Trying to explain inequality to my students

I have been working in trying to explain better to my Master's degree students recent developments in academic research on inequality, including contributions by Milanovic and Piketty among others. Here are some notes of what I have been preparing:
Milanovic: global inequality among all citizens in the world is today more explained by between-country than within-country differences compared to 150 years ago, although more recently the tendency is being reversed.
  ∙  Global inequality is higher than the inequality levels of the most unequal countries.
  ∙  There are discrepancies about the sign of the changes in global inequality in the recent past.
  ∙  Globalization (increase in trade and economic integration) has increased mean income of some developing countries and affected within income inequality.
The economic surges of China, India and other nations have been among the most egalitarian developments in history, so national growth may play a big role in reducing global inequality: but not clear that they compensate for increasing within inequality in the USA and other countries and for the decline of other nations.
  ∙  Should we care about global inequality or we should care only about poverty?
 1. Bhagwati: even the calculation of global inequality is a "lunacy:" there is no "global polity," no "addressee."
 2. Krueger: "poor people are desperate to improve their material conditions... rather than to march up the income distribution ladder."
But there are ethical (universalism or cosmopolitan Social Welfare Functions -SWFs) and practical (globalization of media and information creates a sense of injustice or at least a desire to migrate) reasons to care about global inequality.
  ∙An idea: an international agency with taxation power to tax from the rich in rich countries to the poor in poor countries without government involvement that takes away national sovereignty from both rich and poor countries.
  ∙Problem: "no taxation without representation," hence difficult to implement without global democratic federalism (according to Milanovic himself, soccer has been better than politics at this, with FIFA and rules for national teams redistributing welfare gains to poor countries).
How much of our individual welfare is determined by the country where we are born? Around 1/2 (Milanovic). Given that personal circumstances (gender, race) also affect, the probability of effort greatly affecting income in the global scale is low: migration is rational for citizens of the poorest countries.
  ∙Rodrik: if a small efficiency improvement implies large redistribution of income, we should use criteria of justice (who are the parties affected? do they deserve the redistribution? should we compensate the losers?), "we should need some assurance that the process conforms with our conceptions of distributive justice."
  ∙The distributional impacts of economic restructuring (structural reforms) are big: no pain, no gain.
Stern: we do not need social welfare and individual utility functions to theorize about the need to reduce inequality:
 1.sometimes the difficulties of interpersonal utility comparisons with a utilitarian SWF make it difficult to use them to redistribute: it would be efficiency-improving to transfer income from depressed to non-depressed people because the latter are deemed more efficient in converting income into individual utility;
 2.with a rawlsian SWF, it may allow for a very wide and rising inequality, where additional gains are disproportionately received by the rich, so long as tere is some, albeit very modest, increase in the income of the poor.
  ∙  Capabilities or empowerment approach by A. Sen: individuals should have right to basic goods, abilities and services to develop a free life -eg learning to read, access to basic health.
Bowles and Gintis: inheritance of inequality higher than expected, and not necessarily related to genetic inheritance of Intelligence Quotient (IQ) or other traditional inputs to wealth, but related to inherited traits (such as race, population group).
  ∙  Krugman: inequality may be reflected in biased political power.
  ∙  From Kuznets to Piketty: from the prevalence of the view that development and inequality followed an inverted U-shaped relationship, to the believe that capital income is increasingly concentrated internationally.
Inequality of income reflects a continuous measure. There are also important discrete categories that add information on social power: social classes, groups. These categories occupy different contractual roles in hierarchical relations.
  ∙  How to redistribute: pre-distribution? international taxation? highest jurisdictions should raise the taxes with the more mobile bases. Is inequality good for growth? Essential dilemma: social monopoly versus incentives.
  ∙  Should we care about equality of opportunity or also about equality of outcomes?

A better way to decide

Mr Carles Suarez questioned in a letter to the FT on September 27th the democratic credibility of those who do not think that a secession referendum, in this case in Catalonia, is the best instrument to democratically decide about institutional architecture.
However, Catalonia should find a better way than a secession referendum to democratically decide about its future constitutional status, in a world of overlapping and shared sovereignties where the nation-state is becoming obsolete, especially in Europe and the euro-zone. If and only if, over an extended period of time, a very large and stable majority in elections show an unambiguous support for a detailed “independent” constitutional project within a clear international framework, then some democratic procedure accepted by all relevant actors should be established to peacefully negotiate and finally take a final decision about it. These conditions clearly do not apply today. It would be much better to create incentives for political leaders to reach a broad new federal agreement that is then submitted to the electorate.
Philip Stevens has warned in the FT that there is a thin line between the democracy of a plebiscite and the mob rule. This is so, especially when the independence drive is supported by an obscene use of public resources, as it happens in Catalonia, where the regional government is full time devoted to this issue, which is instrumental to hide dramatic budget cuts and very disturbing corruption scandals.
I do not believe that those who doubt that a 2017 referendum in the UK to exit the EU is a good idea, are any less democrats than those who support it. The same logic applies in other latitudes. There are better ways to decide, and these better ways are those used by the most important democracies in the world, which take the form of federations.

