Diversion: An Economic Model of US Elections

Economics helps explain disarray in politics, at least politics US-style. Put every voter on a line, from right to left; candidates move towards the center. With a little bit of detail added, this model, due to Hotelling, helps clarify the strategic nature of our electoral game. (Harold Hotelling's simple model of product differentiation dates to 1929. The politics version is the median voter theory.)

Where on a small beach would two pushcart vendors locate? Assume they start on the ends of the beach, each to their own side. They then split the business – everyone goes to the nearest vendor, with the person in the very middle indifferent which he chooses. But let one vendor push his cart partway towards the center, and that cart then splits the business that lies between, plus everything towards their end, and so gets more than half the business. The response is obvious: the other cart moves towards the center as well. Repeat, and eventually they're next to each other, at the center of the beach.

So let's look at an election to Congress. That process starts with primaries; there's lots of local variation, but for simplicity assume they're limited to party members. Now voting is inconvenient, and primaries don't always get much publicity. So let's further assume that only those who really care vote. Candidates align themselves at the center of their party, and so we get one candidate at the 1/4 mark, another at the 3/4 mark. He who can move most successfully to the center wins the popular vote. If one candidate missteps and does not quite move to the center, the other candidate can take advantage of that. Of course random factors matter – an untimely scandal, spending money unwisely, misjudging which states are on the edge and so not allocating enough time, or even personality. The model doesn't capture everything.

This simple model highlights the dilemma Republicans (and in some races, Democrats) face, as the primary system pulls them to the right, with the issue of race (plus, less centrally, social nostrums) uniting a large enough block of activists to turn out to vote. As activists moved further from the center, that suggested that Democrats could win presidential elections even with weak candidates, by moving to right of center. Put in a strong candidate, a good campaigner such as a Clinton or an Obama, and you have a landslide. (Strong candidates and strong presidents aren't the same thing – we elect people because they're good at campaigning, not at policy or administration or negotiating with Congress.) Party activists who love the game, or love power are happy with this process. However, the party faithful will typically be unhappy with their final candidate, because the median activist isn't a centrist.

Now lots of assumptions are hidden in this model. However, we don't need a perfectly uniform distribution, or (with lots of caveats) only one dimension. We can, for example, let money sway matters, allowing candidates to "buy" votes. Of course two can play that game, and if it's harder to buy votes the further you are from a potential voter's position, then there's still pressure to move towards the other candidate.

However, the model does require flexibility; voters opt for whomever is closest to them, even if they're at one end of the spectrum and the candidate is all the way in the center. In other words, no one running for office gets locked into their initial positions. (In economics, the Stackelberg model assumes that's not the case.) A second crucial assumption is that there are only two players; three's a crowd, and there's no equilibrium strategy. Third, if the market is a circle rather than a line, then two players move as far apart as they can, the opposite result – but in my judgment that's not how politics works, even if the extreme right and the extreme left may be hard to distinguish on strong state issues (think Weimar Germany, where both the right and the left were nascent dictators and central planners).

So why are our politics not centrist? First, there seems to be a limit on how quickly (that is, how far) a candidate can re-center after the primary. In terms of the Hotelling model, if voters are limited in how far they will travel – they won't vote for someone who "betrays" them – then candidates will be limited in how far they can reposition themselves after the primary election. (In the Hotelling model, this comes for example from using the square of the distance a voter must travel.) The harder it is for a Republican to shift away from positions needed to win a primary, the easier it is for the Democrats. But potentially the Democrats enter the race with similarly untenable positions, if their primaries are similarly dominated by activists far from the political center. Casual empiricism, though, suggests that while there is a distinct "Right" in American politics, there is no Left – the US has never had a strong Socialist Party, or even a Labor Party. What "liberal" means is unclear. And that's an important point. Due to their diffuse positions those with some sort of liberal inclination have only a weak pull on a candidate, and a good grassroots campaign can turn out their vote.

In the last election, Republican candidates did not move. Perhaps this was a defect in the candidates themselves, or in their use of the same political advisors they employed in the primary, who were unable to distance themselves from their "natural" constituency. However, it's not just been this one election, and the Democrats (rhetoric aside) seem to be center or center-right, which would be consistent with what would happen with a coherent Right and an incoherent Left. To reiterate, the Greens and others on the left have always been too fractured to be a threat in primary elections. And when they do field a candidate who has campaign salience, the result is electoral disaster for Democrats: the further a candidate moves towards the Republicans, the greater the potential for a magnetic personality such as a Ralph Nader to nibble away at the more liberal part of their base.

Of course if being an incumbent get's you close to half the vote, then strategy doesn't much matter – an incumbent has to try hard to lose. Redistricting throws open the process, at least on the margins; scandals can matter. (Think of this as adding a second dimension, a "probity" axis, where scandal means the incumbent has chosen an extreme position, on the sideline, thereby ceding more of the playing field to the opposition…) In addition, for the House (but not the Senate) local issues can have salience. In practice, though, that seems to mean that rural candidates are always pro-farmer, whatever their party label; candidates move so far to the center that they're indistinguishable on such local issues. In any case, to the extent that incumbency dominates other factors, the only elections where this Hotelling model matters are ones for open seats – whether one views Romney's candidacy as amusing or as sad, if incumbency really matters, it was doomed all along to irrelevance.

