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Henry VIII (the right-wing of the Tory party) wanted to divorce his first wife (the EU) and marry Anne Boleyn (stop immigration and transfer payments to the EU ) but the Catholic Church (Angela Merkel) would not let him. So, he renounced Catholicism and became a Protestant, a new form of Christianity conceived by Martin Luther (Nigel Farage). But then Mary Queen of Scots (Nicola Sturgeon), a Catholic, married a French Prince when Elizabeth I (Boris Johnson) eventually came to the throne. Mary got beheaded and the Elizabeth’s reign turned out pretty well.

But here Boris’s and Elizabeth’s paths diverge. The Protestant Reformation was forward looking and emphasized the work ethic. Faragism – to the extent it is a philosophy – is backward-looking and is about denying globalization. Not clear then who gets beheaded, Boris or Nicola.


Trump is the Principal and a Republican Congress member is the Agent. Trump wants their support and wants to compel them to support him. There is no money to align incentives and all Trump can do is shower with praise (e.g. people who cave in to him are “brave” like Megyn Kelly who went to visit him in Trump Tower after their dustup) or rain down abuse (e.g. the Republican Governor Martinez of New Mexico who dared to text during one of his speeches).

From the Agent perspective, since there is no money, there is only re-election probability. This leads to two cases. In one case, the Agents reelection probability is increasing in being seen as pro-Trump. Then, Trump should allocate praise and abuse in the natural way. In the other case, the Agent’s re-election probability is decreasing in being seen as pro-Trump but Trump would still like Republican support to increases his election chances. Then, Trump should visit the Agent’s district if the Agent does not support Trump. He should say the Agent is brave and lie and say the Agent does support him. This threat maximizes compellence.


Marco Rubio provides the most interesting example. He has lumped in with Trump as he decides whether to run for re-election. If he throws his hat into the ring and Trump’s polls tank in Florida, Donald should threaten to campaign there heavily if Rubio shows signs of weakening in his support of Trump.

Your kid leaves her phone lying around. You find the scatterbrain never bothered to change her password as you guiltily break into her phone. You follow the trail of texts from last Saturday night. The slang is beyond you but Google translates. Shocked you find the supposed naïf and her friends were trying score some pot and booze from the cool crowd in school.

How should you respond?

You immediately want to go Putin-style hard on her ass. Confrontation, grounding, extra math classes. But any confrontation will likely reveal you accessed her phone. The stakes will only increase. Password changes, another phone purchased with the proceeds from the baby-sitting business..who knows where it will all end up?

You think through your strategy. Before this crisis, your threshold for the gateway drug was caffeine. So no Coca Cola has crossed the girl’s lips. But it seems she’s graduated from Izzes to Corona. Surely that worse than Coca Cola so you should come down like a ton of bricks? But one thing is certain – your access to her secret life is over because she’ll close off the information superhighway. How will you know if and when she’s “chasing the dragon” as people apparently said when you were young? You realize your threshold for intervention is coke (the drug) not Coca Cola. Just keep an eye on her messages till you see “yeyo” and then intervene.

You contemplate home schooling. You head over to the liquor cabinet and fix yourself a Scotch. Straight, no chaser.




From National Memo:

A day in the life of the emptiest suit in Washington:

7 a.m. You wake up, light a Camel. Read a pink Post-it left on the refrigerator by your wife: “John, don’t ever forget, YOU REALLY ARE THE SPEAKER OF THE HOUSE!!! Also, we’re out of bagels.”

7:30 a.m. You lie in your tanning bed meditating about the government shutdown, wondering if it was such a brilliant idea to let it happen. You put on some Pink Floyd, “Dark Side of the Moon,” but that doesn’t help.

8:00 a.m. On the ride to Capitol Hill, your driver remarks that there’s not much traffic in the city, no tourists lined up to see money being inked at the Bureau of Engraving and Printing. You smoke another Camel.

Hiaasen has a new book out.



From political scientist Gary Cox at the Monkey Blog:

The idea goes back to England’s Glorious Revolution, where MPs fought hard to put the Crown on a short financial leash, so that they could control Crown officials’ actions. Although they did not use the term, English arguments about what would give Parliament bargaining leverage vis-à-vis the Crown hinged on the budgetary reversion.  Because expenditure authority would lapse every year, forcing portions of the government to “shut down” in contemporary American parlance, parliamentarians were assured the Crown would seek a new budget every year — whereupon they could bargain for attainment of their various goals.

