Evan Seyfried ’16 (Economics of Public Policy) recaps the Barcelona GSE Lecture by Robert E. Lucas (Chicago, Nobel Laureate)
Lecture summary by Evan Seyfried ’16 (Master’s in Economics of Public Policy). Above, the author talks with Robert Lucas after the lecture.
The modish Banco Sabadell Lecture Hall, overlooking grand, prosperous Avinguda Diagonal, is filled to capacity this Thursday evening. Nobel laureate economist Robert Lucas is here to present the 34th Barcelona GSE Lecture, and the GSE community is eagerly anticipating the talk.
“What was the Industrial Revolution?”
The topic would have seemed almost trite in less-skilled hands. Lucas, however, over the past decade has focused his talents on exploring economic models that might explain rapid industrialization like that of the United Kingdom starting in the late 18th century. He views the rise of urbanization and industrialization through the lens of economist Gary Becker’s theory of population fertility and couples it with a human capital growth model.
This talk draws heavily from Lucas’s recent research on human capital and economic growth1, the diffusion of the Industrial Revolution2, and a rejection of the “great men” hypothesis of economic progress3.
The central hypothesis of his lecture tonight is, essentially, that of his 2015 paper on economic growth, with its blissfully short abstract:
“This paper describes a growth model with the property that human capital accumulation can account for all observed growth. The model is shown to be consistent with evidence on individual productivities as measured by census earnings data. The central hypothesis is that we learn more when we interact with more productive people.”1
From this basis, Professor Lucas presents his most recent work on the topic. He begins with a graph—how else would an economist begin any lecture?—showing the striking relationship between a country’s prosperity (measured in GDP per capita) and the share of its population employed in agriculture.
Why is the relationship between these two variables so consistent? Later in the lecture, Lucas will develop his model based on a “dual economy” of low-skilled agricultural workers and various levels of skilled urban dwellers.
But first, a little history.
“Macroeconomics’ finest hour.” (A brief historical digression.)
Thomas Robert Malthus, English cleric and scholar, became famous (and, to some, infamous) when he published “An Essay on the Principle of Population” in 1798. The essay neatly distilled a framework for pre-industrial population dynamics:
“Yet in all societies, even those that are most vicious, the tendency to a virtuous attachment is so strong that there is a constant effort towards an increase of population. This constant effort as constantly tends to subject the lower classes of the society to distress and to prevent any great permanent amelioration of their condition.”4
Its publication led to a massive controversy that rapidly spread across the landscape of political economy. Although Malthus’s work was not nearly as apocalyptic as his deriders asserted, it still pointed out uncomfortable truths about the seemingly unrelenting misery of the lower classes, even in “advancing” nations.
A century and a half later, economist Gary Becker took up the Malthusian mantle with his seminal work, “An Economic Analysis of Fertility,” a study of the dynamics of family planning and income. Becker explicitly acknowledged his debt to Malthus: “[…] Malthus’ famous discussion was built upon a strongly economic framework; mine can be viewed as a generalization and development of his.”5 Becker’s further research concluded that viewing fertility as a result of marginal-cost/marginal-benefit decisions is a satisfying way to explain the phenomenon of high-income families voluntarily lowering their fertility rates. His framework implies that families with more human capital invest more resources in fewer children.
Professor Lucas calls the Malthusian insight and the subsequent robust debate among political economists of the day “macroeconomics’ finest hour.”
The Path Off the Farm: What Is an Industrial Revolution?
Lucas now presents his synthesis: Becker’s fertility model combined with Lucas’s own human capital model, both placed in the context of the urban-agricultural dual economy.
Like Becker, Lucas’s model has parents view their children as “durable goods” that yield a “psychic utility” but also impose costs. As families move up the socioeconomic ladder, they make different decisions regarding investment in the “quality” of the children (everything from time spent teaching, to money invested in tutors and private schools). Over time, the quantity/quality balance leads to lowering fertility among higher socioeconomic classes.
In the dual-economy framework, rural (landless or small proprietor) farmers are pushed by wage considerations to move into dynamic urban environments as low-skilled workers. At first, with no wealth to invest in their children, they make “quantity” a priority over “quality.” Over generations, however, there is a tipping point where a given family has accumulated enough resources to make meaningful human-capital investments in their children. Once this occurs, they can now move up to the higher-skilled tiers of society. Crucially, it is this accumulation, not of wealth, but of human capital, that drives further growth in Lucas’s model. The speed at which these changes occur depends on the magnitude of “interactions” in society: how often and to what degree people engage with one another in productive exchanges—anything from academic discussions to business deals.
A key mechanism in the model is that economic growth itself is what allows the low-skilled workers, coming from the farms, to dependably get better and better jobs over time. Thus, the dynamic is self-reinforcing as more rural workers move to the cities.
When considering the Industrial Revolution, we can appreciate how natural it would be to dismiss the intangible, fuzzy concept of “human capital” and only focus on material capital: factories, infrastructure, mines, etc. But if we view the Industrial Revolution with Lucas’s model in mind, we can at the very least see that Lucas’s statement from his 2015 paper—”human capital accumulation can account for all observed growth”1—is quite plausible.
Later in the same paper, Lucas asserts: “The contribution of human capital accumulation to economic growth deserves a production function of its own.” 1 In the model Lucas has presented tonight, he answers his own demand. There is, indeed, a “production function” for human capital, and when it is coupled to a fertility model, it can show the dynamics of rapid urbanization and economic growth. In other words, it can model an industrial revolution.
To use Lucas’s own words from the lecture: “We used to think of the Industrial Revolution as factories and coal, but I think the main consequence was the emergence of the bourgeoisie who are just creating things out of nothing, generating wealth and production.”
What does this all mean? What are the implications of this model in 2016?
We go back to the graph showing the relation between GDP per capita and share of population in agricultural work. Lucas mentions how many areas of the world are still in the upper left portion of the graph—poor, agricultural, unskilled-labor-intensive economies. According to Lucas, we must not be deluded into thinking that a pastoral lifestyle is something to be preserved at the cost of indefinite poverty. Lucas states, “The idea that you can prettify this lifestyle is just plain wrong.” Rather, we have a collective interest in the flourishing of all people around the world, and we have emerging evidence that investment in human capital, coupled with smart urbanization, is one of the best ways to achieve it.
