The Economist against Bidenomics

The magazine The Economist was founded in 1843 to defend free trade and a limited government. Since then, free trade has globally expanded (and contracted several times) and the size of government has expanded almost continuously, together with life expectancy, education but also the destructive power of wars. Today, public expenditure is more than 50% of GDP in some of the richest and more advanced countries of the world. In the future, if societies want to improve their welfare, it will most probably come from a combination of free trade and good (and large) governments.

In a special report and an editorial this week, The Economist calls “Homeland Economics” the protectionist turn in the economic policies of the US, the EU and other jurisdictions, including Japan and India.

The usual arguments against protectionism (free trade promotes efficiency) are combined with an attack on new industrial policies targeted to strengthen value chains. The Covid-19 pandemic and the war in Ukraine have triggered an increase in the resources spent on public intervention in specific industries. At the same time, governments like the Biden administration (with Bidenomics) have taken advantage of the enhanced tolerance with government activism to introduce subsidies that accelerate the Green transition.

In what The Economist calls the era of neoliberal globalization (the decades between the fall of the Berlin Wall and the global financial crisis, where poverty and global inequality decreased), government intervention was not absent. At the same time, inequality in specific countries increased or was scarcely reduced from very high levels (as in Latin America), and climate change reached scaring dimensions. It is hard to see how to achieve better living standards (equitable and sustainable growth everywhere) without a balanced combination of markets and governments.

New Industrial Policies, according to The Economist’s special report (which sounds the alarm about introducing geopolitical objectives in economic policies, as if the two had been disconnected in history), will in fact increase inequality, because it is no longer clear that with new technologies manufacturing jobs (the traditional objective of “industrial” policies) are low-skilled any more. At the same time, less trade will mean more global inequality because the improvement of living standards in emerging economies will stop.

The environmental critique of the new interventionism is more moderate. The magazine’s special report accepts that New Industrial Policy can be a second best instrument to address climate change, because voters will better accept sacrifices from these imperfect policies if they create new jobs.

The Economist will not stop Bidenomics and similar policies and governments will remain as necessary as ever if not more. Some cautions are in order, though. Some protectionist policies have a high cost in terms of budgets and loss of productivity. And shocks are often better absorbed by markets than by planning.

That is why new forms of intervention should probably focus on: global infrastructure and development; limiting the power of global multinationals; accelerating the fight against the climate emergency; productivity and job quality. That will not mean more markets and less government, but better institutions including both.

Good Jobs

Traditional economics has a preference for redistributive rather than predistributive policies. However, some pathologies of our economic system can only be tackled when they originate. This is the case of bad jobs.

The quality of employment (Rodrik's "good jobs") is given by a series of material and immaterial characteristics. With respect to the material ones, the first is without a doubt real wages high enough to more than satisfy in a lasting way (with stability) people's vital needs (so that a large majority of working people feel part of the "middle class" and fully integrated into society). And the second is quantifiable or objectively decent working conditions, such as working hours and the structure of the working schedule, the possibilities of promotion (within the same organization or in other organizations) or the possibility of combining the professional career with other vital activities. Among the immaterial characteristics, we can consider the degree of creativity of the tasks to be developed, the formal or informal representation in decision-making about the tasks to be carried out or in the governance of the company, the quality of personal relationships in the company organization and in daily work (including the relationship with customers and suppliers) and in general the degree of "disutility" (anxiety, exhaustion, "stress", "burnout") of the effort in the workplace or to what extent the workplace contributes to personal self-fulfillment and satisfaction, including training and learning opportunities. 

Good jobs are workplaces where there is no abuse of power or exploitation of vulnerable situations, or verbal or sexual abuse, where trust and cooperation are valued, and where power is distributed and decisions are made fairly and transparently, with autonomy and participation of working people. Included in this section would be those issues that have to do with whether new technologies are used to replace or control work, on the one hand, or if they are used to improve work experience and work productivity, on the other, along the lines of Acemoglu and Johnson in their recent book "Power and Progress".