Eventually the power of the purse meant the monarch became a figurehead, the House of Lords a rubber stamp and power truly resides in the House of Commons. So, the analogy would be that the President becomes an (elected) figurehead, the House of Lords becomes an (elected) rubber stamp and the House of Representatives becomes the center of power. And the Tea Party Republicans want to turn us into Britain!

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.

If the federal government shuts down on Oct 1, only essential staff get salaries. Congress is considered essential.

After the government shutdown, there will be a blame game to determine who gets held responsible for the closing of national parks etc. Either or both sides could in principle suffer the negative hit from the shutdown. Each party has to do something to get the upper hand in the argument. The first to renounce their salaries during the shutdown will get the upper hand.  They can say ” We share the pain of the shutdown with the American people and stand in solidarity with them. The other side is not suffering and is inflicting pain on all of us – they have nothing to lose and are advancing an extreme political agenda which is not in the interests of the American people.” The other side will soon capitulate and give up their salaries too. But the second-mover does not reap the rhetorical benefit. There is huge incentive to move first. So, there is a pre-emption game and everyone renounces their salaries.

According to Jean-Jacques Dethier, a development economist at the World Bank:

 Alec Trevelyan (Sean Bean) wants to use an electromagnetic pulse from a nuclear weapon to bring London to its knees and destroy the Bank of England, but not before electronically stealing millions of pounds from the Bank’s systems.

Plausibility: First of all, wouldn’t destroying London and the Bank of England render the pounds you’ve stolen largely worthless? “Not exactly worthless, but close,” says Dethier. Would you be able to convert it? “It’s actually very hard to convert huge amounts of something, which is a problem the Chinese now know well with all their American dollar holdings,” he says. So Trevelyan would have to spend all those pounds in the one country that’d take them: Britain. Whose economy he’s just destroyed.

Other great analyses can be found at the Vulture.

Gingrich, Santorum (and I guess also Ron Paul) keep splitting the conservative vote in the Republican primaries. Romney gets through because of the split.

Gingrich and Santorum are playing a dynamic version of Chicken (a war of attrition) with budget constraints.  With complete information, a war of attrition has the player with the lower budget dropping out immediately in equilibrium.  He knows that eventually there will be a penultimate stage where the player with the bigger budget will definitely fight because he knows he will be the only player left standing the next and final period and hence will win the prize with certainty.  The player with the dwindling budget might as well drop out and save his money at the penultimate stage. But then we can backward induct to the pen-penultimate stage etc. and the player with the smaller budget drops out immediately.

This solution relies on a lot of rationality and complete information. Both of these are suspect in the Republican primaries. On the one hand Gingrich seems to be in the better financial position. He has a billionaire bankrolling him, Santorum does not. But on he other hand, the billionaire might not want to waste money on a lost cause. And it appears Santorum does have more money in the bank than Gingrich because he does have some support. And both men display the mixture of nutty self-belief and guile that is characteristic of politicians. Plenty of reason for the race to go on for along time.

Perhaps too long for Obama supporters. I think they should prefer Gingrich as the Republican candidate in the general election not Romney. In Florida, Romney showed that he has strong support among moderates. Moderates are the key to victory in the general election. A Democratic billionaire has to pitch in, help out the casino billionaire and bankroll the Gingrich SuperPac. They can do this by setting up an anonymous company with a PO box, keep their identity hidden and sign over a check. A big enough donation should trigger a Santorum exit as in analysis above. Then, it’s Romney vs Gingrich the rest of the way (with fringe support for Paul).

Hot off the presses from the Hollywood Gossip:

[T]he rapper quickly accepted when a follower named MyBestAssets made him an offer regarding his hometown Giants and the New England Patriots.

It’s unclear who MyBestAssets is, what those assets are, and what the extent of her relationship with Chelsea Handler’s ex is. But she’s apparently a Pats fan.

“Lets bet. If the Giants lose the Superbowl, u must post ur d*ck on the twitter. If they win, I’ll post my boobs & face. Bet?” she wrote. 50 quickly went all in on that.

“Ok It’s a bet. See your d*ck on twitter Feb 5. Lol” she wrote.

