Saturday, April 30, 2016

Where is the old sovereign state in Europe?

The old idea of a state associated to a currency, a language, an army, a flag, a monarch... is dead. The still frequent habit of associating a language to a country's flag is a symbol of a more general mismatch between symbols and reality. When I see the Spanish language associated to the Spanish flag I feel a current of cognitive dissonance, because I empathize with all the hundreds of millions of people who have Spanish as their language and who do not live in Spain. And I empathize with all those Spaniards who also have other languages as their own. In Europe, our army is NATO, whether we like it or not. We have our national flags coexisting with local or regional flags, and with the European flag, and with many other flags that are important for some people, expressing sexual orientation identity or sports preferences. Our monarchs are more and more becoming like the kings of Southafrican tribes, mere touristic attractions and actors and actresses in old useless rituals. In the eurozone, our currency is the Euro, although we may also use digital or local social monies (none of them is a national currency any more). We use one language for one function and another one for another (some fanatic socio-linguists in Catalonia don't like this, but that is just because nationalists tend not to like facts), and more and more we will use one jurisdiction for one thing and another one for another. The peace deal of Northern Ireland some years ago was in this sense much more interesting than the in-out referenda that have become fashionable in the United Kingdom more recently. That deal was based on a broad agreement that involved both Ireland and the UK, and both populations endorsed it in a referendum, as part of a process of complex agreement, not of simplistic division. Ireland and the UK became united again to decide on a very important topic (peace) although they kept different instutions for other things: we may argue that although citizens believe they belong to independent countries, they share their most important public good: absence of violence. The Scottish referendum was much more divisive, but it also illustrated that creating a sovereign state is not what it used to be, as even the secessionists did not want a new currency or a new head of state. What remains of the old sovereign nation-state is the myth, which is used to fight for local political control. It is the political media market that is still national, our leaders (and media outlets) are mostly still national. And they are fighting for your mind. But the real stuff is no longer national.

Friday, April 29, 2016

An example of the difficulties of regulatory independence

Four years ago I started a research about the reform of regulatory institutions in Spain. Finally, the result has been a paper with Ramon Xifré from Pompeu Fabra University that has been accepted by the journal Utilities Policy (hopefully, they will upload an electronic version in the next few weeks). We argue there that there are concerns that the Spanish reform (the merger of the antitrust agency and sector regulators) imposed a homogeneous level of independence for different sectors, reduced the overall level of regulatory independence, and by unilaterally changing legislation, de facto reneged on regulatory independence by taking advantage of the legislative change to remove from office the regulators appointed by the previous political majority.
Regulatory agencies are influenced in their evolution by the pressures of interest groups and political principals. This has indeed been the case in the Spanish reform.

Consolidation can be justified in industries where there is technological convergence; coordination between regulation and competition policy also makes sense when liberalizing industries. But this does not justify the extreme position of integrating almost all regulation and competition policy in a single agency, especially when the integration is not designed with consumer welfare as the main objective. This extreme position is not justified either by reasons of productivity or competitiveness, as the relationship between the institutions of regulation and competition policy (microeconomic tools) with stabilization or macroeconomic growth objectives is not well established. This does not mean that efficient network industries and competition are not important in the long run, but there is little reason to believe that the institutional details of policy have macro implications.

In contrast with the model of maximal integration adopted in Spain, the case for a certain degree of institutional diversity appears to be justified because, although some consolidation and coordination may be beneficial, diversity creates the conditions for accountability and sound decisions for consumers in markets that are complex, subject to the pressure of interest groups, and uncertain.
Good board members and officials may over time overcome the institutional deficiencies that we have noted with regard to this reform. But the reform itself reveals interesting issues about the difficulties of regulatory independence in practice. If fairness in the process of reform is as important as the outcome (as argued in the behavioral literature), then the institutions of regulation and competition policy have not become more robust as a result of integration, because these institutions remain vulnerable to the changing opinions of the public, stakeholders, and potential new political majorities, who have not been involved in the reform process. 