The questions following the lecture are—as expected from economists—pointed. In response to questions about the refugee and economic migrant crisis in the EU, Lucas denies that his model says anything specific about it, but states emphatically that he supports immigration in general. Finally, when asked about the prospects of continued economic growth, given recent anxiety about economic stagnation, Lucas responds that since the Industrial Revolution we have seen stable growth unlike any period before in recorded history. He believes that growth will continue, as capitalism reinvents itself yet again, this time for the information age—though he admits that “flush toilets are way more important than Facebook.”
With that, the lecture concludes, and the lucky attendees weigh the expected utility of waiting in line to speak with the most influential living economist against the expected utility of beating the rush to the cava and jamón ibérico at the reception. The gears of the market keep turning.
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.
Benjamin Anderson and Ramiro Antonio Burga
Economics of Public Policy
This paper provides empirical evidence of the persistent effects of exposure to civil conflict on political beliefs and participation. We exploit the variation in geographic incidence of conflict and birth cohorts to identify the long-term effects of exposure to violence on belief in democracy, trust in institutions, opinions in support of civil rights, voting turnout and casting of blank ballots, and participation in civic organizations. Conditional on being exposed to violence, the average person exposed to violence during certain sensitive stages of life still holds slightly more negative opinions about the value of democracy and are less likely to participate in civic / political organizations in the long-run.
About the paper
Political preferences heavily dictate the role of the government, the policy making processes that emerge, and potentially even the institutional framework, itself (Besley and Case, 2003; Aghion et al., 2004). Furthermore, consequential effects of various forms of political institutions is a primary focus of Political Economy, and justifiably so, for the array of welfare implications encompassed within, including, economic growth, inequality, health outcomes, and many others (Acemoglu et al., 2001; 2002). In countries where citizens have been exposed to violence during sensitive periods of life, it may be more difficult for governments to gain trust and build support for democratic processes and good institutions.
There are many logical pathways which one could speculate that civil conflict might affect citizens’ political beliefs; perhaps the most conspicuous of which being trust. Lack of protection, safety, and government accountability could lead to a decrease or lack of trust in the government, while exposure to violence, fear tactics, and other criminal behavior could result in distrust toward other members of society (Jaeger and Paserman, 2008; Rohner et al., 2013). Secondarily, residual effects of civil conflict in the form of fear, in particular for safety, could dissuade citizens from various forms of political participation (Salamon and Evera, 1973).
Summary of findings:
We examine the effect of exposure to conflict during sensitive developmental periods of life on persistent changes to various measures of political beliefs and participation. The results show that the average person exposed to conflict during the age range 13 to 17 will have slightly more negative opinions about democracy well over a decade after the conclusion of the violence. Very minor long-term effects are also present for participation in civic organizations. Our results show that the average person exposed to conflict during the age range of 7 to 12 has a decreased likelihood of participating in civic organizations of approximately 3% to 6% for each additional year that the individual experienced violence in his/her district during this period of life. While these effects are economically small, it is notable that any long-term effect is detected given the likely presence of strong attenuation bias as discussed in our threats to identification. We find that the most sensitive stages of life for the formation of political beliefs, with respect to exposure to conflict, are the pre-teen and teenage years. Contrary to the effects of violence exposure on human capital and labor market outcomes, we do not find effects occurring at the earliest life stages.
The detection of effects in both belief and action variables not only helps to validate one another, but it also suggests that beliefs indeed translate to actions. This connection provides some evidence that changes in political perception also corresponds with political behavioral change.
Even though the effects we detect are relatively small, they might have been severe during and shortly following the civil war.
Although we are unable to further analyze heterogeneous effects, the effects could be quite large for certain individuals who may have been exposed to more extreme amounts or types of violent acts.
Knowledge of the size and temporality of these consequential effects of civil conflict on political beliefs and participation as well as mechanisms which drive these changes would be invaluable. This would allow policy makers to develop targeted strategies to help combat the destructive effects of violence on citizens’ political beliefs and behavior that could undermine the healthy growth, development, and stability of society.
On the experience:
The thesis was almost certainly the most fun and rewarding assignment of the year, despite the imposing time constraint. Having received rigorous training to acquire the tools needed for such a project, and having discovered and nurtured our own interests via exposure to a multitude of prominent literature in various applied topics throughout the year, it was exciting to unleash the knowledge we had gained and apply some of our empirical techniques to a new and interesting research question of our own.
Throughout the program, but especially during the thesis, we were fortunate to have access to the knowledge and support of professors. Aided by some enthusiastic and accomplished mentors, we evolved our expectations of ourselves. Their expertise in areas related to those of our paper – conflicts, violence and political economy – optimized the quality of feedback and constructive critique we received in the process. The final presentation to our directors, professors and peers was another valuable component. It served as a welcome challenge that exercised essential communication skills, not only for conveying complex ideas to an audience, but adroitly and favorably reacting to questions and criticism.
The feeling of accomplishment derived from materializing a quality piece of empirical work is great motivation to build on for the future. Just one year ago, not only would this project have been impossible to execute, even the vision of it coming together was unfathomable. By the final term, we knew that we were prepared; now, we carry forth these tools, creativity, and confidence in our abilities.
On working with a coauthor:
At the outset, the thought of working with a coauthor for the thesis did not sound ideal, but ultimately, it had many advantages. It offered another opportunity to gain from the international and cultural diversity of one another and to develop these working and personal relationships; it was an invaluable intangible experience for which we will be forever thankful. Our complimentary skillsets and working styles prevented this beast from ever becoming a burden. We are proud of what we were able to achieve given the constraints, and ended up with a final project that far surpassed anything that we could have done independently within the same amount of time.
While the outcomes of most public investments schemes are not completely foreseeable, the benefits of investing in education to both children and broader society could not be more clear: education is strongly correlated with improvements in health and nutrition, it is one of the best protections against poverty, and it fosters civic participation and democratization.
Although the importance of education to individuals and society is apparent, access to education differs substantially between and within countries. In particular in developing countries the access to education is extremely restricted. Looking at within country disparities, these barriers to education often disproportionately affect girls. In the 1970s the Indonesia’s central government launched the Sekolah Dasar INPRES program (henceforth SD INPRES), one of the largest primary school construction programs in history in order to counteract this trend of stagnating primary school enrollment rates. This large-scale construction program led many economists to study the numerous impacts on the Indonesian population by taking advantage of its form as a natural experiment.