A federation or a confederation?

There is a big post-referendum debate in the UK about federalism. I particularly liked this article by Timothy Garton Ash, endorsing a federal UK, a confederal EU and an also federal euro-zone. Federalism, according to a good English friend of mine is a word that has negative connotations in the UK (particularly in England) that create very bad vibes, probably because they've been a proudly independent and strongly unitary state - the UK since 1688 and England since 1066.  The word federalism tends to make them think USA, Canada - let alone rule by (and from) Brussels ....  "WTO good, EU federal state bad" says my friend. 
But there is also a strong British federalist tradition (which had a strong influence on European federalists like Spinelli) and more and more politicians, like Menzies Campbell, and intellectuals like Garton Ash or Will Hutton are losing their fear of the F word. As for Europe, it will probably be something in-between a federation and a confederation. In the latter, the states keep a lot of their sovereignty and there is little relationship between the confederal level and the citizens. In a more integrated Europe (something I think is desirable) I find a federation more democratic. But there is not one single federalism, and we should collectively find a unique agreement, one about an institutional architecture that will be flexible and asymmetric. Until the XV century, there was a lot of diversity of collective organizations, which later disappeared with the consolidation of nations states. But al the local and regional level, many of those diversities survived. For example, in Italy cities are stronger than regions, and in Germany regions or states are stronger than cities. In a more united Europe, there should be room for constrained but real flexibility and innovation below the European level.

Scotland: the silent majority was silent no more

The winners of the Scottish referendum are a federal Britain and a federal Europe, which have now become a credible proposition. Gordon Brown made a speech the day before the referendum that seems to have been decisive in the clear victory of the NO vote. It is a great federalist speech (which starts with “The silent majority is silent no more…”) without using explicitly the F word. But others have been much more explicit.
Chris Bertram said: “So I hope there’s a “no”; “yes” could turn things very nasty, both in Scotland and elsewhere in the UK. But DevoMax brings its own problems. If Scotland gets so much devolved power, then why should similar local control not be vested in other parts of the UK? In short, what we need is a federal structure with Scotland, Wales and a selection of English regions being the constituent Länder. Eine Bundesrepublik Britannien, in fact. If Ed Miliband and Labour are smart, then they will make the call for a UK-wide constitutional convention part of their campaign for 2015.”
And Will Hutton said: “The only offer that can now persuade Scotland not to secede is to trump that half-cock quasi-federalism with a proper version. Westminster's party leaders must offer to create a federal Britain and irrevocably commit to a constitutional convention to discuss its implementation if Scotland votes no. This is not "devo max", or further incremental powers to control social security or taxation. This has to be the real deal – a wholesale recasting of the British state so that Scotland, Wales, Northern Ireland and all Britain's great cities and towns have the autonomy they need to create the societies and culture they want but within the protective umbrella of Great Britain. This really would be the best of both worlds, and not just for Scotland.”
Good!!

More on Scotland and Catalonia

In the last few days, as the Scottish referendum approaches, we have seen some intellectual heavy weights either openly arguing against the independence project of Alex Salmond, or proposing something much better: a federal Britain. Paul Krugman has asked the Scots to "be afraid, very afraid" and to think twice before swallowing the idea that currency union without political union is possible. Will Hutton, one of the most important intellectuals of the British left, has explicitly advocated for a "federal Britain," something that I openly support. Meanwhile, the best predictors (prediction markets, where investors put at stake their own money, so that their average bets amount to a measure of the "wisdom of the crowds") of the referendum's result say that the NO vote is still much more likely to win. But, of course, these are only predictions.
Meanwhile, as I argue today in an on-line debate in Europp, Catalonia should find a better way than a secession referendum to decide about its future constitutional status, in a world of overlapping and shared sovereignties where the nation-state is becoming obsolete. If and only if, over an extended period of time, a very large and stable majority shows an unambiguous support for a detailed “independent” constitutional project within a clear international framework, then some democratic procedure accepted by all relevant actors should be established to peacefully negotiate and finally take a final decision about it. These conditions clearly do not apply today.
Most internationally recognised legal scholars and political scientists believe that the right to secede should be restricted to extreme cases. Accordingly, secession referendums are the exception in developed democratic countries, especially in the context of the European Union and the Eurozone, which are in a complex process of increasing political integration and redistribution of sovereignty.
There are three commitment problems, well-known to social scientists, associated to the unrestricted use of a referendum of independence in federal systems:
1) Federal governments should not be too powerful, and focus on the creation of the legal and regulatory frameworks for markets to operate efficiently (including a strong currency and clear borders), and commit both not to expropriate prívate investments and not to interfere with federal units, according to the theory of market preserving federalism due to Weingast and his co-authors.
2) Potential majorities or elites in federal units should commit not to cheat opportunistically on the specific investments made by large minorities assuming the permanence of some federal institutions: educational degrees, retirement benefits for federal civil servants, language skills, factor mobility, currency…
3) The governments of federal units should commit not to use their resources to promote the partition of the federal state. Otherwise potentially federal states will be reluctant in the future to decentralise in contexts where it would be desirable to do so. When federal units are relatively rich, there should be a mutual commitment for the units to fairly, boundedly and transparently contribute to the common resources and for the federation to preserve self-government and the participation of the federal units in shared decision-making.
Unless these commitments are respected, societies may fail to build the stable federal systems that are necessary in our increasingly integrated economies. To preserve commitments, democratic societies build institutions that constrain the unrestricted use of majority rule. That is why we have constitutions, international treaties and courts of justice. To the extent that, as I believe, it is desirable that both Spain and the EU become better federations, the use of a unilateral independence referendum as a decision mechanism would jeopardise this objective. It would also trigger internal and external cascade effects that would make it impossible to focus the energies on a more integrated and democratic Europe.
Spanish and Catalan leaders should instead build on our common values to submit to the final decision of the electorate an agreement on a shared institutional architecture that can be legal and stable in the European context, and give satisfaction to historical grievances.