This is not something that can be addressed with taxes and transfers. It requires “relational” policies that operate in concert with strong and functional worker unions, without stifling the innovation incentives and flexibility of organizations.

What to say to first year students on the first day?

There is only one opportunity for the first time. In my first (and perhaps a little bit of the second) class on Introductory Economics of the degree on History, Politics and Economics, I have the privilege of almost full attention by almost all of my students (after the first class, attention and attendance tend to gradually diminish).

Applying my experience as student and teacher, it is important to start before the first class, perhaps sending a message, or going to the reception meeting, or asking a colleague for 5 minutes of her class if hers is some days before mine, and telling them to do something before the first class, such as reading some brief article or having a look at the textbook (in our case, a free e-book, The Economy).

In the first class, I try to give a taste of the contents, by summarizing the ingredients of the full course but also by showing some graph with data about an important topic (such as global inequality as in Unit 1 of The Economy).

I tell students that teaching or learning is a cooperative task, as most things are in human life. I introduce the concept of “Externalities” by telling them that asking questions in class generates positive externalities, and looking at the smartphone or talking to the neighbour generates negative externalities.

I don’t shy from giving them advice that is rooted in what you need to be a good student (I think they appreciate this, although I’m not sure that anyone has given me this advice explicitly): 

-Be modest and ambitious at the same time: be aware of the constraints, but try to satisfy your preferences, especially when these can be enjoyed with others and not against others.

-Develop critical thinking, especially with yourself and your tribe, without falling into paralysis or nihilism.

-Ask questions, seek help, never miss an opportunity to learn or have fun.

The first days are a good opportunity to understand what do the students care about: CORE’s Word cloud is a good tool. I show them the Word cloud from the previous 2 years, reflecting that Covid and Inflation have been sudden presences, but that Inequality and Climate change look more permanent.

On methodology, I try to convince them of the complementarity between theoretical models and empirical evidence, and about the usefulness of using good definitions, although these are more ambiguous in social sciences than in natural sciences. This I can illustrate with the definitions of economics and capitalism in Unit 1 of The Economy

Economics is not about shopping, but about understanding the world (on this, The Economy is superior to traditional textbooks) and changing the world, as Wendy Carlin once said. I will not teach them how to be rich, but how is wealth distributed. Although institutions give me disproportionate power in the classroom, courses are always a process of collective learning. I tell them “I also learn from you and you can and should learn from each other (if you talk to each other)”.

Finally, I emphasize the importance of the multidisciplinary nature of their degree in History, Politics and Economics. This gives them a great opportunity to be more realistic, because things are not separated in the real world, as they are in academic disciplines. But there are risks to be avoided. For example, multidisciplinarity should not be superficiality, but selective depth on some of the key issues of the subdisciplines. And the opportunity must be seized to develop a truly multidisciplinar perspective on some topics. This is what will give them an advantage relative to those that only get the deep perspective of one of the subdisciplines.

Good jobs and Bidenomics

Recent talk about “Bidenomics” suggests that there are new developments in economic ideas, even beyond the fate of US politics. These new ideas are the result of the re-evaluation of the role of governments, markets and firms after the global financial crisis, Covid-19 and the war in Ukraine.

The new ideas (sometimes a new insistence on old but useful ones) include pro-labor and not anti-labor use of technology, participation of workers in governance, decentralized organizations, new antitrust policy, public investment and subsidies in climate friendly technologies that complement private investment, and others.

Some have talked of a return of old-fashioned industrial policy, but economist Dani Rodrik recent paper “On productivism” shows that ideas about the promotion of “good jobs” go clearly beyond that. 

Rodrik analyzes how the replacement of the neoliberal paradigm in economic thought with a new one, which he calls "productivism," should occur. These "paradigms" have the advantage that they allow ideas and actions to be oriented, but they have the disadvantage that they can cause excess rigidity and lack of adaptation of the recipes to local circumstances. 

