Lagarde seems more enlightened...

The FT has a nice little report on David Cameron and the EU, here. Moreover, here's what Damian Chalmers has to say about selective EU law. How would he deal with the incentive for time inconsistent promises from the national council and the resulting conflict of interests. The problem is the same as the one face in the implementation of the SGP in the Eurozone: The people who are expected to carry the burden of rules (ie to be punished by them) should not, alone, be the ones expected to ensure that they are well implemented. If everybody can chose what they want, than everybody will be selective. If Damian Chalmers logic applied, the Single market agenda would have never gone forward. Trade-offs are the costs of functional coordination. Without the CAP and regional policy, there would not have been enough support for the single market. I believe however that Damian Chalmers does actually have a point, although the 15 meter rule about the fireworks is not a bad idea and would do a good job at protecting people, if people are stupid enough to want to violate it, then for god's sake, do it. There's just too much human stupidity for governments to contain. However if anyone is to decide which EU laws are constitutional or not, it should be the ECJ. My EU law is a bit rusty, to say the least, but doesn't the ECJ already do this, deriving its power from article 230 TEC? If so would it not be more appropriate to just add a provision in one of these treaties, stating that EU law is supreme over national law, except on those matters whereupon it affects aspects of national culture which do not disrupt higher goals of EU law, or something like this (what I mean is to make a law which would ensure that competition in the single market is not disrupted and that EU integration is not disrupted, but that if a silly amendment is included which disrupts national cultures, if these are harmless, where these national, cultural practices are harmless there is no reason to create conflict, and impose rule from above). Thus I propose that instead of Chalmers proposal for national EU law review councils (which FYI is what parliaments already are...) the ECJ ought to fulfil its role of judicial review, possibly aided by a treaty provision which ensures that harmless national cultural practices should not be disrupted. Then again blowing up in a fire work accident does seem harmful enough. Then again, what do I know... He's a EU law specialist! Finally, Christine Lagarde, French foreign minister has very interesting insights on the financial crisis, discretionary fiscal policy, automatic stabilizers, and on the effects of competition between China and the EU (although I assume competition of an economic nature, one is left to wonder whether her comments may also apply for foreign and military affairs) and how it may stimulate stronger cooperation between EU member states.

Bad but the EEA is the reason why this is not scary

Ok! So, Tony barber has the following thing to say: "If Cameron - or, more likely, William Hague, his Rottweiler foreign secretary - causes the relationship to deteriorate too much, then it is certain that calls will mount in mainland Europe for the UK’s departure from the EU. And, of course, there will be many in the Tory party - and the UK Independence party and elsewhere - who will say, “You know what? Why not?” Now I've put forth this idea at least twice, but I'm not particularly happy to get confirmation. I maintain, that if this were to actually take place, that half witted eminence would find himself at the end of a very uncomfortable political and economic environment. But as a UK graduate and a fan of the country, I believe it would be an enormous (but bearable) loss to the EU. And this is where I move on to the next step, and believe that sounding the alarms is unwarranted. The UK may hurl uninformed and bigot insults at the EU, however it can do very little to stop the EU except from withdrawing its contributions to the EU budget (which since Thatcher are not enormous). Otherwise the number of fields on which it holds a veto power is very limited. This is actually where the opt outs from the UK are useful. The EU can't impose its rules on it, but it is also unable to veto those proposed rules. On the other hand, the EU can do a lot of damage. Most of it would be indirect and even passive. Some at least theoretical could be direct and malicious in intent. Lets see: The first category implies by its mere existence the EU could damage the UK, if that country were to leave the union. How? Two interconnected reasons: financial markets and trade. The UK is enormously dependent on the financial sector, whose agentstend to be quite sensitive and fond of the EU (bigger markets=more money!!). If the UK left the EU (to become unassociated with any other European integration project than the OECD and the OSCE)it will be exposed to suddenly having to pay tariffs on exports to the EU. Don't get me wrong, I have no illusion that the EU would lose a lot from it. But in this, as in many other things, size matters and as it stands the EU is a giant in comparison to which the UK is small. Not tiny, not minuscule, not meaningless, but small enough that it would suffer a lot as exports and imports would decrease. Where as Europe would suffer a little bump, the UK would fall down a ravine. As the it loses access to the EU investors will start abandoning it, as products manufactured in the UK no longer have access to the rest of the EU market and are thus more expensive. Who would benefit? Probably Sweden, Finland, Ireland and Denmark who would split the chunk of market share that UK firms would loose, and Paris and Frankfurt who could then become the uncontested centers of European finance. In conclusion to this discussion, this is a situation that can be quite easily understood in the following manner: if, Y=C+I+G+X-M and Y=C+S+T, where Y is the GDP, C is consumption, I is investment, G is government expenditure, X is value of exports, M is value of imports, S is national savings, and T is government revenues, then I-S + T-G = X-M, If the UK leaves the EU, it automatically means that "X" decreases and "I" decreases, which implies, under the "crazy" assumption that the British will not suddenly want to tighten their belts and consume less, that in order to maintain present levels of consumption the UK government will have to start spending more (G increases) without forcefully raising taxes. Conclusion? If the UK leaves the EU, it is forced to run a deficit. Given its present fiscal situation I don't believe that is not quite advised. And remmember, this is all without the EU moving as much as a malignous finger. Imagine if the EU was to become vicious about this: That's unlikely scenario number 2. EU governments and the ECB could do 2 things. First they could start selling UK Treasury bonds, thus causing a decrease of the credibility of the pound. Secondly they could start selling as manny pounds as they hold. Both would be bad, in conjunction ,and with the caveat associated with lack of quantitative data, I would estimate it would be lethal for the UK. But then again, this is not only an extremely unlikely scenario. It is one which could jeopardise the EU. A trauma for the UK, the back days of the George Soros created monetary crisis are still a vivid memory for the Brits. However this was caused by bad governance which brought about an inevitable event. The close pegg of the pound to the Deutchmark, with open financial markets and no capital controls, was according to the "unholy trinity" of exchange rate agreements, doomed to fail. Germany stopped helping the UK buying pounds because otherwise it would be sunk with the it. What I am proposing here, simple though it may sound is pure evilness in terms of economics and completely abhorrent to the consensus typical of the concerns and approaches of the EU. So really I cannot contemplate a reality where Scenario 2 comes into being. But then again, my imagination is limited while the realm of possibility is infinite with decreasing probability. It would take the coincidence of an enormous amount of human stupidity for matters to reach this climax. This really is an apocalyptic vision as far as economics is concerned. In consequence I propose that if the UK is to make too much of a fuss, the other members of the EU ought to ask it to leave the area. In so doing they should stir some much needed debate at home which at least should highlight the arguments above. If the government responsible for this antagonizing mess is not booted out of office and the UK actually choses to pursue this line of action, then a much less complicated alternative, that in my opinion is becoming much more optimal for all parts concerned, would be for the UK to leave the EU and join the EEA. The EEA is the European Economic Area, heir to the European Free Trade Agreement, and has such illustrious members as Norway, Lichtenstein and Iceland and the other 27 members of the EU, who set the rules of economic activity. Basically non EU members of the EEA have to abide by the rules in order to get access to other European markets, but do not have a word in determining those rules. Everybody gets the economic benefits, the UK does not have to follow any "Foreign" or "European" encroachment on its (nominal political) sovereignty rules while the rest are able to happily pursue political integration. Finally, Spain will still receive its fair share of drunk British tourists. Why would I still prefer the UK to stay in the EU? Because despite its most childish of attitudes towards the project, there is a place for the UK, as long as it is a constructive and honest partner. Skepticism is not a bad thing and the EU is a huge undertaking one which benefits from the occasional slowdown and brainstorming which such a partner could stir. However it is a fragile project and it is dangerous to undermine it with ignorance and nationalist slur. Either way I still wonder where this will all have led to in 10 years time...

