Sunday, April 26, 2020

Economics after COVID-19

During and after the last global financial crisis, there was a lot of soul searching among economists, and although the reaction was slow and far from universal, some fruits have emerged from that. A higher concern for inequality, a turn to more empirical methods (facilitated by technology), new pedagogical projects such as CORE, and more dialogue with other disciplines.
I do not remember well what happened in the early days of the crisis in 2008, but now perhaps because there is even a more intense use of social networks (because of technology supply but also because of technology demand in lockdown), many economists are hurrying to provide very early analysis of what is happening, predictions of what will happen, and prescriptions about what should be done. The dangers of research in a hurry are well-known. That is precisely why the production process of research is slow. Researchers need to work parsimoniously, and their work must be assessed by qualified peers. When work is screened and published, debate continues and others elaborate on previous work, or forget it, or demolish it because there were unspotted mistakes or unlooked at factors.
Three months ago, economists did not know anything about COVID-19, but some of them are now telling anyone who listens why some countries are more affected by the pandemic than others. Besides cross-country regressions being quite a thing of the past (among other things because countries are rarely a good unit of analysis, except for the fact that data is collected at the national level), it is quite likely that if one still wants to run a regression with the most talked about variables on the right hand side of the eqation, these variables would only explain a small part of the variation, and most of the variation would be random.
That is not to say that we should not do empirical work. I am sure that many people are doing very good empirical work, the results of which will not be known in months, perhaps years. Some people are learning from past pandemics, and that is a good idea. It would not be wrong if we correct a little bit the unbalance of the last years and we also have a look at good theoretical work. Jean Tirole and his co-authors have very good recent theoretical work on social norms and narratives, which may be useful in the difficult years to come.
We should not rush to completely change what we were doing, but instead keep working on the new things that emerged from the previous crisis. Perhaps then we will not only help society stop the crisis (what happened the last time), but we will also learn to build societies with more solid foundations (stronger and more cooperative governments that fight inequality, climate change and health hazards).
The recent article by Bowles and Carlin in VOX-CEPR suggests that the study of mechanisms of resource allocation beyond markets and governments (such as communities or civil society) deserve attention. A paradoxical result will perhaps be that the scientific method has taught us that values, social norms and narratives are a key ingredient to build a more sustainable society, although the use of the scientific method in economics was based on the idea that value judgements should be avoided.

Monday, April 20, 2020

Climate, politics and the boiling frog

After watching the videos of lectures by Raj Chetty on climate change and big data, I read the article by Moore et al. on climate change and the "boiling frog effect." As they explain,
"the remarkability of particular temperatures changes rapidly with repeated exposure. Using sentiment analysis tools, we provide evidence for a “boiling frog” effect: The declining noteworthiness of historically extreme temperatures is not accompanied by a decline in the negative sentiment that they induce, indicating that social normalization of extreme conditions rather than adaptation is driving these results. Using climate model projections we show that, despite large increases in absolute temperature, anomalies relative to our empirically estimated shifting baseline are small and not clearly distinguishable from zero throughout the 21st century."
The key concept here is the social normalization of extreme conditions. The phenomenon is a gradual one. Unfortunately, I am afraid that the "climate" boiling frog is accompanied by a "political" boiling frog, by which extreme political conditions are progressively normalized. One day a sexual predator with the mental age of a five-year old is elected to the presidency of the richest country in the world, and just a few years later the same individual promotes the "liberation" of states where scientists and governors recommend the lockdown of the population. Of course, the two boiling frogs complement each other. The political boiling frog makes slowly boiling the climate boiling frog easier. If both the climate and the political phenomena continue to happen slowly, it will be very difficult to stop them, because what would have been incredible 10 or 20 years ago, now has become normalized.
Does the possibility of a wake-up call exist? Perhaps one of the few pieces of good news these days is that the COVID-19 pandemic may provide such wake-up call. This sudden and global shock breaks the slow progress of the boiling process. Perhaps public opinions will realize that unless we introduce deep changes in our societies (reinforcing the public sector and cooperation at all levels), we will remain exposed to dramatic hazards for our health and welfare, like pandemics, climate change or poverty. But this will not happen automatically, it needs massive investment by leaders and decent governments on new narratives and social norms.

