What Will Happen in Germany After the European Elections?

Political Berlin has been brimming with rumors about what will happen to the German federal government after the upcoming elections to the European Parliament, the Bremen state legislature and municipal elections in nine German states this coming Sunday, May 26. In this post, I will outline some of the conditions under which parties in Germany are currently operating. Connecting these conditions, I will then come up with some thoughts about what will happen next.

The CDU is facing a problem ever since Annegret Kramp-Karrenbauer (aka AKK) took over from Angela Merkel as the party leader, but not as the chancellor, in December 2018. Historically, the two roles have mostly been held by the same person whenever the CDU was in power. Dividing party leadership and chancellorship diminishes the role of either, especially in a political system where parties matter as much as in the German case. This is condition number 1 – the CDU has a strong incentive to unify the roles of party leader and chancellor, which right now means electing AKK chancellor. The CDU also has a strong incentive to unify party leadership and chancellorship quickly because AKK is trailing in the polls – her party leadership is viewed less enthusiastically than the party had hoped back in December.

The SPD is in abysmal shape electorally and their plight is likely to become only harder. In the latest poll for the European Elections, the SPD, at 17 percent, is trailing the CDU by 13 percentage points, coming in third after the Greens (19 percent). This predicted 10 percentage point loss compared to the last EP elections would be a disastrous result for the Social Democrats, especially after they have been campaigning hard and with the prominent and popular German Minister of Justice, Katarina Barley, as their lead candidate.

Maybe more importantly, and even worse for the SPD, recent polls have the party now lose their plurality in the state legislature of Bremen to the CDU. The SPD has ruled Bremen ever since 1945 and regards the state as their home turf. A loss there would likely send shock waves through the party. This is condition 2 – the SPD is likely to face defeat in the elections to the EP, the Bremen state legislature, or both.

Such a situation with an extremely nervous SPD would present the CDU with an excellent opportunity to solve their problem outlined in condition 1. Either the SPD pulls out of the federal government and there is a new coalition without new elections that brings AKK into the chancellery. This would require CDU, Greens and FDP to overcome their differences that has precluded them from forming a coalition back in 2017. The FDP has signaled that this time around they might be willing to become part of the federal government.

Alternatively, the CDU could use the situation to force the hand of the SPD. This is how it would work: Angela Merkel could step down as the Chancellor, suggesting AKK as her successor to the Federal President. The President would then suggest AKK as the new Chancellor to the federal parliament, in accordance with Art. 63 of the Federal Constitution. The SPD has frequently said that they would not vote for AKK and rather leave the government. The CDU could then either form a new coalition, form a minority government or call for new elections, following the procedures outlined in Art. 63, 4 of the constitution.

But it all comes down to how nervous the SPD really gets. Because here is the tricky part: Any new chancellor that is elected by the Bundestag would likely call early elections to add legitimacy to the change in chancellorship. Given their polling results for elections to the Bundestag, a rational SPD cannot want federal elections any time soon. Rather, the rational course of action for the Social Democrats would be to wait out their term and hope for the best in the 2021 elections. But judging by the many dissenting voices in a party that is known for its unruly functionaries and membership, rationality may not be the virtue to prevail after a devastating showing in the upcoming state and EP elections.

This is why my prediction is that Germany will hold federal elections before the regularly scheduled date in the fall of 2021, possibly as soon as September this year. The outcome of such early elections would then probably see a renewal of a CDU-led government.

Centrist Annegret Kramp-Karrenbauer is pulling ahead in the CDU leadership contest. Here is why.

With one week to go until the CDU party convention in Hamburg, the German Christian Democrats are looking more energized than they did in a long time. As the party is gearing up to elect a new leader after Chancellor Merkel’s late-October announcement to step down as the CDU’s chairwoman, the three frontrunners in the contest to succeed her have been touring the country and presenting themselves to rank-and-file party members. The leadership contest has already reinvigorated the discourse in a political party that — historically — has seen little necessity for debate as long as the chancellory was reliably in Christian Democratic hands. (The CDU had to check their party by-laws to figure out how to handle a candidacy of more than two candidates — something that had never happened before in the party’s 73 year history).