Wednesday, April 27, 2016

The Nationalist International

The leader of the Italian Northern League has expressed his admiration and support for Donald Trump in the USA. There is a paradox here, in that nationalist movements are supposed to care only about their people. But of course all these leaders (also Marine Le Pen and other European populists) have interests in common. All of them are interested in promoting the xenophobic values of supremacism, more or less disguised in a democratic rhetoric. The Italian Northern League has been particularly active in expressing its support for foreign nationalist movements. They are the only important political party in Europe, for example, that has expressed its support for the secessionist movement in Catalonia. What is surprising then is that these nationalist politicians complain when another foreign leader expresses opposition to their ideas. For example, last week-end the Mayor of London (and one of the leaders of the Out vote in the irresponsible Brexit referendum called by David Cameron), Boris Johnson, tried to insult the US President Barack Obama when the latter argued that it would be much better for the UK to stay in the EU, and that he supported a stronger and more united Europe. Some people claim that the support of Obama to the In campaign may backfire and be seen as intefering in internal affairs. But I bet that the Out campaign spends a lot of resources trying to get prestigious foreign leaders to support them (probably with little success, as it happens with secessionists in Catalonia). Here's what The Guardian had to say about the support for Trump by the Northern League: "One of Italy’s leading rightwing politicians, Matteo Salvini, has declared his unabashed support for Donald Trump, saying he would choose the “legality and security” of a Trump presidency over the “disastrous” policies of Angela Merkel and Barack Obama. The bombastic head of the Northern League party – who is known for his verbal attacks on migrants, stance against the European Union and praise of the “good work” of fascist Italian dictator Benito Mussolini – met his American idol at a rally in Philadelphia on Monday. The date was 25 April, a day when most mainstream politicians in Italy are celebrating a national holiday that has never sat well with some ultra-conservative politicians: the day that marks the country’s liberation from fascism. Salvini’s most important European ally is Marine Le Pen, the head of France’s Front National party. In a series of tweets, Salvini praised Trump’s candidacy and published a photograph of himself with the New York tycoon."

Sunday, April 24, 2016

No, you can't

Nationalists in the UK have not liked what President Obama had to say about "Brexit" at the BBC. And he is not the only prestigious American who believes that the Out vote is a very bad idea. Nationalists in other European lands should pay attention too. The most important and prestigious democratic leader in the world (among other great personalities) is against European frangmentation:

The UK could take up to 10 years to negotiate trade deals with the US if it leaves the EU, Barack Obama has said.
In a BBC interview, the US president said: "It could be five years from now, 10 years from now before we were able to actually get something done."
Britain would also have less influence globally if it left, he added.
His warning over trade has angered UK campaigners for leaving the EU - with UKIP leader Nigel Farage dismissing Mr Obama's comments as "utter tosh".
Mr Obama has previously said the UK would be at the "back of the queue" for trade deals with the US, if it left the EU.
When asked about the comments, he told the BBC: "The UK would not be able to negotiate something with the United States faster than the EU.
"We wouldn't abandon our efforts to negotiate a trade deal with our largest trading partner, the European market."
He also warned the UK would have "less influence in Europe and as a consequence, less influence globally", if it left the EU.

Wednesday, April 20, 2016

The fruits of doing only one thing in one week

Besides watching "Spotlight" in the plane and the Sanders-Clinton debate due to the time zone, last week in Cali (Colombia) I concentrated on an unusual rather one-dimensional effort: teaching a 6 hours per day course in Applied Microeconomics, and interacting with students and faculty at Universidad Javeriana. The result of this lack of other common distractions was learning, having time to process insights and ideas from students, professors, and even from myself. For example, I realized that when students are motivated adults and have high ethical standards, one needs to spend less monitoring effort during the final exam (they just don't want to cheat). A great illustration of the interaction between internal and external institutions. Social norms save energy, which one can allocate to more productive uses. I also learned from a Cuban professor, when I asked him about the socio-political future in his country, that a likely scenario there is a political and business alliance between the military and the oligarchy in the exile, which will probably be bad for democracy, but good for stability. Another professor has done some work on large sports events, and he had developed more extensively a thought I also had at some point: these large events are wasteful to some extent, but it is difficult to achieve the same degree of coordination (including popular support) for other purposes, which implies that a coordinated effort to transform a city can hardly be done through means that are not one of these events. I also realized that there is a very simple way to classify incentives. These are not just extrinsic or intrinsic as I had been explaining in the recent past in my classes. A better classification keeps this initial taxonomy, but expands the extrinsic branch with monetary and non-monetary incentives, where the non-monetary part includes prizes, distinctions, applauses or similar extrinsic motivations. Simple, but useful.