Previous literature on the impact of SD INPRES suggests that until recently only little attention has been paid to the effects of the primary school construction program on girls. This is not very surprising since Indonesia constantly performed poorly among international gender equality measurements such as the Gender Inequality Index by the United Nations or the Global Gender Gap Report by the World Economic Forum. Work by Hertz and Jayasundera (2007), Pettersson (2012), and Ashraf et al. (2014), take differing approaches in studying the effects of the SD INPRES program in women. The novelty in our approach lies in the fact that with our data set, containing more cohorts than previous analyses, we are able to check for persistency of the resulting effects of the school construction program on later cohorts by extending the time range used in Duflo’s pioneering analysis. We also investigate whether the effect of the program on women might not be reflected on the intensive margin, i.e. the actual duration of education, but rather on the extensive margin, in other words the likelihood of completing primary school education.
A key element of our identification strategy to identify causality of the school construction program on educational outcomes relies on variations of an individual’s exposure to the program based on date and region of birth. For the purpose of our analysis, we only treat the combination of these two variations as exogenous. By its nature, the SD INPRES program was designed to allocate more schools to regions where primary enrollment was particularly low, inducing heterogeneity in the number of average schools built per district. A second source of variation is reflected in the age of the students. A child of 12 years of age or older in 1974 when the SD INPRES schools started to operate, could not benefit from the program. On the other hand, a child aged 6 or younger in 1974 was young enough to fully benefit from the newly constructed schools. Similarly, children between 6 and 12 years of age in 1974 only enjoyed partial exposure to the program. If the program had an effect on an individual’s years of education, we would expect the program to have the largest effects for fully exposed cohorts, a somewhat mediocre effect on the partially exposed individuals, and no effect on children that were too old in 1974 to benefit from the program. The large, exogenous shock of the SD INPRES program enables us to differentiate between treatment and comparison groups, in the manner of a quasi-experiment using a difference-in-differences approach.
In line with previous literature, we find that the SD INPRES program had significant effects on schooling outcomes of Indonesia’s children. However, children did not benefit from the primary school construction program equally. In fact, we find substantial heterogeneity of the program’s effect between genders, mostly favoring boys over girls. On average, one more school per 1,000 children in the district of birth increased schooling duration by 0.12 to 0.21 years for boys. However, this effect is less clear-cut for women: depending on the sample specification and type of analysis, we were able to obtain significant results for women albeit substantially smaller in magnitude. In particular when breaking down the analysis on each birth year cohort, our estimates suggest that only the youngest cohorts hitherto benefited from the program, with effects ranging from 0.1 to 0.17 additional years of schooling for an additional school built in the district of birth. Such suggestive late onset of the program’s effectiveness on women motivated us to perform a persistency analysis on later female cohorts. Including eight additional birth year cohorts, we find increasing and significant effects of on average 0.2 additional years of schooling. These findings suggest that a potential effect on women’s schooling might have set in later. Our mixed evidence thus far gives rise to doubts whether the SD INPRES program worked on the extensive margin of schooling attainment. Due to possible selection disadvantages at the transition between primary and secondary school, the effect of the program for girls might not be reflected in the in years schooling but merely in their likelihood of primary school completion. We find significant but negligible effects on women’s likelihood to graduate from primary school.
Ideally, a policy trying to increase education should be targeted at disadvantaged groups of society in order to decrease inequality and break the vicious cycle of poverty. Our findings suggest that women in Indonesia are particularly disadvantaged when analyzing educational outcomes. Further research should hence try to identify other possible heterogeneities when stratifying the sample interest. During our analysis, we made first attempts by looking at different specifications such as the difference in effects between individuals living in rural versus urban areas, or looking at potential heterogeneity varying by ethnicity. Such deviations of our analysis might unmask further heterogeneity, which will be essential to identify when assessing and improving Indonesia’s education policy. It will therefore be necessary to devote further research and policy attention towards the long-term impacts of the program by analyzing the educational and labor market outcomes of later cohorts, captured in the SUPAS 2005 and 2015 polls. On the basis of these results it will be necessary to identify and study potential policy remedies to overcome the tremendous challenges Indonesia’s education system faces.
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.
Authors: Genevieve Jeffrey, Yi-Ting Kuo, Laura López and Stella Veazey
Economics of Public Policy
We examine the effect of income on birth weight by employing two identification strategies using US Vital Statistics Natality data. First, following a study by Hoynes et al. (2015), we take advantage of an exogenous increase in income from the Earned Income Tax Credit using a difference-in-differences methodology. The Earned Income tax credit (EITC), enacted in 1975, is a refundable transfer to lower-income working families through the tax system and is one of the primary tools used in the United States to fight poverty. The EITC underwent an expansion is 1993 (Omnibus Budget Reconciliation Act), increasing the maximum credit families with and without children could receive. Following Hoynes et al. (2015), we take advantage of the difference in maximum credit available for families with different numbers of children. We find that the increase from the EITC reduces the incidence of low birth weight and increases mean birth weight. In addition, we discover that maternal smoking and drinking behavior during gestation is reduced.
Next, in order to try to capture the effect of income on birth weight across the population (as opposed to just high-impact groups), we exploit income variation from a policy change in Alaska that allowed payments from oil wealth to be distributed to all Alaska residents. We employ a comparative case study methodology using a synthetic control group following Abadie et al. (2010). Our comparison group is comprised of a combination of North Dakota, Oregon, Delaware, Kentucky and Nevada. The analysis shows a substantial increase in Alaska’s average birth weight over its synthetic counterpart around the onset of the policy. However, we refrain from attributing the divergence to the dividend payments alone, given significant changes in Alaska’s economy that coincide with the policy and are not well-mirrored by the control states.
Adam Aten ’13 (Health Economics and Policy) is a researcher at The Brookings Institution focusing on evidence development and biomedical innovation within the Center for Health Policy. Prior to joining Brookings, he was a civil servant at the U.S. Department of Health and Human Services developing policy expertise in health insurance for low-income populations, digital information systems and information governance, and cost effectiveness of public health programs.
