Saturday, December 28, 2013

The book of 2014

OK, the book was published in 2013, but I do not expect many people to read its around 1000 pages by the next two days. This book describes and quantifies the increasing inequalities at the national and international level in the XXI century and makes a number of proposals to reduce them. The most important of these proposals is a progressive global tax on capital. This is a useful utopia that could be applied today in the European Union and perhaps in the future extended at the global level. Of course, it is something that needs new accompanying institutions, especially a more integrated and democratic Europe that leaves behind the old nation states. The book is also a call for a better economics, more integrated with other social sciences, especially history and political science. It has an excellent accompanying web page and should be read by any economist or student of economics, especially those that think that the market is the solution to anything, or those that think that solutions can be found at the national level.

Monday, December 23, 2013

How to fight populist movements

There are several movements in Europe which have as common objective to exploit the anxieties of the working classes to promote simplistic solutions to common problems. These simplistic solutions can have different forms, from looking for scapegoats (typically foreign citizens from neighbouring countries or regions, or immigrants) to protectionism or nationalism. Of course, there is some responsibility for these of the mainstream political parties and their inability to introduce necessary institutional and political reforms. But in my view the deep cause of the social distrust is the severity of the economic crisis and the difficulties of finding alternative economic policies. In Europe, the margin for national policies is very narrow, and significant solutions should be sought at the EU level. But the case must be made that populist movements are wrong and that their exploitation of people’s anxieties is dangerous. This requires involvement in public debate, collective organization and use of facts and reason as much as possible. If the next European Parliament has more than a symbolic share of this type of political movements, the project of an integrated Europe as a force for peace and welfare will be severely damaged. And the problems that are at the root of the anxieties will get worse, not better.

Wednesday, December 18, 2013

Spanish soccer and state aid

The European Commission has opened three distinct in-depth investigations to verify whether various public support measures in favour of certain Spanish professional football clubs are in line with EU state aid rules. None of the measures was notified to the Commission, who was alerted by concerned citizens. The Commission has concerns that these measures provided significant advantages to the beneficiary clubs to the detriment of the clubs which have to operate without such support. The opening of an in-depth investigation gives Spain and interested third parties an opportunity to comment on the measures under examination; it does not prejudge its outcome.
Commission Vice President in charge of competition policy Joaquín Almunia said: "Professional football clubs should finance their running costs and investments with sound financial management rather than at the expense of the taxpayer. Member States and public authorities must comply with EU rules on state aid in this sector as in all economic sectors."
I couldn't agree more with Mr. Almunia, although he is an Athletic Bilbao fan and I am a Barça fan, and our clubs are among those investigated. Public subsidies for football clubs raise many interesting issues for welfare economics. It will be very interesting to follow this investigation together with my students in the course "Behaviour and Incentives in Economics: The Case of Soccer" in the Study Abroad programme of the Autonomous University of Barcelona.

Thursday, December 12, 2013

"The Haves and the Have-nots" by Branko Milanovic

The last book by Milanovic, lead economist of the World Bank research division is, as it says in its subtitle, "a brief and idiosyncratic history of global inequality." The book is structured around three main essays: one on within country inequality, another one on between countries inequality, and another on global citizen inequality. Each of these essays summarizes and gives a personal interpretation of the economic literature on these issues. After each main essay there are some shorter chapters, called vignettes, where the author illustrates the main topics with episodes from history or literature. There are two important ideas among others in this book. One is that inequality among countries (locational inequality) is today much larger than within-country inequality, as opposed to what happened until the ninetieth century. Overall, the place of birth and the income class of the parents determine 80% of anyone's income, the remaining 20% left to luck and effort. The other main idea is that there are important reasons to worry about global inequality, although there is no global political authority to whom we can send our complaints (perhaps we should build one). The reasons have to do with a practical and an ethical reason. The practical reason is that huge inequalities at the global level create political tensions, potentially chaos that may ignite huge migration movements. The ethical reason is that from a cosmopolitan criterion of social justice, there is no reason why we should worry more about citizens from our country than about human beings from other countries.

Thursday, December 5, 2013

Homage to Nelson Mandela


The costs of secession movements

Scholars and commentators that have been thinking about the potential secession of Quebec and Scotland provide interesting insights on the sovereignty debate in Catalonia. The constitutional, cultural, economic and demographic realities are different, but Quebec and Scotland are the only examples of parts of industrialized states that have tried to secede peacefully through referenda. Robert Young introduces the important concept of the transaction costs in the transition to secession, which, as well as uncertainty costs, depend on the politics and the degree of conflict associated to secession should this occur. He claims that transition costs in general can be very significant, and may delay for several decades the potential net benefits of independence. Kim Somers and François Vaillancourt present some interesting quantitative work on the now fifty-five year old debate about sovereignty in Quebec: despite the small number of time observations and endogeneity problems, they show serious costs of the hypothetical event of secession in terms of GDP and migration, but they do not find significant overall economic costs of the movement towards independence. This may provide a clue of the proposals for “light” or “low cost” independence that seem to be made by secessionists in Scotland now that the referendum approaches: “independence” seems to be compatible with keeping the pound, the queen and the BBC at least. What secessionists find useful is the “movement”, the “process” towards independence: that is not very costly economically and it provides huge political dividends potentially for many years. But they need the process to last, not to finish, that would be too costly (politically for them, and economically in general).

Monday, December 2, 2013

Scientific rigour and political activism

A friend of mine who has spend time doing research in Canada, in Montreal (Quebec) to be precise, told me an interesting anecdote. She attended a seminar of a researcher whose conclusions reinforced an argument of the supporters of Quebec’s independence. When my friend had to opportunity to talk to this researcher in private and raised the issue of his support to independence, the researcher said that he was surprised that my friend assumed that he was pro-independence, since this was a private issue that he completely separated from his work as a researcher. I bet that this anecdote would not have happened in Spain or Catalonia, where it is much easier to infer the political position from the statements made in research formats. There is nothing wrong in being a scientist with political positions. That is what Einstein used to do. But the theory of relativity had little to do with world peace or social justice, the ideas advocated by Einstein. It is much more difficult to separate the two spheres when you do research in social sciences, where the choice of topics and the interpretation of results is unavoidably impregnated by one’s biases, as was openly and unashamedly done by the neo-conservative members of the Mont Pelerin Society. Scientists should be modest and open-minded, and be willing to update their prior beliefs as they receive contradicting evidence. The bad thing is when someone tries to disguise his or her prejudices into science. Some of the best economists today are openly partisan (they are openly left-wing), like Stiglitz, Krugman, Bowles, Aghion, Piketty or many others: in this case their progressive values have inspired their big questions, but their answers are nuanced (at least in my biased view) enough to see that they know how to update their beliefs. I prefer these intellectuals, rather than those whose bias is to ride the wave of the moment or to look somewhere else in the face of injustice or stupidity.