Monday, April 13, 2020

Critical junctures and roads not taken

Daron Acemoglu, in his last book with James Robinson, "The Narrow Path" and in his recent debate with Jean Tirole on the coronavirus crisis, has pointed out that throughout history there are rare "critical junctures" where significant changes are possible. Virtuous societies take advantage of such junctures to make progress towards states of higher capacity that are better controlled by society. The theory suggests some question marks in terms of empirical content (how can one identify if we are in the presence of a critical juncture?), but there is little doubt that in some points in time changes have really been possible, and the road taken by history was just one among several that were possible at the time.
In "The Plot Against America", the novel written by Phillip Roth and now an HBO TV series, the critical juncture is the 1940 US presidential election, which in true history was won by Frankiln D. Roosevelt, the builder of the New Deal, and in fiction was won by Charles A. Lindbergh, a nazi sympathizer. Other thinkers have focused on the critical juncture of the US Civil War of the XIX Century, were the federalists defeated the confederates that had triggered the war with the secession of some southern states. What if… the confederacy had won the US Civil War? What if instead the federalists had won in Central and South America? Then in the North there would be a panoply of small independent states with no single market, and in Central and South America there would be large and strong federations with strong markets and institutions, instead of the many failed states that now populate the southern half of the Continent. What if, as suggested by Thomas Piketty in "Capital and Ideology", Africa had been decolonized like India, with a big federation, instead of tens of small states many of them landlocked without access to the see? What if Europe had become a federation before the second World War, as suggested by the likes of Churchill or Robbins? We will never know, but all these things were possible and did not happen, highlighting the role of contingency and the indeterminacy of history. If we are in a critical juncture now, the road that will be taken is not written in stone. We should better fight for cooperation, federation and solidarity.

Saturday, April 11, 2020

From soccer superstars to economics superstars

I must confess that I used to watch too many soccer matches. Do I miss them? Not much. I guess that humans have a high ability to adapt. There are some historical soccer matches on TV these days, but it is not the same experience. We will see whether soccer recovers its recent weight on the preferences of people like me, or our children's generation, once the pandemic is over. Suddenly, we have realized that life offers other things beyond enjoying games played by Leo Messi.
But while Messi and other soccer superstars cannot telework, economic superstars can, or at least one can enjoy their work online even if the work was produced some time ago. The depreciation rate of economics superstars' work is lower than for soccer superstars. For example, I am in the middle of a self-imposed program of watching everyday one of the 18 lessons taught by Raj Chetty on Economics and Big Data at Harvard (around one year ago). It is an excellent course. It is teaching frontier econometrics by example. By looking at his (or others') work he introduces first year students to the world of quasi-experiments, but also to basic statistical concepts. Instead of approaching economics or econometrics from theory, he approaches them from real world data and by addressing pressing problems such as social mobility, racial disparities or the challenges of education policies. The class on racial disparities, for example, explains how there is a persistent gap in income between white and black individuals in the US because their mobility functions are different. It is as if they were on different treadmills. Their opportunities will not change just by trying to help those in the current generation. Policies must change the treadmill.
Another example of enjoying economic superstars these days was watching the debate between Acemoglu and Tirole about the economics of coronavirus chaired by Besley at the Royal Economic Society. Acemoglu tried to frame the policy failures of governments in front of the coronavirus crisis in terms of concepts from his last book with Robinson, "The Narrow Corridor". There is little doubt that state capacity is crucial to address emergencies like the present one. Jean Triole was quite impressive talking almost desperately about the need for more cooperation, stronger international institutions, and social norms that promote a long run perspective in health policy, climate change or the fight against inequalities. Institutions and social norms are related: a role for stronger independent institutions is to diffuse information and norms that promote this long run perspective. He explained very well the need to separate the fact that in this crisis there is little risk of moral hazard (as the crisis results from an exogenous event), from the fact that there should be no open bar. Public money still has an opportunity cost, and therefore public interventions and expenditures should be carefully targeted.
Like in soccer, economic superstars are not alone. In soccer, they need team mates and rivals so that we have games and tournaments. In economics, other more modest professionals have the obligation at least to promote these good ideas, build on them, and teach and discuss them with our students (on line or, whenever possible, face to face).

