My modest experience in doing empirical work has taught me humility and skepticism. That is because often data tells you that what you thought was probably completely true, actually gets qualified a lot by empirical evidence.
That happened to me when I was studying the empirical effects of Independence in practice for telecom regulators in Latin America, with my friend and colleague Miguel A. Montoya (mostly in his PhD thesis, which I supervised). In my previous theoretical work on the topic, with Jon Stern and Paul Levine, we concluded that independent utility regulators were as important, if not more, than independent central bankers. However, once we accounted for a continuous measure of independence in practice (difficult), and once we accounted for the endogeneity of regulatory independence (difficult), the effect on investment in telecoms was significant, but very modest. There were probably things, at least in Latin American telecoms, that were more important for investment than the independence of the regulators.
There are many other examples of empirical results that disappoint the theoretical or policy expectations. That is the case for example of microcredits, as explained by Esther Duflo in her Nobel Prize speech (published in the last issue of the American Economic Review). Or it is the case of small class sizes to have a positive impact on learning results, as explained in the econometrics textbook by Stock and Watson. Does this mean that independent regulators, microecredits or class sizes never matter? No, they still may matter a lot in some cases, and actually empirical work can help understand the heterogeneous effects of these treatments.
Sometimes, we may have to make a judgement about the effect of these treatments in particular cases, in the absence of data. It would be very interesting to study what is the impact of expert commissions on policy in general; my bet is that this impact is very small, as these commissions are many times an exchange of legitimacy for the politician for ego for the experts, but of course in some cases experts are a matter of life and death, like in a pandemic. One particular issue in which regulatory independence seems to me crucial now is in the approval and distribution of a vaccine for COVID-19 in the USA. The combination of a context where corporate lobbying is a massive phenomenon, vaccines are produced by private sector corporations, and there is a presidential election where the incumbent president is desperate for votes (and not known for his respect of democratic institutions) creates a context that will require, at least for once, really insulated Independence of the Food and Drug Administration, which, if I am not wrong, is the agency in charge of approving the vaccine. I can easily imagine a nightmare scenario where Trump accelerates the approval of a vaccine in collusion with a corporation to boost his election prospects some weeks before the election.
Friday, July 24, 2020
Sunday, July 19, 2020
Performance enhancing drugs and finances
The recent two chapter ESPN documentary about the rise and fall of cyclist Lance Armstrong (which I watched in a Spanish cable platform) tells both the personal story of the cheater and the psychological character behind him, and the institutional history of the struggle between a clean sport and doping. On the personal side, it shows the two faces of a mostly serial selfish man, who is capable of crying for his son, but at the same time is unable to remember the number of the T-shirt with which the son plays in a football team. Or who treats arrogantly and dismissively most of other riders in the peloton, but at the same time shows empathy and love for his main rival at the time, the (also disgraced) German Jan Ullrich. The conclusion one draws is that Armstrong shows many of the tendencies of normal human beings, and therefore one must not expect much from their individual heroic decisions to fight doping. Therefore, the need for institutions.
On this, the documentary explains how the world cycling federation, UCI, colluded with Armstrong until the last minute to protect him as a heroic cancer survivor who was a great magnet to draw fans from all over the world, and especially the USA. Although Armstrong took illegal substances from very early in his career, it was EPO, administered by the meticulous Italian doctor Michelle Ferrari since 1996 (after a short resistance by Armstrong when according to him EPO started to become widespread in 1993), that probably put him under what he calls high octane doping. Then, by coincidence or not, he had a cancer that was very close to take his life, he survived, and he came back to win seven "Tours de France", the most prestigious cycling race. When he was still recovering, in 1998 the Festina scandal (the police arresting a team of cyclists in the French race) triggered the creation of the World Anti-Doping Agency, which is today the top global authority on illegal drugs in sport. Lance Armstrong became rich and powerful as a result of his victories and his heroic story, and it was not until 2009-2010 that he began to be investigated, not by sports authorities, but by federal judicial authorities in the USA, after several press reports had questioned his practices. Although this initial investigation was closed without conclusions, it was soon re-started by the US anti-doping agency, which finally found Armstrong guilty of doping after many former team mates testified against him.
