Guest Post: A Market-based Solution for Pork
[Note: The opinions expressed below, as well as the title of the post, belong to Fletcher (bio here), and no one else. They do not necessarily represent the opinions of myself, the LDS Church, or this guy. I do not edit guest posts; as such, any grammatical, logical, or factual mistakes that may exist are entirely Fletcher's fault, and frankly, I'm astonished that he didn't catch them.]
by Fletcher
Though I am an Economist, I am not of the class of Scott or MM (a frequent commenter) for that matter. To steal a sentiment form John the Baptist, “I am not worthy to do the latch of MM’s sandals.” My expertise lie in the analysis of data, so take this with a grain of salt. Also, this post does not seek to find the intersection of libertarianism, economics and Mormonism. This is purely an economics post, though if you can find some intersection with the other two, go for it.
President Barack Obama recently lauded the fact that the recently passed “stimulus” bill contained no earmarks. Needless to say, I was a little shocked. I was pretty certain there were spending sections in there that had nothing to do with Keynesian stimulus principles. But, this post is not about the spending bill. But, it has everything to do with budgeting and allocation of spending priorities.
Now, I am no insider to the government spending process, but it seems pretty clear that, when politicians X, Y, and Z want to pass a certain law, but need W’s support to do so, X,Y, and Z will add some juiciness to the bill for W’s constituents. This allows W to go back to his district/state and say, “I was able to do (insert juiciness here) for you, so you should re-elect me.” Then, later on, it’s not too unreasonable to assume that W will later throw a bone to X, Y, and Z when W needs reciprocated support. This is a game to them, and that’s fine. The only problem with this game is that the rules are not clearly defined. If they were, then I think the average American would be more accepting of $700 Billion spent here, or another $400 Billion spent over there, or the $1.7 Trillion just over the horizon. So, here are my proposed rules.
Let there be a number on which all budgeting is based. This number is a spending per capita figure. Now, assume that this number is exogenously determined (much like population statistics). Let us also assume, and this is a tough pill to swallow, that there is a balanced budget requirement, such that the spending per capita value, multiplied by the population equals all tax revenue. Given these assumptions, there is a total budgeted amount of money that the government has to spend.
Now, let us assume that the nationally agreed upon public goods are taken care of (national defense, highways, lighthouses, and all that). The remainder of the budget is then divided amongst all the Representatives.*** Now comes the game. Representatives who have serious spending agendas (spending above and beyond the allocation) will have to convince other representatives that their spending projects are of a national priority and ask them (and their allocation) to jump on board. You’re probably asking, “How is this different from the game X, Y, and Z are playing with W?” X, Y, and Z now have to convince W to not only hand over his/her vote, but his/her cash too. That, my friends, is the kicker. In the first game, X, Y, and Z were paying W in exchange for a vote. Now, that dynamic of the game is gone. It is replaced with a consensus of the merit of the project that is under consideration. More importantly, the amount of money that can be spent on this class of projects is fixed.
Just think of this as a form of political cap and trade. What’s good for the goose is good for the gander.
*** For this exercise, we have to take the Senate out of the spending process. Since each state has the same number of Senators regardless of population, it would be fruitless to try and give them some sort of population based allocation. Let’s say for now that Congress has power to decide spending, which needs to be ratified by the Senate. Assume also that the Senate has clearly defined criteria for ratification of the spending (meaning that if the Representatives followed all the rules in deciding the spending, the Senate could not reject the bill).
Very interesting policy. I would love to see this put in place, but Bernanke said this morning that the recession should end in ‘09.
Whew! Boy, am I relieved. Thanks Bernanke! I mean, even though he has been a terrible prognosticator, he’s going to get one right eventually, right? He is due and I’m feeling lucky.
Anonymous
03/16/2009 at 4:48 pm
“He is due and I’m feeling lucky.”
Don’t hold your breath!~
cw
03/16/2009 at 6:43 pm
…politicians X, Y, and Z want to pass a certain law, but need W’s support to do so…
I think it’s fair to say that, after 8 years, W’s coattails have dissolved into utter nothingness. But for the sake of argument, I will continue reading…
Now, lets assume that the nationally agreed upon public goods are taken care of (national defense, highways, lighthouses, and all that).
