The Cost of Catalan Privilege
A conversation with Jesús Fernandez-Villaverde on the Rasheed Griffith show
Or listen on Spotify
Show notes
Spain’s fiscal architecture is more than a ledger‑sheet debate; it is, as economist Jesús Fernández‑Villaverde, the Howard Marks Presidential Professor of Economics at the University of Pennsylvania, reminds us, the very skeleton of the modern state. Drawing on Schumpeter’s maxim that “the state is taxation and taxation is the state,” Fernández‑Villaverde opens the conversation by weaving the American and French revolutions into a wider argument: when you refashion a nation’s tax machinery, you refashion the nation itself. That lens frames Catalonia’s renewed demand for a new financing model, not as a routine budget negotiation but as an existential redesign of the Spanish state.
Jesús details how Spain already operates one of the most decentralized fiscal systems in the world, “more latitude than most U.S. states,” he notes, yet Catalonia now seeks the bespoke privileges long enjoyed by the Basque Country and Navarra. The Regional Authority Index rates how much self‑rule and shared rule each country’s sub‑national governments actually wield. In its last update the index places Spain as the most decentralized unitary state in the sample and fourth overall among 96 countries.
Those northern provinces collect every euro on their own soil and forward a modest remittance to the central treasury, a setup that Fernández‑Villaverde brands “a Confederate relic.” Extending it to Catalonia, he argues, would hollow out Spain’s common‑pool finances, deepen inter‑regional resentment and erode the principle of equal citizenship, while turning the national revenue service into little more than a mailbox for provincial checks.
Politics, of course, is the solvent in which these principles dissolve. Prime Minister Pedro Sánchez’s coalition leans heavily on Catalan and Basque votes; hence, the Jesús says, the Socialist leader flirts with a reform that his own party barons fear will be “the kiss of death”. Layer onto that an opaque, labyrinthine funding formula, ripe for local demagogues to blame Madrid or the neighbors, and Spain’s fiscal question becomes not merely who pays, but what kind of country the Spanish want to be.
Recommended
La factura del cupo catalán: Privilegios territoriales frente a ciudadanía - Jesús Fernandez-Villaverde and Francisco De la Torre
El desafío secesionista catalán: El pasado de una ilusión - Alberto Reig Tapia
El guionista de la Transición: Torcuato Fernández-Miranda, el profesor del Rey - Juan Fernández-Miranda
Website about the economic agreement with Basque Country
Las elecciones generales de 2030 - Jesús Fernandez-Villaverde
A Millennial View of Spain's Development: Essays in Economic History - Leandro Prados de la Escosura
El dilema de España - Luis Garicano
This transcript was automatically generated by AI and lightly edited. We don’t catch every error, so if you spot one, send a message/email via progress@cpsi.org.
Rasheed: Hi Jesús, thank you so much for coming on the podcast.
Jesús: Thank you for having me here.
Rasheed: So I'm looking forward to talking about your new book. [Shows book]
Jesús: Yes.
Rasheed: It has been making quite a stir in the last couple weeks in Spain because of the recent legal adjustments, to put it mildly, that are being pushed by Catalonia.
We'll come to that but I want to start off very broadly. Something you mentioned. I'm gonna ask it in a question. What did Schumpeter understand about the concept of states that political pundits tend to not understand?
Jesús: Okay, so the the point that we highlight at the beginning of the book, which is recalling a very famous talk that Joseph Schumpeter, gave right after World War I in Austria is that a modern state is basically a fiscal state. By that he meant that the fiscal structure of a state determines all the other political economic structures of the state.
And therefore, if you change the fiscal structure of a state, you are changing the state in itself and the examples that we give in the book are very straightforward. And two that come to mind well, while the United States. The United States is born from a fiscal dispute. So the British Empire was organized around the idea that the colonies in North America had their own responsibility for taxation, for fiscal policy. And then in some moment the government in London, the decided that should not be the case, that they want to move to a different system. And that initiates a constitutional conflict that ends up with independence of the United States. But many people forget that the constitution that we have now in the United States is actually the second constitution that the United States had, the 1787 Constitution.
There was a previous one, the articles of Confederation on Perpetual Union. And what happened with that constitution is that it set up a fiscal system that was not sustainable. And it's very clear by around 1786, early 17 87; that the system is not working. And that's why James Madison convinces many other people to call for the Constitutional convention in Philadelphia to create a completely different fiscal system and with it a complete different federal system. And the interesting thing is, if you actually read the pamphlets and the articles of the time, it was very clear to everyone involved that we were talking here about fiscal systems. So that's the first example that we have in mind.
And the second example is the French Revolution. The French Revolution comes because Louis XVI needs to call the State Council, because the the French fiscal system was in complete bankruptcy and he wants to change it. And that unleashes a series of forces that leads to the French Revolution. So at the very core of the origin of this modernity, you have the American Revolution and the French Revolution. Both revolutions are fundamentally about fiscal structures. So when you are talking about fiscal structures, it's not, that boring class you took in public finance in your senior year where they were telling you about debt, loss. Taxation is actually the very essence of a modern state.