New polling data released today show that the party’s newly-found enthusiasm translates into increased voter support — the CDU was polling 2 percent better than two weeks ago. The data also show that among CDU supporters, a plurality of 48 percent now favor centrist Annegret Kramp-Karrenbauer as new party leader, up two percentage points from two weeks ago. Right-of-center Jens Spahn, the current minister of health, took a big hit, with only 2 percent of CDU supporters now preferring him as party chairman. Support for Friedrich Merz, who stands for more market-friendly economic policies but has also come under fire for his suggestion to abandon the individual right to asylum enshrined in the German constitution, has increased by 4 percent to 35 percent among CDU supporters.

The strong showing of Annegret Kramp-Karrenbauer (or AKK as she is know in Germany) is in line with the centrist preferences of CDU supporters. The below figure shows the distribution of preferences of those respondents to a 2017 post-election survey who said that they feel a particular strong attachment to the CDU. In other words, these are CDU partisans. Note that this group is more narrowly defined than that of CDU voters and that not every CDU partisan is necessarily a CDU voter at every election. On the other hand, CDU partisans are not necessarily members of the party who will elect the new party chairperson next week in Hamburg. However, their opinions matter for the leadership contest since they are indicative of broader support for the CDU under alternative leaders. The data come from the German Longitudinal Election Study.

Preferences of CDU partisans (“I feel close to the CDU”) on two dimension

CDU partisans are about as centrist as can be, with an ever-so slight tendency to the center-right on both a state-market (economic) dimension and on an open-closed (societal) dimension. The party leader that is most in line with these preferences is Annegret Kramp-Karrenbauer. And while it is alway possible that party members vote for a chairperson who will give them a new direction, the political reality of mass parties in modern democracies suggests that a successful leader is a moderator rather than an innovator. For the CDU, this is particularly true if AKK as a party leader could retain the chancellory for the party; a likely feat, given the thoroughly centrist preferences of the German electorate as a whole.

German Parties’ Positions Mostly Match the Preferences of Their Voters. The Exception Is the SPD.

The GLES data are a gift that keeps on giving. Today, we are looking at preference profiles of voters of different parties. To recap, here is what the overall German electorate looks like:

Distribution of voters’ preferences with positions of political parties

Voters’ preferences are distributed on two dimensions, a left-right dimension that describes economic positions (from 0 = “left” = “more taxes, more social transfers” to 10 = “right” = “less taxes, less social transfers”), and a societal or “new politics” or “identity” dimension that stretches from 0 = “left” = “Green, Alternative, Libertarian” to 10 = “right” = “Traditional, Authoritarian, Nationalist”.

We can look at these preferences separately by parties. In the GLES survey, respondents were asked which party they voted for in the 2017 federal elections. We can use this information to distinguish between the preference profiles of voters of different parties. Note that the absolute numbers of self-proclaimed voters are different across parties. Warmer colors denote a higher density of voters in a location only relative to the numbers of voters of that party,  not relative to all voters.

Distribution of voters’ ideal points, by party

The figures reveal important differences between the ideal points of voters of different parties:

  • The AfD is the party with the most extreme distribution of voters, with voters concentrated mainly at the right-wing identity politics edge.
  • In contrast, voters of all three “old” parties, i.e. the established parties of old West Germany before ca. 1983 – CDU/CSU, SPD, FDP – are concentrated in the center of both distributions.
  • The Left party’s voters are the most dispersed, with preferences reaching into the right-wing extremes on the societal dimension.
  • The Green party’s self-proclaimed electorate is the most clearly concentrated “post-materialist”, even though it comprises a solidly center-left mass on both dimensions.

If we compare these distributions to the positions of parties, we find that the SPD is the party that is farthest away from the mass of the distribution of its voters. This is corroborated by statistical  analysis: The SPD is the only party for which the distance between a voter’s ideal point and the party’s position is not a significant predictor of vote choice. In other words: Those who voted for the SPD did not vote for the party because it was close to their preferred positions, but despite the fact that it was far away from their ideal points.

More specifically, the political positions of the SPD are too “left” on both dimension for the liking of their voters. Those voters who hold positions similar to those of the SPD vote for either the Greens or the Left party. Given the overall distribution of voters’ preferences, any further moves to the “left” are likely to result in a further decrease of  the SPD’s political support.

