Beyond market failures

Mariana Mazzucato gives the BBC as an example of an expanded role for the public sector, beyond the correction of market failues and the correction of inequalities, which are the conventional justifications for government intervention in welfare economics (the branch of public economics that establishes the conditions under which markets can be efficient and equitable).

Certainly, the BBC is an admirable institution, and it is difficult to think of it not only without the coercion needed to enforce the payment of its license fee, but also without the public sector ethos that characterizes it. Perhaps one could think of some community organization that replicates a similar effort, but I don’t know of any TV organization that is not in the public sector that has a similar level of quality.

However, it is not automatic that any public TV organization will be like the BBC. In Spain, both at the national level and especially at the regional level (and especially in Catalonia), we have created in some cases propaganda machines that are the opposite of the BBC.

In the era of the Internet and social networks, one hopes that some institution or a set of institutions with the spirit of the BBC can set the standards for good reporting, information and opinion. I am afraid that regulation is not enough: direct intervention is needed, although subject to a lot of trial and error… until BBCs emerge in many parts of the world, or a global BBC in the times of technological platforms and social media.

The direct creation of organizations and institutions is not the only role of government beyond the correction of market failures and the redistribution of initial endowments. A lot of research in economics and other social sciences in the last 10 to 20 years suggests that narratives are very important to activate the support of public opinions to projects like fighting climate change or correcting inequalities. Government institutions can play a big role in the transmission of such positive narratives, through public sector media, through good politicians setting examples, or through the public education system. 

But like public sector TV, government narratives can also be used to promote hate and division. Without understanding the role of governments as story tellers, it is difficult to understand the nation state as an institution that not only provided some public goods (like armies or the military service), but also as an institution that obtained the consent of most of its citizens, and the legitimacy to support large markets and communities as units of solidarity. The challenge now is to expand these communities of solidarity beyond the national level. 

Public economics evolving

I started this week a three-month course on Public Economics. The course is taught in English, and I use mostly the textbooks by Jonathan Gruber and Hindriks & Myles. The first is more empirically and policy oriented (although too much centered on the US for my purposes), and the second is more theoretical, with relatively updated materials on the measurement of inequality, behavioral economics and political economy.

I’ve used the Rosen and Gayer and the Stiglitz textbooks, and I keep them as reference for specific topics. But all of them show the inertias of textbooks, and the difficulties they have in incorporating ideas and results that are now broadly accepted in the research community and even in the public debate.

There is paradoxically a tradition in Public Finance or Public Economics of portraying a skeptical and even cynical view of the public sector. It is a world of (Niskanen’s) bureaucrats, tragedies (of the commons) and (Arrow’s) impossibilities, which combined imply that we are relatively hopeless when it comes to trying to solve humanities’ problems.

Two relatively old-fashioned ideas are still promoted from the introductory chapters of these textbooks, even in books written by relatively progressive and innovative authors such as Gruber and Myles. One is the supposed existence of an inescapable trade-off between efficiency and equity, and the other is the idea that “most” of the time markets are efficient and market failures are exceptions to the rule.

The “Leaky bucket” that was necessary to transfer resources according to Arthur Okun is only a valid metaphor once a frontier has been achieved where all the simultaneous gains in efficiency and equity have been achieved. I asked my students to come up with examples where it is possible to improve both in efficiency and equity and they easily suggested policies like helping immigrants, reducing unemployment, promoting public education, and promoting women’s participation in the labor market. Once all these and many similar policies have been successfully enacted, only then, perhaps to improve on equity has a cost in terms of efficiency. Of course, it is also easy to come up with examples of stupid policies that are sold to reduce inequality but that bakfire (sometimes in terms of equity as well). But at a macro level, if we imperfectly equate efficiency with income per capita, there is empirically no correlation between this measure and measures of inequality such as the Gini coefficient. Equally developed countries with high sandards of living on average have different levels of inequality.

