The end of an exceptional period in regulation?

Jon Stern has published a nice working paper comparing developments in the economic history of network infrastructure industries with recent developments in the regulation of braodband/communications and energy in the United Kingdom. Regulation of network industries in the UK, since the privatization experience of the Thatcher period, has been characterized by a focus on efficiency and the more or less declared goal of replacing regulation with competition as soon as this was possible. However, for most of the history of network industry regulation since the beginning of railways regulation, this was motivated by distributional and affordability concerns. In the UK, the desire to expand the information revolution to everybody and the combination of increasing fuel prices, climate change concerns and the economic crisis since 2008 has produced an environment where focusing regulation only on efficiency concerns has proven increasingly difficult. Many economists were enthusiastic about this exceptional period of a single-minded focus on efficiency, not because they thought that distributional concerns were not important, but because they thought that these concerns could be better addressed by other instruments such as taxation and social security. For some reason, traditional economists love separation arguments. But sometimes separation is difficult. After all, taxation is a multi-goal activity itself, and more often than not, it does not achieve satisfactory distributional goals due to a concern for efficiency or because of informational, macroeconomic or other reasons. An additional reason that makes separation difficult in regulated industries is the demonstrated importance of behavioral biases by consumers, which introduce difficulties in the introduction of competition for retail consumers, difficulties that cannot be easily overcome with transfers. Something Jon Stern does not address in his paper, and which perhaps can be a path for future research, is the impact of the increased concern for distribution on the evolution of the institution of independent regulation itself. After all, the accountability of an independent regulator, and its rationale, are faciltated by the fact that the regulator is supposed to be single-mindedly pursuing efficiency, and not other objectives for which insulation from a democratic political process is perhaps less justified. Distributional concerns may actually not only undermine at least partially the status of the independent regulator, but also of other regulatory institutions that prevail in other countries. Writing this from Chile (the country that with the UK started the privatization movement in the 1980s), here the lower chamber of Parliament just approved (by unanimity) a resolution proposing to change the structure of the panel of experts that arbitrates disputes in the water sector, among other measures trying to put downward pressure on the tariffs of water and sanitation companies. Although the package has still to go through the upper chamber (the Senate) and the executive has expressed its disagreement with the lower chamber, the stock price of the water incumbent company went down by 14% on the day of the vote.

Economists for a wide audience, according to Tirole

Jean Tirole, the 2014 Economics Nobel Prize, has written a book in French for a wide audience, "L'economie du bien comun." It is a long book, and I am reading it in a disorganized way, since most of it is a popularization of his research, and I am quite familiar with his work since my years as a graduate student. One of the parts of the book that I enjoyed more is the one devoted to discuss the relationship of the research economists with the wider public. Tirole argues with the clarity that characterizes all his work that applied researchers in the social sciences face many demands and opportunities to interact with the media, politics and private interests. He is very open about the risks (including the ethical ones) involved in these relationships. Research is about nuances, debates, doubts, small steps towards the truth. Instead, media, politics and business controversies are about strong opinions and personalities. Tirole, especially since he was awarded with the Nobel Prize, has been reluctantly dragged more towards this aspect of his work. The book is precisely a result of this pressure. Although these books are aimed for a wide audience, in practice they end up being read by other economists that are curious or want to have a shortcut to the ideas of great researchers without paying the cost of reading the scholarly articles. This great economist argues nevertheless that interacting with the outside world is necessary as long as one does not exagerate his or her wisdom especially in areas that are far away from the topics of research expertise. In the media markets and in the political and business worlds there is not much demand for nuance and seriously critical minds. There are few economists turned celebrities that are as open as Tirole about the risks of engaging with the open world. These days the risks of exagerating and jumping into conclusions are enormous with social networks, blogs and 24 hours news channels. We should all spend less time with current events and more time with deep knowledge, although we know that by doing this we are leaving all the floor to charlatans and useful idiots.

