On the Yellow Vest insurrection

After a prolonged silence, I feel some irrepressible urge to express my thoughts on current events in France. I would not be arrogant enough, though, to compare myself with Kant who changed his immutable daily walk when hearing news about the French Revolution…

The current insurrection is the result of a number of ideological, political and economic forces which gradually made life unlivable for the French lower middle-class.

How did we get there?

It all started with a long cultural battle waged by the Left in order to conquer and maintain hegemony.

Watch a French movie of the 1930s, 40s of 50s. You will generally encounter the noble figure of the Proletarian, often played by actor Jean Gabin, who would be a member of the Résistance fighting bourgeois Vichy collaborators, an honest worker exploited by his crook employer,  or a free man whose spontaneous love for some upper class lady would be crushed by the hypocritical moral order. The Left was all for the working class and accordingly idealized and romanticized its representatives in its cultural products.

Then events did not unravel as planned. The evil consumer society happened. During the post-war period, working class people moved away from industry to become clerks. They started owning cars, houses, going on vacation, purchasing records, organizing barbecues, going to the restaurant, and so on. They started investing in savings plans and setting up fences around their property. They were ripe for supporting the  social order.

This process culminated in 1968, when some children of the bourgeoisie, trying to organize a revolution (I honestly have no convincing explanation why), were “betrayed” by labor unions who saved the Gaullist regime in exchange for a general wage push (called “Accords de Grenelle”).

However this was a Pyrrhic victory. De Gaulle was gone the year after and the Communist Party and the main labor union (CGT) were unable to prevent the new 1968 hedonistic left-wing bourgeoisie from taking over. The 68ers rapidly managed to control academia, and from there it was only a matter of time before their ideology penetrated the media, the administration, charities, and the world of professional politics.

This stealth conquest of power set the stage for a large scale cultural and political offensive against the lower classes. Since their living standards were improving, their political preferences would sooner or later evolve, and it was no longer possible for the Left to seize power based on the traditional class conflict between labor and capital. Indeed, East German proles, supposedly dictators, were driving two-stroke engine Trabants, while their West German counterparts, supposedly exploited, were driving Volkswagens, if not BMWs or Mercedes.

Something else had to be invented.

To get a grasp of this something else, one should watch (again) a movie. This movie is called Dupont-la-Joie and depicts a bunch of racist, stupid redneck white males committing an ugly rape and accusing an innocent north African immigrant of the crime. Jean Carmet, who played the rapist, had replaced Jean Gabin as the new figure of the average lower class French. Short, unattractive, presumed sexually inept, racist, sexist, vulgar and idiotic. The new romanticized left-wing hero was now the immigrant, in his double role as a victim of colonialism and racism and as an incarnation of the “bon sauvage” yet unspoiled by the alienation of modern consumer society.

This ideology spread throughout the new elites almost unchallenged during the 1970s. And the socialist Left masterfully built on it to produce an almost unstoppable political war machine. Through its local politicians and a network of associations, it gradually enrolled suburban ethnic groups (the new “bons sauvages”) into New York style identity politics. This cornered the white lower classes into their own identity politics, which meant voting for the National Front.

There is no room here to explain what a blessing the National Front was for the May 1968 establishment. It was all about feeding that beast while keeping it scary.

The National Front was given a great deal of media attention and at the same time  carefully locked in a ghetto of suspected racism so that any policy it could propose was interpreted through this lens.

The National Front was a political blackhole. It absorbed any dissent, stamping it with infamy. Are you against the single market? You’re a racist. Against monetary union? A racist. In favor of tax cuts? A racist. Against the monopoly of Social Security? A racist. Against the European constitutional treaty? A racist. Against same sex marriage? A racist.

Le poumon. Le poumon. Le poumon. Le poumon, vous dis-je.

The process reached a tipping point circa 1997 when the Socialist Party came back to power.  Having played for 20 years, the Dupont la Joie script now influenced policy, which could be summarized by the 80-80 rule. That is, 80 % of policy decisions were made against 80 % of the people. For the first time in history, politicians in a so-called representative democracy considered that their job consisted not in pleasing their constituency, but in correcting them.