This week he has written a post for the World Bank’s Investing in Health blog on universal health coverage (UHC). Here are some excerpts:
Decision-makers now have many tools at their disposal to analyze trends and take strategic decisions – increasingly in real-time – thanks to the rapid diffusion and adoption of information and communications technologies. New approaches to collect, manage and analyze data to improve health systems learning, such as how the poor are benefitting (or not) from health care services, are helping to ensure the right care is given to the right patient at the right time, every time – the goal of UHC.
It is relatively easy to agree on public health targets, but actual progress requires a management structure supported by dashboards that can allow monitoring of intermediate outcomes in real-time.
Nobel Laureate Roger Myerson presented his latest paper, ‘Local Agency Costs of Political Centralization’ to the Barcelona GSE community on the 3rd of June.
The central focus of the paper is to examine how efficient the widely accepted notion of Political Centralisation is.
Some existing literature already argues that political decentralization and community empowerment may be the key to successful development. They show how autonomous local governments can reduce entry barriers in national politics. Creating the space for success on a smaller scale can lead to them becoming strong candidates for higher office. The decentralization of power also gives local leaders a stake in nation building.
Others argue that one centralized government could also have the same effects by applying differentiated policies accounting for regional differences.
The need for targeted policies for differing dynamics in different regions is clear but the way to achieve this is still being explored. Myerson comes in with this paper is to show that in order to achieve efficient local public investment there needs to be accountability which is best achieved with decentralization of power.
The mechanism he uses to analyze this issue is a model of moral hazard in local public services in which an efficient solution is only feasible when officials are held accountable to local voters.
Political Decentralization can lead to Accountability
If the quality of the local public services can only be observed by the local residents, then unless the residents have power over the officials’ career, they will not be accountable.
If the local residents do not have the power to dismiss the officials, their careers would depend more on political relationships than on effectively managing local public services. This would have a roundabout effect on development as without good public services, private investments would be scarce since the success of these investments would depend on the quality of these public services.
In his talk he expounded on the following example to illustrate his findings. In a remote town, if we imagine each resident invests to start an enterprise whose probability of success would depend on the amount spent on public services in the town. The only observable evidence that the official spent the money on public services would be the number of successes among the residents’ enterprises.
This budget is managed by the local official, who could divert any part to his personal consumption. What Myerson shows is that there is a premium that can be paid to the official in addition to his salary that would incentivize the official to stay. This would make up the moral hazard rents and allow the efficient amount of investment to be spent.
Myerson shows that for a given budget if the official is paid ‘p’ if a specified fraction of residents report success then the renewal thresholds and official salaries can be set as functions of the local population ‘n’ that would result in the efficient budget and induced public investment levels.
Distrust and Instability
However if there were distrust, the voters would rather replace the incumbent if they expect the funds to be stolen in the future. In this case, public investment and residents’ benefits would be a decreasing function of the political instability parameter ‘q’. However as long as the utility from the induced public investment for the given level of instability is positive, residents can still benefit.
Autocracy – Rulers Incentive
In an autocracy the national ruler can commit to allow the town to elect an autonomous local government in exchange for a tax the residents would pay until their utility is maximized.
Moral hazard rents would be paid by candidates in terms of cash or political support. The autocracy could offer these offices as rewards for support and help them ward off challengers in this way.
If the national ruler could credibly commit to allow an autonomous local government after picking the first incumbent local official, the ruler could gain fiscal and political benefits per resident. But for this to happen, the ruler must make a credible commitment to the division of power constitutionally which would be against his interests ex-post.
With local accountability then the ruler would not be able to use the offices as rewards as this would make him vulnerable to voters distrust.
If successful they could be serious contenders for national office competing against him. This may be politically too costly for the incumbent national leader.
Separation of Information from Influence in an Autocracy
Key supporters are important for the success of any leader. A leader can get more support when key supporters monitor how he treats others so not rewarding one would cause distrust in all. If successful, competitors cannot recruit supporters without constraints.
Since an autocratic ruler is only accountable to these courtiers, they must deter wrongful dismissals as he can resell the vacant offices with moral hazard rents.
Courtiers can impose political costs on the ruler but these costs cannot depend on information that the ruler would be able to manipulate.
Courtiers could impose a penalty on the ruler depending on the set of dismissed officials. They should choose this penalty such that the dismissal set is a small fraction of all offices. If the net service value the ruler would get from replacing the official would equal his penalty for dismissal, the ruler would pick the dismissal set based on information on public services. However on the other hand, he might choose to dismiss those with the best services as they may prove to be strong contenders and rivals.
Under democracies also, political leaders need the reputation of rewarding patronage to motivate supporters. Under democracy, local autonomy threatens to increase competitive entry into national politics against the interest of national officials. One example of this given was Pakistan. National democratic competition also raises the political risk for the retention of appointees.
However if Local Accountability leads to better Public Services could Democracy induce leaders to promise it?
An analysis shows that with sequential bids the challenger can win by offering marginally more in most districts and zero where the incumbent spends the most. Contrary to the optimal socially, this will lead to small offers everywhere.
Endogenous Decentralization in a Unitary Democracy
However if public budgets are fixed as in most cases, then candidates can compete based on promises of accountability of the local officials. An alternative for this would be for the candidate to sell the office for a political contribution and then spend this money obtained on the campaign. This would win over the uninformed voters while the informed would vote for the best promise. This result thus depends on the proportion of the population that is informed.
Inefficient Centralization in a Unitary Democracy
Citing the example of Ukraine, Myerson also warned of the possibility of politically neglected regions being dangerous for a nations territorial integrity if it facilitated the opportunity for disaffected regions to secede. In an equilibrium of a 2-candidate election for national leadership of a unitary state, each candidate would naturally maintain inefficient centralized management of local public services in a fraction of all districts.
The key points were that moral hazard in local public investments can be efficiently managed with local accountability. When the public services can only be observed by local residents, officials can only be held accountable if their careers depend on the resident’s approval. Political decentralization would guarantee such local power.
However if the leader can resell offices then he would not a neutral judge of the local public services. In the specific case of a centralized autocracy, dismissal must be approved by the national elite and residents cannot communicate their complaints to them, so without a guarantee of local political rights there can be no credible commitment to sustain efficient local investments by the autocratic national government.