Sunday, April 5, 2020

Renaissance bonds and economic ideas

There is no shortage of articles by economists trying to make sense of the current crisis and making proposals to address the economic and social consequences of the COVID-19 pandemic. Although a few of them rush to make proposals that only look at the advantages of the proposed solutions, most authors are aware of the existing trade-offs, like for example LSE economist Ricardo Reis. Emergencies do not eliminate dilemmas, if anything they make them more acute.
There is a general consensus that stopping the economy is necessary now to save lives (although some have been slow to reach the conclusion), and this will require first emergency funds to treat the ill, and second funds to support the incomes of those most hurt by the sudden break of economic flows. In a third stage, it will be necessary to revive the economy with demand side stabilization policies (fiscal and monetary).
But some authors have gone beyond this, and have noted that exceptional supply side policies will be needed as well, because the usual market mechanisms will not be able to efficiently deal in the short run with the necessary coordination to gradually revive the economy with those that are immune or not ill. In the CEPR-Vox portal, there are interesting articles in this direction by Baldwin, Dewatripont and Ichino. The need for some sort of careful and sophisticated planning based on an intensive use of technology is also emphasized by Weil and Sethy in this article. Of course the use of immunity tests will have to be balanced with the associated concerns for privacy and the unintended effects on the incentives for some individuals to get infected.
If European mechanisms and global coordination are needed in the aggregate demand mechanisms and to support those regions most affected by the pandemic (these regions as we are seeing may be different over time), they will also be needed in this planning stage to gradually revive the economy in a sort of large scale public-private partnership. This has the political pre-requisite of trying to defeat the national-populists, Trumps and Bolsonaros that still believe that this is a national war, or otherwise isolate them with experts and both lower and higher level governments.
This need to think about supply policies should not make us forget about the urgency of the fiscal problems. That is why I have signed (together with many others) an Open letter which included this paragraph:
"In line with other appeals that we also subscribe to, we propose issuing Eurobonds, that we suggest calling “European Renaissance Bonds”. These bonds could be backed by some common fiscal capacity or other financial instruments created ad-hoc, considering that the fear of moral hazard cannot play any role under the present circumstances. Moreover, let us stress that this new common debt will not imply any mutualisation of existing sovereign debts but will refer only to the expenses that are needed to face the huge common shock hitting all EU countries. If a collective political determination and consensus emerges, no technical problem is unsurmountable." Although high levels of debt will be needed, some authors have already proposed to start thinking about how to raise taxes to pay the final bill. Landais, Saez and Zucman, for example, have proposed  a Progressive Wealth Tax, which is not incompatible with a tax on the extraordinary profits that a few firms will make with the crisis.

Saturday, April 4, 2020

Interview with Branko Milanovic

Branko Milanovic: “If we equalize the initial capital, it will not be necessary to redistribute so much”

Interview by Francesc Trillas (originally published in Catalan in Política & Prosa, December 2019) about Milanovic’s last book, “Capitalism, Alone”

Question. What is different in “Capitalism, Alone” from your previous books?

Answer. It's a different book ... well, not completely different, because it's also about inequality. But it is more ambitious, because it has a more political and philosophical side.
Let me start with the title. The title means that capitalism is the only mode of production, the only way of organizing production (except for globally irrelevant cases) that exists in the world today. This may seem like a statement that is irrelevant to some people. For example, young people have already lived only under capitalism. But if you look historically, you will see that capitalism was created on a large scale after the Industrial Revolution, and had competitors at that time, even though the British were leading globalization, because much of the world was feudal.
In central Europe there was forced labor in the year of the revolutions of 1848. In Russia and the United States there was slavery in the 19th century. In India there was also forced labor. The rival that capitalism had to defeat in some way was feudalism. In the end, capitalism prevailed, we have almost nowhere people who do not have the same rights as others. But also since 1917 with the Russian Revolution there was another competitor, Communism ...
Q. You know well because you lived under a communist regime

A. Indeed, this competitor was significant because it reached a third of the world's population, and probably more than a third of the earth's surface, including China and Vietnam afterwards. And some countries that came closer like Ethiopia, Angola, and others. But now they are gone and China has become a capitalist country. That is why capitalism is alone today.
Q. It's alone, but in a diversity of ways, right? Because in many parts it is not brutal capitalism like Manchester in the 19th century.
A. Okay, these are different forms of capitalism and the book in fact is about different forms of capitalism, not one. The book broadly outlines the existence of two major forms of capitalism: what can be called meritocratic liberal capitalism and political capitalism. Today, unfortunately, the word meritocratic has come to mean something that is deserved. But I use the concept of John Rawls, for whom meritocracy simply means that there are no legal restrictions for each one to become what they want. In other words, not because you were born black or in a poor family, you must not have the same rights.

This is very undemanding in social terms: there are no quotas, no free education ... but with liberal capitalism in the sense of Rawls's "liberal" concept it does mean that there is some correction for this birth inequality. I use the United States as an example of this kind of capitalism because I know the country well and know the data much better.
The rich and very educated marry among them: this is homogamy; the same individuals have high incomes of capital and labor: this is homoplutia.
And the second type of capitalism is the political capitalism of China (and of Vietnam, Angola, Ethiopia, etc.). The book has a political side, because it says that we have capitalism as the only mode of production now, but from a political and social point of view it comes in two different versions, which are to some extent competing. To understand why what I call political capitalism is different, I look at its genesis, where I argue that communist revolutions in China and Vietnam are equivalent to bourgeois revolutions because through communist revolutions they were free from all feudal impediments, and were able to free their countries from foreign rule. And communism could only do these two things, because they were so well organized. And almost without being aware they created a national bourgeoisie ...
Q. You mean the cadres of the communist party?