The irrelevance of the French minister of the Economy

The replacement of a French protectionist by a 36 years old philosopher as French minister of the economy illustrates the irrelevance of this position. The relevant instruments of macro-economic policy in the euro zone are today in the hands of the European Commission and the euro-group. That is why Manuel Valls, the French prime minister, could afford to appoint a demagogue protectionist with ideas that are very different from his, for reasons that had to do with internal party politics. And that is why now that he needed to give the opposite signal, he appointed a moderate philosopher of a very young age, too young in fact to seriously think that he will take any relevant decisions. France influences economic policy at European level meetings, so hopefully Hollande and Valls will focus on appointing good advisers for their role in these meetings. I have always seen France as a successful country, and therefore I do not understand well why it is supposed to be always in crisis. It is a society with a very high level of state intervention in the economy, that has one of the highest standards of living in the world. Surely it has to reform many things, but I don't think they seriously consider doing something very different from what they have been doing pretty well since the times of François Mitterrand: work for a more integrated Europe, consolidate their alliance with Germany, and accept an open economy with a high degree of public spending. Their risk is Madame Le Pen, not the moderate socialists. Their goal should be the same as everybody else's in Europe: promote a more democratic, and less technocratic, European federalism.

Acemoglu and Robinson on Marx and Piketty

Acemoglu and Robinson, the authors of "Why Nations Fail" have written a critical review of the book by Thomas Piketty "Capital in the XXIst Century". They argue that what they call the "general law" of Piketty that the rate of return of capital (r)  is higher than the growth rate (g), and that this persisting difference will drive increasing inequalities is as misguided as the "general laws" of Karl Marx, such as the decreasing profit rate and the fall of capitalism. Acemoglu and Robinson claim that the common mistake of Piketty and Marx is that they neglect institutions and politics. This is surprising to me, unless one takes a very narrow view of institutions and politics. Piketty and Marx are both very "political" authors, and their theories can be interpreted as institutional theories of capitalism, in the sense that they analyse the basic structures of society. Marx predicted that the forces of production and the relations of production (the infrastructure) determined the superstructure (politics and culture, for example), but one can interpret many institutions (such as property rights) as infrastructure. Acemoglu and Robinson claim that political institutions are first (their "general law"?) and that they determine economic institutions and outcomes. This general law is subject to discussion to say the least, as illustrated in the work of Robert Allen, one of the economic historians mentioned by Acemoglu and Robinson. Of course time has proven many of the Marxian predictions wrong, and time may prove many or some of Piketty's predictions wrong. I interpret Piketty's work as basically reporting in a very detailed way that r has been higher than g in many countries in the recent decades, and that, unless we take some very serious political and institutional decisions, this will expand and persist and have a very damaging effect for democracy. Acemoglu and Robinson provide analytical narratives of Sweden and Southafrica, and some simple econometric work, to claim that politics and institutions are more important than r-g. I do not think that Piketty claims that r-g is the only thing that matters, and that is precisely why he says that strong redistributive policies are needed. Acemoglu and Robinson accept that huge inequalities can have a negative effect on democracy, but it seems that their proposal to correct for this is some vague intervention on the political channel, but not strong taxation intervention on inequalities per se. I sympathize with this comment by Milanovic on the review by Acemoglu and Robinson (AR). But I look forward to the response by Piketty himself, who was a bit dismissive of the work by Acemoglu and Robinson in his book, arguing that while AR refer to the institutions that facilitated the industrial revolution, he makes proposals about the institutions (progressive wealth taxation and federalism) that should rein increasing inequalities in the era of globalization today.