By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.
“In my over 50 years of academic life, the 1% has never had as much influence in shaping the knowledge of economics as it does now.”
UPF Professor Vicenç Navarro, author of Podemos’ electoral program, talks about the way economics is taught today and some of the policies put forward by Podemos.
Vicenç Navarro is currently a professor and the director of the Public Policy program both in Pompeu Fabra and John Hopkins University. Being one of the most internationally cited researchers in the field of social sciences, Vicenç Navarro is an economist, political theorist and sociologist who has been widely recognized for challenging neoliberal approaches to the study of economics. Together with professor Juan Torres, he is the author of the controversial electoral program put forward by Podemos, where they advocate for a strong public sector and welfare state, as well as a move away from an economy based on speculative industries like construction. Love-him or hate-him, Navarro’s strong opinions have been able to shake the current economic academia and Spain’s political scenario – and we are here to ask him about it.
Part 1: Reflections on the way Economics is taught today
Hugo Ferradáns (HF) – There is little doubt that neoclassical economics has contributed to a very large extent to the study of economics and social sciences. Nevertheless, it seems that this neoclassical school of thought has monopolized the economic syllabus in top universities around the United States and Europe, leaving alternative economic perspectives ignored.
You suggest in a number of articles that many of the economic policies that are being implemented currently in Europe come from specific power relations within the Eurozone (European Central Bank and the IMF against anti-austerity movements in Greece, Spain, etc.). In relation to the study of economics, how does the lack of teaching about institutions and politics in the economic curriculum, as well as the lack of debate against the foundations of neoclassical theories, are limiting our understanding of today’s economic and political scene?
Vicenç Navarro (VN) – One of the major problems we encounter in the production of economic knowledge is its excessive disciplinary approach. Actually, the academic institutions are usually divided by departments based on disciplines, one of them being economics. The reality that surrounds us, however, cannot be understood following the disciplinary approach. The understanding of our realities, including the economic ones, calls for a multidisciplinary analysis, with the understandings of the historical, political and social forces that shape and determine that reality. In order to understand the current Great Recession, for example, we have to understand how power—class power, race power, gender power, national power—is produced and reproduced through political institutions, as well as social and cultural ones. In other words, we have to comprehend how power relations shape the governance of our societies, including their economies.
Modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy.
The current economics, for the most part, do not do that. They specialize in branches of the tree without understanding, or even less, questioning, the nature of the forest. Moreover, they have given great emphasis to the methods, depoliticizing the realities of the economic phenomenon. Today, modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy. Currently, most of the major economic problems we face are basically political.
You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand; this is the result of the changing power relations—primarily class power relations—that have occurred in the last thirty years. You can also not explain the crisis without understanding the enormous influence of financial capital on the European Central Bank. To try to explain reality by referring to the working of the financial markets as a point of departure is profoundly wrong and naïve. Financial markets have very little to do with markets. It was enough for Mario Draghi, the President of the European Central Bank, to speak a sentence, to reduce the interest rates dramatically.
The absence of the study of the political and social context, determined historically, makes current economics an apologetic message for current power relations, mystifying, hiding, and/or confusing the understanding of the economic phenomena. It is not surprising, therefore, that the critical traditions within economies are completely ignored or marginalized. It is predictable that current economists did not perceive the arrival of the current recession, which is a Great Depression for millions of Europeans. Only analysts from critical traditions were able to predict it. And we did it.
HF – Many people would ask why are historical and political contexts so ignored in the economics syllabus if they are so important to understand economics. Does this rejection come from a clash of interests between economic and political powers and Universities, or was it a slow transition towards a neoclassical orthodoxy led by the academia?
VN – The current emphasis on methods and its analysis of the economic reality without looking at the political context that determines it is a consequence of changes in the power relations in our societies. The apologetic function of current economies of the current power relations explains its lack of relevance. What we have been seeing since the 80s has been the enormous growth of income derived from capital, and the decline of income from labor. This has resulted in the drastic growth of inequalities.
The influence of financial and economic institutions in the production of knowledge is enormous.
But those who derive their income from capital have enormous influence on value-generating systems, including the media and universities. This is extremely clear in the US but is happening also in the European universities. Today, the influence of financial and economic institutions in the production of knowledge is enormous. They fund research, support economic journals, and shape, to a large degree, the academic culture in the area of economics. It is very similar to what happens in medicine where the pharmaceutical industry has a major influence in shaping clinical knowledge and practice.
In my over 50 years of academic life, never has the 1% (those who derive their income from capital) had as much influence in shaping the knowledge of economics. The situation in Spain is even worse than in the US, due to the lack of public funds for economic research. The major research institutions are funded by major banks or major corporations. This explains the dominance of the neoliberal ideology in most academic forums, journals, and major media.
HF – Does this influence go beyond universities? How does this affect democracy in Europe and the United States?
VN – The influence of what now is called the 1% on society affects all institutions that reproduce information and knowledge, from the major media in a country to the university, and now including the entire educational system, starting with the schools. The expansion of the teaching of economics to the school systems in an intent to expand a vision of reality that is in accordance with conventional wisdom in a country, the wisdom shaped by the 1%, and its allied classes (which includes approximately another 10% of the population).
Part 2: Public policy in Spain
HF – Moving now to policy in Spain, we would like to talk about the role of media in democracy. The importance of and the ways to achieve a plural media independent from public institutions and economic powers has been subject of intense debate over the past years due to its relevance to democratic quality. As an example, Prat and Strömberg (2011) suggest that to achieve this plural and independent media we need to encourage financially independent outlets. McChesney and Schiller (2003), however, focus on the importance of public media as a way to insulate outlets from being controlled by corporations.
In the economic program that Podemos presented, of which you are one of the authors, you suggest that there should be a “separation by law between the property of financial groups and communication outlets, thus ensuring the independence of all media companies from the government and large corporations” (page 10). Furthermore, you mention that there should be a “legislation that provides a minimum quota of independent public media outlets”, by which “no company could take more than the 15% of the total media market” (page 10).