A. Not only, because now this world is capitalist in the sense that most of the added value is produced by the private sector.
The system in these countries is capitalist, and has not been planned; it is just as history has turned out. They started out as socialists, of course, and tried to put socialism into practice, but found themselves creating a national bourgeoisie. I think the genesis, the creation of this political capitalism, is very different from the origin of liberal capitalism, because the liberal capitalism of the United States and the West did not have to get rid of external colonizers, despite the fact that the United States was a colony, but it was a very different situation.
I look at the systemic forces that increase inequality in the two types of capitalism and lead to the creation of a sustainable elite in both cases.
Q. And within liberal capitalism, do you not distinguish between the most laissez-faire system in the United States and the most social democratic system in Europe?

A. Not much. At first I make a bit of distinction, but I really believe that there is essentially liberal capitalism today and that democratic social capitalism was diluted in liberalism in the 1980's (after approximately 1945). Of course there are differences between Denmark and the United States, but the systemic factors associated with globalization, technological change and the decline of unions, and the issues associated with migration, move them in the same direction. From a global perspective, they are not that different, though there are differences between countries.

Q. What is the impact of the two forms of capitalism on inequality?

A. I speak of seven systemic forces that cause inequality in liberal capitalism:
First, the increase in the percentage of GDP contributed by capital, which means increases in interpersonal inequality; this is an empirical reality that has been happening for the last 30 years. Second, this directly translates to an increase in interpersonal inequality because the people who receive a large portion of their income from capital are above in the income distribution. If two people, poor and rich, had the same share of income from capital, an increase in the ratio of capital to total income would not create interpersonal inequalities, but it really is not the case. Third, rich people receive better returns on their assets, as Piketty tells Capital in the 21st Century.
Fourth, the rich and very educated get married more to each other: this is called homogamy. Fifth, the same individuals or families have high incomes of both capital and labor; this is called homoplutia. This was not the case in classical capitalism, where the great capitalists or landowners did not basically work. There are now great executives of companies who have high income from work and capital because they accumulate wealth over the course of their working lives. By the way, this is more productive than if you are just earning a living. None of the latter two phenomena, homogamy and homoplutia, are ethically or morally bad, public policy has nothing to do with them, each one marries who they want and working is productive. All this makes it not easy to deal with inequality in modern society.

Sixth, rich people are trying to buy, or have a non-proportional influence on, the political system, more than between the 40's and 80's. And seventh, they are transferring all these benefits, which come from having more wealth and education, to their children, more than in the past. Educated parents spend more time on parenting than other parents (we have good data on this), giving their children immense benefits compared to other children, solidifying the upper class. This is also a positive thing, it is desirable for parents to spend more time with the children, but in this way they give huge advantages to their offspring.
This, combined with the control of the political process, leads to the creation of an upper class in liberal capitalism.

Q. And many of these forces are also present in political capitalism ...

A. In the countries of political capitalism there are three additional factors. First, an efficient administration or bureaucracy, with few restrictions on its operation, which does not have to spend time on deliberation. This is a key aspect of political capitalism for generating growth. Second, the absence of rule of law, which leads to endemic corruption. This is not something that is a system anomaly. The system must be corrupt because without the rule of law, one must be able to punish in some way. Coercion is not based on the law but on power. And thirdly, in these countries there is state autonomy. The interest of the state can be imposed beyond what the rich want. The power of the capitalist bourgeoisie is less than in liberal capitalism, which has become the empire of the rich. They maintain the autonomy of the state to pursue mercantilist policies or even to pursue policies contrary to the richest. China's rich, rather than Russia's, are custodians of a wealth that is, in a sense, the state's wealth. The rich have more power in liberal democracies.
Q. Another book that has also been published this fall, is Capital et idéologie, by Thomas Piketty. This book makes a series of proposals to reverse what it describes as a shift of the social base of progressive parties, which today seem to have the support of the more educated sectors, but are losing the support of important sectors with a low level of education or income. Do you agree with this description, and with Piketty's proposals?

