Thursday, December 18, 2008

The Political Problem with Creative Destruction

My wife and I are getting estimates for solving a drainage problem in our basement. Let me start by saying that by drainage problem I mean leak I'm sick of mopping up after it rains. This is not a hugely serious problem, but it's one we want resolved for a couple of reasons. So we get two radically different estimates. One guy says, sump pump, drill some holes in the foundation, complete drainage system, $3,800 bucks. But, he guarantees the work. Another guy says, the problem is a simple drainage problem that will involve re-routing one downspout outside the house for 195 bucks. No guarantee or promise.

The $3,800 estimate comes with this nice little schematic, a four step process, very official looking set of forms to sign. All very professional looking. The $195 deal is from a grizzled old guy who "thinks" this should solve it, but involves trusting his experience without a nice set of drawings and plans. It's a nice contrast in approaches. Based on the scope of the problem and cost, guess which one I'm going for since it's my money?

Applying scope and costs is useful in understanding the Big Three bailout debate. Why we are so likely to choose the cheaper, if somewhat more uncertain, fix in our homes and lack the same confidence in "less is more" when it comes to attacking bigger, more expensive challenges in politics and economics? Roger Cohen's really nice op-ed piece in the Manhattan Worker's Daily raises the problem nicely. He argues that:

"Americans have always lived at the new frontier, at least in their imaginations. It’s taken the death of the likes of the wonderful Pan Am to keep them contemplating the horizon rather than their navels. The risk of saving the moribund is the demise of the vital — and the long-term cost of that is incalculable."

So we have to let the Big Three die a natural, economic death because that's how markets work. Sure, there will be nasty job loss, and I won't hear that Mellencamp song as much in truck commercials, which is not a bad thing. But in the long run it's the American way, apple pie, all that. Omelets and broken eggs. And Rog, the short term cost is like at least 25 billion bucks! So we can understand the consistent public polls showing opposition to any bailout for the Big Three.

But it's interesting, isn't it, that if we live on this "new frontier" that only 55% of us oppose the bailout. And, it's pretty likely that despite current GOP Senate opposition to a bailout, either President Bush or Obama is going to cut a deal and write a check to GM and Chrysler, and possibly Ford.

The simple response to this is that it's a pure Public Choice interest group story in which interest groups flex their muscle in the system to distribute the money of other taxpayers (those of us who don't work for the Big Three directly or indirectly) to themselves (the UAW, Big Three management, Big Three dealers, etc). The politicians who support the funding get "paid" by Big Three interests during elections either through campaign funding or the support of organized labor.

But that's short sighted, and I'll illustrate it with a simple point. Let's assume that 55% of the public opposes a bailout as that survey says. 45% of the public does support the plan, and that's waaaaaaay more than the percentage of people who have direct or indirect interests with the Big Three. The survey also notes that:

"Union households are no more apt than those without a union member to favor the plan, 44 percent compared with 42 percent. However, the union householders who support the plan are more likely to be strongly behind the bailout."

Now that's not consistent with an interest group story, with all due respect to my public choice friends. Other union members should be supporting this plan completely. So what's going on here?

People, by and large, are sometimes afraid to trust the "do less" solution. It's pretty, nay, VERY clear that when potential loss increases in politics, folks seek risker paths to avoid those losses. Hence the wider support public support for a bailout, an expensive, risky solution, in the face of a big economic problem. So whether or not you belong to a union you might think this bailout is not a bad idea.

Add in the fact that the public thinks that the solution will be paid for largely by someone else's money and you can see why almost half of the public supports the expensive sump pump because a big expert plan seems to be a safer route than the "do less, get more" route. I happen to think this is a really big deal in politics generally. Debates are about espousing large, complicated plans and positions to sell to voters. Campaigns are about presenting solutions to problems, or even finding new problems for politicians to solve. Politicians can act like entrepreneurs and actually "sell" new problems and new solutions to the public. My favorite example of this is how effective both parties have been in increasing the penalties and salience of crime despite decreases in the crime rate.

All this is a long way of saying that the GM bailout politics is not only a Dem/Rep, union/non-union, regional political story. It's also about a part of the public wanting to be sold the more expensive, complicated "plan" when faced with what's characterized (in this case correctly) as a major economic problem. When a lot of money is on the table, it's hard to believe that we don't need plans and funding and experts to solve the problem. Trusting other institutions (in this case markets and the invisible hand) where we don't completely understand or CONTROL the mechanisms is not natural for us. Just fyi, I hope to write a bit more about this in terms of Obama's vague use of terms like "hope" and "change" more in coming posts. It seems to me that a lot of this is very applicable.

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