Sunday, May 31, 2020

National-Populism (and much worse) is this

In the middle of a revolt and civil unrest after the assassination of another African-American citizen by the police, after failing to provide leadership and national management in the worst pandemic in decades, Donald Trump called a press conference two days ago where he only talked about China... It is one of the best illustrations of national-populism that one could find. For a national-populist leader, it is imperative to find a scapegoat, especially when problems escalate and one does not have a solution, nor the will to look for one.
Of course, Trump is much worse than a national-populist, but the nationalist and populist components are key dimensions of the catastrophe that is unfolding in front of everybody. These components are the foundation on which he can build worse things such as the contempt for institutions, conventions, the media or democratic rivals, or the potential refusal to admit defeat if he loses the November presidential election, as suggested by New York Times columnist Roger Cohen.
National-populists have no passion for honest government. In fact, they do not govern at all. As Robert Reich has argued in an article in The Guardian, Donald Trump is not governing: his divisive tweets are no substitute for government.
Riots do not develop out of thin air, everybody knows this in general, and in the US in particular in the context of racial discrimination. But in these days of discord, the US president fans the flames, instead of providing leadership and calm. Trump even threatened White House protesters with "vicious dogs and ominous weapons." All this is very disturbing, and all decent people in the world should desire that it ends in November. For it to end, I believe it is also better that any kind of violence ends, even if violence is understandable from those that suffer violence and that see for ages no response to their non-violent protest. But violent protest will make it easier to resort to a "law and order" rhetoric, which is probably the only hope that Trump has to have any chance of winning the November election. When the other party cheats in a contract, it is wrong and counter-productive to do the same, the only hope comes from restoring the institutions of a decent social contract and make them work in favor of deep reforms.

Sunday, May 24, 2020

Accountable federal democracies

The COVID-19 crisis is a wake-up call to the many things that are wrong with capitalism, the nation-state and representative democracy, as we have experienced them in the recent decades.
The great New York Times journalist Roger Cohen looks for signs of hope in the middle of this crisis, and sees them… in Europe. In many places, and most notably in the US of the dystopic  presidency of Donald Trump, forces are trying to disrupt the workings of accountable democratic governments, looking for scapegoats and trying to blame the Chinese, the states, and Madrid or Brussels in other places.
In some situations, federalism can be used to free ride and blame others, but the hope is a federalism that can be used to have accountable governments at every level that cooperate and that are aware of their interdependencies. The hope is that this can be made to work in Europe, if the European Union accelerates its federal transition. And Cohen suggests that the recent agreement between Merkel and Macron to finance recovery by means of transfers and European debt is a clear sign that this may be happening. Against all the eurosceptic rhetoric, it turns out that the hope comes from Europe.
Accountability is just one of the objectives of a federal democracy. Others are efficiency and equity in the deployment of public policies. Sometimes these objectives may be in conflict. For example, accountability calls for a transparent delimitation of responsibilities, and many times efficiency and equity require close cooperation and working togehter. But the terms of the relevant trade-offs may be improved, and in the long run some trade-offs may disappear, like for example when efficiency and equity make institutions stronger and this improves accountability.
The crisis is showing the shortcomings of our current, but existing, federal mechanisms (nationally and internationally). These mechanisms are not a panacea against opportunists that are masters in transferring blame and looking for scapegoats.  But the crisis also shows the necessity and urgency of better, stronger federal mechanisms of solidarity and sustainable prosperity. This is the essence of the European Hamiltonian moment.

Monday, May 18, 2020

Counter-cyclical central powers with pro-cyclical sub-central ones, again

Rodden and Wibbels have an academic article where they analyze, in the context of the previous global financial crisis and before, the conflicto between counter-cyclical stablization policies of central governments, and pro-cyclical budgets of sub-central ones. Because of tax competition and borrowing constraints, the finances of regional powers have a very hard time in times of crisis, although in most federations and decentralized countries, they have very important expenditure powers that are more under demand in times of recession. This creates tensions that, among other things, may undermine the stabilization efforts of the central Powers, who in turn may have incentives not to transfer enough resources to the sub-central governments, in order to shift the blame for the crisis.
Although fiscal policies of central governments sometimes provide modest insurance against regional income shocks, the paper shows that procyclical fiscal policy among provincial governments can easily overwhelm these stabilizing effects. The authors examine the cyclicality of budget items among provincial governments in seven federations (it seems that Canada and Australia do it better than the others), showing that own-source taxes are generally highly procyclical, and contrary to common wisdom, revenue sharing and discretionary transfers are either acyclical or procyclical. Constituent governments are thus left alone to smooth their own shocks, and they document the extent to which various restraints on borrowing and saving undermine their ability to do so. The resulting procyclicality of provincial fiscal policy is likely to have important implications in a world where demands for countercyclical fiscal policy are increasing but considerable fiscal responsibilities are being devolved to subnational governments.
They do not develop a lot on the potential solutions, but they hint that specific institutions like ones existing in Australia and Canada may be useful to introduce an explicit mandate to counteract output shocks. Since similar tensions are emerging again in federal and decentralized countries in the context of the COVID-19 crisis, these ideas will be necessary again.

