"Google and Facebook have excessive power over business"

Prof. Luigi Zingales  photo: Eyal Izhar

Influential economist Luigi Zingales talks to "Globes" about digital monopolies, praises Netanyahu's grasp of economics, and reflects on the future of Europe.

In late January this year, Facebook announced that it would stop publishing advertisements promoting cryptocurrencies, headed by bitcoin, in order to improve the "integrity and security" of financial services notices and advertisements. The declared reason for the change was that some of these notices were linked to deceptive or misleading methods, and Facebook therefore wanted to protect its users from them. Google followed suit in March and it appears that it is easy to see the effect of this boycott on the prices of cryptocurrencies.

"I'm one of those who oppose all the buzz about cryptocurrencies and regards it as mainly madness," says Prof. Luigi Zingales, one of the most original and influential economists in the US today, "but think about the principle for a minute. These people (Google and Facebook) control almost 90% of all digital advertising. They can decide tomorrow that they're boycotting your product. In essence, they're the late 19th century railroads - the entire progressive movement and antitrust law in the US arose because these railroad companies exploited their monopolistic power." Zingales visited Israel this week and spoke with "Globes."

Are the major technology companies endangering the media?

Zingales: "There's no doubt about it. Imagine that Facebook decides to boycott your newspaper and stops distributing its content - how much will that affect revenue? Google and Facebook have the power to decide who will live and who will die in the business world - this is excessive power."

"Algorithms are written by people and people have agendas"

In an article published a year ago in "The New York Times" together with journalist Guy Rolnik (currently a researcher at the Stigler Center at the University of Chicago, headed by Zingales), Zingales advocated legislation establishing social networks users' ownership of their social profile - a solution along the lines of the telephone number mobility reform in the Israeli mobile telephony market. Zingales's proposal would enable Facebook users, for example, to switch to competing social networks together with their page.

Since then, the major technology companies have won court victories in the US making it even more difficult to switch between networks, leading Zingales to speak out harshly on the subject. "This is a monopoly in its most brutal form that possesses the power to distort democracy and the state is only increasing its power," he remarked at a conference of the American Enterprise Institute (AEI) last November.

Are you leading a campaign?

"I don't think I'm campaigning, but I am worried. We organized a conference in Chicago last April and now we are launching a committee trying to investigate what can be done about the problem. What I learned at the meeting in Chicago is that people disagree vehemently about the solutions, but I think that there is a general consensus that we've got a problem and the problem is privacy, not monopoly, although the privacy people say that it is not monopoly, but privacy. Everybody says it is the other camp, but nobody says that everything is perfectly OK. So I think that we should worry. In fact, my biggest worry is the potential political power of these companies. You know, just the ranking of news in Google affects the way that people vote. It's true that it won't make extreme leftists vote for Trump, but it will affect the undecided vote, and they're the ones who usually decide elections.

"Now I'm not saying that Google has done it, but all these things are dependent on people and people have their own biases, so this is going to have quite a dramatic effect on the vote, so I think we need to be aware because there is no chance of making any change if the politicians feel they won't be reelected if they speak out against Google or Facebook.

"I've dealt for years with the negative effects of the financial sector's lobby in Washington. Wall Street can only bring money to Washington. The large technology companies can bring money and votes. The politicians - the only thing they prefer to money is votes."

Because you don't need the money anymore if you have votes?

"Not exactly. The politicians need money for themselves, but it's more correct to say that the votes also bring money with them."

Will it eventually be necessary to dismantle the technology giants?

"I don't think dismantling is the only solution to the problem of excessive monopolistic power. Google, for example - I see no logical reason to separate it from its search engine, because it has enormous economies of scale. But does Google have to own YouTube? I'm not sure. As for Facebook, why should it be integrated with WhatsApp and Instagram? The European Union has already investigated this and can easily change its decision and separate it.

"Every case has  an appropriate solution, so I like the idea of mobility, because it's minimally invasive, low risk, and has a big upside. It won't solve the problem of invasion of privacy; we'll have to decide how far we can go in protecting privacy. The safest house is one with no windows, but no one wants to live in a house like that, so compromises also have to be found for privacy."

Have you been under pressure to step back from this subject?

"No. My advantage is that I'm not an economist who makes a living from the private market. I don't live this industry; I look at it from the side, and it sometimes takes a less knowledgeable outsider, someone less familiar with it but who has a fresh perspective."