So taxation is the state, and the state is taxation.
Rasheed: Now we're gonna be talking a lot about Catalonia. Basque Country also, but Catalonia in particular. And of course coming from the outside, people tend to think the Catalan tendency towards separation is a fairly recent phenomenon. As you highlight in the book, it is not given that the sentiment of Catalan separatism far predates the modern state of Spain.
Is there a future where you think this sentiment goes away?
Jesús: So there is a low frequency movement that is happening right now in Cataluña, which is the enormous demographic change. Okay?
And I have made this point many times. Right now around only 55% of births in Catalonia are born from a mother that was born, actually not even Catalan, that was born in Spain. That basically tells you that only 40, 45%, perhaps even a little bit less of mothers that were born in Spain speak Catalan at home. At this moment, I will say that less than 30, 28% of kids born in Cataluña, perhaps even less, will speak Catalan at home. And that basically means that as we fast forward over the next 40, 50 years the use of Catalan as a language will suffer a lot. And usually this type of nationalist movement are very directly linked with the language. Not always. You have the case of Ireland as maybe as an exception. But in that sense, my reading of the situation is that Catalan nationalism will be much less prevalent in 2060, than it is today. Again, all this depends on a lot of demographic factors, and of course forecasting the future is difficult.
Rasheed: In 2017 when there was the illegal referendum in Cataluña. There was, following that, a situation where the Court of Auditors and Supreme Court wanted to give some massive fines to people involved in using public money to push forward the referendum. One of them was a very well known economist - Andreu Mas‑Colell. And at the time, many international economists, including 33 Nobel Laureates, wrote a famous letter where they unequivocally supported Mas-Colell. It was pre purported to use public funds to also promote separatism.
Why do you think that a lot of international (often mostly American) econ professionals tend to be a bit more lenient when it comes to separatism in Cataluña, but not, let's say, revolting in DC.
Jesus: Yeah I think that there is a combination of factors. Academics tend to always look sympathetically to what appears to be the underdog. Poor economies which are trying to fight for freedom or whatever you want to call it. And the aggressor's been fined by the legal authorities to be forced to pay some money.
So that always looks good. You stop randomly an academic in any university and you tell a story like that without entering into many details. And people will always be sympathetic. The second point, which I think is more important, is, he was a very well known academic, very well respected.
I don't have anything negative to say about his academic accomplishments and that makes him looked very favorable towards the rest of the profession. But it was my experience at the time. Several people asked me, and when I outlined the legal structure of the case, everyone was like, "wow, this is not exactly what I thought it was." So let me give you a very complete example. You probably know, in the United States, organizing a referendum of independence for a state is unconstitutional. The Supreme Court has decided that. So imagine that the secretary of let's say Pennsylvania, decides to sign a piece of paper saying that he's going to use money from the government budget from the state, from the Commonwealth of Pennsylvania budget, to pay for that referendum and to organize the steps for that referendum. And in addition to it, he has a report from the legal office of his Secretary of the Treasury telling him that this is illegal. And yet you still sign it. How will you react if I tell you that case? Has this person incured any type of legal liability? Of course he has. And when I explain it in that way, a lot of people said "I didn't know it." Some people say "oh, he does microeconomics. He doesn't really know about the law." And I said "no, but remember. The legal counselor, the senior legal counselor of his department, sat with him down and explained to him that what he was going to do was illegal." And yet he signed. So what do you want me to say?
At the end of the day, he's not going to pay that money back. But I think that we should not confuse one thing with the other.
Rasheed: Was there any economic logic behind the autonomous community design following the transition, and the new Spanish constitution in 1978?
Jesus: Yes. Okay. You need to think about the history of Spain and the economic history of Spain more concretely in a little bit of a wider framework. Spain didn't do a very good job during the 19th century. So Spain doesn't transition successfully to what many political scientists have called the modern state or the modern liberal state .It's in a process of construction of a modern state that remains uncompleted up to today, in fact. And one of the consequences of that in complete transition is that Spain has only weakened after the industrial revolution. Now modern historiography tends to be a little bit more positive that the traditional view that was always very negative. And I agree with that modern view. But nonetheless, at the end of the day, think about the big picture in the process of the construction of a modern state and a modern economy during the 19th century, Spain got a B- or a C+. Now in particular that incomplete construction of the state means that in the late 1870s, Spain has or undertakes something that is called “Restauración borbónica” after the first republic, the Bourbon family comes back to be the new kings of Spain again, I Alfonso XII, Alfonse XII. And in particular the party in the government at that moment, the Conservative party, with Cánovas del Castillo as prime minister is a very strong defender of autarchy, very high protectionism and a lot of state intervention. Maybe now this is a little bit easier to understand after the new administration in the United States , but people often forget that the conservatives have traditionally been the party of tariffs, of protection and the state government intervention.
Rasheed: That's right.
