Monday, March 31, 2014

Pierre Trudeau, against de current

The book of selected writings (between 1939 and 1996) by Pierre Trudeau, the father of Canadian federalism, with the title "Against the Current," provides many lessons for those who think that nationalism should not be opposed. For example (p. 204):
"It is possible that nationalism may still have a role to play in backward societies where the status quo is upheld by irrational and brutal forces; in such circumstances, because there is no other way, perhaps the nationalist passions will still be found useful to unleash revolutions, upset colonialism, and lay the foundations of nation-states; in such cases, the undesirable consequences will have to be accepted along with the good.
But in the advanced societies, where the interplay of social forces can be regulated by law, where the centres of political power can be made responsible to the people, where the economic victories are a function of education and automation, where cultural differentiation is submitted to ruthless competition, and where the road to progress lies in the direction of international integration, nationalism will have to be discarded as a rustic and clumsy tool."

Friday, March 28, 2014

A few words on fuzzy economics

I finished a proposal for a book chapter on the relationship between fuzzy logic and modern economics. Here is what I say about behavioral and institutional economics:
"Behavioural economics replaces the assumptions of rational and exogenously individualistic behaviour by an assumption that individual behaviour is presided by the mental shortcuts and predictable biases that real individuals show, according to research in empirical and social psychology. Decisions depend on framing, preferences are reference dependent, and the communication based on natural language (intuitions,
vagueness, fast thinking) matters. Fuzzy logic seems complementary to this approach, to the extent that it provides a more realistic framework on which to base assumptions on preferences.
Formal and informal rules that constrain and structure our social behaviour (institutions) are recognized to play an important role in attempting to solve social dilemmas (cooperation and coordination problems) in our society. Our behaviour in repeated games depends on cognitive representations, where languages play an important role in a variety of domains: firm, market, politics, communities. Saliency plays an important role in the emergence of conventions. The coordination of identities through interactive sense-making plays an importantrole. Fuzzy logic could play an important role in better describing the role that natural language plays in structuring representations and cognitive structures that structure our social games."
I finish by saying that "In the last century economics has made progress by explaining partially the workings of very simplistic market economies. The next step should be to analyze the dynamics of socio-political systems with boundedly rational players that navigate with fuzzy categories, where citizens as voters and policy makers interact with citizens as they behave in the domains of markets and communities."

Monday, March 24, 2014

Robert Reich on the decline of the nation-state

The nation-state is in decline but new tribalism is growing. That is a paradox we have to solve if we want our democracies to survive and new democracies to take root and expand. I said that as applied to Catalonia, Spain and Europe not long ago. It would seem that the USA is immune to these problems. However, here is what Robert Reich, former Cabinet member of the Clinton administration and professor at UC Berkeley has to say about it:
"We are witnessing a reversion to tribalism around the world, away from nation states. The same pattern can be seen even in America – especially in American politics.
Before the rise of the nation-state, between the eighteenth and twentieth centuries, the world was mostly tribal. Tribes were united by language, religion, blood, and belief. They feared other tribes and often warred against them. Kings and emperors imposed temporary truces, at most.
But in the past three hundred years the idea of nationhood took root in most of the world. Members of tribes started to become citizens, viewing themselves as a single people with patriotic sentiments and duties toward their homeland. Although nationalism never fully supplanted tribalism in some former colonial territories, the transition from tribe to nation was mostly completed by the mid twentieth century.
Over the last several decades, though, technology has whittled away the underpinnings of the nation state. National economies have become so intertwined that economic security depends less on national armies than on financial transactions around the world. Global corporations play nations off against each other to get the best deals on taxes and regulations."
(Keep reading here).

Thursday, March 20, 2014

Towards a behavioural political economy

Economics has experienced an evolution from Neoclassical welfare economics, with an emphasis on normative issues and the identification of market failures in a world with rational agents, towards public choice (with an emphasis on government failures with self-interested rulers) and modern political economy, which is similar to public choice but more neutral in terms of the moral implications of the tension between market and government imperfections. All these approaches have in common that they assume that the relevant agents are fully rational. Behavioural economics changed this, and with the help of psychology, assumes more realistically that agents have predictable psychological biases, with difficulties to optimize, self-control problems and non-standard (more social than individual) preferences. In the first years of behavioural economics, though, the emphasis has been on the bounded rationality of consumers and citizens, assuming implicitly that rulers could intervene to de-bias them. Of course, rulers (politicians, regulators) are biased themselves, after all they are also citizens and consumers. Hence the need of models that more realistically assume that all agents may be affected by bounded rationality. Of course, the relevant biases are different for different agents and time periods. Some of the agents may be aware of their biases and others not. This gives scope for the design or the evolution of institutional mechanisms that recognise the biases and, to the extent that realistic socio-political processes allow it, try to achieve results that improve the welfare of societies.

