Archive for May, 2012

Now the U.S. presidential race begins

May 30, 2012

The Republican primary in Texas has confirmed Mitt Romney as the GOP presidential candidate for the 2012 election. At present, there is no significant independent candidate in the field. So the race for the White House pits the incumbent, Barack Obama against the challenger, Mitt Romney.  According to the polling data, the race starts approximately even. The usual incumbent advantage at this stage in the competition has been eroded by the slow economic recovery and by the complete failure of the President to present the electorate with any kind of manifesto for his next four years in office.

Neither candidate has outlined a realistic economic manifesto, though clearly Romney’s agenda is tilted more to economic efficiency and Obama’s is tilted more to some undefined notion of fairness. It is to be hoped – though hardly to be expected – that media pressure will force more details out of both candidates as the competition progresses. At this stage, voters are well-advised to be wary. When candidates waffle, either their minds are vacuums, or their purposes are devious.

In terms of valence characteristics, the candidates are evenly matched. They are approximately the same height. They both sport full heads of hair. They are both slim. They are both physically fit. They are both wealthy (Romney significantly more so at this stage than Obama). They are both well-educated.  They both appear to be monogamous and good family men. Both their wives are home-makers. One candidate is white, the other half white. That will most likely make a difference, but who can tell at this stage, in which direction.

Let us pray that the candidates are pinned down on salience, so that informed voters can identify policy commitments. The rationally ignorant voters will focus on valence in any event, which is a major reason why the candidates are inclined to obfuscate and lie about their true intentions.

So start your engines!  And may the better man win!

Voter vulnerabilities: rational ignorance

May 29, 2012

Political systems characterized by large electorates suffer from a major systemic weakness. Whatever the vote rule – from pluraility to proportional representation – individual voters do not count in national elections. They do not count because there are so many of them. For example, the probabability of an individual voter determining the outcome of a U.S. presidential election is less than one in a million.  With such a low probability, even if voters go to the polls – as roughly half of them do in presidential elections – they have little or no investment incentive to become informed about the policies of the competing candidates.

The net return to voting is given by the relationship:

R = PB-C

where R is the net return, positive or negative, B is the differential present value of the  benefit to an individual voter if his preferred candidate wins, P is the probability that the individual’s vote is decisive, and C is the cost of voting.

For most voters PB turns out to be less than a red cent. C is significantly higher. So R typically is less than zero.

So if individuals turn out to vote, they typically do so not for investment but for consumption purposes, including the value placed on democracy. Let us add that term to the relationship:


As long as D>C, rational voters will go to the polling booths. However, they rationally will not do so well-informed about the candidates’ policy manifestos. Gathering information is costly and , given the indecisiveness of the individual vote, there is no net gain to being well-informed. This explains why many voters remain rationally ignorant about policy manifestos.  They vote blind on the issues.

So what then drives the vote?  According to one theory, valence factors, especially in presidential elections. By valence, one means the apparent physical and other personal characteristics of the competing candidates. Typically, this resuts in the following dominations:

tall beats short

 physical fitness beat  unfitness

slim beats obese

attractive beats ugly

hair beats baldness

cowboys beat indians

smooth talk beats honesty

brains are often a serious handicap

votes can be bought and sold

Well, you get the general picture. In  modern media dominated elections, Winston Churchill could not have won an election, neither could FDR. Chris Christie could not run. Warren Beatty and George Clooney have seriously considered throwing their hats in the ring.  God help us, they might well win if they did so. Maybe in 2016,  Britney Spears  may occupy the White House with Paris Hilton as Vice-President.

The vote motive is the fulcrum of democracy. Some fulcrum, one may legitimately conjecture!  Of course, not everyone is rationally ignorant. Watch out for the special interests. There is no vacuum in the political market-place. So you do not need me to tell you what really happens.



Exploiting voters (1): ignorance

May 28, 2012

In a recent column, I asked the question: why is lying an essential ingredient for success at the polls?  Let me open the discussion with a true American scenario.