Many people would question these policies, arguing that independence and quality in media markets are not necessarily achieved by constraining private companies and expanding public media outlets. Many examples of private media outlets that are independent of private corporations can be given, such as The Guardian, The New York Times and even La Sexta in Spain. How would an increase in the presence of public media outlets improve the independence of media from economic and political powers in Spain? Isn’t the problem of media independence about a casta that operates both at the private and public level?
VN – Today, financial capital—primarily banks and insurance companies—have the dominant voice in the major media. In Spain this is obvious. All major media are in deep debt and are in the hands of the banks. It is because of this that Professor Juan Torres and I indicated in our economic proposals for the new party Podemos that that linkage should be discontinued, because it enormously limits the necessary ideological diversity that should exist in any democracy. Today, there is no such diversity in Spain.
But that situation is not unique in Spain. I have lived for many years in the United States, teaching at the Johns Hopkins University for over fifty years, and ideological diversity is also very limited in that country. Rarely, if ever, will you see intellectuals such as Noam Chomsky in the major media. Incidentally, I have to correct you regarding The New York Times in the US and La Sexta in Spain. The largest groups of members on the Editorial Board of the NYT are related to insurance companies and banking. This explains the hostility of that daily to the specific single-payer proposal for reforming health care in the US. This proposal, put forward by the left of the Democratic Party and the labor union would be a model of the health care system that already exists in Canada, and would eliminate private health insurance within the publicly funded system.
And La Sexta is owned by economic and financial interests that also fund some of the extreme right-wing media, like La Razon. They allow some space for the left, but always in a very limited way. They expose those critical voices because they realize that the audience increases when critical voices are allowed. But the major owner supervises the production and do not leave much space for progressive forces.
HF – The economic program of Podemos also argues that it would encourage the presence of small and medium size companies to foster employment creation.
The Economist published an article called “Supersize me” (February 21, 2015) arguing that a lack of larger firms in Spain means fewer jobs and a less resilient economy. In particular, it mentions that “bigger firms tend to be more resilient in hard times than smaller ones. In Britain, for example, large companies – those with more than 250 workers – provide almost half of all private-sector jobs, compared with just a quarter in Spain. The Círculo de Empresarios calculates that if Spain had the same mix of firms as Britain, it would have lost half a million fewer jobs since the global financial crisis.”
From this perspective, what is attractive about medium and small size firms in an economy with such high unemployment rate, and what makes big corporations not a good option to overcome the challenges that Spain is facing today? How would this influence unemployment for young people?
VN – The major economic problems existing in Spain are not the size of the enterprises. Most of the largest Spanish enterprises used to be public enterprises that were privatized and run by friends of the governing parties. Many of them are less efficient than they were when they were public. Some of the major private banks that have run into major problems have been banks that used to be public. And even public banks were forced to act as private banks. And that is one of the major problems. Private banking in Spain is far too large. Spain is the country in the European Union with the smallest public banking sector. It is also one of the countries where it is most difficult to get credit. This, and the lack of demand due to the large reduction of wages (the lowest wages in the EU) and cuts in public expenditures (the lowest public expenditure in the EU) are the causes of the recession and limited recovery.
If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
The greatest need in Spain to restructure the economy, changing its dependency on sectors very prone to speculation, like construction. Also, contrary to what the 1% in Spain claims, the public sector is very underdeveloped. If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
HF – In your opinion, then, what would you say is Spain’s biggest challenge from an economic and political point of view, and what could the country do to overcome it?
VN – I would say that the biggest problem Spain is facing right now is the very limited democracy that it exists in the country. The transition from dictatorship to democracy in Spain took place in conditions very favorable to the conservative forces that controlled the State and the media. As a consequence, the Spanish state has a very limited democracy and underfunded welfare state. There is a need for a transition from the dramatically insufficient democracy to a real democracy, with active participation of the citizenship in the governance of the country.
Spain’s political class and institutions have behaved in an extractive manner. This situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.
By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.
In 2012, MIT professors Daron Acemoglu and James Robinson published one of the most compelling and resourceful books I have read in the field of development economics: Why Nations Fail. Their work suggests that the existence of extractive institutions and an extractive political class constraints to a large extent the ability of a country to experience prosperity and economic success.
Acemoglu and Robinson define extractive institutions as those institutions that create a system that moves resources from the many to a small powerful elite. In this sense, institutions that are extractive do not secure property rights to the population, nor provide an unbiased justice system that caters for the interests of the powerless. Many examples are given: North Korea vs. South Korea, Mexico vs. the United States, etc., drawing the conclusion that, if a society operates under the rule of a state that fails to create institutions that are democratic, a state will be bound to fail and not achieve a decent level of prosperity.
Although Acemoglu and Robinson’s work focuses on the relevance of extractive institutions in developing countries, this article will show how the argument could be easily expanded to developed countries like Spain.
Indeed, after many years of economic boom where money was flowing ferociously into the economy, Spain appears to have reached an economic and political cul-de-sac. Where did all the money go? How can it be that Spain is now leading the charts of extreme child poverty in the European Union, and at the same time is the country with the highest number of high-speed trains and empty houses in Europe?
At this point is where Why Nations Fail becomes appealing to me. I put forward the idea that Spain’s political class and institutions have behaved in an extractive manner and that this situation is largely due to a structural system of rent extraction, both at a institutional and cultural level, that drives the creation of wealth to the benefit of a few.
It is important to clarify, though, that this article appreciates that the extent to which Spain’s institutions are extractive is not the same as the ones described in Why Nations Fail. Spanish institutions do secure property rights and provide certain mechanisms to achieve a satisfactory level of development and economic growth. However, the construction and housing bubbles, as well as today’s economic policies put forward by the conservative party Partido Popular, suggest how many institutions are fuelling a system that perpetuates a ruling elite without trickling wealth down to the rest of the population.
I would like to introduce, not only at a political-economy-theory level, but also looking at a number of historical qualitative and quantitative data, how Acemoglu and Robinson’s discourse is crucial to understand today’s political and economic situation in Spain, and how a move towards a greater democratic and prosperous country will only be achieved by a regeneration of Spain’s political class.
