Luis Garicano on Spain, Europe, and the Future of Work
Conversations with Tyler
Economist Luis Garicano joins Tyler to discuss the structural economic challenges facing Spain and Europe, specifically focusing on housing shortag
Key takeaways
- Spain's housing supply is constrained by political fears of corruption following the previous real estate bubble.
- The Spanish economy is increasingly governed for and by pensioners due to high life expectancy and low fertility rates.
Main topics
- Spanish housing crisis
- European productivity and demographics
Notable quotes
Europe is very good at incremental, little by little innovation. We're really not good at making radical changes.
Conclusion
The episode highlights the tension between established political struc
Transcript preview
Speaker 2 (0:04) Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. For a full transcript of every conversation, enhanced with helpful links, visit conversationswithtyler.com. Speaker 2 (0:25) Hello, everyone, and welcome back to Conversations with Tyler. Today, I am honored to be speaking with Luis Garicano. He is a Spanish economist, one of the best-known and also best economists in Europe. He was also a member of the European Parliament. He taught at the University of Chicago Business School. He is now, for the second time, at London School of Economics. He has a new and excellent book out, as far as I know, the best book on AI and the job market. It is called Messy Jobs, and it is co-authored with Jim Lee and Yanhui Wu. Luis, welcome. Speaker 1 (1:02) Thanks very much for having me. It's really a pleasure. Speaker 2 (1:04) We will get to Messy Jobs, but first I have so many questions about Spain. So why is it that Spain has become so nimby? Before the great financial crisis, there's so many homes being built, right? There's overbuilding, everyone goes crazy, and now it seems to be land of nimby. What's been the switch in the political equilibrium? Speaker 1 (1:24) There is part of it which is ideas matter. So Spain was pretty permissive about housing. There was a pretty elastic supply and people were building all over the place, up to 800,000 houses a year, which is a lot for a country. And what happened is that we got a housing bubble. It exploded. There was a lot of overbuilding at the time for many reasons. But basically, there was a triangle between promoters and politicians, local politicians and the savings banks, a bit like your SNL crisis. And so people identified easy building with corruption and people identify easy building with high prices. Believe it or not, there really is. a serious debate in the Spanish media. Maybe, I guess, you're not so surprised with Mamdami in New York, but there is a very serious debate on whether building more houses would lower prices. And there is people saying, no, it has nothing to do with how many houses you have. So people think that building wouldn't solve it, and they think that you need to restrict tourist flats and so on. There has been some of that. There's also been, after the bubble, a big restriction on the rights of municipalities to make decisions on land, which because it was supposed to lead to corruption. So this is something that has happened in many areas that you're trying to make people accountable and you end up making people scared and making people unempowering and people who could make the decisions. And you end up with a completely rigid supply, which is what we have now. Hundreds of thousands of immigrants per year, only a hundred. less than 100,000 houses built per year. And indeed, as you said, no YIMBY movement at all. It's complete NIMBY. There is nobody in Spain, maybe just a very few people, including me, saying, hey, let's build more housing. Speaker 2 (3:10) If you drive through Spain, which I'm sure you've done more than I have, but a lot of it is really quite empty, right? And you see those big billboards with the Black Bull and nothing else for miles. What are you going to do with all that land? What does that equilibrium look like? That simply people crowd into a few cities? and the rest just dwindles? Speaker 1 (3:28) Yes, the current way that housing is built is basically very much by agglomerating in the center. So a very large share, I don't remember the exact number, but a very large share of the most dense census tracts in square kilometers in Europe are in Spain, in Madrid and in Barcelona, which is surprising for a country that is completely empty. First, we are putting a lot of solar energy on that empty land. But second... There is a lot of restrictions on what you can do with it because of biodiversity. There's a ring around Madrid where you cannot build, like around London. In Barcelona, people think you couldn't build. People think Barcelona is full. In fact, all the area around the airport is empty and it's agricultural land. But people in Barcelona are convinced. It's impossible to grow the city. So a lot of it has to do with biodiversity regulations and effort to keep nature and so on. And, you know, it's, I mean, my other country is England, of course, where I'm working and living right now. And England, the United Kingdom, has this view that if you touch any bird, that construction has to be completely stopped. And Spain is not on that extreme, but all of those concerns matter a lot. Speaker 2 (4:37) Why is there a current productivity crisis in Spain? Speaker 1 (4:40) Productivity, indeed, hasn't grown. For three decades, more or less, we've had a lot of extensive growth. We're having immigration, we're having tourism, but we don't really have productivity. And a lot of it has to do with the political economy. I think if you want to explain the West, not just Spain, you have to understand who is voting and who is being governed for. Spain is a particularly low fertility, high life expectancy country. the fifth lowest fertility and the fifth highest life expectancy in the world, a gross amount of very high pensions. Essentially, 100 % of the GDP growth we had since 2008 has gone to pensions, to the pensioners. And in terms of investment, there is very little in terms of investment, productive investment. We had this fantastic highway network and this high-speed rail network. It's not really getting the maintenance it needs. Just as one example, the country is basically being governed. by and for the older retired people. Speaker 2 (5:42) So what does the optimistic scenario look like? You don't have to predict it's going to happen, but lay out for me how it could all go well. And, you know, you would get productivity growth of one and a half percent a year and economic growth a bit higher than that. So Spain has amazing Speaker 1 (5:58) fundamentals for the current situation, meaning we could easily be very electricity energy rich due