Sunday, January 15, 2017

The book about Kahneman and Tversky

After writing "Moneyball" (which would inspire a great movie with Brad Pitt as manager of a baseball team), Michael Lewis knew from a review by economist Thaler and legal scholar Sunstein (authors of "Nudge"), that the biases that plagued the work of traditional baseball scouts and managers were just an example of a more general phenomenon that had been studied by Israelian psychologists Amos Tversky and Daniel Kahneman. The latter won the Nobel Prize in Economics in 2002, which would have been shared by his friend and co-author had he not died some years before, in 1996. He would also write the very successful book "Thinking, Fast and Slow." As a consequence of later paying more attention to Kahneman and Tversky, and of personally knowing the former, Michael Lewis has now published "The Undoing Project," about the lives and work of the two great psychologists and their close and eventually problematic personal and professional relationship. The book contains a valuable summary of their theories. To lecturers it is useful to have new ways of explaining things to a broader public (or to undergraduate students). For example, a good way to summarize their thoughts (especially Kahneman's) is that individuals care not only about money and material rewards, but also about emotions related to outcomes. Tim Harford in the Financial Times has praised the book, but expressed surprise that the first chapter is devoted exclusively to biases in basketball at the NBA with no mention of the two star pshychologists until the very end. Perhaps Michael Lewis had another Moneyball story but now about the Houston Rockets in basketball instead of the Oakland A's in baseball, but thought that the NBA story was not enough for a single piece. But then given the exagerated role that basketball plays in the book, perhaps Lewis could have done more to discuss the important contribution that Tversky made to the study of basketball: the "hot hand" phenomenon. For many years, a study by the late psychologist introduced among statisticians the idea that the "hot hand" really did not exist, but it was just a misinterpretation of a possible realization of a collection of random events. However, more recent work with more sophisticated statistical techniques has questioned the work by Tversky and others on this, and it seems that there could be reasons having to do with self-confidence and coordination that justify the existence of serial correlation among the shots of an individual player during a game. Although of course we are very bad at interpreting random events, the "hot hand" phenomenon is far from settled. Of course Lewis does not have time and space to discuss all the subtleties of scholarly work and debate. But perhaps those areas or characters that he emphasizes should be discussed more in depth. For example, Lewis stresses the role of Thaler among economists and Sunstein among legal scholars (and in the administration as "regulatory czar" with Obama) as promoters of the unorthodox ideas of Kahneman and Tversky. He also discusses the relationship between the two Israeli psychologists with an American psychologist, Paul Slovic, an expert in expert bias. Then, it is surprising that Lewis does not mention the controversy between Slovic (among others) and Sunstein, a great defender of the role of insulated expert agencies in the public sector. The book is very enjoyable nevertheless and will surely be very successful. The seller at the shop in Heathrow Airport (I was in transit) where I bought my copy had no doubt about it: "do you know "Nudge" and "Thinking Fast and Slow"? Then you'll like this!"

Thursday, January 12, 2017

Why workers should be federalists

As David Autor explains very well in this TED talk, jobs will not disappear with technological change. Instead, there will be more of them. But rapid changes in labor markets due to robotization and globalization are disruptive for millions of workers especially in relatively developed countries. The rise of global multinationals that manage data offer opportunities to young entrepreneurs and globalized workers, but of course pose enormous challenges for ordinary people. Globalization is here to stay, and is actually responsible for many good things that we have (this blog... my apologies for being self-centered). But it changes our life and changes the content of the optimal policies in areas like labor institutions or fiscal policies, which now have what economists would call enormous cross-border externalities. We cannot debate labor market policies as if workers were still mostly in factories, and we cannot debate fiscal policies to have a decent level of revenues to finance welfare policies as if nation-states had still the monopoly of sovereignty. Of course they are still relevant, and they should be especially if we have nothing in place to replace some of their functions. But in Europe we do have something in place, the European Union, thanks to which we have human rights, free movement and money out of the ATM's. Without supranational policies it is going to be impossible to stop tax competition (or regulatory competition in for example lowering minimum wages) or to coordinate policies to fight climate change that will destroy the life of billions of workers if nothing is done in the present and the immediate future. Without large democratic aggregates organized in successive rings of federalism, it is going to be impossible to contain financial instability, and it is going to be impossible to manage migrants and refugees. Those theoretically progressive leaders that are agnostic about nationalist movements should think twice. When socialist leaders, with a few honourable exceptions like Jean Jaurès, embraced nationalism in the first world war, they opened the door to the catastrophes that destroyed the lives of millions of working families across Europe in the next years and decades (including the second world war). Union leaders that do not raise their voice to fight national-populists in Catalonia, Scotland, Bavaria, Northern Italy, England or the Netherlands are useful idiots that should remember what happened to the left in places like Israel or Ireland once they became identity prisons.

