Not interested in non-federal solutions

I don't claim any expertise in the Greek crisis. I believe there is a consensus that the euro zone is disfunctional as a monetary union, and that to survive it requires a political and fiscal union. In their absence, it would be better to abandon the project. Many of us believe that a political and fiscal union are necessary, not only to make a monetary union sustainable, but because they are ways to make possible the dream of a united Europe that leaves behind centuries of fragmentation and violence. Austerity policies have failed, and in this Paul Krugman is right. To the extent that the leaders of the Union are trying to keep pushing these policies, they are wrong. But some claim that the agreement was within reach when the Greek government suddenly called a referendum because it didn't want to face the political consequences of accepting the agreement. Those of us who live in countries dominated by nationalist controversies know about the dangers of playing with plebiscitarian democracy. Democratic radicalism is sometimes incompatible with democratic quality. I wish that some sort of agreement still takes place that allows for debt restructuring and credible reforms supported by the citizens of creditor and debtor countries. The Greek government, in the meantime, has done many things I didn't like, like for example approaching Vladimir Putin. I don't understand why Tsipras reached an agreement with the nationalist right instead of the center- left. I also know that all this happens because of the lack of credibility of precisely the center-left, but I cannot see how the situation can be improved without a role for realistic center-left policies that are truly committed with a fair, democratic and federal Europe.

Readings in modern political economy

I have been traveling this week, and brought with me a few books and papers to keep reading in airports and planes. I read a book on the political and institutional aspects of global projects written mainly by engineers with an open mind for interdisciplinary work with economists, political scientists and other schoalrs. Some of the authors were present in the meeting I attended to build a global database of infrastructure projects. The authors emphasize the complexity of institutional arrangements that accompany this kind of undertakings. The ideas suggest that promoters and investors should anticipate the existence of resistances by stakeholders and improve the mechanisms to engage with them and predict their behaviour. More than insulated experts deciding and regulating projects, we need engaged experts who communicate with communities and work with them. On methodology, I have been reading a book on field experiments and their critics, with articles defending and criticising the use of randomized control trials and related techniques. It contains a very interesting skeptical piece by Angus Deaton among other interesting chapters. Finally, I have also been reading the book "Imperfect Union," about the role of special districts in the USA. These districts are specific jurisdictions that manage schools, water projects, infrastructures and many other services. The author reports that these districts have the problem that they tend to be captured by special interests, because only those who intensely benefit from them incur the costs of monitoring and voting for them.

Status and identity wars

Dan Kahan, Paul Slovic and other researchers in the Cultural Cognition Project that I mentioned in my previous post emphasize that many disagreements come down to different cultural views, which are defended in status battles. People in these battles try to feed their identities and then use all kinds of argumentative tools to promote them. As we know from experience, it is very difficult to convince others who have different cultural view points. All this is intuitive and I agree with them. Some details do not seem to me as convincing in their arguments. They give a very specific idea of cultural world views. They would have two dimensions, one from individualism to communitarianism, another from hierarchical to egalitarian. But why two dimensions and not more? It seems that these world views would be exogenous and the result of social norms in fixed groups. However, the history of the last two centuries in Europe has seen many people changing their cultural world view, some even going from the support of democracy and solidarity to the support of fascism. I agree that what people do not seem to lose is their concern for their identities and their status. As a result of these ideas, these scholars propose that we should encourage consensus building and the acceptance of the fact that we have different cultural values instead of hiding them. That sounds good, but we should work on filling the details.

Personal experience, prejudice and scientists’ judgements

The work of legal scholar Dan Kahan and social psychologists and other behavioural scientists that collaborate with him, and the research project around The Cultural Cognition Project at Yale University is a great source of insights about biases and their origins in cultural values that are difficult to reconcile. One of the examples given by Kahan is the use even by the best scientists of personal experience as a source of empirical evidence. Scientists should know that personal experience is incomplete and usually untimely, and cannot be used to make inferences. However, it is not uncommon (I can see it many days at my University) to hear scientists and scholars make statements from a very narrow sample of examples based on their personal experience. Sometimes this translates into absurd prejudices or statements based on national or professional stereotypes that one would imagine that had been eradicated from universities in the Middle Ages. The problem is that scientists are more affected by overconfidence than lay people. Therefore although scientists may be affected by biases less often than lay people, when they are affected they may be more overconfident about their biased judgements. Lay people are more aware of their limitations. That may explain perhaps why some of the best scientific minds have cooperated in the past with dictators and genocides. Kahan and his co-authors are therefore sceptical that isolated expert agencies can have the answer to many regulatory or policy problems, since they may run the risk of being biased in a way that makes correction of errors more difficult. There is no doubt that expert scientists have a role to play in policy, but there should be mechanisms in place to check their overconfidence, especially when they depart from their narrow fields of expertise.