The average Joe does not think right, does not talk right, does not eat right,  and does not move right. The average joe smokes too much, drinks too much, drives too fast in a car which is too big, does not educate his kids properly, and does not dispose of his garbage correctly. He contributes to global warming and the obesity crisis. He is a cause of traffic congestion and road accidents. He does not welcome newcomers. He does not adhere to an open, inclusive society. He does not appreciate the talent of contemporary artists. He bears the guilt of his ancestor’s crimes: slavery and colonialism. He is loaded with gender stereotypes. He lacks enthusiasm about the noble ideal of European unification.

Voilà pourquoi votre fille est muette.

The millennium ruling class faced the daunting task of reprogramming 80 % of the people while avoiding being voted out of office.

The Yellow Vest insurrection is a revolt of the reprogrammed against the reprogrammers, in a context where buying social peace through bribes is increasingly difficult since, as Mrs Thatcher put it “socialism only lasts until you run out of other people’s money” (which in itself is the other root cause of the insurrection).

Part of the reprogramming plan involves a substantial assault on living standards. This is what triggered the current protests.

Over the last couple of years, due to taxes, the price of diesel rose by some 30 eurocents per litre. For a lower middle class family which could use up to 50 liters per week, this means a reduction in living standards by 60 euros per month, an enormous share of noncommitted disposable income.

For years diesel was supposed to be good because it uses less fuel. People were encouraged to buy diesel cars and manufacturers spent money to make them cleaner, less noisy and more reactive. People made cost-benefit analysis on where to live and which car to buy based on an assumed price of diesel. Now that these irreversible decisions have been made, they are being told that diesel is now bad, because it emits “particles”. Diesel CO2 emissions per kilometer are 40% below those of gasoline but somehow global warming is no longer that big a problem when it comes to imposing a new tax (just like it is not a big problem when it comes to replacing nuclear plants by coal plants or by wind turbines backed up by fossil plants).

Policies in favor of “sustainable development”, also known as “punitive ecology”, have hit everywhere. The cost of construction has increased by 60 %, in part due to regulatory hysteria (see  here); the cost of energy like electricity or heating fuel, the price of water, are skyrocketing. “Sustainable development” policies target the basics of life itself and they systematically harm the poor disproportionately.

A now popular view is that French society consists of three strata. The academically credentialled bourgeoisie of the inner cities. The ethnic suburbs. The periphery, where the entire native French lower classes now reside.

When you live in the periphery, no matter what you do, you use your car. Therefore, a tax on gasoline is a tax on everything you do. It might be a good tax from an economic point of view (low distortions) but it makes people mad (in fact taxing inelastic behavior makes people mad). The roads are also scattered with speed radars, meaning every time you do something, you are spied by the police (and you’re not allowed any lapse of inattention). As of now, 60 % of the French speed radars have been vandalized by the yellow vests. Any additional speed limit means any single thing you do takes longer, thus restraining your total freedom. One thing the new government did was to reduce speed limits on roads by 10 km/h. This is typical of the policies that are opposed by 80% of the population, and against which people feel helpless.

 It is highly symbolic that the Parisian elites who impose these policies can travel at 350 kms per hour on high speed trains (called TGV) that all run between Paris and some other major French city (while stopping conveniently near places where the elite vacations such as the Perche or the Luberon, whose landscapes have also been strangely spared by wind turbines). Such public infrastructures are of little use to residents of the periphery, who are regularly lectured about the merits of mobility and nomadism and at the same literally prevented from moving (especially moving into Paris).

The inner city elite has zero understanding of these people’s problems, because they have zero empathy for them. They have zero empathy because they do not interact with them. TGV conveniently takes you from your Parisian fancy neighborhood to your renovated Luberon farm; it does not stop in between. The elite knows about the people only through the lens of its media, that has been playing some variation on Dupont-la-Joie uninterruptedly for the last 40 years.

The yellow vest movement is best understood as a hybrid between the U.S. Tea Party movement and Italy’s Cinque Stelle. Its position is largely incoherent, reflecting the diversity of its members’ motivation to join. But it has two original features compared to what we are used to in French agitation tradition. First, the yellow vests want less taxes (in the form of lower gasoline taxes but also lower taxes on (small) business). Second, they want more democracy (in particular, in the form of “popular initiative referenda”).

