Broken Branches, Peruvian Edition

The executive and legislative branches of the Peruvian government appear to be heading for a showdown. Longtime CG friend and awesome economist Cesar Martinelli breaks it down for us in this guest post:





Forget about the soccer war of the 1960s. Peru’s current government may collapse apparently because of disputes about the organization of the Pan American games in 2019. President Pedro Pablo Kuczynski of Peru—or PPK as he is known in Peru—was sworn in merely four months ago, receiving high marks from both domestic public opinion and the international press. A typical profile of PPK in the media like this one written by my colleague at George Mason University, Tyler Cowen, would extoll PPK’s impressive experience as a policy-maker and as a private banker, his connections with international organizations, and his academic pedigree. One of the best-received initial decisions of PPK was to include in his first cabinet the Minister of Education of the previous administration, Jaime Saavedra. With impeccable credentials of his own as a policymaker and academic, including a PhD in economics at Columbia University, Jaime Saavedra has pushed successfully for a revamping of education in Peru, around the recognition of the importance of evaluation and incentives—two themes that are central to the economic view of policy making. Saavedra’s popularity has been cemented by his ability as administrator and his obvious enthusiasm and knowledge of the field, even if there remains in Peru like elsewhere widely different views about the proper role of the state in the education sector, some at odds with Saavedra’s mildly interventionist stance regarding guaranteeing the quality of college education.
These coming weeks, PPK’s government is bound to appear again in the news, and the apparent reason is Minister of Education Saavedra. Yesterday, Saavedra was required to appear in Peru’s Congress to answer a list of questions posed by the majority in Congress, conformed by the followers of Keiko Fujimori, still smarting from the lost of the presidential runoff against PPK, and minor allies. The list of questions, unfortunately, has nothing to do with discussing the direction of the education reform, and reads more like a laundry list of assorted complaints, mainly about the organization of the Pan American games. The debate yesterday in Congress has not been an edifying spectacle, with the spokesperson for the majority roundly declaring that Peru’s recent improvements in the PISA evaluations were the result of some sort of conspiracy promoted by the Peruvian government. We live in a post-truth world, I guess. Absent any real policy disagreement, the only reason the majority in Congress may be moving toward the dismissal of Saavedra is precisely because he is successful and, as such, an asset to the government. A successful administration by PPK would delay or endanger Fujimoristas’ anxiously awaited return to the control of the executive, where most political rents can be generated.

This is what follows next. Fujimoristas have announced that will move toward censoring Saavedra in the coming days. According to the Peruvian constitution, Saavedra will have three days to resign. The executive can reply by promoting a question of confidence regarding the whole cabinet. If the Congress insists, then the whole cabinet must resign, and the President will be forced to form a new cabinet. This may be less daunting than it sounds since the President can in principle reshuffle the cabinet and propose it to Congress as a new cabinet, for instance promoting Saavedra to Prime Minister. And here starts a chicken game. If the Congress rejects the new cabinet or in any other way fails to approve a question of confidence, the President has the ability to dissolve the Congress and call new elections. Therein lies a wonderful irony. The current constitution dates from 1993, and was approved in a referendum promoted by the President Alberto Fujimori, father of Keiko, after illegally seizing power following disputes with Congress. One of the purposes of the constitution of 1993 was precisely to make it easier for the President to legally dismiss Congress.


One can imagine two alternative scenarios. In one scenario, the PPK government caves in, trying to appease Fujimoristas. We have seen that movie before; PPK himself wrote in 1977 a great book describing the economics and politics of Peru in the 1960s, when a reformist and generally well-meaning president was trapped in a tug of conflict with an opposition-controlled Congress. Things did not go very well, and representative democracy gave room to a military takeover. Much has changed in the Peruvian economy and society since then; sadly, rent-seeking and irresponsible behavior by political hacks has not. In the other scenario, PPK promotes a question of confidence and lets Congress inch towards a legal dissolution. This requires something new from PPK, beyond all the highs and lows of his extensive vita—true political leadership.