Saturday, November 30, 2013

Low cost Independence

The Scottish nationalists have announced the details of their project for an independent Scotland, which includes keeping the Queen of England and the pound, and membership of the European Union, although officials from Brussels have repeatedly announced that once independent, Scotland would start its new life out of the EU and would have to apply for membership like any other external country. Two things seem to me quite extraordinary from this announcement. First, that it has taken several years for the Scottish nationalists from their commitment to independence to unveiling the details of what they exactly mean by independence. Second, what they mean by independence does not seem very independent, which seems fine to me, because I do not exactly understand the meaning of independence (or sovereignty) in the European Union and in a globalized and interconnected world. There are some differences between the Scottish nationalists’ campaign for independence and the Catalan nationalists’ campaign for independence. For example, Catalonia is relatively richer than Scotland compared to Spain or the United Kingdom respectively. Or in Catalonia the identity is based more on a native language that is spoken by a larger fraction (although not as the first language of a majority) of the population, although almost everybody speaks two languages, because since they both belong to the same language family, it is easy to speak both. One similarity between both campaigns, though, is that both reveal a preference for a sort of low cost independence. Catalan nationalists have given even fewer details of what would “independence” look like, and are also thinking hard on how to keep EU membership in any event, but when one of them threatened with a one-week general strike as part of the campaign for a referendum, the others immediately said that not even a one-day strike was on the agenda.

Tuesday, November 26, 2013

Resisting reforms that harm no-one

I have attended some policy debates recently on the duality of the Spanish labour market (the fact that we have a record level of temporary contracts). A few years ago, a group of economists proposed a very simple reform: to replace all contract options by basically one single fixed contract that increases the firing costs over time, leaving temporary contracts for season contracts in product markets where work is really seasonal. Since current workers with fixed contracts would keep their current contracts it is hard to understand why trade unions have so fiercely resisted such reform. Samuel Bowles, in his chapter on bargaining in his “Microeconomics” book (page 201), argues that “getting to the bargaining frontier may require new institutions or precedents, that with some probability will later be deployed to the disadvantage of one of the bargainers”. If this can be applied to labour reform in Spain, perhaps organized workers do not fear the new contract per se but fear that it will open the door somehow to them losing bargaining power. Assuring them that it will not be so is perhaps the key to a successful reform. This requires expanding the political economy traditional framework (social groups defending their interests about the particular policy at stake) to take a more comprehensive view. Acemoglu and Robinson have a recent paper on policy advise where they also claim that advisers should take into account the effect of reforms on the political power of affected groups. Perhaps in these cases it would be better to propose the reform together with a broader package that makes it more acceptable to workers, and that includes tax issues, training possibilities or participation in firm management.

Friday, November 22, 2013

"Queries": think European, read European

I participated today in an event organized by the Foundation for European Progressive Studies (FEPS) in Barcelona. I chaired an interesting debate on industrial policy, where some interesting ideas were exchanged on the relative importance of vertical versus horizontal policies, or the need to pay attention to the ideas of Dani Rodrik on the institutional design of industrial policies. The organizers took advantage of the event to present the magazine Queries, which is the first progressive European wide magazine. The event was attended by an interesting mixture of practitioners and academics, among them the economist from Columbia University Stephany Griffith-Jones. I believe that FEPS are doing interesting work in trying to get the practice of European progressive parties closer to the ideas of top left-wing academics. This kind of work is specially needed in times of great political uncertainty and volatility, when the dangers of populism and technocracy must be fought with solid arguments and well-thought strategies. The difficulties of progressive strategies at the national level must be overcome not with desperate attempts to copy the recipes of the populist, but with the update at the UE level of the principles that have worked well in the countries that have been under social-democratic governments for more years.

Sunday, November 17, 2013

Are students and politicians always worse?

Teachers routinely claim that students are each year worse than the previous one. It seems that Aristotle was among the first recorded scholars to make this claim, which reveals that obviously it cannot be true. Of course students keep changing because society changes. A similar claim is made about politicians. The times of Winston Churchill and Franklin D. Roosevelt are gone, and since few people are alive to remember them, we assume that they were much better than our current politicians. Obviously this claim cannot be true either. A linear trend towards always increasing mediocrity in the quality of our politicians cannot be true. Again, politicians change with society, and the quality of individual politicians is to a large extent random. Of course, Obama is not worse than Bush, although this was worse than Clinton. But that is my opinion, and it is very difficult to establish the criteria by which they should be judged. Mandela and Lula da Silva did not possess great academic credentials, but were arguably among the best politicians ever. There are some objective aspects of reality, though, that can be used to think a little bit about this issue. For example, there are today more democracies than 30 years ago, and there are less dictatorships. Unless we argue that democratic leaders are systematically worse than dictators, it is impossible that our political leaders are linearly worse as time goes by.

Aging curves

In a previous post (for which I have received some understandable criticism) I claimed that most probably soccer player Leo Messi had already reached the peak of his aging curve in terms of professional performance. I extracted the idea from the book by Nate Silver "The Signal and the Noise". This book clarifies that aging curves are very noisy, and that there is a lot of variation around the average aging curve. It also argues correctly that different professionals have different aging curves: Olympic gymnasts peak in their teens; poets in their twenties; chess players in their thirties; applied economists in their forties... Since I turned 48 some days ago and I am an applied economist, I hope to be one of those that prove that variation is high. The location of the peak depends on physical and mental factors. Mental factors include psychological, cultural and social factors. I think that a lot of decline in academics can be explained by egos and people spending too much time on trying to keep old reputations and positions of power, rather than by capabilities. But I may be wrong. As economist Avinash Dixit once said, I think a good idea for professionals beyond the average peak is to try to behave always as if we were 23 years old. Actually, the best active economists I know are older than 60 and I don't think they have peaked. What do they have in common? They like to work hard, they are beyond vanity, and to be honest, they don't have a blog...

Saturday, November 16, 2013

Do novelists know anything about politics and economics?

It is frequent to read in the newspapers articles and columns by famous writers, or interviews with them, on a variety of issues, inlcuding of course politics and economics. It is certainly not only writers who are asked about these issues, so are singers, sports players and artists. In a free world, their right to express their opinions must be respected. However, one should be aware that their opinion is in many cases as valuable as the opinion of any person walking on the street. The only difference is that the famous have more access to the media. An article by Terry Eagleton in the Times Literary Supplement criticizing the political and economic opinions of J.M. Coetzee and Paul Auster (and the correspondence between them, which has recently been published as a book) reveals that the value of their judgement on these and other issues beyond literature is close to zero. These are great writers, but the fact that you are a good writer, singer, sports player or artist does not make your opinions in any field any more interesting than anyone else’s. This is one of the reasons why one should be suspicious of the views of people (like some in political circles) who only or mostly read from newspapers, which devote a disproportionate space to the opinions of famous people.

