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Greece and the Troika are engaged in a war of attrition. The player with the higher cost to staying IN vs conceding and dropping OUT is in a stronger position in a war of attrition.

Greece has capital controls, is about to renege on a payment to the IMF, faces an offer from the Troika that is impossible for the Greek government to get through Parliament and the offer consigns the Greeks to more austerity and economic stagnation. They have little to lose from staying IN.

The IMF does not face an existential crisis if it sticks to its guns. The EC suffers from staying IN if there is contagion but they have protected themselves.

So both sides have low costs to staying IN. They have to increases costs on the other side to persuade them to concede.

For the Troika, the strategy is straightforward: they can’t accede to the Greek request to extend the bailout for the referendum, give extra money to banks etc. This is basically what they are already doing.

For the Greeks, the strategy is more surreal: To inflict maximum cost of the Troika, Greece should default on its payments but remain in the Eurozone. Greece is cut off from international lenders anyway and the default will not have any incremental effect on their ability to borrow. With Greece insolvent, the ECB will be the key decision-maker. Do they keep on lending to Greece as they are still technically in the Eurozone? The German Finance Minister says this is the case (via Bloomberg):

German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece would stay in the euro for the time being if Greek voters reject austerity in a referendum scheduled this week, according to three people present.

Schaeuble also said the European Central Bank would do what’s needed to protect the euro if Greeks voted against the bailout terms in the July 5 referendum

This is ideal for Greece. They keep the Euro and get the debt restructuring they want via default. And other countries in the Eurozone are infected by Greece being in the Euro. If Greece needs anything from the EC, this is an ideal threat point for them.

What if the ECB denies Greece credit? This state of affairs may need to be maintained by the Greek government issuing GrEuros as a medium of exchange. GrEuros can be used to pay the government as if they were Euros. GrEuros will not be accepted outside Greece by wary investors but they would trade internally in Greece. The GrEuro/Euro exchange rate will float. There is less risk of contagion here as GrEuros are not the same as Euros. Eventually GrEuros will become drachmas.

All these tactics will prolong the war of attrition. They will mask the bigger problem: How sustainable is the Eurozone with a monetary union but no political union?

I found this discussion paper by Stergios Skaperdas offered a useful perspective on the crisis. Here is a passage on default:

If Greece had defaulted in early 2010 Greek debt could have become sustainable in the long run with a writeoffs imposed on bondholders of considerably below 50% of total debt. The country would have had to borrow internally, perhaps issue IOUs (as it has done already), and impose a few modest cuts. The effect of such a policy would have been mildly recessionary.

What was done in 2010 instead by the troika was to provide Greece with loans so as to cover its budget deficit without default, in exchange for increasingly draconian budget cuts, tax increases, and institutional changes of dubious value. The effect of this policy was a fast downward spiral of the economy. Since debt kept increasing and the country kept getting poorer fast, debt was becoming ever less sustainable. Thus, the second bailout in 2012 restructured Greek debt, with the main losers being Greek pension funds and Greek banks. The Greek state had to borrow 50 billion euros just to recapitalize the banking system and continues to have to cover the losses of the pension funds (in addition to cutting pensions, cutting health expenditures, and increasing retirement ages). The continued contraction of the economy, deflation, and a few additional loans from official sources have brought the debt-to-GDP ratio close to 180%, the highest it has ever been.

Now, default would be considerably more difficult both because Greek public debt is under English law and because 80 percent of it is official and owed to official sources (the IMF, the ECB, and other Eurozone member countries). Yet, that debt is unsustainable and there is virtually no chance it will be fully paid back. Default is still a taboo but it is bound to occur in one way or another, regardless of how it is named.

Suppose there are two bakeries which make wedding cakes and other baked items. The pastries from one bakery are pretty much the same as those from another so the baked goods market is quite competitive and margins and profits are thin.

The legislature passes a law allowing businesses to select which customers they will serve and which they will not.

One bakery, bakery A, decides to be selective and the other, bakery B, decides to be non-selective. The fact that bakery A has become selective becomes public knowledge either because the bakery advertises this fact or through word-of-mouth.

Does economic competition eliminate discrimination? This is the question.

Customers who abhor bakery A’s selection criterion boycott bakery A even if in other respects it would be convenient to just get a doughnut from bakery A. So, bakery B, gets additional business it did not get before.