A love-hate relationship with the right wing in the US

Zingales has a love-hate relationship with the popular right wing in the US. He despises racism and xenophobia but believes that populist movements can generate pressure that will redress the balance in the capitalist system, which is constantly biased towards networked people with good connections. "Popular anger should be channeled in the direction of reinvigorating free competition and creating a counterweight to crony capitalism," he wrote in 2012 in his second book, "A Capitalism for the People," a book frequently cited by Prime Minister Benjamin Netanyahu.

Zingales is not eager to talk about his relations with Netanyahu but agrees to say that he met him once (in 2014) and was impressed by his economic understanding. "His grasp of economics is not something you often see among political leaders," he says.

What did you mean when you recently said, "We desperately need an advanced populist ideology"?

"We have a certain distortion in favor of technocracy. We're raising an aristocracy which I'm part of, by the way. I'm a globalist who earns a lot from globalism. I'm an Italian living in the US and visit Israel and other places around the world. I don't want to sound like someone who spits in the well he drinks from, but I want to draw people's attention to problems and the problems are the people left behind, while the advantages are going to a very small group of people. When I wrote the book in 2012, the word 'populism' was still quite rare. I said that an outbreak of populism was in store; the only question was what route it would take. My hope was that something would happen similar to what happened in the US in the early 20th century - an outbreak of populism that corrected the markets instead of destroying them. I admit that this hope is getting smaller by the day."

Is the worldwide wave of populism cresting?

"It's likely that we're at the end of the beginning. Italy can be a turning point. Between blindly following the European Union and the desire to withdraw a third way of repairing the faults is emerging. It's no accident that populism prospered in South America, because inequality of incomes in South America is the most severe and the gap is yawning in comparison with the other regions in the world. Populism is a response to an elite looking after its interests. I therefore often say, 'The problem is not populism; the problem is elitism.' These are two sides of the same coin, so I think that elitism has to be broken in order neutralize the sting of populism."

What do you think about the outcome of the G7 summit and its collapse?

"First of all, most of these meetings are for show, so I don't think the world has ended. I think that Trump understands that he has bigger enemies. The public discourse that he is arousing is on the right issues but he's simply going about it in the wrong way. For example, I don't understand why he is quarreling with Canada. You can make a case that Germany is practicing trade dumping in the West. Thanks to the euro, they have a gigantic trade surplus that they are not using and they are not contributing enough to the European budget. After World War II, the US invested a lot in Europe. So if Germany wants to become the hegemonic country in Europe and the world, it needs to take responsibility. You cannot be a hegemon on a shoestring."

Won't these geopolitical upheavals affect the global economy?

"The fault line is China on the one hand and then the US on the other. I fear that Germany is too weak to be on its own and I fear that the interests of Germany are too strongly related to China to take an independent position. So I think that there is a Chinese-German bloc and then the question is what the rest of Europe is doing. The UK is going its own way and is probably more in the US sphere of influence."

"The goal of increasing trust is not being achieved"

Zingales believes that crony capitalism, the term most identified with him, was coined by economist Lawrence Summers. Zingales became aware of the issue when doing research that resulted in a study he published in 1994 that exposed abuse by controlling shareholders in public companies in Italy, who issued shares to themselves at the expense of the ordinary shareholders. "In Italy, the controlling shareholders are thieves and I put that in writing. Crony capitalism has been my main subject of research ever since."

Your articles and those by others on the subject have unquestionably contributed to increased awareness of the dubious connections between capital and government. Today, we impose a widespread system of rules, arrangements for preventing conflicts of interest, and cooling off periods for regulators designed to prevent a revolving door from a government position to the private market and back. Despite these measures, however, it cannot be said that public trust in the system today is greater than in the past.

"It's disappointing that the goal of increasing trust is not being achieved. In my opinion, it's worthwhile trying to understand the reason. Maybe these reforms aren't understood and aren't convincing the public because they're too complicated and technical. In my most recent book, "A Capitalism for the People," I reached a conclusion that is not obvious to economists - that a simple and well-understood regulatory solution is sometimes preferable, even if it's less economically efficient, for two reasons: people understand it; and it's much harder to manipulate it. For example, take the rule in the US about the separation of retail banks from investment banks. A serious economist can prove in three minutes that this rule is inefficient, but the world believed that it was the most practical solution. The solution regarded as desirable, the Volcker Rule, is too complicated, unenforceable, and arouses great opposition. Dealing with it resulted in a horrible waste of time."

As you know, our prime minister was very impressed by your book, and now talks about the need to take an axe to regulation. The politicians claim that that the pubic expects them to reduce regulation and limit the power of the regulators.