A. I have prescriptive parts in the book. The part of Piketty's book on Change in Voters’ Structure, which is very relevant for Spain, relies on evidence based on surveys from very diverse countries. Partly because of the success of working-class policies, there is a new group of voters who are becoming more socio-liberal; their interests change because they are now wealthier and have a better education. But without American political analysts seeing it, a lower-class part of the working class has stopped voting.
My general philosophy in terms of prescriptions is that if there are such forces that increase inequality, pre-1980 policies based on education, unions, taxes and transfers may no longer work as before. There can be no more years of compulsory education, we are on a roof, people cannot be forced to have doctorates. Unions are in decline. Middle-class people no longer want to pay higher taxes than they already pay or vote for them, and they are more skeptical about the use of public money than in the past.

Tax rates of 90% of maximum marginal rate only affected a very small part of the population. Maximum rates can be increased, but I don't think much is gained.
Since we cannot redistribute current income much, it would be better to develop policies to equalize the initial endowment. Both human capital and asset ownership.
If we equate capital relatively, we will not need to redistribute so many resources. How is financial capital decentralized, which is much more concentrated than income? We need to think of a people’s capitalism where the middle class has more capital, withdrawing privileges that large investors have. At present small investors have no advantage but the rich do: they can transfer resources to descendants, accumulate profits, etc. Inheritance taxes must be used to redistribute ownership.
Q. But to do all this would require some degree of international coordination, right? Otherwise, capital would move ...

A. Yes, it requires international coordination. It is also necessary that everyone has the same access to the same quality of education. There are currently two levels of education, which cannot be seen in the school years, but in the quality of the schools. Years of education no longer determine wage levels, but the quality of education does. The quality of public education must be significantly improved, in order to balance the provision of human capital. In the United States, change should be almost revolutionary. Today's system is to preserve the privileges of rich people. And the last point is to reform the financing of the political system. I do not give many details, but these are my prescriptions. We need a new goal: people's capitalism.
Q. Is there any difference between this people’s capitalism and the popular capitalism Margaret Thatcher spoke of?

A. My people’s capitalism bears some resemblance to the popular capitalism of Margaret Thatcher, though she did little to materialize it except for the privatization of home ownership. The concentration of share ownership did not diminish, but I think he had the same idea.

This should be the next great goal of capitalism in rich countries: greater equality in capital provision. It should be a democracy or a capitalism of owning people. The system would be much more stable if everyone had a stake, rather than the current situation, where the forces of inequality are getting stronger.
Q. On a personal level, even after many years have passed, do you miss the Yugoslav federation in your cultural identity, in your life?

A. Not now, but yes when the break-in and in particular the war took place. My family was neither religious nor nationalistic. The breakup of the USSR was not a tragedy for many people (for some it was a great development, like the Baltic states, unless you were part of the Russian minority in those countries), but it was for many others , who had to redefine their identity. People don't appreciate that. There were a lot of mixed families that don't exist anymore, as the documentary “Brothers no more” (about the distance created between basketball players and former Friends Petrovic and Divac) explains. This shock, this redefinition of identity, is not easy. You need to reevaluate your identity and the identity of others.
Q. You have made proposals that have been relatively controversial with regard to immigration.

A. I think, at least in theory, that globalization should include free movement of workers, as well as ideas and capital. But people are not avatars, they have cultures and social norms. Work is not the same as capital, there are cultures, religions, world views, along with economic reasons. For these reasons immigration is conflicting. Before you say no one comes (like the Dutch politician who said the country was already full), you must accept, for the population's preference, temporary immigration permits (4 or 5 years), as the system in Germany, but with an obligation to return. They would come only if they had a job, and their permit would not be renewed.

Sure, this has drawbacks, but the general idea is that foreigners come for jobs that exist, and after leaving, without direct access to citizenship, but protection of health and work. There would be some citizenship protections, but not all.
Q. You have also criticized environmental movements in developed countries.

A. It is very easy to ask that others do not have access to amenities and luxuries that we have. Some environmentalists have no idea what the numbers are. If you set the income level as it is, one option is for the poorest to leave them as they are. But if you want them to get better, and a lot of people, up to middle levels in the rich world, there are no resources for everyone without growth.
They have to tell us what they want to do, you can't go out of reality. If they want radical solutions, they have to say how they make it politically viable. If they want us to think seriously, they have to do the numbers and tell us what strategy we will follow. How will we do it? They haven't thought about it enough. And sometimes it is unfair to many people who want to be rich, have cars, travel by plane ...
There is a link between global inequality and climate footprint, because the rich pollute more, consume more, and eat more meat. With less inequality, there would be less climate footprint. But by reducing Bill Gates's consumption, it would just be a drop in the ocean - no illusions should be made. But this is not a topic that I discuss in my book.