Jesus: It was liberals who were against that. But to make a long story short, from around 1878 to around 1959, Spain embarks on a process of autarchy, import substitution And various state and a lot of government intervention. That changes dramatically in 1959 with the Plan de Estabilización, the Stabilization Plan where basically Spain opens to international trade makes the peseta convertible, the currency that we used at that time. And first and foremost the consequences were that for around 17 years, Spain grew very fast. So when you want to think about why Spain is a modern country, why you go to Madrid, you go to Barcelona, it looks a lot, like many other European cities those are the big years where Spain goes from being a very poor and underdeveloped country to being a modern economy.
Rasheed: And all of that was during the Franco period, just to make that point clear.
Jesus: But remember, it's from 59. The first Franco was against it. This is the second Franco. I can tell you exactly why the Franco regime completely changes its economic policy in 1959. Think about it as very standard and classical catchup. It's also based on a lot of very energy intensive models of growth and it comes to an end around 1973 or 1975. First of all, because the oil shocks mean that energy is much more expensive.
Spain doesn't produce any oil or any natural gas, of any importance. And just because I was saying before, just the pure process of convergence kind of reaches an end. So, the Spanish economy is in a very difficult situation. And in particular, you need to reorganize the public finances. And for that you need a complete new framework of government.
And that's a little bit of the economic background behind the Spanish Constitution of 1978.
Rasheed: On that point - before we move on, why exactly did Franco II change the policy so quickly? Some Spanish historians claim, all these Opus Dei “progress-pilled”technocrats really got into the brain of Franco. But what was it in your view?
Jesus: I agree with the conventional historiographical view. Franco never believed in the market. And he was really forced into that in 1959. So the persons to keep in mind over here were basically Alberto Ullastres and Mariano Navarro Rubio. So the situation and to some extent, maybe a little bit less, Laureano López Rodó. So let me give you basically what happens and a little bit of historical background.
Contrary to what many people believe, Franco regime was not monolithic, okay. It was really a coalition between different groups. It's what political scientists sometimes have called "limited pluralism." And what they mean by that is, of course you are not a democracy. I don't want to confuse any listener into believing that this was a democracy, but it's not a monolithic structure like the monolithic structure of the Communist Party of China today, for instance. And there were different groups within that coalition of government. In Spain we refer to them as familias, families.
So one very important family, for instance, were the Fascists, the Fascistas. They were also called sometimes the Blues, los Azules, because the shirt of the Spanish Fascist party, is a blue shirt. And these guys werea along the lines of Mussolini, maybe Hitler, except that in Spain, antisemitism was never a big deal because of course at that time the Jewish population in Spain was very small. And these guys believe in a standard fascist economic, industrial policy, et cetera. The main representative was a guy called Wanis. And very strong defense of workers' rights. People tend to forget that fascists were very much into the defense of workers rights in a very peculiar way.
But anyway, then you had the army. The army was another family. And then you have the monarchist, the old monarchist who believe in a very traditional view of the monarchy. they came in two flavors: the ones who defend what is the current branch of the monarchy of the dynasty in Spain Felipe VI. Not his, not Felipe VI, but his grandfather Juan De Bourbon. There was the flavor that defended what was called the Carlista branch, which was a branch that broke off in the early 19th century. And then there was a group as you were saying that were called the Technocrats.
So who were the Technocrats? The Technocrats were basically people who as you say, many of them were linked with Opus Dei, Catholic. I'm forgetting another group, the Propagandistas. But don't worry about those. And basically these guys had a lot of background in education.
They tended to be either professors at the university of very top civil servants. Something for people who are from outside of Spain, that perhaps is sometimes difficult to understand, is that the examinations to get into the top civil service are extremely competitive and really they are the top. They are the top of the crop.
The cream of the cream in at the university. It's a little bit different from the United States or other countries. Anyway, so you have all these types of people who are very prepared, much more professional, and have much better knowledge of of the international developments. And they think that the Spain needs to develop and needs to grow. Now, they were not Democrats in any meaningful sense of the world, but on the other hand, they thought that a very old style dictatorship didn't look that good in the context of 1959. And what they wanted maybe was to move towards a little bit of a soft authoritarian regime, something like that. Now they are minority in the government and they cannot really impose their views, but they have three enormous advantages. The first enormous advantage is that they can get things done. So Franco realizes the first Technocrat that comes to power is ano. Rado, who is basically running the day-to-day of the Spanish civil service. I don't know how many listeners may remember a wonderful British TV series called "Yes Minister." And yes,
Rasheed: Yes, I know it very well…
Jesus: So then they may remember Sir Humphrey Appleby, like the top civil servant - Laureano López Rodó, Sir Humphrey Appleby. He has the advantage that he gets things done. So when Franco or his kind of second in command, Carrero Blanco says, "I want to do this. I want to prepare this project, I want to accomplish this thing", Laureano López Rodó shows up one month later and says, "look, this is the draft legislation. This is. The organization that we need." And, both Franco and Carrero Blanco start to realize if we want to survive and have an effective government with high capability, these guys are very good. The second thing that these guys have in favor is that both the United States and all the international organizations like the IMF and the World Bank, that indirectly depend on the United States as well, really supported. The last the United States, of course, wants a reliable ally in the Cold War against the Soviet Union.
