Bringing the State Back In (to the discussion on redistribution and innovation)

SoupCarLine

In recent months, the New York Times has published a series of opinion pieces that read like an abbreviated syllabus in comparative political economy. An analytic piece from late April chronicling the (perhaps) excessive generosity of Danish social democracy kicked off the discussion, prompting a response from Nancy Folbre as well as a “Room for Debate” roundtable on the sustainability of continental welfare states. The Folbre piece linked above makes brief reference to a recent(ish) paper by Acemoglu, Robinson and Verdier (ARV) which argues that while some countries may be able to combine robust welfare states with sustained economic growth, all countries can’t do so at the same time without retarding global innovation rates. They explain their argument succinctly in the short version of their piece:

The fact that technological progress requires incentives for workers and entrepreneurs results in greater inequality and greater poverty (and a weaker safety net) for a society encouraging more intense innovation. Crucially, however in a world with technological interdependence, when one (or a small subset) of societies is at the technological frontier and contributing disproportionately to its advancement, the incentives for others to do so will be weaker. In particular, innovation incentives by economies at the world technology frontier will create higher growth by advancing the frontier, while strong innovation incentives by followers will only increase their incomes today since the world technology frontier is already being advanced by the economies at the frontier.

America: enduring child poverty and substandard education so you don’t have to. You’re welcome, Sweden.

Thomas Edsall has a piece from April evaluating this argument in light of some countervailing claims, and it’s well worth a read. Whether redistributive incentives are really the key driver of cross-national innovation rates deserves serious critical scrutiny. It’s also worth thinking in normative terms about whether one might tolerate a slower iPhone development cycle (or even – gasp – a lack of iPhones altogether) for the sake of greater social equity.

That aside, however, the ARV model seems plausible. Anyone who has dug a bit into the literature on Varieties of Capitalism will recall the basic claim about innovation: both ‘cutthroat’ liberal market economies (LMEs) and ‘cuddly’ coordinated market economies (CMEs) innovate, but do so differently. LMEs, with their flexible labor markets and ubiquitous-but-impatient venture capital, make radical technological leaps, while CMEs are better at incremental advances. America develops the Fordist production system, Germany makes cars that don’t suck. The ARV model takes this observation to its logical conclusion: CME incrementalism relies on LMEs to expand the technological frontier. For those of us who would like to see a more robust safety net and more egalitarian distribution of post-transfer income, this is discomfiting.

I don’t have anything close to the formal chops necessary to critically evaluate the technical specifics of the ARV model. I would, however, make two observations about its real-world importance and applicability. First, as the authors briefly acknowledge, people have tried to test some of the implications of their thesis. Taylor (2004) and Akkermans, Castaldi and Los (2007) both use patent data to compare innovation rates between “cutthroat” LMEs and “cuddly” CMEs. The former article finds no discernible difference between them, while the latter finds limited and industry-specific support for the notion that LMEs innovate the fastest and/or most radically. ARV do cite both of these efforts, but don’t really address the complications they present to their central argument.

Second, and more crucially, much of the discussion around this question ignores the state’s potential to drive innovation through direct investment in science. ARV treat innovation as a function of incentive structures facing potentially innovative individuals or firms. “Cutthroat” economies, with their looser regulation and weaker redistributive regimes, provide innovators with stronger incentives to invest capital in risky-but-potentially-innovative ventures. State investments in R&D, though, could plausibly drive innovation on the supply side by providing resources in a manner divorced (or at least estranged) from market pressures.

To cite a few well-worn American examples, many of the technological advances crucial to the twenty-first century economy happened outside the private sector. The first general-purpose computer was developed to calculate artillery firing tables for the U.S. Army. The microprocessor was developed by NASA in order to miniaturize computers for guidance and navigation during the Apollo program. The packet switching network that became today’s internet was first developed by ARPA (now DARPA), an advanced research agency within the Pentagon. Today, the National Institutes of Health commits a budget of roughly $30 billion per year to biomedical research, including the kind of risky basic research that may not generate immediate commercial returns, but can lead to radical innovations over time. The NIH alone represents almost a third of the money spent on health research in the United States, and is likely the reason that America is a leading innovator in this sector. The National Science Foundation commands another $7 billion to fund research across scientific disciplines (with one, ahem, notable exception). More trivially, that self-driving car that Google has been promoting like mad recently? It also has its roots in a series of DARPA initiatives.

