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.


    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.


    [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
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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…”


New working paper

Bobos in Paradise: Urban Politics and the New Economy

The term “bobo” stands for “Bourgeois Bohème” and was coined by David Brooks (2000) in a famous book about the rise of a new knowledge elite. This new kind of bourgeoisie is generally considered as prevalent in globalized capital cities, and its lifestyle and political attitude stand in contrast to that of the traditional bourgeoisie. Furthermore, the bobos are generally viewed as a politically powerful group. They have been instrumental in bringing about left-wing governments in municipalities such as Berlin, Paris or San Francisco, despite the relatively high economic status of this social class.

Politically, the bobos are viewed as generally supportive of environmentalists and/or socialist parties. Their takeover of major cities has taken place in the context of sharply increasing house prices from the mid-1990s to the onset of the financial crisis, and led to policies that recognizably differ from the ones implemented both by the right and by the traditional left. These policies can be summarized as follows

∙  Greater investment in collective urban amenities and socialized recreational events.

∙  Reduced urban space for the automobile, generally coupled with a reduction in parking space, higher taxes and more stringent regulations and constraints for personal vehicles. More investment in public transportation and in dedicated areas for bicycles, skate-boards, roller skates, and so forth. Deregulation of the use of bicyles (authorization to use wrong ways and bus corridors). Public provision of cheap bike and electrical car rental, and dedication of public space to those devices.

∙  Promotion of “social mixity” and “diversity”, by means of transfer policies and/or subsidized housing that maintain a critical mass of lower class dwellers in the city center, while intermediate classes are eliminated and relocate themselves in the outer periphery

This paper provides some elements for understanding these developments from a “pure economic perspective”. By this I mean that I will attempt to explain them as a consequence of technological developments, instead of just assuming that bobos are a new kind of individuals with their own preferences. The paper focuses on the relative roles of, and conflict of interest between two kinds of bourgeoisie:  The skilled workers of the old economy versus the skilled workers of the new economy (bobos). The former work in activities that are more land intensive, while still preferring to live in a city centre. As a result they derive more utility from commuting and are less willing to raise commuting costs in order to improve urban amenities than the bobos. The paper shows that as the new economy grows faster than the old economy, the bobos overtake the cadres as the politically decisive group in the city. As a result, the level of urban amenities goes up and so do transportation costs.  I also show that it may be profitable for the decisive bobo class to subsidize location of lower class unskilled workers in the city, in absence of any altruism toward them or intrinsic taste for a socially diverse makeup of the city. This is because such subsidies allow to force the economy to settle in a “bunkerized” equilibrium in which the service providers to city dwellers are located in the city, so that the price of services no longer goes up with the amenity level. As a result, ex-post there is no cost to raising the amenity level in the city, and the resulting political equilibrium involves the highest possible level of amenities, while commuting has disappeared.

Finally, I provide evidence using French cities that those urban areas that have most invested in amenities are such that (i) had a greater employment share in the new economy initially, (ii) experienced the fastest growth in house prices, and (iii) tended to have a greater increase in service employment as well as the proportion of inhabitants in public rent-controlled housing.

Read it here

ELA, Grexit, and the technocrat turned politician.

The missing link between the Greek solvency problems and its membership of the eurozone is called liquidity. Absent liquidity problems, for example under 100% reserve banking, the two issues would be entirely disconnected, since the banking system would never need emergency liquidity assistance from the ECB.

I believe the doctrine of the ECB underlying ELA, is that ELA deals with a technical (as opposed to political) issue (The way ELA works is nicely described in this piece by The Economist). And this technical issue is what we call multiple equilibria.

According to this view, there exists a bad equilibrium where expectations of exit from the Eurozone and bank runs mutually reinforce each other. Under normal circumstances, banks can get fresh liquidity from the ECB at the going interest rate (which is very low), in exchange for collateral. This collateral has to be “good”. Assuming Greek banks hold Greek debt, the collateral becomes “worse”, the less solvent the Greek government. To the extent that Greek bonds are denominated in euros and owned by non-Greek residents, Grexit would either trigger a redenomination of those bonds in a depreciated drachma, or make it more difficult for Greece to pay them back, since it will presumably experience a substantial real depreciation. Therefore, expectation of Grexit makes Greek sovereign debt worse and Greekn banks less solvent. As depositors fear that their own bank could be liquidated, they run to the bank to get their cash back. Running to the bank delivers not a double dividend, nor a triple dividend, but a quadruple one:

First I am protecting myself against the bank’s bankruptcy. True, my deposit may be insured, but if the bank run is general the insurance system is undercapitalized and I may not get my money back.

Second I am converting the virtual euros of my bank account, that may be converted into drachmas any time, into actual euros that are physically the same as those circulating in Germany, and are much more difficult to convert except by extreme coercion.

Third, I am certain to have cash when I need it, instead of being rationed by bank holidays and controls on withdrawals.

Fourth, I am protecting my savings against a surprise capital levy that could be imposed by the troika on deposits in order to pay back creditors.