And it was a prosperous ally, and it wants an ally that is not going to fall to the Soviet subversion and having a crazy, semi fascist structure with an underdeveloped economy, that doesn't look very good. So the United States and the IMF really like López Rodó, Navarro Rubio and Ullastres because these are the guys that can get things done, that can get Spain modernized, and that helps in the big context of the Cold War.
And of course that means that not only do you have the the pressure of the United States, but you also have the money of the loans that the IMF for the World Bank can give. And this makes a huge difference. The third fundamental. Issue is that Spain has run out of foreign currency. We are in a situation where this import substitution scheme, this import substitution model of of economic growth has completely run out of steam.
And there is no money. Navarro Rubio wrote memoirs that are very interesting and I always recommend to those who want to read them, you probably need to get them in some type of library because it's impossible to get a copy. But Navarro Rubio explains that there is a meeting of the cabinet and Franco is against this Plan de Estabilización. Because I remember Franco never liked the Plan de Estabilización. He did it against his best judgment. And the meeting ends and Franco gets out and Navarro Rubio follows him and don't know how many readers know this or how many listeners know this. It's a little bit of insight, but Franco was very short he has this very, high pitched voice.
And Navarro Rubio was very tall, a very big guy, and with a very deep voice. Navarro Rubio follows Franco and says, "Mi General", "My General" in Spanish. You don't call sir to the military officers, okay? That's only in American movies. You need to call them general. He says, "we are running really out of foreign currency. This is serious. We need to do something about this." And Franco, who understood as much about economics as I understand about the production of mussels in the Black Sea asks "but what about the crop of oranges?" Because of course, even at the time, the export of oranges from Valencia and Murcia were a big part of the export of Spain, but even in 1959 it was not that much.
Navarro Rubio replies right away. "But what if there is a frost? We lose the crop. So we don't have that inflow of foreign currency." And basically Franco replies, " do whatever you want, but don't get me involved into it." Which to me is the ultimate example of a state with a complete lack of capability when the dictator that is running the country says " do whatever you want, but don't get me involved."
So this is basically, I think, Franco recognizing that he doesn't really have any real alternative. He never like it. And even until the end of his life, even if he had to rely a lot on the technocrats, he always had a little bit of a love hate relationship with them precisely because on one hand he admired that they could get things done, but on the other hand he was very suspicious of what their ultimate goal was with respect to his regime.
Rasheed: Okay, so there's one thing that you highlight and stress a lot in the book that I was very surprised by. In practical terms the Spanish state is even more fiscally decentralized than the US. Could you explain how this is possible?
Jesus: So this is very interesting. When the Spanish Constitution was being drafted basically the idea is we have very different views. There are different parties. There is a committee. They put together a committee to draft the Constitution. And the problem over there is that there is many different views. The different drafters of the Constitution decide to write a constitutional text that is extremely ambiguous. So the Spanish constitution allows both a tremendously centralized state structure and an extremely decentralized tax structure. And the same with all the other type of rules . That was probably a good idea. That was a good idea because all the previous constitutions that the Spain had, so Spain had a constitution in 1812, in 1934, the Statutory Real 1837, 1845, 1854, 1867, 68, 1873, 1879, and 1931. All these constitutions had always been constitutions of one political party. There had never been an effort to draft a constitution where different political parties with different programs could all use that constitution. The Constitution of 1978 in comparison, is a constitution that allows for a high degree of indeterminacy in how we are going to structure the country.
It turns out that for a number of reasons of political economy that we try to describe in the book briefly, if I may say, the book is 93,000 words, but it could have perfectly been 200,000. But for a number of reasons basically we end up in a situation where we really push the Constitution to its max in terms of the decentralization. So at this moment I will say that Cataluña or some other regions have certainly more fiscal autonomy than most states in the United States and more power. At the same time, it's a system that is very obscure and poorly designed and it does not provide the right incentives.
So the good thing about the US is that you have the federal revenue service and that generates the taxes for the federal government, and then you have the state taxes. Now, the system is not as clearly delineated as some people claim because there are a lot of transfers from the federal government to the states. What you have in Spain, in Cataluña is that there is roughly only one fiscal agency, only one revenue service. Then the money that comes from that revenue service is allocated between the central government and the region. This is different though from the system in the Basque country and Navarra. The system of Basque Country and Navarra is truly the system of a Confederacy. So if you live in the Basque Country or Navarra, you don't pay Spanish income taxes. This is something that most people will find shocking. But that's the fact. Okay, so if you are in Biscay, there is a specific Biscay income tax. Now people need to be very careful about this.
This is not like in the US where if I live in California, I pay my federal income tax and my California income tax. No. This will be a system where if you live in California, there is no federal tax. So California will be getting all the money, absolutely all the taxes in its territory, taxes on income, on profits, corporate taxes, VAT, absolutely everything.
And then it takes a little bit of that money and transfers to the central government. And that's in some sense the system that the US, as I was mentioning before, had under the Articles of Confederation. So the fiscal system in Delaware was completely independent of all the other 12 states.