In any case, the author considers that the void left after the decline of neoliberalism (which in turn replaced Keynesianism) will be filled by new paradigms, both whether you want or not, and that is why it is necessary to participate in the debate about what strong ideas should be tried to be introduced. To do this, he proposes the concept of "productivism." as a flexible paradigm that must be adapted to local circumstances. This proposal differs from neoliberalism in that it gives an important role to the state (and civil society) in achieving economic opportunities for all territories and all segments of the workforce, acting directly on the supply side to combat some of the scourges of today's world, such as inequality or climate change.

Productivism would consist of prioritizing interventions in the production phase in the companies, in close cooperation with them, aimed at creating "good jobs". If until now public intervention to improve the well-being of the population had prioritized redistributive policies (taxes and the welfare state), accepting the jobs created by the market, now it would be a matter of intervening directly so that quality jobs are created. Companies should "internalize" the impact of their decisions on the well-being of the entire population, without assuming that increases in productivity will be automatically distributed throughout the economic system as a whole.

Rodrik understands good jobs as those that provide reasonably high salaries as a safe path to the middle class and a good standard of living (to avoid “economic dualism”), job stability and promotion possibilities, generating positive externalities with local communities. Promotion policies of good jobs would be developed through coordination between business and the public sector to generate economic opportunities throughout the territory.

These quality jobs should not be restricted to large companies, but should be a priority especially for small and medium-sized ones. Productivism would focus on actions with a medium impact on productivity, to avoid the «emptying» of the intermediate parts of the labor force, which would be complementary to other existing interventions, such as investments in education and training or tax incentives to the companies.

The author points out that the policies he proposes are in line with the proposals by MIT economist Daron Acemoglu (recently collected in the book published with political scientist Simon Johnson, Power and Progress), in the sense of promoting technologies that "increase" rather than "decrease" work. There is a risk that new technologies, such as artificial intelligence, greatly increase the creation of wealth, but that this is compatible with the impoverishment of workers, as has happened with other technological changes in history when they have not gone accompanied by institutional changes that promote the general interest and redistribution.

This paradigm shift should be accompanied by an improvement and adaptation of the capacities of the public sector, to guide labor, regional and industrial policies (which should be more based on the services of small and medium-sized companies than in the manufactures of the great «national champions») in the direction of much greater coordination with the productive structures. The internalization of externalities by companies would be part of the system of governance, and not simply a form of corporate social responsibility, and the boundary between growth policies and social policies would be diluted. 

It is clearly too soon to evaluate the real impact of these ideas, but we must pay attention, because they are being very influential in the largest economy.

From zero sum mentality to negative sum reality

Not everything is a penalty kick –the quientessential zero sum interaction, where there is pure conflict, and no common interest among the players. In fact, most social interactions are not zero but positive sum: they combine conflict and common interest (think of a firm or a family).

A problem arises when what is a positive sum game is perceived by the main players as a zero sum game, and opportunities for mutual gain are not realized. Economist Maitreesh Ghatak from the London School of Economics uses a bus analogy: when a bus is crowded and the riders are ethnically heterogenous, instead of blaming the lack of budget for more buses, some may be tempted to blame the excess of riders from “the other” ethnicities. 

According to Ghatak and his co-author Vedier, “Economic hardship or rising inequality or slowdown of economic growth alone can create political discontent. When any two of these three aspects of economic malaise coincide, discontent turns to despair, but there is still a vent through which some steam goes of. For example, economic hardship and rising inequality may still seem tolerable if there is some prospect of economic growth, the benefts of which are expected to trickle down in the form of a higher standard of living in the future. But when long-term income stagnation for most of the population and decline for some go together with high rates of income growth at the very top, you have zero sum economics –when your loss is someone else’s gain. Zero sum economics turns despair into rage against the establishment and whips up a perfect political storm,” which is what Trump’s electoral victory in 2016 really was. 