to solar, wind and nuclear. We have all this empty space where you could put nuclear plants with much resistance. In fact, we are closing them for political reasons, but the energy could be a big advantage. It's a really amazing place to live. There is no more. diverse geography and climate and nature anywhere in Europe, I think, or close to, and beautiful. And you could easily see a situation where Spain becomes Florida or Texas, Austin, you know, like Texas. Think of Texas. Attract technology, attract talent who wants to live there, attract energy, build the data centers, et cetera, et cetera. That scenario is not impossible. The political economy is the tricky part. Speaker 2 (6:50) But doesn't that mean you actually... don't have good fundamentals. You said you don't even have a YIMBY movement. Life there really is quite good. I've been many times. It's one of my favorite countries to visit. Isn't that like a kind of resource curse where there's no sense of crisis? Old people live for a long time. It's very comfortable. The weather's great. The food is amazing. Aren't those, in fact, liabilities in a time of very rapid change? Speaker 1 (7:14) I think that's Speaker 2 (7:15) a Speaker 1 (7:15) great point. The political economy is the constraint. We have had reforms in Spain, including during the dictatorship when the crisis situation was unsustainable. Spain opened up under American pressure in 59 and had the highest growth rate in the 60s. It reformed in mid-80s and early 80s with the socialist government that was very actual pro-growth and pro-development, a yimby socialist government. It's eliminating, imagine the socialist government that eliminated housing rent control, which right now is coming back everywhere. It reformed again in the upcoming Euro, although as Tano Santos and Jesus Villanueva and me have shown in the Journal of Economic Perspectives article, that pro-reform movement before the Euro was gone in all Southern Europe once the Euro. make the urgency go away. And he has reformed again in 2012 under the euro crisis and the Spanish crisis. So he could do the reforms he needs. It's going to have to be through a crisis, I'm afraid. Speaker 2 (8:12) Now, you come from Valladolid, which, as you know, for a long time has been an automotive center. Should the European Union impose strict tariffs and quotas on, say, Chinese electric vehicles, self-driving cars? Speaker 1 (8:24) I don't have a religious view on this and other industrial policies. I think that you have to evaluate them. There is an article by Danny Roderick and co-authors, recent review, which says industrial policies work under some conditions, not under others. We know they have worked in Korea at some point, etc. What do they need? They need to be able to have the conditions to let losers fail. And you need to have an objective, a clear... Now, is Europe in a situation to have an industrial policy where losers are let fail in the car industry and where Europe has a clear view of where we should go? I think the answer is no on both. In terms of what the loser's power is, basically any industrial policy would be governed for and by the losers. Basically, as we have seen, traditional car companies are receiving all the help and all the aid. And whether we know what the objective is, we have a melange of conflicting environmental, labor, industrial security objectives. So I wouldn't be very optimistic about the chance of success of an industrial policy on large scale, tax these cars, try to make the legacy companies suddenly become cutting edge. And I also think that what we are seeing is the European companies are getting... destroyed in third country markets. In Latin America, you only see BYDs now in Africa, everywhere else. So I don't think that would solve much. I can see the short-run pressure and I understand it, but I think our problems are different. Our problems are about labor regulations that allow people to adapt fast, are about lack of innovation and are about lack of incentives. as opposed to incremental innovation. Europe is very good at incremental, little by little innovation. We're really not good at making radical changes. And I think that's where the problem is. Speaker 2 (10:16) But let's say the automotive sector leaves Valladolid, which is a city of, what, three, four hundred thousand people? It's not huge. It would be a major blow. What would actually replace it? What would the place look like ten years later? Speaker 1 (10:29) For Valladolid, it would be devastating. It would be devastating. We are both Valladolid and Palencia are. are big centers for Renault and Michelin, the car tire company and the car manufacturing brand. It would be devastating. So we would need the other industry that Valladolid has has been the capital of Castileon. It's a very kind of bureaucratic intensive country. You know, Spain had a bureaucracy before anybody else had a bureaucracy. Well, I guess China also Speaker 2 (10:54) had a bureaucracy. So that's the other industry, which is not a very promising industry. I Speaker 1 (10:58) think that... What we need to do is to give a chance to innovation and to change. And the way we're doing it is just slowing down all change and all adaptation. Speaker 2 (11:08) But there was a media article recently. It said something like, well, Americans don't read anymore, texts aside, but the Spanish, they still read. Do you agree? Books and novels, right? Not on your smartphone. Speaker 1 (11:21) I guess there's quite a lot of reading among females much more than men. I think it happens, women more than men. I think it happens everywhere in the world. But even then, it's relatively, meaning that also the publishing world is adapting to that, which I'm not sure I understand why women are remaining a more loyal constituency of books. I don't know the figures. My sense is that Spain is going through the same shorter attention span, TikTok short videos. When you're in the public transport and you see what people are doing, they're just... We're hitting the videos with the same finger as everywhere else in the world. Speaker 2 (11:53) If I walk into a bookstore in Spain, I'm struck by how much the front tables are mostly fiction, and there's a relative paucity of nonfiction. Speaker 1 (12:02) That's correct. Speaker 2 (12:02) The U.S. is actually moving in that direction, but we used to be very much the other way around. Why that difference? That's a great Speaker 1 (12:09) question. There is not a long tradition of nonfiction. If you think of what are your remarkable... 150 or 200 books from Spain and none of them will be non-fiction. And in fact, it is also related to the fact that Spain doesn't have a big tradition on research and innovation. So Spain has always had a humanistic, artistic, think of