Thursday, April 14, 2016

The pleasure of teaching the Stackelberg model

The Stackelberg model is one of the components of what is called Industrial Organization, the microeconomic study of imperfect competition by oligopolies and monopolies. Its name may not tell much to a random reader, but the students and professionals of economics have probably heard about it. I would not say that it is a very useful model, except to understand some properties of models of market power. However, its two firm version seems to me a masterpiece of rigour and precision. Of course, there are many similar models in economics (probably not all of them are as useless). When one has enough calm to prepare it, it becomes such a pleasure to explain it, bit by bit, slowly (as I did today in a course I'm teaching in Colombia these days). What I do is first to explain the mathematics of it, and next I draw a graph with all the details. Somehow, the graph becomes as complex if not more as the maths. First one has to draw the reaction functions of each firm in a surface where the axes are the quantities of a leader and a follower firm. Then one explains why the profits of the leading firm can be represented by concave curves where the direction of more profits in down to the right, and why these so-called iso-profit curves have their maximum on the reaction function of the leader. Then one has to show that the point of the Stackelberg equilibrium is the point of the follower's reaction function that touches the best possible iso-profit curve. The whole thing does not finish until one shows that unless the quantities are interpreted as capacities, or unless the leader has a way to credibly commit to the Stackelberg quantity, the whole thing collapses to another equilibrium, the Cournot equilibrium, where the leader ends up with less profits. I apologize for not reporting about something that any reader can understand, but other academics will understand the pleasure of teaching slightly complex things that, unlike reality, are clear and precise.

Friday, April 8, 2016

No man is an island

We are seeing too many ugly conservatives that are becoming very influential in Europe and the US, such as Donald Trump or Marine Le Pen. There are other less famous ones that not even believe that they are ugly and conservative, but with their more or less open nationalism and populism make possible the surge of the more famous faces. It doesn't need to be like that. I mean, not all conservatism needs to be ugly, xenophobic and disrespectful. That's why I loved an article by US senator and former presidential candidate John McCain. I was in the US for most of his campaign against Barack Obama. Of course, I was more excited by the current president than by McCain at the time, but I always thought that he was a decent politician (perhaps a bit ignorant in complex topics like economics). I remember vividly the day he announced that his choice for vice-president would be Sarah Palin, confirming the theory (perhaps pushed too far that day) that presidents and vicepresidents should be completely different to complement each other. Now my impression that McCain is a decent human being is confirmed by this article where he praises a communist that went to fight in the Spanish Civil War in the 1930s. Here's how the article finishes: "Mr. Berg went to Spain when he was a very young man. He fought in some of the biggest and most consequential battles of the war. He sustained wounds. He watched friends die. He knew he had ransomed his life to a lost cause, for a people who were strangers to him, but to whom he felt an obligation, and he did not quit on them. Then he came home, started a cement and stonemasonry business and fought for the things he believed in for the rest of his long life.
I don’t believe in most of the things that Mr. Berg did, except this. I believe, as Donne wrote, “no man is an island, entire of itself.” He is “part of the main.” And I believe “any man’s death diminishes me, because I am involved in mankind.”
So was Mr. Berg. He didn’t need to know for whom the bell tolls. He knew it tolled for him. And I salute him. Rest in peace."

Sunday, April 3, 2016

Are institutions good travellers in PPPs?