Wouldn’t we first have assume that such things are agreed upon (i.e., that they merit any consideration, as well the size of said consideration) before assuming that they’re taken care of budget-wise? This is a big assumption for me, at least.
Is a per capita allocation really fair? Wouldn’t you need a GDP-based per capita allocation? Certain regions produce far more than others, and dividing up the tax revenue simply based on bodies seems unfair to ultra-productive Idahoans like myself (even if we do live in SoCal now).
Most importantly, how could you get the House–who would be subject to this game–to impose this very restrictive and inconvenient mandate on themselves?
Scott
03/16/2009 at 6:54 pm
Fletcher,
I’m not sure what to make of this yet because I’m still a little confused about the structure of the game. I fear I am missing something that others aren’t. I need additional info…
1. Is this a non-cooperative game where we are looking for a Nash Eqbm budget allocation? If so, what exactly are the payoff functions for the politicians? Is there a mechanism for proposals to be made?
2. Or is this a coalitional game and we should be thinking about existence of a core?
Mike
03/16/2009 at 8:58 pm
On a related note, is your first name Irwin? As far as you know?
Mike
03/16/2009 at 9:03 pm
cw-
I knew I should have ended my comment with:
“*sarcasm”
Scott-
Fletcher’s idea is interesting and is worthy of discussion. The practicalities on the other hand…
Also, I was assuming that “W” was not GWB, but some random politician. A clarification perhaps Fletcher?
Anonymous
03/16/2009 at 9:38 pm
I am certain “W” was not intended to be GWB, but only (the oddly absent) Fletcher could say for sure. One of these days I will learn to stop making jokes when I have no clue as to what is funny.
Scott
03/17/2009 at 12:40 am
Fletcher,
Thank you for your post. I hope you will add a comment to my guest post as well. Here are a couple of my reactions to your post:
This is a game to them, and thats fine. The only problem with this game is that the rules are not clearly defined.
Actually, the rules are very simple and very clearly defined: majority rules. Period.
It is the strategy that is not clearly defined, and this is a good thing. Strategy is privileged information, a costly good for which the People (through their lobbyists) pay dearly.
Finding out what X and Y want, and what Z and W are willing to give up, is the very reason we have elected leaders. Otherwise, we could have popular referenda on every question, with the result that (lobbying being impractically expensive) the majority would always prevail and the minority would have no chance.
It is widely claimed that Hamilton advocated a representative democracy, ostensibly fearing “mob rule”, whereas Jefferson favored direct democracy. In practice, the real division was over the ability of the elites to exert disproportionate power over politicians, with Jefferson even spearheading a national movement to relocate state capitals to the geographic center of the states, away from the commercial hubs (typically on the coasts or boundary rivers), to thwart this “corruptibility”.
Jefferson was morally wrong to embrace this while simultaneously acceding to a non-parliamentary system. Lobbyists are the only thing that make a majoritarian system ethical.
The Supreme Court has recognized this and repeatedly ruled that the Rational Basis test permits, even as the sole reason, raw political horsetrading. When they review a law singling out coal mining at a particular elevation for preferred treatment (and understanding the net result to favor a specific corporation), the Court accepts the rationality on its face without second-guessing the Congress, assuming (rightly) that this was payoff for e.g. defense of Israel.
Viewed in this light, the people have no right to sit at the table of your “game”. You must “pay to play” by lobbying your Representative (in person or through hired proxies), and you must especially pay to purchase the costly information on how to do this effectively.
Whether or not there is public buy-in is irrelevant to our system. There need be only 51% buy-in of 51% of the Representatives. A model that does not capture the cost of information will fail to capture the non-trivial and surprisingly fair result of our political economy.
Just think of this as a form of political cap and trade. What’s good for the goose is good for the gander.
I hope my above argument explains why I think “cap and trade” is the wrong metaphor. Pollution controls can be public and transparent because it is effectively a zero-sum game (there is a fixed amount of air to pollute) with indifferent participants (relatively straight indifference curves and a long cause/effect time lag relative to time constant of information propagation) in equibrium with a large reservoir (of unpolluted air with marginal levels of pollution). With pollution, the Nash equilibrium is robust against change by any one participant.