Independent regulators and the Progressive movement

I keep reading on the evolution of economic thought about the idea of independent regulatory agencies. A big support to the idea came at the end of the ninetieth century in the USA from the Progressive movement, which opposed the corruption associated to patronage and machine politics, and pushed for reforms in favour of a professional civil service and a neutral administration. It was not until the 1960s that there was a reaction from the right against administrative agencies and strong bureaucracies, when Niskanen argued that the main objective of bureaucrats was to maximize budgets and the size of the administration, adding one more explanation (beyond the Baumol and Wagner laws) to the growth of public expenditure during the past century. Migué and Bélanger generalized the idea of self-interested bureaucrats to consider broader bureaucratic objectives. The theories of administrative organization were in the meantime enriched by the work of behavioural scientists such as Herbert Simon, who emphasized the idea of bounded rationality, and agents who more than maximizing behaved with a satisficing or adaptive behaviour. Starting in the 1980s agency theory added complexity to the analysis of the relationship between agents in the public sector (not necessarily called "bureaucrats"), politicians, interest groups and voters, emphasizing their different motivations and levels of information. In the last few decades, the intellectual heirs of Herbert Simon have modernized their tool box and now add a few ingredients to the analysis of the modern public sector: officials, managers and workers in the public sector may fail to optimize like those analyzed by Simon, but they may also be guided by intrinsic preferences, such as altruism, a public sector ethos, or missions, which may paint a more positive landscape than the one contemplated by Niskanen. However, expert agencies, although necessary, may also be affected by overconfidence and other biases that are equally or more prevalent among experts than among lay people. Today the big debate is how to combine technocratic expertise with a healthy democracy. The ninetieth century progressives would surely enjoy this debate.

A social-democracy of fear

In the essay about social-democracy by the late Tony Judt which has been re-published in the volume “When the Facts Change”, he defends his ideology as a moral issue. Not necessarily a positive project, but a “conservative” project in the sense of defending the welfare state. But in order not to lose the welfare state we must adapt our institutions to a global order with problems that go beyond the nation-state:
“The answers to such questions should take the form of a moral critique of the inadequacies of the unrestricted market or the feckless state. We need to understand why they offend our sense of justice or equity. We need, in short, to return to the kingdom of ends. Here social democracy is of limited assistance, for its own response to the dilemmas of capitalism was merely a belated expression of Enlightenment moral discourse applied to “the social question.” Our problems are rather different.
We are entering, I believe, a new age of insecurity. The last such era, memorably analyzed by Keynes in The Economic Consequences of the Peace (1919), followed decades of prosperity and progress and a dramatic increase in the internationalization of life: “globalization” in all but name. As Keynes describes it, the commercial economy had spread around the world. Trade and communication were accelerating at an unprecedented rate. Before 1914, it was widely asserted that the logic of peaceful economic exchange would triumph over national self-interest. No one expected all this to come to an abrupt end. But it did.
We too have lived through an era of stability, certainty, and the illusion of indefinite economic improvement. But all that is now behind us. For the foreseeable future we shall be as economically insecure as we are culturally uncertain. We are assuredly less confident of our collective purposes, our environmental well-being, or our personal safety than at any time since World War II. We have no idea what sort of world our children will inherit, but we can no longer delude ourselves into supposing that it must resemble our own in reassuring ways.
We must revisit the ways in which our grandparents’ generation responded to comparable challenges and threats. Social democracy in Europe, the New Deal, and the Great Society here in the US were explicit responses to the insecurities and inequities of the age. Few in the West are old enough to know just what it means to watch our world collapse.We find it hard to conceive of a complete breakdown of liberal institutions, an utter disintegration of the democratic consensus. But it was just such a breakdown that elicited the Keynes–Hayek debate and from which the Keynesian consensus and the social democratic compromise were born: the consensus and the compromise in which we grew up and whose appeal has been obscured by its very success.
If social democracy has a future, it will be as a social democracy of fear. Rather than seeking to restore a language of optimistic progress, we should begin by reacquainting ourselves with the recent past. The first task of radical dissenters today is to remind their audience of the achievements of the twentieth century, along with the likely consequences of our heedless rush to dismantle them.”