Most unrest in France is traditionally by stakeholders of the system, aka intérêts catégoriels (labor unions, students, farmers…) who fight over their piece of the cake. They do not want the cake to shrink, so they typically do not complain about taxes being too high. They do not want those who have little claims over the cake to have a say, so they are not supportive of direct democracy. Here we have something entirely new. In particular, there was no Yellow Vest protest last year when the government passed labor market reforms, that arguably reduced the bargaining power of unionized workers somewhat — such reform was irrelevant to the nonunionized, rentless, often independent workers who are presently taking the streets. Likewise, it is not the recent partial removal of the wealth tax which triggered the insurrection, although some YVs do complain about that reform, which certainly makes the gasoline tax hike appear especially cruel and unjust.

The YVs realized two things: First, even though they are nominally sheltered from the wealth and income tax, they do pay a lot of taxes. This is hardly surprising. In a country where public spending amounts to near 60% of GDP, everybody has to pay a lot of taxes. Second, since they do not have a voice, there is little that taxes (or, for that matter, policy) do for them. They only favor the wealth tax as an alternative to the gasoline tax; but they could not care less if its removal were financed by spending cuts. They have witnessed decades of ever increasing taxes while public services were closing in their community, trash was collected more infrequently, and the police was increasingly racketing them instead of protecting them. They don’t benefit from the amounts spent on culture, contemporary art, higher education, research, high speed trains, identity politics or greeting migrants who at best compete for them for jobs and access to public services and social insurance.

Some see in the YV movement a prelude to revolution or at least deep long lasting political change. The recent wave of “populism” (Trump, Brexit, Italy, etc.) may validate this view. Yet in all good logic the YV should fail miserably. All established powers are against them. For one thing, the radical Left joined the movement, that is, it pretended to. Their goal is to turn it into a usual organized interest protest thus emptying it of its meaning and delegitimizing it in the eyes of its very members and of general public opinion. Second, the media are predictably playing their usual part of racism accusations (Dupont-la-Joie never ends) and in their reports do not distinguish between the actual protesters and looters-arsonists who are conveniently left to operate (an old trick). Surely this will fool and scare some people. Third, Macron has skillfully made concessions that are likely to divide the YV, in a way that, like the radical left’s participation, makes them appear like just another angry intérêt catégoriel. The uninspired  minimum wage hike that he promised is likely to please those protesters who are at the margin of the system (low wage earners with regular job contracts) but not the others–independent workers or small business owners. That is, Macron tries to divert the movement into traditional French zero sum politics, which, given the YV diverse support base, is bound to be divisive.

Macron also knows, like the Italians know, that it is now stupid to risk losing elections by keeping public deficits under check. The deficits are taken care of by the European Central Bank, which is a wonderful invitation to let them be determined residually as the outcome of political concessions to various protest groups.

This is ironical since many people who are sympathetic to the movement complain that the Euro is the problem, because it supposedly locks the country in a straightjacket of fiscal austerity, preventing the government to do all this wonderful redistribution that would solve our social problems (which makes me wonder how we could ever get away with a 57% public expenditure ratio). Yet the Euro has become a machine to mutualize and monetize public deficits. Absent the Euro the insurrection would be met by massive capital flight and a sharp depreciation of the currency, and it would be far more difficult for Macron to make such concessions in a country with a 3-digit debt/GDP ratio.

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Catalan independence: An aporetic moment in history

 

  1. The referendum on independence is a move by the regional government of Catalonia. These regional governments were established by the Spanish constitution of 1978, which grants them wide powers and was ratified by a large majority of Catalans. That is, the infrastructure for organizing a local referendum on independence is itself a by-product of the Spanish constitution. That same constitution which makes any secession from the country illegal, as well as any referendum about such secession.

    Historically, the Catalan nationalists have used the power granted to them by the constitution to take over the educational system and the local public media, so as to advance Catalan national sentiment and marginalize the Spanish culture and language.

    Had they foreseen that some regional governments would use their constitutional extended local powers to gradually implement an unconstitutional secession, perhaps a majority of Spaniards would have rejected that constitution, and instead would have opted for a more centralized constitution, which would have made-it impossible ex-post for a regional government to implement a secessionist referendum, if only because there would not have been any such regional governments.

    Or, foreseeing that the Catalan government would try to secede, the Madrid government might have imposed its own anti-constitutional preventive measures, such as a takeover of the Catalan public media and educational systems.