Surely bakery A is suffering and hence should drop its ill-advised selection policy? Not so fast.

Some customers favor bakery A’s policy and they actively seek out bakery A’s products (the “Chick-fil-A” effect). So bakery A loses some customers but gains others. Moreover, the customers it gains are more loyal than the customers who enjoyed its products before it adopted its policy. Similarly, the customers bakery B gains are more loyal too.

Hence, product differentiation has increased because of bakery A’s active adoption of its policy and from bakery B’s decision not to adopt the same policy. The logic of competition now implies both bakeries will make more profits than they did before.

So, discrimination is not driven out by competition between firms. If anything it is reinforced by competition. This stands in contrast to Becker’s model where competition decreases discrimination in employment. (There is some way to make these models consistent by having workers have preferences over co-workers. Maybe someone already did this model?)

Without political or legal intervention, competition will not drive out discrimination.

Forty-seven Republican Senators signed a letter to the Iranian leadership claiming that any nuclear non-proliferation treaty signed by President Obama could be vacated at the stroke of a pen by the next President. What is the impact of their tactic on the probability of the deal being signed?

There are many effects but here are four key ones:

1. The Iranians now get further confirmation that President Bush III will be tougher than President Obama. The deal on the table is the best they are going to get. This makes them more likely to sign.

2. Democrats who are skeptical of the deal with now rally round the President, as they did after the surprise Netanyahu speech. This makes a deal more likely.

3. The Iranians now get further confirmation that the deal may fall apart under next administration. This makes it easier for them to renege in the future if circumstances dictate – they can more credibly blame the U.S. for being untrustworthy. Their citizens will not blame them if they exit the agreement as the Iranian leadership can more credibly blame the U.S.

Russia and China can trade with Iran with less international condemnation as the U.S. can be more credibly faulted for the deal falling apart. This makes a deal more likely.

4. The “no deal” option just got better too for reasons outlined in 3. Iran can blame the U.S. for not agreeing to the treaty and try to persuade Russia etc to break sanctions. This makes “no deal” more attractive relative to “deal” and makes the deal less likely. It could also mean that the deal the Iranians now get is improved to reflect their better outside option. If the deal is already better than even the improved outside option, the improvement will have little effect on the chance of a deal.

So, unfortunately, the net effect of the letter on the probability of an agreement is ambiguous. But even if the letter makes a deal less likely, it makes it less likely by making Iran stronger.

He is as smart as people say:

Sen. Ted Cruz (R-TX) announced Monday his intention to donate his congressional salary to charity for each day government remains closed, pinning blame for any potential shutdown in operations past Sept. 30 on Senate Majority Leader Harry Reid (D-NV).

“Harry Reid should not force a government shutdown,” the conservative firebrand said in a statement. “I hope that Reid stops refusing to negotiate and works with the House to avoid a government shutdown, and, at the same time, prevent the enormous harms that Obamacare is inflicting on the American people.

“If, however, Harry Reid forces a government shutdown, I intend to donate my salary to charity for each day the government is shut down,” he added.

But it turns out his offer came after Democratic Rep Gary Peters:

@SenTedCruz joining me to donate pay to charity, but not to stop shutdown. I urge you to drop politics. Irresponsible to do anything less.

As budget negotiations get underway with the threat of sequestration looming, it’s worth recalling a basic lesson from game theory.

Consider two parties in the same vehicle speeding towards a cliff. The one who concedes, i.e. chickens out and steers the car out of danger, is the loser. Winning is better than losing but either is better than driving off the cliff. Finally, time is valuable: if you are going to concede, you prefer to do it earlier rather than later. Still you are prepared to wait if you expect your rival will concede first.

In equilibrium of this game, unless someone concedes right away there is necessarily a positive probability that they will go over the cliff.  

The proof is simple.  Consider player 1 and suppose his strategy is not to concede immediately. Then we will show 1’s strategy is such that if 2 never concedes there is a positive probability that 1 will also never concede and they will drive off the cliff together. To prove it, suppose the contrary: that 1’s strategy will eventually concede with probability 1 (if 2 doesn’t concede first).  If that is 1’s strategy then 2’s best reply is to wait for 1 to concede. In equilibrium 2 will play such a strategy and the outcome will therefore be that 1 is the loser with probability 1. But if 1 is going to be the loser for sure anyway he should have conceded immediately. That’s a contradiction. We have shown that if 1 does not concede immediately then his strategy will allow the car to drive off the cliff with positive probability. The exact same argument applies to 2. Thus in equilibrium, if the game begins without an immediate concession there is a positive probability they will plunge from the cliff.