In the 1960 presidential election campaign, the Democratic Presidential candidate, John F Kennedy assigned to his Vice Presidential running-mate, Lyndon Baines Johnson the task of securing the South.  Johnson, by all accounts ran a splendid campaign. He rode a two locomotive railroad train (The LBJ Express) on an extended journey across the South, stopping at town after town. As the train approached a chosen stop, the melody of  ‘The Yellow Rose of Texas’ would be relayed from the LBJ Express, rising to a crescendo as the train steamed to a halt. Johnson would then bellow out the words: ‘What has Dick Nixon ever done fer yew?  The train would then exit with The Yellow Rose at full volume. A mile or so down the track, Johnson would bellow out: ‘Turn awf that Yeller Rose! Turn awf that fuckin’ Yeller Rose!’ The votes that Johnson raised by this train journey turned the election in favor of ‘Little Johnnie’ as the 6 foot four inches tall  LBJ , wearing cowboy boots and a ten gallon Stetson, contemptuously referred to the physically emaciated and (by his standards)  vertically-challenged JFK  in private.

So what does this tell us about the LBJ campaign:

 Potential voters congregating at the train stops were not there for detailed political speechifying. They wanted to hear ‘The Yellow Rose because it was a Texas song. They wanted to see LBJ, as an archtypical Texas cowboy, and relish the Magnolia in his southern drawl. They were not averse to hearing some salty language. And they were not aware that LBJ, as a powerful Senate Majority Leader, had moved the first successful civil rights bill in a century into U.S. federal law as the price, to the northern liberal Democrats,  for being a contender for the Democratic Presidential candidacy (which he had just lost to JFK). They recognized (for the most part anyway) the name of the Republican Vice President under Eisenhower, and now Republican candidate for the Presidency (Richard Milhouse Nixon) and probably knew nothing whatsoever about him other, perhaps, than his September 1952 Checkers speech (where he had saved his Vice Presidency by a sob-tale about his pet cocker spaniel).

That, you might say, is not much information on which to base one’s vote for the Presidency. Why would that suffice for the large congregations that took out time to meet the LBJ  Express?  I shall address that question in tomorrow’s column.

Eating out is not all about the food

May 27, 2012

Tyler Cowen, an economics professor at George Mason University, has become a food celebrity across the nation. Today he is featured in the Business Section of The Washington Post offering insights into where and what to eat in the nation’s capital. He brings a lot of useful insights to his columns, as well he might, given his vast knowledge of food and his mastery of the basic principles of economics.

In Professor Cowen’s judgment, eaters-out should patrol the restaurants around them with eyes and taste buds searching incessantly for new ventures, new culinary experiences, and the highest-quality food and service. The moment that a restaurant slips, run for the exit and never, ever return. Always assume that a new restaurant, if initially successful, will slip and falter as complacency sets in. Never enter a restaurant frequented by good-looking single women. That restaurant is a magnet for predatory males who view the location as a pick-up center and could not care less about the quality of the food.

What is missing from all this first-rate analysis?  Any comprehension that eating establishments are communitarian locations. Individuals and couples – couples are not center-stage in Professor Cowen’s analysis  –  are rarely food predators in the sense that he defines them. They eat out to meet friends or to be together in a comfortable environment. They relish the welcome that they receive from a friendly host for his long-time customers.  The restaurant or bar is a place where they feel comfortable and welcomed, even if the food is not at the cutting-edge of cuisine innovation.

Why do I write this column about food, a subject peripheral to my academic interest?  Because the economics that drives Professor Cowen’s analysis is the same economics that sadly alienates many potential readers from an important source of knowledge and information. Of course, economics should focus on individuals as the active principals and agents in a market economy. We have known that since 1776 when Adam Smith published The Wealth of Nations.  But individuals live in communities, they interect with each other, they trade with each other, yes, on the basis of self-interest, yet also within an environment of trust and sociability.

Leave those elements out, and you present at best only half the story. Surely, you explain why some gourmets drive around the suburbs looking for unknown restaurants in faceless strip malls serving food that they have never before ingested. Surely you understand why single diners move restlessly from restaurant to restaurant, watchful for any sign of slippage while ordering meals recommended by their waiters  from menus written in languages that they cannot read.

But such analysis cannot explain why so many happy families crowd in day after day to the Old Country Buffets, to enjoy themselves in comfortable locations, surrounded by other happy families, and welcomed by  waiters who recognize them and who pat them on the back as they comment favorably on a new dress , a change of hair style or the fact that the husband has chosen to wear an attractive tie.

Professor Cowen will be aware, as a food maven, that many more people eat out in the long-surviving Country Buffets of this world than in briefly rising DC crescents such as Little Serow, Rasika, and Mintwood Place. If economics is to provide an in depth understanding of the behavior of individuals in their daily lives, it should not focus excessively on the narrowly individualistic traits of the few, at the cost of ignoring the more sociable traits of the many. For it is the many that typically drive market outcomes.

