July 17, 2011
July 9, 2011
The Republican leaders have the upper hand in the debt ceiling negotiation. From the Machiavellian perspective, this is totally expected. The negotiation is a classic game of chicken in which a crazy player has an advantage.
Several of the most recent Nobel prizes in Economics have gone to people who worked in a discipline called Game Theory, the study of strategic decision making. One of the great discoveries in Game Theory is that in some games, a player can give himself an advantage if he loses some control. The classic advantage is the game of chicken, beloved of boys who have just earned their drivers permit. In this game, two boys (girls seem to lack interest in this game) race toward each other in their cars. To play the game correctly, both players should accelerate to top speed so that if they collide, they will be at least seriously injured.
Each boy can choose from two strategies, tough-guy or chicken. To win the game of chicken, one player must swerve while the other player does not. The player who swerves last is the winner, the tough guy. The player who swerves first is the loser, the chicken. If both boys swerve, they both are chicken, the game is a draw, and the members of the press, assembled at the road-side, jeer, and write unkind reviews of the contest.
The interesting insight from Game Theory is that a player that can credibly demonstrate that he lacks control and hence cannot swerve will win the game. For example, one driver might ostentatiously throw his steering wheel out the window. Onlookers may think that he is insane, but the demonstration forces the other driver to rethink his strategic choices. The sane player can dismiss the possibility that the crazy player will choose the chicken strategy. Having seen the crazy player’s steering wheel fly out the window, the sane player knows that he can no longer win the game or even play to a draw. He must concede. The sane player must be the chicken. Of course, the same logic holds of one player can credibly demonstrate that he delusional enough to believe that nothing bad can happen even if there is a collision. In a game of chicken, the crazy player has the advantage.
That is the situation with the debt ceiling negotiation. The Republican leadership can credibly claim that most of its members are crazy enough to believe that if the U.S. defaults, nothing very bad will happen. Their claim is credible because the current composition of the House Republicans is the result of a long selection process that has weeded out its sane, moderate, conservative members. This fact forces Democratic leaders to rethink their position. They cannot win or even play the negotiation to a draw. They must concede.
Game Theory models are never perfect; there are always minor complications. For example, the game of chicken is not usually played with passengers in the car. In the budget negotiation, unfortunately, we are all passengers. However, that consideration does not seem to concern either party. A more serious complication is that while a boy’s game of chicken simply ends when one boy swerves, the budget game can go on. There are two consequences.
First, this is probably not a good time to balance the budget. The country is just emerging from the worst recession since the Great Depression. The damage was severe and correspondingly the recovery is slow. The received economic wisdom is that this is still a time for deficit spending and stimulus. Balancing the budget now will probably choke off the recovery. In light of the current debt problems in Europe and even with regional government debt in China, a balanced budget in the U.S. will probably increase the value of the dollar. A strong dollar will raise the price of U.S. exports and exacerbate America’s trade deficit and increase unemployment. Since these things will happen on Obama’s watch, he is likely to get the blame. The Republicans need not worry about this side effect, but the Democrats must worry.
Second, this negotiation may establish a pattern. If the President makes concessions on the debt ceiling negotiation, the Republican leadership will be emboldened to continue bullying him.
What should Obama do? Some commentators, even one particularly intelligent one, argue that if Obama does not show that he is a tough guy and draw a line in the sand, he his presidency will suffer. However, if he plays tough in this negotiation, he will cause a collision which will do irreparable harm to the nation and to his presidency. I believe that he should bow to the inevitable logic of this game, but work to change the circumstances so that it does not recur.
One of the President’s strengths is the he is capable of strategic reasoning. Having found that the Republican Party can win this game of debt ceiling chicken, President Obama is not likely to allow them to play it again. He will, most likely, hold out for a deal that either increases the debt ceiling automatically or makes cuts that are so deep that the ceiling will never again be an issue.
By holding out for a comprehensive solution, Obama can turn the public perception in his favor. He can become the deficit hawk. Once he has disposed of the deficit ceiling issue, the Republican’s can no longer bully him. He can then draw his line in the sand and use his veto power to enforce it. However, for this round, the Republican leadership has already won.
July 2, 2011
Some commentators (e.g. Mark McKinnon writing in the Daily Beast) are pleading for us to take Michele Bachmann seriously. However, they do not always make clear if we should credit her candidacy or her ideas. She might be politically successful, but she will never be a credible leader and her political ideas are simply crazy talk.