“When long-term income stagnation for most of the population and decline for some go together with high rates of income growth at the very top, one has zero-sum economics and that naturally raises the possibility of using various kinds of social identities to claim a bigger share of a fxed sized pie.” They show that in ethnically or racially polarized societies this naturally leads to the salience of social identities that enable majority ethnic groups to vote for policies that exclude minority groups so that they get a greater share of a dwindling surplus.

Brexit and Trump, seven years later, have proven politically and economically disastrous, but they are not totally defeated. What comes after rage? Why don’t we see more disappointment with these proposals? A combination of economic and cultural issues keeps complicating the analysis. Biden is clearly better economically (see Freedland and Krugman) and, yet, Trump can win again. A majority of Brits regret Brexit, but no political party wants to reverse the decision.

The Brexit Project also convinced voters that they were in a zero sum game with the EU. Now citizens realize that there was also common interest with Europe and they are immrsed in a negative sum post-Brexit reality.

Journalist Peter Foster in “What went wrong about Brexit and what we can do about it” (the last book to give details about the disaster that Brexit has been, see a review here), writes this: “Understandably, Brexit played on the insecurities of communities that felt they were losing their sense of agency in face of global forces: big tech and social media; flat wages and unaffordable houses; low growth and rising job insecurity; immigration and outsourcing. Those issues have roiled all industrialised democracies in different ways, with differing results. But the original sin of Brexit was to promise that leaving the EU would make the UK better able to meet those challenges. It didn’t, it won’t –and it was never going to. Those who made those rush promises should have known better. Most of them surely did.”

The UK has decided to come back to the HORIZON European research program. As a pro-European anglophile, this makes me happy. My prediction is that they will come back to everything (including the single market at some point), but they will hardly be accepted again at the decision-making table. They will become rule-takers, (some) reluctantly accepting that the interaction with the EU is a positive sum one. So much for sovereignty.

What's wrong with football officials?

The current scandal about the sexually abusive behavior of the president of the Spanish football (soccer) federation (and member of UEFA’s executive committee), Luis Rubiales, is just the last of a series of scandals of this official in particular, and of other football executives elected by the structure of professional soccer.

In 2018, Rubiales replaced Angel M. Villar, who had gone to prison under corruption charges. That was just a few years after Gianni Infantino had replaced Sepp Blatter in front of FIFA, soon after the FBI had brought charges of corruption and organized crime against several members of the FIFA executive committee.

Infantino committed to reform FIFA, and appointed a team led by legal scholar Miguel Poiares Maduro to work on proposals to change the governance of football. After some time doing his work, Poiares resigned. He has explained his experience here and here. He concluded that football is impossible to reform from inside.

Rubiales’ behavior is unfortunately not uncommon in Spain (or other strong soccer communities). It is just that now it is incompatible with supporting the values represented by the very successful women’s national team, and the contradiction is unbearable. 

The journalist Simon Kuper’s book “Barça. The rise and fall of the club that built modern football” explains (p. 370) about Joan Laporta, the president of FC Barcelona (the team that had 11 players in the final of the World Cup, 9 in Spain, and 2 in England): “There was trouble on election day after he (Laporta) told a young woman with whom he’d pose for a photo: ‘Call me when you’re eighteen’. The only female member of his campaign slate was sent out to explain that he’d meant he’d be signing the girl to a Sports contract”. In the next few pages, the author expands on the Laporta style, including his inclination to appoint relatives and friends and get rid of professionals in executive positions.

Poiares has also explained that women are discriminated in their access to positions of responsibility in the structure of football. The Assembly of the Spanish Federation that Rubiales has called to organize his defense, only includes a symbolic presence of women.

Corruption, sexism, arrogance, lack of transparency, are well-known characteristics of the governance of football, even more than in other Sports, because of the immense power of their governing bodies, itself the result of the global success of the sport. Transparency International has this thread on the structural features that facilitate "sextortion" in sport. FIFA is a global unregulated monopoly. Only the power of public opinion (like with stopping the European Super-League) and perhaps the action of large democratic jurisdictions (like the US or the EU) can constrain them. But success is even then only temporary. For example, the US Attorney General that led the case against FIFA in 2015 works now for a law firm hired by FIFA and has spoken recently favourably of the efforts of the institution to reform.