MacDonalds is much more important as an insight into American cuisine  than is  Keren at Florida Avenue and 18th Street, Washington, DC, an Eritrean restaurant  currently under new management. If one forgets that reality, then one can really get lost in the ether when writing about market economies.

The phrase ‘a truth-speaking politician’ is an oxymoron. Why?

May 26, 2012

Successful politicians, it seems, almost always lie to the electorate whose votes they seek. They almost always tell the voters what is is they want to hear, not what they intend to deliver. They tell different voter groups different tales, according to the known profiles of those groups. They lie seemingly without conscience. They change direction once in office without remorse or explanation. I speak here of those who are successful. So, if my hypothesis is correct, lying is an essential ingredient of political success.

In other areas of life and endeavor, such is much more rarely the case. Surely it is true for successful gigolos, who lie to women successfully to dispossess them of their virtue and of their assets. But gigolos are utterly despised by the large majority of women whose common-sense overcomes their superficial sensibilities. In the big picture of human relationships, gigolos do not dominate.

It is true of snake-oil salesmen who dispossess households of their savings by racking up lies about the properties of the commodities in which they deal. Once again, however,  successful snake-oil salesmen constitute a tiny minority of the  overall market-place. They survive by being fleet of foot, moving from community to community fractionally ahead of dawning realizations about what kinds of lying rogues they truly are.

It is true of a minority of religious frauds – the Elmer Gantry’s of that market-place. Once again, however, the large majority of those who market religion are hard-working true believers who honestly sell an albeit irrational product to those who search for such irrationality.

Successful politicians, however, are fundamentally different.  They lie without shame and win election after election on a continuing flood of such lies. Seemingly unfazed voters swallow lie after lie, bewitched by their honeyed words, their tanned faces, their false smiles, their rolled-up sleeves, and their ever -outstretched hands. In the United States, incumbent success rates rival those of the old USSR.

So what is the matter with voters folks?  That is the question that I pose today. That is the question that I shall attempt to answer in forthcoming columns. Does something bad happen to the brains of an individual when he moves from the private market-place to the public arena. Is stupidity a function of in which market-place one  stands, rather than of who one is?

Your views and comments on this issue are really welcome. For we are confronting a problem of immense significance in attempting to understand the seemingly bizarre behavior of otherwise sensible individuals when they congregate in  the public square to imbibe the words of false prophets.

The public choice case against the euro bond

May 25, 2012

European stock markets have been falling recently over fears of a Greek exit from the euro zone.  Yet Germany’s borrowing costs inexorably decline.  This week Berlin sold two year bonds that pay no interest. Compare that to Italy’s two-years yielding 3.5 per cent, Spain’s 4 per cent and Portugal’s 9 per cent.  So, it is not surprising that the idea of issuing eurobonds is currently topical within the euro zone (Germany excepted):

The argument is this: While some euro-zone countries have huge fiscal problems that have strained their borrowing costs, the picture for the euro zone in aggregate is much better.  The euro zone’s total budget deficit was 4.1% of GDP in 2011, while total government debt equaled 87.2% of GDP.  If the euro zone were a country, those numbers would compare favorably to the U.S., where the deficit was 8.7%  of GDP last year and total debt has already hit 100% of GDP.  Yet the U.S. can still borrow at rates much closer to Germany’s than to Italy’s.  So the idea is to pool the borrowing, lower the rates, and everyone comes out a winner.” Editorial, ‘Deus ex Eurobonds’, The Wall Street Journal, May 25, 2012

In truth, the euro bonds idea is a singularly bad one and every country in the euro zone would not emerge a winner from such an innovation. Germany would be a sure loser.

When the U.S. Congress narrowly approved Alexander Hamilton’s 1790 proposal for the federal government to assume the war debts of the original 13 colonies, the commitment extended only to the legacy war debts, run up arguably in the interest of the country as a whole. Individual states were held fully responsible for all future debts.  In consequence some states went on to over-borrow and fell into bankruptcy. Fiscal discipline still lies with each state in the union.

In contrast, euro bonds would extend to the future debts of each euro zone country. The legacy debts have been run up, not for the benefit of the euro zone as a whole, but to pander to the profligate electorates of each member country.  Undoubtedly, the introduction of euro bonds would weaken the incentives of politicians and electorates in individual euro zone countries to balance their fiscal budgets.  Angela Merkel justifiably will be voted out of office should she burden German taxpayers with the costs of high-rolling among the PIIGS.