McKinnon quotes Bachmann speaking about America’s economic problems as follows.
“I don’t believe that the solutions to our problems come from Washington. More than ever, Washington is the problem, and the real solutions will come from our businesses, our communities, our schools, and the most basic and powerful unit of all—our families.”
It seems impossible that simple ignorance could produce, in such a short statement, so many errors of fact and judgment.
Bachman does not believe “the solutions to our problems come from Washington.” However, Washington was certainly the solution to the recent banking crisis. No other entity, certainly not Business, could have bailed out the nation’s leading banks. So crucial and so successful was Washington’s rescue package that the nation’s most successful investor, Warren Buffett, publically thanked the government in a New York Times op-ed titled “Pretty Good for Government Work”.
Bachman says that “More than ever, Washington is the problem. However, the government played no role in precipitating the banking crisis, except that it failed to regulate the mortgage brokers and investment banks that did create the crisis. The phrase “Washington is the problem” was made famous by Ronald Reagan, who began the era of deregulation. We can certainly suspect that had the Government not been hobbled by years of deregulation, under regulation, and lax regulation, it might have prevented the financial crisis. In his testimony before congress, Allan Greenspan agreed that as chairman of the Federal Reserve, he had been too lax in regulating banks and had placed too much faith in the supposed self-correcting nature of the market. He said, “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
Bachman says that “the real solutions will come from our businesses, our communities, our schools, and the most basic and powerful unit of all—our families.” What is it about recent history that would give anyone a shred of hope that business is the solution to any problem, much less the current economic slump that it created? Furthermore, the nation’s major economic problem is high unemployment and it is unlikely in the extreme that international corporations, even those based in the U.S., will hire American workers when they can hire labor more cheaply abroad.
Charles E. Wilson, President of General Motors and President Eisenhower’s Secretary of Defense, famously remarked that he thought “what was good for the country was good for General Motors and vice versa.” Because our corporations are now international players, Wilson’s remark is no longer true either in its specific or in its general, metaphorical sense.
As for our communities and our schools, because of the business-induced economic downturn, they are underfunded and barely able to provide basic services, much less provide a solution to the nation’s current economic woes.
Similarly “the most basic and powerful unit of all—our families”, are in no position to help. It is not clear how Bachmann thinks families could increase employment when nearly 10% of them are being undermined by unemployment. If Bachman believes that the American family is important, she should be (but is not) a champion of government programs that strengthen most of America’s families: progressive taxation, day care, health care, etc.
The misrepresentations packed into this short quote are unlikely to be the result of ignorance. At best, they are cynical propaganda. At worst they are the ravings of a crazed charlatan.
June 26, 2011
In the political propaganda wars, the Democratic Party coalition of white professionals, Blacks, Hispanics, and fading trade unions is badly outgunned by the Republican Party forces which include Corporate America, and the ignorant masses, especially those in the Bible belt. However, Niccolò Machiavelli made an observation about the deception of the masses that may offer the Democrats some hope.
Niccolò made his observation by way of an example concerning the republican period in ancient Rome. At this time there were two political factions: the nobles and the commons. At first the nobles dominated, but through a process of rabble rousing, struggle, and series of hard won reforms, the populous gained political power. In one such reform the commons gained the right to elect four tribunes to represent their interests in government affairs. However, having been excluded from government there were no qualified candidates among the commons themselves.
The people clearly believed and fought for the general idea that they were just as good as the nobles. We might expect that given the opportunity, they would have elected Tribunes from the commons, qualified or not.
In his Discourses on the First Decade of Titus Livius, Machiavelli tells us what actually happened on the occasion of the first election.
“When the four tribunes came to be chosen, the people, who had it in their power to choose all from the commons, chose all from the nobles. With respect to which election Titus Livius observes, that “the result showed that the people when declaring their honest judgment after controversy was over, were governed by a different spirit from that which had inspired them while contending for their liberties and for a share in public honors.” The reason for this I believe to be, that men deceive themselves more readily in generals than in particulars.”
CHAPTER XLVII – That though Men deceive themselves in Generalities, in Particulars they judge truly
In contemporary America, the public clearly believes the general tenants of the Republican Party platform. Americans accept the notion that the U.S. should swagger on the world stage, that free-loading minorities are ruining the country, that homosexuality and other forms of moral degeneracy are threatening our social cohesion, and that we must return to traditional values. You might think that in this environment the Tea Party’s message of rage and self righteousness, would propel it to victory across the board.