Friday, November 15, 2013

The objective of social democracy should be sustainable progress

At a time of political and economic uncertainty, especially in Europe, it is useful to vindicate the political tradition that has provided more welfare to more people for a longer period of time: social democracy. Social democratic government experiences in northern and central European countries are the most successful ever, in terms of shared prosperity. According to the words of the late historian Tony Judt, social democracy is not only a list of government policies, but also a collection of values that are the best to navigate an uncertain globalised society. It is something of a paradox that social democratic organisations face electoral difficulties in many countries at a time when the alternatives (deregulated capitalism, communism) have failed so clearly the test of government. The social democratic model of shared prosperity means high taxation with a generous universal welfare state, a clean government, environmentally sustainable growth, excellent public education, and willingness to introduce reforms when there are crises, while maintaining the essential aspects of the model. These characteristics are compatible with open markets and large privately owned firms. The countries that have remained faithful to this model are today among the most stable and prosperous in the world. They are not a paradise, nor are they free of problems, but any proposals on how to exit a crisis should start from this benchmark.

The aim of egalitarianism should not be limited only to a static measure of equality in income. It should incorporate concern over the inheritance of inequalities, lack of social mobility and the overly high correlation between the income of parents and the income of children. It should also focus on inequality in access to power, and in the access to discrete contractual positions (weak or strong, principal or agent) that are determined by an individual’s wealth.
(The full article has been published in European Politics and Policy and can be read here).

Saturday, November 9, 2013

FC Barcelona should sell Leo Messi NOW

OK, a more precise statement should be that it probably would maximize the long run probabilities of FC Barcelona winning games and titles to sell Leo Messi as soon as possible, but that I acknowledge that this will probably not happen and that broader lessons can be extracted from it. I am a Barça fan and an admirer of Messi, but professional sports’ players have an age profile such that they peak at some point between 25 and 30 years old and after this peak their performance decline (Messi will be 27 this season). Strikers that base their quality on speed, decline on average earlier than other players. That does not mean that after their peak they decline abruptly, but it may also happen. If you have an asset that is still highly valued by potential  buyers although it is about to decline in performance, the asset should be sold, because with the resources you could buy new assets that help you win more in the future: better scouts, new players, new facilities for the youth teams. That is more so if in your team you have another player that is going to be one of the best in the world in the next few years. In the player transfer market, like in auctions or takeovers, the selling parties usually have more bargaining power, and buyers in soccer tend to overpay for strikers. I would not wait to sell Messi after the next World Cup, which is played in Brasil, and the likelihood that Messi and Argentina will fulfill their exaggerated expectations is low. Most probably, Messi will lose value during the World Cup, even if he does not get injured again during it or just before it. Messi has won four times the Ballon d’Or, and has been free of injuries for four or five seasons. That will hardly happen again. Of course, all this is a prediction, and events may prove me wrong, but I try to stick to the rules of expert Nate Silver in making predictions: combine data, past experiences and informed intuitions. Also, it may happen that he is sold but that FC Barcelona runs into other problems (like not sacking other players that have their mind more in the gossip magazines than on the pitch) and stops winning for other reasons. However, FC Barcelona probably will not sell him, because of the confluence of the endowment effect and populism. Due to the endowment effect, a well-known bias in behavioral economics, economic agents overestimate the value of assets they possess relative to the same assets when they do not possess them. Populism is pervasive in modern soccer especially in large markets like Barcelona, where two sports newspapers and an army of talk shows and media journalists compete to keep lots of voting and influencing fans excited. In the direct democracy of the best European clubs, the short run passions of fans have more power than their long run interests (these not being to maximize profits, but the probabilities of winning in the future). Fans should be protected from their short run selves: that is the broader lesson.

Sunday, November 3, 2013

Optimal marginal income tax rates

In the United States the marginal tax rates (ie, what the wealthy pay for what they earn above a certain threshold ) of the income tax were very high after the second world war. In the recent decades, they declined dramatically.
The debate on this issue has been reactivated as a result of French president Hollande 's promise to raise the marginal rate of the income tax to 75 % (the promise has been  fulfilled, but for a very high threshold and for corporations, which has received protests from the rich, especially football clubs), and the movement "Occupy Wall Street", which had as one of its slogans "We are the 99 %" , as a reference to the fact that economic growth in recent decades only benefited the richest 1%.
Apart from the historical evidence, the interesting thing is that the best economists who have studied this believe that a top marginal rate above 70 % is desirable,  meaning that it is socially optimal, because contrary to what the right says, it would not create a major disincentive to wealth creation, and would allow for ambitious distributional programs.
Paul Krugman has repeatedly referred to this in his blog, for example here and here.
There is a very interesting book with articles by some of the leading experts on the subject (Sáez, Piketty, Diamond) which is the "Occuppy Handbook". It is a very interesting book with articles by leading economists of the highest academic level that support progressive proposals. Incidentally, it is interesting that this book does not show any Spanish economist.

Wednesday, October 30, 2013

Branko Milanovic: Europe, democracy and the welfare state

Two recent articles by the World Bank economist Branko Milanovic are very illustrative of top level progressive thinking on the challenges that Europe faces.
In the article on democracy, inequality and capitalism, Milanovic raises the issue that Europe is not used to massive immigration in the way of the US or Australia. As a result of that and in conjunction with the economic and financial crisis, welfare states are threatened by the the loss of wealth and confidence of the middle classes, which historically have been key to sustain democracy. Europe remains the most attractive region to live, although it is not the most dynamic. It remains a factor of attraction for workers from other regions of the world, but its lack of growth conditions the reaction of local populations to immigration. Milanovic wonders if as a result of this dynamics, the coincidence of capitalism and democracy in Europe is an interlude, an exception limited to the second half of the twentieth century and the early years of the twenty-first. In his most recent article, Milanovic argues that to prevent economic decline, Europe should be ready to accept new immigration in a structured and ordered way. Immigration is inevitable, and it is desirable economically in a continent that is declining in terms of innovation and demographics.

Sunday, October 27, 2013

The European Tea Party, a shortcut to paradise

The future of the European project is threatened by our own version of the Tea Party. A populist diverse movement that draws from populism, nationalism and a modernist extreme right (such as that of Madame Le Pen in France) combines an anti-politics rhetoric, an anti-immigrant rage and a protectionist anti-European mentality. It is not a conventional extreme right, which is something it has in common with the American version. But it is anti-rational, anti-government and promises simplistic solutions to complex problems, à la Beppe Grillo in Italy. It is a very serious enemy to all those that think that expanding and improving democracy and welfare is the solution in a more, and not less, integrated Europe. The answer to it must be a cultural fight in favour of a post-national Europe, but one that appeals not only to rationality, but also to feelings and emotions in favour of a borderless harmonious Europe in peace with itself. In Spain, the European Tea Party probably does not need any new affiliated organization, because nationalism (central or peripheral) plays its role and appeals to the same instincts. But Europe is in danger from this confluence of populism and nationalism: will the European Union still exist in ten years time? What if it does not exist? Time for action.

