Zingales Surprises By Omitting Big *C* in OMT

Usually any disagreement I have with Luigi Zingales is just a political science or sociology nitpick about a gap in the economic approach. I thought we broadly agreed on capitalism and reform, including his stated objections to the bailout of firms, banks, and sovereigns.

But this time may be different. In his latest piece for Project Syndicate, published yesterday, Zingales argues that Spain and Italy ought to end the uncertainty about the effectiveness of the European Central Bank’s (ECB) program for Outright Monetary Transactions (OMT) by taking early advantage of the ECB offer. Zingales interprets the uncertainty as political (whether the German parliament would approve OMT in an emergency, whether unsustainably indebted governments will risk the domestic electoral disapproval of external bailouts which amount to an admission of government failure).

Let’s not forget, by the way, that critics regard Outright Monetary Transaction as a dressed-up bailout to indebted states which have themselves to blame, and a potentially massive dose of moral hazard which perpetuates uncertainty and postpones the solutions.

I do not follow monetary policy as closely as Zingales (my last post on the topic is here). Yet I have the impression that the real uncertainties surrounding OMT relate to the unspecified conditions for structural adjustment reform that the ECB has promised to attach to OMT.

A ‘bailout’ is only ‘not a bailout’ if it is a condition for reform. So why not mention big *C* conditionality? If a radical academic cannot do so, why would Monti? Are political and intellectual leaders too frightened to persuade the people of the inconvenient truth?

Though it is curious that Zingales does not mention conditionality or structural adjustment, they are implicit here -- “triggering the OMT in advance would promote political stability in the face of uncertainty, because it would tie the hands of any future Italian government”.

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The purpose of conditionality is to take discretionary power from the mass of politicians -- to tie their hands in some way and facilitate a shift of monopoly power to leaders who are sheltered temporarily from everyday political competition. In yesterday’s piece (and rather like Monti) Zingales chose the route of emphasizing OMT benefits that any Keynesian or socialist critic of structural supply-side priorities could also agree to, i.e. not mentioning the “conditions”.

The benefits of OMT for crisis-hit countries are only universally European priorities (or ordo-Liberal and neo-Liberal national priorities) if the conditions for structural adjustment reform are unequivocal and enforceable. Structural supply-side reforms eliminate moral hazard and the rent-seeking and inefficiency which cause the symptoms which OMT is designed to treat. 

I thought Zingales favoured treating causes rather than symptoms of capitalist crisis.

The elephant in the room is the fact that the electoral cycle does not easily accept real structural reform. Ordinary voters won’t vote for pain while the laughing gas dispenser remains standard-issue equipment in the dental theatre. If an unelected technocrat cannot push the reforms through, an elected technocrat is no more likely to succeed.

As Zingales suggests, there may be an element of personal pride in the actions of European politicians who put on their nationalist political blinkers, thoroughly waste their valuable short term of office, and then hand the presidential sash to comedians.

My view is that lack of courage and conviction are a greater impediment than “personal pride”. Strength of character, calm conviction, and personal courage are the attributes of an effective politician in a big crisis. A good leader needs to be tough and resilient, with the confidence of their convictions. They shouldn’t be in the job without these qualities. The art of politics may be the art of compromise as well as persuasion, but it is compromise based on principled pragmatism. It is not compromise based on fear about the electoral cycle.

Sociologists are rather tougher than economists on the topic of leadership. Looking at the outcomes of crisis in the 1930s the sociologist Talcott Parsons said societies which must undergo major structural change experience irrationally high levels of “anxiety and aggression focused on what rightly or wrongly are felt to be the sources of strain”, and “patterns of belief with a strong regressive flavor whose function is to wish away the disturbing situation”. Citizens find all sorts of people and situations to blame for strain instead of accepting that rain will sometimes fall on the plain even in Spain, and in economics there is usually no gain without a little pain. For them to face reality they need to be "mobilized", said Parsons. This mobilization is always “in essence a matter of political action, involving leadership”. Action, leadership. 

The utility of democracy during an economic crisis lies not in the expression of the will of the electorate, but rather in the electoral method for selecting leaders who then have authority over the voters for a period of years long enough to do structural reform.

Democracy requires direction from elected leaders who differ from bureaucrats in the way entrepreneurs differ from managers. Bold reforms, daring leaps of faith, sound technical expertise, and skills to calculate optimal means to an end. Policy innovators swim against the stream. They break the mould, face inconvenient facts, circumvent old values, and overcome resistance from vested interests. Like business entrepreneurs who depend on financiers, policy heroes convince other politicians and other elite groups to bear most of the political and economic risk. They show and tell stakeholders about the viability and cost–benefit of a reform enterprise. Basically, this is what we employ politicians for. Actually, this is what we employ academic economists for too!

Zingales could say to Mario Monti and Mariano Rajoy: If you do really take pride in civic improvements and economic progress, be courageous and strong. Pull the trigger all the way on structural reform. Tell the people the inconvenient truth. Once that task is done and dusted, an Outright Monetary Transaction would be your country’s justly deserved reward.


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