However when it comes to specifics, as it did in the special election in New York’s 26th district, people are not easily deceived. The voters (who have elected a Democrat only 3 times in the last 100 years) elected Democrat Kathy Hochul, 47 percent to her Republican opponent Jane Corwin’s 43 percent. Tea Party candidate, Jack Davis, got approximately 9 percent.
The Democratic Party won that election, not by battling the Republicans about generalities, but by making the election about something very specific, Social Security.
The same contrast between the public’s support for Republican generalities but Democratic specifics applies to several other important issues, such as health care and financial industry reform.
From the Republican perspective, the recent events in New York are more ominous still. On Friday (24 June 2011) New York’s Republican-controlled Senate passed a bill to recognize same-sex marriage on a 33-29 vote. According to the New York Times, Nation-wide 50% of the electorate supports gay marriage versus 34% who are opposed. Only two years ago, the numbers were 42% in favor versus 54% opposed. I believe that what accounts for the difference is that two years ago the issue was seen as an instance of a generality. People’s opinion reflected their general opinion about homosexuals. Now the issue is seen as a specific choice.
We can hope that the Democrats take a lesson from recent events in NY, position themselves as pragmatists, and fight their election battles on specific issues. If the Democrats fight on specifics, they will force both parties to craft proposals that are less extreme and we can hope, help form a practical political consensus.
June 19, 2011
Commentators tend to describe political confrontations (e.g. the upcoming fight in Congress over raising the debt ceiling) as negotiations among rational institutions (e.g., the Republican and Democratic Parties). The implication is that the parties will reach a rational agreement and in particular will not do something that his mutually self destructive. By this simplistic reasoning, Republicans and Democrats will reach a debt ceiling deal before the impasse causes real problems. Unfortunately, the lack of a deal and the specter of an American government that is irrational and self-destructive are already causing problems and are likely to cause more.
The rational-institutions model covers up an important complication. Institutions do not negotiate; only the people who lead those institutions negotiate. A negotiation cannot produce an agreement that is good for the institutions, unless that agreement is also good for the leaders.
As a description of the Republican and Democratic Parties, the rational-institutions model is particularly misleading because the American political process increasingly selects politicians that are not rational people, but are true believers. The selection process is particularly acute in primary elections where voter turnout is thin and dominated by the ideologically committed. To win in such an election a politician must be seen as an absolutely reliable advocate for whatever issues dominate the ideology. Ideological voters seek, not representatives who are smarter and wiser than themselves, but uncompromising zealots.
The political parties cannot act rationally unless their leaders are rational. Unfortunately, it is unlikely that an institution made up of zealots will select rational leaders. The leaders of both political parties (particularly the Republican Party) are not fully rational. They are not seeking the interests of their Party or even their own selfish interests. They are instead people who are animated by their faith in an ideal.
Niccolò Machiavelli’s friend Francesco Guicciardini put the issue nicely in the following quote.
“The pious say that faith can do great things, and as the gospel tells us, even move mountains. The reason is that faith breeds obstinacy. To have faith means simply to believe firmly – to deem almost a certainty – things that are not reasonable; or, if they are reasonable, to believe them more firmly than reason warrants. A man of faith is stubborn in his beliefs; he goes his way, undaunted and resolute, distaining hardships and danger, ready to suffer any extremity.”
Francesco Guicciardini, Maxims and Reflections (Ricordi), Pennsylvania Paperbacks edition 1972, p 39
On the rational-institutions view, Republicans and Democrats should nearly always reach a mutually beneficial compromise, and it should be very unlikely that they stubbornly set themselves on a course of action that is destructive to both parties. However, the abysmal approval ratings that American voters give the U.S. Congress suggest otherwise.
On the rational-institutions view, Republicans and Democrats will reach a compromise on a bill to extend the debt ceiling. They will not be so obstinate that they will extend negotiations so long that the uncertainty spooks the market and they will not attach to the bill austerity measures that are so severe that they choke off the economic recovery. Unfortunately, given the high numbers of true believers, obstinacy is exactly the outcome that we can expect.
U.S. banks believe that the actions of the Congress have already been self destructive. Because of the protracted negotiations over the debt ceiling, the banks are curtailing their use of U.S. Treasury bond. Banks use Treasury bonds as collateral for financial transactions because the bonds carry an excellent credit rating and they are so plentiful that they are easy to sell and thus make attractive collateral.