When faced with the bank run, the ECB has to do something. If it refuses to provide liquidity, say because the collateral is no longer acceptable, then the banking system in Greece collapses. And in order to provide liquidity to its banks, the Government will have no choice but to exit the Euro, making Grexit a self-fulfilling prophecy. The bank run equilibrium is a Grexit equilibrium, indeed expected Grexit acts as a catalyst for the bank run by reducing the market value of bank assets.

But it makes no sense for the ECB to value the collateral of Greek banks at its price under the Grexit equilibrium, if instead a better equilibrium can be enforced: that is, an equilibrium where the bank run does not occur. ELA is an attempt to enforce the good equilibrium by setting interest rates and haircuts at levels consistent with the good, not bad, equilibrium. If the good equilibrium is indeed an equilibrium, sufficient liquidity should be provided under those terms so as to “tame” the bank run and keep Greece within the Euro area.

The problem with this fairy tale is twofold.

First, technicality is not so easily distinguishable from politics. We see that the ELA tap is being shut by the ECB, because the Greeks are not accepting the conditions set by the troika. The banking crisis in Greece, initiated by the ECB, may bring the government down. There is no way Tsipras can decide, as the democratically elected ruler of Greece, to provide liquidity to banks despite the ECB veto, unless he exits the Eurozone immediately. Voters on Sunday may support the Yes vote because they believe banks will reopen sooner than if No wins. That is, the ECB can bring down a democratically elected government by stopping providing liquidity to its banks. In that respect, the similarity between Alexis Tsipras and Salvador Allende is striking; in both cases we have radical leftists heading a minority government. The difference stops in that instead of having a military coup (Pinochet and the CIA) we have a monetary coup (Draghi and the Troika/Eurogroup), and instead of the trucks blocking the roads, we have the banks blocking the transactions.

While closing the liquidity tap inevitably is a political coup against the Tsipras regime, keeping it open is another forced transfer from European taxpayers to Greek residents. In other words, regardless of the decision, the non-elected ECB cannot avoid doing politics.

Given the fiscal situation in Greece, the terms under which the ECB is accepting Greek bonds as collateral under ELA are probably too generous. Under ELA the ECB lends to Greece at 1.5 % and the haircuts are secret (See here and here on haircuts). Under the assumption that the ECB is successful at killing the bad equilibrium, the terms under which a Greek bank can borrow from the ECB should be the same as those in the market. Since Greece is tapping ELA it means that these terms are better, hence that there is a transfer. The transfer is larger, the larger the gap between the market prices the ECB is trying to achieve and actual market prices. If the ECB were fully credible in extending an infinite credit line to the Greek banking system, this gap would disappear. If the good equilibrium exists, the fiscal transfer to the Greeks is the mirror image of the ECB’s limited credibility and of the market view that the probability of getting to the good equilibrium is lower than 100%. The transfer, and the likelihood of the bad equilibrium, could then be eliminated by making the credit line infinite, killing any doubt by markets about the viability of Greek banks.

But, if the good equilibrium does not exist, Hans-Werner Sinn is right: The Greeks will take advantage of ELA to sell all the Greek debt to the ECB at an inflated price, converting their deposits into fresh and good euros, and leaving the ECB, that is, the taxpayers from solvent countries, with dubious claims on the Greek banks’ balance sheet. An unlimited credit line can no longer kill the bad equilibrium since it is the only one. It would simply raise the amount of money transferred to the Greeks by other euro area residents.

That the bank of Greece, not the ECB, is supposed to bear all the risk of ELA, is a cosmetic provision: ultimately, the bank of Greece accounts are implicitly consolidated with those of the bankrupt Greek government.

And it is hard to believe that the good equilibrium exists. That is, if the Euro were made as big a taboo as incest, the quadruple dividend from getting your money back would just become a triple dividend. Think about it. The benefits of having your money in a bank deposit rather than cash are quite small. The reason we keep it there is because it is the default option for most wage earners (they call it libertarian paternalism). So you only need a small cost of having your money deposited in a bank for it to be rational to withdraw your money. The asset side of the Greek banking system provides ample reasons to justify a bank run.

(The reason why the “good equilibrium” has existed for so long is that banks have been regularly provided with fresh cash by central banks, bailout money by governments, and deposits have been insured. But we may ask whether this form of financial intermediary makes sense. Perhaps the financial crises tell us that it is an evolutionary dead end and that banks should be eliminated. By saving them each time, public authorities are fighting against economic evolution and sowing the seeds of the following crisis.)

Post Scriptum — Here is an interesting piece by Dirk Niepelt. Clearly, the reason why governments would like to eliminate cash has everything to do with exercising discretionary control upon private savings — so as to implement a capital levy when needed, as advocated by Mrs Lagarde — and very little to do with “combating crime”. Virtual cash held at the monetary institute is also vulnerable to capital levy. In the long run, suppression of cash  by heavily indebted government will eventually harm them, as private means of payments (like bitcoin) will arise.