    Furthermore, Catalans who oppose independence are put in a catch-22 situation with respect to the referendum. If they vote, they recognize that it is legitimate for the regional government to hold such a referendum, despite that it clearly is not, from the point of view of a believer in the Spanish constitution and an opponent to independence. If they do not vote, they make it more likely that the referendum is won by the independentists.

    While the secessionist move is clearly illegal, a deeper question is: Is it legitimate?

    Legitimacy is different from legality. Whenever a law or constitution is no longer viewed as legitimate, a crisis arises. For example, until fairly recently, the French civil code prescribed that women had to obey their husbands and could not vote. A philosophy textbook from the mid-1930s that I own, and which is not even remotely socialist or egalitarian, makes fun of the fact that Mrs. Curie cannot vote while any male drunkard can. This is evidence that such restrictions lost their legitimacy prior to being abolished.

    The Spanish constitution, while legal, is not considered as legitimate by the partisans of Catalan independence. They would probably claim that they supported the 1978 constitution for lack of a better option, and that this in no ways ties their hands to abide by Spanish unity, a concept they entirely reject in the first place.

    This brings the following question: What is legitimate? What is the source of legitimacy?

    Modern nationalist movements arose in the mid nineteenth century after a wave of Napoleonic invasions overturned the universalist and cosmopolite ideals of the Enlightenment.  Nationalistic political views rest on the idea that states and nations (or peoples) should be matched together. A people is a set of persons who share a common cultural heritage and/or common ethnic traits. German nationalism proposes that German people should all live in the same German state instead of being scattered between a multi-ethnic empire and a handful of semi-autonomous principalities. Slovakian nationalism proposes that the Slovaks be separated from the multi-ethnic Austro-Hungarian empire to create their own nation state. Sionism considers that the Jewish people are entitled to a state and to a territory.

    Under this view, Catalan nationalism is legitimate because there is such a thing as the Catalan people, who therefore deserve a state and territory  in the same fashion as Estonians or Uzbeks.

    Yet by the same token any subset of people within an independent Catalonia, who consider themselves organically Spanish, or anything else, may, provided they control some constituencies, unilaterally secede from Catalonia. They could perhaps emulate the Bosnian Serbs and declare a Spanish republic of Catalonia, or emulate the Crimeans and declare they are part of Spain, with perhaps full support from the Madrid government.

    An alternative foundation for legitimizing the Catalan independence movement would be “communautarianism”, or “collective libertarianism”, whatever we may want to call it — a doctrine by which any subset of people (regardless of historical and geographical considerations) may declare themselves a community and freely form a state of their own. Here the key issue is: How do we define what an acceptable such subset is, and by what collective decision process does it decide to become independent? Under this doctrine, the people under the jurisdiction of the Generalitat de Catalunya are no more an acceptable subset than the rich, Harry Potter fans, or people who wear blue glasses. Indeed a key selling point for independence is that through income taxes, Catalunya is subsidizing the rest of Spain. If that argument is valid, then it is legitimate for the rich to create their own community and secede from the poor.

  2.  

    The “comunidades autonomas” created by the Spanish constitution recognize regional identities on organic/historical bases (unlike French regions and departments that were drawn with a flavor of tabula rasa) and at the same time state the limited scope of those identities — i.e. they are not nationalities, just local particularities, and can in no way supersede the Spanish nation. But the Catalan nationalists seem to want to have it both ways. On the one hand they adhere to the Spanish geographical/historical definition of those comunidades while using it to promote their nationalistic agenda. On the other hand they resort to collective libertarianism when arguing that it is not acceptable for Catalonia to transfer money to the rest of Spain.

  3.  

    [NB:  A key issue here is the huge mistake that Madrid made by granting full fiscal autonomy to Navarra and the Basque Country.]

  1. Another issue is the process by which decisions are made within the self-defined community. Majority voting, as opposed to unanimity, is surely illegitimate since opponents are held hostages by being constructed as a minority within a group which (in the absence of any historical legitimation) is artificially designed — for example if the entire “Paisos Catalans”, i.e. Catalunya plus Levant plus Balears plus Roussillon, had collectively voted over independence of the “Paisos Catalans” as a whole, it is likely that independence would have failed, for people in Valencia or Palma have little taste for it. Similarly, independence would have been rejected if the entire country had voted over it. And again, under this doctrine as well as under the organic nationalist doctrine, opponents to independence are perfectly entitled to decide that they want to secede from Catalonia and create their own country, or join Spain, or any other country they wish, subject to mutual consent.

