Sunday, March 27, 2016

Federations and debt

The article “Fiscal Federalism: US History for the Architects of Europe’s Fiscal Union” by C. Randall Henning and Martin Kessler is a fantastic source to draw lessons to make the European Project sustainable: “Before drawing too heavily on the US experience in concluding that constitutional debt brakes are a key solution to Europe’s debt problems, however, Europeans should consider three essential aspects of the context in which the balanced budget rules of the states operate. The US experience suggests that the particular path through which rules are adopted and enforced is likely to be critical to their implementation and that introducing such rules for euro area member states should be accompanied by a federal system of fiscal powers and a common fund for rescuing and recapitalizing banks. Consider these three caveats in turn. Within the US federal system, the states are “sovereign” with respect to debt.  (…) The second fundamental caveat is that the federal government’s relationship with the states must be seen within the context of a broader fiscal union. Since Alexander Hamilton’s plan was enacted, federal debt has been supported by the full system of federal powers, including a sweeping power to tax. The federal government’s role in public expenditure and taxation is large relative to the states. The theory of optimum currency areas has trained attention on the fiscal transfers among different regions of the country that are effected through the federal system of revenue and expenditures as well as through direct budget support to states and local governments. (…) US banking and capital markets are the third element of the context in which budget rules operate and the states relate to the federal government on fiscal matters. Compared with Europe, banks are less important conduits for finance relative to capital markets and bank regulation is less fragmented, being more of a federal responsibility. Stabilizing the banking system, along with stabilizing the macroeconomy, has been the responsibility of the federal government. In the United States, the states have not themselves undertaken large-scale bailouts or recapitalization of banks over the last century. As a consequence, the need to stabilize the banking system did not come into conflict with balanced budget rules at the state level. In the euro area, by contrast, harmonization of bank regulation is still young and the fiscal costs of bank rescues and recapitalization remain primarily a national responsibility. The introduction of debt brakes threatens to collide with the need to mount large-scale rescues of banking systems at the level of member states. As such provisions are put in place, therefore, it is all the more important that the euro area unifies banking regulation and creates a common pool of fiscal resources for rescuing, restructuring, and recapitalizing banks."

Friday, March 25, 2016

Johan Cruyff: a key link in the evolution of football (and nothing more)

In a week where we are witnessing atrocities in the core of Europe (violation of refugees' human rights and terror attacks) it may seem a luxury to spend a few lines  remembering a sports star. I apologize for it. But Johan Cruyff represents for people of my generation in Barcelona the transition from black and white football (soccer in the USA) to colour football, the transition from Real Madrid humiliating us, to Real Madrid becoming the Washington Generals to the FC Barcelona Globe Trotters. We grew up watching football with the flying Dutch as a player and a manager. As a player, he came to Barcelona after his best years were over at Ajax, winning only one Spanish league -in his first year in 1974 (the first league of my life). With manager Rinus Michels (he coached Ajax, Barcelona and the Dutch national team), Cruyff and his team mates innovated with the introduction of Total Football, a style of play with roots in several places (explained in the book "Inverting the Pyramid"), that consisted of constantly switching positions and playing strategically with space, invading all the time the other team's part of the pitch. The highlights of the first game of The Netherlands in the 1974 World Cup, against Uruguay, are very illustrative of this: enjoy them here. He came back to Barcelona as a manager in 1988 and he stayed for six seasons in which the team won four leagues and a European Cup in 1992 (losing another final in 1994). As a manager he continued and radicalized Total Football's revolution, playing with only three defenders and even day dreaming with the possibility of replacing the goal-keeper with a field player to gain more offensive potential. He didn't do that, although he came close when he chose Carles Busquets (the father of current midfielder Sergio Busquets), a goalie that was better with the feet than with the hands, as a replacement of Zubizarreta. Van Gaal, Guardiola and Luis Enrique just added discipline and a few touches to the model that today is so influential in European football. As Simon Kuper from the Financial Times explains, Cruyff loved controversy, and I will not bother the reader with the many examples of this in Barcelona. If you can, read what the international press has to say about Cruyff, like this piece in The Economist, or this one by John Carlin in The Independent. Meanwhile, some sections of the Catalan media and political class embarrass us with an attempt to link Cruyff to the drive for the secession of Catalonia. The truth is that Cruyff unfortunately didn't even bother to add Catalan to the collection of languages that he didn't speak well. Let's focus on the sports' legacy: today FC Barcelona's goal keeper Ter Stegen is a prodigy both with his hands and his feet and number nine player in Barcelona (same number as Cruyff in 1974) is Luis Suárez from Uruguay, whose parents probably remember that game in the World Cup 42 years ago. Our ancestors claim that a player of Hungarian origin, Kubala, made it necessary in the late 1950s to build the current Nou Camp stadium in Barcelona. Johan Cruyff and his generation probably made possible the globalization of football: the stadium is now the Planet.