Thursday, October 24, 2013

Boundedly rational, but resourceful

Traditional economics assumed that human beings were rational but helpless. Rational in the sense that they had well defined preferences and objectives, and everything they did was consistent with them. But helpless in the sense that when their decisions have impacts on others that do not have any role in deciding outcomes, individuals needed external help, in the usual form of government intervention. Instead, the late Elinor Ostrom, in her Nobel Prize lecture in 2009, argued that real human beings are boundedly rational but resourceful. Individuals are more complex than originally assumed by economists. Real humans are affected by systematic biases in their judgment and decicion-making, but also have resources, such as social preferences, to overcome collective dilemmas. Ostrom also emphasizes that goods are also more complex than originally assumed: we don't have only purely private and purely public goods, but there are goods with intermediate degrees of rivalry and excludability (the two dimensions that define whether a good is private or not). Relatedly, forms of economic organization should not be restricted to government versus market, but many different or intermediate forms, such as communitarian or mixed forms of provision, are very often desirable. But Ostrom had a special distrust for those external interventions that try to impose (usually one-size-fits-all) solutions upon communities without exploring first the ability of communities themselves to find institutions that may alleviate collective problems. A potential interpretation of her words is that social problems should not be left to technocrats, or experts (as suggested by libertarian paternalists such as Thaler and Sunstein), but to communities themselves. Ostrom devoted her career to show that features such as communication, trust, egalitarianism, transparency, participation and long horizons promoted cooperative institutions with just the minimum necessary external intervention. One can interpret this as a call for a minimum government, but I prefer to interpret it as a vote in favour of a better democracy as opposed to technocracy.

Thursday, October 17, 2013

Beneath the paving stones, Europe (not Catalonia), or why the secession drive fails to ignite foreign support

The supporters of the secession drive in Catalonia spend enormous efforts and resources in trying to gather international support for their cause. There are at least two books in English in the bookstores explaining the arguments in favor of independence, written by local supporters (apparently they failed to find foreign prestigious experts, which would have increased the credibility of the endevour). The Catalan autonomous government is itself spending public resources in this international campaign, for example by deploying an organization of international supporters (of Catalan origin) called “Diplocat”. Letters to President Obama have been sent (and received a cold shoulder).
The results of all these efforts have been very meager. Basically, there is no relevant foreign support for Catalan independence. European Union officials have repeatedly stated that an independent Catalonia would start its life out of the EU, and prestigious news organizations such as The Economist or the Financial Times have expressed their support for a better, federal integration of Catalonia in Spain in a united Europe. The promoters of independence should reflect about the reasons of their failure. Perhaps the distributive implications of the drive and of the actual independence (if it ever happens) of a relatively rich region where human and identity rights are fully respected, are not the ones that usually ignite international solidarity campaigns. We are talking about XXI Century Catalonia, not India, South Africa or Tibet in the XXth Century. No peace minded international activist would desire instability in Europe, especially southern Europe and the Mediterranean. Federalism is as a more ambitious and at the same time realistic alternative. Secessionists often argue that federalists do not have supporters outside Catalonia (disregarding the opinions of 40% of Spaniards according to a recent survey and the above mentioned international supporters), as if implying that external support is not needed for independence. But new frontiers are an international issue. Climate change, financial instability, or global poverty cannot be fixed from any of the current national states in Europe (as Daniel Cohn-Bendit often says), much less from a new, small nation-state (especially if it is not accepted as a member of the European Union).
In a very revealing piece today in the New York Times (NYT), several Catalan business executives express their discrepancy with the secessionist drive. The reporter only collects the opinion of one executive in favor of independence. This is Jordi Bagó i Mons, chief executive of Serhs, a provider of hotel catering and other tourism services, who is a member of a business association that supports secession. Mr. Bagó argues that with independence “we can construct a much better economic model for Catalonia”. One wonders whether Serhs itself should be an inspiration for this model, since the President of the company and former politician, Mr Ramon Bagó i Agulló, has been investigated for fraud by the official Catalan Anti-Fraud Office (see El Pais, January 29th, 2013). Very appropriately, the NYT report explains how the Catalan government that promotes the secessionist drive has itself been weakened by corruption scandals. It is then not surprising that this movement fails to inspire foreign supporters, as previous Catalan freedom fighters inspired the support of people like George Orwell.

Tuesday, October 15, 2013

Economics of Business

Today I attended the opening lecture of the Master in Economics and Business Administration at the Autonomous University of Barcelona, my university. It was given by Vicente Salas, a professor now at University of Zaragoza and in the past in our University that I admire, that was the chairman of my thesis committee in Florence back in December 2000. The topic of his presentation was Entrepreneurship and Development, where he presented a summary of the literature and a summary of his research on the topic. He left the most inspiring part for the end of his lecture, where he presented his thoughts on the relationship between economics and business, a topic to which he has devoted his academic career. He said that there were three ways to approach this relationship:
1) Economics AND Business. This is providing business people with a basic knowledge of economics, so that they can have a vocabulary and some basic ideas about the economic context, in a similar way as they should know something about sociology.
2) Economics FOR Business. This is about managerial economics, thus providing business people with some managerial tools inspired in economic rationality, such as incentive or game theory.
3) Economics OF Business. This should be about asking questions such as why firms and entrepreneurs exist. It should also be about the role of entrepreneurs as organizers and the economic role that organizations play in society and the input they contribute to productivity. It should be about continuing the agenda of Roland Coase, who recently passed away, and others who are concerned about some fundamental questions about how our society is organized.
Professor Salas argued that unfortunately most undergraduate teaching focuses on the first way of approaching the topic, perhaps a little bit on the second, but the third approach is almost absent and much more emphasis should be given to it.

Wednesday, October 9, 2013

Can competition be made more attractive to the left?

Some economists tend to emphasize some market failures more than others, and despair at the failure of ordinary citizens to see the damage that their preferred market failure produces on the economy and society. A clear example is the emphasis on competition. I share a concern for competition: wherever possible and desirable, competition should be promoted. Competitive markets, under some conditions, are conducive to efficiency. However, these economists should not forget:
-The theory of the second best: when there is more than one market failure, addressing only one of them does not guarantee efficiency. For example, if there is a negative externality and market power, addressing only market power may make the externality problem worse by increasing output.
-The presence of a competitive market by itself does not do anything by itself in terms of equity, although competition may promote a more meritocratic society, which may be good if there is equality in the initial conditions.
-More competitive markets create losers. Potential losers will not accept more competitive markets unless there are mechanisms to compensate for the losses. Even if these mechanisms were present, potential losers may find that promises to compensate them are not credible, unless the adequate institutions are in place. Sustainable competitive markets require sustainable welfare states.
-Some competition takes place in markets where there are positional externalities, that is, consumers compete with others for status, as described by Robert Franks in "The Darwin Economy". This sort of competition is wasteful and has large welfare costs.
I agree that competition and competition policies are important ingredients of a modern economy, but competition should not be seen in isolation from the overall economy. Ordinary citizens are perhaps not that ignorant of the overall impact of competition.