Where does that leave us? A nation by consent is a theoretical fiction. Nations are a by-product of history. A nation is essentially a successful army. Through war, new nations emerge and old nations disappear. The catalan nationalists know that, and they also know that they were never very good militaries. But modern wars can be conducted through other means: money, lawsuits, news, culture, education… These are the weapons that the nationalists have used, and they got very far with them because it was such a taboo to retaliate by military means. Yet we have seen in Yugoslavia or Ukraine that taboos sometimes collapse.

New working paper

Engineering Crises: Favoritism and Strategic Fiscal Indiscipline

Gilles Saint-Paul, Davide Ticchi,Andrea Vindigni

Abstract : If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the .first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt .which makes crises more likely .is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
Read it here
Continue reading

New working paper

“Secular Satiation”

Abstract:  Satiation of need is generally ignored by growth theory. I study a model where consumers may be satiated in any given good but new goods may be introduced. A social planner will never elect a trajectory with long-run satiation. Instead, he will introduce enough new goods to avoid such a situation. In contrast, the decentralized equilibrium may involve long run satiation. This, despite that the social costs of innovation are second order compared to their social benefits.
Multiple equilibria may arise: depending on expectations, the economy may then converge to a satiated steady state or a non satiated one. In the latter equilibrium, capital and the number of varieties are larger than in the former, while consumption of each good is lower. This multiplicity comes from the following strategic complementary: when people expect more varieties to be introduced in the future, this raises their marginal utility of future consumption, inducing them to save more. In turn, higher savings reduces interest rates, which boosts the rate of innovation.
When TFP grows exogenously and labor supply is endogenized, the satiated equilibrium generically survives. For some parametrer values, its growth rate is positive while labor supply declines over time to zero. Its growth rate is then lower than that of the non satiated equilibrium. Hence, the economy may either coordinate on a high leisure, low growth, satiated “leisure society” or a low leisure, high growth, non satiated “consumption society”.

 

Read it here

 

 

The economics of publishing in economics

The following text was prepared for a conference organized by the Kiel Institute and the pure player journal E-conomics on “The future of scholarly publication in economics”. It was originally intended to be a full fledged paper, but I only got to page 2. If time permits, I will write a sequel containing suggestions on how to improve the system.

When I started my career as a professional economist in the 1990s, I naively believed that publications were the means by which economists were communicating their ideas and findings. I could not imagine that the papers published in  the journals were not actually meant to be read. I also naively thought that the final outlet of an academic paper did not matter so much – since the paper is read, it would get whatever influence and attention it deserves, regardless of where it is published, as long as it is a visible enough journal. Finally, I believed that the publication process resembled somewhat the publication process in a French book publishing house, with delays not exceeding three months. After all, it would not make any sense if it took years for a publication to be available to its public.

Of course I was wrong in all accounts. The publication process in economics is not a publication process, it is a validation process by which we acquire a certain rank in a certain pecking order. Submitting a paper to a journal has nothing to do with research dissemination, it is far more similar to taking an exam or participating in a sports competition. The actual dissemination takes place mostly orally, in seminars and conferences; these seminars and conferences are also important validation events, because they allow authors to signal some of their characteristics that may influence their position in the pecking order, while not being easy to infer from their papers.

Now, when you take an exam as a student, you are graded by your professor, not by a fellow student – who would be a competitor if this exam is actually a contest. If you participate in a tennis tournament, the referees do not participate themselves in the tournament. Would anybody take the winner of the French open seriously if in earlier round Federer had been eliminated by an arbitral decision made by Nadal?

Yet this is the way our own profession is organized. Each submission is “peer reviewed’, that is, it has to be accepted by anonymous referees who happen to be participating in the same beauty contest as the author(s), most often in the same subcategory. At a minimum, as believers of cost-benefit analysis, we should consider that the journal editors and referees themselves perform a cost-benefit analysis when deciding whether or not to publish a paper. I must say that if I apply such a theory to explain my own experience with acceptances and rejections, I easily get an R2 of 80 %.