The Size of Fiscal Multipliers

What effect does discretionary fiscal policy have on the size of an economy?

The question asks what is the effect of targeted and supposedly purposeful public expenditure on GDP. This involves looking at public expenditure that is not automatic and thus excludes the effect of unemployment benefits. The fiscal multiplier explains how many €cents are created in an economy as the result of €1 spent by a government.

This study, from the CEPR, proposes a number of ideas. Standing between the studies of Barro (1991) and Barro (2009) and those of Romer (2009), which seem to contradict each other, it argues that the effects of fiscal multipliers are best undestood in light of the environment in which they take place. Thus it focuses on whether the relevant economies are opened or closed, have fixed or flexible interest rates, are emerging or developed, more or less indebted and whether the focus of the fiscal stimulus is investment or consumption.

Multipliers are stronger in closed and developed economies, under fixed exchange rates and if they focus on public investment rather than on public consumption.

Additionally, this article also suggests (page 0, abstract point (2) ) that there is no difference between tax decreases and expenditure increases, which to economic neoliberals distraught would imply that the government has at least as good information about the needs of individuals as these individuals do themselves. It would imply that there is no asymmetry of information between tax payers and their government. This may have to do with the fact that in OECD countries (the sample used) countries do tend to use counter cyclical fiscal policy. This means that government spends money when it becomes the most scarce, ie during economic downturns. In this sense it is easy to understand why it makes no difference to have the government or individuals spend the money. Effectively, the government spends the money purchasing public projects from private companies, which in turn pay their workers, which in turn put their money in the bank who latter loans it to private sector companies, which will use it to efficiently compete in the market (excluding market inefficiencies, which may not be the smartest thing given that during economic downturns, if they are caused by decreases in investment, they will invariably involve the bursting of a bubble which means that at least for a while it is likely that the market will be a bit inefficient as it will be unable to distinguish between good and bad investments). Its basically, keynesian policy. Obviously this should end quite rapidly as soon as the market finds its balance again, as otherwise public expenditure will crowd out private investment.

My only question is really about this issue of cyclicality. I may have missed it, but I don't find any distinction between pro-cyclical effects and counter cyclical effects of the fiscal multiplier... As I said above the answer seems pretty obvious that counter cyclical policy ought to have more of an effect than pro-cyclical policy, but it would be nice to see evidence (a control variable for lagged economic growth or for official recessions).

The Lisbon Treaty and David Cameron: Ideologies and Interest and What Happened to Portugal

My first exploration of the Lisbon Treaty attempted to give a "what if" view of the future of European integration, in light of what could go wrong and what were possible plots. I briefly argued that one of the reasons for Gordon Brown to stay on as PM had to do with this treaty. I maintain that he must get a hearful from his European counterparts each time they meet him (particularly Sarkozy and Merkel). Probably the actual more immediate reasons lie closer to home. Instead of looking at the interests and behaviour of Gordon Brown, lets do the similar analysis for David Cameron.

Cameron and Klaus, sitting on a tree...