Spatially speaking, the SPD performed better than expected in the 2017 German Federal Elections, while the CDU did worse. And the AfD is the least-liked party of them all

There is a long political science tradition of modeling voting decisions as based on which party a voter is “closest” to in a policy space. This space can, in principle, be of any dimensionality; for both theoretical and empirical work, the assumption of a two-dimensional policy space is frequently used.

Voting in such a framework is simple – voters calculate the distances between their own ideal point in the policy space and the positions of all parties competing for votes. They then vote for the party that is closest to their ideal point. There is no consideration of e.g. how likable a candidate is or whether a voter feels particularly attached to a specific party. All that matters is distance. In addition, voters’ preferences (their ideal points) are fixed and exogenously given and there is no abstention.

We can use this model to gauge which parties over- or underperformed in the 2017 German Federal elections, given their policy stances and given the stated preferences of voters. For voter’s ideal points, we turn to the GLES post election survey data and use the questions on  preferences over taxation and immigration to measure the ideal point of a voter on an economic and a societal dimension, respectively. For parties’ positions on the same two dimensions we use data from the Chapel Hill expert survey. Here is what this looks like:

Political parties are positioned around the center of the distributions on the two dimensions. Warmer colors denote that more voters with those preferences can be found in these regions of the policy space, while the dark blue color that can be found towards the extremes of the distributions indicate that there are few voters whose ideal points are located there.

Some parties, like the CDU/CSU and the SPD, are closer to where the bulk of voters are, while others like the FDP, the AfD, the Left party and the Greens, position themselves more to the edges. How should these positions translate into votes? If we assume voting based solely on minimum-distance considerations, the SPD should have gotten a mere 14.3 percent of the votes instead of the 20.5 percent it actually received. In contrast to this over-performance, the CDU/CSU should have received 39.1 percent of the votes instead of the 33 percent it ended up with. The table shows these numbers for all the parties currently in the German Bundestag

Party Expected Minimum Distance Vote Share Actual Vote Share Difference
CDU/CSU 39.5 33 -6.5
SPD 14.3 20.5 6.2
GREENS 9.8 8.9 -0.9
LEFT 7.9 9.2 1.3
FDP 9.9 10.7 0.8
AFD 18.5 12.6 -5.9

While the Greens, the Left party and the FDP performed about as predicted by a minimum-distance model, the AfD performed much worse than minimum-distance considerations would suggest.  One of the reasons for the discrepancy between predicted support and electoral performance might be the likability of parties. The GLES data contain information on how voters view parties. Respondents are asked to voice their opinion on parties by using an 11 point scale with a range from -5 to +5 where -5 stands for “I don’t think anything of this party at all” and +5 denotes “I think very highly of this party”. This question goes beyond mere distances in a policy space. It also covers emotional and longer-term attachment to political parties. 

Using this measure, we find that the AfD is the least liked party with an average value of 2.77 on the -5 to +5 scale. A full 60 percent of voters chose the worst possible judgment for the AfD. By comparison, the SPD has a mean favorability value of 7.4. However, we find an almost identical number for the CDU. Even considering the somewhat lower values for the CSU, the favorability rating cannot explain why the CDU/CSU underperformed their minimum-distance spatial expectations.

Maybe, then, it was all about the candidates? Comparing the favorability ratings of Chancellor Angela Merkel and then-candidate for the Chancellory Martin Schulz of the SPD, we find that the difference between Schulz and Merkel is about 1.25 in Merkel’s favor. In other words: If Merkel had been seen as unfavorably as Schulz, the CDU/CSU would have done even worse. On the other hand, a candidate Schulz with Merkel’s favorability rating would have outperformed the SPD’s spatial forecast by an even wider margin.

Looking ahead, these findings are good news for the CDU and not so good news for the SPD. With the SPD already outperforming their levels of support suggested by a spatial perspective, it is not clear how the party could increase their vote share, especially not if the SPD moved to a position further to the left. For the CDU, the party’s longtime strategy of steering a calm course could just be what is needed to bring voters back who should have voted for the party based on their preferences, but didn’t do so in the 2017 elections. In any event, neither party stands to gain from moving further to the extremes.

Political Parties Take Notice: The German Electorate is Centrist Through and Through

Germany is usually not known for its overly exciting domestic politics. Recently though, things have gotten more interesting. As will be recalled, the German Bundestag took an unusually long time to elect a new chancellor.  Then, there was the summer drama over migration that brought the recently formed coalition to the brink of collapse.