From Niskanen to behavioural agencies

Today I taught my last class on Public Economics of this course, a great pleasure. I finished by talking about the behaviour of bureaucracies and the productive efficiency of public agencies. In the current syllabus, the analysis of public organizations stills centres around the contribution by Niskanen more than 40 years ago. Niskanen, in the Public Choice tradition, reached the conclusion that the public sector was too large because bureaucrats had the objective of maximizing budgets. Very early, some critics such as Migué and Bélanger, although sharing the idea that public servants were not necessarily concerned by social welfare, argued that budget maximization was an extreme case, and that their preferences could include many other considerations. As Stanford's political scientist Terry Moe explains in the "Handbook of Organizational Economics", a lot of research has been done since then, and today we have a very rich theory of public organizations, where agencies interact with legislators and interest groups, and their motivations may include both extrinsic and intrinsic incentives (some of them altruistic and well-intentioned). The latter are not the only departure from "homo economics", as it is well recognised that public agents may also fail to optimise (thus behaving in a satisficing or adaptive way) and may judge and decide with the same heuristics and biases that everybody else uses. Our syllabus needs some updating.

The unbearable lightness of many pro-independence movements

This piece of the Wall Street Journal is a good example of the waste of talent, money and time of some secessionist movements in Europe (one of the richest regions of the world) in the XXIst century. For example, some citizens in Sardinia (a Mediterranean island) want to leave Italy and join Switzerland:
“Switzerland and Sardinia are a natural match,” says Mr. Napoleone, also 51. “What one is missing is the other’s strength. Together, they would make a very successful joint venture.”
Sardinia, with a flag recalling the island’s 14th-century kingdom, has a long tradition of independence fever. Over the centuries, it was passed around by foreign powers before finally being tacked on to modern Italy in 1861. With a population of 1.5 million, the island, which lies between Italy and Spain, is today home to more than 10 parties calling for secession from Rome, emphasizing a culture, dialect, and history distinct from Italy’s mainland.(...)
“I’m fighting for the future generations and for my own children,” Mr. Caruso says. “Switzerland is the ideal nation to help us secure our culture and traditions.”
The duo have each invested about €10,000, or about $10,875, of their own money and spend several hours a day tending the movement’s Facebook group and community page. While they often find themselves responding to comments branding their campaign as “folly,” they also count thousands of online supporters and have raised a few thousand euros selling T-shirts and other curios emblazoned with the movement’s red and white flag.
Meanwhile, Switzerland’s border has been mostly unchanged since the 1815 Congress of Vienna. The newest Swiss canton is Jura, added in 1979, but it was carved out of an existing canton."
When one reads about others, it is perhaps easier to feel the embarrassment.

From Wicksell to Slovic

I have been re-reading the critique of social psychologist Paul Slovic and legal scholar Kahan to the ideas of Cass Sunstein on the need to delegate substantial policy authority into insulated expert agencies. The view of Slovic and Kahan is that both the public and experts have bounded rationality that can be explained by prior cultural world views. A fraction of these cultural world views cannot however be imposed on the rest of the population. It is better then to promote a deliberative democracy where experts can have an input and a large degree of unanimity is achieved. These are the same ideas that Sweedish economist Knut Wicksell promoted in the first half of the XXth century. He argued that most policy issues are multidimensional and that for these issues majority rule alone was unfair and unstable. Although his ideal of unanimity is hard to achieve, qualified majorities are perfectly possible for many issues and are actually employed in the European institutions. This is contrast with the downsian idea of democracy, where issues are seen as unidimensional and the focus is on majority rule. The arguments of Slovic and Kahan and the way they present them are admirable, but they are not free from weaknesses. For example, they treat cultural world views as immutable and almost exogenous, whereas it is easy to find examples of people who change their world views during their life times (although they do not often change the style they use to defend any world view). And the solution they propose is much more appropriate for small rather than large communities. It is hard to visualize how the ideal of a deliberative democracy reaching a high level of consensus can be achieved in mass democracies. More work will be needed.