According to this article, Cameron told Klaus that he would hold a referendum if the Lisbon treaty was not yet adopted when he came to power. The question is thus, what is it that providing that information to Klaus means. Logically speaking, Cameron knows (because everyone knows) that Klaus is a Euro-sceptic, who does not like the Lisbon treaty, which he legitimately sees as an encroachment on Czech sovereignty. It is thus legitimate that within some reasonable boundaries of his own perceived long term self-interest, he would like to sink the Lisbon treaty so as to save the nation-state and all that. Taking this into consideration, and assuming that Cameron did too (and wasn't just being candid), his sharing of that information with Vaclav Klaus would have implied that he wanted to sink the Lisbon treaty as well and was effectively saying "hold the boat for another year. I'm coming, we can sink it together and I'll offer my protection and that of the mighty United Kingdom". This all makes sense, and if all agents are rational, without any boundaries or behavioural biases, this is what a politician who wants to sink the Lisbon treaty would have done.

The question however is whether sinking the Lisbon treaty is really in the interest of anyone politician or country specifically, David Cameron and the UK. This issue can have 2 approaches. One focused on the interests, and another focused on the ideologies. My argument is that only when a very specific view of partisanship is taken to outweight other concerns does it make sense to take the approach that I have described Cameron taking.

IDEOLOGIES (PARTISANSHIP)

This issue has to do with clusters of ideas. Ideologies are the personalities of parties. It has to do with how groups of people make sense of the world, in accordance with their interests. Thus rich people who strive under the present status quo support right wing parties which are conservative and normally reactionary. They like the way the world presently works because it made them well off playing under these rules. Poorer people obviously do not support the same party. They do not strive. They do not do well under the present game rules. They want to support a party that stands for change, in the hope that hardly any system will be worst than the present one. Parties represent classes, religious groups, ethnicities, and geographical groups, who are either happy with the present status quo or not.

From this very abstract, stereotyped perspective of the world it becomes fairly evident that new ideas cannot be adopted by reactionary groups. Conservative parties may be able to take new approaches and structure narratives differently, but they will not be able to adopt new ideas that alter the status quo in any way that threatens those who benefit from it. Thus the conservative party is ill fitted to be a natural supporter of European integration. European integration means the erosing of sovereignty by one country to the rest, as all member states pool their resources and coordinate their policies in order to minimise undesired and negative externalities. If the conservative party continues to be anchored in the belief that the UK is better off by selecting bits and pieces of European integration, because it considers it to be an economic project, rather than an all encompassing political and social one as well, it can hardly be an advocate for the project and for a reform of the rules which extends the scope of European integration and facilitates decision making.

If one assumes a utility function (U) based on two variables, taste(P) and output(Y), U=U(P,Y), where satisfying ones political taste has intrinsic value which increases utility through P, then it is possible to explain David Cameron's behaviour and willingness to give a signal to Vaclav Klaus regarding his willingness to support the demise of the lisbon treaty. It's basically his position. However as this article and the other argue, he does not seem to have a lot of security in his choice, which would indicate that the partisan channel is not the root cause. It would seem rather that the explanation should be found in opportunistic, electoral reasonings.

ECONOMIC (SELF) INTEREST

This section deals with Y and it's potential variants. Y may be an expression of the interest of the politician or of the country/economy.

Country

From a purely economic self-interest point of view the Lisbon treaty does more damage to small countries like the Czech republic than to the UK, by decreasing the majorities needed for approving EU directives and other forms of European legislation. The connection here is that the EU is another arena for countries to conquer markets and wield influence to conquer more markets. This in turn would be reflected When a super majority is needed small countries play a bigger role in vetoing. When a smaller majority is needed, smaller countries loose out. Table 1 provides game theoretical measures of power within the different voting procedures of the EU and shows clearly that there is a decrease in the influence of smaller countries as the years have gone by (0 is minimum and 1 is maximum). So the UK's interests are overrepresented in comparison to smaller states (FYI, this is not unfair. The Lisbon treaty deals with one of the issues that was brought up by the German Supreme Court, which has to do with equality of representation. It failed to recognise the European Parliament as a democratic institution because it said that it attributed more influence to some countries (e.g. Luxembourg) than others (e.g. Germany). the UK may be more powerful in terms of relative votes than before. But this should overall make the system fairer).

My point however is that Cameron would be smart to try to get all the help and all the friends inEurope that he can get. Particularly when his partners in France and in Germany are also conservatives giving him an easier time finding overlaps than if the PS and the SPD were in power in France and Germany respectively. If he informs Klaus that he'll veto if Klaus holds it out until 2010, then he'll be held accountable by french, spaniards and germans. The UK is in dire fiscal straights. He can't lower taxes and lowering expenditures in a downturn is not very popular (despite the IMF and the Washington consensus). With limited room at home he can't possibly alienate European partners and if he is intelligent he has realised that the UK does not play in the same league as the US, and would therefore be intelligent to not expect much help from that side of the Atlantic (China seems to be the US's most relevant partner at present. It has a similar scale and holds a lot of US bonds and is responsible for a lot of US trade deficit).If bad luck strikes and the UK needs help (as its situation as a small open economy, on the world market, exposes it to), its good to have more friends than few.