Eli Dourado wrote this on Twitter:

Despair. RT @GovChristie: The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging.

When there’s a natural disaster some people, like Gov. Christie, start complaining in knee-jerk fashion about price gouging. And then some other people, with their knees jerking in exactly the same fashion, start complaining about people who complain about price gouging. The latter sets of knees usually belong to economists.

Suppose that an unexpected shock has occurred which has two effects. First, it increases demand for, say bottled water. Second, it cuts off supply lines so that in the short-run the quantity of bottled water in the relevant location is fixed at Q. A basic principle of economics is that if you wish to maximize total surplus then you should allow the price to adjust to its market-clearing level. This ensures that those Q consumers with the highest value for water get it. The total surplus will then be the sum of all their values.

The price plays two roles in this process, one crucial to the result, one just incidental and not necessarily intended. First, it separates out the high-value consumers from the low-value consumers. That’s the crucial role. Unavoidably it also plays a second role of taking some of that total surplus away from the consumers and giving it to producers. If you are maximizing total surplus you are completely indifferent to that second effect.

But what if you don’t want to maximize total surplus but just want to maximize consumers’ surplus? Your goal is that the Q bottles of water you’ve got should generate the greatest possible benefit for those who will consume them. I would bet that most people who understand the previous paragraph also assume that it applies equally well to the problem of maximizing consumer’s surplus. How else would you maximize it but to ensure that those with the highest value get the water?

But in fact it is quite typical for the consumer surplus maximizing solution to be a rationing system with a price below market clearing. I devoted a series of posts to this point last year. The basic idea is that the efficiency gains you get from separating the high-values from the low-values can be more than offset by the high prices necessary to achieve that and the corresponding loss of consumer surplus.

Why would we only care about consumers’ surplus and not also the surplus that goes to producers? We normally we care about producer’s surplus because that’s what gives producers an incentive to produce in the first place.  But remember that a natural disaster has occurred. It wasn’t expected. Production already happened. Whatever we decide to do when that unexpected event occurs will have no effect on production decisions. We get a freebie chance to maximize consumer’s surplus without negative incentive effects on producers. And just at the time when we really care about the surplus of bottled water consumers!

Of course there are other good reasons to be skeptical of rationing in practice. It might not be enforceable, it might lead to inefficient rent-seeking, etc. But these objections mean that the debate should be about rationing in practice. The theoretical argument against it is weaker than many people think.

Ezra Klein has a great post about the “cheap talk” used by candidates to try to manipulate beliefs about their candidates chances of winning.  He concludes:

The bottom line is that Boston fears scared Republicans won’t vote and Chicago fears confident Democrats won’t vote. And so, in this final stretch, Boston wants Republicans confident and Chicago wants Democrats scared. Keep that in mind as you read the spin.

In an patent race, the firm that is just about to pass the point where it wins the race and gets a patent has an incentive to slack off  a bit and coast to victory.  The competitor who is almost toast has an incentive to slack off as he has little chance of winning.  But if the race is close, all firms work hard.

Elections are similar except the campaigns have the information about whether the campaign is close or not and the voters exert the costly effort of voting.  Campaigns have an incentive to lie to maximize turnout so the team that’s ahead pretends not to be far ahead and the team that’s behind pretends the race is very close.  As Klein says, no-one can believe their spin and no information can be credibly transmitted.

If they really want to influence the election, the campaigns have to take a costly action to attain credibility.  For example, they can release internal polling. This gives their statements credibility at the cost of giving their opponent their internal polling data.

Some time ago I had half-written a post calling for a Nobel prize for Al Roth.  It was after he gave his Nancy Schwartz lecture at Kellogg and I decided not to publish it because I thought maybe it was just a little too soon.  Not too soon to get the prize but too soon to expect the Nobel folks to give it to him.  I am glad I was wrong.