I don’t mean to suggest that the private sector doesn’t drive a substantial majority of innovation in contemporary developed economies. Even the NIH budget, colossal by any standard, represents less than half the capital devoted to biomedical research in the United States. Nor is all state-funded research created equal. Some work suggests that state subsidies of private sector R&D initiatives may crowd out, in whole or in part, private investment in similar projects (a cursory lit review indicates mixed evidence on this score). Still, if the concern is that more egalitarian societies might de-incentivize the kinds of risky bets that lead to radical technological leaps, that effect could be at least partially offset by direct public investment. It may yet be possible to subsidize school lunches without gutting technological progress.

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David Cameron and Centrifugal Crises

British Prime Minister David Cameron made waves in late January when he announced plans to hold a referendum on the U.K.’s continued membership in the European Union. Should the Conservatives win elections in 2015, Cameron promised a simple “in or out” referendum on E.U. membership by 2017.  The move seems to have roots in domestic politics. Cameron faces considerable pressure from the Eurosceptic wing of his own party as well as a challenge from the UK Independence Party, which has been surging along the Conservatives’ political flank.

This all raises the prospect that, absent Conservative defeat or a Europhilic turn on the part of the British public, one of the core members (and key funders) of the E.U. could make an ungraceful exit in the coming years. In the long term, this could prove a greater threat to the viability of the European project than the economic woes of more peripheral members like Greece and Spain.

Labour leader Ed Miliband sharply criticized the proposal and hardened his own opposition to such a step (though support from some of his backbenchers may be shaky). Nick Clegg, whose Liberal Democrats are members of the Conservative governing coalition, dissented sharply as well. Heads of state in Europe did not react warmly to the news, nor to the strong-arm tactics it represents. Former Prime Minister Tony Blair said Cameron’s brinksmanship could backfire: “It reminds me a bit of the Mel Brooks comedy Blazing Saddles where the sheriff says at one point as he holds a gun to his own head: ‘If you don’t do what I want I’ll blow my brains out.’ You want to watch out that one of the 26 [other EU member states] doesn’t just say: ‘OK, go ahead.'”

Extra points for the Mel Brooks reference, and for having the good sense not to repeat the quote verbatim.

Cameron’s move seems risky, but makes sense in light of both domestic and international factors. In addition to shoring up cracks in his governing coalition, his announcement seems designed to increase his leverage in upcoming negotiations over the E.U. budget. Cameron himself is not a hard Eurosceptic, but his support for a pro-Europe vote in any future referendum has now been made implicitly contingent on his receiving an acceptable offer from his counterparts on the continent. By publicly committing to a referendum, Cameron presents Paris, Berlin and Brussels with the choice of either buying British support for a “yes” vote or hoping that the Conservatives lose the next election. How palatable they’ll find either option remains an open question.

That being said, Brian Taylor points out that the Tories may be undermining their position on the question of Scottish sovereignty:

They have said that the [Scottish National Party] cannot guarantee Scottish membership of the EU, post independence.

The Nationalists have, of course, contested that vigorously but, at the very least, the issue gained some traction.

Now what do the Tories say on this topic?

Reject the SNP, stick with the UK – and we will offer you the prospect that a vote across the whole of these islands may take you out of the EU, perhaps in contradistinction to opinion in Scotland.

In a bid to reassert the economic and political autonomy of Britain, then, the Tories could end up actually weakening the British state.

Whatever the outcome, this episode highlights the contradictory and self-undermining nature of elite responses to the ongoing economic crisis in Europe. Years of austerity, some of it imposed at the encouragement or insistence of Brussels, have made the financial burdens of European integration heavier for the continent’s economic core. At the same time they have constricted recovery and led to anemic growth, high unemployment, and prolonged economic misery.

It would be naive to say that say that such conditions “cause” nationalist or parochial backlash, but the economic crisis does seem to be having centrifugal effects on multiple fronts.

On the one hand, it puts sustained pressure on the political and economic bargains that make the E.U. viable. Though not a member of the Eurozone, Britain is a major net donor to the E.U. (see chart from Le Monde, below) and the third largest economy in Europe. Its departure would represent a major shock to the institution.

EU Contributions; Le Monde

On the other hand, the crisis has intensified sub-national fissures in a number of member states. Separatist and nationalist movements in Scotland, Catalonia and Flanders have all seen their fortunes improve since the onset of the crisis. They present an interesting twist on what Frederick Solt calls “new-nations” theories of economic distress and nationalism (see Brown, Hechter and Brass). In their simplest forms, such theories predict sub-national mobilization by groups that are materially deprived relative to society at large. Relative deprivation is key.  Here, though, nationalist grievances have coalesced around a different narrative. Separatist elites have made hay over the uneven financial burdens imposed by ‘society at large’ on local prosperity. As movements, they seek to protect the fruits of relative affluence rather than overcome relative deprivation.