Individual

Whoever is to blame for the demise of the Lisbon treaty is not going to make friends anywhere in Lisbon. Now that's ok for Klaus and Kaczynski. They are at the zenith of their careers and can't possibly conceive of doing much more of relevant in the upcoming years. They have well established cronies who'll support them (either for fear of friendship, but certainly with respect). Stopping the Lisbon treaty should not be a big problem for them. Without ignoring internal political bickering, they can claim to be of a line of politicians who actually believe that the Lisbon treaty is a step too far. They don't like the idea of moving from one sphere of influence (USSR) to another (EU), and have made it clear that that's the way they see it. Cameron on the other hand is not that kind of politician. He is not in power, though him and everyone else rightly assume that he will soon enough be. More importantly he has never been in power and has a very limited number of cronies who need him. He has friendships but is rather inexperienced (this article actually gives the idea that particularly regarding Europe, the Conservative party seems to have several important players) . He probably has all the money that he is allowed to have and has done a good job at keeping friends close and enemies at bay. However he lacks the political ability of Peter Mandelson and the historical political stance of Margaret Thatcher. He will suffer the same shortcoming that Tony Blair had when he came to power, without many of his skills (Jack Straw, Peter Mandelson, Gordon Brown, New labour etc). He does not propose a revolution (despite many efforts, labels and rebranding of the conservative party) like Tony Blair's New Labour. He is not going to win because he has new ideas. He is going to win because the other guys will have been at it for 13 year, which has given then enough room for mistakes (Iraq, Financial Crisis). However he is not even able to fully benefit from these blunders, given that they were really caused by a refocus of Labour around the centre and even to the right which was successful by its ability to appeal to and steal conservative votes. Quite simply, Cameron for all his youth and charisma is inexperienced, poorly connected internationally, ideologically dull and the upcoming leader of a big European country but small international player, in the middle of a severe economic crisis, lucky enough to oppose 12 years of political leadership from his political adversaries. And this is not an insult: luck and charisma may be more empty of content but probably go a longer way to win an election than does substance and experience. So he is not Klaus (old ideas, a lot of experience) and he is not Blair (new ideas, but little experience ) either.

Regarding Europe it seems that he has no ideas except those of his party. Not ever having experienced it, he really doesn't seem to care enough to stand up for what he believes (stand up against his party's dominant euro-sceptic fringe, or with his party against the EU). He is torn between William Hague, Liam Fox and Mark Francois' Euro-scepticism, and Malcom Rifkind and Ed Llewellyn Europhilia.

Conclusion

In conclusion, Mr Cameron is in a bit of a pickle. If he helps sinking the Lisbon treaty his and his country's interests will be pushed far to the back of European discussions, thus marginalising British interests among its most important partners. If he seems to be anything less than indignant with the Lisbon treaty, he'll loose support from his party. Thus Mr Cameron's utility function does not so much depend on P as his P seems to be equal to zero (he couldn't really care less). However, his Y seems to be informed by other people's P as well as by the Y of the UK. U=U(P,Y)=U(Pc,Yuk), where Pc is the dominant partisan position of the conservative party that the Lisbon treaty is evil, and "Yuk" is the economic benefits of the UK from not crushing the treaty, which should be a reflection of good governance by Mr Cameron and hopefully ensure his dominance in British politics for a while, thus ensuring his own income.

Of course there's the ideological issue brought up previously, but that only precludes David Cameron from staying quiet, if he feels like Klaus. If he is personally indifferent to Europe which I actually think he is (if for no other reason that he would have otherwise made a lot more fuss about the 2nd Irish referendum, and about the treaty itself), then it would be smart for him to not put his words into action. If as I think, he is only playing the field, trying get the support of Euro-sceptics which are abundant in the UK, but who do not prioritise the EU very much, then its better to seem against the Lisbon treaty but to not stand in the way, than to strategise about how to bring it down. Badmouth the treaty and the European bureaucracy all you want, but don't start signalling other players something which you don't seriously want to happen.

The UK, with all its opt-outs and its European size has a lot to gain from this treaty and David Cameron has a lot to win from being perceived as reluctantly having to accept the Lisbon treaty as a fait accompli resulting from the bad policies of his predecessors. He gains very little from being the guy who destroyed 10 years of European integration efforts.

I would like to finish with a colourful warning. I am Portuguese and can base myself in my country's experience. Portugal was a great Empire, once upon a time. We gave the Western world Africa. We uncovered Japan, the Americas and found new paths to India a to a rich commercial route when Europe's path was blocked by other geopolitical entities (Ottoman Empire of Suleiman). We made a lot of money, failed to invest it properly and progressively became a footnote on the westernmost edge of Europe. We were stuck in a locked political system with dominant reactionary views of the world and entrenched in our past glory. We watched the cue pass by. Our greatest ally (UK) robbed us of our colonies (1890: the pink map). We lost. That is what will happen to England if it does not understand its place in the world and the fact that its interdependencies lie with Europe. It is not an empire. In a global economy no one is isolated and no one is an island. It is a major player in an internationally integrated economy and solidly represents the interests of 10% of Europeans. That's less than 0.1% of the world.

Health care debate in the USA

Here's an interesting video posted on the Huffington Post regarding the debate on health care reform in the USA. As a European I have no first hand experience of what's going on at this time there, and as such these are just some thoughts on what someone leaning over the Atlantic ocean sees from this side. This post is divided in three parts. The first describes what I find interesting about the present shape and content of the health care debate in the USA. In the second part I try to come up with some explanations for this. The last part concludes with a couple of comments on what I'd do if I'd be expected to lead the debate and was able to see things as clearly as I am now that I don't have to lead anything at all. Most these comments are based on chapter 4 of "The Welfare State as a Piggy Bank". A more technical treatment of this topic can also be found in "The Economics of the Welfare State". More information about healthcare in Europe can be found at the European Observatory for Health Care systems, which has a country information index.