Don’t forget his very important co-authors Tayfun Sonmez, Attila Abdulkadiroglu, and Utku Unver.  These guys, Tayfun especially, were still working on matching theory when nobody else was interested and before all the practical applications (mainly coming out of their collaboration with Al) started to attract attention.

This is a time for microeconomics to celebrate.  When you are on a plane and you tell the person next to you that you’re an economist, they ask you about interest rates.  Everyone instinctively equates economics with macroeconomics.  And that’s probably because most people have the impression that macroeconomics is where economists have the biggest impact.

But actually microeconomic theory has already had a bigger impact on your life that macroeconomic theory ever will.  And there’s no politics tangled up in microeconomics.  When you meet a microeconomic theorist it never once occurs to you to check the saline content of their nearest body of water.

There are no fundamental disagreements about basic principles of microeconomics. And I would say that Al Roth epitomizes what’s great about microeconomics.  He has no “field:” he does classical game theory/bargaining theory and he does behavioral economics.  He does theory and experiments.  He theorizes about market design and he actually designs markets.

Al is the second blogger to win a Nobel prize.  Compare their fields and their blogs.

I never met Shapley and I only saw him give a couple talks when he was already way past his prime.  But gappy3000 reminds me that he and John Nash invented a game called Fuck Your Buddy.  So that’s something.  And now he has a Nobel Prize. And of course without his work there would be no prize for Roth either.  David Gale should have shared the prize but he died a few years ago.

Temporary parking sign spotted near the Stanford GSB/Economics department by Michael Ostrovsky (via Google+)

I wrote about it here.  I had a look at the video and it was the right call given the rule, but as I argued in the original post the rule is an unnecessary kludge.  At best, it does nothing (in equilibrium.)

The difference between cycling and badminton:

“I just crashed, I did it on purpose to get a restart, just to have the fastest ride. I did it. So it was all planned, really,” Hindes reportedly said immediately after the race. He modified his comments at the official news conference to say he lost control of his bike.”

The opposition took it in stride:

French officials did not formally complain about the British tactic.

“You have to make the most of the rules. You have to play with them in a competition and no one should complain about that,” the France team’s technical director, Isabelle Gautheron, told The Associated Press.

But,

“He (Hindes) should not have told the truth,” Daniel Morelon, a Frenchman who coaches the China team, told the AP. “It’s part of the game, but you should not tell others.”

CJ Roberts rescues the mandate by noticing that it’s a tax.  Here’s the key line in the dissent of the minority, Kennedy, Scalia, Alito, and Thomas:

The issue is not whether Congress had the power to frame the minimum-coverage provision as a tax, but whether it did so.

The full decision is here.

Josh Gans gives a handy benchmark model where the answer is no.

MODEL 1: Wholesale Pricing

Suppose that a book publisher charges a price of p to a retailer. Then, based on this, the retailer sets a price to consumers of P and earns (P – p)(a – P).

In this case, the retailer’s optimal price is:

P* = (a + p)/2

Given this, the publisher’s demand is Q = a – P* or Q = (a-p)/2. The publisher chooses p to maximize its profits of pQ which results in a price of p* = a/2. This implies that the final equilibrium price under the wholesale pricing model is:

P* = 3a/4

MODEL 2: Agency

Under an agency model, the publisher sets P directly while the retailer receives a share, s, of revenues generated. The publisher, thus, chooses P to maximize its profits of (1-s)PQ. This generates an optimal price of:

P* = a/2

Conclusion

Regardless of s, the price under the agency model is lower than the price under a wholesale pricing model. The reason is that the agency model avoids double marginalization. The comment here does not reflect other effects arising from ‘most favored customer’ clauses that can apply in both wholesale pricing and agency models and are discussed further in Gans (2012).

Instead of a mandate to buy insurance and a penalty of $X if you do not comply, what if everyone’s taxes are raised by $X and anyone who complies with the mandate receives a refund of $X? Does that make it constitutional?

Professional line standers.

The word “Intrepid” is on Hans Scheltema’s business card, and it’s more than just the name of his business. The professional line-stander prides himself on sticking it out, in all kinds of weather, on behalf of the lawyers, lobbyists and others willing to pay for a place in line at big events, such as arguments before the Supreme Court this week on thefederal health-care overhaul.

But even a guy with supreme stick-to-itiveness has his limits.

