The Calculus of Dissent

The opposition of conservatives in both Australia and the US to proposed stimulus bills despite the popularity of such measures and their endorsement by the IMF is (let’s call it for what it is) a form of political gamesmanship that could potentially pay dividends in a few years’ time depending on the extent of recessions in both countries.

Yes, there were ideological (some prefer the term philosophical) reasons for opposing them: too much wasteful pork was inserted, not enough tax breaks, a wasted opportunity to reduce taxes on labour seen as the most distortionary, and the tendency for cash handouts to be tucked away in savings because of the lump sums being handed out.

All of these plausible and valid reasons aside, the lack of political incentive to engage in deficit spending can be seen as the main reason for their opposition and should have been pinpointed early on by those advising both the Rudd and Obama administrations. The narrative being woven of the crucial and historic moment requiring bipartisanship fell on deaf ears from those across the aisle.

In the US Congress, not one Republican from the House voted for that chamber’s version. At the Senate, three moderate conservatives came on board, in exchange for reductions in the the total size of the package (by about 100 billion US dollars) and an increased share for tax cuts. This high price for such a feeble form of bipartisanship has frustrated Keynesian “Depression” economist Paul Krugman. He looks at the gap between potential and actual gross domestic product and concludes that the size of the now stimulus law is not large enough.

The title of this article (I should say) is inspired by the Nobel Laureate James Buchanan, the leading economist of the “Virginia School” of public finance. His book co-authored with Gordon Tullock, the Calculus of Consent, is an exposition of the “politics of exchange”. It demonstrates how, logrolling (a.k.a “you scratch my back, I’ll scratch yours) under majority voting rules leads to unchecked growth in the size of the public sector.

Buchannan and Tullock’s approach could be considered an economic rationalist approach to politics in a democratic system. In the crafting of the spending bill, the brazen pork barreling engaged in by US congressmen at the lower house seems to support this view. In terms of the rejection of these packages, the conservatives seem to take a stance that behavioural economists and game theorists regard as “retaliation”.

In bargaining games, two players are asked to split a cash pot. The first player is told he can propose the share splitting ratios. The second player can either take it or leave it. If he rejects the split then no deal takes place. First movers are instructed to propose a lopsided split, say 90-10. Knowing that he can either settle for 10 percent or nothing, the rational person would be expected to accept. In such experiments, it has been observed that second movers often turn the proposition down even if it is against his interests to do so.

The fact that in the US, Democrats had the majority and could still pass legislation without any support of other players possibly emboldened some to push the envelope. Staring at potential failure of these measures and a mid-term election in less than two years forced Obama to seek some modicum of co-ownership with Republicans to insulate him from criticism down the track. This effort failed, and as a result, his fate rests with the success of the stimulus.

In Australia, the story was a little different. A lack of majority in the Senate and the presence of a few Greens and independents meant that this was a multiplayer “game” with more than two players. The outcome was predictable: the bill was passed with concessions made to parochial interests. The outcome for the global economy though is less predictable. Only time will tell whether the calculus of dissent was right.