I-Present shape and content of health care debate in USA 1) First of all, there seems to be no informed debate what-so-ever on the trade-offs implied by public and private options. In a time when media is accused of transforming complex issues into soundbites, this debate has gone further and turned an amazingly complex issue into 5 words: "good", "evil", "selfish", "communist" and "nazi". In my opinion, "uninformed" or "misinformed" are more appropriate. 2) Secondly, there seems to be no framework of analysis. It's not that people don't structure their opinions in a nice "1500 words essay" format, proposing a range of different opinions. But there should be some structure. I don't expect a unified framework of analysis either. Nor do I expect to see a fully informed debate, with complete information. However there should be some awareness of the multitude of issues involved such as, the consequences of private and public financing in terms of quantity and quality of health care services consumed by medical patients and the price of health care services paid to industry suppliers. 3) As a person who's studied social sciences and is used to the highly stylised methods of theoretical analysis, it is interesting to note how the real world is different from the one studied through the lenses of rational choice theory, even allowing for incomplete and asymmetric information. These models would predict that some form of debate should be taking place, with individuals contributing their personal experiences, specialists contributing their expertise and politicians taking from both sides to understand the issues and explain and implement policy. Instead, what I observe from this side of the ocean is that people who attend these townhall meetings have engaged in a series of collective monologues (not even... monologues at least have an argument, and tend to last a bit longer), dividing themselves in two self reinforcing camps, who seem to find no legitimacy or respect in each other's positions. Moreover the specialists seem to have fled the stage and politicians are doing their best not to be booed off stage. 4) The media is doing a pretty bad job at keeping track of this and at calling it a misrepresentation of facts (whether it be honest or not). The media which is supposed to inform is not.

II - Why is this happening? 1) and 3)Bad or incomplete information is normal in such a complex issue. In our efforts to understand things we simplify them. However, it's interesting that, what seem to be, concerned citizens don't take advantage of the opportunity presented by townhall meetings to destroy myths and clarify their opinion. I can come up with 3 inconveniently impossible to test reasons for this: First, there's intrinsic human nature. Once we make up our minds, we don't easily change it. We are generally stubborn and therefore are not good at being contradicted, much less at constructively engaging those who contradict us. Secondly, there's a group think type of behaviour, which implies that individuals of a certain group tend to interact much more with each other and through those interactions reinforce each other's feelings. In my understanding of the application of the Lipset and Rokkan cleavage model to the USA, the political cleavage seems to be reinforced by a polarising electoral system which favours the interaction of hardcore republicans and democrats with others of their group, possibly supporting this belligerant outcome. Finally, there's the argument from Mancur Olson, that minorities will always be more cohesive and easily organised and thus more efficient at voicing their opinion and lobbying for their position than an unorganised majority. This is a well tested explanation and makes sense, given only a limited number of people in the audience were making a fuss. However, given that there was no evidence of organised strategies, it is difficult to really posit that this is the case. However these protests continue to take place in most townhall meetings and its possible that they are supported by each party. Without any more information I would just go for the first explanation that those Americans which have made up their minds are unwilling to change it and just spoil the party for everyone else. Regarding the specialists I think that it's a non-quantifiable issue of skill and courage. Technical specialists tend to live in a world of their own, where their opinions are questioned in an orderly fashion, everybody being given their time to speak. This does not work here. These people aren't coming to these meetings to get informed, but to boo the guys that they think are responsible for the messy change around them. Politicians in america who like to count votes, might feel uneasy with two crowds making a mess leaving it without any safe position to take (a problem easily solved by the self-selection inherent of political ralies). 2) The issue of the incomplete and inaccurate information could be helped by a more honest debate. Obama won the election by showing people that life is not black or white but rather grey. This is a grey issue, if there ever was one, and should aggressively be treated accordingly. A debate about health care reform should is one which is concerned with a trade-off between equality and efficiency. From an analytical point of view it should be divided in two parts. One considering forms of financing and another analysing different arrangements for physical provision. In each of these, there's a choice between a purely public, a purely private or a mixed system. Each has advantages and disadvantages: choice involves a tradeoff. The discussion of financing can be divided in 2 issues. The first issue focuses on the specificities of individual consumers of health care insurance within the framework of medical insurance, and the incentives that this mechanism creates in terms of insurance provision by private companies. Insurance premiums (the money that must be paid by consumers to their insurance company periodically) are calculated according to the following formula:

This implies extremely bad news for the poor who cannot afford it and for people suffering from chronic (untreatable) diseases. Because for them p is 100%, this implies that if they would insure against that loss, it would be more expensive (because of administrative costs and profit margins of insurance companies) to insure than to pay for it themselves. Moreover, if its a chronic disease, it's likely that the cummulated cost of treatments will be quite expensive. The handicapt, those suffering from diabetes and the elderly will not be covered by health insurance, because they represent too high a risk. That why Americans have medicaid for the elderly. Moreover, anyone living in poor conditions or in a dangerous neighbourhood will also represent a high risk (though not a 100%) and will either not be offered plans or will have too pay overly expensive plans. The state on the other hand detaches health care contributions from risk. Either by making it a flat rate or by tapping or incorporating it into the income tax, it implies that if you are a risky individual you will get access to the same public funded scheme as the non risky. This is good because it increases coverage.