Now, Germany’s established political parties are trying to react to their dwindling electoral support. Chancellor Angela Merkel’s announcement to step down as a party leader has sparked a battle over the CDU leadership as well as over the party’s future direction.  Andrea Nahles, chairwoman of the social democratic SPD,  has disowned the party’s own successful labor market reforms in an attempt to play to a more left-wing base.

From an electoral perspective, which strategy is likely to prove more successful? As we have noted before, the CDU’s supporters are thoroughly centrist. This does not bode well for either Friedrich Merz or Jens Spahn, two hopefuls for the CDU’s chairmanship. If anyone can benefit from these centrist preferences, it should be Annegret Kramp-Karrenbauer, the pragmatist champion of those party members who are still supporting Angela Merkel.

The same is true for the electorate as a whole. Using data from the GLES 2017 post-election study, we looked at respondents’ preferences over policies on two dimensions. The first dimension is an economic dimension and conforms to a standard notion of “left” vs. “right” politics with respect to taxes, redistribution and the role of government in the economy. The other dimension is a societal or “new politics” dimension that captures preferences over authority vs. liberty, marriage equality, abortion and multiculturalism. Higher values denote more conservative or right-wing preferences.


The figure shows the (representative) distribution of German respondents’ preferences on these two dimensions together with the 2017 positions of political parties, based on data from the Chapel Hill expert survey. On an economic dimension, the bulk of voters holds preferences that are smack in the middle between “left” and “right” economic policies. On a societal dimension, more conservatives positions, gauged by surveying preferences on immigration laws, are slightly favored over more liberal policies.

It is hard to see how a party strategy of becoming more extreme could be electorally beneficial under these circumstances. Especially the SPD would be ill-advised to move to the left on either an economic or a societal dimension. Not only are potential voters thinning out in these areas of the policy space, there are also two competitors – the Greens and the Left party – that are already firmly established in the respective corners. For the CDU, the dangers lie in alienating the bulk of voters in the center of the distribution. By moving to the right, the CDU might lose more than what they have to gain by adopting more conservative positions, especially if these positions were to resemble those of the AfD.

It remains to be seen if politics in Germany revert to their old less-than-exciting but thoroughly successful ways or if Germany is facing a period of self-inflicted political turmoil with parties veering off to the extremes. Voters, for one, would resoundingly prefer the former.

Where should the CDU look for a new leader? Smack in the middle!

The German CDU needs a new party leader after Chancellor Angela Merkel announced today that she will step down come December. Even before the announcement was official, names were floated in Berlin and beyond. Friedrich Merz, Annegret Kramp-Karrenbauer and Jens Spahn have thrown their hat in the ring. Count on more candidates to step forward, while others may well withdraw. After all, the CDU has a strong tradition of sorting out these kind of things in backroom deals rather than drawing them out in broad daylight (looking at you, SPD!)

But where should the party look for a replacement for Ms. Merkel? One way to think about this is in terms of the political preferences of the party’s supporters. The below figure shows the distribution of preferences of those respondents to a 2017 post-election survey who said that they feel a particular strong attachment to the CDU. In other words, these are CDU partisans. Note that this group is more narrowly defined than that of CDU voters and that not every CDU partisan is necessarily a CDU voter at every election. The data come from the German Longitudinal Election Study.

Turns out CDU partisans are about as centrist as can be. And while an argument could be made that a party leader should be a person that pulls or pushes the party into a new direction, the political reality of mass parties suggests that a successful leader is a moderator rather than an innovator.

Who, then, is the most centrist of the three candidates that are known so far? Clearly, Annegret Kramp-Karrenbauer. Friedrich Merz is too conservative on both a societal and and an economic dimension. Jens Spahn, on the other hand, has mainly positioned himself as a conservative critic on the societal dimension. Both candidates should not be able to trump the centrist Annegret Kramp-Karrenbauer, especially not if they are both upholding their candidacies, thus drawing on the same support base. Let’s wait till early December when the party has to make its final decision.