"It's better to settle for a few clear rules that can't be done without. The big problem of a small country like Israel is that you all know one another. Such a small world can easily become a country of cliques. Israel's big fortune was mass immigration, especially from the Eastern bloc - it resulted in a social reshuffle. If we look ahead now, I'm not sure you can count on continued mass immigration, so the risk that you will become a country of cliques is very great.

"The worst example I can think of is Chile. The case of Chile highlights the advantages and disadvantages of the economic (neo-liberal, A.B.) approach at the University of Chicago. They did everything by the book. It's true that a large part of their success was due to their very low starting point, but although they were very successful in several aspects, they had major failures in others - social mobility, for example.

"A colleague of mine who researched the matter found that Chile has very strong segregation in its education system. It's not because of the level of instruction. He found that people who succeed in getting into the prestige universities are only those who were accepted to the private Catholic schools - all the advantages of education go to the upper class. Someone not born into the upper class won't gain anything from educational achievement, while on the other hand, if you were at a prestigious school and made social connections, then you're part of the elite. This problem hasn't developed yet with you because of immigration, but now you're on a path liable to lead to a country with a closed elite."

Israel has another characteristic that has to be taken into account - military service, which still serves as a tool of social mobility, especially for young people from the outlying areas who are accepted into technology units.

"You're right. Your army is meritocratic for the simple reason that you're constantly at war. I discovered that the job placement system in the army is based on personal tests developed by Daniel Kahneman and Amos Tversky (Kahneman won the Nobel Prize for economics; Tversky died before the prize was awarded). This is the top, technologically speaking, and it's definitely a significant advantage that the army is open to advanced psychological approaches. Giving equal opportunity to everyone was historically a function of the Catholic church. If you were ambitious and talented, but poor, the church was your only chance of a career."

How do you see the future of human society in a world in which more and more human professions can be replaced by robots and computers? Some say that there is nothing to fear because it is a fact that all of the technological progress of the past 200 years has not increased unemployment; on the contrary.

"That's true, but it could very well be different this time. I'll explain why. Take industrialization in Italy, for example. Someone who lost his job in agriculture went to work in industry. In the current technological revolution, professions like network programmers, healthcare for senior citizens, and entertainment will remain, while occupations like truck driver are liable to disappear and be replaced by self-driving trucks. It won't be so easy for a truck driver to be retrained for the future professions.

"In all of the previous revolutions, there was always an abundance of jobs left for people who were not, let's say, the most well-educated. So I think that it's likely that an aristocracy will arise, and then the sons of the upper class will have to serve in the army in order to repress the others, or we'll have to find work and a way of life for those left behind. I deliberately said work first and then way of life, because it's possible, for example, to find a solution of a fixed universal income."

A fixed income works nowhere.

"It actually doesn't work badly in Alaska; it's not bad from that standpoint. The problem is that most of us don't work just to earn a living. Work is the purpose of life, a way of creating social connections. It gives a feeling of pride. Retiring quickens the aging process and hastens death for many people. The fact that in the future a large part of the population will be unemployed is liable to pose a very serious problem to society."

"The moderate left is disappearing"

Zingales was born in Padua in northern Italy 40 kilometers from the Yugoslav border. In an interview, he told about the fear of Soviet invasion that accompanied his childhood. The economist said that he developed political awareness at a very early age under the influence of his father, who had a rightwing outlook that caused friction between Zingales and his teachers at school, most of whom were leftists.

"Basically, the center left is disappearing," Zingales says. "The Socialist Party in France is gone. In Spain maybe in parts it has come back, but it has lost a lot. In Greece it is disappearing, in Italy it has disappeared, and in Germany it is disappearing. The only place where it has come back is in England, where it has become basically a very radical socialist party."

You have said that the only people coming with any solutions are the old socialists.

"Yes, and I think that is a problem. And there is also the new right. I think that from the US to Italy to France, the new right has an appeal among the lower class, and we need to understand why and address this problem."

Because of its populism?

"I think that populism is a big word; it's a bit vague. They are worried sick about some of the issues. For example, it is very easy to be cold on immigration and expect human beings to go somewhere else. For example, I spoke the other day with a former member of the Communist Party leadership here. She is like a hard core Communist and she recognizes now that the former Communist and now Democratic Party etc. completely underestimated the disruption that immigration brought.

"The center left has embraced the European project and the European project is a project very much pro-market, but with no welfare. There is zero welfare in the European market, so it is not surprising that people whose fear was about welfare go to the nation state. In France, former socialists have voted with Le Pen and they are not with Le Pen because she is a fascist. They vote for Le Pen because if you are trying to get protection, the protection is there and these are issues that we need to incorporate. We cannot brush them under the rug."