So what are the costs and benefits of accepting a paper, when you maximize your own rank in the pecking order? The main cost is that if the paper is accepted, the author will gain ranks in the pecking order, and surely this cannot improve your own rank, at least if one focuses on a ranking by number of publications. You will be much more reluctant to accept a paper by somebody who is in the same league as you are, than a paper by an author who is much better or much worse ranked than you are[1]. If the author is similarly ranked as you are, his progress will typically harm you: if behind, he will be more likely to overtake you, if ahead, you will be less likely to overtake him.

Another cost is the opportunity cost: instead of publishing this paper, you may prefer to publish another one whose net benefits to you are greater.

On the benefit side, publishing a paper may improve your own career to the extent that you are cited in the reference list; however there may be a trade-off here. You do not want to publish a paper that displaces your own work. A typical such paper is a paper that proves that you did something wrong, or proposes a more elegant method to do what you already did. This paper will probably cite your work, but if displaces it as the new reference paper on the relevant topic, you end up losing citations in the long run. You much prefer a minor extension of your work, or a paper that makes use of a methodology that you introduced and applies it to a different problem (such papers generally cite your work as an ad autoritatem argument to justify the use of that methodology, therefore you will get more citations if the methodology is somewhat dubious).

The other benefit is quid pro quo. The most important example of that is that one may be fortunate enough to be in a cooperative equilibrium in the game played with the referees. Smith may accept the papers by Jones, and vice-versa. Together they progress in the pecking order at the expense of the others, despite that each individual acceptance of Jones by Smith harms Smith.  This is a standard case of repeated prisoner’s dilemma. While the referee reports are supposedly anonymous, it is very easy for Smith to signal to Jones that he wrote that favorable report: they meet each other all the time at conferences. And Smith’s reports generally cite the work of Smith with some emphasis.

Small subfields are better at solving the prisoner’s dilemma than large ones, because the same individuals match more often in the refereeing assignment game. Thus, the rumor has it that it is relatively easy to publish in the field of social choice, while macro is a cut-throat environment.

Such cooperative equilibria make it difficult for a researcher to change fields. First, you have no record of playing the game in the new field, and so you have to convince the incumbents that you will behave properly. Second, if you are perceived as a type who is likely to change fields, you may not be around any longer when it is time for you to reward your referees for having accepted your paper, by accepting theirs or otherwise. If you believe that it is a good thing for people to move across fields occasionally, this feature surely is a source of inefficiency.

There are other forms of quid pro quo. Some economists command resources, and they can offer in kind rewards to those who help them, for example by inviting them to very nice conferences in very nice places. The beauty of it is that this form of corruption is simply indistinguishable from good faith. After all, there is no reason why a conference would take place in an ugly, dangerous, and polluted city—it would harm the quality of the conference–and it is perfectly desirable to invite the most prominent people in the field, who also happen to control access to the best journals, a feature which is itself totally defensible on meritocratic grounds. It is also perfectly understandable for an economist who controls access to a nice conference in a nice place, not to invite as a keynote speaker somebody who sent him a nasty rejection letter[2]: There surely is some equally notable candidate that one may want to select instead.

[1] To the extent that the distribution of papers published across authors follows a power law, it is very unlikely for somebody to overtake the leaders, even if he is extremely well ranked, because the leader will have so many more publications than he has. That is, it is much more difficult for the 20th ranked economist to overtake the leader, than for the 250th ranked economist to overtake the 150th ranked one. Therefore, the leaders’ papers are more likely to be accepted, which reinforces the power law and path dependence aspect of the distribution. In essence, the leaders are not much of a threat. At the other end of the distribution, the fact that laggards and newcomers are also not much of a threat, generates a mechanism for upward mobility in the ranking.

[2] Although rejection letters usually start and end with ”I like your paper…”

 

Karma Camorra

When I was in my late thirties, we used to have a small house in the southeast of France.  It was in a village not far from orchards where they were growing apples, pears and peaches. In the village there was a scale for weighing the trucks so as to record the quantity of fruit they were carrying.

I remember my son and I when we were watching the weighing operations. He was fascinated by the magnificent peaches and by the magic of all the mechanical tasks. I was proud of providing him with a great educational moment, a firsthand encounter with human labor, in all its nobleness.

At the end of the operation, we naturally asked where all these peaches were going. I was eagerly waiting for an answer, expecting a dignified conclusion to this wonderful moral experience.

“We burn them”, said the farmer.

My son and I had a glimpse of what pure evil meant.