Wednesday, March 23, 2016

It's not Belgium, it's us

After the terror attacks in Brussels yesterday, the authorities in Paris decided to decorate the Eiffel tower with the colours of the Belgian flag. Of course this is a well intentioned initiative. But it gives a wrong message. The attack on Brussels is not an attack on Belgium, it is an attack on Europe. And the risk of further attacks will not be minimized unless a European answer is given to international terrorism. Security is an example of a pure public good. Of course some security threats are local (some of them ultralocal, like the safety risks of babies at home) but the current terror threats in Europe concern all Europeans. Anti-terrorism policy is today a European public good. There are obvious gains from European coordination of anti-terrorism policies. Europe should have its own FBI, as well as it should have a common asylum policy, a common fiscal policy, and a common strategy to deal with immigration and refugees. It is in the common interest of all Europe, all its member states and all its citizens. A common European FBI would be no panacea, just as the FBI and the CIA are no panacea in the USA, but they would get us closer to feel better protected. I also found a little bit ridiculous the calls to patriotism by the French authorities after the terror attacks in Paris last December. The combination of the euro crisis, the refugee crisis and the terror attacks works in the direction of lowering the prestige of the European idea, but at the same time works in the direction of illustrating more than ever the need to leave the nation-states behind and create a common narrative of solidarity and fraternity that supports the efforts to create common institutions and policies.

Tuesday, March 22, 2016

I confess: I am the only fan that likes Louis Van Gaal

Next season ManU will have a new manager that will free ride on the young talent that Louis Van Gaal has promoted in the last two seasons (Rashford, Lingaard and many others). The same happened previously at Ajax, FC Barcelona, Bayern Munich and the Dutch national team: no other manager at top teams has the courage to risk everything to give minutes and games to the youngest players. Other more glamorous younger managers should be compared to the great Louis after a comparable career in so many teams and leagues: then we can look at titles won and talent promoted. Today Van Gaal's team still has chances to go back to the Champions League and to win the FA Cup. Most probably it will not happen and he will be sacked. Meanwhile, I enjoyed today's comments after defeating ManCity as I enjoyed them when Van Gaal defeated Spain in the last World Cup. Today inThe Guardian: "This was the sweetest of victories for a manager many United supporters want sacked. Four times the usually perma-seated Van Gaal was on his feet in a show of how much a win meant to him, twice to argue with the fourth official – about Daley Blind’s treatment from Sergio Agüero and a penalty denied to Marcus Rashford. The third and fourth were to give instructions to players – Antonio Valencia and Michael Carrick – despite the Dutchman having said previously that touchline chat is ineffective. Beforehand Van Gaal said: “After going out of the Europa League, it is a big disappointment. We are ready again. We have to close the gap to them and so have to win this game.” They did and are now a point behind City. And, if this is Van Gaal’s last taste of the fixture, his record closes as P4 W2 D1 L1. Rashford shows he has a bright future: An eighth consecutive start for the 18-year-old came as a surprise given Van Gaal’s tendency to tinker and the fact Marcus Rashford had not scored since registering twice in his second match for the first team. Yet only 15 minutes were required for the striker to suggest he may be a regular presence in the big time by leaving Martín Demichelis in a different postcode as he skipped in on Joe Hart before banging home a memorable winner. Rashford should also have had a penalty as the interval neared when Demichelis took him down. Each time the ball arrived he was a menace with his cocktail of pace and willingness to drive forward." Music to the ears to defenders of lost causes.

