Bring back core and non-core promises

The election is no longer “on the horizon.” It’s close enough to smell the sausages. Everyone involved in politics is working hard, trying to get us to listen, trying to get us to believe, trying to get us to vote.

Most of what they are saying is lies. Or to be a little kinder, false predictions about what they will do in the future.

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Labor’s policy list

Labor has set out 100 positive policies on its website.They’re really quite interesting and I recommend having a look.

But will it do them all? No way.

Take its plan to cut capital gains tax and negative gearing. These are very bold reforms any party would struggle to get  through the Senate.

And – despite recent reforms – the coming Senate is going to be a particularly mixed one.

Psephologist Anthony Green predicts eight Greens, three Nick Xenophon Teamers, either Glenn Lazarus or Pauline Hanson, Jacqui Lambie and an associated senator, plus probably one other odd-bod from Tasmania.

It’s a volatile mix that would wreak havoc on the most carefully-planned legislative agenda and laugh heartily at the very idea of a mandate.

And there is no guarantee of a mandate, for anyone. A hung parliament is quite possible, with independents and Greens set to make good runs in a range of lower-house seats. Nick Xenophon Team is a huge factor because it is competitive in some classic Coalition seats in SA. One expert tips six cross-benchers.

The odds of a hung parliament are 4:1 against and the closer the two major parties get, the better the chance a couple of independents (Yes Tony Windsor, I’m thinking about you) could have the parliament in the palm of their hands.

What all this means is that words spoken before the election – however earnestly meant  – cannot all come true.

Why don’t politicians admit that?

Instead of having broken promises littering the field of battle, creating the impression  “they’re all liars”, why not explicitly admit some outcomes are state-contingent?

They could make promises contingent on election outcomes:

“If we win a Senate majority we will pass all our policies. If not we will make health and education our top priorities.”

Promises contingent on Budget outcomes.

“If company tax revenue rises above $100 billion, we will fund a new hospital in Launceston.”

Or promises contingent on other promises.

“If we can get our negative gearing reform bill through, we will fund the building of submarines in South Australia.”

Politicians demur on hypotheticals for a reason – adherents of the more cynical schools of political communication will insist the complexity is too high for voters. And I’m sure the first few weeks after adopting this approach would be full of mocking.

The Leader of the Opposition is a maybe man, a possibly politician, an if-then individual,” the PM would jeer. “He’s built an escape route into every promise!”

Perhaps most politicians would wilt immediately under such ripostes – and the bad press that would follow. Gallery journalists – whose expertise in reading the tea leaves might be slightly less valuable in such a scenario – might be unwilling to give the approach a decent chance.

But maybe, just maybe, a  contrast would eventually become apparent between one side explaining their priorities and the risks and contingencies while the other side baldly claims things that can’t all come true will all come true. It just takes one politician floundering when asked, “But what will you do if you don’t control the Senate?” for that to become the favourite question of press-packs everywhere.

If so, the pressure for truth-telling would ultimately fall on the party that over-simplifies their plan. If that party won an election and then failed to keep their promises the consequences would likely be harsher, given the good example set in advance.

There would still be plenty of opportunity for broken promises. Sometimes politicians simply do the opposite of what they say they will, as Tony Abbott demonstrated after the last election.

But without the cover of all those things promised that were only really deliverable under very particular circumstances, the flat-out lies would be much easier to see.

 

How Malcolm Turnbull could be just what Labor needs

This post is a quick, simple game theory explanation of Australian politics. It’s not comprehensive. It cuts out a lot of detail. It simplifies radically. In doing so, it aims to shine a light on one interesting dynamic.

Please don’t get the impression I’m unaware other dynamics are running at the same time. This is just one strand in Australia’s politics – but an interesting one.

Tony Abbott learned a lot from John Howard. What he learned most apparently, was the lesson of the 2001 election – that an environment of negativity and fear and a focus on national security benefit the incumbent.

Abbott ran hard on national security. We have planes in the air over Syria because of those lessons – learned when Abbott was 43 and had been in parliament for seven years. Not to mention our new paramilitary Border Force. Even his elevation of the anti-methamphetamine campaign to a national level seemed to be part of a campaign to whip up fear.

Was he fundamentally wrong?

I say no. The reason Abbott couldn’t get an edge on national security was Bill Shorten stuck to him like sticky stuff to a blanket. Suffocatingly bipartisan on every issue, Shorten appeared to know that the slightest bit of space between him and the PM would be blown out of proportion.