Tuesday, March 18, 2014

Mankiw defending the one percent

(This is part of my article in the LSE's on line magazine Europp).
Despite growing concerns about income inequality, economist Gregory Mankiw has recently argued that inequalities are an unavoidable or even beneficial aspect of economic progress, and therefore the rich must fight to keep them. Robert Solow has replied to Mankiw, countering that the one per cent defend themselves well enough.
Mankiw’s core argument is that inequalities are necessary as incentives to encourage work and innovation, and that inequality is not dangerous for democracy because wealthy people are divided in their support for conservative and progressive causes. We should therefore go back to a “pre-Piketty” world, he suggests, where it is important to focus on eradicating poverty, but inappropriate to concentrate on the issue of inequality.
While it is true that a fully egalitarian society in terms of outcomes would be detrimental for wealth creation, it is hard to argue that the monetary incentives (for example in the financial industry) or returns on capital for the richest are truly necessary for value creation. Even the typical argument that entrepreneurs deserve to be extremely rich must be put into context, as many innovations (such as the Internet or the touch screen) were originally developed by government, as pointed out by Mariana Mazzucatto

In any case, the largest fortunes in the world do not exist for meritocratic reasons. Top incomes mostly come from executives in large companies, hedge funds, or from extremely wealthy heirs, as recently noted by Paul Krugman on his blog and Piketty in his book.
Mankiw’s other argument is that high inequality is not a danger to democracy. The political power of the wealthy should be considered neutral, since the wealthy support both conservative and progressive causes. However, the fact that they support non-conservative leaders or political parties does not imply that they support progressive or strongly egalitarian policies.
In fact, there are many instances of rich philanthropists focusing on poverty and child malnutrition, but not on income inequality. They may actually support progressive parties or politicians not because they believe in progressive causes, but in order to have influence over them and to pressure them not to adopt policies that might erode the position of the very wealthy. Such attempts to control the political process may not be successful in their own right. Nevertheless, as capital income continues to grow more than labour income (as explained by Piketty), it may lead to an increased risk of plutocracy. The rich will have even more resources to control public life, while their fortunes may escape national tax authorities (Piketty calculates world tax evasion at 10 per cent of global GDP). Democracy might not be reducing inequality because it is not working well enough. In the future, elites may have even more influence over the political process. They will promote causes that make them popular, but they will likely never call into question the mechanisms that allowed them to amass enormous fortunes. This may lead to the increasing privatisation of politics.

Saturday, March 15, 2014

The British center-left, decidedly federalist

Two of the most prestigious leaders of the UK's center-left have recently clarified their decidedly federalist positions. Former British Labour leader and Scottish Member of Parliament Gordon Brown proposed six changes that clearly go into a federalist direction:
  • A new UK constitutional law to set out the purpose of the UK as pooling and sharing resources for the defence, security and well-being of the citizens of all four nations
  • A constitutional guarantee of the permanence of the Scottish Parliament
  • A new division of powers between Scotland and Westminster that gives Holyrood more powers in employment, health, transport and economic regeneration
  • A new tax sharing agreement that balances the commitment of the UK to pool and share its resources with the need for accountability to the electors in all the places where money is spent
  • New power-sharing partnerships to address shared problems on poverty, unemployment, housing need and the environment
  • A "radical" transfer of powers downwards from Westminster and Edinburgh to local communities
The Scottish Liberal Democrats, under the leadership of the former UK leader the Scottish Menzies Campbell have published Federalism: the best future for Scotland. This report concludes that the opportunity for federalism in the UK would be ended permanently by a Yes vote.
There is broad consensus around two points:
-The Scottish Parliament should raise most of what it spends.
-The Scottish Parliament should be permanently entrenched.
There is the opportunity to move quickly after a No vote because the Scottish public will have been engaged in the referendum debate.
The Queen's Speech of 2015 should be the vehicle used. Party manifestos for the 2015 UK election should contain commitments to the two areas of consensus. The details of the consensus should be agreed through a short‐life gathering facilitated bythe Secretary of State for Scotland in October 2014. The political parties in Scotland that are committed to change should consider signing a Glasgow Agreement to demonstrate that commitment. The people of Scotland can take confidence in the delivery of real change in Scotland from 1997 to 2014.

Saturday, March 8, 2014

The Bush effect

Last Thursday in Brussels, in the Forum on Inequality organized by the socialist group in the European Parliament, Professor Gosta Esping-Andersen from Universitat Pompeu Fabra referred to the "Bush effect" as the phenomenon of rich parents over-investing in their over-stupid children. This is only one aspect of the increasing educational segregation that we are observing in many societies. Social mobility is lower than once imagined because the children of poorer parents find it harder and harder to have access to a good education. That is more so in societies that are suffering budget cuts as a result of the economic crisis. More unequal societies are also those that have less social mobility. In Spain, the children of the upper middle class and the rich tend to go to better funded schools, to learn English better and to have more time and money to access an increasingly expensive higher education. In many societies, the children of the upper middle class and the rich have more conversations with their parents, learn many more words and have higher self-esteem than other children. And nevertheless, some of them, as the Bush children, are so stupid.