In other words, it’s at least as likely that a debt union would drag Germany’s borrowing costs up as it would bring Italy’s down – a possibility of which the Germans are acutely aware.  Investors lend to governments because that’s where the money is, to borrow a phrase.  A debt union without a central fisc is another euro-mirage.” Editorial, ‘Deus ex Eurobonds’, ibid.

Secret Service Director, Mark Sullivan, lies under oath

May 24, 2012

If Mark Sullivan was an honorable man, he would have resigned immediately following the disgraceful sexual misbehavior of  twelve Secret Service agents in Columbia in April 2012. If Mark Sullivan was an effective director of the Secret Service, the sexual license in Columbia would not have occurred. Unfortunately, if Mark Sullivan were honorable and effective he would never have been appointed to the directorship of a deeply corrupt agency of the United States Government. 

Circuses require ringmasters.  Mark Sullivan is Director of the Secret Service because he is a popular ringmaster, bonded deeply into the culture of sexual promiscuity promoted within the agency. “Wheels up and rings off” is the motto that vaulted Mark Sullivan into the directorship of a Secret Service sexual circus run entirely off taxpayer dollars.

If Mark Sullivan was an honest man, he would have acknowledged the widespread cultural depravity of his agency yesterday before the Senate Homeland Security and Governmental Affairs Committee. Instead, he chose to perjure himself under oath in order to insulate his debauched colleagues while protecting his own well-padded government paycheck. Fortunately, his blatant lies fell largely on skeptical Senatorial ears.

“Over the last six years, we’ve done 37,000 trips around the world, and we’ve had no situation like this one before.”  (Mark Sullivan)

“These individuals did some really dumb things.  I’m hoping I can convince you that it isn’t a cultural issue.” (Mark Sullivan)

“It is hard for many people to believe that on one night in April 2012 in Columbia, 12 Secret Service agents there to protect the president suddenly and simultaneously did something other agents had never done before.”  (Senator Joe Lieberman, Connecticut, Independent)

“I’m a little bit confused as to why we would be sending a $150,000 person, another person, to basically babysit people that you say this hasn’t happened to before.”  (Senator Scott B. Brown, Massachusetts, Republican) 

“This isn’t Animal House.  The mission of the Secret Service is too important to the nation for its agents to engage in risky behavior.” Senator Joe Lieberman, Connecticut, Independent)

“If we ignore or downplay what happened here, it can be like cancer.”  (Senator Susan Collins, Maine, Republican)

“If Sullivan doesn’t change his tune, it won’t be long before his superiors conclude that he is the disease.”  Dana Milbank, Cirque du So Lame, The Washington Post, May 24, 2012

Eagles are worth more than owls in euroland

May 23, 2012

Gresham’s Law – bad money drives out good – dates from an era of metallic currency. Debased coins circulated while genuine coins were hoarded.  Gresham’s Law now applies to a single currency – the euro – where some euros are deemed to be more valuable than others.

“When countries joined the single currency, a relatively simple piece of legislation converted contracts into euros at a prescribed exchange rate.  But you cannot simply reverse that process when countries leave the single currency.  You have to prescribe which contracts are now to be fulfilled in drachmas and which remain in euros, or converted into Deutschmarks.  That determination is politically fraught, technically complex and subject to long legal challenges.” John Kay, ‘All euros are equal but some are more equal than others’, Financial Times, May 23, 2012

The issue is not whether the euro coins in one’s pocket carry an Athenian owl or a German eagle.  The issue goes to bank deposits and loans, residential mortgages and commercial contracts, as well as to wages and prices.  The drain of funds from Greek banks is an indication that ordinary people are now thinking in these terms. Instinctively, they understand the nature of Gresham’s Law.

Awaredness of Gresham’a Law is why a Greek exit from the eurozone presents an existential threat to the zone itself.  Once a path to exit has been defined, households and businessness will have a template for understanding the consequences of any further unwinding: cheap money always drives out dear money, if they exchange for the same price.

In the current eurozone context, German and Finnish euros are worth more than Greek, Spanish, Irish, Portuguese and Italian euros. For the former carry only upside risk whereas the latter carry only the risk of loss. Once the Greek template clarifies the magnitude of this differential, Gresham’s Law will follow with a vengeance:

Since there is potentially no limit to the willingness of the private sector to exchange weak euros for strong, the only limit to the process is the patience of German and Finnish taxpayers. So check whether the euros you hold are eagles or owls before others do.” John Kay, ibid.