Shorten refused to break his national security lock-step with Abbott even if it cost him. When “Border Farce” was announced Shorten was all for it. Shorten also supported boat turnbacks even though his party was very suspect of it.

National Security bipartisanship was not a rule of thumb for Labor under Shorten. It was iron law.

All this meant Abbott’s chosen strategy got no lift-off, and as he pushed it harder and harder (e.g. by begging the US to ask us to bomb Syria, and repeating the phrase Death Cult reflexively), he looked somewhat mad.

In essence, Shorten played the game of chess correctly, from a political perspective. Abbott’s fear and negativity strategy was absorbed perfectly and seen off.

Now the government is trying something different. Positivity. Malcolm Turnbull keeps repeating that it has never been a more exciting time to be Australian, and talking about opportunities. No more Death Cult.

I love it. This is the political discourse I crave.

But the person craving it even more might be Bill Shorten.

He’s been a strangled and ineffective communicator for the last two years. But that could be the result of being forced to play “small target” and match Abbott on the fear side.

Now the game is about offering competing positive visions? That’s Labor turf. They invented NDIS. They can offer a vision of Australia where we have not just wealth, but wealth with a bit of meaning and compassion.

Today even, Bill Shorten has been out announcing a policy. Labor will reverse the Government’s higher education cuts and offer tertiary education places to disadvantaged people.

People love to write Bill Shorten off. But if you look past the zingers to the chess game being played beneath the surface, you can understand why the Labor Party chose him.

The curious case of poll-driven political reporting.

The Guardian published a report yesterday about Bill Shorten. The author set out to repent for calling  Bill Shorten a “tired accountant”. The impetus for the story was the turn around in the polls.

“Shorten is still leading the Labor party in the wake of this latest credibility disaster for the Coalition, after last week’s credibility disaster (blocking a free vote on marriage equality) and the preceding week’s credibility disaster (chopper-friendly Bronwyn Bishop). He’s now sitting atop polls from both Ipsos and Morgan that have the Coalition facing a loss of between 36 and 44 seats.

Is it time for a rethink?”

I’ve seen this kind of thing before, and I don’t like it.

Interpreting what a political leader does through the polls is intellectually vacuous. It’s easy to write. There is no need to have a view on tough questions about policy effectiveness or priorities, the merits of intriguing questions about whether the head of the AWU should be matey with big business, or the management and composition of their front bench.

The author of yesterday’s piece is not especially guilty. She has written about policy more than polls. But overall, allowing poll numbers to drive judgment of politicians’ merits is now commonplace. [1, 2, 3, 4, 5, 6, 7, 8, 9].

The rise of this sort of reporting means a swing in the polls does double business.

Not only does a poll bump get the leader kudos in their party, but it changes the tone of reporting about them. The new, glowing stories therefore amplify swings in popularity. That may be responsible for the increasingly binary popularity positions we see among our political leaders (They’re often wildly popular like Baird or old Abbott, or wildly unpopular, like Gillard and new Abbott).

This kind of reporting validates the paradigm that political hacks of the most cynical kind push inside their parties: We can do good once we’re in power. For now let’s focus on winning. It sidelines those inside a political party who think they should focus on making the country better, not just making the polls better.

Here’s a choice example of the kind of reporting I’m talking about.

The Sydney Morning Herald's Peter Hartcher thinks parties should use poll numbers not policy ideas to choose their leader. Is he right?
The Sydney Morning Herald’s Peter Hartcher thinks parties should use poll numbers to choose their leader. Is he right?

I can only imagine the cognitive dissonance some reporters must experience when they write articles demanding more policy substance and less poll-driven rubbish.

Of course, we do need some political reporting. It’s helpful to peek behind the curtain from time to time and see the way the magician performs his tricks. You feel like an insider.

But it can’t be all we have, most of what we have, or even a substantial minority of it. It’s a sometimes food.

Our meat and veg must be stories about policy.

Should unemployed people be forced to take any job?

Tony Abbott is having a horrendous run. He’s now more unpopular than Bill Shorten, who holds an 11 point lead in approval ratings, a reversal that is truly spectacular.

His big problem is a tough budget that broke promises.

One of the Government’s signature policies is to push young people into taking work. Their policy is called “earn or learn.” It will deny the Newstart (dole) payment to anyone under the age of 25; and people aged 25-30 will not be eligible for the dole in their first six months of unemployment.

”There is no right to demand from your fellow Australians that just because you don’t want to do a bread delivery or a taxi run or a stint as a farmhand that you should therefore be able to rely on your fellow Australian to subsidise you,” said Employment Minister Eric Abetz.