A white elephant on a green mountain

2017 will be the 25th anniversary of the Olympic Games of Barcelona. I lived these games as a very young city councillor and obviously have great memories of the event, not least from running 50 meters with the Olypimc torch the night before the inauguration. Everybody has actually good memories of the Games, whether they ran with the torch or not. The games were very successful and have been praised even by the now almost consensual literature on the drawbacks of big sports events, for example the book by Andrew Zimbalist "Circus Maximus." However, even those very successful games give examples of the big problems of these events. Barcelona 1992 was also plagued by cost overruns (check the work by Bent Flyvbjerg) and have left a legacy of white elephants. Most of the white elephants are in the Montjuic mountain, this being one of the two hills than delineate the perimeter of the city. Anyone who has come to Barcelona knows that Montjuïc is a hill almost totally occupied by an urban park very close to the center of Barcelona. It is like Central Park on a small mountain, something very hard to make excludable. The Olympic Stadium, the swimming pool, the main sports pavillion (Palau Sant Jordi) are there, being well maintained and with the irregular use provided by concerts, family events and the occasional sports tournament. This contrasts with the other hill surrounding the city, Tibidabo, farther away from downtown, with no olympic faciltities, and with an excludable fun park at the top that is managed by a municipally owned operator (which resulted from the failure of a corrupt private operator in the 1990s). The Montjuïc White elephant is costly, very costly, but there is no way back given that we were very happy to organize the games, which contributed to a huge urban transformation. Now, some months ago it was announced that a private-owned company (with good political connections) would run a sort of theme park, called Open Camp, in the Montjuïc olympic facilities, by which visitors would pay a ticket and enjoy the facilities by practicing their favourite sports. When they presented the project, they claimed to be endorsed by an "economic impact study" by Universitat Pompeu Fabra. When I saw the ill-defined concept "economic impact study" and I saw that the supposed study was not backed by any name of any individual academic that put her or his reputation at stake, I became suspicious. I looked for the supposed study in the Internet and I couldn't find it. Since I also still have some political connections from my times in the City Council, I told them my opinion, including my prediction that some time from them Open Camp would ask to be bailed out. Since this week in the local press there was a piece saying that the request for a bail out had already been made, I felt in the need to write this post.

Are nation-states necessary to preserve cultures and languages?

Branko Milanovic has written an excellent post on the trade-off between global equality and the preservation of cultures, traditions and languages that results form the preservation of "countries". The argument is that if we allowed free migrations, global income equality would increase but some small countries would de facto disappear because a majority of the population would abandon them. But then some traditions, cultures and languages that are preserved by these countries would disappear. If we accept that this disappearance would have such a cost, then we have to integrate this cost in the social evaluation of a policy of free migration. I agree that losing cultures, languages and traditions has an enormous social cost, as well as the extinction of animal species is a cost for nature and the environment. However, I would question the principle that nation-states ("countries") are necessary to preserve languages, cultures and traditions. Actually, nation-states have been as effective preserving languages as destroying them, as only a few nation-states have been able to promote the linguistic diversity that characterizes most of them (certainly not Spain under Franco). The pattern of one country, one flag, one language, one culture, one army, one currency, is something that hardly exists anywhere in the world (certainly not in Europe). I also feel uncomfortable with the practice of associating one language with one national flag, which is quite common in the Internet. What is the flag of the Spanish language, spoken in so many countries? What is the flag of the English language, spoken as a first language in many countries and as a second language in many more? Even my own mother language, Catalan, is not only spoken in the administrative autonomic region of Catalonia, but also in other Spanish territories, as well as in regions of France or Italy. Is there any language whose borders coincide with a nation-state? Perhaps yes, but none comes to my mind. If we are serious about protecting language and cultures, these should be preserved by good federal international and local institutions that have as objective the preservation and promotion of most of them if not all (at a reasonable cost), and not the conflict between them. There are more than 4000 languages in the world, and we cannot have one country for each of them, but they are part of the cultural wealth of all humanity. I would like Catalan to be one of the great European languages, and this can only be achieved by a multi-institutional effort with the cooperation of agents from several territories.