Did the CDU move to the left? Hardly, but AfD voters think it did

We are still pondering the implications of the 2017 federal elections in Germany that propelled the far-right AfD to become the third-strongest party in the federal parliament. As new data on party positions and voter perceptions are becoming available, we took a look at the purported leftward shift of the Christian Democrats, Angela Merkel’s CDU.

With the party leadership’s decision to open up the vote to allow for the introduction of marriage equality, including the possibility for gay and lesbian couples to adopt children; the decision to end nuclear power in Germany; and, most importantly, chancellor Merkel’s 2015 decision to open Germany’s borders for about 1.1 million refugees and migrants, the previously conservative party seemed to have veered far into the left field, particularly on a policy dimension that can be described as GAL/TAN –“Green, Alternative, Libertarian” vs. “Traditional, Authoritarian, Nationalist” (Hooghe, Marks, and Wilson, 2002). 

We can look at two kinds of position data to see if the claim of a leftward shift of the CDU is actually true. The first data source employs objective criteria in coding party manifestos to gauge parties’ positions. We used data from the Comparative Manifesto Project  to compare the CDU’s position over time. The GAL/TAN variable we constructed takes positive mentions of a “national way of life”, “traditional morality”, “law and order” and negative mentions of “multiculturalism” as indicators of more right-leaning positions, while negative mentions of a “national way of life”, “traditional morality”, “law and order” and positive mentions of “multiculturalism” are indicators of more left-leaning policy positions. Normalizing the resulting indicator to a range from 0 (left-most position) to 100 (right-most position) puts the CDU at 45.35 for the 2017 elections. In 2013, this number was 44.68 – indicating that there was hardly any change at all. Going back further in time, the CDU is at 42.05 in 2009 and at 43.17 in 2005. This is certainly not a pronounced leftward shift.

This result is corroborated by data from a second source, the Chapel Hill Expert Survey (CHES). The CHES data are compiled by asking political scientists what they think the positions of political parties in their country of expertise are.  According to the CHES data, the CDU changed its position on the GAL/TAN dimension only moderately, from 6.0 in 2014 to 5.8 in 2017 on a 0 to 10 scale where 0 stands for the left-most position and 10 for the right-most position.

Here is the interesting part: This notion of a party that remained essentially stable in their policy position on a GAL/TAN dimension is not shared by voters of the AfD. Using representative survey data from the German Longitudinal Election Study (GLES), we see that AfD voters see a pronounced shift to the left in the GAL/TAN position of the CDU.

While, in 2013, non-AfD voters placed the CDU at 6.79 and voters of the AfD saw the CDU at 6.48 on the GAL/TAN dimension (the GLES data use a 1 to 11 scale, with 1 denoting left, 11 denoting rightward positions), this perception changed massively in 2017. AfD voters placed the CDU at 4.98, while non-AfD voters placed the party at 6.1. Put differently, the perceptions of voters who didn’t vote for the AfD are broadly in line with objective and country expert data on the political position of the CDU, while AfD voters massively overestimate the leftward shift of the CDU.

This perception of a a pronounced leftward shift of the CDU on a new politics dimension by AfD voters also renders the CDU and the SPD more alike. In 2013, the perceived difference between the parties on the GAL/TAN dimension was 1.74 among non-AfD voters and 1.99 among AfD voters. In 2017, these differences changed to 0.87 and 0.58, respectively. The difference between AfD voters and non-AfD voters in the perception of the CDU in comparison to the SPD thus increased between 2013 and 2017. This is evidence of a successful mobilization that portrayed the CDU as being “too far” away from AfD voters’ ideal points and the AfD taking up the slack. The table below shows a summary of these results, together with data on the perception of party positions on a general left-right dimension and and economic dimension.

Obviously, perceptions matter in politics. One interpretation of these findings is that AfD voters were looking for a reason to rationalize their support for a party that is at odds with much of the post-war political consensus in Germany. Casting the CDU as having swung massively to the left may just have done that trick.

The German Bundestag is very late at electing a chancellor. Here’s how late, exactly.

It’s been four months (and counting) since the German Federal elections and the country is still without a new government. After the center-left SPD decided last weekend to enter formal coalition negotiations with Angela Merkel’s CDU and its Bavarian sister party, the CSU, it is still far from clear if and when the three parties will agree to form a new government. Already the SPD’s youth organization is rallying to prevent the party’s base from agreeing on a yet-to-be negotiated formal coalition treaty. And on the conservative side, tensions are mounting between those who view the results of the preliminary talks between  the three parties as the final offer to the SPD and others who are willing to make yet more concessions to the social democrats.