The rationale is to stir up resentment at the welfare state.

“The bludger should not be our national icon.” – Rupert Murdoch, (American citizen)

It’s an entirely political, dog-whistle ploy to make underpaid workers of Australia target their resentment at the unemployed, not the managers that dine with their own remuneration committees. 

But doesn’t mean the policy intent is all bad. Here’s why the policy can do good for some people (caveats follow).

Long-run unemployment is one of the most damaging things that can happen to a person. It causes not just a fall in skills (human capital). It is associated with worse health outcomes, including mental health issues, falling life expectancy, higher chances of dropping out of the labour market, and their children’s school performance.

Long run unemployment is also bad for the economy. Hysteresis is now an accepted fact of macroeconomics. It describes the way long periods of high unemployment make the minimum achievable unemployment rate creep higher and higher. An economy that can match people into jobs swiftly increases the welfare of future workers.

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Sure unemployment is bad. But people know that and want to get themselves a job. No?

Well, a new paper from the National Bureau of Economic Research shows that unemployed workers set a reservation wage that affects their willingness to take a job.

“workers are 24 percentage points more likely to accept an offer that is equal to or exceeds their reservation wage than to accept a job with a wage below the threshold.”

This fits with some excellent new research by Australian economist Justin Wolfers. He found arbitrary thresholds are a source of important irrationalities in human behaviour, and illustrated it with marathon finishing times.

marathon finishing times
Source: NY Times

Wolfers’ article focuses on how arbitrary thresholds could cause irrational investment behaviour, especially the case of people being unwilling to sell their house for less than they bought it for. But the analysis could as easily apply to reservation wages, which can be set with reference to what you used to earn.

If you refuse a job because if pays $5000 a year less than your old job, but then spend months more unemployed, you may well be worse off.

These pieces of research are part of the new behavioural economics that finds predictable irrationalities in human behaviours.

It is not uncommon for social outcomes to be improved with a “nudge” toward the more rational course of behaviour. Traditionally, of course, conservatives oppose these kind of nudges, preferring to let humans remain “free”, while liberals tend to endorse them. In the case of “earn or learn,” it is more of a shove then a nudge, and conservatives are more likely to be fans of it.

I don’t want to stand up for the exact policies that the Coalition has brought in. I think they are too blunt to have a net good effect. But the concept that the labour market will reach equilibrium without intervention is also likely wrong – unemployed people should be encouraged to not just search for, but take a job.

CAVEATS: 

How all these taxes will help Tony Abbott win the 2016 election

Tony Abbott is throwing his promises under the bus with glee. He promised no new taxes and has now pledged a debt levy and an increase in petrol tax.

He knows how electoral cycles work. Pain and broken promises early in your term are forgotten later:

The 2014 Budget is full of taxes and cuts.

The 2015 Budget will have a few more cuts and be austere.

Then in 2016, election promises will start getting made. “How can we afford these?” people willl ask.

Finally, with an election probably just a few months away, the 2016 Budget comes out. Lo and Behold! Australia’s fiscal position is in surplus, taxes can be cut and the spending can begin.

The press goes into a fury of congratulation over Mr Abbott’s “strong leadership.” Lots of photos appear of him standing outside new hospitals, with a big smile on his face.

To most people, the grumbling of early 2014 is as relevant to the political situation as the result of the 1974 VFL Grand final. Labor can’t get over the broken promises and keeps talking about the past, while Mr Abbott is focused on the future.

Don’t believe me? Evidence for how this works is right under our noses.

The coverage of the Victorian government’s first Budget looked like this:

“THE Baillieu government has been forced to slash more than $2 billion in spending from its first budget in an attempt to insulate the state economy from looming financial pain and deliver on its election promises.

And with Treasurer Kim Wells’ budget predicting a $4.1 billion hit to GST revenue alone over the next five years, the budget also launches a tax crackdown, with 50 new jobs at the state revenue office to raise an extra $235 million.

The Coalition went to the election promising $1.6 billion in savings, but yesterday announced deeper cuts totalling an extra $638 million.”

Coverage of the pre-election budget looks like this:

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Mr Abbott is playing the long con. But with a shorter election cycle than was available to Mr Napthine, (federal is three years, not four) it’s more of a gamble. Will it work?

 

How voting for a crazy candidate is smart (and voting for a smart candidate is crazy.)

Could voting for a really crazy candidate work in your interest?