Zakaria, immigration and Spain

Journalist Fareed Zakaria, in his weekly program in the CNN and his article in the Washington Post, established last Sunday a positive correlation between immigration and the right wing populist vote. He cited as evidence a scientific article which is an "empirically motivated theoretical model" presenting it as if it were real empirical evidence. The article is an interesting simulation where the units of analysis are member-states of the EU, and Zakaria supplemented it with examples. Thus he said that in Japan there is minimal immigration and no far right surge, and in Spain immigrants are mostly from Latin America so that they are not felt as really alien and as a consequence there is no far right populism. Although the article by Podobnik et al. cited by Zakaria is interesting because it raises the issue of the importance of non-linearities and tipping points, I am not sure that the same conclusions would be reached with real empirical evidence if we used as units of analysis regions or metropolitan areas. For example, London is the region (or metropolitan area) of the UK with the highest proportion of immigrants, but it has a mayor of Pakistani origin and is a stronghold of the anti-Brexit vote. In Spain, in my city, Barcelona, there are important concentrated groups of Pakistani, Romanian and Chinese migrants, and, although there have been minor racial tensions and some attempts to take political advantage of them (for example by a local leader of the ruling Popular Party, later promoted to regional leader, in the suburban city of Badalona), there is no big surge of racist parties. Therefore, although it is true that right wing racism is not salient in Spain, the main reason may not be that most migrants are from Latin America. Another reason may be that the mental instincts conducive to racism are satisfied by other proposals in the supply side of politics in Spain. Spanish nationalists in the Popular Party (although not exclusively) that inherited a culture of uniform centralized identity satisfy part of these instincts to many voters. Other voters are satisfied by radical nationalism in Catalonia or the Basque Country. Although Basque nationalism has moderated in the recent past, Catalan nationalism has radicalized (with a tipping point around 2012) and has the support of right wing populist parties such as the Northern League in Italy (soon to be renamed as the Nationalist League) or the right wing populists in Finland. The picture that illustrated the last article by Zakaria in the Washington Post had the leader of the Northern League holding a banner with the slogan "Voto Subito" (Vote Now), which is also a usual demand of nationalists and populists in Spain, in our case asking for a referendum of self-determination of some Spanish regions. The emphasis of the neo-populists on direct democracy is also another potential explanation of their modern appeal (and their danger). I completely sympathize with the conclusions of Zakaria in his "take" last Sunday (we should come to accept immigration and manage it wisely), but the details matter if we are serious about making globalization compatible with democracy.

And this is what Aditya Chakrabortty has to say about the Brexit referendum today in The Guardian: "One of the canards about the referendum is that the decisive swing came from working-class voters furious at high immigration, and that therefore the primary issue that needs to be resolved in the next few years is who gets to stay in Britain and how. Whenever I hear that, I think of the voters I spoke to in south Wales just before the vote. True, all the leavers volunteered immigration as their main justification. But the longer we talked, in this area that remains almost exclusively white, the more it became clear that they were angry at something else – not the invisible refugees, nor far-off Brussels. One, Gareth Meek, told me: “I’m angry at the British government. They sold the country out. There’s nothing we own any more.” A multitude of frustrations, pushed through a binary vote."

"Rally round the flag" without violence

"The Rally round the flag" phenomenon has been studied in the context of terrorism and violence. One of the star papers in this year's economists' job market has been written by Juan Morales from Toronto University. He explains how some Colombian politicians (especially incumbents and right wing leaders) have been good at exploiting violence to increase their electoral support. However, non-violent conflicts can also be used to try to rally voters round the flag. The peaceful version of the phenomenon may actually be more difficult to defeat, because it is more subtle and less blatant. The economist Paul Krugman has already experienced the accusation of being insensitive to regional identities because he does not believe some of the miracles that are promised to revive some regions. Those of us that are critics of nationalist movements in Europe are under the same pressure every day. It is good to see that we are increasingly in good company. By the way, the non-violent "rally round the flag" phenomenon also explains why in Spain we don't need openly xenophobic political forces: similar instincts are fed by a long cultivated tradition of cultural indoctrination, of which not removing the graves of our ancestors is a key part. This is very well explained in an article today in the New York Times by Dan Hancox. He says: "As a new generation of fascists gains influence with governments from the United States to Hungary, it may be the source of some surprise that Spain has no equivalent to Greece’s Golden Dawn or France’s National Front, especially given the desperate and long-lasting effects of the economic crisis in Spain. In part the absence of a major contemporary Spanish far-right party is a legacy of the civil war and dictatorship, and the mass killings that ensued, which loom over the country to this day. In part — and this is the other reason Mr. Rajoy would prefer to look to the future — it is because the governing Popular Party absorbed much of the Francoist political machinery. The party’s founder, Manuel Fraga, had been a government minister under Franco."

Public-private partnerships without public-public partnerships?

