I like to read the comments people leave in articles in Spanish sports papers. I find them funny. There’s typically a decent mix of inter-team hate, intra-team hate, and general conspiracy theory. One can find a similar mix in the press of other countries, but not nearly to the same extent as in Spain. What these comments reveal — although there may be some sample bias — is an emerging culture of mistrust, caused in large part by ongoing depression in Spain and political corruption. Strong economies are built on trust, and this emerging culture in Spain can undermine forces of recovery in a country already handicapped by bad structural and counter-cyclical policy.
In “Economics and Knowledge,” Hayek developed a theory of equilibrium incorporating the role of expectations. In a division-of-labor where each agent relies in large part on others, an equilibrium occurs when the expectations of these agents coincide. For example, you, generally speaking, would only continue to work if you were certain that you would receive a paycheck at the end of the week. Businesspeople have certain expectations of the demand for their product, and of profitability. In the real world, expectations are often wrong — businesses fail, stock markets crash, et cetera. In equilibrium expectations are in harmony, so that everyone’s plans coincide.
The term “coordination” is essentially synonymous with “equilibrium.” For disparate expectations to jive, plans must be coordinated. When plans don’t coincide, there’s discoordination. Coordination differs from equilibrium, however, in that it has a more ambiguous definition. It might be useful to think about it as a spectrum. Plans may not be perfectly coordinated, but people’s actions are not always total failures. In fact, most of the time, things work out. When you take your car to the mechanic, he’s there; your paycheck arrives on time; your landlord expects and gets his rent by the monthly deadline; et cetera. We can also think about an economy having a certain degree of order, where equilibrium is maximum order. The better coordinated plans are, the higher the degree of order.
The concept of order can be applied to business cycle theory. Expectations have played a central role in business cycle research since the 1930s. Most firms do not expect a sharp decline in demand. Those that do typically mistime their preparation. A clear example is the 2007–09 financial crisis. Investment banks’ plans did not work out when a significant fraction of their assets dropped in value. The small businesses which went bankrupt had their expectations reverse. In mid-2006, few people thought that they had a large probability of losing their jobs in 2008–09. The business cycle is a period of discoordination — a loss of order.
Spain’s recession, following a housing bubble, has been particularly bad. Indeed, it feels more like a depression. Spain’s unemployment rate is over 26 percent. Much like during the Great Depression, a large fraction of unemployment is the result of bad policy. The IMF estimates Spain’s average outgap gap for 2013 at –4.338, which is comparable to that of the United States. Yet, the U.S.’ unemployment rate is “only” at 6.7 percent. Bad supply-side policy, in conjunction with bad demand-side policy, has made a disaster of an already bad situation. Spain’s structural problems, of course, have existed for a long time, but they were partly hidden by the boom of the early and mid-2000s. Schneider (2011) estimates that the value of production in Spain’s informal (extralegal) sector has been greater than one fifth of Spain’s GDP since ~1994, falling to 19.3 percent of GDP in 2007 — but, no doubt larger after the crash (although, in part because of a decline in GDP). Large extralegal sectors are typically a sign of bad supply-side policy.
Problems in Iberia go beyond bad policy. Spain’s democracy is more fragile than some people realize. The country has passed a few tests for robustness — such as the (quasi-abortive) February 1981 coup —, and high growth during the late 1990s and for much of the 2000s seemed promising. Indeed, many in Spain were looking forward to the day that the country would replace Canada in the G8! But, the country’s economic woes have been joined with corruption issues in government — and the problem crosses party lines: bribery, illegal payments, money laundering, et cetera. Further, regional banks funded local programs, and the relationship between these banks’ balance sheets, their health, and the political support they receive is unclear. These scandals have made it hard for Spaniards to trust their governments, whether national or local. The range of this distrust has spread to the royal family — especially after legitimate corruption charges against some of its members — and elsewhere.
The extent of distrust can be seen in Spain’s changing football (soccer) culture. Referees are always criticized. It’s hard to find an article on a big Premier League game without reading one manager’s criticism of the referee’s handling of a game. There are constant complaints against refereeing in all sports. But, in Spain, it’s especially bad, because complaints have given way to conspiracy theories. There is this notion that the governing body in Spain, RFEF, implicitly or explicitly supports a status quo that favors Barcelona and Real Madrid, the two highest earning football teams in Spain. The theories go as far as to claim that referees make their calls to purposefully help the the two “big teams” (los grandes). And, of course, between the two big teams fans accuse the other club of corruption. Even players have made these accusations — Cristiano Ronaldo and Sergio Ramos, players for Real Madrid, made comments to this effect after last weekend’s match against Barcelona.
There is, in general, an emerging culture that sees corruption and scandal everywhere. Bonds of trust are disintegrating. This can have dire long-term consequences. Trust, in some sense, is an institution; or, it’s a value manifested in certain institutions. Businessmen spend a lot of time and money establishing a relationship of trust with their clients. They offer warranties, they make sure to always leave their customer satisfied (hoping for the relationship to be repeated over time), et cetera. When there is no trust, the economy suffers. The transaction costs to some exchanges can become too high, and trades which would have led to gains for all parties involved simply don’t take place. To put the role of trust into perspective, recall the 2011 paper by Nunn and Wantchekon, finding evidence that slavery created a culture of mistrust, holding development in sub-Saharan Africa back. This is happening in Spain. While political corruption is hard to compare to slavery, the emerging culture in Spain may have dire economic (and political) consequences for years to come.
Mistrust might make political reform more difficult. Note how untrustworthy Ukrainian protestors have been of the “reformed” Ukrainian government. The same is true of Spain, although in different areas and to a different degree. Governments with fragile relationships with their people are going to have a hard time passing structural reforms that may not produce immediate results. Mistrust also makes a situation ripe for regime uncertainty. Uncertainty over the political climate makes business more difficult and less attractive, especially if this business requires large investments. Mistrust can spill over into the private sector in other ways around. Large businesses — which tend to be villainized when it’s the worst off who suffer the most — can lose demand for their product, even if their product confers to the consumer the highest satisfaction relative to other choices. Mistrust can even hurt relationships between small businesses, and even between small time vendors and their customers.
The effects of the business cycle, especially if these effects are made worse by bad policy and political corruption, can influence an economy for many years thereafter. They can make recovery more difficult. When a people lose faith in their institutions of governance, this mistrust tends to spread to other sectors of life, including business. It itself is corrupting, because it changes the institutions which guide economic processes. It limits trade, and when trade is limited we lose out on gains from trade. Countries like Spain (and Greece) are undergoing this transformation, and if this process isn’t reversed, the consequences can become more dire than they already are.