None of these three apply to the Federal budget. The marginal utility of each participant varies wildly (we are a nation of single-issue voters), wealth can be easily destroyed with bad macroeconomic policies, politicians (via their voters) have cost functions not fully captured by GDP (gross district product of that Representative), and secrecy is a highly fungible asset because of voter apathy. The net result is a web of conspiracies among Representatives that would collapse if exposed to the light of day. That is why there is no public market: votes are up-or-down, with no line-item veto, and keeping secret the voting strategy. The Nash equilibrium is highly sensitive to the decisions of each participant and cannot be separated into various player-vs-reservoir quotient games.
My parting observation is that economics is inseparable from politics, with votes the common currency (the “money” supply not being of course inflationary, but backed up by a “gold reserve” of sorts, i.e. the number of issues voters care about, so that paradoxically artificially-generated crises such as terrorism , far from being a sign of inflation, are one mechanism to increase “productivity”…I’m thinking this analogy needs a blog of its own!)
Anyway, it is difficult to monetize political priorities, given that the strategy for doing so is a trade secret of each politician, and so I am skeptical about the value of applying game theory to an economic model involving players who behave in “seemingly irrational” ways (i.e. very rational but econometrically challenging). Ironically, it is the crooks of Wall Street that best fit your model, not the model citizens in my home town.
Dan Weston
03/17/2009 at 2:38 am
Wow. I didn’t think I would elicit any response. Now the real question is, should I stop typing here and only imply that I am over my head, or type on and remove all doubt.
Recall that I said, “My expertise lie in the analysis of data, so take this with a grain of salt.”
Also, I am in a suburb of Milwaukee right now and am a little frazzled after a long day of job stuff.
@MM
“I’m not sure what to make of this yet because I’m still a little confused about the structure of the game.”
This is why I am not a game theorist. I have no idea what the analytical structure would be. I guess this would be more of an experiment where, if you could cap the total allocation of discretionary budget (or total pork fund), then let them hash out what they want. What structure would you propose?
And no, my first name is “fletcher”.
@ Dan
You raise some interesting points; points to which I have no immediate response.
I will say that the cap and trade analogy can fit. The reason I believe this to be true is for the following:
Yes, the pollution controls can be transparent and open to the public. But what about the cap? How is the total carbon allotment determined? The cap is not very transparent, and has endogenous political weight behind it. But once that cap is determined (and the initial allocation which follows), then the market functions well.
Why can’t there be a determined cap on discretionary spending? In all that you argued (maybe I missed it), I didn’t see one argument as to why there couldn’t be a cap in the first place. It may be true that the strategy is proprietary and all that, but I don’t see any reason why it can’t be capped. Let them keep their strategy. I just want them to adapt their strategies to a hard constraint, instead of a soft one. I would venture to guess that, with a cap in place, the political process would become more transparent.
Now, you can argue whether or not it should be transparent. That is a topic for another debate. But, from an administrator who advocates increased transparency, this would be an efficient way to achieve it.
@ All
remember, grain of salt. If you want to talk about strong distributional assumptions, i’m all ears.
fletcher
03/17/2009 at 4:10 am
@ Fletcher
Of course you elicit a response … only my posts about Bill Simmons or V-8 avoid such scrutiny.
I’ll get to the rest in the morning…bed time.
Scott
03/17/2009 at 4:17 am
Fletcher,
Let me sneak in here while Scott gets his 40 winks.
Thank you for replying. Your “grain of salt” has seasoned my palate, so thank you for the discussion. Your modesty is of course misplaced: arguing from authority is (as you no doubt know) a logical fallacy, and it is your arguments that matter, not your expertise, so surely no apology is needed before advancing a well-reasoned argument. I certainly will not be apologizing for my ignorance below.
one argument as to why there couldn’t be a cap in the first place
Yes, I am sorry I failed to address this point. Let me answer by way of digression…
Why do we have a deficit at all? States are not permitted to print money, and so their ability to borrow is all the more important. Yet in California, we are reduced to wildly oscillating budgetary swings which are destabilizing and suboptimal because we (through our Constitution)do not permit ourselves to burden our children with debt and must live with a balanced yearly budget. Actually, this is an economically irrational choice, isn’t it? If we were rational, we would run up their credit card as far as creditors would allow, and our children would do the same to theirs.