If banks believe that U.S. bonds are becoming unattractive as collateral, it is a safe bet that demand for U.S. government bonds will decrease and that interest rates will have to rise to spur demand. This will, of course, increase the cost of financing the debt and do measurable harm not only to both political parties, but to the U.S. economy.
June 12, 2011
The proverb “live by the sword, die by the sword” (based on Matthew 26:52) is supposed to remind us that the way you choose to live your life has certain inherent risks. In the unfortunate case of Rep. Anthony Weiner, D-NY, the proverb should read “live by the media, die by the media.
The story itself is the sort of tale the media loves: titillating, vacuous, and capable of filling endless air time with opinion and speculation. For that reason, the saga of Weiner’s electronic peccadillo is the sort of thing that I would normally choose to ignore. However, before his demise Weiner was a media darling and it is the role of the media in his rise and fall that gives the tale proverbial significance.
The story itself is unimportant, and media commentators have strained to find some significance in it that would justify the scope of their coverage. For example, manycommentators are calling the gossip about Weiner’s foolish conduct “Weinergate”, a reference to the Watergate scandal that brought down the Nixon administration. That label is typically over dramatic and thoughtless. Watergate had genuine political significance, involved dozens of conspirators that went to the very top of the government, and involved issues as profound as the continued operation of the Constitution of the United States. The Weiner story involves nothing more significant than one shallow, power hungry man, who made a foolish mistake that exposed him for what he is. Weiner was not a great legislator or political leader; he was simply a media savvy, political celebrity.
In early times, one gained political power by means of competitive achievements in fields (such as the military, business, or machine politics) that selected capable, if not necessarily, wise men. However, in modern day America, the arena in which people compete for political power is the media. Since the downfall of city political machines, the marginalizing of organized labor, and the rise of political action committees and PR firms, media attention (paid or unpaid) has become the primary means not only of winning an election, but of gaining the credibility to stand for public office. Form always mattered more that it should. Now form matters much more than substance.
For example, consider Sarah Palin, an undistinguished, half-term governor of an insignificant state. She has accomplishments in no area except in winning media attention. We are now in an era of government by media. Unfortunately, government by media attracts to politics increasing numbers of people who are not only power hungry, but shallow.
Weiner is a typical power hungry man. Like Rep. Christopher Lee (R-N.Y) who resigned in February over a similar indiscrete electronic flirtation, Weiner is not simply a bad apple. He is typical of people who go into politics, people driven primarily by their craving for status in the form of fame and power. Weiner was simply playing at being a congressman. Any arena of competition would have satisfied his power lust as well, but politics fell to hand.
I suspect that for Weiner and other such men, political convictions are a distant secondary consideration. Power hungry men want to put themselves at the head of some group (any group) of people. They automatically convince themselves that they truly believe the things that they want other people in that group to think they believe. Ambitious men like Weiner do not serve a cause; they simply attach themselves to a cause.
Of course, status seeking (even in the form of political ambition) is not a sin; it is a reproductive adaptation. Throughout human and primate evolution, high status males were probably better able to win more mates and leave more offspring than low status males. Consequently, we (males in particular) are descendant from those people who craved status most ravenously and got it most effectively. Being a reproductive adaptation, it makes sense that status seeking should co-vary with the other main reproductive adaptation, lust. Indeed we do find that high status males also tend to be the most lustful. The list of examples would have to start as early as King Solomon and will probably not end with Rep. Weiner. Far from being just a “bad apple”, the Congress is certainly full of such men.
Self selection practically guarantees that an exclusive club, like the U.S. Congress would be made up, not of idealistic do-gooders, but of status-hungry sex fiends. Unfortunately, with status comes pride. They think they are gods, omniscient and omnipotent. Worse still, law makers seem to have an understandable tendency to believe that they are beyond the law. These side effects make congressmen high handed and careless. It is not surprising that they tend to get caught.
What is surprising is the degree to which the main vehicle that these men ride to status is the media. Because of the weakening of the party system, political contests (particularly primary elections) become not ideological but personal. The Party cannot do much to help a congressman get re-elected. The best thing he can do is to be a celebrity in his own right. Only the media can give someone star power. Consequently, these congressmen are unusually shallow publicity seekers.
