The Political Market Jude Wanniski February 16, 2001

To: Students of Supply-Side University
From: Jude Wanniski
Re: The Political Market

An earlier version of this lecture was originally presented on January 30, 1998, as the third lesson of the spring semester, a semester also devoted to the political side of the political economy. The lecture is meant to demonstrate that the "political market" is as efficient as the economic marketplace. That is, just as the free market for goods and services is driven by consumer demand, so is the market for political ideas and the political leaders who represent those ideas. Consumers in the broad marketplace only will buy those things that strike their fancy or fulfill their needs if the price is acceptable. This means producers who wish to be successful in selling their goods and services have to be attentive to consumer demands on price and quality. The more information available in the marketplace about the availability of goods, services and their quality and prices, the less waste there will be, and the happier the results will be for both producers and consumers. The marketplace falls short of the optimum when there are limitations on information flows, or if government interventions on taxation, regulation or monetary arrangements are sub-optimal.

In the political marketplace, the same conditions apply. The "best man" (or best woman) will win the election if there is a free flow of information communicating how they intend to represent the constituency that is doing the electing. Our lesson next week will be devoted to the mechanics of that political model. This week, the lecture is focused on how it was that I came to see the parallels between the two markets, and the significance to the real political world in which we live. It is not easy to accept the notion that elections always turn out correctly, given the information available, but the process is a precondition to the workings of a democracy. There now is even more confusion because of the outcome of the November elections, with George Bush winning the vote in the Electoral College by a single vote and losing the popular vote by a significant amount. When I woke up the next morning and learned there was a dead heat in the presidency, the House and the Senate, my first thought was about how exquisitely efficient the electorate was in forcing the two political parties to get along with each other instead of engaging in the kind of “food fights” we have seen in Washington in recent years. (Treasury Secretary Paul O’Neill used that term last week in testimony before the House Ways&Means Committee to describe the battles between Republicans and Democrats over “static” and “dynamic” scoring of tax cuts -- and promised to find a way to resolve the conflict peacefully.)

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I first learned about the efficiency of the political market in the local elections of 1962 in Las Vegas, Nevada, as it happened. I was a 25-year-old reporter for the Review-Journal, the biggest newspaper, with a circulation of 30,000 in a town of about 130,000 back then. I'd been covering all the local issues, but one that began to interest me was a proposed bond issue that was going to be voted upon by all the residents of Clark County. I forget the exact amount of money, but it was colossal. The money raised was to build a flood channel across the desert floor to the north of the hotel Strip, which would protect the city if a flood came rushing down from the mountains. The Army Corps of Engineers had designed the flood channel and of course recommended that it be done. There was some amount of federal money that would assist in the project.

The proposal was almost certain to pass, I thought, because everyone in town who was anyone was supporting it. The Chamber of Commerce was behind it, as were the associated general contractors and the AFL-CIO. The county commissioners were in favor of it and so was the mayor of Las Vegas, Oran Gragson. My newspaper supported it editorially and so did the Sun, published by Hank Greenspun. There was not a dissenting voice. As it happened, earlier in the year I had talked my younger brother Terry into leaving New York and his job at the Army Corps of Engineers and joining me in Nevada, where he wound up with an engineering job at the Nevada Test Site. I asked Terry about the flood channel and he laughed about all the boondoggles he had seen emanating from the Army Corps. He described it to me as a monstrosity built to withstand a 100-year flood, meaning that it only would have real value if it were standing when once in a hundred years a tidal wave would come off the mountains. He said it was a waste of money.

Whereupon I went to my boss, Robert L. Brown, and explained to him what I had learned. I urged that we change our editorial position. Brown told me he could not do that: Suppose our opinion causes it to be voted down, and the next day there is a 100-year flood and the town is washed away. I thought about that a moment and realized it was hopeless. It was such a shame, I thought, wasting all that money. So it came as a delightful surprise that when the results of the voting were in, the issue was defeated by a 2-to-1 margin. Without instructions from the elite, the citizens had sized up the bond issue and saw it for the boondoggle it was. This was my first, most important lesson on the collective wisdom of the electorate.

A “boondoggle” is an expensive government project that may have sounded good when it was first proposed, but whose reason either was shaky to begin with, or the passage of time had made it irrelevant. As we discussed in last week’s lesson, once a “team” has formed around a politician or an idea or a project, its highest priority is survival. Global Warming is a clear example of such a “boondoggle.” The scientists who originally thought it up now have decided the problem is not carbon dioxide. Twenty years of satellite measurements find no global warming. But the international team assembled to promote the idea has grown to Frankenstein proportions. The NYTimes has made such an enormous intellectual investment in it that it plods on, pushing the Kyoto Treaty. Journalists who may be embarrassed at their past writings in favor of Gwarming are searching for other sources of greenhouse gas and look for exits. On the other hand, the national Ballistic Missile Defense shield, which the WSJournal began promoting during the Cold War, now has a monstrous team of warriors who insist we need to spend a zillion dollars on the idea. Why? Well, there are those rinky-dinky rogue states that might build an ICBM and top it off with a nuke. Because that sounds silly, the latest to come out of the Boondoggle bunch is that we need to protect against “accidental launch” by the Russians or Chinese. They still are not telling anyone that the kind of shield they are talking about would have to be armed with a mini-nuke warhead if there is to be any chance of stopping an incoming accidental launch.