On Sunday afternoon, after holding down spot No. 3 outside the Supreme Court for the better part of the day, he hired a homeless man to fill in for a few hours. Scheltema, 44, who had taken over Sunday morning for a guy who had held the spot since Friday, wanted to go home to recharge — both himself and his BlackBerry.

The big event of this week in the U.S. will be the Supreme Court discussion of the Affordable Care Act aka “ObamaCare”, a supposedly derogatory nickname now embraced by the Obama campaign. At the heart of the fight is the so-called individual mandate which requires everyone to purchase health insurance. A related and important argument is that additional provisions, such as requiring coverage for individuals with preexisting conditions, become prohibitively expensive without the individual mandate. This is because, without the mandate, healthy individuals will not buy insurance till they become sick and this drives up costs of insurance companies. So, if the individual mandate is struck down, the argument goes, the court should also strike down the requirement that insurance companies cover individuals with pre-existing conditions.

I am not a lawyer but the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action. There is plenty of precedent for taxing “action” but can the federal government tax “inaction”? Many amicus briefs have been filed but there are two key ones by economists.

David Cutler, who worked in the Obama administration, has filed one with many co-signatories (including Akerlof, Arrow, Maskin, Diamond, Gruber, Athey, Goldin, Katz, Rabin, Skinner etc.). They say there is no such thing as inaction. A conscious decision to forego healthcare is an action and hence under the purview of existing law. Foregoing insurance also affects outcomes largely by shifting costs to others and hence is not a neutral decision.

The other side of the argument is filed by Doug Holtz-Eakin with co-signatories inclusing Prescott, Smith, Cochrane, Jensen, Anne Krueger, Meltzer etc.) First, they argue that if an individual does not want to buy converage it must be because the costs outweigh the benefits. Second, they argue about the numbers, claming the costs imposed by the uninsured on the insured (“cost-shifting”) are far below the $43 billion estimated by the Government Economists and are more like $13 billion.

The first part of the Holtz-Eakin argument is, to me at least, odd. Uninsured individuals can get healthcare for free in the emergency room. Hence, they can get the benefits of healthcare  -or at least healthcare in extreme circumstances – without the costs. So, of course for them the benefits are outweighed by the costs because they get the benefits anyway. The argument by Holtz-Eakin presumes that the individuals are not free-riding and so their private decisions fully reflect the costs and benefits but they do not. Then, the second part of the argument which admits there is cost-shifting going on basically makes the point I am making – if there is cost-shifting, there is free-riding and then individual’s decisions do not fully internalize costs and benefits.

There has to be a better argument against the individual mandate than this. I looked at Senator Rand Paul’s brief. The precedent for this case is a 1942 case involving an Ohio farmer who was exceeding his quota of wheat production. Footnote 6 caught my eye:

So infamous is the case, it has been set to music, to the
1970s tune of “Convoy”:
“His name was farmer Filburn, we looked in
on his wheat sales. We caught him exceeding
his quota. A criminal hard as nails. He said,
“I don’t sell none interstate.” I said, “That
don’t mean cow flop.” We think you’re
affecting commerce. And I set fire to his crop,
HOT DAMN! Cause we got interstate
commerce. Ain’t no where to run! We gone
regulate you. That’s how we have fun.”

Will this convince Justice Kennedy or is it cow flop?

Find all briefs here.

Observers cite the possibility of a brokered convention as the only reason for Newt Gingrich to remain in the race for the Republican nomination. If Mitt Romney cannot accumulate a majority of committed delegates prior to the convention, then Newt’s delegates give him bargaining power, with the possibility of throwing them behind Rick Santorum or even forging a Santorum/Gingrich ticket.

But why wait for the convention? If Gingrich and Santorum can strike a deal why not do it right now? There are tradeoffs.

1. If all primaries awarded delegates in proportion to vote shares there would be no gain to joining forces early. Sending Newt’s share of the primary voters over to Rick gives him the same number of delegates as he would get if Newt collected those delegates himself and then bartered them at the convention. But winner-take-all primaries change the calculation. If Santorum and Gingrich split the conservative vote in a winner-take-all primary, all of those delegates go to Romney. Joining forces now gives the pair a chance of bagging those big delegate payoffs.

