Returning in the times of the coronavirus

I cannot believe that I have been away from my blog since September of last year after a trip to Chile.  How much things have changed!   We could then travel and thought that the main risk for those who live in the UK was Brexit.  Yet the last few months have reminded us how unpredictable life is and how we should not take anything for granted.  An unexpected pandemic is leaving deaths, health care chaos, and a major economic crisis.  Of course, it has also reminded us of the heroism of many (particularly doctors, nurses and many other key workers) and should remind us the importance of public health services.

Yet I am not coming back to the blog to talk about the virus; as much as I would like to contribute to those debates, I do not have particular expertise on the subject.  Instead, I hope to write more often now to: (a) remind us all of the costs of growing costs of inequality; (b) explore the likely impact of the current crisis in income concentration; and, to a lesser extent, (c) discuss the extent to which the global North - global South division is still useful and valid.

To begin, let me include here a few links demonstrating that the impact of the crisis on income distribution is likely to be rather harmful (these articles are from The Economist and the FT, but I will try to diversify more in the future):

How covid-19 exacerbates inequality --the case of the UK

The pandemic shock will make big, powerful firms even mightier

Big hedge funds raise money to capitalize on market turmoil

More tomorrow.  If somebody is reading this and have suggestions or reflections, please let me know.  I realise saving lives and keeping healthy is our priority... but reflecting on the consequences that the crisis can have in one of the key problems of the 21st century is not irrelevant.

The Costs of Inequality: Invitation to CNN

I have spent a few days in Chile invited by the Instituto de Estudios Internacionales of the University of Chile.  They have introduced a fantastic new MA in Development Studies led by José Miguel Ahumada.  It is great to be in Santiago where interesting policy debates are taking place around Pension reform among others.  While in Chile, I had the opportunity to talk about my upcoming book on the Costs of Inequality in Latin America and its lessons for the rest of the world in CNN Chile.  It was a nice experience and a great opportunity to reflect on the consequences of economic inequality at the top. Here the link.

The Venezuelan crisis and its complications

I just wrote another column in Agenda Pública about the Venezuela crisis (in Spanish).  I am convinced that Maduro's government stopped being democratic a while back.  The more I hear Venezuelan analysts discussing the situation--we had a nice event yesterday at the Kellogg--the clearer the problems become.  Nevertheless, the strategy of recognizing an alternative governments is extremely risky and sets a dangerous precedent. What are the criteria to recognize or not recognize a new president in each case?  This is an important question given the growing number of semi-democracies and semi-dicatorships from Nicaragua to Turkey and Hungary).  Also, the chances that this ends up in a civil war have increased significantly.

I so much hope that we can soon have free and fair elections there!

My new Op-Ed (in Spanish) in Agenda Pública

I am currently working on a book on what Latin American teaches about inequality to the rest of the world (you can find a short description here).  In reading about the region's history and comparing it with the present, it became clear how difficult building a vibrant democracy has been.  In unequal contexts, the elite just have limited incentives to allow for an institutional structure that promotes redistribution.  I reflect on this problem in my recent Op-Ed in Agenda Publica (where I am happy to now be a regular contributor).  As always, comments are most welcomed!

Income inequality and the commodity boom in Latin America

I just finished a paper exploring the links between income inequality and the commodity boom in Latin America.  I am still surprised with how many people claims that "the reduction of inequality was thanks to the commodity boom" without realizing that those two processes usually don't go together.   While the paper does not use new data, it does try to use all the evidence available (both descriptive statistics and secondary sources) to conclude that governments managed the commodity boom better than in the past in the short run, but did not promote any radical change in the long run.  The paper also presents data based on household surveys with new studies based on taxes, which very few people have done so far.