Sunday, January 8, 2017

Tirole and the global economy

I finished reading these days the impressive book in French by Jean Tirole "Économie du Bien Comun." He explains the results of his research in the last decades, on regulation (which is his original topic) but more broadly and perhaps interestingly on behavioral economics, Europe, climate change or the labour market. It is the chronicle of a desperate appeal to change our institutions to better take into account the general interest, or as he would say to better align the individual interest (of human beings, organizations or states) to the social (global) interest. There is a very interesting paragraph on the loss of relevance of even the French state (p. 219):
"In the last thirty years, there has been a double loss of influence of the jacobin French state:
-To the benefit of the market as a result of privatizations, of the opening to competition, of globalization and of the more systematic use of auctions and bidding systems;
-And to the benefit of new actors, either of a political nature –Europe and the regions- or otherwise –judicialization and creation of independent authorities."
My only criticism of the book is that Tirole does not envision any role for the state as company owner. That is questionable in a normative sense (surely there must be some conditions under which arm's-length regulation becomes difficult because of transaction costs or some other reason), but it is blind in a positive sense, because state-owned firms seem to be here to stay. You don't need to look at China, you can start by looking at France itself, but you can look at China if you want.
The message of the book is clear in my view: there are so many changes in the way the economy works as a result of technological change and globalization, that we cannot afford the risk of leaving institutions as they are now, or of individual or nation-state laissez-faire. We should manage globalization better and not because there is necessarily a correlation with the rise of national-populism (perhaps there is not: the book "Globalization and its discontents" by Stiglitz was published in 2002, when Brexit and Trump were not in the political radar). As a speaker said in the WEAI conference that I attended in Santiago this week, human globalization started with the Homo Sapiens taking over the Neanderthals. Has the white (South and North) American man any moral authority to say that immigration should be stopped? When one sees Trump or Pinochet, one certainly has doubts that unselected migration yields good returns (good descendants of immigrants) in the long run but no, I don't believe that globalization can or should be stopped. We should manage it better because our institutions evolved to be fit in another era.
To me the big politico-economic questions of today remain 1) how to answer Rodrik’s trilemma (actually a dilemma when one realizes that globalization is unstoppable: it is, perhaps Trump is a nativist but he won with a decisive help from a foreign power, as Pinochet became a brutal dictator because of another foreign power…) and 2) what are the main causes of national-populism (because we should stop it if we are to make progress towards a better world). There are no easy answers.

Monday, January 2, 2017

Should even Chile be interested in modern federalism?

Chile (I'm spending some days here) is a unitary country that is geographicaĺly relatively isolated, and it has been successful in developing stable institutions and a good economic performance (not perfect, inequality is still way too high). I thought that being a relatively successful geographically isolated centralized and unitary country, if I can argue that if even Chile can take advantage of federalist ideas, then any country would benefit from them.
Let's try.
By modern federalism I understand a multi-level democracy where no single level has the monopoly of sovereignty, because of the obsolescence of the nation-state. Accepting this idea would be a severe blow to the Chilean military, but perhaps it would be good for everybody else (even for some generals with an open, international and professional mind). Members of Parliament in Chile are now considering the democratic election of regional powers. Regions already have some powers, but regional presidents are appointed by the central government, not a characteristic of a multi-level democracy. As the size and complexity of government has increased in the recent decades, apparently politicians are finding it interesting to discuss the possibility of applying the subsidiarity principle to their arrangements. Of course it is no panacea, and they should make sure that new democratic powers use their budgets not to undermine the whole system but to strengthen it. Chile has an increasingly conflictive Mapuche problem and an old general problem of racial discrimination; ideas form how federal countries deal with cultural and linguistic diversity can be of help here. They also have a territorial dispute with Bolivia, which would become a lesser problem if South America or Latin America became more integrated. A good sign is that some of the big private corporations that are so important in Chile agree with this orientation: the national airline LAN-Chile (LAN meaning National Airlines) has now become LATAM (for Latin America I guess) after a series of acquisitions. And by their own choice the Chileans live in a very open globalized economy, and therefore all the problems and challenges (in the labour market, the tax system or climate change) that apply to the obsolsence of the nation-state in the times of the Internet and big data also apply to them. The argument seems to work. Then it works for any country.

Tuesday, December 27, 2016

The end of an exceptional period in regulation?

