1989-2014 and beyond: from the fall of the Berlin Wall to a federal Europe

25 years ago the fall of the Berlin Wall marked the end of the fragmented Europe that was inherited from the second world war. It is a simplification to say that the fall ended the Cold War. It was that, but it was also a great step toward a truly unified Europe. Our continent had been a divided force since the end of the Roman Empire, it was a collection of fighting polities. The territorial division had some positive aspects such as institutional competition and innovation. But these were more than compensated by terrible wars and conflicts that culminated in the enormous tragedies of the XXth century. The fall of the wall did not end the tragedies, because we still had to endure the shame of the Balkans war, after which many still celebrate the birth of new nation-states on the ashes of the death of 300.000 people. Most of these small Balkan nation-states are still scarred by tragic ethnic rivalries. The unification of Germany and the integration of the former communist countries in the European Union show the way of progress in the opposite direction: federation and union in diversity. This horizon has many enemies, most notably the nationalist and populist movements of leaders such as Nigel Farage in the UK or Marine Le Pen in France, or the nationalisms fuelled by Vladimir Putin in the East, or the dangerous games played with democracy by Mr. Orban in Hungary. But Europe has made a lot of progress despite their enemies. Today we have common institutions, a common elected Parliament, a common currency for most countries, and free movement across basically virtual borders. We are making progress towards a banking union and a fiscal union. But a federal Europe is more than this. It should be about a true European government directly accountable to the citizenry, in charge of common policies, in the same way as local and regional governments are accountable to their citizens. To achieve this, we need a European demos, with people sharing experiences and truly establishing a European political conversation. The European Union is still a factor of attraction: countries want to join and only minorities in member states want to leave. We have to build on this and pay tribute to those that made the fall of the Berlin wall possible, to work now for a truly federal and integrated Europe.

Towards a more agnostic behavioural political economy

Last July there was an interesting conference in Venice organized by CESIFO on Behavioural Political Economy. Most papers can be found in the conference's web page and will be published in a forthcoming issue of the European Journal of Political Economy. I already read some of them, and there is no doubt that they show the way in terms of what is increasingly necessary to understand the interaction between politics, economics and behavioural sciences in general. Economic thought has evolved from traditional welfare economics, where individuals are assumed to be rational and selfish but there is the implicit assumption that some benevolent planner has the ability to make things better. Then the public choice critique argued that planners cannot be assumed to be different from everybody else, so they should be assumed to be selfish as well. That was used as a justification of policies to reduce the size of government. But the assumption that everybody is selfish does not imply that markets are better than collective solutions based on game-theoretic principles, so a more agnostic view became the consensus among economists with what became the accepted label of "political economy." Behavioural economics then questioned the assumption that all agents are rational, even when they take important economic or political decisions, such as voting. The first answer to that was to assume that there would be planners unaffected by bounded rationality and that could help lay citizens to decide, though by keeping the principle of free choice. Thus the libertarian paternalism of "nudgers" such as Thaler and Sunstein was born. However, critics with this view point out, in an analogous way to what the public choice critique did, that planners are no different from everybody else, and that they can also be affected by bounded rationality. Actually, in one of the papers in the Venice conference it is shown that experts behave with similar biases than normal citizens when making policy choices. In some contributions, it is apparent that behavioural economists give also an ideological interpretation to this argument, by claiming that the fact that policy makers are boundedly rational justifies downsizing government. The logical evolution of all this is that instead of a "behavioural public choice," we will have a "behavioural political economy" that is more agnostic about the size of government. In that sense, it is interesting, that the survey article that was presented in the conference has already changed its title: before the conference, it circulated as "Behavioural Public Choice". After the conference, it circulates as "Behavioural Political Economy." It would have been interesting to see the discussants' presentations or any feedback that made the authors change their mind about the title. I don't think that behavioural considerations favour the right nor the left, it depends on the issue and the specific policy, and on time and place. Stiglitz in his book on inequality has a chapter on how the elites exploit the behavioural biases of the poor, and Slovic and coauthors have a paper criticizing from a radically democratic point of view the views of Sunstein. It will be very interesting to see how these academic debates evolve. The interest is not only academic. The evolution of the previous debate between public choice and political economy has influenced the international political debate on issues such as the Reagan revolution and the "Washington consensus."