The notion that markets in general are efficient is today quite conventionally replaced by the view that the conditions for markets to be efficient are very demanding and quite unusual. Of course this does not translate into the notion that fixing widespread market failures is easy, as we know by the current experience of trying to fix pandemics, climate change and inequalities. And not only it is quite generally accepted that governments (and other institutions and mechanisms beyond markets) can help alleviate conventional market failures, but by expanding the notion of market failures, they can also help give a socially desirable direction to technological change or globalization. Some of the spirit of the materials of the CORE Project (or the forthcoming micro book by Bowles and Halliday) should permeate the public economics textbooks.

The Catalan populist lab is running out of ideas

Catalonia will live on Sunday another regional election, where the pro-independence parties will fight to keep under control what has in practice become their propaganda machine, an Autonomous government with a budget of more than 40 billion euros, which includes a public TV station with 2300 employees.

The pro-independence movement is now more divided than ever, with at least 5 parties competing among themselves. In the electoral campaign, their only agreement has been to sign a handwritten document whereby each of them commits not to enter in a coalition government with the Catalan Socialist Party, an ally of the Spanish Socialist Party governing in Madrid, and the franchise of the European socialdemocracy in the region.

Five and a half years after the pro-independence parties established an 18 months roadmap to independence, and almost 10 years after they started the “process,” Catalonia remains in Spain, Spain is very high in the rankings of full democracies, and it remains a member of the European Union, the Eurozone and the Schengen space.

When it all started, in the years of the global financial crisis that hit heavily the European periphery, the European project was in crisis, and the Spanish government was in the hands of the conservative Popular Party. Things are now very different. Only the solidarity with some former members of government that were sent to jail for their illegal declaration of Independence in 2017 keeps the movement mobilized. These politicians enjoy a very generous penintentiary regime, and are in fact actively participating in the electoral campaign. The Spanish government is in the process of considering their pardon.

Some details are difficult to follow when one is not familar with local events, but what has been happening in Catalonia is in my view of interest for scholars of populism and nationalpopulism.

It has many of the characteristics of any populist movement, as defined for example by experts Hans- Werner Müller and Federico Finchelstein: erosion of democratic institutions, a rhetoric that emphasizes grievances, xenophobic tones (in this case, against Catalan citizens with origin in other Spanish regions), and a convenient definition of what is the “people” and who is a genuine member of it.

It is also an example of a plutocratic populist movement, with a supply side contributed by a risk-loving upper class and a demand side of middle and upper middle clases, whose economic and cultural anxieties are exploited. Many of the upper class individuals who initially supported the movement or viewed it with sympathy, now try to distance themselves from it, especially after thousands of firms moved their headquarters in 2017 after the legal uncertainty created by the illegal declaration of Independence.

The economic cost of the “process” goes hand in hand with the social cost of divisions and the decline of the respect for institutions.

A left-wing rhetoric by some pro-independence leaders is combined with an almost absence of voters from the lower-middle and working clases, for the main reasons that these social sectors have their origin in other Spanish regions, and do not have Catalan as their first language. This is very well explained in an article by Oller, Satorra and Tobeña published in Nature.

Catalonia combines being a peripheric region in Europe (which makes it fertile ground for a populist left), and a rich region in Spain (which makes it fertile ground for a populist right).

Xenophoby and supremacism, openly or by innuendo, have spread under the justification of what is a combination of a fiscal revolt of a relatively rich region (as explained by Piketty in his last book), and an ethnolinguistic conflict that so far has been basically non-violent, but which has shown many cases of intimidation and intolerance.

The mobilization of identity to break up re-distributive coalitions has been for long a strategy chosen by olygarchies especially in times of crises. 

How to defeat nationalpopulisms like this one is not easy, but must combine some of the recipes of German scholar Müller (dialogue within the law, support for institutions  and especially representative democracy and separation of powers) and the Canadian politician Dion (doing all that, and confronting populist leaders with arguments, and also with with grace).

Mostly without knowing it, but by trial and error, this is what the Catalan Socialist party, the main rival of the pro-independence coalition, is doing in this election.

