Sunday, April 26, 2015

TTIP and the politics of economic modeling

In our post-democratic era government from, for and by the people is increasingly replaced by governance from, for and by technocrats. Citzens are kept at one remove from politics by the technical nature of the language in which politics is being waged. That is partly because of increasing societal complexity; partly because of the decline in discretionary public spending, as Wolfgang Streeck and Armin Schäfer have shown in Politics in the Age of Austerity; but also because of intentional elite strategizing. No better way to keep citizens out of the fray than by framing the issue at stake as an engineering problem.

No better illustration of how this works then the politics surrounding the Transatlantic Trade and Investment Pact (TTIP) that is currently being negotiated between the US and the EU. Dating back to early 2013 when Obama and his EC counterpart Barosso flagued their mutual willingness to embark on the establishment of a Free Trade Agreement between the US and the EU (a long standing wish of the European and American business communities), the negotiations were initially treated by the American and European political elites as a matter of better market coordination with only positive welfare consequences (win-win) and hence without any need for democratic consultation. Increased output legitimacy was deemed to be sufficient to dispense with input legitimacy, to paraphrase the German political scientist Fritz Scharpf.

To back this up, European commissioner De Gucht who was responsible for the negotiations commissioned a number of studies from prestigious European think tanks as background material for the political marketing of the pact. Using sophisticated econometric trade models (Computable General Equilibrium), Ecorys, Bertelsmann and IFO predicted small employment and welfare gains in the case of maximal harmonization in the medium to long term. What was left out of account in all three studies were transition costs, redistributive effects as well as social and ecological effects. Moreover, the models were based on the assumptions of full employment (employment losses in sector A are by definition compensated by employment gains in sector B) as well as homothetical cost functions, meaning that the relative costs of labour and capital are assumed to be fixed, which defines shifts from labour to capital a priori out of existence.

The two riders – the degree of harmonization and the timing of effects – proved crucial in the political debates that ensued when one year into the negotiations the press finally got wind if it (George Monbiot of the Guardian on November 3,2013) and raised doubts about the redistributive neutrality of the pact. For they allowed proponents to sell TTIP to increasingly skeptical citizens as economically beneficial without indicating that these benefits hinged crucially on the successes of the negotiators to fully eradicate non-tariff trade barriers (of which an increasing number proved highly controversial, i.e. chlorinated chicken, GMO food, financial services) and would manifest themselves only on the medium to long term, raising strong doubts about how TTIP could ever be ‘the cheapest stimulus package you can imagine’, as De Gucht claimed in a March 2, 2013 speech held at Harvard.

As the economic sociologists Ferdi De Ville and Gabriel Siles-Brügge have recently argued in New Political Economy, economic modeling is not so much about actually ‘predicting’ future welfare effects of current political decisions but is rather about politically ‘managing fictional expectations’. In contrast to their putative aim, namely providing reliable guides into an uncertain future, these models help to construct a certain but imaginary future in order to facilitate political consensus on the issue at stake by using a fictional econometric world that due to its technical nature is able to hide its fictional nature from the eyes of non-experts.

In the words of De Ville and Siles-Brügge:

[I]n line with the ‘ideational turn’ in political economy, we argue that it is not objective consequences of trade agreements as such (which simply cannot be known for certain a priori), but the management of expectations about their effects which affects the support for and opposition to the launch, conduct and conclusion of free trade negotiations (p. 19).

If economic modeling does indeed serve predominantly political functions and is to a strong degree nothing but an exercise (albeit a theoretically controlled one) in fictional imagination, there would be no better way to bring to the fore the politics of modeling than by being presented with a wider variety of ‘predictions’ based on competing econometric models. Nothing beats another ‘fictional expectation’ to highlight the fictional nature of any exercise in econometric modeling.

That is precisely what the US-based Italian economist Jeronim Capaldo of Tufts University has done. In a widely debated 2014 paper Capaldo presents different ‘fictional expectations’ regarding the future employment and welfare effects of TTIP, which are strongly at odds with those of the EC commissioned reports. Instead of gains, Capaldo’s econometric exercise ‘predicts’ losses, especially for the North-European members of the EU. By bracketing the assumptions of full employment and homothetic cost functions, Capaldo’s model is able to include transition costs as well as redistributive effects. In particular, Capaldo ‘predicts’ rising unemployment as well as welfare losses as a result of a declining labour share of the national product caused by a weakened bargaining position of labour unions.

What is interesting about Capaldo’s paper is not that his ‘predictions’ are negative or even different from the official reports, but that he used an alternative econometric model to derive his ‘fictional expectations’, namely the so-called United Nations Economic Policy Model (UNEP). By doing so, Capaldo has done democracy a big favor. By demonstrating that different econometric models produce different future worlds, Capaldo has shown policy makers as well as ngo’s and citizens that the certainty proclaimed by the political marketeers of TTIP is a political fiction which serves particular political interests. Capaldo’s counter-imagination has given politics back to citizens. For this, he should be applauded instead of attacked, as Jacques Pelkmans, a Dutch economist from the EU funded College of Europe, in a recent interview in the Dutch daily De Volkskrant so unfairly did, when he accused Capaldo of ‘hooliganism’ that was merely meant to harm Pelkmans' cherished TTIP.

One would have hoped – seven years after a crisis which discredited large parts of the mainstream economic paradigm – to see a tad more humility among the economic tribe, a tidbit more self-awareness about the limitations of their own models, a teeny weeny more recognition of the unavoidable politics informing their theories, as well as a little more appreciation for the need to have a serious conversation between different economic paradigms. If only to teach citizens, politicians and journo's that they shouldn’t take economic ‘expertise’ too seriously.