In European soccer (football) there is not much talk of performance enhancing drugs, but there is talk of performance enhancing finances. The European football federation put in place some years ago the Financial Fair Play (FFP) regulations in collaboration with the European Commission, the European Union executive body. These regulations were meant to alleviate the unbalance produced by a series of huge investments in top teams that came from sources of finance located in sovereign or other funds of autocracies like Qatar, Abu Dhabi or Russia, investing in teams like Paris Sant Germain (PSG), Manchester City or Chelsea. The regulations establish that money invested in soccer should come form soccer revenues. The loophole is that these clubs have apparently found very easy to inflate sponsorship deals with brands that draw from the same funds, to be compliant with the letter of the regulation. That is why this week the Court of Arbitration of Sport (CAS) has ruled that Manchester City had not broken the rules, as previously established by UEFA, and would be able to play next season in the European Champions League again. Some authors like Stefan Szymansky have claimed that these regulations are unnecessary, because what these investments do is to increase the number of teams that credibly compete at the top level, reducing the dominance of traditional clubs like Real Madrid, Bayern Munich, Juventus or Barcelona. It has to be said that there is some hypocrisy about money coming from outside sources, as traditional teams in some cases have benefitted from tax privileges that have allowed them to sign and retain some of the best players in the world, or their countries have used other sources of tax payer money (like public broadcasters) to support their national champions. Is performance enhancing finance a big problem in European soccer? Yes, but it is very difficult to fight. The ethical doubts raised by the origin of the finances of clubs like Manchester City or PSG should probably be directly addressed by conditioning the participation of their clubs in European competitions to high ethical and human rights standards in their owners' other areas of business (namely, ruling their countries). After all, that is probably one of the main strengths of European institutions: their ability to put conditions to participate in European club goods.
What the history of performance enhancing drugs can teach to performace enhancing finances in sport is that fighting them is a long and winding road.
On this, the documentary explains how the world cycling federation, UCI, colluded with Armstrong until the last minute to protect him as a heroic cancer survivor who was a great magnet to draw fans from all over the world, and especially the USA. Although Armstrong took illegal substances from very early in his career, it was EPO, administered by the meticulous Italian doctor Michelle Ferrari since 1996 (after a short resistance by Armstrong when according to him EPO started to become widespread in 1993), that probably put him under what he calls high octane doping. Then, by coincidence or not, he had a cancer that was very close to take his life, he survived, and he came back to win seven "Tours de France", the most prestigious cycling race. When he was still recovering, in 1998 the Festina scandal (the police arresting a team of cyclists in the French race) triggered the creation of the World Anti-Doping Agency, which is today the top global authority on illegal drugs in sport. Lance Armstrong became rich and powerful as a result of his victories and his heroic story, and it was not until 2009-2010 that he began to be investigated, not by sports authorities, but by federal judicial authorities in the USA, after several press reports had questioned his practices. Although this initial investigation was closed without conclusions, it was soon re-started by the US anti-doping agency, which finally found Armstrong guilty of doping after many former team mates testified against him.
In European soccer (football) there is not much talk of performance enhancing drugs, but there is talk of performance enhancing finances. The European football federation put in place some years ago the Financial Fair Play (FFP) regulations in collaboration with the European Commission, the European Union executive body. These regulations were meant to alleviate the unbalance produced by a series of huge investments in top teams that came from sources of finance located in sovereign or other funds of autocracies like Qatar, Abu Dhabi or Russia, investing in teams like Paris Sant Germain (PSG), Manchester City or Chelsea. The regulations establish that money invested in soccer should come form soccer revenues. The loophole is that these clubs have apparently found very easy to inflate sponsorship deals with brands that draw from the same funds, to be compliant with the letter of the regulation. That is why this week the Court of Arbitration of Sport (CAS) has ruled that Manchester City had not broken the rules, as previously established by UEFA, and would be able to play next season in the European Champions League again. Some authors like Stefan Szymansky have claimed that these regulations are unnecessary, because what these investments do is to increase the number of teams that credibly compete at the top level, reducing the dominance of traditional clubs like Real Madrid, Bayern Munich, Juventus or Barcelona. It has to be said that there is some hypocrisy about money coming from outside sources, as traditional teams in some cases have benefitted from tax privileges that have allowed them to sign and retain some of the best players in the world, or their countries have used other sources of tax payer money (like public broadcasters) to support their national champions. Is performance enhancing finance a big problem in European soccer? Yes, but it is very difficult to fight. The ethical doubts raised by the origin of the finances of clubs like Manchester City or PSG should probably be directly addressed by conditioning the participation of their clubs in European competitions to high ethical and human rights standards in their owners' other areas of business (namely, ruling their countries). After all, that is probably one of the main strengths of European institutions: their ability to put conditions to participate in European club goods.
What the history of performance enhancing drugs can teach to performace enhancing finances in sport is that fighting them is a long and winding road.