LOL indeed. This is definitely the most unusual wager we’ve heard of, which is saying something, as certain THG staff members have bet on the coin toss. The coin toss.

Anyway, let’s go Giants. We really don’t need to see that.

I’m a Pats supporter but I now I have some reason to be happy if the Giants win.

My family have decided that I am too sarcastic.  I concurred.  So, I agreed to sign an anti-sarcasm contract :

“Under pain of having to donate $1 toward Lego for every infraction, I hereby declare my intention to eschew sarcasm.”

The kids were making $8/day for the first few days till I learned a little self-control. So far so good.

Then, weird little things started happening. A child would ask innocently: “Can we have  second dessert?” Or “Can I skip homework today?” etc. I would unfortunately respond with sarcasm.

I realized that the attempt to deal with my sarcasm by giving me incentives had created another incentive problem. I tried to change the contract so the money goes to charity but my kids refused to renegotiate….Is there some corollary of the Holmstrom moral hazard in teams model that says our it is impossible to implement optimal incentives with budget balance?

My colleaque, political scientist Tim Feddersen, says he does not understand recent U.S. elections. He understood Bill Clinton, Dick Morris and triangulation. He understood George W Bush and “compassionate conservatism”. These are all consistent with the logic suggested by the median voter theorem: politicians should adopt policies that will win the support of the median voter (forget the fact that the politicians will renege on their promises as soon as they get in office!).  But George W Bush was not a compassionate conservative in 2004.  And for some reason, Tim can’t rationalize how President Obama got elected via the median voter theorem.

So there is a competing theory which is less well worked out, the ideological voter theory.  In this theory, it is the extremes that determine elections so the candidate must play to them.  One version of the theory would include turnout as a second dimension of voting strategy as well as how the citizen actually votes once she gets in the voting booth.  Extremists have lower costs of turning out so the payoff to motivating them at the cost of alienating independents is greater than the benefit to motivating independents at the cost of not motivating extremists.  This theory would say Santorum is the biggest threat to Obama.  Watching Santorum’s speech the other night, I was moved by his story about his grandfather’s life as a coal-miner while I found Romney’s speech formulaic and artificial.  So, I have some sympathy for this theory. (Of course, Jon Stewart has yet to fully explain to me what Santorum’s policy positions are  If they are as extreme as my preliminary google search suggests, I might switch back to the median voter theory.)

So, the ideological voter theory suggests that Santorum is Obama’s most potent adversary.  This implies Obama supporters should hope that Romney comes out alive from the Republican primaries.  (I have yet to incorporate Larry Kotlikoff’s candidacy in my world view though I completely endorse Jeff’s fulsome praise.  I visited BU Econ a couple of years ago and it has a great “corporate culture” that I too attribute to Kotlikoff.)  But Romney has plenty of money so no need to bankroll him.  Just give it to Obama.

Suppose you think centrist, independent voters decide elections.  This is the median voter theory of elections.  If you believe this theory, then Mitt Romney is the biggest threat to Obama.  He is probably a moderate, like the father he hero-worships.  He is responsible for Romneycare, the model for Obamacare etc.  So, Obama supporters fear Romney as the Republican candidate.  They should seek to weaken him as much as possible in the primaries or even try to ensure another candidate is left standing at the end of the primaries.

The strategy of Obama supporters who subscribe to this theory is simple: Give money to Newt Gingrich.  He is promising to help Santorum and fight Romney. At worse, he will weaken Romney and at best, given Gingrich’s efforts, Santorum may squeak through.

Yoram Bauman is also an environmental economist.  With this hat on, in the NYT, he says:

Learning about the shortcomings as well as the successes of free markets is at the heart of any good economics education, and students — especially those who are not destined to major in the field — deserve to hear both sides of the story.

Which reminds me of my plan to put in more stuff about common property resources, public goods and externalities into my MBA course next quarter…

Ex-News of the World journalist and phone hacking aficionado Paul McMullan describes the public interest thus:

The public interest, he said, added up to no more than the sheer number of copies the News of the World could sell. “Circulation defines the public interest” – which meant that everything was legitimate as long as the public bought the paper. “You have to appeal to what the reader wants – this is what the people of Britain wants. I was simply serving their need,” he said

Hence, if the people are willing to pay to  read about Hugh Grant’s peccadilloes, then it is O.K. to hack into his phone etc. to give the people what they want.  There is a flavor of a free market argument here.  But we know that prices are necessary for the market to work efficiently – the market is not literally free in terms of commodities being free! There are no prices here so there is no reason why giving the public what they want leads to efficiency.  Hugh Grant may value keeping the identity of the mother of his child secret at v while the public values the information at 0<v'<v . In the absence of a price, the information will get revealed even when it is inefficient (i.e it does not maximize social surplus).