Monday, October 7, 2013

The paradox of Europe

In "The Globalization Paradox" Dani Rodrik establishes the trilemma between an internationally integrated economy, political democracy and the nation state. The three things together are not possible, and societies must choose at most two of them. In the 1920s most developed nations chose to exclude de facto political democracy by sticking to the gold standard, keeping the formalities of the nation state but making it impossible for majorities to impose their will. After the second world war, nation states limited international economic integration and preserved the possibility of majorities imposing their will for example through an expanded welfare state where democracies had this preference. Another possibility if to make progress toward a global federalism, making compatible democracy in a new global governance and global economic integration, but by leaving behind the nation state as we know it. Many may think that this is impossible, and certainly Dani Rodrik thinks that it is not even desirable, because nation states allow for diversity and experimentation. However, making progress towards federalism is possible at the European level, and we have certainly already seen much progress in this direction, for example in the Schengen agreement that establishes common border controls, or in the common monetary policy. The problem is that these arrangements are imperfect (as seen in the euro crisis or in the tragedy of immigrants in Lampedusa). The solution of the euro crisis and the Lampedusa tragedy is the same: we cannot stay in the middle. Either we make progress towards a more integrated, fully democratic and federal Europe, or we restore national border controls and national currencies. I believe it is much better to go forward, because there are many ghosts hidden in the European geography, and more Europe is needed as a collective good to keep peace and stability. In Europe, my preference for the two feasible sides of the Rodrik trilemma is clear: leave the nation states behind. The problem, and the deeper paradox, is that the decision has to be made by the nation-states themselves, because the European Union is a union of nation-states. They have voluntarily surrendered already much sovereignty, and they should surrender much more.

Thursday, October 3, 2013

The costs of political neutrality

Paul Krugman and Lydia DePillis explain that apparently well intentioned "big business" interests fail on many occasions to stop policy outcomes that are really bad for themselves. As an example, they mention the government shutdown in the US, which clearly goes against business interests. While conventional wisdom assumes that big business have a lot of power in politics, the fact is that, although they do try to have a lot of power, the degree to which they are successful depends on the strategies they follow, the strength of democratic institutions and other determinants. One of the reasons they fail to stop really disastrous outcomes is that, when they are transparent, they typically surround their pleas by an aura of political neutrality. When one of the political sides is much more biased towards irrationality, neutrality's only effect is to give an advantage to the crazy side. Something similar happens not only in the USA with big business, but also in other countries with all kind of people with professional or other reputations to maintain. For example, in Italy it is obvious that disaster for the country as a whole and for normal businesses in particular has a name: Silvio Berlusconi. And it is obvious to any external observer that the only serious organized alternative to Berlusconi is the center left. Why then many apparently reasonable economists, business people, professionals, artists, etc., fail to express their explicit support for the reasonable side is a mistery to me. In Spain, we are in the midst of an enormous economic and institutional crisis, with right wing parties in Spain's and Catalonia's governments not being even able to have structured negotiations that facilitate a formula that makes it possible for Catalonia to have a better status in Spain, mirroring the logic of federal multi-national states. Center left and left parties and organizations are developing very reasonable ideas on how to improve upon the status quo. But if they do not receive the explicit and active support of people that in private acknowledge that we are headed for disaster (one that could threaten the stability of the euro zone and southern Europe), disaster will just happen.

Friday, September 27, 2013

Climate change is getting serious

The intergovernmental panel on climate change ( has issued a new scaring report. This report collects the scientific consensus on climate change. “Continued emissions of greenhouse  gases will cause further warming and changes in all components of the climate system. Limiting  climate change will require  substantial and sustained reductions of greenhouse gas emissions. Global surface temperature change for the end of the 21st century is projected to be likely to  exceed 1.5°C relative to 1850 to 1900 in all but the lowest scenario considered, and likely to exceed  2°C for the two high scenarios,” said Co-Chair of the Panel Thomas Stocker. “Heat waves are very likely to occur  more frequently and last longer. As the Earth warms, we expect to see currently wet regions  receiving more rainfall, and dry regions receiving less, although there will be exceptions,” he added. Projections of climate change are based on a new set of four scenarios of future greenhouse gas concentrations and aerosols, spanning a wide range of possible futures. “As the ocean warms, and glaciers and ice sheets reduce, global mean sea level will continue to rise, but at a faster rate than we have experienced over the past 40 years,” said Co-Chair Qin Dahe. The report finds with high confidence that  ocean warming dominates the increase in energy stored in the climate system. Unless we do something, life in our planet will be something very different a few decades from now. The exact degree to which that will happen is uncertain, but the probability of a disastrous scenario is far above zero. Of course, the ones who will suffer more will be the most vulnerable and poor. Time to combine egalitarianism and environmentalism at a global scale.

Monday, September 23, 2013

Germany: good news for Europe?

Angela Merkel has obtained an excellent result in the German general election. However, the liberals and the euro-sceptics failed to overcome the threshold to go into Parliament. The result is that there is a left wing majority in the German Parliament. This majority will not translate into a left wing government because the SPD rejects to be in government with the extreme left (probably for good reasons). However, the fact that a potential left wing majority exists is an important constraint for any policy. The social democrats slightly improve their percentage relative to the previous election. This illustrates the general difficulties of the social democracy in Europe, but at the same time it shows that any realistic progressive alternative must be built around social democracy. The wave of fringe parties eroding the role of mainstream parties has been stopped, at least in Germany, probably showing the correlation between a country being deep in crisis and the surge of these fringe parties. Wolfgang Munchau, associate editor of the Financial Times, said that a slight improvement is the worse that could happen to the SPD, because it will not cause a big change in German policies towards Europe, and it will not trigger the profound renewal that is necessary in the SPD. However, given that realistically it was very difficult to avoid a good result for the Christian Democrats, a grand coalition between the CDU and the SPD is a lesser evil that should produce small but significant changes in the policies to manage the euro crisis. We should expect some moderation of the austerity policies and a serious push towards an integrated Europe that make growth policies possible.

Tuesday, September 17, 2013

Who pays the price of political business links?