In their excellent book The Economics of Public Private Partnerships, Chilean economists Engel, Galetovic and Fischer, three of the best experts in this topic in the world, make a number of proposals to improve the performance of this type of contracts to build and maintain infrastructures, and to provide services over them, as in motorways and similar projects. Recently they teamed up with one of the best Spanish experts in the topic, Ginés de Rus, to write a report about motorway PPPs in Spain. One of the chapters of the Chilean economists' book is devoted to the governance of these concession contracts. They believe that one of the problems they have is that all the stages of one of these contracts is governed by agencies inside the same ministry, the Public Works department. They propose to replace this structure by at least three agencies as independent from government as possible: one to select the project, another to enforce the contract and a panel of experts to adjudicate controversies in renegotiations. For Spanish motorways they propose the same solution. In Spain, motorway PPPs have been very controversial, because they have been renegotiated several times since they were first used in the 1970s. Motorway PPPs in Spain have not avoided white elephants and the allocation of risks has always been controversial. After the fiasco (because of demand overestimation and cost underestimation) of a set of motorways around Madrid in the recent past, some judicial decisions may oblige the national govern to pay several billion euros to bail out the concessions. This has become a distributive problem between shareholders, users and taxpayers, not very different from the problem of the tariff deficit in energy that the government had to fix two years ago. But in any distributive problem it is difficult to delegate it to technocratic experts, who should decide in an accountable way on complex issues on which most society agrees. Additionally, Spain is not a centralized isolated small country like Chile, but a large decentralized democracy that belongs to the European Union. The report co-authored by de Rus acknowledges that some of the problems with PPPs in Spain are due to this institutional complexity, which will hardly be fixed by creating independent agencies at the national level. The governance of PPPs is a complex problem, and more debate is needed. Another good presentation of the issues was given by French economist Stéphane Straub some months ago in a conference in Barcelona.

Friday, April 1, 2016

Social Democrats should push for Piketty's New Deal for Europe

If the decline of social democracy in Europe is not stopped, that would be a tragedy for our world. The European social model shows that our continent, which concentrates 50% of social expenditure in the world, is the mother land of the center-left, and an example for the rest of the Planet. But today the challenges of rebuilding the social contract can only be addressed if we have the courage to go beyond the nation-state. That is why I believe that social democratic leaders in Europe should follow the advice of French economist Thomas Piketty about the need to build a true federation in the eurozone. I am afraid that the alternative more and more is Marine Le Pen and similar xenophobic populists. Here is what Piketty has to say in The New York Review of Books in his article "A New Deal for Europe": "The far right has surged in just a few years from 15 percent to 30 percent of the vote in France, and now has the support of up to 40 percent in a number of districts. Many factors conspired to produce this result: rising unemployment and xenophobia, a deep disappointment over the left’s record in running the government, the feeling that we’ve tried everything and it’s time to experiment with something new. These are the consequences of the disastrous handling of the financial meltdown that began in the United States in 2008, a meltdown that we in Europe transformed by our own actions into a lasting European crisis. The blame for that belongs to institutions and policies that proved wholly inadequate, particularly in the eurozone, consisting of nineteen countries. We have a single currency with nineteen different public debts, nineteen interest rates upon which the financial markets are completely free to speculate, nineteen corporate tax rates in unbridled competition with one another, without a common social safety net or shared educational standards—this cannot possibly work, and never will.
Only a genuine social and democratic refounding of the eurozone, designed to encourage growth and employment, arrayed around a small core of countries willing to lead by example and develop their own new political institutions, will be sufficient to counter the hateful nationalistic impulses that now threaten all Europe. Last summer, in the aftermath of the Greek fiasco, French President François Hollande had begun to revive on his own initiative the idea of a new parliament for the eurozone. Now France must present a specific proposal for such a parliament to its leading partners and reach a compromise. Otherwise the agenda is going to be monopolized by the countries that have opted for national isolationism—the United Kingdom and Poland among them.(...)
If France, Italy, and Spain (roughly 50 percent of the eurozone’s population and GDP, as against Germany, with scarcely more than 25 percent) were to put forth a specific proposal for a new and effective parliament, some compromise would have to be found. And if Germany stubbornly continues to refuse, which seems unlikely, then the argument against the euro as a common currency becomes very difficult to counter. Currently, a Plan B involving the abandonment of the euro is being touted by the far right, a policy that is increasingly tempting to the far left. Why don’t we start by actually giving a chance to genuine reforms that would make the eurozone work for the common good?"