And then Delaware will give a little bit of money to the continental Congress, that's the system that you have right now in the Basque Country and Navarra. What happens is that, of course, the system gives enormous power to those two regions. It means that they are not contributing that much to the common pool to pay for services like national defense public debt, et cetera. And Catalan nationalists have said, "me too. I also want to be in that situation." So they want to move from a situation where they already have an incredible amount of power. And as I mentioned, and we mentioned, and I think we document very well in the book, for instance, certainly much more self-government than states in the United States. They will basically be a confederate state within a confederation. And that's what we think will be a terrible outcome. And we don't think it's a good idea. And that's why we wrote a whole book about that.
Rasheed: I'm not sure if I wanna go down this particular side quest rabbit hole, but something you mentioned about the constitution, that I hear often. Contrary to your point about the 1978 Constitution being the most pluralistic, some legal scholars tend to think the 1812 “la Pepa" constitution was a lot more broad with all encompassing, different viewpoints, different hemispheres in Spain, Hispanic world and so on than any other later Constitution, technically in Spain.
Jesus: That's true. The 1812 Constitution was relatively open to different views of the world, and the problem is, it was a little bit utopian. It was a constitution done in the middle of the Napoleonic Wars, and I think that Constitution fails not as much for being a very narrow minded constitution, as I will say. On the side of the Right, for instance, the 1834 Constitution or on the side of the Left, the 1931 Constitution. But I think it was just utopian in the way it was structured. That was not the constitution for a country in 1812. So for instance the idea of the system of representation as was set up, I don't think it would have ever worked in practice.
Now, having said that it is true that if, for instance, after the independence of the Americas, we had, let's say in 1834 or 1837, a constitution inspired by the principles of the Constitution of 1812, but with a much more realistic framework. I think that the modern history of Spain will have been much better off. What is really remarkable about the Constitution of 1787 in the United States, and I'm a big admirer and I actually teach this to undergrads for many years. It's this wonderful balance between these ideas of creating a modern union and a modern republic, but also with a hard nose pragmatism of "we need something that will work day to day."
Madison and everyone else who was involved in the design of the Constitution need to be immensely praised for being able to balance ideals with the practical wisdom. And unfortunately, I think that in the Spanish political tradition, this concept that you need to balance ideals with practical wisdom has always been absent. I think it's has a little bit to do with our Catholic cultural background of the Martyr that dies in the pile of fire or against the lions in the circus of Rome instead of trying to think for something that is practical and is possible. And even the Constitution of 1787 had a few things that didn't quite work out and had to be amended right away, but that shows that constitutional design is very complex because it's very difficult to forecast all the situations that may arise and how to address them.
Rasheed: You mention in the book that you thought the Spanish Constitution of the Secondary Republic was a lot more clear when it comes to competencies of the State and regional powers.
Jesus: Actually that's true. So as much as I was a critic of the Constitution of 1931, in some aspects it actually designed political structures in terms of the centralization that was much more transparent. It was much shorter, it was less ambiguous. So in that sense, yes. So that part of the 1931 Constitution I like a lot. Now, on the other hand someone could criticize me for the following thing.
The 1931 Constitution really only was in operation for five years until the war started, even in the area, still controlled by the Republicans after the coup d'état in July, oh by the way, today is July 18th. Even after the beginning of the coup d'état in the areas still controlled by the republic it was not really operative in any meaningful sense of the war. So you only have five years, and that means that we don't really know how the system will have ended up 10 years later, 20 years later, 25 years later. And it may be in the case that it would have end up with even a worse outcome. But having said that, I think that the reading of the sections of the articles related to the home rule by regions in 1931 was actually quite a sensible one.
Rasheed: One of the common critiques of your critique of the new financing plan for Catalonia is just idea that, "but shouldn't there be different models of financing for regions? Won’t competition actually end up being good for the State in general?"
Jesus: So we need to be very careful about distinguishing two different things. Number one is, should we have fiscal competition among different regions or territories. Yes, I'm happy with that. The second argument is, should we have asymmetries in the legislation that allows different territories to do that?
And that's what I'm against. Okay. So look, Texans can lower taxes and offer a more attractive environment to businesses than California, but federal legislation applies in the same way to Texas, and to California. What I'm against is the idea that you're going to have some rules applying to Cataluña, to the Basque country and to Navarra, but not to the rest. What I want to emphasize, and I think this is a point that many of my critics don't get, is that the fact that I want to treat everyone symmetrically, does not imply that I want to impose uniformity, which is a very different thing. But if we are going to let Cataluña make decisions about this income tax, we need to let everyone else make exactly the same decisions.
So if you ask me when I walk into your office, "will you sign onto the Swiss fiscal system?" Probably yes. "Will you sign onto the US fiscal system?" Probably, yes. The point is, that is not what is being proposed on the table. And I think in a very disingenious way, who defend what is being proposed on the table right now are saying, "oh, but this looks like Switzerland, the United States, and that's a lie." They are using the prestige of Germany or Switzerland or the United States to defend something that is not the system in Germany, in Switzerland, or in the United States.
Rasheed: Could you make it more concrete? Why isn't this financing plan for Catalonia just like the Swiss model? Because on the surface it really seems very close to this model.