That’s the implication of a new study by some very sharp economists from the World Bank, MIT, Universitat Pompeu Fabra and Northwestern University: ELECTORAL RULES AND THE QUALITY OF POLITICIANS: THEORY AND EVIDENCE FROM A FIELD EXPERIMENT IN AFGHANISTAN.

They compare the results in two types of local elections:

1. Where multiple candidates are elected; and

2. Where one winner rules.

In the latter, voters opt for clever moderates. But in the former, voters identify hard-cases and elect them.

“We propose a theoretical model where the difference in the quality of elected officials between the two electoral systems occurs because elected legislators have to bargain over policy, which induces citizens in (type 1) elections to vote strategically for candidates with more polarized policy positions even at the expense of candidates’ competence. Consistent with the predictions of the model, we find that elected officials in (type 2) elections are more educated than those in district elections and that this effect is stronger in more heterogeneous villages. We also find evidence that elected officials in (type 1) elections have more biased preferences.”

Negotiation is a staple of politics. Greek democracy was founded on the idea of thesis and antithesis entangling in order to forge synthesis. Our modern-day parliaments are the inheritor of this intellectual tradition.

But negotiating is tricky.

Coming to the negotiation table with a smile on your face and a sensible plan immediately marks you as the loser. President Obama found this out the hard way in his first term.

The Atlantic:

“When it came time to deal with the expiration of the Bush Tax Cuts, President Obama again immediately abandoned the liberal — and his own original — position of allowing all of the Bush Tax Cuts to expire and started negotiating from the centrist position of allowing only the Bush Tax Cuts over $250,000 to expire. By holding hostage the extension of unemployment benefits, Republicans quickly got their way in the tax talks.”

Obama is a smart guy and he did not repeat his mistake. Think Progress quotes him on the topic:

“I suppose what I could have done is started off with no tax cuts, knowing that I was going to want some and then let them take credit for all of them. And maybe that’s the lesson I learned.”

ImageBy his second term, Obama took a hard-line position to negotiating and the Republicans were the ones that copped the blame for the government shutdown of 2013.

Politics has become more polarised in the United States, as the fantastic Graphic on the right here illustrates (source: The Economist). That means more divisive figures in public life.

For example, Ted Cruz, the barnstorming Republican Senator from Texas who led the Republicans into the debt default impasse (an issue that required negotiation to resolve).

Cruz is described as…, well, let me Google that for you.

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Now, Cruz lost the wrangle over the debt default. He was cut out by his own side. But his ploy might have been the only way to win. If the other side thinks you are an idiot before you start negotiating, you’ve convinced them they need to offer something stupidly good to close the deal.

The lessons for Australia are many. The moderates in parliament hold less power than the wildcards. And this is especially so in the Senate, where neither party currently has a majority, and negotiation is far more important.

This may be why you hear so much from the Greens Senator Sarah Hanson-Young and so little from the ALP Senator Carol Brown. The less mainstream your position, the more you can expect to gain in concessions, and so the more favour you can expect at the ballot box.

Evidence the Australian public is savvy on this topic can be found in the most recent Senate election, which sent a full box of Froot Loops to our nation’ capital.

This line of thinking raises two important questions:

1. Does this way of voting represent an inherent conservative desire? If we want to gum up the works of politics, matching the other side’s wildcards with wildcards of our own should just about do the trick. A government system stocked with outliers on the spectrum will create a lot more noise and fireworks than one stocked with moderates, but perhaps just as much in the way of real reform.

2. Where we see moderates elected to rule a system, can we assume this means we don’t expect any negotiation to happen? That if someone seemingly sensible like Bill Shorten is elected to head the ALP, that we expect him to rule it with an iron fist?

I value your thoughts on all this – please leave a comment below!

Latterday Knight Fever: the economics of prestige

The Abbott government has announced it bringing back Knightoods and Damehoods to Australia. Each year, four people will arise with the title of Dame or Sir.

Of course, the whole thing is a retrograde step taken by a man with, by George, a madness for kings. Knighthoods were first axed by Whitlam in 1975, reintroduced by Fraser in 1976 then axed again by Hawke in 1983.

In one way, I like it. The old honours system which topped out with ACs and AOs was both sterile and opaque. The Sir and Dame system is one that people can grasp. From Sir Lancelot to Dame Judi Dench, people see and understand. If a comprehensible public honour is not the point of an honour system, I don’t know what is.

(One also can’t deny it’s a political football that you kick up into the sky when you want to distract attention from something else, in this case the fact the Assistant Treasurer is featuring in a very unflattering way in a corruption inquiry.)

