"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Sunday, February 19, 2012

Spanish Roulette - Gambling with OPM

Spain is famous for its lotteries and the devotion of its people for gambling. Therefore, we shouldn´t be surprised if the recent labor reforms ( Essentially deep cuts of social and labor rights) announced by the Spanish government look, more than anything else , as a huge gamble. Yes, a gamble but with a twist : They pay , We win... what is called gambling with Other´s People Money ( “OPM”) or what I would  call " The Spanish Roulette". I will try along the next few paragraphs to explain the lik between gambling and policy 

First of all a few words on Gambling : Gambling does not fit into the traditional definition of a rational economic behavior. Why is that ? The explanation is simple : The chances to win ( a lottery, for example ) are generally too small in comparison to the cost of the ticket. So when facing an unfavorable perspective a "rational" person would prefer not be involved. Some would even claim that gambling is basically an unfair business, but no one would doubt that the “non rational” gamblers are fully aware of the expected losses. Under normal circumstances the bets and the chances to win or loose are transparent and measurable ( for example , the chance to win in a roulette is 1/37).

However, the level of “non rational” behavior can reach new highs. For example when the gambler pays for a lottery ticket without knowing the odds and /or the winning price. I guess that even the most heavy gamblers would avoid such lottery. However there might be one small exception : If the ticket is paid by someone else, while the prize goes into the gambler´s pocket, gambling turns to be the most rational game in town. Playing with OPM ( Other´s People Money) is the most lucrative business.That is the business the Spanish Governemt is developing trough the labor reform.

This OPM gambling game is precisely what the Spanish Government announced : The denominated “Labor Reform” is equivalnet to a "bet" : The reform includes the loss of labor rights such as the lower severance pay, the introduction of an almost arbitrary right to fire, the abolition of collective agreements ( if a company FORESEES lower sales along 9 months..... ) and more. In “Gambling” terms, the cost of the ticket of the national lottery is clear and palpable on particular and collective terms , exclusively on the working class.

Now, any political ( or economic ) decision that involves huge social or economic certain cost should be weighted against future benefits for the Spanish society ( Example : Churchill´s “Blood Sweat and Tears “ was the price, but the reward was Victory) Otherwise, how can we evaluate the Reform? For example, is there any minimal level of unemployment reduction that justifies the reform? What is the timetable to begin to have some positive results? Did the Government elaborate a “Plan B” in case the actual plan does not work ? And so on....

So I looked around to see whether any important politician and / or economist ( BTW most of them supporting the reform) can enlighten our way with clear and measurable objectives. Unfortunately the only thing you can hear from them are pathetically vague slogans such as “ A step in the right direction”, or “The results of the reform will not immediate, it will have a medium term “ or “ The rationalization of the Spanish labor market “ and so on. So the benefits for the huge sacrifices are not so clear , lets say not existing from a practical perspective. An if there are , please show us …..So isn´t it fair to denominate the new gambling scheme “ The Spanish Roulette”?

As a matter of fact such behavior is typical for politicians which always avoid serious commitments to prevent future critics ( if the results are less than expected) and leave room for maneuver. Fair Enough. However, what really surprises is the reaction of the vast majority of my colleagues, the Economists. We are trained to evaluate figures and facts, and in case we deal with uncertain situations ( such as the future) the discipline developed tools ,models and probabilities to assess the benefits of uncertain economic scenarios . Therefore aby automatic support (or disapproval) of a policy measure without clear figures or model is closer to the field of beliefs and religion than to the field of a social ( although inaccurate ) science.

Is the support for vague and not quantified promises the result of a shallow, not critical thinking of my fellow economists ? Or maybe this is not a question of professional competence, but the recognition that the “Spanish Roulette” scheme will be always “rational” as long as the ticket for the lottery is paid by OPM ( especially the working class) ? I will leave these open questions for the reader to answer.