Weiner, like Palin, was a reliable entertainment-news resource. He was flamboyant, solicitous of media attention, and helped journalists supply their media bosses with much needed entertaining broadcast minutes. In short, at the height of his powers, Weiner was always a good story. Unfortunately, that made his demise an even better story. “Live by the media, die by the media” should be a warning, not only to other politicians, but to anyone interested in the quality of our legislators, and perhaps to the media itself.
June 4, 2011
Politicians and the media are all abuzz about the U.S. debt “crisis.” That debt is roughly equal to the nation’s annual GDP. So what?
The annual GDP (Gross Domestic Product) is (roughly speaking) all the money that residents of the U.S. make (and either spend or save) in a year. It is analogous a family’s annual income. A family with an annual income of 50,000 per year and a $110,000 mortgage for its house is in much worse shape. Yet, by conventional wisdom, assuming that the house is worth the investment, the family has made a sound economic decision.
Is America’s national debt really a crisis?
Niccolò Machiavelli’s friend Francesco Guicciardini would answer as follows.
“Wise economy consists not so much in avoiding spending – for that is often necessary – as in knowing how to spend well; that is to spend a grosso, and get twenty-four quattrini’s worth.” [One grosso is twelve quattrini].
Francesco Guicciardini, Maxims and Reflections (Ricordi), Pennsylvania Paperbacks edition 1972, p 56.
By Guicciardini’s criterion America’s debt is worrying only because so little of it is a good investment. Roughly 20% of government spending ($687,105,000,000) goes to the military. That is 6 times the amount of the next most well defended nation, the Peoples Republic of China. Defense spending is essentially a subsidy for business. It produces profit for defense related industries and contractors, but produces no value for the country. Sadly, cuts in defense spending are off the table.
The only government spending of which Guicciardini would approve are projects that improve the nation’s infrastructure, its resources, or its people. These would be programs for roads, communications, conservation, education, and health care. These, however, are exactly the programs that both sides (and especially the Republican’s) propose to cut.
Social Security and Medicare do not really figure into the question of the quality of the government’s spending as an investment. These programs are basically mandatory, non-profit financial services that the government provides for its citizens. If they were privatized, they could not be more efficient. Privatization would replace the government’s single, integrated system with many private systems, which would produce diseconomies of scale. Furthermore, each private provider would have to generate a profit for shareholders and pay high salaries to its executives.
The idea that private industry could, in spite of these added expenses, provide the same service at the same cost to the citizens is fanciful. That would be possible only if the privatized firms were miraculously efficient. My experience is that private bureaucracies are not more efficient than public bureaucracies, they are just more expensive. The recent financial meltdown and great recession underscore the additional point that private firms are also more risky. All that privatization will do with certainty is to create another subsidy for the financial services industry.
A true believer in the divinity of the Free Market might argue that the government, as well as a private business can go broke. That is true but if the provider of your private retirement plan goes bankrupt, the courts will decide who and how much creditors are paid. You will be powerless. If the government becomes insolvent, at least you will get a vote in how the problem is resolved.
To be sure, the Social Security and Medicare programs are becoming insolvent, because people are living much longer beyond retirement. There are fewer person years of employment that can be taxed to pay for more person years of retirement and health care. This imbalance means that to maintain the current quality of service, we will have to increase payroll taxes, increase the retirement age, or both.
The imbalance is a problem for politicians, not for the country. Politicians want to increase services without raising taxes. When costs are rising faster than revenues, each side wants to serve its constituency, at the expense of the constituency of the other party.
Furthermore, in America every political issue sooner or later has something to do with race. The Republican Party depends on lower-middle-class, white, southern, voters; many of whom feel that their taxes are subsidizing lazy, morally degenerate Blacks and Hispanics. The Democratic Party depends on Blacks and Hispanic voters; many of whom feel that their labor is subsidizing lazy, morally degenerate old white people who control the economy. Republicans and Democrats pander to their supporter’s prejudices. Republicans want to exploit the Social Security/Medicare funding imbalance to create an artificial crisis, in the heat of which they will be able to dismantle these “subsidy” programs. The Democrats want to exploit the “crisis” to provide political cover for the necessity of raising payroll taxes or increasing the retirement age.
Underfunding Social Security and Medicare and the resulting political squabbles are a problem, but not a financial crisis. Farsighted leaders would have addressed the funding imbalance years ago (when it was a minor problem) by small, incremental adjustments that pegged the retirement age to life expectancy. However, foresight is not a virtue of the democratic process. A democracy can deal with problems only when they have become serious and well known. The challenge now is not to overreact.