A permanent emergency

The cartoon of The Economist in the early days of the pandemic, showing Covid-19 as practice for the much bigger challenge of climate change, should be kept in mind.

The pandemic has been a lesson in many ways. I ask my students to reflect about it, as it has been an economic phenomenon that has deeply influenced their lives, and from which they can learn more than from any theoretical class (although I hope they can also learn from these).

From covid, they can learn about the meaning of externalities, uncertainty, social interactions, the role of the market and the role of government, the importance of economic activity, output, income and aggregate demand. In the CORE web page there are very useful materials to learn from Covid.

In the worst days of the Covid pandemic, societies accepted degrees of public intervention that would have been impossible to imagine some time ago. Richer societies were able to significantly compensate workers and firms for the losses, and were also able to produce and distribute vaccines at large scale. Unfortunately, our effective solidarity did not expand to poorer countries. In Europe, integrated efforts to vaccinate and to invest for economic recovery showed the potential for joint acion and true political and fiscal union.

We have seen later that disruption was not limited to pandemics, but could be provided in the form of wars, climate change and the erosion of democracy. All these forms of disruptions are related and complementary. In the long run, the social risks related to climate change are the more threatening, and societies have been reluctant to introduce the necessary social changes to stop the disaster. Why democracies in particular have been unable to do what we know is necessary to be done to stop greenhouse emissions is something that is debated. The answer has to do with behavioral issues, lobbying by corporate interests and difficulties of cooperation in a world without strong enough global institutions.

But now he have more experience of the threat (with wild fires, extreme heat waves and other natural disasters), and we know that government action can be of large scale to solve social problems (such as pandemics and climate change). The awareness of the emergency that we experienced at the beginning of the Covid-19 pandemic should be extended as a permanent state. We need strong governments at all levels (also good firms, well regulated markets and well-functinning communities), and we need them to coordinate, horizontally and vertically. Climate disaster can to a large extent still be stopped: it is very different for global average temperatures to increase by 4 or by 1.5 degrees. To keep the growth of temperatures (and the social calamities associated to it) as low as possible, we need to make permanent what until now was exceptional.

Any appetite for more referendums after Brexit?

The hubris of David Cameron was behind his call of two Independence referendums that signalled the end of his political career: the Scottish Independence referendum in 2014, and the Brexit referendum in 2016. In the first one, the option for Scotland to remain in the UK prevailed by a relatively small margin. In the second, as it is well known, the leavers prevailed, by an even smaller margin.

The two referendums were legal, but unusual and irresponsible. In the first case, because the absence of a written Constitution in the UK allows majorities in Westminster to allow a referendum that may trigger the partition of the country, an option that is almost totally absent in democracies with a written Constitution. That this is legally possible does not mean that the Scotish have the right of self-determination interpreted as the right to secede, because they need the permission of a majority of the UK Parliament. In the second case, the member states of the EU have the possibility to leave the Union, once the member state in question decides to trigger Article 50 of the EU Treaty which allows to start negotiations that finish with a country leaving the club (something that so far has only happenned with Brexit). 

It is today well- known that the Brexit referendum gave the opportunity to demagogues to circulate lies that made possible the narrow victory of the leave option. After the referendum, a Constitutional crisis that lasted for several years consumed three prime ministers, and after 5 years of painful negotiations the UK left the EU institutions, plunging the country in a state of chaos that has little to do with the promises and debates that took place in the referendum campaign.

In Scotland, now the First Minister Sturgeon is calling for a second referendum in 2023 (less than 10 years after the first one), but now politicians in Westminster from the two main parties are very reluctant to accept it, according to The Economist. Strugeon’s answer to this has been to evolve towards a “Catalan strategy,” that is, the strategy of organizing a referendum without the acceptance of London, or even the strategy of giving a “plebiscitarean” interpretation to a regional election. All these strategies failed in Catalonia, ended also in a Constitutional crisis, and sent several politicians to jail (later pardoned) or running away from justice. The Observer’s columnist Andrew Rawnsley has argued that a second referendum in Scotland may be necessary, citing as an example the second referendum in Quebec (1995 after 1980) when the remainers prevailed for the second time but by the narrowest of margins. Rawnsley doesn’t mention the Constitutional crisis that surrounded that referendum, the legal uncertainty and the economic crisis that followed, from which Quebec has not yet recovered. Why would a second referendum in 10 years be necessary? Why not three, four…? After the second referendum in Quebec, they stopped calling referendums like this, not because 2 is a magic number, but because the Constitutional crisis reached such magnitude, that the Canadian Parliamentary majority passed a Clarity Law that makes such referendums mostly unlikely, getting Canada closer to most democracies, where the right to secede is just not accepted in written constitutions, to avoid instability and to promote consensus and dialogue among democratic representatives and communities to solve identity problems.