However more greys ensue from these observations. Having to be a low or average risk implies that there are some incentives for strict private insurance. I once ran into this American retired gentleman who told me that in order to get insurance his insurance provider required him to loose weight in order to bring his collesterol levels down. This is annoying, but not a bad thing. On the other hand, if one can get insurance despite one's lifestyle, then there's no need to loose weight like that gentleman did. It's like when we go to a "all you can eat restaurant". The tendency is to eat more than normally, because its cheaper. The interesting observation at this stage is that Americans are more obese than "socialised" Europeans are. Therefore the incentives are either not all that good, or they are not stronger than psychologic and biological dependencies on sugar that low self estime and over exposure to fast foods may create. A final consideration about private insurance companies has to do with their impact on investment. Insurance companies accumulate money a bit like a bank. Instead of depositing money in exchange for being able to withdraw it later, the deposit is made in exchange for a promise that under some circumstances we can tap into an entitlement that the company will pay for our health care expenses (car repair expenses, for car insurance). In the mean time, the insurance company takes the money, invests it and collects the interest of this investment. This means that insurance companies are good for the economy (assuming that they invest well and that this investment is good for economic growth in general and not just for the firm). Therefore a balance is probably to be struck between the need to maximise coverage, maximise productive investment potential and minimise bad incentives (moral Hazard and adverse selection), through an appropriate mix of private and public financing. The second issue of demand and supply, is nicely understood through the tools of microeconomic product market analysis. This looks at the aggregate or collective analysis, and crams everyone together as similar in risk, but different in terms of incomes and can be very technical. However, a simple explanation ought to give a fair and accessible understanding of the issue. The difference between publicly and the privately financed options is a matter of quantity consumed/provided and costs of consumption. The public option works as a subsidy. The state comes in, buys the stuff for a high price and sells it back to medical patients at a lower price (figure1).

The difference between the high price paid and the low price of consumption is paid for by government revenues and debt. If health care is provided for free, then it's completely paid for by the government, which would imply higher taxes and/or debt (area A+B in figure 2).

What this means is that medical companies will not make more or less profits because of a private or public scheme. On this issue the difference is only in the level of taxes or debt and in the number of people who get health care services.

A mixed system like the one France has mixes the best of both worlds. Everybody is covered by the national public healthcare plan. Only people above a certain level of income contribute and people above another, higher, level of income have to purchase insurance from a limited number of highly regulated insurance companies. This creates a situation where richer individuals pay for their own insurance (though they are able to use the public programme) which gives them easier access to private hospitals, thus bypassing some of the cues caused by the public scheme. This on the other hand decreases the cues of the public scheme. One the other hand, everybody can get treated at a private hospital. 4) The issue of the role of the media is completely distinct. My opinion is that we only have our own very voyeuristic nature to blame. Fights are more exciting than their absence and thus get more attention for the same reason that I would be more interested in the people talking outside of my class in secondary school than in what my teachers were saying. I don’t know many people who’d bother to read this entire post. And those who would probably don’t have the time to do so. A sober thorough news channel would be forced to hire extremely well versed specialists to discuss at length issues which few people would watch. This would decrease their ratings, make them loose advertising revenues, decrease the value of their publicly traded shares and ultimately lead to a more or less hostile takeover from some competing conglomerate.

Comparing news casters with Walter Conkrite does very little to help this debate. Walter Conkrite was a bigger anomaly in terms of providing good information as the British political system is good at providing good governance. First of all there were no 24 hour news networks, who needed to entertain audiences all day long. Secondly, he had very little competition, as at the time there were very few syndicated TV channels broadcasting across the USA. Finally it was good luck. Walter Conkrite and Edward Murrow were two giants in a small pool of normal journalists. They could as easily have been very bad reporters. Obviously the great ones were remembered as they operated in an environment that allowed them to shine. Newspapers seem to not be doing to bad a business at discussing some of these issues, but who bothers to actively read a newspaper, when one can passively be bombarded by the news as a couch potatoe? The system is built in such a way that it makes it much more difficult for anyone to shine.

III – What would help?

I think that 2 things could be done very easily that would help the general tone of the townhall meetings. I also propose 2 more widespread ideas for reforms that would help healthcare reform, its debate and the debate of other issues.

First, before the speaker comes to the stage, have a member of security read the rules of the talk. Ensure that anyone speaking without having been given authorization or otherwise disturbing the session will be politely removed from the premises. Might look bad on camera, but that’s just tough. Looks worst for the guy getting kicked out and it looks worse for the speaker if he stays as he is made to look like he cannot control his audience. If he does indeed say anything that is dauntingly stupid, don’t worry if it is that offensive people will rebel en masse and no amount of available (and reasonable for such an event) security will stop them from kicking him out. Finally if he does say anything stupid the camera is there to capture it. My hunch us that nothing bad will happen. Bush did that for 8 years and nothing bad happened.

Secondly, hand out panflets at the beginning of each session. Small, key word panflets briefly explaining the pros and cons of the public the private and the mixed scheme. They should be 2 pages (1 paper both sides) long and as a rule of thumb it would be smart to not let there be more than two panflets. These should be drafted by a non partisan group such as the CBO (Congressional Budget office) and endorsed by both of the major parties. This should enlighten the audience and improve the debate.

More complex proposals intend to change the rules of the game. Specifically regarding healthcare, regulate the restauration business with particular emphasis on fast food joints. Governments are there to provide good incentives. Meals that cost less than a certain price and provide calories above a certain threshold of healthiness should be taxed. Foodstuffs that comply with the health and safety concerns and targets endorsed by specialists and the government agencies should be given subsidies or tax cuts. Incentivise eating to optimise it, rather than maximise it.

