Monthly Archive for May, 2009


Is “politician” just another service industry job?

One of my friends disagrees with my thoughts on the MP expenses scandal in Britain.  I’m not entirely sure, but I believe that part of our difference of opinion starts at a disagreement over what it really means to be a politician.

So here is my question to the world at large (yes, I recognise that it might be a false dichotomy): Is “politician” a job title just like any other, or is being a politician to have some sort of sacred, noble trust? Is there is something more to the role than simply maximising the returns to your constituents or the country as a whole?

Let me propose a thought experiment (for any American’s in the audience, parliament = congress and MP = representative).

Suppose we change the law so that a) voting for your representative to parliament is mandatory; b) each member of parliament represents exactly the same number of people; and c) in addition to electing a representative to parliament, everybody is permitted to vote directly on any matter brought before that parliament. If you choose to vote directly on an issue, then the weight of your representative’s vote is decreased proportionately. In this way, we would have the possibility of anything between 100% pure direct democracy and standard representative democracy, depending on what people choose.

How many people would choose to vote directly on some issues? How many on every issue? Clearly the answer is that we’d have a distribution. Some people would vote directly on everything, some would do so occasionally and some never at all.

So what do we make of that distribution? I’ll grant that I’m thinking like an economist here, but I think it’s a perfectly normal, mundane choice between trade-offs. Should I pay attention to the debate on fishing regulation or should I do something else? Everybody faces a different combination of available options, preferences over those options, incomes and relative prices between those options, so any range of attention to parliament might emerge.

In that situation, choosing to not vote directly is entirely equivalent to taking your shirts to the dry cleaner or hiring a maid to clean your house once a week. It’s an economic decision like any other, which in turn makes “politician” just another service industry job title like “financial adviser” or “maid”.

[Side note: This scenario is currently my ideal. If I could, I’d have MPs  paid per parliamentary vote per person represented, with a negative hit to anybody that introduced a bill to parliament so as to discourage frivolous votes.]

Update (1 June ’09): Put another way, why should a backbench opposition MP, who has only an abstract and indirect power over my life, be subject to more stringent ethical standards than the person performing heart surgery on me, who has direct and absolute power over my life?


Westminster democracy and illiberalism

Cam Riley doesn’t like the new “Bikie Laws” in South Australia.  He quotes Gary Sauer-Thompson, who says:

My understanding is that under the legislation … the Attorney-General has right to call an organisation, which could be anything from an informal group of people who meet at the local pub for a weekly drink through to a football club or a business, a Declared Organisation. The Attorney-General can use secret and untested evidence in making that declaration, and his decision can’t be challenged in the courts.

… Severe penalties are then visited upon controlled members who continue some form of contact, even remote contact by post, fax, phone or e-mail – two years imprisonment for a first offence, five years for a second or subsequent offence.

I agree with Cam and Gary.  This is illiberal and unnecessary.  The law is ostensibly to combat criminality in gangs of bikies, but every element of that criminality is already illegal.  It’s already illegal to conspire to commit violence, or to trade drugs.  So the net effect of this legislation is simply to grant the Attorney-General the power to disallow any organisation that (s)he doesn’t like.  Cam points out that the “emergency” laws enacted in NSW following the Cronulla riots are still on the books.

My question is this:

Why do these laws get passed now when they (probably) wouldn’t have been passed following equivalent crises 100 years ago?

It seems obvious that the legislature has a political incentive to be seen doing something, as time in the media’s spotlight is currency to a politician.  It’s common to suggest, although not universally accepted, that the sharp end of the executive (i.e. those charged with enforcing the law) generally wish for more options in carrying out that enforcement.  In a Westminster system of the executive having a controlling influence in the legislature, that would imply inexorable movement towards illiberalism over time as exogenously-sourced crises occur.

So how has liberalism survived for so long in the Westminster tradition?  What, if you’ll excuse the pun, arrests the movement to a sort of democratic dictatorship?


Counter-cyclical markups

One of the things that gets discussed in the currently-under-attack topic of DSGE models is that of counter-cyclical markups.  If the typical firm’s markup is counter-cyclical — that is, if it’s markup over marginal cost rises during a recession and falls during a boom — then both the magnitude and the duration of any given shock to the economy will be larger.

From the front page of the FT website this afternoon:

counter-cyclical profits

The article it’s referring to is here.


The MP expenses scandal in Britain

It’s both spectacular and petty.  The fraction of MPs that truly scammed the system is tiny and the scale of the claims for the most part only seems offensive in a recession.  It was started by Cameron as a political stunt, but when Torys were implicated he had to take it nuclear or look terrible.  The Speaker was culpable, yes, but he was thrown under the bus by Brown all the same.  That The Telegraph got the complete list in a leak is more of a story, to my mind.

What style of Speaker will emerge is an interesting question.  If it’s another Labour party member, it will be easy to imagine the role moving somewhat  in the direction of the Speakers of the lower houses in Australia (where the role is quite partisan) and the USA (where it is extremely partisan).  In a parliamentary democracy (Australia, UK) , that will serve to grant the executive more power over the legislature, which is a Bad Thing ™ in my books, as it reduces the ability of the opposition to contribute to the legislative process in any meaningful way.