There are clearly serious governance issues behind a democratic façade. Those who elect the executives depend on the favours of the elected. This unaccountable power can only be stopped by popular pressure, affecting the decisions of sponsors and large democratic jurisdictions.

In previous scandals, Rubiales first line of defense was that attacking him endangered the award of the 2030 World Cup to Spain (with Portugal and Morocco). Independently of whether this World Cup is necessary for Spain, now Rubiales’ resistance to resign is the main reputational obstacle to organize the event. But if Rubiales resigns, the same governance structure and culture that put him in command (and Blatter, Infantino, Laporta) will remain in place.

I have written more about these topics in my book (in Spanish) "Pan y Fútbol" and briefly in my Introduction to IEB's Report on soccer and economics (in English, Spanish and Catalan).

Wilson's mistake

After the first World War, US President Woodrow Wilson promoted a number of steps (the “fourteen points”) to facilitate a durable peace. One of them was interpreted as the so-called right of the peoples to self-determination.

The Fourteen Points were a proposal made by the President in a speech before Congress on January 8, 1918, outlining his vision for ending World War I in a way that would prevent such a conflagration from occurring again (in that sense at least, he failed, as it did occur again). They also were intended to keep Russia fighting on the Allied side, to boost Allied morale, and to undermine the Central Powers.

During World War I, U.S. President Woodrow Wilson promoted the concept of "self-determination," meaning that a nation—a group of people with similar political ambitions—can seek to create its own independent government or state. The idea is also alluded to in the fifth of his Fourteen Points, although the words "self-determination" are never explicitly used.

Point fifth says: “A free, open-minded, and absolutely impartial adjustment of all colonial claims, based upon a strict observance of the principle that in determining all such questions of sovereignty the interests of the populations concerned must have equal weight with the equitable claims of the government whose title is to be determined.”

The principle does not state how the decision is to be made, nor what the outcome should be, whether it be independence, federation, protection, some form of autonomy or full assimilation. Neither does it state what the delimitation between peoples should be—nor what constitutes a people. There are conflicting definitions and legal criteria for determining which groups may legitimately claim the right to self-determination. The United Nations has enforced the concept for groups under colonial control, but not for regions of developed countries with a significant number of secessionists.

According to Wikipedia, since the early 1990s, the legitimatization of the principle of national self-determination has led to an increase in the number of conflicts within states, as sub-groups seek greater self-determination and in some cases full secession. The 2000 United Nations Millennium Declaration failed to deal with these new demands, mentioning only "the right to self-determination of peoples which remain under colonial domination and foreign occupation."

Major problems remain defining "peoples" (or deciding which authority will decide who constitutes a people and who does not), respecting the rights of minorities, and dealing with distributive dilemmas when seceding groups are relatively rich and contribute financially to the welfare of other groups. "Partitions" are not like assembling and disassembling Lego pieces, as once said the economist Branko Milanovic. A meaningful application of the right of self-determination, interpreted as the right to secede, requires that the Planet be populated by non-overlapping well-defined “peoples” or “nations.” This assumption does not hold in practice. They are not well-defined and, to the extent that sometimes they are, they do overlap in many cases.

The written Constitutions of well-established democracies (all of those in the EU, for example) do not accept the right to secede of parts of a territory.

Israel and Yugoslavia are examples of the contradictions that are inevitably reached when real communities try to apply Wilson’s principle. Northern Ireland, instead, reached a (so far durable) peace agreement under different principles, faclitated by the existence of the European Union, and put in danger by Brexit. Ethnocratic temptations in India, in the US, in Russia (think of Putin’s referendums) are further reminders of the risks of projects that underestimate the practical difficulties and the moral dilemmas of creating new nation-states, expanding the current ones, or rejecting minorites from them. Federalist roads not taken in Africa or Latin America have degenerated into fragmented continents, but are a reminder of a better possible post-national future.