2. Teaming up now solves a commitment problem.  If both stay in the race and succeed in bringing about a contested convention, the bargaining will be a three-sided affair with Romney potentially co-opting one of them and leaving the other in the cold.

Those are the incentives in favor of a merger now.  Working against is

3. A candidate has less control over his voters than he would have over his delegates. Newt endorsing Santorum does not guarantee that all of Newt’s supporters will vote for Rick, many will prefer Romney and others would just stay at home on primary day.

Gingrich and Santorum are savvy enough, and there is enough at stake, for us to assume they have done the calculations. Given the widespread belief that any vote for Rick or Newt is a really an anti-Romney vote, they surely have discussed joining forces. But they haven’t done it yet and probably will not, and this tells us something.

The huge gain coming from points 1 and 2 can only be offset by losses coming from point 3. Their inability to strike a deal reveals that the Gingrich and Santorum staffs must have calculated that the anti-Romney theory is an illusion. They must have figured out that if Gingrich drops out of the race what will actually happen is that Romney will attract enough of Gingrich’s supporters (or enough of them will disengage altogether) to earn a majority and head into the convention the presumptive nominee.

Newt and Rick need each other. But what they particularly need is for each to stay in the race until the end, collecting not just the conservative votes but also the anti-other-conservative-candidate vote in hopes that their combined delegate total is large enough come convention-time to finally make a deal.

Here’s a pretty simple point but one that seems to be getting lost in the “discussion.”

Insurance is plagued by an incentive problem. In an ideal insurance contract the insuree receives, in the event of a loss or unanticipated expense, a payment that equals the full value of that loss. This smooths out risk and improves welfare. The problem is that by eliminating risk the contract also removes the incentive to take actions that would reduce that risk. This lowers welfare.

In order to combat this problem the contracts that are actually offered are second-best: they eliminate some risk but not all. The insured is left exposed to just enough risk so that he has a private incentive to take actions that reduce it. The incentive problem is solved but at the cost of less-than-full insurance.

But building on this idea, there are often other instruments available that can do even better. For example suppose that you can take prophylactic measures (swish!) that are verifiable to the insurance provider. Then at the margin welfare is improved by a contract which increases insurance coverage and subsidizes the prophylaxis.

That is, you give them condoms. For free. As much as they want.

How did British PM David Cameron steel himself for the historic all-nighter last week in Brussels?

Cameron, it is said, used his tried-and-tested “full-bladder technique” to achieve maximum focus and clarity of thought throughout the gruelling nine-hour session in Brussels. During the formal dinner and subsequent horse-trading into the early hours, the prime minister remained intentionally “desperate for a pee”.

Showing a healthy disdain for ivory-tower types who claim the opposite:

Australian and American researchers examined the “effect of acute increase in urge to void on cognitive function in healthy adults”. After making eight “healthy young adults” drink two litres of water over two hours, the researchers asked them to complete a series of tasks to test their cognitive performance. They concluded from the results that an “extreme urge to void [urinate] is associated with impaired cognition”.

 

The Palestinians cannot get membership in the UN because the United States would use its veto.  But they have other options.  A month ago they were voted in by a wide margin to the United Nations Educational, Scientific and Cultural Organization, UNESCO.  This compelled the United States to cease funding to UNESCO because of an American law that prohibits contributing to any organization that recognizes the Palestinian Liberation Organization which the US considers to be a terrorist arm.

The US has no veto power to prevent entry to UNESCO or 14 other special UN agencies.  Quoting Gwynne Dyer:

If the Palestinians apply for membership in each of these organisations over the next year or so, they will probably get the same 88 percent majority when it comes to a vote on membership. None of the countries that defied the United States and voted Palestine into UNESCO is going to humiliate itself by changing its vote at other UN agencies. And each time, Washington will be forced by law to cease its contributions to that agency.

The United States would not actually lose its membership by stopping its financial support – at least not for a good long while – but it would lose all practical influence on these agencies, which do a great deal of the work of running the world. It would be a diplomatic disaster for Washington…

I thank Sean Brockelbank for the pointer.

Honestly though, I like Rick Perry now more than ever.  How he handled that moment is incredibly endearing and anti-political.  And I understand a lot about the GOP by noticing that every time one of their candidates does something likable his popularity among the base is eroded.