Some conservatives are delighted to support an agenda of private involvement in infrastructure financing and operation, usually in the form of so-called Public-Private Partnerships. The academic literature, well summarized in a book by Chilean authors Engel, Galetovic and Fischer, stresses that for these partnerships to achieve good social results, they must be accompanied by a robust regulatory system and by an institutional framework that guarantees public control and accountability at all the stages of a project. Something that is missing in most analyses (perhaps because Chile is a centralized democracy behind the Andes) is the public-public dimension of such control and accountability mechanisms. Many of the operators involved in PPPs are multinational corporations, and many of the PPP projects go beyond traditional administrative boundaries: they cross state lines in federal countries, or they cross national boundaries in continents that make an effort to integrate their economies, or they cross old municipal boundaries to integrate metropolitan areas. Many conservatives are less comfortable with this part of the deal. Some progressives also seem to live in a simple but no longer realistic world where they believe that by switching from some form of ownership to another at the purely local level is going to change the world. They would all like to work in a simpler world with public-private partnerships or pure public operation without public-public partnerships. But we live in an interconnected world. A key dimension of the public-public partnerships that are required for a good regulation of public-private partnerships is the checks and balances provided by multi-layered government, as many in the USA are discovering as a way to avoid becoming a huge banana republic under Donald Trump.

A populist: "I am not a populist"

Minutes after conceding defeat against his progressive rival in Austria, the person that everybody else calls a far right populist leader, Norbert Hofer, was trying to distance himself from the wave of populism that is sweeping democracies the world over. By populism I understand an appeal to the popular classes proposing simplistic solutions to complex problems using demagoguery and making an opportunistic use of democracy. Using a very polite style, he was claiming that he was a very respectful politician. The same day, the dethroned (but not retired) leader of the Catalan secessionists, Artur Mas, wrote an article in the main newspaper of the Catalan bourgeoisie claiming that his sovereignism was not populist, but based on objective grievances. Of course, all these leaders have differences among themselves. Not all of them are open xenophobes or sexual predators like Donald Trump. Not all of them are openly europhobic like Marine Le Pen. But all of them administer a clever recipe of scapegoating (against Muslim people, immigrants, or bureaucrats in a supposedly distant capital) and disdain for the restraint and social norms that used to accompany good democratic practices and the respect for the letter and the spirit of the law. It is social conventions, which are different from place to place, that mostly constrain them to still respect some written and non-written rules. I have been reading a report in The New Yorker  about the Philippino leader, Rodrigo Duterte, about his apparent changes of opinion, his contradictions, his constant playing with legality, his permanent postponement of all his plans blaming his delays on the scapegoats and extending the times that become permanently extraordinary (similarly to Mr. Mas, whose political party holds regional political power since 2010 with a very poor record beyond the secessionist rhetoric). In all these places, these leaders are supported by some decent people, and their rise is also the responsibility of many in the left that have not been wise enough at channelling the frustations of many people. But they pose a threat to democracy and fraternity by making identities salient and undermining cooperative efforts at finding solutions. I've heard Le Pen, Farage, Wilders, the Northern League in Italy and many others distancing themselves from each other. This is just another thing they have in common.

Understanding Italy

When I lived in Italy, the then leader of the party of the left that had inherited the structure of the Italian Communist Party and that had occupied the space of the Socialist Party after the corruption scandals of the 1980s, Massimo Dalema, wrote a book under the title "Per un Paese Normale" (for a normal country). For good and for bad, however, Italy is still a very special country. Tomorrow, the Italians will vote in a referendum that has atrracted the attention of the global media. I am not sure that the coverage has done a good job at facilitating the understanding of what is happening. A Constitutional reform to increase centralization and diminish the role of the Senate has become a plebiscite about the Prime Minister, Matteo Renzi. According to The Economist, the reform does not deserve a Yes vote, but the political beneficiaries of a No victory would probably be the Five Star movement, which is led by a eurosceptic comedian. To be honest, I don't know what would I vote, I don't like Matteo Renzi, but I dislike the most likely alternative even more. I would like Italy to be dominated by the modernized left that seemed to be advancing in the mid ninenties when I was there. But I have missed a lot since then, although I read La Repubblica every Sunday. Europe needs a reformed Italy, not any more of its clowns and charismatic leaders. Not more miracles, please.