It turns out that the European Union has a price support scheme. When fruit prices hit the floor, the excess supply is carefully gathered, transported, weighed, inspected, and burned. The farmers are then paid by the government (aka us) for the burnt peaches, at the prevailing rate.

We were told the inspectors were severe. They were only accepting the best looking fruits for incineration. You see, they were wary of fraud. They did not want farmers to game the system by artificially collecting second rate fruits so as to reap more subsidies. Consumers would not have accepted those second rate peaches. Otherwise, they would have had to pay them with their own money. But bureaucrats who incinerate the peaches pay them with other people’s money. They have little incentives to control the quality of the peaches. Those particular inspectors, though, were loyal and conscientious. Only the best peaches were burned.

In the 1970s, French economists working on the theory of fixed price equilibrium were worried about the issue of manipulable rationing schemes. How do you allocate supply to demand when price regulation prevents them from being equal? You need to put in place a rationing scheme which is not manipulable, but you also care about efficiency. There is a trade-off. Random rationing is not manipulable but it is inefficient. Allocating scarcity according to self-reported marginal willingness to pay (MWP) is efficient if such reporting is truthful, but manipulable if consumers can overreport their MWP.

The EC rationing scheme was both inefficient and manipulable, because it forced the taxpayer to purchase the excess of supply over demand while destroying the excess supply – a complete waste of resources – and because supply could be boosted artificially by manipulating quality.

I have another story regarding fruit burning. A big French company had sold trains to Argentina. At that time, Argentina was short of foreign currency. Instead of telling the argentines that it was not France’s problem, the geniuses in the French government accepted an in-kind payment. And that in-kind payment was in apples – presumably the government made a transfer to the train manufacturer and ended up with the apples. Unfortunately, this large supply shock inflicted upon the market for apples drove the price down to the common agricultural policy floor, so that most of the apples obtained in exchange for the trains were incinerated. The French government might have just as well directly purchased the trains and sunk them into the ocean.

But everyone has his Karma, or Nemesis, and the Nemesis of all regulators and politicians is an organized crime institution called the Camorra. Every economist should have read Roberto Saviano’s book. It is a treatise describing one of the most efficient organizations on earth. I also highly recommend the movie, which trumps any of your favorite Halloween horror show, if anything because it’s true.

The Camorra will not leave any gain from trade arising from state regulation untouched. This is their business model: they spot an arbitrage opportunity created by government, and they exploit it. This equally applies, of course, to sound and unsound regulation. The Camorra does not care whether regulation is good or bad. But if it is bad, this makes their job easier. They can expect more cooperation down the line.

And so I must confess that I was quite happy to read on page 306 of the French translation of Gomorra that at least in Campania, the peach burning officials had found their Karma. Apparently the fruits were no longer burned but buried into the ground (perhaps as a tribute to the global warming crowd), and the Camorra had set up a scheme by which garbage was illegally buried instead of the fruits. The criminals were getting the subsidies that should have been reserved for burying the beautiful fruits, and at the same time had established a distribution network so that the fruits would reach the consumer, presumably at a price below the EU floor.

The Camorra had managed to annihilate the EU policy according to which the fruits should be destroyed. Instead, because of the Camorra’s criminal activities, the fruits were eaten. By people.

Along with Uber-style web platforms, the Camorra is an institution that considerably reduces the margin of manoeuver for economic regulation and taxation. Its existence should be acknowledged in any policy evaluation exercise.

For example, there is talk of eliminating cash transactions in the Eurozone. Officially, the goal is to fight money laundering. In fact, the true goal is to eliminate the parallel economy, which is flourishing due to the secular upward trend in taxes and in the amount of regulation. If cash disappears, many transactions will have to be effected legally, and even more would probably no longer take place because they will no longer be profitable. Recorded GDP will go up but actual GDP will fall.

But this policy is likely to simply fail, because the private sector will end up with an alternative means of exchange. While there is much talk about Bitcoin, the Camorra is in an excellent position to become a central bank for the new currency.  Should cash be eliminated by the ECB, it has a huge incentive to introduce such a currency, so as to preserve its commercial operations. It is credible enough to impose it as de facto legal tender, because of its ability to use violent means against competing means of exchange. But, since violence is costly, it will probably also make its currency more desirable than competitors by pursuing a price stability objective, keeping its money supply in line with the volume of transactions. An inflationary policy would be hurting itself substantially, since by nature it must have large cash holdings.