Some history: from the 17th century until today
The creation of a very dense and static political and economic elite in Spain can be traced back to the 16th and 17th centuries. The combination between an absolutist government and a system of privileges that encouraged the middle class to abandon productive work and constitute tax-free property entails, created an elite (the so-called hidalguía) that was characterized by a rejection to culture and class mobility. Indeed, this elite was very supportive of the emergence of rent-seeking structures, as seen in the massive increase of mayorazgos during the decline of the Spanish empire, which ensured that the hidalguía could not see their capital reduced but only increased. In this way, even though Spain was being hit hardly by an economic turmoil at the beginning of the 17th century, the elite managed to keep their wealth at the expense of the whole population.
Such mechanisms of extraction from the population endured continuously over history, protecting the power of the government, the aristocracy and the bourgeoisie 1. It was not until the Second Republic (1930-1936) that Spain’s political elite was questioned. The Second Republic was a period in Spanish history where the government started to impose a number of very progressive and democratic policies, and where the cultural elites started to have a say in politics. Nevertheless, this ‘insurrection’ ended up being highly suppressed by a coup d’état from the military, obviously led by the previous political elite. This caused a Civil War that ultimately drove Spain into 40 years of a dictatorial regime under the rule of Francisco Franco, who brought back the previous system of corruption and rent-extraction to the country.
After Franco’s death, the transition to democracy was the result of a compromise between the old dictatorship heirs and a new class of younger politicians that had been organized in underground movements. Under these circumstances, the new democracy inherited many of the ways of doing politics that were customary of the Francoist regime. It is certainly not surprising, thus, that such an extended and static elitist system continued until today. In fact, the development of rent-seeking institutions that provided systems of extraction is something so ingrained in the Spanish society that it endured after the transition to democracy.
The construction and housing bubbles
This article puts forward the idea that one of the major exponents of such a system were the construction and housing bubbles. A huge expenditure in public infrastructure, both at the local and state levels, as well as a facilitation of housing construction by the local and regional governments has been a distinctive feature of Spanish politics over the last decades. Although many politicians have tried to argue that such a level of investment in public infrastructure was a way to provide the population with a system of “common welfare”, this political discourse seemed to confuse allocating public resources for construction of essential public transport systems, like fast-train lines and airports, with the supplying of unnecessary infrastructures in order to get private gain, such as, for example, Castellon’s airport, which has been opened since 2011 but has not managed to attract any flights yet.
Where institutions create culture: Spain’s ‘culture of ownership’
The Spanish housing market has been a case-study for many economists for showing some unusual features. One of the most prominent ones is the level of homeownerships when compared to the average European countries– 87% of Spanish population is living in owned rather than rented houses, in contrast with the 60% average of Europe. Many politicians have encouraged this market structure by stating that Spain has an innate ‘culture of ownership’ as opposed to other European countries, and thus Spaniards should follow this ‘Spanish way of life’. Nevertheless, this was not the case not that long ago. In fact, in 1950, 51% of the population lived under a rented property, and even in some cities such as Madrid and Barcelona this figure could increase up to 85%, indicating that this ‘Spanish way of life’ was more imposed by public institutions than ingrained in the DNA of the Spanish population, something that is consistent with Why Nations Fail’s argument that culture does not precede politics, but rather politics creates culture.
This change was fuelled by the minister of housing in 1957, José Luís Arrese, who, after stating the famous quote “Spain needs to be a country of owners, not of proletarians”, presented a political project to confront the increasing number of shacks in the metropolitan areas of cities. In this project, Arrese committed to undergo a series of reforms, such as a massive investment to build new houses and fiscal reforms to provide the majority of the population with their “right for adequate housing”. Although the number of social houses built during this period of time were almost nonexistent, many of the reforms that characterized the last decades of the Francoist regime marked a point of inflexion in the emergence of a ‘country of owners’ in Spain. In fact, housing started to be seen by the political elites as a mechanism of social control by which the revolutionary desires of the working classes could be brought down. Making the working classes subordinates not only to the state, but also to the national banks that provided them with credit, gave the regime a new sense in the ways they could control the population and undergo their political project. Expanding ownership and the housing sector would not only bring economic growth, but also political stability. This was clearly stated by Arrese, who mentioned in a speech in 1957:
“Man, when not given a proper shelter, tries to take over to the streets and, controlled by his bad mood, becomes subversive, bitter and violent.”
Nevertheless, the poor social housing provision and the systematic speculation that gave the elites notorious economic revenue produced an environment of total political disaffection and lack of credibility. In fact, many of the national companies that created this boom in housing during the 60s were extremely linked to the richest families in the country, some members of which were even part of the political and administrative elites as well.
Furthermore, this desire to build a culture of homeownership further continued after the implementation of democracy, indicating again how housing was a mechanism of the elites to satisfy their interests. In 1985 and 1988, new reforms undertaken by the socialist government gave homeownership fiscal preference over renting. Buying a house could decrease by 15 to 17 percent the amount of income tax paid to the government. Also, Spain is the country with the lowest expenditure in social housing in Europe, spending 48.5 Euros per capita in contrast with the 117.06 of the European average. In this way, social housing did not expand in the years of the housing bubble because it ended up not being profitable for building companies. Thus, although the demand for social housing was increasing massively due to the systematic rise of housing prices in the real-estate market, the supply of social housing remained static, making it difficult for low-income families to buy a decent house.
The systematic fiscal compensations and the creation of a general belief by politicians that a house was ‘the best investment because prices never went down’ produced a general propensity for buying instead of renting. However, although the policies regarding tax discount for house ownership were massively applauded by the public, the real effects of these policies were neutral for consumers. The deduction of the tax for homeownership was actually compensated by the overpriced houses in the market, ultimately making the sellers, being big building companies and private banks, the only ones who benefited from this system of rent extraction. Furthermore, the political class was so linked to this culture of ownership and speculation that they would intensely benefit from the increase in prices and the rise in construction. In fact, many of the MPs in the national parliament owned more than three houses in 2011.
A political framework: the laws of urban planning
Besides the fuelling of a culture of ownership, Spain’s political class also created a framework in which speculation could operate freely, mainly taking the form of laws of urban planning that favoured mass construction.
In 1956, the Spanish government put forward the first law of urban development, which gave local councils the competencies to define whether an area was urban (suitable for building) or rural (unsuitable for building), as well as to determine the density of the construction to be taken place, making local governments able to redefine the land value of a specific area within a municipality.
