Saturday, November 14, 2020

A time-consistent left and a progressive time-consistency

I have spent a good deal of my research and teaching time talking about the Commitment or time-inconsistency Problem in Economics, and I still do it. This is the problem that monetary policy or regulation face in a democracy: there is the temptation of a short run popular policy, to the detriment of long run benefits (for everybody) in terms of lower inflation or higher investment. In a way, it is the collective version of the self-control problem in behavioral economics.

In a democracy, the collective temptation comes from pressures from the majority to redistribute resources in the short run, in many cases. The problem is there and will always be there. Populism can be interpreted as an attempt to give simple answers to this complex problem, or to behave as if it didn't exist. The challenge is to find forms of redistribution that are sustainable over time, taking into account political, economic and environmental constraints. Not easy.

When this problem is explained, some see in it the hidden agenda of trying to give certainty to big corporations and wealthy investors, to protect them from hungry mobs. But this would be misguided. Vulnerable people also need certainty. When scholars stop showing admiration for Trump and exaggerating the support he has among the poor, perhaps they will see the millions of individuals and families that have feared for their futures in panic of a second Trump administration. In other examples of national-populism, it was easy to perceive in Catalonia, in 2017 around the failed secession attempt, the fear of vulnerable people, mostly with origin in other lands, who where scared of losing citizenship, rights and future opportunities.

Populism has dangers. Covid-19 has shown them. Populist rulers have done very badly in managing the pandemic. But beyond it, and although at the macro level perhaps they have improved, there is typically a large cost to try to forget about constraints and burdensome institutions.

Happily in Europe, socialdemocrats and even Greens do not score high on populism. That is ground for hope, because the Ecologic and Digital transitions that leave no-one behind require investments today, meaning freeing resources from the present to devote them to the future. We must find ways to redistribute minimizing long run costs, and promote long run benefits without punishing today even more those that have been punished enough. A time consistent left, or progressive time-consistent policies and institutions, must be a fundamental part of efficient redistribution mechanisms.

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