Friday, March 18, 2016

A tale of two French economists

Two French economists have become enormously famous and influetial in the recent past, Thomas Piketty and Jean Tirole. Piketty is the author of "Capital in the XXI Century", a best seller book explaining the empirical realities of huge inequalities, the trends that push them, and the policy proposals that could reverse them. Piketty is outspoken and has not been shy to make clear his political left-wing positions, for example first endorsing the current president François Hollande, and then criticizing him for not fulfilling his promises. It seems that now Piketty is busy promoting the idea of a primary election in the left to choose a common leftist candidate. Jean Tirole, the Nobel Prize in economics winner of last year, is very different from Piketty. Tirole does not intervene in party politics and is less prone to participate in the media, although the Nobel prize has made media participation more difficult to avoid for him. I have been told by a French colleague that Tirole, who was very well known and respected by academic economists but unknown by everybody else before the Nobel prize, is now quite unpopular in France, were he is criticized by the extreme left for promoting pro-market solutions. The fact is that I doubt that the right loves him much, because he is also in favour of curbing market power and the capture potential of large corporations. Piketty and Tirole agree on many things. For example, both are big federalists, being in favour of a truly integrated and democratic Europe. But recently they have taken different positions on occasion of the proposal of the French government to reform the labour market. This proposal has triggered street protests and huge divisions in the left. It tries to liberalize the labour market, making it more flexible with the objective of reducing unemployment. Piketty has opposed the reform and Tirole has endorsed it. The differences reflect a typical controversy when center-left governments face situations of high unemployment. We have experienced that in Spain in the past. In a way, both parts are right. Introducing flexibility in the labour market may reduce the bargaining power of workers and make many of them more vulnerable. But not reforming rigid labour markets in contexts of large unemployment does little to reduce it. Without being a specialist, I have the intuition that the solution must be to offer something for workers in exchange for accepting more flexibility: participation in the firms' boards, tax reforms, unemployment benefits reform...

Sunday, March 13, 2016

John Carlin, Simon Kuper and Arsène Wenger

My two preferred sports journalists, John Carlin and Simon Kuper, disagree on one important point: the merits of Arsenal's manager Arsène Wenger. I like these two sports journalists because they rarely write only about sports, but they combine sports (mostly football -soccer in the US) with discussion of issues of broader interest. I wonder if they read each other. Carlin writes mostly in the Spanish newspaper El Pais and Kuper writes mostly in the Financial Times. The former wrote an article last week where he said that Arsenal would need a little bit of the impatience that the club officials at teams like Real Madrid show for their managers. Wenger has been in his postition now for almost twenty years, beating records of managerial tenure. Although he has never won the major football torunament, the European Champions League, he won several times the English Premier League, although many years ago, and several times the FA Cup (althoug they were eliminated today from this year's edition). However, Arsenal are an example of stability. A consistent playing style and transfer market strategy have not only allowed them to keep stable finances but also to regularly access the last stages of the Champions League (athough they only reached the final once, being deferated by Barcelona in 2006). Instead, Kuper admires Wenger. He sees in him football's Billy Bean, the mythical manager of the Oakland A's in baseball, whose statistical revolution was brought to the movies and the bookstores in "Moneyball". Wenger has been able to succeed competing with richer clubs with a broader fan base precisely because he keeps a scientific approach to evaluating strategy both on the pitch and in the transfer market. At the same time, he has promoted many young players and helped build a new stadium without bothering the tax payer. I understand the impatience of Carlin, and the Arsenal fan. If Wenger is replaced by the time of the game this week against FC Barcelona, perhaps they'll cause problems to my favourite team in a post managerial change reaction, but they will jeopardize the stability of the last two decades. Perhaps two decades are a lot (are they? is there empirical evidence across industries?), but then it would be better to replace the manager taking a broader perspective, and not only looking at the last game's score.

Thursday, March 10, 2016

Selection by lottery or by election?