However, this law was rather restrictive in some of the requirements for determining whether a piece of land is fit for urban development. To regulate and fuel the massive construction of houses during the housing bubble, successive governments put forward new laws that eased these requirements, such as the Law 7/1997 of 14th of April 1997 applied by José María Aznar, which allowed urban development in virtually any land throughout the country. In this way, local governments were able to easily increase the land value of particular unused areas by giving them an urban title. This fed the emergence of corruption during the housing boom years, since local governments could easily benefit the economic elites by increasing land values through giving land areas an urban title.
Furthermore, this new law gave local authorities the ability to issue building permits according to their local urban plan. In possession of a building permit, landowners were entitled to start with the building or urbanization project, having, however, the legal duty to give 10 percent to 15 percent of the total construction costs of the new urban development to the local authority. Both the state and landowners, thus, had very strong incentives to expand urban land, since local authorities could benefit financially from expanding areas of urbanisation and landowners could retain much of the value of their already valuable lands. Many municipalities were intensely financed by these forms of revenue, as seen in Valencia.
In addition, the decisions about the land title given to certain areas within a municipality tended to be signed by local authorities and private companies privately through the so-called convenios urbanísticos, which actually lacked any kind of transparency and regulation by the state. Politicians and private companies could negotiate many of the conditions for urban development in a city without a formal legal framework that regulated a possible case of interests in the negotiation of the convenio urbanístico.
It is important to differentiate how Spain’s legal framework is different from other similar developed countries in Europe. Indeed, many countries give councils the ability to decide the nature of lands in cities. Cities in France and Germany, for example, are also able to do so. In Spain, however, there is a system that gives private companies and local authorities incentives to expand urban land and build. Since local governments will get a big amount of revenue from giving building permits to private companies, they will deliberately do so to finance their debt. Also, since the negotiations between public and private actors were not regulated, local authorities and companies set urban policies to generate capital gains for the elites at the expense not only of creating a bubble in the economy, but also at the expense of environmental deterioration too.
The inefficient judicial system: a matter of resources?
Lastly, this article will briefly focus on Spain’s judicial system. On the basis of Acemoglu and Robinson’s (2013) theoretical framework, a state that is not providing a system that “prevents theft and fraud” would be “failing to secure property rights and justice” among the population, and thus becomes extractive. In this sense, if Spain is not promoting a system that is independent from other actors such as the political elites and that controls the evolution of extractive activities from any agent in the economy, especially from the ones in power, it will be contributing indirectly to the existence of this rent-seeking society.
The current judicial system in Spain is very inefficient. The average time that takes a trial to proceed with a resolution is one of the highest in Europe, sometimes taking 10 year to know the outcome. The media and many politicians have argued that this problem is due to the lack of resources given to the judicial institutions. However, Spain’s expenditure on justice is 50% higher than in France, and only 10% lower than Germany. Also, the number of judges per 100,000 inhabitants is similar to the one in France.
The problem, thus, must go beyond a simple analysis of the resources given to its institutions. One of the main problems, and it is indeed connected to the construction bubble, is the overlap of the political class and the judicial system. The two main parties, PSOE and PP, control the judges through the General Judicial Board (CGPJ), the major institution of Spain that promotes the independence of the judicial system from the parliament and the senate. In fact, although in 1980 a law that established that 12 of the members of the CGPJ were chosen by other judges was put forward, this law was derogated in 1985, giving the Parliament the power to choose all of the 20 members of the CGPJ. From this moment on, the CGPJ became a body used by the political class to rule for their own interests, where both political parties are constantly replacing the members of the chamber every time they come into power. It is not surprising, thus, that a study put forward by the World Economic Forum places Spain in the 60th position out of 133 in terms of the independence of the judicial system in front of the parliament, the senate and many private companies, being behind countries such as Namibia, Botswana and Gambia.
Regarding the cases of corruption that rose during the boom years, many of the trials about political scandals are still not resolved because of both the inefficiency of the judicial system and the poor dependence from the political parties that the system of justice has. One of the clearest examples is the Gürtel case, where the power of the political parties over the justice system was uncovered by the suspension of the judge Baltasar Garzón, the one that started its investigation. Indeed, when many front-line politicians from the government of Valencia and the Autonomous Community of Madrid started to be accused of bribery, money laundering and tax evasion in relation to the construction activities, a number of right-wing parties, of which some were involved with the politicians accused, put forward a lawsuit against him for causes unrelated to the Gürtel case.
After a long process of investigation, the CGPJ decided to move Baltasar Garzón aside the case and suspend him as a judge for 10 years. Currently the investigation is still ongoing. Most of the front-line politicians that were related in the case, such as Francisco Camps, were not found guilty.
The fact that the Spanish judicial system is failing to impose the rule of law to prevent theft and fraud is not a matter of opinion. Many studies have analysed the trust that the public has towards the judicial system, finding that it presents one of the lowest in Europe, being at the same level as Greece and Bulgaria. The effects that this can have on the evolution of further rent-seeking activities similar to the housing bubble are massive, since politicians know that being involve in corrupted activities will not be punished by law.
Challenging the establishment
This article has focused on the manifold ways in which Spain’s institutions have created a system of rent-extraction, with specific attention to the construction and housing bubbles. Although this issue calls for a more extensive and resourced analysis, I believe that Acemoglu and Robinson’s theoretical framework provides a good starting point.
This article has concluded that Spanish institutions are extractive for the following reasons. First, it was argued that Spain has been historically a country with a strong political elite that rules for the interest of the elites. Institutions constantly created a culture that perpetuated a system of rent extraction, as seen in the creation of the mayorazgos, as well as the ‘culture of ownership’ so acclaimed during the housing boom years. Second, institutions and major politicians not only promoted a certain culture that benefited them, but also a national administrative and political structure that fuelled the construction sector, and thus ultimately moving public resources into their hands. Finally, politicians also fuelled the creation of a non-independent judicial system that ensures that corruptive activities are generally not charged by law.
It is crucial that Spanish citizens challenge the establishment. Some moves from new political parties, such as Podemos, appear to be opening a door for this. Nevertheless, it is still not clear how the political scene will change in the following months. There is much to come, and hopefully Spain will realize about this vital challenges.
 For example, the mayorazgos were not abolished until the 19th centruy.
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