The Economist recently published an article arguing that the influence of big business in politics was excessive. The appointment of individuals with a political past, or with political connections to the board of directors of private companies, is potentially one of the tools that businesses have available to them in order to influence public policy decisions. Of course, it can also be argued that some former politicians have other skills in addition to access to government and its decision-making channels. But the presence of political staff on the boards of directors of large private companies has become a concern regarding the functioning of our democracies and our corporations.
The extent of the phenomenon has been documented by systematic empirical evidence in countries as diverse as Indonesia, Germany (historically at the time of Hitler and also contemporaneously), France, and the United States (including the evolution of companies connected with former Vice President Dick Cheney and those connected with former Treasury Secretary Timothy Geithner). The phenomenon therefore has a huge international scope and is present in both developed and developing countries.
There is also anecdotal evidence for countries such as Chile and South Africa – where some of the main leaders of the African National Congress, the party of Mandela, have been co-opted by companies traditionally in the hands of the white minority. One surprising aspect is that in some cases there is a negative association between the presence of former politicians and business performance, while in other cases this association is positive. Acemoglu and his coauthors, in their study of firms connected to former US Treasury Secretary Geithner, suggest that factors driving this association to be positive include a weak institutional framework and high discretion in making political decisions (which is more common for example in times of crisis).
(The entire text, written by Pau Castells and myself, can be read here)

Friday, September 13, 2013

A better idea for Catalonia

Mr. Artur Mas, the right-wing president of Catalonia and leader of a party tainted by corruption scandals, wrote an article in the New York Times on Tuesday supporting Catalan independence. He argued that the issue should be left to Catalans to be decided in a democratic referendum, for which he has not clarified what would the exact question be. It would be good to discuss and decide the issue democratically and within the law, which now is difficult given the strict control and manipulation of public media by Mr. Mas and his supporters, who have at this stage lost control of a nationalist movement that they decided to support with the objective of making the citizens forget about budget cuts and corruption scandals. He argued that at the same time Catalonia wants to be a member of the European Union. However, for an independent Catalonia to be a member state of the European Union it would need the unanimous approval of the current 28 member states. So far, not a single one of them has declared its support (Latvia’s leader has said that it would consider the possibility). And it is hard to see how a single member state would accept the precedent of a relatively rich part of a member state breaking it up. To convince other countries that Catalan independence is a good idea, the supporters of the idea should show evidence that the project improves welfare not only in Catalonia (something that is very questionable given that Spain is Catalonia’s main trading partner) but also elsewhere. They should answer the question: Will Europe be a better place if Spain breaks up? The chauvinist Italian Northern League has expressed its support to Catalan independence. With such supporters, it is hard to see how serious Europeans will ever express their support. A federal Spain in the transition towards a truly integrated Europe, where the member states progressively lose importance, is a much more intelligent way to solve forever the lack of recognition of Catalan identity. The Economist also supports a new understanding between Catalonia and Spain. The Financial Times explicitly argues in favour of an asymmetric federalism. It seems that, although federalists are treated like psychotics in some Catalan circles, federalism has much more and more qualified international support than independence.

Tuesday, September 10, 2013

A learning left

In this article, Severin Borenstein denounces the dogmatism of right-wing commentators who try to manipulate the ideas of Roland Coase to promote their anti-government ideology. In the case of the use of market mechanisms to correct negative externalities, for example climate change, Borenstein argues that the left has made in the last decades a learning exercise that the right is far from doing. In his classical article "The Problem of Social Cost", Coase argued that under two strong conditions (complete property rights and zero transaction costs) the parties to an interaction with external effects could bargain to achieve an efficient solution, with no need for government intervention. That has been used by the right to promote the ideas of privatization and of laissez-faire in general in case of market failures, forgetting that Coase did not claim that the two conditions were a description of the real world. Of course, the Coase theorem expanded the potential for market solutions to social problems, but in many cases governments are needed to make markets possible, as Borenstein argues. More generally, the left has learned that markets and governments are mostly complements and not substitutes: and many more examples could be provided of the fact that when the left becomes a learning left (open minded and evidence based) societies can reach the highest possible standards of living. A learning left is a hope for humanity, an ignorant right one of its main threats.

Saturday, September 7, 2013

Madrid avoids the winner's curse

Tokio has just won the bid to organize the 2020 Olympic Games. In May 2004, days before the organizer of the 2012 Games was decided, the British magazine The Economist wrote a piece under the title "Do London a Favour: give the Olympics to Paris." Following this line of thought, Madrid should be celebrating that the games will be organized by another city. Instead of organizing an expensive party, Spain's capital will be able to spend its scarce resources on more pressing needs, such as health, education or social projects. Apparently, the weakest point of Madrid's bid was the failure of the Spanish authorities to show determination in its fight against illegal doping. Probably the financial and institutional crisis (corruption scandals included, to which sports doping belongs) did not help. When Italy was ruled by the government of the technocratic economist Mario Monti, it wisely decided to withdraw the bid to organize the 2020 Olympics. Let's hope that the Spanish authorities, who have not been convinced by other arguments, find now the energy to fight any form of corruption, including doping in sports.

Wednesday, September 4, 2013

Ronald H. Coase dies

Ronald H. Coase, the Nobel Prize of Economics in 1991, died on Monday September 2nd in Chicago, at the age of 102. He was born in England but spent most of his life in the USA. He was one of the most influential economists of the recent past, and probably one of the most used and abused ones. His contributions can be summarized probably as explaining the limits of both markets and government. In "The Nature of the Firm" he explained that it is often costly to use the market system, and that this is a reason for the existence of hierarchycal organizations such as firms. The key to the existence of one form of allocation mechanism or another was the presence of "transaction costs". In "The Problem of Social Cost" he explained that when people and firms behave in ways that harm others, government intervention is not necessarily the solution. If there are no transaction costs and property rights are well established, the parties in the economy can negotiate through free exchange to find an efficient solution. By this so-called "Coase Theorem" market efficiency was expanded even to the case of "externalities", which are considered a market failure in traditional economics. What many "abusers" of Coase have forgotten is that this result was established under very strong conditions (zero transaction costs and complete property rights), that are usually absent in the real world. Coase's objective was to try to direct attention to the presence of transaction costs and the need to find institutional solutions adapted to different types of transaction costs. Then Coase has been used to justify extreme privatization policies or more useful institutional innovations such as pollution permits or spectrum auctions. Besides his substantial contributions, he should also be remembered for his method of working and writing, always opposed to dogma, always mindful of institution and empirical details. This can be shown in his wonderful essay "The Lighthouse in Economics". I thank Prof. Vicente Salas for introducing Coase to me in the 1990s, I have always find it a key reference in the area between industrial organization and public economics.