When he made his red-meat candidacy announcement this summer, I was frightened, and the GOP insiders already had him in the White House. Then when he appealed to his party’s heart to defend financial aid for the undocumented in Texas, me and the GOP switched places.  When he gave that speech in New Hampshire that went viral, I thought he came across as a guy you could hang with.  Everybody else said he must be on drugs.  Bill Clinton talks like that and he’s our buddy Bubba.

The standoff between Herman Cain and his accusers offers us some interesting strategy to contemplate.  The accusers are muzzled by a non-disclosure agreement they signed as a part of their settlement with the National Restaurant Association, where they worked alongside Mr. Cain.  But lets walk down the tree to the node where the NDA has to be enforced.

One of the accusers has gone public with the allegation.  To enforce the NDA is to admit that the NDA exists, which in turn is an admission that there was a settlement, which for all practical purposes is an admission that the allegations are true. Now, back here at the beginning of the game tree, should the accusers consider this a credible threat?

Perhaps.  Because the allegations will be devastating whether or not Mr. Cain confirms the settlement.  By then he would have little to lose, and at that stage the presumed penalties mandated by the NDA plus plain old retribution would be motivation enough.

(Let’s admire but ultimately ignore as unrealistic the gambit of not enforcing the NDA as a way of “proving” that there is no NDA because there was never any settlement with these accusers.)

However, it appears that the settlement is actually a contract between the NRA and the accusers.  If that is the case then the decision to enforce it may not be Mr. Cain’s.  Does the NRA have any credible motivation to do so?

Maybe not, but in some ways this arrangement may strengthen Mr. Cain’s position.  Imagine that the accuser’s lawyer holds a press conference and publicly asks “Mr. Cain, my client is subject to a Non-Disclosure agreement arising from a sexual harrassment settlement in which you were the harasser. You deny this.  Since the accusations are false you should be perfectly willing to release them from the NDA.  Please prove to the American people that you are telling the truth by waiving it.”

Mr. Cain wiggles out of this one by publicly saying “Yes, I have nothing to hide. The NDA should be waived” and then by privately urging the NRA to do no such thing.  The NRA can of course deny that there was any agreement and indeed the agreement probably requires them that because it presumably prohibits all parties from talking about it.

Spake Kim:

“I got caught up with the hoopla and the filming of the TV show that when I probably should have ended my relationship, I didn’t know how to and didn’t want to disappoint a lot of people,” the post said.

That explains it.

On Monday, me and some dudes are gonna tailgate outside the Kellogg School of Management before the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is announced. You should totally come. It’s gonna be ill. My pick to click this year is N. Gregory Mankiw. They’re gonna say it’s for his work on menu costs and price stickiness, but that’s bunk. It’s really so they can hand it over to someone who isn’t Paul Krugman.

Who’s on your Nobel fantasy team?

In related news, Harvard has shut down its Nobel pool (and Al Roth plans on a late breakfast.)

I am attending a workshop organized by Eli Berman at UCSD.  Eli and his co-authors have been studying the military surge in Afghanistan.  Colonel Joe Felter, a key member of the research team, presented an overview of the theory of counterinsurgency (COIN) – How can the Afghan government and the US forces “win hearts and minds”?

Think of Apple and Samsung competing for consumers.  In the end, a consumer hands over some cash and gets an iPad or a Galaxy.  Both sides of the exchange have sealed the deal, an exchange of a product for money.  The theory of COIN works the same way.  Two potential governments compete for allegiance from an undecided population.  They offer them security and public goods in exchange for allegiance.  They may also use coercion and violence to compel compliance.  There is a key difference – an Afghan citizen can take the goodies offered by the U.S., claim he will offer his allegiance and then withhold it.  The exchange takes place over time and there is no “contract” that guarantees payment of allegiance for US bounty.

The Afghans will offer their allegiance to the government that will be around in the long run.  And the Taliban tell them, “The Americans have watches but we have the time.”  And this strategic issue undercuts the theory of COIN.  How can the surge work if one of the firms that is trying to sell you a product won’t be around to honor the warranty?

The daring raid on Osama Bin Laden’s Pakistani hideout has deeply embarrassed the Pakistani military and secret service ISI.  American helicopters were able to fly in undetected, kill the world’s most wanted man and leave with his body.  We might speculate about the consequences for Al Qaeda and the possible acceleration of withdrawal of American troops from Afghanistan.  Instead, I thought I would talk about the implication of the American attack on Pakistan.