We used historical data on government formation in Germany and calculated the time it took in the past from election day to the election of the chancellor in the Bundestag. As a parliamentary system, German governments are not determined by the results of the general elections. Rather, government formation is left to the parties in the newly elected federal legislature.

Time from federal parliamentary election to election of a chancellor in Germany, 1949-2013

Looking at data from the 18 Bundestag elections since 1949, we found that, on average, it took the federal legislature just shy of 40 days (39.8 to be precise) from election day to the election of a chancellor. The longest it ever took before the 2017 elections was after the elections in 2013, when 86 days passed before Angela Merkel was elected chancellor with the votes of the CDU, CSU and the SPD.

The German constitution gives the newly elected parliament  a maximum of 30 days after the election to meet for a first session (Article 39.2 of the German Basic Law). Considering the time from the first Bundestag session to the election rather than the time between general elections and election of the chancellor, this time is just under 11 days. Again, at (as of today) 92 days since the first Bundestag session, the current situation is highly unusual.

Download the data

Barring any upsets by the social democratic party base, Germany should have a new government by Easter. Failing this, the beacon of stability that is the German constitution, still leaves to possibility of forming a minority government; an option that while generally not well regarded in Germany, has worked well for a number of countries, including Germany’s neighbor to the north, Denmark. It stands to reason that a minority government with the lively debates it requires to secure majority support for specific policies would be an option that is preferable to yet another grand coalition and its de-politicizing tendencies.

The blockchain, the end of transaction costs and new challenges for government authority

If you haven’t been living under a rock, you have by now heard about the blockchain. To recap, a blockchain is a record of transactions that is kept on a distributed network of computers. Each new transaction gets added to the blockchain and the distributed copies are identical. There is no central authority that oversees the transactions. Because of its distributed nature, the blockchain cannot be falsified. The most prominent application that uses blockchain technology is Bitcoin, a cryptocurrency that has seen a meteoric rise in value over the last year.

However, the currency aspect of Bitcoin may not be its most important feature. Rather, the blockchain idea goes far beyond the basic functions usually ascribed to money (means of exchange, a store of value and unit of accounting).

There is no reason why the blockchain should be restricted to recording who has transferred what amount of money to whom. The peer-to-peer distributed ledger that is the blockchain can hold all kinds of information, including the terms of contracts between parties. That way, contracts can be executed automatically, in an if-this-then-that fashion. This eliminates a large chunk of transaction costs usually involved in contract monitoring and enforcement.

The drastic reduction of transaction costs might prove the greatest disruptive potential of blockchain technology. As Ronald Coase has famously argued in his 1937 paper “The Nature of the Firm”, transaction costs that result, inter alia, from monitoring and enforcing contracts, are the main reason why firms and organizations exist at all. Without the existence of transaction costs, contracting could be left to independent parties in the market place.

Oliver Williamson has added several important aspects to Coase’s work, among them the notion of asset specificity. If assets are specific to a certain task, the incentives for shirking on contracts increase. Asset specificity is also paramount when thinking about human capital and its use. Under which conditions are workers willing to invest in industry-specific or even firm-specific human capital assets? This is one of the questions that has given rise to the varieties-of-capitalism literature and its argument that asset specificity in human capital formation can only be achieved if it is embedded in a context of robust welfare state provisions that act as insurance in case the asset specific human capital investment loses its value.

Blockchain technology has the potential to reduce transaction costs that stem from monitoring and enforcement requirements and that have contributed to the existence of firms. The Ethereum platform, for example, implements a programing language than can be used to write self-enforcing, so-called “smart” contracts that do not rely on trust or third-party involvement. Contracting could become a lot easier and more efficient if possibilities of shirking and reneging on contracts are minimized or altogether eliminated. A simple example for a trustless contract between a vendor and a buyer can be found here.

Smart contracts also have important implications for governments and their authority. The following is just one example from a rather specific field but it illustrates the point: Many countries’ legal provisions know the institution of a “legitimate”, i.e. that part of a deceased person’s estate over which the decedent does not possess full legal authority. In these countries, a certain part of the inheritance goes the testator’s children, spouse or parents, irrespective of the stipulations in the will. In other words, the testator is limited by legal provisions in the use of his or her estate after death has occurred.

