Friday, May 30, 2014

Picking Pareto's Losers

Picking Pareto’s Losers
I was having an interesting conversation about inequality and political corruption with an economist (I know, it sounds like the start of an esoteric joke) when he said, “(the) economist’s gold standard is Pareto improvement or loss.” 
What, I hear you cry, is a Pareto Loss?  At the risk of disappointing my friend (who is very likely on to me anyway) I freely admit that I had to look it up.
“Pareto” was Vilfredo Pareto (Vilfie, to his friends?) a 19th and early 20th Century Italian economist who later turned to sociology.  A “Pareto Efficiency” is a essentially a state of equilibrium, an allocation of resources in which it is impossible to make anyone better off without taking from someone else.  A “Pareto Improvement” is when reallocation makes at least one person better off without taking from anyone else.  And a “Pareto Loss” occurs when the aggregate loss to others exceeds the benefit to the person or group benefitting from the reallocation. 
To return to the conversation, I posed the following hypotheticals:
My town government owns a building in a prime location that it offers to the public for $10M cash, thirty days.  The appraised value is, say, $15M, but the government has a bond coming due and needs cash quickly and can’t wait for an extended appraisal, due diligence, and bidding process. 
I know it's a great deal, but I don't have $10M.  Jim, the richest man in town, has the money and can do the deal  He reaps the benefit of the below market price.
Or, suppose a new Mayor and Town Board are elected, and Jim is their major campaign contributor.  There is no financial crisis, but the new Mayor pronounces himself all about “privatization” and so before the new drapes are installed in his office, he calls Jim and as a thank you, cuts a secret deal with him—no outside bidding, and the same steeply discounted price ($10M for the $15M building.)
To me, as a citizen, the first example is just the way life is.  Jim is rich, I’m not, the town has an immediate need, and, as my late father used to say “money comes to money.”  I don’t see either a political or moral dilemma.  The second example I find outrageous.  High-roller Jim buys a few politicians and, in return, gets a huge gift of public assets that could have been used for roads, schools, sanitation and cops.
My economist friend, however, in viewing it purely from a professional perspective, didn’t agree.  Even a corrupt bargain was not, in and of itself, problematic. “So what? It's just a transfer. The city used to have the building, now the financier has it.  It doesn't change the level of output, just the distribution.”
As you might have expected, I reacted to this. I wondered if this was simply a public/private thing (and he was a good capitalist) so I reimagined the situation as my personal property company selling the building to Jim on the below market terms, after Jim bought a very expensive convertible for my supposedly loyal manager.  In an excess of understatement, I added I would be very irritated.
Again, while he understood the irritation, as a professional, he was unmoved: “Pareto improvement or loss. This is neither, it’s just redistribution.”  My problem was one of psychology and political science, not of numbers.
So, what do ostensibly soulless economists care about? “(T)he worst part of political influence by the rich is value destroying corruption.  For instance, suppose he's allowed to demolish the building and construct a 100-story condo where it doesn't belong. Then society as a whole is worse off--the benefit the developer derives is less than the social cost. It's Pareto loss.”
“Value-destroying corruption.”  Now we have a metaphor we can use.  He’s an economist.  I’m politically oriented.  From that perspective, I would argue that my friend, in claiming the politically motivated sweetheart deal doesn’t, per se, destroy value, may be missing something critical.  
Politics, by definition, creates winners and losers.  But governing shouldn’t be about reward and punishment.  We should expect those who lead us to improve things.  In short, if they are going to put their thumb on the scale in favor of one group, they should do no more than accomplish Pareto efficiency, and optimally, a Pareto Improvement.
Of course, that is (without the Pareto fetish) essentially what they claim they do.  When a Republican pushes for more for the wealthy, he couches it in terms of “job creation.”  Democrats speak more generally about redressing inequality, but the more sophisticated support better education, vocational training, and infrastructure which, in the long run, would give more people the ability to succeed, create and consume.  In effect, parties differ on approach but both are saying essentially the same thing, which roughly translates to “support my pals and it will be good for everyone.”
Except, we all “know” that’s a lie.  These folk really don’t care about everyone, they only care about those people who pull the lever for them, or, more importantly, write them a nice check. Knowledge of that dirty deal that the Mayor did with big-bucks Jim can induce a sort of lawlessness among the general population.  People don't report income, they barter, they pay cash to avoid sales tax, they cut corners.  Instead of fearing moral opprobrium and worse if they are caught, they feel stupid if they obey the rules while everyone else isn’t.  So, that $5M gift to Jim of public assets, even if it’s just at first “re-distribution” can be amplified by a thousand small acts of non-cooperation and become a Pareto Loss.

That process seems to be accelerating. One of the real dangers of this constant lurching back and forth between the parties, with wave elections suddenly installing single party-dominance, is that there’s a pent up demand for special favors.   That demand is being met by newly elected politicians taking care of theirs first and always, swiftly and often ruthlessly.

Yet, the spoils system isn’t new by any means.  What seems to have changed is something larger, yet harder to quantify.  It’s a sort of willfulness to take and a deafness to the legitimate concerns of others. 

You saw a hint of this on Tuesday, when Ralph Hall, the 91-year old Texas Congressman, was defeated in the Republican primary by Tea Party candidate John Ratcliffe. Hall’s sins basically boiled down to age and a (perceived) unseemly tendency to be a little too much of a gentlemen.  His leaving closes the door on an era; in January 2015, there will be no more WWII vets in Congress.

If you think that kicking the old coot out the door is something to celebrate, I would suggest you might be wrong.  Because what Hall takes with him is a little bit of the mindfulness that Milton Glaser was talking about last week.  The Greatest Generation had a consciousness that came from shared experience and often painful sacrifice.  Pols and partisans they surely were, but they were also open to other ideas and collaborative solutions.

I’m not an economist, but I feel pretty secure in saying that the passing of their way of thinking will lead to a Pareto Loss.  I don’t think I need to point out who will be the losers.

May 30, 2014

Michael Liss (Moderate Moderator)

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