Then there is the reverse scenario where details of Hugh’s shenanigans in L.A. are worth v’ to the public and secrecy is worth v to Hugh but v’>v>0. In this case the ex post efficient outcome will be implemented by the media. But there is ex ante inefficiency in gossip production. As Hugh does not capture any or the surplus he generates from cavorting with ladies of the night, he will not cavort at the socially optimal level. To fix this serious problem, Hugh and the Sun, Daily Mail etc have to begin by consulting the seminal work of Ted Groves and Myerson and Satterthwaite. A mechanism of some sort needs to be set up to maximizes second-best social welfare. I am sure someone has already worked this out in some abstract mechanism design context (Cole, Mailath and Postlewaite or Bergemann and Valimaki?). The basic idea should involve “selling the firm to the agent” or setting up transfers so each agent maximizes social surplus. This is hard to do for all agents simultaneously I would guess unless you accept some inefficiency in terms of dropping budget balance or accepting some underinvestment ex ante.  But this is still better than the ad hoc mechanism we have right now where the court system makes transfers to Hugh. This wastes resources and does not result in the optimal scheme.

While we mull over what the answer might be, we can enjoy this McMullan performace:

When the debt limit increase finally passed, the law included the creation of a 12 person committee, the SuperCongress, which will negotiate the next round of spending cuts and tax increases. If they fail to agree, automatic spending cuts go into effect.  These spending cuts include elements that are painful to both parties and this punishment is meant to help the committee members compromise.  Also, the automatic spending cuts that kick in if there is no compromise are not as painful for the economy as a failure to increase the debt limit.  This seems to be the idea.  I have a couple of points.

First, the Democrats partly caved this time around because they feared the Tea Party wing of the Republican House members were “crazy types” who were willing to destroy ratings of American Treasury bonds to get dramatic spending cuts.  Next time around, the threat of disagreement has to police the Tea Partiers.  Do they really care about defense?  If they care about small government and less foreign intervention, they may actually want defense spending cuts.  To get these guys to compromise, the disagreement point should have included libertarian-unfriendly policies.  Federally mandated rules that everyone should brush their teeth twice a day, extra additives in drinking water, gun control laws and perhaps a constitutional amendment to eliminate the right to bear arms.   Stuff like that should have been in the disagreement point.

Second, the parties face a choice of whom to put onto the SuperCongress.  Each party will have six members, three drawn from each chamber.  The strategic problem is fairly familiar as it resembles Schelling’s discussion of delegated bargaining.  Each party has the incentive to appoint extreme members with tough bargaining stances so the other side will be more likely to give in. Paul Ryan is an obvious choices for the Republicans.  Dick Durbin is an obvious choice for the Democrats.  If both parties pursue this strategy, there will be deadlock and the disagreement point will come out of the SuperCongress (another example of Prisoner’s Dilemma everywhere).

This analysis is normative – it does not account for strategic errors.  And there have been plenty of those. During the health care negotiations we had Max Baucus fruitlessly pursuing his Republican friends trying to get them to sign on. Olympia Snowe got a lot of one-one-one face time with the President.  As Krugman points out (see also Jon Stewart a couple of nights ago!), the debt limit extension could have been folded into the extension of the Bush tax cuts last December but the President believed John Boehner at his word. So, my guess is that while Nancy Pelosi and the Republicans will follow the rational choice predictions because they are quite clearheaded, Harry Reid will try to forge a bipartisan compromise.  Max Baucus is on (and Kent Conrad would have been if he were not retiring).  Ben Nelson is a maybe.  Why not go take the extra step Harry and nominate Susan Collins or Olympia Snowe to show that you mean well?  With that kind of strategy, the Bush tax cuts may get extended again as part of the SuperCongress compromise and remarkably the Democrats might be forced to implement a compromise that is worse for them than the disagreement point.

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