Sunday, July 12, 2020
Some light on populism
In his last book on "Capital and Ideology," Thomas Piketty dismisses populism as a category that deserves much attention, as according to him, it hides what is essential, which is how dominant sectors in societies build justifications for inequality throughout history. However, by so doing, he neglects the role that populism may play precisely as a tool used (with some risk) by dominant sectors to obfuscate domination and the true sources of injustice.
Some recent articles on the economics and politics of populism throw some light on this complex and evolving issue. At the end of 2019, the Journal of Economic Perspectives published some articles from a Symposium on the topic, including an article by Sebastian Edwards updating his early study of populism in Latin America, and comparing it to modern versions of populism. One of his conclusions was that the more recent populism is more about short-termism in microeconomics rather than in macroeconomics. In that issue, there is also a very interesting article by Yotam Margalit where the author suggests that cultural and economic factors interact in a subtle way in causing populism.
This week I became aware of two more recent articles, which deal extensively with the difficult issue of defining populism itself. Sergei Guriev and Elias Papaioannou, in a long survey of the literature, suggest a minimal definition based on aspects shared by most other definitions, centered on the twin concepts of anti-elitism and anti-pluralism. Anti-elitism in the name of the people would provide the justification to go against checks and balances, and anti-pluralism would be at the root of a homogeneous view of a virtuous "people." The part of the survey devoted to the complementarities between populism and modern social media is especially instructive. Similarly to Edwards, they compare old and new versions of populism, and they conclude that the new versions are less damaging for the economy, although they have a negative impact as well on investment, inflation and other magnitudes. However, the biggest damage caused by populism is not on the economy, but on social and political institutions, both formal and informal ones, as populism erodes the basic institutions of democracy, as well as trust and other social norms. In another article, just published in Comparative Political Studies, Meijers and Zaslove provide what is in my view the best summary of the empirical challenges of measuring populism taking into account all the dimensions of the phenomenon. To do that, they use the opinions of experts on a number of separate dimensions of populism (not their opinion on "populism" as such), and they provide measures and correlates of populism for 250 parties in 28 European countries.
Interestingly for phenomena I know (and suffer) well, these 250 parties include the two parties that lead the pro-independence movement in Catalonia (from the regional government), PdeCAT and ERC. The two parties score on populism far above the Basque Nationalist Party and at a similar level as other parties at the national level in European countries that are well recognized internationally as clearly populist. At the beginning of the surge of the pro-independence movement in Catalonia in 2012, one of the arguments given by some academics close to this movement, was that independence would be used to build new and high-quality institutions that would replace the, according to them, weak Spanish institutions. However, today Spain scores very high in most dimensions of the quality of democratic institutions, and the pro-independence parties have eroded the self-government institutions and questioned the rule of law. Like it happens with other populisms in developed countries according to Guriev and Papaioannou, it has been the judiciary and other powers of government in our multi-level democracy that have prevented populism from causing more damage.
Some recent articles on the economics and politics of populism throw some light on this complex and evolving issue. At the end of 2019, the Journal of Economic Perspectives published some articles from a Symposium on the topic, including an article by Sebastian Edwards updating his early study of populism in Latin America, and comparing it to modern versions of populism. One of his conclusions was that the more recent populism is more about short-termism in microeconomics rather than in macroeconomics. In that issue, there is also a very interesting article by Yotam Margalit where the author suggests that cultural and economic factors interact in a subtle way in causing populism.
This week I became aware of two more recent articles, which deal extensively with the difficult issue of defining populism itself. Sergei Guriev and Elias Papaioannou, in a long survey of the literature, suggest a minimal definition based on aspects shared by most other definitions, centered on the twin concepts of anti-elitism and anti-pluralism. Anti-elitism in the name of the people would provide the justification to go against checks and balances, and anti-pluralism would be at the root of a homogeneous view of a virtuous "people." The part of the survey devoted to the complementarities between populism and modern social media is especially instructive. Similarly to Edwards, they compare old and new versions of populism, and they conclude that the new versions are less damaging for the economy, although they have a negative impact as well on investment, inflation and other magnitudes. However, the biggest damage caused by populism is not on the economy, but on social and political institutions, both formal and informal ones, as populism erodes the basic institutions of democracy, as well as trust and other social norms. In another article, just published in Comparative Political Studies, Meijers and Zaslove provide what is in my view the best summary of the empirical challenges of measuring populism taking into account all the dimensions of the phenomenon. To do that, they use the opinions of experts on a number of separate dimensions of populism (not their opinion on "populism" as such), and they provide measures and correlates of populism for 250 parties in 28 European countries.