Recent developments in the U.K. suggest how these super-national and sub-national crises of legitimacy could become mutually reinforcing. The specter of an E.U. exit undermines confidence in the national state’s position as a point of access to European markets and institutions. This in turn raises the stakes of regional separatist politics by sharpening the distinction between national and European alignment.

Cameron may well be able to balance these competing interests for the moment. Acute though the current crisis may be, the institutional roots of both the E.U. and the United Kingdom run deep, and continue to reflect considerable elite and popular consensus. That said, centrifugal pressures across the region seem unlikely to abate until Europe can return to robust and broadly shared growth, something which the broader policies of recent years have done much to forestall.

Dommage for Catalonia: Identity and Economic Crisis

Since the beginning of the Euro crisis, there has been a substantial amount of analysis, and more than a bit of hand-wringing, over the (arguably counterproductive) resurgence of nationalism among the European Union’s constituent states. Nicholas Sambanis’s New York Times op-ed from a few weeks ago is representative: he suggests that the crisis has refocused the European populace on their parochial national identities at the expense of their (potentially) continental one, and that such socio-psychological (re)orientation is preventing concerted action to solve the problem:

As Europe’s status declines, the already shaky European identity will weaken further and the citizens of the richer European nations will be more likely to identify nationally — as Germans or French — rather than as Europeans. This will increase their reluctance to use their taxes for bailouts of the ethnically different Southern Europeans, especially the culturally distant Greeks; and it will diminish any prospect of fiscal integration that could help save the euro.
The result is a vicious circle: as ethnic identities return, ethnic differences become more pronounced, and all sides fall back on stereotypes and the stigmatization of the adversary through language or actions intended to dehumanize, thereby justifying hostile actions. This is a common pattern in ethnic conflicts around the world, and it is also evident in Europe today.

Indeed, the economic malaise plaguing Europe provides some interesting evidence for the interaction between crises, insecurity, institutions, elite behavior, and political identity. It has certainly provided a clarifying moment for those who argue that European identity is sufficiently well-developed to have coherent political meaning. The importance of identity is difficult to observe when peoples’ various subject positions (religion, regional identity, nationality, etc.) coexist in harmony. It is when identities are brought into conflict—via social unrest, economic crisis, political competition or war—that they become the most salient. Events of recent years have not boded well for the European project, and have arguably reaffirmed the primacy of the nation-state as the locus of mass political allegiance.

Recent days have added another wrinkle to this narrative. Underreported in the American press, September 11th saw a colossal Catalan nationalist rally in Barcelona. Local police reported 1.5 million attendees. To put this into perspective, that’s nearly as many people as live in the city, and more than 20 percent of the total population of Catalonia. September 11th is Catalonia’s “national day,” commemorating the 1714 Siege of Barcelona that, according to the relevant national mythos, marked the end of Catalan independence. The holiday often draws a decent-sized crowd. This week’s demonstration, though, was orders of magnitude larger than usual. Reports indicate that protesters expressed grievances over their homeland’s disproportionate tax burden within the Spanish state, itself cash-strapped as it struggles with a balance-of-payments crisis originating in Brussels and Berlin.

There are a few points to be made here. The first is to reiterate that for European elites who profess such dedication to their continent-wide project of neoliberal cosmopolitan governance, austerity policies have been highly counterproductive. By requiring Europe’s periphery to deflate its way to renewed growth, Brussels (read: Berlin) is imposing scarcity and economic misery on the very populations it seeks to bind into a unified community of fate. Competition for a shrinking resource base is a poor breeding ground for mutual identification and positive fellow-feeling, yet rather than play savior by easing the damage done to places like Catalonia by international capital markets, institutional Europe has only exacerbated their ill effects.

The second is to note that the last few years provide a measure of support for the account of modern nationalism advanced by Karl Polanyi more than a half-century ago. For Polanyi, the overly-intensive identification with volk and fatherland that plagued midcentury Europe had roots in the collapse of the nineteenth century economic order and the incapacity of extant institutions to assert control over the fates of their societies. The renewed intensity of Catalan nationalism suggests that it continues to function as a kind of psycho-social defense mechanism through which people search for communities of fate with the capacity to control their own destinies. Madrid lies at the mercy of international creditors and lacks the institutional capability to address Spanish problems with any kind of decisiveness. In some ways it’s not surprising that the citizens of Catalonia search for other notions of community with the potential to do better.