Friday, March 7, 2014

If you don't like the word, take the substance

Some people are reluctant to use the word federalism, perhaps because it would imply recognizing that the individuals and parties that always defended it were right. But more and more people throughout Europe recognize that it provides the values and the ideas that are necessary to solve the problems of national minorities and divided loyalties that plague Europe and many other parts of the world. Now it is Ukraine, Scotland or Catalonia. Tomorrow it can be many other places. Today it is again the Financial Times, whose editorial pages have several times endorsed federalism, that includes a column by David Gardner saying exactly that: "The eventual answer to this problem does not have to be either separatism or unionism (monarchy is a secondary issue). It could as well be a creative form of federalism, even though federalism as a word, let alone a formula, sends semantic shivers up the political spine of both countries. Yet if the majority nationalists – also known as unionists – were to look more empathetically at their minority nationalists, they might detect the ambiguities and hesitancy behind much separatist discourse. Surely it has occurred to all three capitals (London, Madrid and Brussels) that these minority nations might settle for something short of secession. But there is a curious reluctance to discuss alternatives – especially to develop further the asymmetric federalism that already exists in the UK and Spain, where Scotland, Catalonia and the Basque Country already have more home rule than other regions, yet want still more.There is no reason why some regions, especially those with a deep-rooted sense of nation, should not have greater self-rule than others if that is what they want – the cost, to paraphrase the King James Bible, of sharing a house of many mansions." The title of the article is "Spain and Britain should not fear the F-word". Its author, and an increasingly number of people, certainly have no fear.

Thursday, March 6, 2014

Institutions and inequality

I am attending the Forum on inequality organized by the Socialist Group in the European Parliament (the only group that could organize a conference of this calibre), where Joseph Stiglitz and Martin Schulz just made the key addresses. I presented a much more modest paper earlier. I paste here a few paragraphs from the introduction and the conclusions of my paper:
"The importance of institutions taking into account that they are endogenous (and therefore must be to some degree self-enforcing) has been acknowledged by numerous scholars. Institutional reforms have to be part of a political equilibrium: they must take into account efficiency and distribution, common interest and rivalry. In Europe, the need for reforms that make progress in the process of economic and political integration, and at the same time improve democratic accountability and commitment and reduce capture, should follow the same logic.
Economists such as Spolaore (2013) or Alesina and Giavazzi (2006) are of the view that integrated policies should be limited to “economic” policies where the costs of heterogeneity are low, and where distributive concerns are scarce. However, from the analysis of existing institutions, there is nothing that prevents lessons from being learned and applied to policies with distributive concerns.
In this paper, four EU institutions are evaluated in terms of democratic accountability, capture, commitment and European integration. These institutions are the telecomunications policy framework, competition policy, infrastructure subsidies and the UEFA Champions League in football. Lessons from these existing institutions are applied to other policy areas, such as fiscal policy and financial regulation. There is nothing in policies with distributive components that prevents positive lessons from being learned.(...)

Europe needs increasingly integrated institutions that encourage institutional and product innovation, and needs to empower those who facilitate integration to make institutional reform part of a political equilibrium. The UEFA Champions League in football suggests that reputational issues and saliency of the institution are key in constraining principals and agents to behaviours that are accountable and transparent. In football, the same referees, players and managers behave better in Champions League games than in national games, in a similar way that some politicians are better EU Commissioners than national cabinet ministers.
In a context of international markets that coexist with significant between and within countries inequality, shared prosperity can only be achieved through the development of institutions that at the same time promote regional integration, democratic accountability and commitment. Authors such as Spolaore (2013) and Alesina and Giavazzi (2006) are wrong in suggesting that European integration should not be applied to redistributive policies. There is nothing in these areas that prevents them from learning from existing institutions. Common fiscal policies and financial regulation that tackle distributive problems in a democratically accountable way are a prerequisite for better efficiency enhancing policies. A new democratic federalism must find a middle way between technocratic solutions and populism.
Future research must focus on the details of an institutional architecture that promotes the desired objectives (including distributive concerns) and that is self-enforcing and stable."

Monday, March 3, 2014

European secessionists, losing the economic debate

After the editorial of The Economist severely criticizing the economic arguments of the Scottish primer minister Salmond, Paul Krugman also expressed his scepticism with Scottish independence, and his preference for "democracies big and diverse" (federal). Previously, the Canadian governor of the Bank of England explained the incompatibility between a monetary union and political and fiscal independence. In its week-end edition, an editorial in the Financial Times praised the bravery of a Scottish business man for expressing his opposition to Scottish independence. Catalan business leaders have expressed their opinion against secession many times. The FT said that this was particularly significant and credible, because business people depend on consumers, regulations and politicians who may not share their views. An international consultancy published an important report questioning the economic benefits of Catalan or Scottish independence. The weight of expert opinion in economic issues related to independence of parts of European member states is now overwhelming. Time to spend European energy on something else.