Notes from a red planet

On my last couple of visits to the River Wind Casino, I’ve heard a lot of talk about Trump. And people, the talk has been overwhelmingly positive. Even folks that I know did not vote for him are impressed.

The Carrier deal? Aces.

The proposed tariff on firms who move production abroad? Even better.

Talking to Taiwan on the phone was highly rated as well.

Here are some more or less quotes:

China can kiss our ass if they don’t like it.

The president of the US can talk to whoever he wants on the phone.

Trump is our only chance for change.

35% is ok but you know what would be better? 100%!

Trump is the only one trying to help.

We are crazy to let China sent their stuff here.

I hope he makes more companies keep jobs here.

While Trump’s trade and industrial policies are horrible economics, attitudes on the red planet (aka Oklahoma) have changed from simply anti-Hillary (Benghazi!! Lock her up!!!) to very pro Trump based on his actions over the last month.

Whatever our own attitude toward the dude is, I think we should understand that, for a pretty large chunk of America, he’s winning them over.

No wonder I hear so much talk from my progressive friends about getting rid of the electoral college.

And don’t think the folks at the casino don’t have an opinion about what that is code for: allowing politics to go back to ignoring them and their interests.


The long lasting effects of trade

In The Long Process of Development: Building Markets and States in Pre-industrial England, Spain and their Colonies, my co-author and I show that smugglers in New Spain (current Mexico plus much more) conducted virtually all trade with Europe in the 1600s, including much of the exportation of silver.  In fact, it is estimated that in some decades over 50% of the silver sent to Europe was shipped illegally from Mexico.  Because this trade was illegal, it didn’t bring about a growing system of laws, rules, & regulations enforceable in a judicial system.

As Douglass North wrote, it is important to have property rights that are internalized in people’s consciousness and unconsciousness, embodied in multi-volume codes of laws and regulations, and enforced by impartial courts and professional bureaucracies. That Mexico did not have because of its smugglers ’ economy.

In principle, the de facto legalization of trade between Mexican ports and the United States during the war with France should have been highly beneficial to the development of a commercial culture in Mexico. It was, in fact, advantageous, but the benefits were limited by the fact that Mexico had few ships on the East coast to use in trade with either the US or anyone else.

An excellent new working paper shows that perhaps illegal trading wasn’t so bad after all, even if it didn’t give rise to good institutions.  Daphne Alvarez Villa and Jenny Guarded, in “The Long-Run Influence of Institutions Governing Trade: The Case of Colonial and Pirates’ Ports in Mexico,” show that:

“The presence of trade, either in its legal or illegal form, leads to significantly better development outcomes compared to neighboring areas where such activities were absent.”

They note that conventional wisdom would assume that “smuggling may be detrimental for long-run economic growth and development for numerous reasons: first, by fostering a culture of informality and illegality in detriment of revenue collection; second, the weaker presence of the state may make it difficult to enforce contracts and protect property rights thus depressing economic activity; and finally, colonial smuggling was at times accompanied by piracy and these ports were often subject to armed attacks and pillage, particularly during the 16th and 17th century.”

However, “smuggling during colonial times may have created the necessary conditions to benefit from trade liberalization in the late 18th century (comercio libre) and after independence (1821). For instance, merchants with the “know-how” and experience of clandestine networks had an advantage in the business once trade restrictions were lifted. Such an early start in commercial activities (either legal or illegal) may have compensated for the damaging effects of a weak state presence and supports an emphasis on increasing returns to scale mechanisms.”

The paper is quite good and well worth reading in full.


Show Me the Money!

As of the final pre-election FEC filing covering spending up to 10/19, Clinton out-spent Trump by 2 to 1! ($898 million to $430 million)!

In 2012 Obama and Rommey’s spending totals were very close to each other (and close to what HRC spent this time).

For some perspective, Halloween spending in 2016 was over $8 Billion, over 5 times what the two candidates spent.

So, Trump spent way less and did way better in terms of electoral votes, which is what matters, than did Romney in 2012 and obviously than HRC in 2016. Maybe he’s not as dumb as everyone thinks. It seems like somebody in that campaign knew what they were doing.