Modern democracies do not take an illegal referendum seriously

Pro-independent movements in Catalonia, with the support of the nationalist regional government, are trying to organize an illegal independence referendum in Catalonia for this Sunday, November 9th. Most democracies do not accept in their constitutions this kind of referendums, although some constitutions, such as the Spanish one, can be reformed in all its content, if there is a large majority that agrees to do so. In spite of this, the pro-independence groups try to go ahead with the referendum, although there is no register of voters, no representatives of all political parties in the count, no neutrality of the regional public media, no commonly agreed referendum question, no commonly agreed nothing. Independence referendums have problems, especially that they artificially promote polarization, in societies where a federal solution would achieve a very high consensus. Referendums with three options are a potential solution, but they are not free of problems. Most democratic nations, especially those that are involved in the European project and in the Eurozone, do not contemplate the secession hypothesis, although their constitutions can be reformed. Catalonia belongs to a highly decentralized member-state of the European Union. We should try to improve democracy and federalism in that context. Manipulating democracy to achieve independence runs into all sorts of commitment problems, as I argued in the LSE blog some weeks ago: "Catalonia should find a better way than a secession referendum to decide about its future constitutional status, in a world of overlapping and shared sovereignties where the nation-state is becoming obsolete. If and only if, over an extended period of time, a very large and stable majority shows an unambiguous support for a detailed “independent” constitutional project within a clear international framework, then some democratic procedure accepted by all relevant actors should be established to peacefully negotiate and finally take a final decision about it. These conditions clearly do not apply today.
Most internationally recognised legal scholars and political scientists believe that the right to secede should be restricted to extreme cases. Accordingly, secession referendums are the exception in developed democratic countries, especially in the context of the European Union and the Eurozone, which are in a complex process of increasing political integration and redistribution of sovereignty.
There are three commitment problems, well-known to social scientists, associated to the unrestricted use of a referendum of independence in federal systems:
1) Federal governments should not be too powerful, and focus on the creation of the legal and regulatory frameworks for markets to operate efficiently (including a strong currency and clear borders), and commit both not to expropriate prívate investments and not to interfere with federal units, according to the theory of market preserving federalism due to Weingast and his co-authors.
2) Potential majorities or elites in federal units should commit not to cheat opportunistically on the specific investments made by large minorities assuming the permanence of some federal institutions: educational degrees, retirement benefits for federal civil servants, language skills, factor mobility, currency…
3) The governments of federal units should commit not to use their resources to promote the partition of the federal state. Otherwise potentially federal states will be reluctant in the future to decentralise in contexts where it would be desirable to do so. When federal units are relatively rich, there should be a mutual commitment for the units to fairly, boundedly and transparently contribute to the common resources and for the federation to preserve self-government and the participation of the federal units in shared decision-making.
Unless these commitments are respected, societies may fail to build the stable federal systems that are necessary in our increasingly integrated economies. To preserve commitments, democratic societies build institutions that constrain the unrestricted use of majority rule. That is why we have constitutions, international treaties and courts of justice. To the extent that, as I believe, it is desirable that both Spain and the EU become better federations, the use of a unilateral independence referendum as a decision mechanism would jeopardise this objective. It would also trigger internal and external cascade effects that would make it impossible to focus the energies on a more integrated and democratic Europe.
Spanish and Catalan leaders should instead build on our common values to submit to the final decision of the electorate an agreement on a shared institutional architecture that can be legal and stable in the European context, and give satisfaction to historical grievances."

Tetlock updates his work on predictions

Tim Harford of the Financial Times recently reported on the efforts by Philip Tetlock to update his work on predictions which goes back to an early book, "Expert Political Judgment." In that book he told us about systematic failures in making predictions by social sciences experts. Tetlock is now involved in the Good Judgment Project, and his provisional conclusions are less pessimistic. Good predictions are possible, but only when they follow some pre-conditions. From these pre-conditions, you can also understand his past conclusions: most experts have been historically wrong because these pre-conditions were not met. Here is what Hardford had to say about Tetlock's recent work: "So what is the secret of looking into the future? Initial results from the Good Judgment Project suggest the following approaches. First, some basic training in probabilistic reasoning helps to produce better forecasts. Second, teams of good forecasters produce better results than good forecasters working alone. Third, actively open-minded people prosper as forecasters. But the Good Judgment Project also hints at why so many experts are such terrible forecasters. It’s not so much that they lack training, teamwork and open-mindedness – although some of these qualities are in shorter supply than others. It’s that most forecasters aren’t actually seriously and single-mindedly trying to see into the future. If they were, they’d keep score and try to improve their predictions based on past errors. They don’t. This is because our predictions are about the future only in the most superficial way. They are really advertisements, conversation pieces, declarations of tribal loyalty."