Jesus: In the Swiss model, you have the following. You have a federal revenue service, and you have the Cantonal revenues revenue services. Okay, so the Federal Revenue Service is a federal agency that runs the VAT and the federal income tax. And the federal income tax and the VAT is the same for everyone in Switzerland, and that's the money that the federation uses to run the federation. And then every Canton has a Canton income tax. I'm skipping some minor details. But I'm aware of them. I'm just trying to simplify. So this doesn't look like a lecture in college. They have their own state, their own local income tax, and you pay to your Canton for that amount of money.
The Canton uses that money for running their businesses. This is most emphatically NOT what is being proposed right now. What is proposed is that there will be no National Spanish Revenue Service in Cataluña. In fact, 100% of the taxes will be raised solely by the Catalan Revenue Agency, VAT, all income tax, and then Cataluña will keep all those tax revenue and just use a little bit of that tax revenue to transfer to the central government as a contribution. You see how it doesn't look at all like the Swiss system?
In the Swiss system there is a federal system run by a federal agency and there is a local tax system run by a local tax agency. These guys say "no, in Cataluña, there will be no national tax agency. We will raise 100% of the revenue and then we will just pass a little bit of a cheque at the end of the year to the central government." The best way to think about it, this is how the European Union works. Portugal or France, they raise all their revenue and at the end of the year they send a cheque to Brussels. That's basically what they want.
Rasheed: This is one very unique thing about Spain. As you wrote in the book, Pedro Luis Uriarte remarked that the Basque Country “es único en el mundo”- the way of doing financing there is the only place in the world that this is happening. In Basque Country how does the collection work - they collect the money, as you mentioned, and then they remit around 6% percent to the central government?
Which is obviously now very small. Why was it that this amount was, fixed back in, I think, 1981 or so? It has never been adjusted since then.
Jesus: So this is simply politics. It turns out to be the case that the two main parties in Spain, the Socialist and People's Party (PSOE), the conservative Party (PP), often do not get a majority in Congress. They only get a plurality and they need extra votes, and the nationalist Basque Country party (PNV) is always ready to chip in for those extra votes in exchange for keeping the system the way it is now.
And in relation to it, we made a mistake in the original design in 1981 that says that the system can only be approved by agreement of both sides, of the central government and the Basque government. So you are in the following situation. I'm let's say the socialist party. I run for election. I get a majority, and you are the nationalist.
I don't need your votes. You just say "I don't agree with any change."
The system gets us to stop. Four years later, I don't get a majority. I only get a plurality and now I need your five MPs (from PNV). You see how the system is absolutely perverse.
You always have a veto to use against any change that is against your interest. But you have a lot of power when I need your MPs to get the system to go in my direction. And that's in fact why the system actually has become more and more unjust because something that has happened is the social security in Spain right now runs a gigantic deficit.
And that deficit is being paid by the central government. But in the computation of the contribution that the Basque Country pays to the central government, that deficit of the social security is not included. Which means that they benefit because the pensions, the retirement benefits are still being paid in. But the Basque Country - they don't pay anything whatsoever. That's why in the book we demonstrate that at this moment, the Baqsue country is receiving net transfers from Spain, net fiscal transfer, which is absolutely ridiculous. This will be the equivalent in the United States, of Connecticut receiving transfers from Mississippi. That goes against any basic principle of fairness.
Even if you were a hardcore libertarian who believes that, everyone should run their own affairs, this is even worse than that. The Basque Country is not chipping in for the running of the countries but they are receiving transfers from the rest of the country. Look, if the PNV wants, [Prime Minister] Sánchez will fall tomorrow.
According to the Spanish legislation, you need 55 days between the fall of the government and the election. But if PNV wants - today is July 18th too late in Spain now.
It will need to be done on Monday. So Monday plus 55 days, Spain will have elections. That's an enormous power that other small regional parties across the world do not really have.
Rasheed: So on that point. So the reason why that's possible is that currently in Spain there is a Frankenstein Coalition that Sánchez had to put together after last election because PSOE couldn't get seats on their own. But that's going to my question: why is it that the central government even considering this new Catalan law?
Of course, we hinted at it but could you be more concrete on that?
Jesus: So the situation is as follows at this moment in Spain. Every time we have a general election, there are really two general elections going on. There is a general election in 15 regions, and then there is a general election in Cataluña, and the Basque Country. And we are in a situation where these two elections give very different outcomes. If you take out Cataluña and the Basque Country, the right wing parties have won the election in Spain every single time, I think since 1996, except I think in in 2005. And even then they lost by one MP. Both Cataluña and the Basque Country vote so overwhelmingly on the side of nationalist and left wing parties, that completely shifts the situation.
So this is particularly important for Partido Socialista, for the Socialist Party (PSOE). The Socialist party now depends crucially on the MPs that they can elect from from Cataluña. This is not very different, for instance, from the liberal party in Canada that depends crucially on the MPs that they can elect in Quebec. Or even labor in England in the United Kingdom in most of the elections, not in the last one, but in most of the elections labor doesn't have any way towards power that does not pass through getting enormous numbers of MPs from Scotland.