My daugther explained to me that in her class (she's 9) delegates are chosen by a lottery organized by the teacher, for terms of 1 month. I asked her whether she thought it is a good idea as compared to an election. She said "of course" (her parents taught her common sense from day 1): "otherwise each would vote only for her friends." LSE economist Tim Besley agrees with my daughter. In the article "Political Selection" (2005), he wrote (there are also many other interesting things in the article): "For a period of time, ancient Athens filled seats on its legislative council by drawing lots from among its citizens. Each citizen served for one year and there was a restriction to two terms in a lifetime. The Greeks understood the downside of this method in terms of ensuring good politicians. They did impose safeguards in the form of a kind of confirmation hearing in which the character and competence of the selected candidate was scrutinized. However, the basic premise behind selection by lot is that civic virtue was widely distributed in the population, so that random selection made it relatively unlikely that anyone picked by the lottery would be a bad politician. Selection by lot was deemed preferable to elections for three main reasons. First, it guaranteed rotation in office, so that politicians were guaranteed to experience both political and everyday life. Second, selection by lot guaranteed the widest possible access to public office and hence was viewed as egalitarian. Third, lots seemed more likely to maintain a unity of purpose in the community, while elections increased the chance that citizens would group into factions. The use of lottery makes a lot of sense in a relatively homogenous city states such as Athens. For similar reasons, lotteries were also used in the Italian city states of Venice and Florence." Of course, there are downsides, but do not apply to my daughter's class: "However, even political thinkers such as Montesquieu and Rousseau who took the idea of political selection by lot seriously in their writings ultimately favored elections, principally because they believed that elections helped in the selection of a natural aristocracy of the talented and virtuous. After all, selection by lot does not favor those with greater political competence over those with less. This view heavily influenced the founding fathers of the United States, who similarly saw the task of political selection as selecting a ruling class that was different from the citizens at large -- superior in their talents and mental capacities. Indeed the term “natural aristocracy” originates with Thomas Jefferson (1813), in a letter written to John Adams. Jefferson wrote: “I agree with you that there is a natural aristocracy among men. The grounds of this are virtue and talents. … May we not even say, that that form of government is the best, which provides the most effectually for a pure selection of these natural aristoi into the offices of government?” Jefferson continues to argue that he favors laws to break up large inheritances and support public education as methods of creating a situation in which the natural aristocracy can rise and be selected." While we wait for the breakup of inheritances, instead of a natural aristoi we run the risk of having someone from the Republican Party ticket elected as President of the USA.

Sunday, March 6, 2016

Donald Trump as a warning

The prospect of Donald Trump really competing for the presidency of the most powerful country in the world is scaring. Almost nobody believes that he can win, and even if he wins, one expects the institutions of the USA to be strong enough to make the experience a historical anecdote. However, the fact that he may become one of the two candidates with chances to become president is worrying enough. I have been curious to follow his speeches in rallies and his agressive behavior in debates. He combines a permanent use of apparently common sense arguments with unstoppable outrageous comments about religious and ethnic minorities that would be unacceptable in any civilized democracy. We are told that his objective is to mobilize the white working class. Beyond sheer racism, he rides two waves that are common in contemporary democracies: anti-politics and nationalism. Some observers have commented that those high rank Republicans that are now scared about the phenomenon should reflect about how their party has been feeding stereotypes and prejudices (on which Trump draws today) to defeat the Democrats for decades. Even the media should reflect about how it has contributed to the anti-politics rhetoric (what is the alternative to politicians, the military?) and to nationalism in a world that is increasingly interconnected. In a competitive media landscape, under pressure from the Internet and social media, more than one traditional newspaper or radio succumbs to the temptation of making concessions to the meanest of populisms. In Europe we see it everyday. If we were to elect a European president one day (something I deem desirable) perhaps we would also have the surprise of one Boris Johnson, one Berlusconi or something even worse runing as a credible candidate. If we want to protect ourserlves from this prospect it is better to stop making concessions to anti-political rhetoric and to nationalism.

Thursday, March 3, 2016

The scale and complexity of institutional change

Now that nationalists in places like the UK, Hungary or other places want to fix everything using referenda, it is helpful to read the late Elinor Ostrom on the complexity and variety of ways to introduce institutional changes addressing the complex scale of constitutional reform. When talking for example about the reform of river basin institutions, she said: "The arrangements that have been developed in these locations over the past seventy years vary considerably. Even in physically similar, neighboring basins facing similar threats over the same period, individuals can develop substantially different yet workable responses. In the Southern California cases, however, the results of institutional experiments being conducted nearby did feed back into the judicial decision-making process and affected (sometimes quite markedly) the design and adoption of institutional changes. Thus, learning from one case helped the participants in nearby locations to craft rules that experience with similar rules had shown to be workable in practice but that differed in ways important in a particular setting. Such adaptability is essential since dynamic social and ecological systems such as human-used water resources lack ‘‘correct’’ solutions that can be designed and implemented once and for all. Sustained governance of those systems therefore depends critically upon the capability to assess institutional performance, consider institutional alternatives, and adopt modifications." And: "We are also interested in understanding what factors contribute to design and adaptation of robust institutional designs. Robust institutions would be those that can adapt to changing economic, political, social and ecological conditions that may threaten the performance of rules designed and implement at one time period in later eras. All other things being equal, we are willing to argue that: (a) institutional diversity, which yields richer information about institutional performance, combined with (b) the availability of institutional arrangements through which people can monitor and modify their institutional experiments based at least in part on that richer information base, would be associated with greater prospects for institutional robustness. Conversely, the absence of either (a) or (b) would contribute to institutional vulnerability."