I’ve occasionally thought that in the event of Australia becoming a republic, the president’s primary constitutional role might simply be to ensure the fair operation of the judicio-political system.  So, for example, the president – or their appointee – might be the official Speaker of the House but would not have a vote (even in the event of a tie) and could not introduce legislation.

Of course, having the monarch appoint an independent Speaker of the Commons in the UK would get MPs’ knickers in a collective knot over the sovereignty of parliament.  Another reason to be a republic.


The Chrysler bankruptcy

This is not a post about how Chrysler might work going forward, nor a post about how dastardly the hold-outs are.  This is a post about the distribution of haircuts and the move from White House-led negotiation to bankruptcy court.

There are broadly four groups of creditors:  The (sole remaining) shareholder, the union/pension-fund, the bond holders and the US government.

Clearly the shareholder should be wiped out.  The question is how much of a haircut everybody else should take.

I believe that by law, the US government would take the smallest haircut (get the largest fraction of their money back) as they’re super-senior, then the bond holders in decreasing order of seniority and the union/pension fund should get the biggest kick in the teeth.  The hold-outs were secured creditors, which means that if the company is liquidated they get a pretty senior claim on the proceeds.

[Update: Duh.  The government isn’t a super-senior bond holder, it’s a preferred share holder, which means that it’s claims, in principle, ought to be subordinate to the bond holders]

As I understand it, the deal on the table had the order differently.  The unions were getting back something like 60c on the dollar, the government 45c on the dollar and the bondholders 25c on the dollar (those numbers are made-up, but indicative).

That conflict between what would normally happen and the deal on offer was what gave rise to this sort of comment from Greg Mankiw:

The Rule of Law — Not!

Via the WSJ, here is the view from a “secured (sic) creditor” of Chrysler:

“Like many others I made the mistake of buying what I believed was ‘value,'” Mr. Gwin says, adding that investors who bought at the time believed the loans were worth more than their market price. “We did not contemplate having our first liens invalidated by a sitting president,” he adds.

As the President intervenes in more and more industries, a key question is how he does it and what he is trying to achieve. Is he trying to reorganize insolvent firms while, as much as possible, preserving the rights of stakeholders as established under existing contracts? Or is he trying to achieve a “fair” outcome as he judges it, regardless of preexisting rules and agreements? I fear it may be the latter, in which case politics may start to trump the rule of law.

Mankiw has an uncanny ability to irritate me at times and although he has a bloody good point, even a vitally important point, this post did irritate me because I suspect that most bankruptcy arrangements aren’t fair, for a few reasons:

First, bond-holders, like equity holders, are ultimately speculators.  We differentiate the seniority of their claims legally, but the fact is that a guy holding a Chrysler bond is just as much of a punter as the dude holding one of the shares.  They (presumably) had the same access to information about Chrysler’s future and they (hopefully) both knew that their investment came with risk.  The idea of one subset of one factor of production being largely protected from the risk of the company’s failure is silly.

Second, employees are not speculators in the same way that the providers of capital are.  The cost of taking your money out of a company’s bonds or shares and moving it to another company is negligible.  The cost of taking your labour out and moving it to another company is significant.  At the very least, you are often geographically tied down while your money is not.  Therefore the socially optimal decision would help insure the employees against the risk of the company failing but leave the capital to insure itself.  Since US unemployment benefits (the public insurance framework) is so measly, it seems reasonable to grant employees partial access to the assets of the company.

Third, in every company to some extent (although varying depending on the industry), the employees are the company.  At an extreme, ask what a law firm would be worth if you fired all the lawyers.  Therefore, even if labour were perfectly mobile, there is a game-theoretic basis for giving the employees a stake in the game:  Principal-Agent problems exist all the way down to the floor sweepers.  This is an argument for German-style capitalism where the workers are also minority shareholders.  You might argue against workers’ representatives on the board of directors, but I do think they ought to have a share holding.

Fourth, even if all of the above balanced out to zero, there might (might!) be be beneficial social welfare to ensuring that the company is an ongoing concern rather than liquidated.  When they pushed Chrysler into bankruptcy, the hold-outs were doing so because they would get more money under liquidation than the deal on the table.  If there is a benefit to social welfare in keeping the company open, there ought to be a way to force the bond-holders to take a hefty haircut rather than liquidating the assets, even – and this is where Professor Mankiw might really get upset – if it wasn’t Pareto improving (the needs of the many …).

Nevertheless – and this is why Mankiw managed to get under my skin on this occassion – I am glad that Chrysler has gone into bankruptcy.

I am glad because even though I largely agree with the White House’s proposal, and even if my four points are all true, it is not the job of the executive to be making these decisions.    There are entire institutions set up for it.  The bankruptcy courts and the judges who preside over them specialise in this stuff.  By all means the White House might make a submission for consideration (as the executive of the country, not just as a stakeholder), but it should be up to the judge to decide.

I suspect, or at least like to imagine, that Barack Obama knows all this already (he is a constitutional lawyer, after all) and that he pushed the negotiation down the path it has taken because politically he needed to be seen to be trying to “save” Chrysler from bankruptcy and economically ne needed to avoid the market turmoil that would have ensued from a sudden move to bankruptcy rather than the tortuously gradual one we have seen.