionable to argue that we live in a climate of systemic corruption and clientelism, and that the solution is a big bang of simultaneous reforms in a short period of time. The correct part of the argument is probably that the difficulties of reforming corruption come from a collective action problem: it is only individually rational to avoid corruption if everybody else does the same. However, this is where the problems start if we apply the argument to Spain or to other developed countries. First, I'm sorry to say that in Spain corruption is not systemic. One can go about with his life on a daily basis without facing corruption: the police is not corrupt and the burocracy is not corrupt, which does not mean that they are perfect. Teachers are not corrupt: we grade exams as fairly as we can. Most public things in Spain are not for sale. There is some corruption in the link between politics and business (but most politicians and bussiness people are not corrupt), and there is corruption inside some industries. There is also a tax evasion problem, which you realize is not a particularly Spanish problem once you read the book by Zucman on the topic. Therefore, in Spain you do not need to change everything to eliminate corruption. It follows that what is needed is to spread the influence of the parts of society (the majority) that are not corrupt. The typical example given to argue that we need a big bang is the transition in Sweden from a very corrupt country to one of the most decent in the world. One famous Spanish economist gave the example of the change in traffic rules in Sweden: in the first half of the XXth century, it seems that they switched from driving on the left to driving on the right from one day to the other. Well, I checked if the same happened in reforming corruption, and the answer is no. Reforming corruption took time, probably more than one century. The article "Getting to Sweden" by Rothstein and Teorell takes two parts, because it needs to cover many decades. Sweden started to reform corruption after losing a war (against Russia, by which they lost Finland) made most agents aware that they had to change habits. The authors show proofs that the Swedish changed first the social norms and subsequently they changed formal rules. It took time. Then in the twentieth century, because of a political coalition between employers and low wage workers (no technocrat designed the system), they centralized collective bargaining and achieved salary compression, which is at the root of current equality levels. In addition to that, they have a very generous system of redistribution that is based on good third party information, broad tax bases and a good combination of efficiency and equity (for example, public goods and services complementary of work). The fact that today they are a relatively homogeneous society with high levels of social capital is probably a product of their fair redistributive and efficient system, which in itself also reduces incentives for corruption. Therefore reforming corruption perhaps also requires improving distribution of income, power and resources. Reforming traffic rules is much easier: it is a purely common interest efficiency problem.

Sunday, May 22, 2016

How can organizations succeed?

We all participate, have participated or will participate in some organization, either as members (perhaps founding members), as workers, as donors or as leaders. That is why it may be interesting, even for non-professionals, to read about what social scientists who have investigated the failure and success of organizations have to say. A useful starting point is the "Handbook of Organization Economics," edited by Gibbons and Roberts in 2013. But more recently a useful survey has been published in the Journal of Economic Literature about "Why Organizations Fail: Models and Cases," by Luis Garicano and Luis Rayo. Although the case examples they give seem a little bit superficial (for example, the Spanish savings banks or "cajas"), their theoretical arguments provide a useful list of topics to care about if one is involved in an organization. For example, from the theories about the multi-dimensionality of effort, successful organizations tend not to care too much about the short run, although this implies overcoming the constant temptations to put too much emphasis on it. And successful organizations tend to think very carefully about the allocation of talent. In particular, organized groups should acknowledge that talent is heterogeneously allocated. This is so in the double sense that some people have more of it (so that more talented individuals should be located in a hierarchy to have an influence on the rest of the organization), and also in the sense that talent is also multi-dimensional, and some individuals have specialized talent that should be allocated with precision in the point of the organization where it can be most productive. Of course, making organizations succeed is as much an art as a science, and there is a lot of randomness involved. But thinking about these issues will not hurt anyone that worries about the future of his or her organizations.

Friday, May 20, 2016

The Economist changes its mind about referendums

One and a half years ago the magazine The Economist published an editorial with the title "Catalonia's future: let them vote." It argued that, although Catalan independence was a bad idea, it should be defeated in a referendum. This was ammunition not only for separatists, but also for many reasonably minded people who are against independence but for a variety of reasons believe that a referendum about this idea that they do not like would be a good thing. Now The Economist (the editorials and articles are not signed by any individual in this magazine) has changed its mind. In the issue just published it runs an editorial against the notion that referendums are in general a good idea, and it has a more specific piece explaining that the fashion of holding referendums in Europe is a bad idea. Perhaps it is because, being a British publication, they are experiencing what is the dangerous descent into a democracy of bad quality with the Brexit referendum. Both in the editorial and in the article, they regret that with the Scottish referendum the membership of the Scottish separatists, although they lost the referendum,  has quadrupled. They also repeat some well known arguments against referendums, such as the inability of this mechanism to consider trade-offs and therefore making it very likely that they will result into incompatible bundles of policies. "Referendum fever (...) makes it increasingly hard to agree on transnational policies. Treaties are generally signed by governments and then ratified by legislatures. Adding referendums to the mix hugely complicates matters. “It’s almost impossible now to see how 28 states would ratify an EU reform treaty,” says Stefan Lehne of Carnegie Europe, a think-tank. Minorities of voters in smaller countries may be able to stymie Europe-wide policies; just 32% of Dutch voters took part in the Ukraine referendum. This could cripple the European project. “Europe cannot exist as a union of referendums,” says Ivan Krastev, head of the Centre for Liberal Strategies, a Bulgarian think-tank."