Meanwhile, The Russian Federation is actively preparing for a pseudo-referendum on the annexation of Ukraine’s occupied territories to the Russian Federation, as they did in Crimea also in 2014. The invaders plan to transfer more than 1,000 Russian experts and volunteers to the region to undermine the internal situation in their favor. They should organize illegal mass meetings, spread agitation in support of a pseudo-referendum and equip election commissions.

Northern Ireland’s Sinn Fein is also planning to call for a reunification referendumin the island, which the Good Friday agreement makes possible, although this agreement was precisely exemplarily approved not by a divisive referendum, but by a referendum that followed a very broad and detailed agreement between all the relevant parties. It would be much better to forget about borders, and to keep an irrelevant “border” between the south and the north, and a community in the north that benefits from co-membership of Ireland and the European Common Market, and the UK (as is the case today). Of course, the solution would be much better if the UK stayed in the Coomon Market as well. But that’s one of the problems of the Brexit referendum: that it collides with the spirit of the Good Friday agreement.

Divisive referendums in advanced democracies are a very bad idea to solve identity problems. They tend to approve long lasting institutions or borders against the wishes of a large part of the population. It is much better to promote a reasoned discussion to reach an imperfect consensus among representatives (potentially followed by a ratification referendum) in a deliberative democracy, as proposed by economist Amartya Sen.

The King of the rhetoric industries

The last book published by Simon Kuper (“Chums. How a Tiny Caste of Oxford Tories Took Over the UK”) provides the background to understand how a clown such as Boris Johnson could lead his country out of the European Union and become Her Majesty’s Prime Minister. Also, it helps us understand why his premiership soon imploded as a result of his lies, incompetence and dishonesty. Johnson predictably turned out to be a successful campaigner and a disastrous ruler.

If the departure of Messi from FC Barcelona helped Simon Kuper promote his previous book (“Barça”), now the resignation of Johnson will help him promote this one. That is good news –both the resignation and the increased number of readers of an excellent book.

The still sitting Prime Minister is representative of a caste of upper class Tories that went to the most elitist school (Eton) and to the most elitist University (Oxford). The nature of these learning institutions, which gave priority to rhetoric and status over substantive knowledge and work, is an independent variable that has significantly influenced the political style of Johnson and his closest allies.

For a non-British reader (and perhaps to some Brits as well), the book reveals the myth of the “intelligence” of Boris Johnson. We are used to hearing the argument that Johnson is better than our populists because he wrote a biography of Churchill and he can recite poems in Latin and classical Greek. The reason for that is that history and classical literature is all he learned in school and university, and most probably at a very superficial level. The style of teaching and studying when he was in Oxford required minimal hours of effort, and was based on essays that lacked substance and serious research. Most of the time was spent conspiring in debating societies where serious ideas occuppied a back seat. 

As a result of that, most of the Oxford Tories (including Johnson)  went into what Kuper calls the rhetoric industries: journalism, television, politics… And they reached the highest jobs in politics not after a previous experience managing anything remotely serious, but by writing columns in right-wing newspapers or joking on TV.

They found in Brexit the cause that they couldn’t find in no longer existing wars. Leading Brexit did not require the management skills of their predecessors in the ruling classes, but provided a similar sense of greatness –at lest to them. “Doing” Brexit turned out to be much more complex, and so far has resulted into an increasingly obvious and hopefully reversible failure.

The book explains how Johnson “took his shaky French to Brussels in 1989” to write columns that appealed to eurosceptics by playing with half truths and stereotypes. A common theme of his articles was that “nobody tells us what to do,” a national-populist slogan that merged sovereignism with inverse class struggle.