To sum up, the Hotelling model suggests that a large swath of voters will always be unhappy with presidential candidates, come the general election. Our politicians are "slick" and "untrustworthy," flip-flopping, betraying those who worked for them in the primaries. Thanks to smaller electoral districts and hence a less diverse electorate – gerrymandering accentuates that – members of the House will also be more polar than the electorate as a whole. Granted, you always want to bargain down to the wire. But if the center dominates, then you do end up with a deal. That doesn't seem to be happening today, and this simple economic model suggests that all that is required to generate this is the rise of a modest-sized "sticky" right.

Addendum: Economics insists that models aren't sensible if they don't lead to equilibrium behavior. A "sticky" right opens room on the left for a third-party candidate, because it leads Democrats to move to the right of center. If political entrepreneurs succeed in finding issues that will unify those to the left, then the center can lose all salience. Now the right end of the US spectrum seems to have defined itself around racial and class lines, white and prosperous, with a largely overlapping group of social conservatives. That's a shrinking base, but the Hotelling model suggests that as long as we maintain a system of party-oriented primaries, that base won't become irrelevant anytime soon, at least for the House of Representatives. This is not what many political pundits assume to be the case, but does match the continued power of a distinct minority in the House. We'll see come fall whether the Senate continues to be less affected.

One other implication is that in districts with strong incumbents, it's hard to motivate the average person who might vote for an opposition candidate. Only strongly driven voters participate – in other words, you get kooky candidates, who take positions incompatible with any sort of move to the center. That reinforces the strength of the incumbent...

Libertarianism's Achilles' Heel, by E.J. Dionne Jr.

Here are comments stimulated by the following Washington Post item of Wednesday, June 12, 2013 12:00 pm

Every now and then someone hits the nail on the headby E.J. Dionne Jr.

In politics, we often skip past the simple questions. This is why inquiries about the fundamentals can sometimes catch everyone short.

Michael Lind, the independent-minded scholar, posed one such question last week about libertarianism that I hope will shake up the political world. I’ll get to his query in a moment. It’s important because many in the new generation of conservative politicians declare libertarianism as their core political philosophy.

Libertarians have the virtue, in principle at least, of a very clear creed: They believe in the smallest government possible, longing for what the late philosopher Robert Nozick, in his classic book “Anarchy, State and Utopia,” called “the night-watchman state.” Anything government does beyond protecting people from violence or theft and enforcing contracts is seen as illegitimate.

If you start there, taking a stand on issues is easy. All efforts to cut back on government functions — public schools, Medicare, environmental regulation, food stamps — should be supported. Anything that increases government activity (Obamacare, for example) should be opposed.

In his bracing 1970s libertarian manifesto “For a New Liberty,” the economist Murray Rothbard … concludes: “Liberty has never been fully tried in the modern world; libertarians now propose to fulfill the American dream and the world dream of liberty and prosperity for all mankind.”

… “Why are there no libertarian countries?”

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Ruggles: Well, we DO have small government countries like Somalia and Angola to "prove" the libertarian point of view, but they seldom bring those types of countries up as success stories despite the fact they have REALLY small governments.

The ideas of the center-left — based on welfare states conjoined with market economies — have been deployed all over the democratic world, most extensively in the social democratic Scandinavian countries. We also had deadly experiments with communism, aka Marxism-Leninism, or perhaps more accurately Stalinist "state" dictatorship.

From this, Lind asks another question: “If socialism is discredited by the failure of communist regimes in the real world, why isn’t libertarianism discredited by the absence of any libertarian regimes in the real world?” Or in the case of Somalia, their failure?

The answer lies in a kind of circular logic: Libertarians can keep holding up their dream of perfection because, as a practical matter, it is a utopia that will never be — can never be — tried in full. Even many who say they are libertarians reject the idea when it gets too close to home.

The strongest political support for a broad anti-statist libertarianism now comes from the Tea Party. Yet Tea Party members, as the polls show, are older than the country as a whole. They say they want to shrink government in a big way but are uneasy about embracing this concept when reducing Social Security and Medicare comes up. There’s no way Republicans are going to attack their own base.

But this inconsistency (or hypocrisy) contains a truth: We had something close to a small government libertarian utopia in the late 19th century and we decided it didn’t work. Smaller government meant that too many people were poor and that monopolies were formed too easily.

JD Rockefeller, Andrew Carnegie, JP Morgan and their cronies controlled wealth equivalent to over 20% of the country's GDP. In today's dollars, that would be over $3 TRILLION, rather more than is controlled by Buffet, Gates, Waltons, and Kochs these days. Government policy was routinely bought and sold.