Thursday, May 19, 2016

The see-saw effect and the difficulty of reforming bad governance

The chapter by Baland, Moene and Robinson in the Handbook of Development Economics, devoted to governance issues, has a very good explanation of the difficulties of reforming bad governance. One well-known issue is the need to take into account not only de iure institutions but also de facto practices (as their account of central banking in Sierra Leone or Zimbabwe illustrates). But less well-known mechanisms are the path dependence of practices even when the elites change, or the fact that elites find new ways to satisfy old objectives when their old instruments are removed. This is called the see-saw effect, and here’s is how they explain it: “Many poor growth experiences are accompanied by a system of dysfunctional laws and regulations and other aspects of governance. An obvious idea might be to directly intervene in these components of governance and promote change in laws and regulations. This was the sort of reasoning that led to the famous Washington consensus some of whose components, for example, privatization of state enterprises, deregulation, and legal security for property rights all seem related to governance. The first pitfall of reform is that directly reforming specific institutions, policies or aspects of governance may not be sufficient, and may even backfire. The reason why such reforms may be ineffective is that it is usually not a coincidence that some aspect of governance is bad. Bad governance is probably fulfilling some political objective. But there are many different ways and a multitude of instruments to achieve a specific goal. Taking away one instrument without altering the balance of power in society or the basic political equilibrium can simply lead to the replacement of one instrument by another with little net effect of the ultimate goal - economic performance.”

Tuesday, May 17, 2016

Are good economists for Brexit?

I have seen that there is a group called "Economists for Brexit". I feared it would be a long list of right wing nativist professionals of the economy, but I am relieved to see that they are only eight economists. I lived almost three years in London, and I spent previously some weeks at Oxford. I am an anglophile who watches the BBC (the best contribution of the Brits to civilization). My PhD supervisor was an English professor. I have English great economists as co-authors and friends, and I had another great English economist as member of my thesis committee. I am very happy to see that none of them are among the "Economists for Brexit." Actually, I do not know any of the eight members in the group, whose chair is the chief economic advisor of the xenofobic former mayor of London, Boris Johnson. Of course now I cannot follow all the details of the referendum debate because I am not there, but it seems to me that this group is very far away from the mainstream in the profession. When the magazine "The Economist" has the same position as old Labour, new Labour, and "trostko" Labour, which by the way is the same position as the decent wing of the Conservative Party and all the Liberal Party, one wonders what kind of economists they are. As it happened on occasion of the referendum about the independence of Scotland, the nationalists are losing this referendum precisely because of the economic debate. They may still win at the end (I hope they do not), but if they do, it will not be because of the economic arguments. The UK needs free trade with Europe, at the same time that it keeps some influence on European rules. The UK needs immigrants, as the rest of Europe does. And the UK will still be admired by people like me if they remain the cosmopolitan, tolerant and open country that I have always enjoyed.

Sunday, May 15, 2016

Milanovic, nativism and methodological nationalism

I apologize to Branko Milanovic because I am reading his last book, "Global Inequality. A New Approach for the Age of Globalization", in a very disorganized way. My only justification of this disorganization is that I attended an advance presentation of the contents at Barcelona before last summer, and I had the privilege to talk to the author after that. I have also presented the main graph of the book to my students in a couple of class groups. In this now famous graph, Milanovic explains how the main losers of globalization have been the middle classes of developed countries, and the main winners have been the middle classes of the emerging countries and the richest one percent in the developed countries. In the book, the author explains the main forces driving these results, both the forces explaining the evolution of within country inequality and those explaining the evolution of inequality among countries. I already knew about some of these explanations, and that is why I went straight to the last two chapters, where Milanovic analyzes the politics of inequality and summarizes some of the main ideas and proposals of the book. Here and there, the author goes back to something that also appears in the rest of his work: the relationship between inequalities and the organization of power and sovereignties. The last chapter questions the methodological nationalism that still guides many of our thoughts, the idea that the nation-state is the main unit of analysis. Of course, politics works mostly still at the national level, but we would do better if we started changing the paradigm to better deal with phenomena that today trascend this level. The national politics is working in worrying ways (and mainstream parties including socialdemocratic parties are at least partly responsible for that) that are very difficult to predict, with the upsurge of populist and nativist right wing parties or candidates in many countries (I missed the Italian Northern League in Table 4.11). When he explains the differences between the USA and other non-European countries and Europe relative to the experience of immigration, he has a wonderful sentence: "...European nation-states have historically been either ethnically homogeneous (...) or, when they were not (as in Spain), the diverse groups have lived next to each other for such a long time that the cultural and normative differences between them would seem rather small to an objective observer." As if realizing that the usual suspects would not like this sentence, he clarifies in a endnote: "I am aware that "objectively" small differences may loom large in the view of people concerned." Read this book.