Oxford Tories became obsessed with European federalism, and they used it as a scapegoat to build a movement based on lies and demagoguery. I learned in the book that the predecessor to the UK Independence Party of Nigel Farage was called the Anti-Federalist League.

Simon Kuper argues that “entertainment journalism was the perfect role for a man who lacked the patience for serious political ideas.” He and his caste colleagues always privileged verbal intelligence over analytical intelligence. That was more than enough to develop “an entertaining and persuasive story, wrapped in tutorial level plausibility, larded with quips and choice statistics and appeals to ancient British traditions of liberty.”

The elite’s self perpetuation was based on a contempt of ideas, and also when needed on corruption and favouritism (plus the tools of expensive professional modern campaigning). All these ingredients (except the professional campaigning) showed up when the Tory leadership had to confront the Covid-19 pandemic, for which their superficial training in Oxford and their previous careers provided no guidance. They did not even have an intuition for exponential growth or contagion models. As a result, the UK had one of the worst records in the western world of fighting the pandemic. The perception of that by the public was not helped by corrupt deals to provide tests and equipment at the beginning of the disease. In addition, while they were incompetently issuing rules for their citizens, some of them, including Boris Johnson, where doing the opposite of what they were asking people to do. The rules were always for others.

As conservative and right wing ideas become less appropriate to deal with the problems of our world, and they deviate more from the interests of a majority of citizens, communication and spin become more valuable assets than in the past. It is no surprise then that one of the leading candidates to succeed Boris Johnson as leader of the Conservative Party is a former TV reality show contestant. Just another one.

Questions and tools in economics and political science

I spent the first part of the week that finishes today in Florence, in a workshop on “The dynamics of regulatory governance” organized by Eric Brousseau, with the support of the Florence School of Regulation. The meeting was used to discuss the initial ideas for a Cambridge University Press book on this topic. I presented the preliminary toughts of a chapter entitled “Regulatory commitment in fully democratic societies: the populist challenge,” on which I am working with two co-authors.

The format gave us an opportunity to discuss ideas with some of the top scholars in the field, something we have not been able to do in the last two years because of the pandemic. In this case, the multidisciplinary approach and web of contacts of Eric gave us the oportunity to interact with top political scientists, legal scholars and historians (in a way I had not done since the times of my interaction with colleagues in the four departments of the European University Institute). I am especially thankful to the feedback received by Standford University’s Barry Weingast and by former US Federal Trade Commssion Chairman William Kovacic, not only during the workshop’s presentations and debates, but also in private conversations in the breaks and meals.

Our project of a chapter includes case studies about the current populist wave from Chile and Spain. I should have known that Weingast had written about the two countries, here and here. The message of our contribution is that the current populist wave seriously challenges the institutions of regulatory commitment that have been put in place in the two countries, and presents ideas on how to make possible investment in infrastructure sectors (such as water and energy) in a fully democratic society subject to populist forces. In a way, the question we ask is what can be done when the equilibrium described by the two Weingast papers collapses. The political equilibrium in place so far was the result of democratic transitions that lowered the stakes of politics and created the necessary order to respect private investors. The (relatively mild, compared to others) populists coming from a new generation of politicians (who question the concessions of the democratic transition) challenge this order, especially in Chile.

In these workshops, the probability that someone knows what you are talking about sharply increases relative to normal life. For example, an author I have mentioned in several of my articles, a 1950s political scientist called Marven Bernstein, who raised an early critique of regulatory independence, turned out to be an idol for Barry Weingast. 

As we discussed in one of the workshop dinners, Economics and Political Science complement each other: in many cases, economists ask the wrong questions with the right tools, whereas much of political science asks the right questions with the wrong tools (especially when political science is not afraid to talk about politics, something that should not be taken for granted…).

The questions raised by Weingast and his coauthors (including the Nobel Prize economic historian Douglas North) in their work are important and difficult, especially if you share progressive values and you want to transform them into sustainable policies. Weingast and I probaly do not share exactly the same values, but it must be admitted that his and his coauthors questions about order and commitment in democracies are relevant and deserve to be answered. The conclusions they have reached are provisional and in some fields have already been challenged, but they have opened important paths to discuss the crucial issues of power, violence and order in our societies. We now know that they are more relevant than ever.