From what I could tell in the data, it seems like HRC spent  $0.00 on media buys in Wisconsin the whole campaign (She did significantly run more ads than Trump in Florida, Pennsylvania, Ohio, and NC)!

Disclaimer: I’m not a Trump guy. I’m for increased immigration, less military spending, fewer people in jail, legal drugs, and affirmative action (Not that HRC would have given me (m)any of those things either).


Thinking harder about globalization

I’ve been thinking recently of how little credibility economists have with working class Americans (or so it seems to me).  In some sense, I’m not surprised.  Economists did a terrible job of predicting the Great Recession and didn’t have much new to offer when it came to fixing the mess.  I could hardly blame anyone for questioning how much faith to put in economic theories.

The Harvard Business Review has a great article this week by Joan Williams called “What So Many People Don’t Get About the U.S. Working Class” and she gives a lot of other reasons that white, middle class voters may distrust economists.  She writes “One key message is that trade deals are far more expensive than we’ve treated them, because sustained job development and training programs need to be counted as part of their costs.” 

I think that she is absolutely correct and that perhaps we have focused too much on the long run benefits of trade (wouldn’t be the first time) to the detriment of the short term costs on American workers.  I had a student once who argued that we should just elect economists as presidents and they can then enact the best policies.  Beside the fact that economists don’t come close to agreeing what the “best policies” are, there is also the issue that we live in a democracy and any policy (good or bad) needs popular support behind it.  I stress all the time to my students that they need to understand the economics and the politics in whatever country they are studying.  It is not enough to just know the economics.  You can recommend awesome, growth-producing policies, but if you can’t convince anyone that you are right, then you have nothing.

Somehow this is harder for me to do when it comes to thinking of US policy.  One of the best, and most honest, exchanges I’ve read about the effect of trade policy on the US middle class came in an interview with Angus Deaton.  The interviewer asks Deaton for his thoughts about globalization and the increasing mortality rate, a provocative finding described in The Atlantic in January 2016:

“Between 1998 and 2013, Case and Deaton argue, white Americans across multiple age groups experienced large spikes in suicide and fatalities related to alcohol and drug abuse—spikes that were so large that, for whites aged 45 to 54, they overwhelmed the dependable modern trend of steadily improving life expectancy. ”  

And this is Deaton’s response to the interviewer:

“But you asked me why this [the mortality rate]—what has this got to do with globalization, and I’m like, you know. And I’ve always taken the position which is—you know, I’ve done a lot of work over the years for the World Bank, and I think this is a pretty accepted, in those organizations, cosmopolitan position—globalization has dragged or pulled or liberated hundreds of millions of people from poverty, in India and China in particular. And those people were really poor to start with. So this is just like an incredibly major achievement in the world.

So when you think the world is going to hell in a handbasket, which it sort of is right now, you have to look back on those amazing achievements. And a lot of those have come from opening up markets, you know, from greater international trade, from all the things we know about. And the sort of cosmopolitan position is, OK, maybe some people in the U.S. and Western Europe were hurt by this process, but you know, they’re really well-off compared with the people in China and India who are being helped. So if you take this sort of positon, that we prefer to help people who are poorer than people who are richer, then this seemed like a pretty good thing.

And so, however, when you see these middle-aged people—and these are the people in the U.S. who are bearing the brunt of this—these are the people who used to have good factor jobs with on-the-job training. These are the people who could build good lives for themselves and for their kids. And all of that has gone away. The factory’s in Cambodia, the factory’s in Vietnam, the factory’s in China, wherever. And, you know, there’s been a lot of dispute between the right and left as to how badly off them are. You know, are the price indices correct, are median wages really falling, and so on. But when you actually see them killing themselves, you know, and the mortality rates are going up, then you think something really, really seriously has gone wrong. One of my colleagues—an anthropologist, Carolyn Rouse—has used the term these people have lost the narrative of their lives.

Now, Pamela asked me the question, you know, why? We don’t know why is the answer. And, of course, everybody has their theory, and that’s where—but, I mean, it’s hard to believe it’s not connected up with those 20 or 30 years of declining economic prospects for people with only a high school education in the United States. And, you know, somehow we’ve got to find a way—I’m not against globalization. I’m certainly not going to go for protectionist solutions or something. But we’ve got to find a way of sharing the benefits with those people, too—and if not with them, at least with their kids.”