Tuesday, September 3, 2013

A real telecommunications market

As a result of recent consolidation movements in the telecommunications industry, the Spanish incumbent Telefonica has called for the European markets to be more similar to the US or the Chinese markets. That is, large markets with a small number of vertically integrated competitors under a common regulatory regime. I mostly agree with the objective, but not necessarily for the same reasons. The segmentation of the telecommunications market is an example of the many things that still separate us from a really integrated Europe. For example Satellite TV operators act under national licenses, despite the fact that obviously satellites can broadcast beyond borders. Similarly, mobile phone licenses and roaming respect member state frontiers despite the fact that the spectrum does not need to respect any legal border (paradoxically, the sound of the telephone is the only remaining physical frontier between many member states, although many other regulatory and legal frontiers remain). I also think that it would be more efficient to have European licenses and truly European integrated operators that exploit scale economies and compete among them. Although the action of the European authorities has left member states less discretion in liberalizing telecoms than electricity, still markets are mainly national and national authorities have an important role. Spain has just eliminated its telecom independent regulator despite warnings by the European Commission, with the support of, if not following direct advice from, Telefonica. European regulators are better than national regulators because their quality is higher and the risk of capture lower, in the same way that in football’s Champions League referees are better than in national leagues.

Friday, August 30, 2013

How not to reform an electricity sector

Some weeks ago, the Spanish government unveiled its package to reform the electricity sector with the main objective of ending the tariff deficit. This arises as the difference between the regulated costs of the electricity firms and the revenues obtained through regulated tariffs paid by consumers. Its volume, 28 billion euros by the end of 2012, highlights the main regulatory problems of the Spanish electricity sector. The tariff deficit is the result of bad past regulation (controlling the prices without reflecting underlying costs) and constitutes an enormous distributive problem. According to experts Natalia Fabra and Jordi Ortega, the remuneration of renewal energies has been the scapegoat of the tariff deficit. Fabra argues that “the reform places the burden of the cost of adjustment mainly on renewal energies and consumers, and leaves untouched conventional energy despite the fact that its over-remuneration is in the origin of the tariff deficit. The new legislation does not define a regulatory framework that is able to face the challenges of the electricity sector.” The new regulation alters the remuneration of investments in renewals that have already been made. The reform leaves intact the current electricity market and the remuneration of conventional energies (nuclear, hydro, coal and natural gas).  Truly reforming the electricity sector amounts to solving together efficiency issues (allocative efficiency and energy efficiency), income distribution and environmental challenges. Europe has given too much discretion to member states, as argued by another expert, Juan Delgado, and Spain keeps using this discretion in a way that is inefficient, distributionaly regressive and environmentally reckless. Final prices should be related to real costs by introducing capacity markets and incentive regulation of the network elements. A reasonable reform should favour the entry of new competitors and the integration of European markets and commit to objectives of financial and environmental sustainability and energy efficiency. The process of reform has been characterized by debates behind close doors and ministerial disputes. Transparency has been absent, as opposed to what happens in countries with better regulatory systems, where a a white paper, stakeholder participation, and input from an independent regulator (for example evaluating the alternatives) would have been conventional. However, at the same time, the Spanish government is abolishing the independent energy regulatory agency. 

Thursday, August 29, 2013

Too much collusion between business and politics

The Economist had a few issues ago a revealing piece on the excessive influence of business people into politics. Starting with the takeover of Italian politics by Berlusconi (and its disastrous effects), it goes on to survey the many ways in which large corporations influence the political arena. The conclusion of a pro-free market magazine as The Economist is clear: there is too much influence of large business on politics. Big firms are obviously necessary in a developed economy, especially when they perform in competitive and well regulated markets. However, their excessive influence in the political process is a corruption of democracy. One way they try to do so is by appointing former politicians, to try to gain access to policy decisions that impact their bottom line. Of course, former politicians have a right to be hired by large corporations, but these appointments should be subject to strict codes of conduct that are nowadays absent. However, some former politicians (such as two former prime ministers and several former economics ministers in Spain, who are in the boards of energy firms which they used to regulate) should reflect about the embarrassment they inflict in their political parties and former voters. And some companies should think twice about some of the low quality politicians they appoint. Although firms not always succeed to influence policy fully in the direction they desire, it is obviously not surprising that it is difficult from local media to follow the responsibilities that business people have of many bad social and economic outcomes, and it is not surprising that in many developed economies large firms pay a very low effective corporation tax. Large corporations are one of the great institutions of modern economies, but societies at large should reflect more about what is their role in bringing about good societal outcomes. If a business friendly magazine as The Economist says that business has too much influence on politics, the truth is probably even more serious.

Sunday, August 25, 2013

Re-reading Bowles and Aoki

Although it has become fashionable to quote “Why Nations Fail” by Acemoglu and Robinson, as the standard explanation of why institutions matter in economic development, there are better sources in my view to understand the role of institutional factors and its interaction with preferences and economic behavior. That is why I am re-reading the books by Masahiko Aoki ("Toward a Comparative Institutional Analysis") and by Samuel Bowles ("Microeconomics") and finding that they mention authors that I have been reading for other reasons between my first reading and the current one, such as Basu and Allen. Bowles and Aoki have in common that they offer a game theoretic view of institutions, which is presented as a critique of, and in dialogue with, standard economic theory. Both of these authors present their view of institutions as a platform to initiate the reader in the foundations of evolutionary economics. They also show interdisciplinary science at its best, namely not as an excuse to reduce rigour, but as an encouragement to find better mathematical models and other scientific techniques, such as evolutionary and agent-based modelling. A common theme is that economic outcomes are not necessarily the result of human design, but often they are the unintended consequences of human behavior, which does not exclude the role of collective action. Aoki is especially illuminating when he presents his view of social reality as a set of domain games (commons, social networks, exchange, organizations and polity) and how the linkages between these domains create complementarities. For example, the free rider problem in the contribution to public goods may be alleviated by the threat of social ostracism in a game of social interaction. All of this is better grounded in social (and other) sciences than “Why Nations Fail”, but it is slightly more complex, which is why you will not see it mentioned in the popular media. But I plan to teach it in my courses (more than I have done so far).

Wednesday, August 21, 2013

Update about Italy

I like to follow events in those countries where I have lived for a while or to which I feel attached. One of them is Italy (the others are the UK, Chile and the US). I try to keep updated reading everything on Italy in the Spanish media, and also in The Economist. But my preferred method is to read every Sunday the column by Eugenio Scalfari in La Repubblica, the newspaper that he founded some time ago. I like many things from Scalfari, like his attention to economic details, must most of all I admire his firm commitment against populism and corruption, and in favour of a federal Europe (the state should be Europe and national governments should sooner rather than later evaporate in a borderless Europe). The good news from recent columns is that Berlusconi has very difficult his return to politics, and that finally it seems that the forces of democracy and justice are prevailing and it is very unlikely that the blackmail of Berlusconi has any chance of having any real bite. Is democracy finally defeating populism and corruption? That is what Scalfari seems to imply. He believes that the Partito Democratico, in spite of his divisions, still has enough human assets to sustain a solid government under prime minister Letta, and that the centre right will have to realize that its future lies in reforming itself to become a respectable European centre-right instead of a clan under the ownership of a corrupt tycoon who once decided to vertically integrate into politics instead of contracting out favours from corrupt politicians.

