Tuesday, July 01, 2014

Democrat vs Republican economics

Eric Zuess' book "They're Not Even Close" compares the economic record of the American political parties from 1910-2010. His analysis shows that most aspects of the US economy are historically stronger under Democratic control than under Republican control. This is also true for the individual states, in that those which lean Democrat have a strong correlation with a robust economy and educational attainment.

Given that Republicans are strongly in favour of self-reliance, big business and the free market, while the Democrats have inclusion and the common good as their official platform planks, this data appears to be counter-intuitive. It does, however, explain why the Democrats have a hard time getting anything done, as they try to please everyone.

One possible explanation is the Game Theory of John von Neumann and John Nash. In brief, many human interactions, including economic transactions, can be modeled as a finite collection of players playing a game. Each player has a finite set of possible decisions/strategies, and a pay-off function, which depends on all of the current choices being made (for a very good explanation, see the Wikipedia entry at http://en.wikipedia.org/wiki/Nash_equilibrium ).
Nash showed that each such game has at least one Nash equilibrium. This is a choice of strategies such that, if any single player changes their choice, their pay-off will decrease. Getting there requires perfect knowledge of all other choices, which is most easily achieved by cooperation.

For a brilliant and simple example of the dangers of pure competition, consider Martin Shubik’s bidding game: We auction off $1 to a group of players. The highest bidder wins it. However, the wrinkle is that the top two bidders have to pay. The only possible non-negative pay-offs for the group as a whole require cooperation, with the maximum being one player bidding 1 cent, and the others not bidding at all.
These models explain why wolves do better than tigers, and ants beat everyone.

So what is it that Democrats do ‘better’? I would argue the concept of public spending as investment, not waste. Here are the kinds of projects usually funded by Democrats, but vehemently fought by Republicans.

Infrastructure – build better roads, water systems, airports etc, and companies can move products and workers more efficiently. In addition, construction involves well-paid jobs, which increases the tax base.

Entitlements – as onerous as this word is to hard-working people, we don’t often see the elderly starve to death, or massive epidemics. Every US city is probably safer than Buenos Aires. How would that change if the poor were actually living on the streets in large numbers?
Education – better-educated people make for a better society, are healthier and less likely to commit crimes (except for fraud).

Science – a bigger contributor to economic growth than abundant natural resources. The problem is that it requires huge investment for unlikely pay-off. This is generally not what companies like to do. Those that do so want results to be proprietary, which necessarily stifles the free exchange of information that progress requires.
So what can we conclude? Mathematics can predict that some cooperation is better for the economy than pure competition.

However, this prediction is after the fact, which is much less useful than before. The only people who will accept the original data are those to whom it is emotionally satisfying, namely economists and Democrats. Republicans will find a way to ignore or explain it away. In other words, the book is sadly unnecessary.


All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.


A K Haart said...

The Amazon comments on "They're Not Even Close" are entertaining. Politics certainly divides people.

Paddington said...

As a scientist and mildly autistic, I am amazed that people's opinions trump facts.

Wolfie said...

Depends who controls congress doesn't it?

Graeme said...

If he manages to prove his point in a book of 126 pages then all power to him. However, there are so many problems to consider. For example, how well do government policies translate into improved economic figures and what are the timelags involved? Given that this book is 126 pages and covers 50 odd states plus the US as a whole, how much real analysis is given rather than just a few bald tables of statistics? It is trivially true that the US financial position was stronger when Clinton left the White House than when he entered it. How much was down to the Democrats? The checks and balances of the constitution seemed to ensure that although the population loved the idea of Clinton as President, they didn't actually want him to do anything. He was a lame duck president faced with a Republican Congress. So how much of his legislative program did he carry out? And how much of the "improvement" was down to Congress (Newt Gingrich et al) forcing him to reduce the deficit etc?