Perhaps economists shouldn’t have been so surprised about working class support for Donald Trump.

*Note: The blog title derives from a good quote by Deaton on globalization and its short to medium term effects, saying “We’ve really got to think harder about this than we have.”  




The way forward

As you know, I work in a University, which means that most of my friends has the mother of all sads from the election results.

Here I just want to say that things are not as bad as they look and the path forward is not as daunting as it might seem.

I am not a fan of president elect pumpkin spice. Didn’t vote for him, think he’s wrong on virtually every social and economic issue. But I don’t see either the accuracy or utility of labeling his supporters as racists, bigots, misogynists, …… Some surely are, but the great majority of them are people with strong grievances (real or perceived) against the current system and treating them with contempt only makes the problem worse.

OK, so here’s my pitch for why we can be optimistic about the future.

The election was really close. We really only need to persuade a million or so folks to change their views. Plus, maybe the dems can learn a bit and run a candidate that doesn’t have so much baggage and doesn’t dismiss a big chunk of the electorate as “irredeemable”.

Second, the future is brighter. Young voters overwhelmingly rejected pumpkin spice, even when the alternative was tepid dishwater. Time is on our side for social progress.

Third, time is also on our side as folks have an additional 4 years now to see that gay marriage does not hurt them, that Islam is not their enemy, etc. Slowly but you know what, some folks may come around. Remember, it doesn’t have to be everyone.

So rather than labeling and demeaning, I suggest we reach out in a spirit of love to try and understand the grievances of the spice brigade and see if we can cut a deal.

If we build a wall (or renegotiate NAFTA and scupper the TPP) and go after China in the WTO can we drop the deportation stuff and maybe even increase legal, vetted immigration and refugee acceptance?

If we include rural whites in affirmative action type programs, can we agree to continue to use government to help disadvantaged minority groups?

We have no problems buying off teachers unions and other types of interest groups, let’s figure out what we can do the raise the status / self esteem of a couple of million pumpkin spicers going forward. Because believe me, the republicans will run other populist demagogues until it is decisively shown not to work.

Nearly half of the electorate that bothered to vote voted for Trump. Yelling at them, no matter how good that may feel,  isn’t going to make their numbers go down. If we want to consolidate and build on the social progress we have attained, we have to find a way to incorporate some of them into the movement.

In the immortal words of Will Toledo, “I want a deal, let’s cut a deal..”





Theory of the Second Best: Anti-corruption edition

Recently I invited Danila Serra from SMU to give a talk on her research on corruption up here in Normatopia. She gave a great talk and there was a huge turnout.

She reported on Lab experiments designed to see if websites like “I Paid A Bribe” can deter what Danila calls extortionary corruption, and also if there were feasible refinements to the site that might perform better.

Her results are amazing. The two papers she talked about are available here and here.

The first reports experiments showing that even if you let bribe demanders post false information about bribe activity, a reporting platform significantly reduces bribes. Among other things, the second paper reports experiments showing that while allowing bribe demanders to collude raises the size of bribes, the collusion breaks down fairly quickly over time.

It seems like reporting platforms really can reduce bribes.

At the end of the talk, I asked Danila if she favored eliminating completely this form of corruption. I got the feeling that she did.

But I think if bribes for services were eliminated in developing countries with no other reforms also being introduced, service delivery would actually become worse rather than better for citizens.

Civil servants might quit showing up to work. Processing times could skyrocket.

My reasoning is that many low level civil servants are not paid well, if at all.  In fact, some civil service jobs are allocated by the job seekers buying the position! Collecting bribes is a functionally important incentive for showing up and doing any work.

So I think eliminating corruption, ceteris paribus, could well make things worse. And this is of course, just an example of the brutal theory of the second best which implies that in a world of multiple distortions, eliminating a single distortion can make things worse rather than better.

To me, absent major civil service reform, Danila’s extortionary  corruption is often a necessary evil.