The dark side of competition

As Charness, Masclet and Villeval explain with an experiment in a recent article, competition for status has a dark side. Unethical behavior within organizations is not rare. They investigate experimentally the role of status-seeking behavior in sabotage and cheating activities aiming at improving one’s performance ranking in a flat wage environment. They find that average effort is higher when individuals are informed about their relative performance. However, ranking feedback also favors disreputable behavior. Some individuals do not hesitate to incur a cost to improve their rank by sabotaging others’ work or by increasing artificially their own performance. Introducing sabotage opportunities has a strong detrimental effect on performance. Therefore, ranking incentives
should be used with care. The implications of this are broader. Giving salience to status and competitiveness creates a society with individuals that focus on gains to the detriment of others, sometimes at any cost. In small organizations, this means sabotaging others or cheating. More generally, a society that privileges the winners, both materially and in terms of prestige, creates incentives for corruption as well as for effort. In the context of organizations, the solution is to reinforce intrinsic incentives and lower the power of incentives when there are several dimensions of effort or several tasks that are substitutes. In the context of society in general, perhaps we put too much emphasis on formal or legal reforms to fight corruption, and too little emphasis on promoting broad ethical values, the equivalent to intrinsic incentives in organizations. Formal institutions are not enough because they will always leave some contingencies to be addressed. Broader values and informal institutions instead, can be more generically applied, although of course introducing them is easier said than done.

Is a referendum with three options the solution?

(This is an exam exercise I gave to my MEBA Master students, but here I show the solutions -the exam was yesterday; any similarity with real facts is pure coincidence)

A community of 100 citizens  has three groups: Icons (40 individuals), Fires (35) and Econs (25). Using the data in the next table, which shows the ranking of preferred alternatives among three options (I, F and E) for each type of voter,

a)  Is there a stable winner in votes with two alternatives? Yes, F is the stable winner (so, the Condorcet paradox is absent from this problem).

b) Are collective preferences transitive? Yes, F defeats I, I defeats E and F defeats E (F is a Condorcet winner).

c) In which of the three groups would we find the median voter? Among the Fires. If we organize the population in one segment from the most pro-I to the most pro-E, a Fire has half of the population at one side and half of the population at the other.

d) Under which rules does and does not the median voter’s option  win in votes with three alternatives?

With three options, the median voter only wins if the voting rules are based on the Borda count, that is, if each voter gives points to the three alternatives in descending order of preference. This is assuming that all voters understand the rules, do not change their mind, understand the alternatives, all of them do vote, and they do not do it strategically. If a voter can choose only one of the three options, the winner will be I, which is not the option preferred by the median voter.

The exercise does not take into account externalities of the decision on other populations or commitment problems associated to each of the options (for example, option I may expropriate previous investments in human capital, settling decisions or professional options).

Table

	Icons (40)	Fires (35)	Econs (25)
First Option	I	F	E
Second Option	F	I	F
Third Option	E	E	I

Le Pen may win the next French presidential election

Some years ago, French voters had to choose in the second round of the Presidential Election between Jacques Chirac and Le Pen father. Leftist politicians did the decent thing and called voters to vote for “the other candidate”. Monsieur Chirac won. There has been a recent poll that says that in a second round of a presidential election, between the Socialist candidate and Marine Le Pen, voters today would prefer Le Pen. It is only a poll, but it shows that there is a real danger that Madame le Pen reaches the second round and that the right and the center right might prefer her to Monsieur Hollande. That means a real risk that subsequently Mme Le Pen may implement her announced policies of abandoning the euro and calling a referendum to abandon the European Union. That may not happen: to start with, François Hollande may not be her rival; and even in the case of winning, she may become more responsible once in government and refrain from driving  her country (and all of us) to disaster.

But the fact that this scenario has become a possibility shows the urgency of devising policies and strategies to reignite the European project (which is the main target of the likes of le Pen in France and Farage in the UK). This means reactivating the economy in a sustainable way, under the guidance both the European Commission, the European Central Bank and the main national governments. But it also means devising a shared strategy against populisms and nationalists, which threaten to lead the European Project to a terminal crisis. And that would mean finishing the single project that has made possible decades of peace and prosperity after centuries of violence and fragmentation. If the likes of Farage, le Pen, Orban, Grillo and the rest of nationalists and populists keep advancing in the popular vote, what is today the European Union may look more similar to the Balcans or the Middle East, a prospect we thought we had left behind forever.