Interestingly for phenomena I know (and suffer) well, these 250 parties include the two parties that lead the pro-independence movement in Catalonia (from the regional government), PdeCAT and ERC. The two parties score on populism far above the Basque Nationalist Party and at a similar level as other parties at the national level in European countries that are well recognized internationally as clearly populist. At the beginning of the surge of the pro-independence movement in Catalonia in 2012, one of the arguments given by some academics close to this movement, was that independence would be used to build new and high-quality institutions that would replace the, according to them, weak Spanish institutions. However, today Spain scores very high in most dimensions of the quality of democratic institutions, and the pro-independence parties have eroded the self-government institutions and questioned the rule of law. Like it happens with other populisms in developed countries according to Guriev and Papaioannou, it has been the judiciary and other powers of government in our multi-level democracy that have prevented populism from causing more damage.
Sunday, July 5, 2020
Protected enclaves are not going to change the world
In the last book published by Esther Duflo and Abhijit Banerjee, recent Economics Nobel laureates, entitled "Good Economics for Hard Times," they implicitly respond to some critics of their previous work. These critics had argued that it would be difficult to change the world "one experiment at a time," suggesting that their micro approach based on Randomized Control Trials could only address small scale problems, in which external validity was at least problematic. In their new book, they cannot be blamed for not thinking big, because they address most of the current big problems of humanity, such as inequalities, trade policies, migrations, climate change or automatization. To do that, for each of these topics, they survey the academic literature (not only experiments) and provide their own view. Although the arguments for every topic have lots of subtleties, the main message is that market mechanisms are not reliable to solve most of these problems, mainly because they work much less smoothly than assumed by traditional economic theory. Then societies should rely on government solutions that focus on those policies that are known to provide good solutions, and not on those about which we know little. One example they give is that we should be less obsessed about economic growth. Obsession with growth was at the root of "supply" policies that have caused a lot on inequality since the 1980s in countries such as the USA and the UK. As a result of these policies, such as lower taxation, these countries have not found the growth panacea, but they are today more unequal than in the past, and more unequal than countries that have been more reluctant to embrace the same policies.
As another example of policies targeting growth about which they are skeptical, they mention the ZEDEs policy promoted by economist Paul Romer (another Nobel laureate). ZEDEs are zones for employment and economic development, which Romer not only promoted in his academic work, but also as a consultant. These zones would be reserved for "charter cities," giant "protected enclaves" that live by what Duflo and Banerjee call Romerian rules within nations that do not. Although Honduras has so far been the only country to buy the idea, Romer wants hundreds of these charter cities around the world, each of them hosting eventually one million people. This is based on the idea that big virtuous cities generate positive externalities, and these create innovation, social capital and growth. The authors explain that, though it claimed inspiration from Romer's ideas, the Honduran vision seemed closer to the banana enclaves of the past: "They deviated form the get-go when they decided not to use the oversight of a third-party government," which was a key ingredient of Romer's project. Duflo and Banerjee conclude that this story "suggests charter cities are unlikely to hold the key to sustained growth in developing countries for the very good reason that the internal political compulsions the charter is intended to hold at bay often have a way of biting back." The idea that somehow one can escape a problematic world by building gated communities, insulated agencies or small virtuous independent countries illustrates the misleading dream that one can fix the world by injecting into it perfect laboratories.
As another example of policies targeting growth about which they are skeptical, they mention the ZEDEs policy promoted by economist Paul Romer (another Nobel laureate). ZEDEs are zones for employment and economic development, which Romer not only promoted in his academic work, but also as a consultant. These zones would be reserved for "charter cities," giant "protected enclaves" that live by what Duflo and Banerjee call Romerian rules within nations that do not. Although Honduras has so far been the only country to buy the idea, Romer wants hundreds of these charter cities around the world, each of them hosting eventually one million people. This is based on the idea that big virtuous cities generate positive externalities, and these create innovation, social capital and growth. The authors explain that, though it claimed inspiration from Romer's ideas, the Honduran vision seemed closer to the banana enclaves of the past: "They deviated form the get-go when they decided not to use the oversight of a third-party government," which was a key ingredient of Romer's project. Duflo and Banerjee conclude that this story "suggests charter cities are unlikely to hold the key to sustained growth in developing countries for the very good reason that the internal political compulsions the charter is intended to hold at bay often have a way of biting back." The idea that somehow one can escape a problematic world by building gated communities, insulated agencies or small virtuous independent countries illustrates the misleading dream that one can fix the world by injecting into it perfect laboratories.
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