Which means that at this moment you don't really want to think about PSC - the Socialist party in Cataluña. So people miss one point is that PSC is literally a different party from PSOE in the rest of Spain. It's a federated party. And the joke I often make now is that it's not that PSC is federated with PSOE, it is that PSOE is federated with PSC. Which is very different.
And that means that the MPs of Cataluña have become so immensely important for Pedro Sánchez and for the future of PSOE that they are willing to give this legislation. Now, the problem, of course, is that the Socialist Party, for instance, in Asturias, in Andalucia, and in Extremadura understands that this will be the kiss of death. And that's why I think that what is really going on right now behind closed doors is a civil war within the Socialist Party.
What happens for those listeners who are not following day to day Spanish politics is last Monday, which I think it was the 14th, there was supposed to be an announcement between the Socialist and Esquerra Republicana, the left wing nationalists in Cataluña, of the new financial agreement. And what they published, a statement of three or four pages is absolutely ambiguous and empty. The reason for that is because I think that even within the Socialist Party, it's not clear that Pedro Sánchez commands enough majority to support this change of the system. But the Socialist Party is really in a terrible situation for the long run.
It's basically becoming the party that only exists because it has electoral power in Cataluña and in the Basque Country. And it's not very clear to me once Pedro Sánchez is gone how they are going to be able to recover their electoral foothold in the rest of Spain.
Rasheed: You also mentioned in the book, summed up in this line that I will repeat: all the people in Asturias believe that Galicia is better financed than Asturias, but all people in Galicia believe Asturias is better financed than Galicia.
Why exactly do people have this weird dichotomy of views.
Jesus: So it is very simple. The system right now is extremely obscure. It's very difficult to understand what is going on, and in fact, I will argue it was designed in an obscure way on purpose. And this basically means that it's very easy for politicians to blame all your problems on the system not giving you what you want.
You could not imagine how many times I had discussions with people who say, "no, the problem of the system is X." And I say, look, "X is not true." And I will actually show them the piece of law, the legislation showing them that the X is not true and they will not believe it. And I will ask: what do you want me to say? So I think it is this, you're in Asturias and I want to run for president of Asturias. So for me to go and say, "Rasheed, you are not doing that well. It's not my problem. I don't get enough money because of the system."
But then I'm doing the same in Galicia. And then you have a twin brother Rasheed Prime in Galicia.
And now I'm saying "Rasheed Prime, you are not doing very well." "It's because, these Asturians are getting a lot of money." So it's a very easy political spin to give. And because the system is so extremely complicated. Look, if I really wanted to explain the system with you in all this detail you would need to give me at least 10 hours. And you have a background in economics. Good luck trying to explain this to someone who doesn't have a background in economics and, doesn't have 10 hours for me to explain this. And that means that politicians like obscure systems - politicians, do not like transparency. If there is transparency, it's very clear that you are the one who has screwed up.
If there is obscurity then it's someone else's fault. Everyone loves that. And that's the main problem in Spain right now, that we have designed a system that is so darn complicated. In the book we say we are not going to name names, but there is this very, very famous journalist who actually recently got a prize for the best journalist in economics in Spain. He wrote in December, this article. It was full of inaccuracies. Now, do I think he was lying? No, I just think he didn't understand the system. So even a well-respected senior journalist writing for a very large Spanish media corporation cannot get this right. How is the average voter going to get it right?
You are never going to be the one saying, "no, it was my fault." You are always going to blame the other person. I have been in this profession for what, like 25 years. I have never seen a case of a paper co-authored by two co-authors, and the paper didn't quite work out and either co-author said "It was all my fault." I think that in every single case, the answer I got was "of my coauthor didn't do what he was supposed to do."
Rasheed: Do you think that the financing system of Basque Country and Navarra should be removed?
Jesus: Oh, totally. I don't know if you saw my X post this morning on July 18th. It needs to be abolished! Destroyed! Exterminated! And once we have finished with that, we are going to bring a Catholic bishop who is going to do an exorcism. Find every single code book that ever had any memory of that system, and throw holy water.
And then we are going to go to Wikipedia and eliminate all the references in Wikipedia of system ever existing. And go to every textbook and eliminate every reference in the textbook. Am I clear?
What Stalin did to Trotsky's memory in the Soviet Union is little in comparison with what I want to do with the cupo .
Rasheed: Wouldn't it be just politically so infeasible to get rid of that system, given the requirements to reform the Constitution and things like that. This is a tough thing to remove.
Jesus: That's true and I'm realistic. I know this is not going to happen on Monday.
I learned something from Milton Friedman. You put ideas on the table.
Once you put ideas on the table, they have their own dynamics and sometimes life surprises you. If we never put those ideas on the table, nothing will ever happen. So just between you and me and everyone else listening to us. Even if yes, the proposal of removing the cupo means that the next negotiation of the cupo is not as unbiased as before, that will already be a good outcome.
Rasheed: Why did the Spanish government remove and then re-implement a wealth tax within three years?