Secondly, pass a law forbidding people from carrying guns. No one needs to carry automatic riffles. Why not carry a bazoola? It’s threatening and not appropriate for a debate. I don’t care what they say, this is the 21^st century, not the far west. There’s law enforcement. That is a fairly tricky thing to do in the USA just on its own… Thirdly, there should be regulation of the 24 Hours news networks. As any (social ) scientist will tell you, more information is not necessarily good. Whu not force them to follow a pattern of coverage which requires that 24 hours news networks must report on geographical areas by time zone? So say when its 9o’clock in a certain place, one obtains the news from that place. Then every so periodically, one gets a roundup of news from a collection of places, so that the news is news worthy!

Finally, pass the god damn legislation relatively fast. Yes liberal democracy is great and there should open debate about these issues. However debate must end at some point. There’s just so much that can be said about anything for so long. If you have the majority, and if it delivers you the votes, than pass the legislation that seems the most plausible, while you can, particularly when public debate becomes this silly. If the electorate does not like it, they can dismiss you at the next election and the next guy will either keep or reform the system. That’s the real beauty of liberal democracy.

PS: Oh by the way, there are some pretty well informed specialists (Krugman, Stiglitz, Mankiw, Roubini,etc) who are skillfully active in the debate. Some politicians (McCain, Barney Frank, and who else?) have demonstrated a very solid moral backbone in the debate. It's not ideal, but while it is imperfect, it is far from helpless.

Reconstruction, Transition and all that mess

The period of the USA's history known as reconstruction (fairly decent review of it in Wikipedia and a rather thorough introduction to it in Yale Open University Lecture Series)is extremely interesting and should probably be put into a discipline of its own, together with, the Japanese Meiji Era, the handling and the consequences of the great war, the Armenian Genocide, the German, Italian and Japanese reconstructions after WWII, transition from communism to capitalism in Eastern Europe (CEEC - Central and Eastern European Countries and Russia's Glasnost and Perestroika), post 1979 Communist China opening to the world, post-Franco Spain, the aftermath of recent post WWII genocides and atrocities and other civil wars in Africa (Sierra Leone, Rwanda, Liberia Somalia, Eritrea, Congo, etc), Southeast Asia (mainly Cambodia and its infamous Khmer Rouge), the Balkans and the transition from military or otherwise fascist looking and sounding régimes in Latin America (Argentina, Brazil and Chile come to mind, but I'm sure there are others). It's possible that I'm being unfair by leaving out Oceania, but it seems that these were rather uncontested situations, where the majority crushed the minority and there was no reconstruction, only annihilation. There was no contest.

One thing that becomes quite evident from the reconstruction period in the USA is the problem associated with the concepts of formal and informal rules, as described by North here (for almost all he ever wrote see here and here), that in order for rules to be credible, they need to enjoy enforcement credibility, which can only be guaranteed by a synchronicity between formal laws passed by legislations and informal rules predominantly present in social conventions, or what he refers as the mental models which help us understand the world. I thought at first that it might have been possible to support ungrounded (in public support) legislation through coercion or incentivizing side payments (North does not actually mention these two), but I guess that in such circumstances no one is determined enough to enforce the first and the side payments are not sufficiently large to be effective.

[On a side note, if anybody has ever read the biography of Franklin Delano Roosevelt, it may become apparent that he was acutely aware of this problem as he always feared to be ahead of public opinion, which caused his delay in entering in WWII )].

This is a big field, which is concerned with understanding the transition from instability to more calm states of nature. In this specific context my interest is larger. It encompasses not mere economic and political instability but also institutional instability as well as the possibility of economic, political, social and institutional stability as the means to achieve North's adaptively efficient economy/society. In this specific case I am very interested in the transaction costs specific to war as well as general economic, political and social strife. I am interested in how societies change their minds or fail to change their minds, and how they move on and deal with prior opposition. How did the unionists deal with the confederalists? How did the Tutsis deal with the Hutus? How did the allies deal with the Germans? How did moderate Germans deal with Nazis and the previous generation? How did Cambodians deal with the Khmer Rouges? How did moderate Spanish deal with the phalangists? How did capitalist Eastern Europeans, Chinese and Russians deal with their communist counter parts (and by the way, vice versa should also be interesting to know)? and more importantly, to which extent did this process of national healing or lack thereof affect economic performance and social and political stability?

Anyway, one thing seems certain, reconstruction failed, and depending on your view of the American Civil war (my apologies to Latin American sensibilities), it probably hindered the unionist war efforts. Now the interesting thing is to understand where and when it failed, and what about the USA made this possible, and whether this was inevitable.

I've got to finish this dissertation so I can get down and do some reading...

In the mean time, here's an interesting look at contemporary KKK. The little subtitles are at least as interesting as the photos.

German Ruling on the Lisbon Treaty's Constitutionality: Legitimacy and Shared Sovereignty

Interesting days for European Integration...

Ireland sets a date for its referendum (2/10/09), the German Supreme Court ruled on the constitutionality of the Lisbon treaty ( check here for the full but only preliminary version of the ruling. BTW kudos must go to the German Supreme court for publishing its rulings in English as well as in German) and I, for lack of imagination and choice, seem to continue to engulf myself in the economic effects of budget deficits and their implication in the analysis of the credibility of the Stability and Growth Pact (SGP). It's fiscal policy analysis with budget deficits, cyclical budget deficits (the potential output version, please...) and their determinants and their effects on Repo rates, flying all over the place.