But we love our children. And love, family duty, political philosophies, all must be factored into any economic model where people seem otherwise to act against their own self interest. Why does my 65-year-old Republican neighbor rage against George W. Bush’s Prescription Drug Plan (when he can only benefit)? Why do I care whether gays in California can marry, so long as I am grandfathered in? Why do rich people cram themselves into a Prius and demand pollution controls? Why should we want to cap a problem that started in the late 1700s and will continue unabated at least two centuries regardless of our actions?
I hope I have illustrated (however anecdotally) my belief that the urge to cap emissions, or our Federal budget, much less the National Debt, is almost completely divorced from our individual self-interest (by “our” I mean those who vote, the median age of which is old enough not to care, in contrast to younger people who should care more yet do not vote). And being so divorced, it is unlikely that we are acting out of economic interest (or that we even understand ourselves why we are so reacting).
It is my reckless speculation that sometimes ostensibly economic matters are essentially political ones, and solutions to those problems that intend to be effective must also be essentially political ones (though by all means dress them up in economic camouflage, if that will help build consensus, or adduce some light to our current darkness). One topical example is the possibility that an economic bailout (of AIG) of billions of dollars (however wise or foolish) has been put at risk because of public backlash over ill-timed bonuses amounting to mere millions of dollars. On a microeconomic level this would be madness: me doing without my morning Starbucks out of spite because they raised the price 1 cent. On a micropolitical level, this makes perfect sense: justice must be served, whatever the cost to those dispensing it.
I would venture to guess that, with a cap in place, the political process would become more transparent…this would be an efficient way to achieve it.
So, to directly address your points at last: there indeed can be a cap, but its imposition is a political statement, and its amount more a matter of self-expression rather than self-restraint. How shall we distribute the burden vertically, horizontally, and temporally? Shall we seek to minimize the total loss, or prefer to express our values even at the risk of further damage? Shall we reduce class tensions or pander to subgroups? In these questions it is the economist who advises, but the politician who consents. I expect (and fear) that this consent will proceed from less dispassionate advice.
And if efficiency is the goal, then I would venture to guess that transparency will not be the best means to achieve it.
Dan Weston
03/17/2009 at 7:04 am
@ Dan
(waving white flag, like a good frenchman should)
I think I have removed all doubt that I am in over my head.
Like Scott said in his comment, the biggest and hardest to swallow assumption I make is that public goods are provided for and there is a clear consensus (I would prefer a borda count) as to when the provision of public goods has satiated public demand and the cost has not exceeded the total budget.
What is left over, is what the government gets to distribute to pet projects.
Your arguments about the rationality of debt are valid. So I won’t say anymore about that.
I think that the only way the my model works is if definitions of “pork” vs. “non-pork” spending are clear. I am assuming they are and you are (rightly) showing that it’s not clear. If they aren’t clear, then my game falls apart.
So, in closing, this idea came as a result of constantly hearing that earmark spending or pork spending needs to be reigned in. Nice political sound bites aside, this would be one way to do it.
fletcher
03/17/2009 at 12:20 pm
( @ Dan: Fletcher did leave a comment on your post, albeit a [very] short one…which was repeated by a couple of others!)
I think this exercise has down an excellent job of showing how difficult political institutions can be to analyze, and why amazing solutions to big problems are few and far between. Politicians have a very clear incentive (re-election), but the paths to achieving this goal are diverse, and modeling the choices and likely outcomes of bargaining games with such imperfect information is a mess.
I personally find the public finance theories to be very compelling and useful as a framework for thinking about these issues, but they, too, have their limitations. In particular, public finance is a fantastic tool for understanding what WON’T work, but it doesn’t (in my experience) offer much in the way of solutions. Moreover, I am an economist and confess that there is no small bias toward a theory of government that is rooted in economic decision making.
Scott
03/17/2009 at 3:44 pm