Germany’s generosity to Greece meets with ill grace

May 22, 2012

The prospect that Greece will default on its national debt is not really news. The Greeks are a profligate race.  Indeed, since Greece gained its independence from the Ottoman Empire in 1832, the country has been restructuring  or defaulting on its debt for some 90 of the ensuing 180 years. 

The news, this time, is that Germany is willing to bail them out. The yet more momentous news is that Germany is bailing them out despite the open contempt with which bailout monies have been received.  Greek newspapers are openly labeling their generous benefactors as Nazis, as they eagerly pocket German taxpayers’ hard-earned donations and continue with their deficit-fueled lifestyles.

“Germany was an organizer of and is by far the largest contributor to the European Financial Stability Facility, which totals a staggering 726 billion euros ($924 billion).  That number will rise and, when combined with earlier funds and loans, Germany’s share will easily exceed the country’s total annual federal tax revenues.  Imagine the U.S. being willing to guarantee more than $2 trillion to bail out Mexico.” Fareed Zakaria, ‘Time to say Danke’, Time, May 28, 2012

Of course, Germans are anxious not to flush euros down Greek sewers, so they require austerity and reform guarantees in return for their largess. There can be no doubt whatsoever that Greece needs good doses of both.  Not only is Greece teetering right on the edge of unsustainable budget deficits. It is ranked 126th (out of 142 nations) in flexibility of hiring and firing and 140th in terms of the burden of government regulation.  Tax collection is almost non-existent and corruption is rampant.

If the next Greek government determines to flout the austerity and reform package that it approved in February 2012, no one should blame the Germans if they pull the plug on Greek bailouts. Greeks should not then bemoan their fate as the realities of life weigh down on the Greek economy:

“Greece might yet have to default and quit the euro zone.  Its competitiveness problem is simply too great and its political leadership too weak.  But if it goes down this path, Greece will find that the markets will refuse to lend it money at reasonable rates unless it does pretty much the same thing Germany is asking it to do.  Life without Germany will mean a lot more austerity than life with Germany.” Fareed Zakaria, ibid.

The 2012 US presidential election farce

May 21, 2012

So far I have not commented on the 2012 US presidential election campaigns of Barack Obama and Mitt Romney. The reason for my silence is that neither candidate, so far, is addressing effectively the key economic issues that confront the United States economy. Instead, both Obama and Romney – most especially Obama – insult the intelligence of the electorate by talking with a profundity that one might expect late on Saturday night in an Irish bar.

The United States economy currently is in a shocking condition. Unemployment, correctly measured, stagnates in the mid- teens, the rate of economic growth for an economy emerging from a recession is anaemic, the level of federal debt as a ratio to gross domestic product is dangerously high, and  the federal budget spills red ink as far as the eye can see.  Whichever of the two candidates accesses the White House in November 2012, these are the issues that will confront his administration. If they are not resolved by 2016, the United States will look like Greece in 2012.

If the election campaigns of the two candidates were real and not phony, the electorate by now should be comparing detailed economic policy plans printed and distributed  widely across the country. The press should be analysing and evaluating the two  prospectuses against the 2016 horizon, questioning and querying apparent inconsistencies wherever they are to be found.

Instead, what we hear from the President is Chicago street-talk about vulture capitalists, economic royalists, fat-cats and job-destroyers. When is the last time that the President has presented an economic model through which to seive the implications of his litany of accusations and threatened reprisals against the most successful participants in a market economy?

Instead we hear from Mitt Romney a proposal for tax reform that does not remotely identify the specific  tax exemptions that must be eliminated if tax rates are to be cut. We hear from Mitt Romney lip-service to Paul Ryan on spending cuts without any details of the precise hits that Social Security, Medicare and Medicaid must take in order to move the budget into the surplus that is required to bring down the burden of the debt. Romney’s campaign undoubtedly is closer to economic reality than Obama’s, but it also is riddled with obfuscation wherever electoral pain is involved.

The truth is, given demographics, past commitments, and current burdens, that federal spending must be reduced from 24 to 20 percent of gross domestic product  by 2014 while federal tax revenues must rise from 15 to 21 percent of gross domestic product  by 2014  in order to begin lower the debt burden by 2016.

If Obama and Romney feel unable to address those realities, they should not be running for office at this time. Until they do so, I shall not be paying attention to the meaningless anodynes that emanate from their lips. There are more important issues on which to expend my energy than to review platitudes in a phony election competition between two weak and cowardly candidates who dare not confront the electorate with the dire reality of the  situation that confronts their nation.