But the real question for an economist is why would people value a knighthood. It doesn’t come with a free horse and castle. It doesn’t get you a discount at the shops. In some ways it’s less useful than a seniors card.

While the income bump from winning an Oscar has been comprehensively studied, old-school conventional economics has little to say on the matter of awards for public service. Luckily our friends in the fields of behavioural economics have tuned their antennae more closely toward the workings of the human mind.

These Knighthoods and Damehoods are the ultimate in positional goods. A positional good is one whose value comes from the fact that others can’t consume it too. Being the richest person in the world, or gold medallist in swimming, having the best address in the best neighbourhood or a degree from the most elite university. The values of these goods “depend not only on the amount the individual consumes but also the amount others consume.” 

At my old employer, Fairfax, the publication of the BRW rich list was an event that carried huge importance. As if the money was not reward enough, certain business people would contact BRW to make sure their assets were sufficiently valued that they would feature prominently in the list. Being on the list did not increase the value of their money in a consumption sense, but it strongly increased its positionality.

Positional goods are theorised to create negative externalities for the many while benefiting the few (See paper from Brookings Institute.) And the giving of medals, etc. is not without negative externalities. Here is Churchill acknowledging that fact:

“A medal glitters, but it also casts a shadow. The task of drawing up regulations for such awards is one which does not  admit of a perfect solution. It is not possible to satisfy everybody without running the risk of satisfying nobody. All that is possible is to give the greatest satisfaction to the greatest number and to hurt the feelings of the fewest.”

In the case of Australia’s newest old-fashioned honour, just four will be handed out per year. Something so rare will indeed have cachet to spare.

The honours are apparently designed for public service, so the tabloids obsession with a Sir Shane Warne may never materialise: “My intention is that this new award will go to those who have accepted public office rather than sought it and who can never, by virtue of that office, ever entirely return to private life,” Mr Abbott said.

Such prizes may be efficient. In a world where tax dollars are not exactly overflowing from Treasury coffers, the government can use prizes as compensation for jobs that would otherwise command a lot of pay.

As Bruno Frey notes in his paper Knight Fever (which title I happily stole for this post) “The material costs of awards may be very low, or even nil, for the donor, but the value to the recipient may be very high.”

Where you can pay someone with a reward that costs you nothing, it would be economically unwise not to do so.

Phaleristics is the study of awards. There is a strong economic literature on the merits or using awards as motivation. From the merits of prizes in furthering science to prizes for poetry and independent film. 

Awards litter most fields. They are especially prominent in fields where the best make a lot more money than the rest, such as acting, and in fields where the government pays the players (the military). These may be fields where contracts are especially hard to specify ex-ante.

Awards like sportsperson of the year carry less weight than Best Actor awards, because it is far easier to identify success in sport, so an award adds little marginal value. (Roger Federer does not always show up to accept the Swiss Sportsperson of the Year award.) Similarly in fields where a free market determines the pay of participants, such as the private practice of law and business, awards are less visible and carry less prestige.

But the award benefits not only the recipient. Mr Abbott emphasises the reciprocal nature of these awards. They are intended in his mind not just as reward for service, but are in fact a payment for keeping mum:

“If you’ve been the Governor-General or a Governor, there are certain things that you can never really do again. You can never really be as free with your opinion as might otherwise be the case. There are certain jobs that you could never really do again because of the position that you’ve occupied. Ditto for a Chief Justice. There is lots of legal work, for instance, that a former Chief Justice could never really do. If you’re a former Chief of the Defence Force or a former Chief of Army, there are lots of issues upon which you can never really comment by virtue of the position that you’ve held. I think when someone does accept a position of such importance and gravity in our system, it is perfectly fitting to honour them in this way.”

When it comes to creating new awards, there may be motivation on the part of the giver, too:

“The institution (or person) bestowing an award can be taken to be a principal who maximises his utility by inducing the agents, as the recipients of the awards, to behave in his interests,” Professor Bruno Frey argues. He continues:

“The whole area of awards is very vague. The semantic is unclear and the various types of awards are not well defined. There is, for example, no clear distinction between orders,  decorations or medals, and they can go with or without titles and money. It will be argued in this paper that these unclear distinctions are no accident, but an important feature of awards. The suppliers of awards have an incentive to differentiate awards at many different levels and to continually create new awards.”

Managing to keep Australian knighthoods and damehoods to just four a year may prove very challenging. And if it can be done, might such an exemplary public adminstrator not be rewarded with the creation of a still higher honour? Time will tell.

Thoughts on the economics of honours and awards? Further reading you’d like to suggest? Put your thoughts in the comments section below!