Denouncing the supply side hipocrisy should not be incompatible with addressing demand issues, that is, some of the economic and cultural grievances. There are also lessons here from Biden and the Democratic Party in the US: organize, campaign, develop infrastructure, and promote an ethic of commitment and civic engagement with democracy and fraternity among the youth, intellectuals, academics and civil society leaders. All this has to be done, because the Catalan national-populist lab has run out of ideas, and the experience has been very costly for society.

Central Bankers as politicians of last resort

Central Banks are usually the lenders of last resort. In good monetary and financial systems, these institutions ultimately guarantee that you will get money when you go to an ATM machine, or that the transfers you do through an automatic system will have any value. 

In Italy, central bankers are not only lenders of last resort, but also politicians of last resort. Mario Draghi will be the fourth central banker to be in a top political position after president of the Republic Luigi Einaudi in the 1940’s and prime ministers (“presidenti del consiglio”)  Carlo Azeglio Ciampi and Lamberto Dini in the 1990s. Einaudi and Ciampi had been previously governors of the Bank if Italy, and Lamberto Dini had been both an executive at the International Monetary Fund and the Bank of Italy before being prime minister. To this list of technocrats, Mario Monti is usually added to them, as he was considered an academic financial expert with no partisan political experience before being European commissioner and later prime minister at the beginning of the twenty first century.

Although Italy is unusual in this respect, this phenomenon has the advantage of removing the aura of ideological impartiality from the figure of the central banker. Ciampi, Dini and now Draghi had or will have to make political decisions, will have to take sides and deal with distributional issues. If they have been chosen, it is because someone of relevance has thought that they have political and ideological skills to contribute to this.

According to the article published yesterday in The Economist, Italy has had 12 prime ministers since 1993.  In the same period, there had been five in Spain. But Spain does not have the pool of political credibility of a great technocratic class, and the head of state (a monarch) lacks the legitimacy to intervene in politics of the Italian President of the Republic, who is the one to propose the technocrat.

The tradition of governors of the Bank of Italy entering politics goes back to Luigi Einaudi, the second president of the Italian Republic after the second world war. Einaudi, a liberal, was a great defender of the idea of European federalism. In that, he has been followed by Monti and Draghi as representatives of an Italian pro-European technocracy. Needless to say, this has the danger of associating the idea of Europe to an aristocracy far removed from the feelings of ordinary people, but it gives Italy a last chance option when everything else fails, and an option that respects democratic procedures and Parlamentarian institutions. In Spain, we do not have this option, so only partisan politics can save us.

Somehow oddly, The Economist adds Giuseppe Conte to the list of outsiders, a lawyer with no previous political experience that was chosen first by the Lega and the Five Star Movement (5SM), and later by 5SM and the Democratic Party . With him, the average duration of a technocrat as prime minister since the 1990s has been little more than one year.

Mario Draghi has the chance to improve upon this average. In a way, he is the best of the lot. He is the more political of all of them, and he comes not only with experience from the Bank of Italy, but with the experience of having been the Chairman of the European Central Bank, where with his “whatever it takes” statement is reputed with having saved the euro from collapsing as a currency. He does not lack an ideology. As a matter of fact, in an interview with Die Zeit some years ago, he said “My convictions were along what you would call today ideas of liberal socialism, not really suited for extremist groups.”

In other countries, the controversy is whether Central Banks are or should be independent from politics. In Italy, the controversy is whether politics is independent from central banking.

Pro-European technocrats are natural allies of the European federalist centre-left in times of crisis. Mario Monti was proposed by President Giorgio Napolitano and Draghi has been proposed by President Sergio Mattarella, under the applause of the center left influential newspaper La Repubblica and its prestigious founder, Eugenio Scalfari.

There is some parallel with events in the USA. Biden and Draghi are two old men that have been called to leave national-populism behind. Of course, in two very different ways, because the political systems and traditions are very different. Biden has won a presidential election, and Draghi will be voted by Parliament proposed by the President of the Republic (himself elected by Parliament), and after an intermediate period of coalition government between 5SM and the Democratic Party that left Salvini (one side of the populist equation)  out of government.  But in a way, they simbolize the end of playground time. It should be good for Europe and for global multilaterlism.