Private or public ownership in infrastructures

Public or private ownership in infrastructure sectors is one of those issues where most of public opinion and many economic experts see things differenty. 

Most economists believe that under some conditions (competition or good regulation) private ownership is preferable. However, some experts in regulation recognise that public ownership may be the default choice where there are no available commitment mechanisms to remunerate sunk private investments. Are there other ways to sustain regulatory commitments in fully democratic societies under populist challenges? In theory yes, but the institutional package (which may include independent regulators) needs the consent of voters. They need to be convinced.

Recent behavioral political economy (and regulation) emphasizes endogenous preferences: standard social choice studies the difficulties of aggregating preferences for given preferences, but preferences and choices are affected by endogenous factors (beliefs, biases, framing, social context…). That is why the public reasons about some policies including public vs private ownership differently from experts.

That and the objective shortcomings of some privatization processes, especially at the end of totalitarian regimes (Pinochet underpricing and selling to cronies, or Russian postcommunism), explain the appeal among many populist progressives of calls to state ownership in water or energy. Chile, once the poster child of the ability to solve the commitment problem in Latin America, in the recent past and now, is experiencing a challenge to “the model” (there is a constitutional referendum on Sept. 4th). In Spain, as a result of the left-wing populist challenge of Podemos and related movements, there is an ongoing campaing to re-nationalize, create public operators or re-municipalize firms in regulated sectors (especially in energy and water).

Chile and Spain have interesting links on this. Mostly privatized Spanish firms took over privatized and other Chilean firms in the 1990s: there is Spanish investment in Chile in telecoms, energy, water, roads, parking lots… The current leaders of the left-wing populist movements (Frente Amplio and Podemos) in the two countries belong to the same generation, are in touch, and inspire each other. And one could add that they share common problems.

For many years, Chile alleviated the commitment problem by a combination of:

-Specific hard to change legislation... with an unpleasant aspect: it is hard to change because of mechanisms embedded in a Constitution that was written in 1980 by the Pinochet regime, although some aspects were reformed in 2005 under democracy.

-Independent judiciary and high quality administration.

-A political system with few political parties, a binominal electoral system, and other checks and balances (such as an agenda setting president with two legislative chambers).

But this political equilibrium collapsed in 2019 under massive protests.

The positive (economic growth, elimination of extreme poverty) and negative (high inequality) outcomes of Chile are an uncomfortable combination of the legacy of a pro-business brutal military dictatorship in the Cold War (1973-1990) under the influence of the Chicago School, and moslty center-left governments in the first years of democratic transition. 

As mentioned above, one of rallying motives of the left-wing populists has been the creation of new public sector operators, especially in the water and energy sectors, so far with little success but a lot of noise. Public ownership in infrastructure sectors then remains attractive because of a combination of the following:

-It remains the default mode when other commitment mechanisms fail.

-Many public sector firms in infrastructure sectors survived the privatization wave of the 1990s.

-Public opinion shows high distrust of the role of private sector firms in infrastructure sectors, and populist forces capitalize on this discontent.

But a focus on climate change, macroeconomic constraints that suggest the need for sustainabe growth, and deep inequalities may make transparent that creating a public operator is a distraction that does little to address the big challenges.

At the same time, large private sector operators need to re-calibrate their role in society, at a time that we face enormous global problems without a global democracy. Not only they need to improve their reputation, but it is imperative that they question the profit motive as their sole driving force, if the correction of global externalities is not strong enough by other means.

My "Google Scholar" view of some economic issues: confused, but at a higher level

As an academic and as an activist, I am sometimes asked (please, keep asking, I learn a lot!) about my opinion on some economic issues on which I am not necessarily an expert. Sometimes I just feel inclined to express my view, perhaps because I suspect that the prevalent opinions may benefit from a more academic perspective. I try to do it with modesty, aware of past mistakes of economists and other academics, on social or policy issues.

For example, this week I have been asked about my opinions on the role of nuclear energy in our transition to a carbon-free economy, and about my opinion about a concept called "doughnut economics," promoted in a 2017 book by Kate Raworth. 

What I usually do in these cases is try to see what the experts say. Of course, the experts are not necessarily those that speak more about these issues in the media. I try to screen them from platforms such as Google Scholar, and then use my own judgment about their credentials, and the identity of their institutions or of the journals or other outlets where they publish.

