Climate change is getting serious

The intergovernmental panel on climate change (http://www.ipcc.ch/) 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.

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.

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)

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.

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.

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.

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.

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.