Here's an interesting article about the German ruling and it's potential consequences. I haven't yet had the opportunity to read the entire ruling and I doubt that I will have the time until September, but based on this article, here's what I its seems to say:

1) That sovereignty rests with the state according to article 23 of the Basic Law

2) That the European Parliament is not a genuine legislature

3) It clearly states what policy areas should not be covered by European Integration, one of which is fiscal policy (ie:fiscal policy is national not European)

I know nothing of Common or Civil Law, much less of the specificities of the German Basic Law, but here's what one can make out.

1) seems to be self evident in explanation, ie: sovereignty rests with the national state because it is said so in the German basic law. The ruling does not specify that all sovereignty rests with nation-states, but only specifically in Germany and as far as stated by article 23 (which for lack of knowledge I will just assume that it is absolute within the boundaries of common sense, ie: as absolute as it is permitted and more or less customary in a developed liberal democracy). This is interesting because all that seems required to change this is to change article 23 of the Basic Law. If it is changed in a manner that ensures that sovereignty can be "pooled" or that recognises European legislative mechanisms as not jeopardising German sovereignty, it shouldn't be much more difficult to solve this problem in the future, than to get the necessary super majority to change the German Basic Law. I don't know why probably because of Munchau's sentence: “Power may be shared, but sovereignty may not", I keep on remembering that sentence I heard about the competing views of the EU. Proponents say that the EU pools resources while opponents claim it uproots sovereignty by sharing it with other nations, and allowing them to have a say in their decisions.

This then brings us to the second point, the EUs lack of legitimacy. I will limit the discussion as the court itself did to input legitimacy, as only that rightly seems to make sense in judicial decisions (however the Chinese would probably like to see this included, at least if they want to legitimise their state on anything else than brutality and raw ability to keep u quiet...). 2) is justified on an interesting basis. One point that keeps on creeping up is the fact that the EU legislative process is not legitimate because of the electoral rule guiding the European Parliament and the assignment of seats. There seems to be a problem of "electoral equality" (II.cc). This is interesting... I've spent the best part of the last 2 years trying to learn about the EU its perks and its problems and I swear to god this never showed up... at least not in any relevant manner. The only time I heard a discussion about it was during the discussion itself of the Lisbon treaty where the Polish president or his brother wanted an electoral rule that accounted for the dead poles of WWII... The courts talk is in exactly thr opposite direction. The other two problems of legitimation are indeed more common. the complainants argue that the Commission is not a representative body, that there is no European political competition and that the commission's monopoly of power to initiate legislation is unconstitutional. I wonder what the court has to say about all this.

I still havent come accross the reason for the different reasons of all policy areas. However it seems plausible that the court goes through all of them individually and at length.

For the decision it really gets interesting only from heading "C", which is about half way through the paper. But again, I'll go through it later.

Finally I must say I do like the mess that it might have created with the SGP and how there might be some problems coming up...

Here's what's interesting: Munchau complains that everybody is cheering that the Lisbon Treaty can be ratified, but nobody realises the constraints that have just been put on future European integration. I believe that this is true, but quite irrelevant for now. The truth is that right now the priority is to get the treaty ratified. It's been 5 years, closer to 6, everyone is fed up with this and its about time to get things moving! We keep on talking about process, not substance, and really process, unless it is corruption, bores people. It's too technical, too confusing. (I just witnessed this today when I tried to explain to a friend the application process for jobs at the EU). Anyway, to go back to the point, European and National officials just want to get this over with. The motto is: "tomorrow, we'll worry about tomorrow". This approach is actually benefitted from this ruling and its meanders. As a matter of fact it helps that someone came along and said: "listen, the EU has problems. It's decision making is not ideal and actually parliaments ought to have a bigger say. Moreover if you want to delegate more powers, to the extent that a delegation of legitimacy will occur, you can't do through the back door. The UK and France won't simply leave one day the UN security council and be replaced by a EU rep due to backstage plotting. If you want the USE (the united states of Europe), you have to do it right. You have to change the constitutions and to properly address issues of where sovereignty lies." Specifically this helps the case of pro-Lisbon in Ireland a lot. Here's a ruling from a pretty pro-European country, saying explicitly that the Lisbon treaty does not delegate power in all those policy areas which spooked the Irish electorate, with images of Irish soldiers fighting and dying for Italy (god forbid), while their one-night-stands were forced by Brussels to abort their unwanted children, and their unwanted children were taught Esperanto in school, so that they could fill up their Esperanto European tax revenue form. According to Cerniglia and Paganni (2007: 12-14), there is a pretty decent match between present delegation of policy areas to the EU and the preference of Europeans for such delegation. Actually, it would seem that there is even some room left for further European integration in defence, humanitarian aid, the environment research and development and foreign policy. But I lose myself... The point here is that this ruling may help the cause of the Lisbon treaty for the reasons that Munchau thought it would hurt European integration. If only the Irish pro-Lisbon side can get properly organised and if their dumb politicians can shut it, we might get a chance to have this thing over and done before David Cameron comes to power and messes it all up for everyone (him included)...

As to the rest, I'm sure that the nation state will be as less fashionable in 25 years as it is today in comparison to 25 years ago...

BTW, another interesting issue for me is the idea repeatedly (6 times) stated of "the will of the people". This is interesting for someone like me who has studied political economy for a while because we get used to talk about majorities and minorities, not "the people" and much less "the will of the people". Obviously I suppose that it is implied in the courts language that "the will of the people" is proxied by "the will of the majority of the people". A Rousseauian reminiscence...