15 years ago, Italy was the strongest supporter of the EU and now it is the other way around. It is because something went wrong with the EU?

"Absolutely. Both. First of all, Italy has been left alone with immigration. For my US readers: imagine that all immigration were to take place through New Mexico and we ask them to deal with this immigration from the state budget and they cannot relocate people who are coming in other states because they are not allowed.

"The French today are saying that all Italians are racists, but they pushed back a pregnant lady that was trying to come to France because her sister was in France. She was dying of cancer, she was pregnant, and she was trying to be legal in France to give the baby to her sister to take care of. They pushed her back; in fact, they chased her into Italian territory without permission in order to make sure that she wouldn't come to France. She died in a hospital in Turin. They are basically collaborating with the people in Africa to bring more immigrants to Italy. And this is a German NGO. If they care so much, why don't they take a plane and ship them to Germany? So let's not be hypocritical - we cannot bring them all. The way to do it is to only bring the ones who are persecuted. Most of the ones who come here are not persecuted; they are trying to get a new life here.

"We must have a system of screening. We must enforce the law. We must stop this trade. The NGOs and all of these people who pretend to be good make the problem worse because every time an NGO rents a ship, more people come. And because the supply is infinite, you need to stop along the way. So that is problem number one - huge. Huge. Europe has left us alone.

Problem number two is the euro. The euro was designed poorly. Every economist recognized that it was a marriage that was designed poorly. There are two issues. One that was anticipated but was brushed under the rug was that in a common currency area, you need some common fiscal policy and the people who created the euro said it would come. 20 years went by and it did not come.

"Secondly, nobody really thought very deeply - and this is the fault of the economic profession in general - what you do in a country that has a large public debt and you want the central bank to intervene in the case of a crisis. Why should Italy be a region with a fiscal austerity program if all that it achieves can be destroyed overnight by somebody crying panic? The first time that panic spread was when Sarkozy and Merkel said we are going to have a move to a structure for greater public debt. Now Germany is pushing through a law to have a restructuring of public debt. I say that if a debt arrangement is unavoidable in the end, it's better to do it now.

"German doesn't want a debt settlement now because in this case, some of the written-off debt will come the expense of the European Central Bank, which bought Italian government bonds. Now the only system that we have is the European Stability Mechanism (ESM, which can grant credit of up to €500 billion, A.B.), and the ESM is not big enough because it cannot save Italy (Italy's national debt is estimated at €2.3 trillion, A.B.). Number two is that the conditions are such that it is political suicide. Even in Italy, they are divided between those who hate Europe and those who love Europe so much that they cannot recognize these faults.

"I am one of the very few people who is in between, and I say, 'Look, I think that the European project is very viable and I don't want a strong currency to destroy it.' I think that number one is of course the fact that we don't want another war in Europe. Number two, I think that in a global power struggle, there is no Italy and no France. The future is a world in which there is the US, China, and India. If you want a seat, you are going to have a seat as Europe; you cannot have a seat as Italy. Italy will become the new Lichtenstein. We need to have a European project, but the European project needs to be shared and democratic. It cannot be that Germany imposes its will on everyone else."

What is the probability of the European project surviving without fiscal unification?

"I have a book in which I discuss this. I make an analogy which I think is very important. It is an analogy between Italian unification and European unification. Because Italy, like Europe, started 160 years ago as a combination of states. Basically, there was a more advanced northern country - a kingdom based in Piedmont. The rulers in Piedmont had no feeling for the southern part of the country. When Italy was unified, Sicily had the same per capita income as Verona, and today it is a world apart. My big fear is that Europe was unified roughly the same way - an idea that appealed to like minds. Now we have in a situation in which basically the north makes the rules for the south, with the risks of that. One risk is the condition of the southern countries in general. Poland and Greece and Italy are in terrible shape."

Prof. Luigi Zingales came to Israel as the guest of the Friedberg Economics Institute. The institute was founded in Israel in 2014 as a non-profit organization to promote appreciation of the principles of economic freedom and the potential for growth and improved welfare through their implementation. The Friedberg Institute holds seminars for which it brings economists and leading economic policy-makers to Israel.

Published by Globes [online], Israel business news - www.globes-online.com - on June 18, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Prof. Luigi Zingales  photo: Eyal Izhar
Prof. Luigi Zingales photo: Eyal Izhar
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