Saturday, May 16, 2020

E-Book (short) review of "Economics in the Age of COVID-19," by Joshua Gans

I found this e-book a useful short guide to the economics of public decision-making in the middle of a pandemic. The book does not make any grandiose claim, but may be a useful guide to explain the economics of the crisis to students (something I guess many lecturers will have to do if not now, very soon, and for some time).
The book starts by explaining why centralized planning akin to efforts made by governments in wartime ("repugnant" in more normal times) is OK in a pandemic. The reason is that coordination is needed in a very short period of time to stop the economy, except for very few essential services. Markets are usually good at achieving coordination, but not when there is an emergency that needs to be tackled without waiting for market incentives to have their effect on decisions and allocations.
Another teachable lesson is that the typical concave-shaped production possibilities frontier of normal times, between health in the horizontal axis, and everything else (or "the economy") in the vertical axis, experiences some significant changes that explain the policy options and cosntraints that governments face. First, in general, there are now fewer feasible allocations because some activities will no longer be possible. Second, the remaining frontier will no longer be concave because of non-linearities. At some point (for example H in the graph) an increase in economic activity will have to be accompanied by a sharp reduction of health, because of the infectious disease. Third (see second graph), progressing too fast on re-opening the economy can be very costly in terms of spreading the disease: if you don't hold your line on social distancing, the production possibilities frontier further shrinks, because many combinations with reasonable health cease to be available.

The subsequent chapters deal with the importance of testing and other technological challenges for gradual reopening. The pandemic is a knowledge problem in the sense that we do not know who is spreading the disease. We can re-open the economy if that is done by those that we know that are less likely to spread the disease. In most places, that is being done in a very generic way, by for example allowing some activities in some regions gradually, but Ganz advocates for a much more fine-tuned approach.
But before re-opening, the best policy to flatten the pandemic's curve is to pause the economy and at the same time try to keep in place the links and organizations that make it possible. The economy should be expanded with keynesian policies only after the disease is contained.
In general, I am skeptical about books being published in a rush. But this one is not over-ambitious and it is based on previous theory and empirical results. There will be an open peer-review process that will finish with a promised second edition in the fall. It will be an opportunity to check how the first one ages.
Although I missed some paragraphs about the difficulty of cooperation between several government levels, both vertically and horizontally, the final words of the book leave no doubt about the importance of achieving global cooperation:
"To buid the global institutions we need to mitigate the costs of future pandemics, we will need that resolve. There are signs of hope (…). Any victory we have over the next two years needs to come with a warning, The eye cannot be taken off the ball. And if you need any guide from history, remember that we did not get the IMF or the United Nations until we had not one but two world wars."

Sunday, May 10, 2020

Politicians and academics

Tim Besley and Andrés Velasco have written an interesting article about the relationship between politicians and scientists in the current COVID-19 pandemic. They are both academic economists who focus their work on public policies, and therefore have a professional interest in politics. Andrés Velasco, now at the London School of Economics, had been in the past a senior minister in the center left government of Chile, and a (failed) presidential candidate. The article goes beyond the typical appeals of academics to heed the views of experts, and shows a good dose of respect for (good) politicians and political institutions. I especially liked this paragraph:

The fact that long before the virus hit most politicians’ credibility was at a nadir should not obscure another equally important fact: in modern secular societies, no one else can do the job of generating public trust. And if those modern societies are democratic, accountability is one key source of that trust. While the conventional view is that accountability is a constraint on political action, it is also an enabler. When politicians have announced lockdowns that impose economic costs, the public know that the politicians will ultimately be judged on whether the trade-offs are deemed to have been well-judged. Holding politicians responsible for a decision they have taken can enhance trust in that action.