Jesus: So two reasons. First of course, the wealth tax is a distortionary tax and is probably not a good way to tax. But the wealth tax has two advantages. One that is good and one that is bad. The good one is that the wealth tax- and this is something that very few people have in our models in economics, it's a good way to control and audit income. So in the US, if I get $10 million, five years ago and I use it to buy some property after five years, when you know any type of legal liability for those $10 million not paid in income tax will disappear, I don't need to justify anything. If you have a system of wealth tax, it's much easier to keep track of quick changes in wealth that hide changes in unreported income. So I'm actually relatively favorable to the idea of a very small wealth tax.
Only 0.001% to be able to keep track of sudden change in wealth that represents hidden income. Now, of course, I know what a lot of people is going to say. You start with a 0.001% and you end up with a 10% tax.
The second argument is that in Spain there is a lot of suspicion. You can check that in any type of survey about values, about wealth. And most people think that wealth is a sign that you have done something nefarious and that you have stolen, that you have exploited someone. So politically speaking, Spaniards are very favorable to a wealth tax.
And even if you try to explain to them that this is, first of all not a very important source of revenue, and secondly, it is a highly distortionary, that's a loss pattern.
Rasheed: What hidden effects does an aging population have on territorial distribution of public spending in Spain?
Jesus: The North is aging much more than the South. It means that the North needs many more resources than the South for things like both health and social security retirement. And that basically means that the system needs to be adjusted to control these things. And look, I hear a lot of people saying things like, "oh, we should have less transfers and they need to figure it out, what to do."
And my answer is, look, Galicia cannot figure out what to do. They have already an enormous amount of old people. And you need to provide services to them. So you need to consider that. And as Spain ages more and more, this is going to be very important and needs to be a fundamental factor.
You need to pay social security, you need to pay health services, and they are not uniformly distributed within the country.
Rasheed: You mentioned, I think in an article that elections in Spain are won by pensioners.
And given that's the case where do you see this idea of doing real reform for long term planning that might have perceived short term bad effects for pensioners.
How does the opposition actually get things done?
Jesus: Oh, I wish I knew the answer to that. I'm actually quite pessimistic on this. In some sense I feel like Saint John, a voice that chimes in the desert. I think that nothing is going to happen with the whole government. And I think that basically no reform of substance is going to happen over the next four to five years, even under a PP government.
What I think is going to happen with let's say 60% probability, who knows? Life is so complicated. The country is going to be in such a terrible fiscal situation that all doors are going to be open and then who knows how we are going to end up.
And I think it's going to be a moment like in 1959 where literally there is no money left. And then even if you don't like to do reforms, you need to do them. So that's my forecast. We are going to kick the ball down to road for five more years.
Rasheed: There are a lot of surveys that show that the Vox has a plurality of voters under 25. So unlike the US, in Spain the younger people simply are pushing a bit more right wing, what does that indicate to you?
Jesus: In fact, I will push that line a little bit further. I think that at this moment there's a plurality in voters under 55.
Rasheed: Right.
Jesus: Yeah. In Spain wages have been stagnant since 2008, and so if you are under 55 and you look at your life cycle in comparison with the life cycle of your parents or even your grandparents, you have been doing worse. The price of housing has completely skyrocketed, the economy is not doing very well and in a well-defined sense, we can come back to that later on and we are accumulating a lot of public debt.
So I think that a lot of people are basically saying, "look, the current system, and in that sense, both the People's Party (PP) and the Socialist Party (PSOE) are offering basically slightly different versions of the same recipe, it's not working for us. So we need to look for something different."
And at this moment, the only one who is offering something different, for good or bad, I'm not judging that, is Vox. And I think that the People's Party (PP) has made a strategic mistake. They thought that Vox was just a flavor of the month that it will disappear.
And I think they have made a fundamental mistake and they are going to stay there forever or for the middle run. And it's only going to keep growing. And of course let's remember there are two Voxes in Spain. There is Vox and there's another one that we call Aliança Catalana. They have a slightly different view about what the nation is.
But for all practical purposes, Aliança Catalana and Vox are the same party. I will not be surprised if Aliança Catalana becomes the largest nationalist party in Cataluña in the next five years.
Rasheed: So final question.
What do you hope for the general public - no, let's say the pundit class in Spain: What do you think they should really grasp from the book?
Jesus: Look at numbers.
Spain doesn't believe in numbers. Spain is one of the few countries in the world where a minister under the People's Party criticized the reforms proposed by a friend of mine, Luis Garicano, because he had done them with an Excel file.
An argument, which I think is absolutely ….you know. Cospedal was her name.
You know one of those nefarious politicians that we have had in Spain. She actually said that. She actually says, "we don't believe in doing policies with an Excel file." We don't believe in numbers in Spain.
You have been here for a while and you will realize that Spain is one of the few countries where you can actually brag about the fact that director means "I studied humanities, that means that numbers are irrelevant for me." Spain is a country that doesn't believe in numbers. And if I just could get people to say, "look, these are the basic numbers of the system, let's talk about numbers”. I will be happy.
Rasheed: Jesús, thank you so much for joining me on the podcast.
Jesus: Thank you. Thank you for having me.