Now imagine a man called Peter who wants to leave everything to the Humane Society. Peter likes animals a lot better than people and certainly more than his son, Bob. Bob is a low-life, up-to-no-good 40-something who has had every opportunity in life and who has squandered it all. However, under current legislation in, for example, Germany, Bob is entitled to 25 percent of Peter’s estate (barring special circumstances).

Knowing this, Peter sets up a smart contract that gets triggered in case of his death. The contract stipulates the automated payment of all of Peter’s money to the Humane Society. If the money itself is stored on the blockchain as a cryptocurrency, no involvement of a third party like a bank is necessary. Obviously, this would make it a lot harder for any government to enforce Bob’s legal right to his legitimate. If the entity to which Peter has bequeathed his estate is in a different jurisdiction, things might become altogether impossible for Bob . Maybe most importantly, Bob would have no possibility to find out how large Peter’s estate was in the first place. If the record is not kept in a bank and if it is protected by sophisticated cryptographic technology – as the blockchain is – then the government acting on Bob’s behalf would have no access to any records – where would the court send the subpoena?

In other cases, blockchain technology can make up for insufficient state capacity. Many poor countries don’t have a functioning real estate register where titles are kept and can be produced in case of a property transfer. Smart contracts could fill this void and make real estate markets more efficient and title ownership more transparent, creating spill-overs into mortgage markets and capital markets more generally. Along the way, the state would have lost some of its (potential) relevance as the keeper of a reliable registry.

Beyond all the hype about bitcoin et al. are two much more important developments. First, transaction cost reductions through smart contracting will dramatically alter the incentives that in the past have led to the formation of companies and other organizations. Their shape, size and boundaries with their environment will change, and those companies that understand these impeding changes will be more successful in a distributed-ledger smart-contract environment. Second, as third parties are eliminated through smart contracting, the legal authority of governments around the world will be challenged. Their capacity to monitor and enforce the compatibility of private-agents’ contracts with national law will be further diminished. As such, sophisticated blockchain technology contributes to the shrinking authority of the nation state in a globalized world.

Private Funding at New York City Public Schools

Parents at some public schools in the US have recently come under criticism for their outsized private funding of public school activities. From hiring additional teaching staff to funding art programs and field trips, the money raised from parents at public schools allegedly exacerbates unequal access to  opportunities in the school system. As Richard Reeves, senior fellow in Economic Studies at The Brookings Institution, points out in his book Dream Hoarders – How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It this kind of money comes on top of a strong correlation between family income and quality of the school district.

Looking at data from a April 2017 report by the Center for American Progress, we mapped the 19 schools in New York City that made the report’s list of the nation’s 50 richest Parent-Teacher Associations (PTAs). Click on the map below to explore the total sum raised by a school’s PTA, the revenue per student, and the number of students at the school. Data are for fiscal year 2013/14.

Out of the 19 top-revenue public schools in the City of New York, seven are in Brooklyn, one is in Queens, and eleven are located in Manhattan. Unsurprisingly, their locations largely overlap with the wealthiest neighborhoods in New York; an observation in line with Reeves’ finding about the dual advantage of public schools in wealthy neighborhoods.

What to do about these findings? Among other measures, the Center for American Progress report proposes to put limits on how private funds at public schools can be spent, for example by precluding the hiring of additional teaching staff. Reeves suggests sharing the money affluent schools raise with schools from districts that are less well off. Measures like these could go some way in reigning in some of the inequality-aggravating effects in private funding for public schools.

However, there is an important caveat here: If relatively wealthy parents cannot spend their contributions in a way they deem best for their children in the public system, they might decide to go private altogether. This would diminish the funds at the disposal of public schools to further the advancement of all children, rich and poor.

Maybe what is needed is a cultural change that makes parents learn to appreciate the value of diversity, community and sharing, rather than focusing on the seemingly “hard” criteria of standardized test scores. In such an environment, pooling of resources across schools could become a less contested affair.


Disclosure: Christian’s daughter attends one of the schools in the top-19 list. Christian and his wife regularly contribute to the PTA fund at their daughter’s school.