Politicians and academics necessarily interact, and they should leave aside their mutual prejudices. Prejudices of politicians about academics include believing that academics have little work, know little about the "real world", and waste time instead of communicating with citizens with the "language of the street." Prejudices of academics about politicians include that they are ill-prepared, have bad intentions or are in general corrupt. The quote by Keynes, about men of action working on the shoulders of some obscure academic economist of the past, should be complemented by saying that often academics dream of being men (or women) of action, that is, politicians.
National-populism will not be defeated by delegating into the likes of Mr. Fauci, but by convincing public opinions that strong actions and interventions are needed to correct inequalities and fight climate change. So perhaps academics could focus part of their work on scientifically finding how to persuade public opinions of this. Politicians have a lot of soft knowledge to contribute to that.
They need each other and, also, they both need to remain modest and aware of their limitations. After all, in some way they are part of an elite that needs the trust and the support of many working people that are neither politicians nor academics. And many people are, or have been, both politicians and academics, like Andrés Velasco, although being successful on both fronts has proven very challenging for them.

Sunday, May 3, 2020

The economic rhetoric about reform and change, now

In an article written in 2017, Stuti Khemani of the World Bank reviews the reasons that economists have provided for the difficulties that democratic societies face undertaking what many have called "reforms," and sometimes "srtructural reforms". There is some understanding that these reforms refer to policies that in some objective way are desirable, but that are blocked by interest groups or some other political difficulty. More modernly, the obstacle to "reforms" seems to be populism. In an initial period, the literature focused on reforms about fiscal consolidation, to open up later the scope to the analysis of liberalization reforms. Since in theory, the winners could compensate the losers, in some sense much of this literature is redundant, because it is well known that social choices by majority rule, or some other voting procedure, do not guarantee efficiency. But beyond interest groups and the difficulties of democracies with efficiency, the article of Khemani is interesting because it opens up a new reason why policies that are socially desirable in some objective way are not developed. This reason has to do with the difficulties of spreading the social norms and preferences that make change possible. Of course, these days this should be applied not so much to fiscal consolidation or liberalization, but to policies that mitigate climate change (and other related hazards such as pandemics) and that reduce inequalities, which by the way are sometimes in conflict with fiscal consolidation or liberalization.
The role of interest groups is actually related to social norms and preferences, because as the author argues
"Part of the power of groups to block reforms, despite the evidence that the reforms would benefit an overwhelming majority, is likely to come from their ability to persuade the “winners”— society or citizens at large—that the reforms are not in their interest. Or, to distract citizens into valuing other aspects of policy-making (such as social and religious policies), systematically mobilizing citizens on those non-economic policy dimensions, while deliberately pursuing economic policies to the detriment of those citizens."

Saturday, May 2, 2020

Federal histories

After the global financial crisis, I read two articles that explained very well which were the challenges and difficulties of European federalism as compared to that of the US. In "The euro crisis: some reflections on institutional reform," Jean Tirole (2012) argued that it was very important to combine solidarity and market discipline, and that this was not easy given the inequalities of income per capita across European countries. He suggested though that we might learn from the evolution of federalism in the US since the eighteenth century. An article he recommended was "Fiscal Federalism: US History for Architects of Europe's Fiscal Union," by C. Randall Henning and Martin Kessler (2012). These authors emphasize the importance of both state-owned fiscal responsibility, and a federal budget. The federal government in the US does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider that maintaining a capacity for federal (European) countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify (as it is slowly doing) bank regulation and create a common fiscal pool for restructuring the banking system.
These days not only comparisons between American and European federalism become relevant, but also comparisons between reality and plausible counterfactuals in large regions. For example,
"The America's More Perfect Unions," by Joshua Simon (2014) is a fascinating article which highlights the direct and indirect economic effects of the success or failure of the political unions established after independence in both the United States and Latin America. It demonstrates that influential political theorists throughout the hemisphere understood the developmental advantages to be gained from unifying former colonies and employing the political authority newly at their disposal to abolish the stifling institutional legacies of European rule, suggesting that if Spanish America’s unions had endured, or conversely, if the United States had collapsed, the two regions’ economies might not have diverged as dramatically as they subsequently did. For example, the autor quotes the "liberator" Simón Bolívar saying: "The states of the Isthmus of Panama as far north as Guatemala will perhaps unite in federation. This magnificent position between two great oceans could become, with time, the world’s emporium, its canals shortening global distances and strengthening commercial ties between Europe, America, and Asia, bringing tribute to this happy region from the four quarters of the globe. Maybe here alone it will one day be possible to establish a global capital, a new Byzantium for the modern world!"
In his last book "Capital and Ideology" also mentions other missed opportunities for federalism in Africa and Europe in the twentieth century. Now we are again at a critical juncture, let's hope and let's make everything posible so that we can keep making progress towards a better federalism in Europe. This will have to combine enhanced fiscal powers to manage debt and taxes for the federation, market and political discipline for the states, and mechanisms of solidarity that make the compact politically sustainable.  If we succeed, the future is to persist in a slow federalist evolution (like in the US history). If we fail (we won't, right?), our future will be closer to a politically unstable combination of small fiscal havens and failed states.