Anyway, it would be great to receive comments on it if anyone has time to read it.  Below is the abstract and here the paper:

Past historical experience and both orthodox and heterodox economic theories lead us to expect a positive relationship between income inequality and commodity booms.  Yet most of the literature has not been surprised by the fact that Latin America’s recent improvement in income distribution coincided with a rapid growth in commodity exports.  How was this positive outcome possible? Did income distribution improve because of higher commodity revenues or despite them? This paper answers these questions—seldom explored in the literature—through an extensive discussion of economic studies, descriptive statistics and policy changes. The paper shows that the reduction of inequality took place among the bottom 90% of the population only, while the income share of the wealthy remained stable when properly measured. I show that the reduction in the Gini coefficients resulted from a combination of better labour market outcomes—which favoured unskilled workers more than skilled ones—and better distributive and redistributive policies. The paper concludes that political pressures forced most Latin American governments to manage the commodity boom better than in the past in the short run but did not lead to significant transformations in the region’s elite-driven development model.

Bolsonaro: primarily a counterrevolution from the rich?

For all the discussions about corruption, the anti-PT vote and Bolsonaro as another Trump, I think these two graphs summarized as well as anything what may have happened in Brazil.  The first one reveals the growth of income between 2002 and 2014 for different groups of the population. The second, the vote that Bolsonaro (in blue) and Haddad (in red) received depending on the income level of the municipality. The upper middle class, which had not won much from the PT years, got upset and tired and decided to vote for somebody else.  One of the saddest things is that this group of the population should be more opened and liberal... and ended up voting for the most iliberal candidate possible. 

https://wid.world/document/divided-brazil-hindsights-on-the-growing-politicization-of-inequality-wid-world-issue-brief-2018-3/

On teachers and hedge fund managers

Today we had a talk from Michael Sandel who opposed the "tyranny of meritocracy" based on money and success with the recognition of the common good--even if hard to define!

With one of his examples, it reminded me of a question that I have heard (and raised myself) many times: why is it that hedge fund managers are paid MUCH more than kindergarten teachers?  The answer of why they should NOT be paid more is clear: a great kindergarten teachers contributes much more to the common good and to the construction of future good societies than a hedge fund manager.

Here a few answers that try to justify the higher income and why I think they do not work:

1. It is about merit: hedge fund managers make a more significant contribution by helping financial markets work and send the right signals.  Since financial markets are the blood of any economy, then they are being paid by their more significant contribution.

This explanation is simply a joke after 2008.  It may be true that finance when supporting production is vital, but what about speculation?  Is it truly contributing to the common good?  Even if it was, is it doing it hundreds of times more than a kindergarten teacher?

2. It is about supply and demand and, therefore, marginal productivity.  This is the favorite neoclassical explanation: in this case, it would imply that many people can be a good teacher (so supply of teachers is high) but few can be good hedge managers (you require sophisticated technical skills like engineering, etc).

This is, again, hard to understand.  First, there are many engineers that are poorly paid.  Second, the supply of really good teachers is not that high, and the market does not seem to know how to recognize quality.  Third, the key concept in the neoclassical theory of value is marginal productivity, which sends us back to what hedge fund managers are really doing.  Are they really being more productive than others?  In what ways?

3. Connected to the previous point, it is about risk.  Investing in the financial sector is much more risky than teaching students so the rewards also need to be higher.  Moreover, surviving that risk and the tension created requires a particular character (again, going back to merit).

Another superficially powerful explanation but rather weak in practice.  Are a lot of hedge fund managers really ending up poor?  Or do they generate enough income to sustain their operations?  And why is "risk" more important than, say, "patience"?  Anyone that has been in a classroom full of three year olds knows how hard to it is to manage them and how skillful one needs to be.

I realize I am not saying anything new, but I just want to emphasize who weak, at the end, the current value system is.  It is not only that the current level of inequality may be morally repulsive. It is that it does not have any clear justification (it is about the market is a weak social explanation) and it is actually leading to a very inefficient and poor allocation of resources.

What am I missing?  Are there other explanations?  I would love to hear from anyone who reads this and has another views.