First, if Navy Seals were able to fly in and steal Osama Bin Laden, might they be able to steal Pakistan’s nuclear materials?   A much more difficult and perhaps impossible enterprise with weapons at different locations, some of them mobile. But the Abottabad adventure was highly improbable too. Therefore, one result of the death of OBL is that the Pakistanis will guard their nuclear weapons with more diligence. This is good for the rest of the world as it reduces the chances of a WMD falling into the hands of extremists.  It is bad to the extent that the rest of the world (i.e. the US!) has plans to capture Pakistani WMDs in some emergency scenario.

Second, the Pakistani military does not come out of this incident looking good. Either they are incompetent, unknowingly allowing OBL to live in an army town, or they are complicit, deliberately harboring a terrorist where he might be least likely to be found.  In either scenario, Pakistan might think that the American action emboldens India.  India now has cover to adopt a more aggressive stance against Pakistan.  This in turn implies that Pakistan might adopt a more aggressive stance itself to counteract any reputational fallout from its perceived ineptitude.  Some kind of cross-border incident in Kashmir is an obvious move for Pakistan to engineer.  There is some distance between Pakistani politicians and the military and some kind of “confidence-building” move by India might help to forestall any increase in tension.  Such a move unfortunately is politically difficult given the huge suspicion of the Pakistani military and ISI following on the heels of the discovery of OBL living safely in Abottabad.

From MR, I read this story about how the San Francisco smart parking meters will be designed to adjust meter rates in real time according to demand.  There wasn’t much detail there but this bit gave me pause.

Rates at curbside meters in the project area will be adjusted block by block in an attempt to have at least one parking space available at any time on a given block.

Republicans and Democrats are negotiating a budget deal in an effort to avert a government shutdown. The last time the government was forced to furlough workers, Congressional Republicans and their leader Newt Gingrich took much of the blame in the eyes of the public.  It is generally believed that Republicans, the anti-goverment party, would again be blamed for a government shutdown should an agreement not be reached this time around.

The first-order analysis bears this out.  While a government shutdown would be a bad outcome for all parties, it is relatively less bad for the anti-big-government Republicans.  Other things equal you would infer that if a shutdown were not averted it would have been because the Republicans were willing to let that happen.

Of course other things are not equal.   The second-order analysis is that Democrats, understanding that Republicans would take the blame now become relatively more willing to allow a shutdown.  This affects the bargaining. Democrats are now emboldened to make more aggressive demands for two reasons.  First, the cost of having their demands rejected is lower because they score political points in the event of a shutdown. Second, for that same reason Republicans are now more likely to accept an aggressive offer.

Will the blame equilibrate?  Does the public internalize the second-order analysis and adjust its blame attribution accordingly?  And what does equilibrium blame look like?  Must it be applied equally to both parties?

In politics only the most transparent arguments hold sway with the public.  The second-order analysis is too subtle to be used as a talking point even though probably everybody understands it perfectly well.  A talking point is effective as long as it’s believed that many people believe it, even if in fact most people see right through it. So the first-order analysis will rule and the blame will not equilibrate.

In the current environment that could raise the chances of a government shutdown.  Ideally Democrats would maximize their advantage by increasing their demands and stopping just short of the point where Republicans would rather trigger a shutdown.  But the Tea Party complicates things. They might be so steadfast in their principles that they are not deterred by the blame. That could mean that the best deal Democrats can expect to reach agreement on is dominated by making a demand that the Tea Party rejects and forcing a shutdown.

The now metered and paywall protected NYT reports:

The Obama administration is engaged in a fierce debate over whether to supply weapons to the rebels in Libya, senior officials said on Tuesday, with some fearful that providing arms would deepen American involvement in a civil war and that some fighters may have links to Al Qaeda.

Why?

Even if fighters do not have links to Al Qaeda or Hezbollah, what is there to guarantee that they are or will remain friendly to the Western allies?  Gaddafi while historically unfriendly had finally been seduced with Mariah Carey concerts and Coca Cola. Arming the rebels might fulfill a short term objective of regime change but at the cost of creating an armed future enemy.  What’s the debate?

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