In fact, as Lind points out, most countries that we typically see as “free” and prosperous have governments that consume around 40 percent of their GDP. They are better off for it. “Libertarians,” he writes, “seem to have persuaded themselves that there is no significant trade-off between less government and more national insecurity, more crime, more illiteracy and more infant and maternal mortality ... .”

This matters to our current politics because too many politicians are making decisions on the basis of a grand, utopian theory that they never can — or will — put into practice. They then use this theory to avoid a candid conversation about the messy choices governance requires. And this is why we have gridlock.

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Smitka comments: Libertarians also refuse to engage in empiricism – unlike, say, a Milton Friedman, who moved away from his earlier monetarism by the 1990s because it simply wasn't supported by the data. On a different dimension, the New Right resemble the state's rights people of old, who when push came to shove did not believe in the concept of a United States, politically or as a national economy. (Do Tea Party members realize that they are thus anything but patriots?)

Too much government? Get states to gut higher education – hardly a hypothetical – and just rely on recruiting from the next state over. For that matter, shut down local public schools, and recruit from the next county over. Roads? Healthcare? Regulation of markets? Small claims courts? As David Ruggles notes, we then start to resemble Somalia. Now Stalin never went all the way to communism (or to be more precise, socialism), but we quite rightly reject the concept on the basis of the historical evidence from his attempt to push the boundaries of the USSR polity in that direction. Somalia stops short of a full libertarianism. But such failed states ought to be enough proof that libertarianism, too, should be treated as a failed concept.

The Upcoming Fiscal Cliff

By David Ruggles, originally published in Auto Finance News

The upcoming “fiscal cliff,” as it’s known in investment circles, is the proverbial “sword of Damocles” hanging over the head of the world economy. Somewhere, Grover Norquist is smiling, while the global economy hangs in the balance. When the country’s two political parties couldn’t agree on a deficit-reduction package ― which the Republicans held as hostage to approving an increase of the country’s debt ceiling a year ago, according to Senate Minority Leader Mitch McConnell ― the two parties entered into a sort of “death pact” known as sequestration. Both parties agreed to concessions previously deemed unpalatable to force them into an agreement before the end of 2012. The concessions have the potential to bring catastrophic impact to the U.S. economy and, hence, to the global economy.

The yearend date was selected because the November presidential election will have been decided, and Congress will be in lame-duck session. In theory, this should make it easier to reach an agreement, but only if the Republicans agree to some tax increases on upper-bracket earners. Under the sequestration agreement, draconian cuts will be imposed on defense and social programs, and the Bush tax cuts will expire, which would bring about tax increases on all taxpayers, not just the top bracket.

The threat of having all the above happen simultaneously has the business community running scared, and with good reason. The spending cuts alone amount to $1.2 trillion evenly split between defense and non-defense spending. The expiring Bush tax cuts will raise taxation at the exact same time federal government spending is cut. One doesn’t have to believe in Keynesian economics to see the potential for short term disaster if agreement isn’t reached on a better balanced plan so the shock of the scheduled tax increases and spending cuts does not occur at the same time.

As of this writing, all of the consternation has yet to spill over to the stock market, as the Dow continues to reach new heights, having restored around $23 trillion in wealth since the Obama stimulus package passed. Whether those two events are connected is anyone’s guess, but the fact remains that many Americans’ IRAs and 401Ks are in much better shape than they were in the fall of 2008. Almost $50 trillion in accumulated wealth evaporated in a short time between the dramatic reduction in household net worth and the tanking of the stock market when the financial crisis hit. Only about half of that has been restored through the stock market, as the housing sector is still shaky. This explains the weak recovery.

At the same time, the credit scores of many consumers have been maimed, preventing them from buying the type of large-ticket items that add manufacturing jobs. Perhaps the electorate will be convinced that a President Mitt Romney can restore the household net worth and quickly heal maimed credit scores while cutting taxes and the deficit. If the electorate is convinced that he can, we will have a new administration come January 2013.

Simultaneously raising taxes and slashing government spending could stop the recovery in its tracks and trigger another recession. As we get closer to year end, if an agreement is not reached early, an unlikely prospect at best, expect the Dow to retreat, car sales to fall off, unemployment to spike, and the ripple impact to affect the global economy while our politicians play brinksmanship with all of our lives.

There is incredible pent-up demand in our economy. The recent small drop in the unemployment rate and the addition of 114,000 jobs should be cause for optimism. To put this in perspective, the 114,000 jobs added in September marked a 900,000 job turnaround from January 2009. Economists say we should achieve around 350,000 additional jobs each month to be considered in robust recovery.

Fitch Ratings and others predict that should agreement not be reached, the result would be another recession.

So how long will it take to heal credit reports and restore household net worth through consumers paying down debt and home prices escalating? Will sequestration take place, taxes rise, and government spending be drastically reduced? Will politicians play with all of our well beings for the sake of partisan ideology? The uncertainty is just another thing holding back recovery.

David Ruggles has spent his career in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the U.S. & Japan. Ruggles has been a dealer for Mercedes-Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru, and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Japan. He blogs at autosandeconomics.blogspot.com and writes regular columns for several publications.