Jon Stern has published a nice working paper comparing developments in the economic history of network infrastructure industries with recent developments in the regulation of braodband/communications and energy in the United Kingdom. Regulation of network industries in the UK, since the privatization experience of the Thatcher period, has been characterized by a focus on efficiency and the more or less declared goal of replacing regulation with competition as soon as this was possible. However, for most of the history of network industry regulation since the beginning of railways regulation, this was motivated by distributional and affordability concerns. In the UK, the desire to expand the information revolution to everybody and the combination of increasing fuel prices, climate change concerns and the economic crisis since 2008 has produced an environment where focusing regulation only on efficiency concerns has proven increasingly difficult. Many economists were enthusiastic about this exceptional period of a single-minded focus on efficiency, not because they thought that distributional concerns were not important, but because they thought that these concerns could be better addressed by other instruments such as taxation and social security. For some reason, traditional economists love separation arguments. But sometimes separation is difficult. After all, taxation is a multi-goal activity itself, and more often than not, it does not achieve satisfactory distributional goals due to a concern for efficiency or because of informational, macroeconomic or other reasons. An additional reason that makes separation difficult in regulated industries is the demonstrated importance of behavioral biases by consumers, which introduce difficulties in the introduction of competition for retail consumers, difficulties that cannot be easily overcome with transfers. Something Jon Stern does not address in his paper, and which perhaps can be a path for future research, is the impact of the increased concern for distribution on the evolution of the institution of independent regulation itself. After all, the accountability of an independent regulator, and its rationale, are faciltated by the fact that the regulator is supposed to be single-mindedly pursuing efficiency, and not other objectives for which insulation from a democratic political process is perhaps less justified. Distributional concerns may actually not only undermine at least partially the status of the independent regulator, but also of other regulatory institutions that prevail in other countries. Writing this from Chile (the country that with the UK started the privatization movement in the 1980s), here the lower chamber of Parliament just approved (by unanimity) a resolution proposing to change the structure of the panel of experts that arbitrates disputes in the water sector, among other measures trying to put downward pressure on the tariffs of water and sanitation companies. Although the package has still to go through the upper chamber (the Senate) and the executive has expressed its disagreement with the lower chamber, the stock price of the water incumbent company went down by 14% on the day of the vote.

Saturday, December 24, 2016

Economists for a wide audience, according to Tirole

Jean Tirole, the 2014 Economics Nobel Prize, has written a book in French for a wide audience, "L'economie du bien comun." It is a long book, and I am reading it in a disorganized way, since most of it is a popularization of his research, and I am quite familiar with his work since my years as a graduate student. One of the parts of the book that I enjoyed more is the one devoted to discuss the relationship of the research economists with the wider public. Tirole argues with the clarity that characterizes all his work that applied researchers in the social sciences face many demands and opportunities to interact with the media, politics and private interests. He is very open about the risks (including the ethical ones) involved in these relationships. Research is about nuances, debates, doubts, small steps towards the truth. Instead, media, politics and business controversies are about strong opinions and personalities. Tirole, especially since he was awarded with the Nobel Prize, has been reluctantly dragged more towards this aspect of his work. The book is precisely a result of this pressure. Although these books are aimed for a wide audience, in practice they end up being read by other economists that are curious or want to have a shortcut to the ideas of great researchers without paying the cost of reading the scholarly articles. This great economist argues nevertheless that interacting with the outside world is necessary as long as one does not exagerate his or her wisdom especially in areas that are far away from the topics of research expertise. In the media markets and in the political and business worlds there is not much demand for nuance and seriously critical minds. There are few economists turned celebrities that are as open as Tirole about the risks of engaging with the open world. These days the risks of exagerating and jumping into conclusions are enormous with social networks, blogs and 24 hours news channels. We should all spend less time with current events and more time with deep knowledge, although we know that by doing this we are leaving all the floor to charlatans and useful idiots.

Sunday, December 18, 2016

A white elephant on a green mountain

2017 will be the 25th anniversary of the Olympic Games of Barcelona. I lived these games as a very young city councillor and obviously have great memories of the event, not least from running 50 meters with the Olypimc torch the night before the inauguration. Everybody has actually good memories of the Games, whether they ran with the torch or not. The games were very successful and have been praised even by the now almost consensual literature on the drawbacks of big sports events, for example the book by Andrew Zimbalist "Circus Maximus." However, even those very successful games give examples of the big problems of these events. Barcelona 1992 was also plagued by cost overruns (check the work by Bent Flyvbjerg) and have left a legacy of white elephants. Most of the white elephants are in the Montjuic mountain, this being one of the two hills than delineate the perimeter of the city. Anyone who has come to Barcelona knows that Montjuïc is a hill almost totally occupied by an urban park very close to the center of Barcelona. It is like Central Park on a small mountain, something very hard to make excludable. The Olympic Stadium, the swimming pool, the main sports pavillion (Palau Sant Jordi) are there, being well maintained and with the irregular use provided by concerts, family events and the occasional sports tournament. This contrasts with the other hill surrounding the city, Tibidabo, farther away from downtown, with no olympic faciltities, and with an excludable fun park at the top that is managed by a municipally owned operator (which resulted from the failure of a corrupt private operator in the 1990s). The Montjuïc White elephant is costly, very costly, but there is no way back given that we were very happy to organize the games, which contributed to a huge urban transformation. Now, some months ago it was announced that a private-owned company (with good political connections) would run a sort of theme park, called Open Camp, in the Montjuïc olympic facilities, by which visitors would pay a ticket and enjoy the facilities by practicing their favourite sports. When they presented the project, they claimed to be endorsed by an "economic impact study" by Universitat Pompeu Fabra. When I saw the ill-defined concept "economic impact study" and I saw that the supposed study was not backed by any name of any individual academic that put her or his reputation at stake, I became suspicious. I looked for the supposed study in the Internet and I couldn't find it. Since I also still have some political connections from my times in the City Council, I told them my opinion, including my prediction that some time from them Open Camp would ask to be bailed out. Since this week in the local press there was a piece saying that the request for a bail out had already been made, I felt in the need to write this post.