On nuclear energy, my first reaction was to believe that there should be a scientific consensus on this topic, as the private and external costs (that is, the social costs) of different ways of producing energy should be well known and quantifiable. However, I could not find such consensus. I didn't find anyone serious saying that nuclear would be a panacea to transition quickly to a carbon free economy, because of its costs, but several articles and apparently independent reports argue that nuclear energy, which does not contribute to climate change, should have a role in the transtition, if ways are found to safely reduce these costs. Probably the lack of consensus is behind the difference of opinions that the European Commission and the European Parliament seem to hold on this issue. What disinterested citizens should ask for, is more expert independent work on this, now that the focus  of public opinion and environmentalist groups is righlty on fighting the climate emergency.

On "doughnut economics," a concept I had heard about but to be honest I never paid much attention to, I looked at a few links I was provided with and I did a Google Scholar search for book reviews of Raworth's book. Its idea is to provide a visual representation of a social and economic system that pays attention to environmental and other limits to economic activity. Some of its principles are very reasonable, and would be subscribed my most experts. The review by Erik Shokkaert criticizes it for building a strawman of maisntream economics. Raworth's agnosticism about economic growth, with the hindsight of the Covid-19 crisis and the current shock of the Ukraine war, is perhaps not something that struggling majorities in our democracies share, as Janan Ganesh points out today in the Financial Times, and as I mentioned in a previous post.

Social science should not be about yes or no answers, but about grey zones and qualified answers, even understanding that policy makers and politicians are often forced into more black and white dichotomies.

Perhaps because I have a vested interest in keeping the value of my Economics PhD, my inclination is that of  not departing too much from the true mainstream, by which I mean the research that is currently done at the frontier, and not the one done 50 years ago. By this I mean that taking into account inequalities, climate change and beahvioural issues, for example, are now part of the economics mainstream, or at least the mainstream self-criticism of standard economics. Advanced research sometimes provides strong answers, but many times it does not, which does not mean that it should not be a useful guide. Very reasonable scholars may sometimes disagree, based on different perspectives, beliefs and ideologies.

By obtaining an overview of current research, sometimes we'll stay confused, but at a higher level.

One full academic year with CORE

I had used the CORE Project’s materials before for one semester courses. But this academic year I have covered the whole contents of the e-book “The Economy” from September to June. The group I taught has been the first cohort of a new degree on Contemporary History, Politics and Economics at my university (Autonomous University of Barcelona). Being an interdisciplinary degree fully taught in English, the students were highly motivated and many of them very participative.

Having shared and worked through all the units of “The Economy”, plus two of the experiments in the e-book “Experiencing Economics” I could more fully appreciate the coherence and richness of the contents. Macroeconomics is seen as an extension of microecnomics, and microeconomics is embedded in a debate about the great questions of our time, such as inequalities, institutions or climate change, in dialogue with other disciplines, such as natural sciences, politics, history or psychology.

Markets are a special case of social interactions (introduced using game theory), and perfectly competitive markets are an extreme and unusual case among many possible more or less competitive, efficient or inefficient markets. Economics is taught with references to what economists have been doing in the last 30 years, such as behavioral economics or Rodrik’s trilemma (I asked my students in the exam how would they solve the trilemma if they could choose: I can proudly say that no one proposed to exclude democracy…). All this can convince students that economics is useful and interesting without lowering the standards.

Perhaps in the future it would be useful to contrast it to other more traditional texts in an explicit way (eg on Aggregate Supply and minimum wages), because students find these materials in the net. The current materials can also be complemented with more on the European economy, populism and modern social choice, or evolutionary applications. Some materials I have barely used this time, I plan to use them more in the future, such as the Leibnizes and the Einsteins (parts that use more intensive mathematical tools), or the empirical projects of the e-book “Doing Economics”. The analytics of the classes, the exams and the exercises have focused on graphical models, but I believe that students should be helped to understand that mathematics is another useful language, and probably simpler than some other existing ones.

We have done many of the Exercises/Interactive Questions of the e-book “The Economy” in class, and the students have produced very interesting Essays/videos with cases related to the units of the e-book or related to supplementary materials such as the files on Covid-19.

Great experience, for wich instructors and students should be grateful to all those who contribute to the CORE Project.