Thursday, August 15, 2013

"Freedom," by Jonathan Franzen

If you have a few days to read a substantial novel, “Freedom” by Jonathan Franzen is a rewarding experience. The story of the Bergklund family is a portrait of the USA in the George W. Bush years and the beginning of the Obama administration. This matters, because the story of the relationships between husbands and wives, between parents and children, is set against the background of a political landscape where the relationship between money and politics is bitterly criticized. The power of the wealthy families is shown in the well connected Jewish family that is “explored” by Joey Bergklund, or the failure of the grandparents of the family  to support her daughter (Joey’s mother later in time) because the rapist was the son of a family that funded liberal causes. The use individuals that have everything material make of freedom and the competition between them to have fulfilling lives is the topic of the book. Being a portrait of contemporary America, depression is perhaps in too many places, and perhaps there is also too much demonstration of the author being well versed in things such as mobile messages, social networks and e-mails. But it is a page turner. And take your time to read the final pages until the end: it is a nice ending.

Tuesday, August 6, 2013

Towards a federal Europe

There is no doubt that the economic, financial and monetary crisis that Europe has suffered in the last few years has exacerbated inequalities and calls for a reaction that facilitates a return to equitable growth. A European federal state, rather than a European inter-governmental Union, is necessary to achieve the triple objective of: 1) coordinating progress towards economic growth and prosperity in the context of more democratic and transparent politics, 2) making a European-wide effort to achieve higher levels of income equality through high taxation and a modernized welfare state, and 3) contributing to protecting the environment and tackling climate change by putting a price on emissions, and promoting under the leadership of a coordinated public sector at European level a new industrial revolution based on green energy.
Statist solutions are no longer sufficient to solve the problems of a monetary Union, and risk making Europe irrelevant relative to the other international and emerging powers.
As Olaf Cramme argues in the book “After the third way. The future of social democracy in Europe”, “social democracy must not underestimate the power of European integration at a time where the phenomenal pressures of globalization and far-reaching societal transformations are asking profound questions of all traditional political ideologies. At some point, a movement, initiative or policy idea will capture the attention of the wider European public. The center-left ought to make sure that it is part of it.”

Friday, August 2, 2013

Mostly good news from Baumol

Baumol and his co-authors explain that the cost disease takes place because “progressive industries” experience above average productivity growth, and “stagnant sectors” experience below average productivity growth due to the irreducible amount of labour they require. The amount of labour in personal services is constant, but the workers cannot earn much less than workers in "progressive industries" (otherwise they would not accept working there). Many stagnant sectors, for technological reasons, are in the public sector, which is one reason why the costs of public sector activities keep increasing. The good news is that because on average the economy’s productivity increases, we have more resources to afford a more expensive public sector. The products and services from progressive industries become cheaper (think of computers, mobile phones, electronic appliances, but also agricultural products, which in this sense are “progressive”), so that societies tend to spend more on stagnant sectors (health, education) than on progressive ones. Unfortunately, that this cost structure is affordable for society overall does not mean that it is affordable for everybody, and there are distributive consequences of some groups not being able to afford cost increases. These distributive implications are most worrying. Another caveat is that activities with negative externalities also belong to the progressive industries, like weapons construction and distribution or polluting activities that produce climate change. Therefore, it is cheaper now to produce bad things. The condition for the affordability in general of a more expensive public sector is that the economy’s productivity keeps increasing at the rate of the last century. Baumol thinks that this is most likely. Let’s hope that he is right.

Friday, July 26, 2013

Spain's regulatory merger

Although Spain needs to improve coordination among its regulatory agencies, the creation of a National Commission on Markets and Competition would seem to be the opposite of what the European Union had in mind. The controversial move merges eight agencies and commissions responsible for competition, telecom, energy, mail, railways, airports, gambling and audiovisual media. I argue in a working paper of IESE that neither the purported savings nor the need for greater coordination justifies such total integration. What's more, government projections that this will save millions derive more from changes to the merger as originally planned, rather than from efficiencies gained through the merger itself. The European Commission has stated all along that it was concerned about the loss of independence that would result from an all-encompassing regulatory body. The most serious warning came in February 2013 from Neelie Kroes, vice president of the Commission, who threatened sanctions unless Spain made substantial changes to its original plan.  The Spanish government responded by changing some of the most questionable aspects. The whole summary of the working paper and a link to it can be accessed here.

Sunday, July 21, 2013

The true Barcelona

The journalist Beatriz Silva (my wife) and the photographer Lorenzo Moscia have produced a wonderful portrait of Barcelona. Beatriz writes "The monumental transformation undergone by Barcelona with the 1992 Olympic Games has failed to make the diverse working-class city full of contrasts disappear where Pablo Picasso began painting in 1896. It is not necessary to venture too deep into the narrow streets of the El Raval or El Born neighborhoods to discover the Barcelona of the belle époque where prostitutes wore the best clothes to welcome the sailors and where it is still possible to get drunk on absinthe. Despite being one of the richest cities in Spain, Barcelona has a poverty rate of around 18%. This figure is even worsening due to an economic crisis that has pushed up unemployment in Spain to 27%. This situation particularly affects vulnerable groups such as the elderly and immigrants who are forced to search for scraps of food or beg to survive. The number of people sleeping on the street has grown by half in just five years."
Read more and see the pictures by Lorenzo here.

Tuesday, July 16, 2013

Expanding Economics

One of the most encouraging trends of modern economics is its expansion to cover topics that are close to other social or other scientific disciplines. In the past, these trends were associated to economic imperialism, but more recently economists accept the importance of being influenced by other disciplines. The trend is most clear in the evolution of public economics or political economy. In public economics, from a sub-discipline being dominated by tax and expenditure theoretical issues, nowadays it focuses more on empirical work that takes a more micro approach and that accepts the importance of bounded rationality in the frontier between psychology and economics (behavioral economics). This evolution can be observed in an empirical analysis of papers covered by the National Bureau of Economic Research in the recent past. Another sub-discipline that is evolving from a simplistic interaction between politics and economics towards more complex and interesting issues is political economy. Today, it has also expanded to cover issues about the importance of culture and history, as explained by Alesina also for a recent NBER survey. A fascinating example of this incursion of political economy in the territory of history is a paper that shows that the density of civic movements and associations in Germany contributed to the rapid expansion of the Nazi Party. The quantitative methods of modern economics provide the best service when they are associated to topics of a moral dimension.