As with the Las Vegas flood-control ditch, democracy has a way of stopping such boondoggles before they get out of hand. In The Way the World Works, you will note in Chapter One that I mention the experience I observed in the 1976 elections in Massachusetts, by everyone's measure the most liberal state of the union. "[O]n the 1976 ballot, nine single-issue referendum questions were put to the voters of Massachusetts, and in each case the side identified with the "conservative" position won a majority of the votes. By a two-to-one margin, the voters supported the principal of a refinery and deep-water port for Massachusetts. They opposed a ban on handguns. They opposed a state power authority. They rejected a constitutional amendment that would have permitted a graduated state income tax. They rejected a system of uniform electric rates. And they narrowly defeated the environmentalists on a measure to require returnable bottles for beer and soft drinks." At the same time, they voted for Jimmy Carter for President.

Twenty-three years ago, only five weeks after The Way the World Works was published, the voters of California went to the polls and by a 3-to-2 margin passed Proposition 13 -- which cut property tax rates by a third across the state. The state referendum was the initiative of an ordinary citizen, Howard Jarvis, who had collected the several hundred thousand signatures necessary to get Prop 13 on the ballot. Prop 13 not only was opposed by almost every elected official of the state, from Governor Jerry Brown on down. It also was opposed by every newspaper, from the San Francisco Chronicle on the left to the San Diego Union on the right. The Business Roundtable and the chambers of commerce and organized labor all campaigned against it. Nobel Prizewinning economists were enlisted to cut paid radio spots that ran incessantly, predicting a total collapse of California's economy, bond rating, and way of life.

A month before the June 8 vote, while still an associate editor at The Wall Street Journal, I spent a week in California traveling the state. I vividly recall that at every restaurant, every shop, every street corner where I stopped with others waiting for a light to change, the conversation was about Prop 13. "Jarvis, Jarvis, Jarvis..." was the buzz. The people of California, I thought, were a giant hive of bees, buzzing to each other in conversation, calculating what to do. It was not until 1990 or thereabouts that I realized the people of the state were functioning as an organic whole, a giant mainframe computer. Each one of us has in his or her head a little computer, each one programmed differently. The buzzing conversation between the voters calculates all the political and economic ramifications of an issue as enormously important as Prop 13, with those having the most reliable information canceling those with less reliable information. Everyone's vote counts as much as all others, in part reflecting a pure assessment of how the vote will effect him or her. The impact of the vote on the community at large makes up the other part. People take into account the interests of the whole as well as their personal interest. Here is how I presented the ideas in the introduction to Chapter One:

The political model holds that the electorate is wiser than any of its component parts. Civilization progresses in a political dimension through the ability of politicians to read the desires of the electorate. Neither the press corps nor other "opinion leaders" influence the electorate, except in the sense of broadcasting the political menu. Their influence instead bears on the politicians, who look to opinion leaders for help in ascertaining the wishes of the electorate. The decline of a nation state or political unit is a sign of repeated failure of the political class to read the wishes of the electorate. Emigration is a sure sign of relative political failure. At the extreme, the electorate resorts to revolution, thereby adjusting the political framework and raising to power a new political class better able to read the desires of the electorate. Modern nation states have built into their political frameworks various safety valves that can bring about urgent corrections in the avoidance of violent revolution or war.

If you have the book, the anecdotes I related about the efficiency of the political market should make it easier for you to accept the idea that if the organism we call the electorate is always correct when it computes -- given the information that has been fed to it -- it does not mean that we can forget about having a Congress and a President and legislatures and city councils, and do everything by computer. If every man and woman makes a difference in the computing process, not only as a unit of binary power, but as a repository of expertise, then if we take out just one man or one woman from the 100 million who are expected to vote for President -- and it is the one with the most relevant information that should be fed to the computer -- then the results of the election will be suboptimal at best. Suppose in 1979 there had been an assassination of Ronald Reagan. The attempt on his life was made in 1981, but if he had been pulled out of the process in 1979, the electorate would have been denied the one man who best grasped the needs of the electorate in computing the direction of national destiny.

When I was a little boy, all little boys (at least those who were white and Christian) were taught that we could all grow up to be President. There was no position to which we could aspire which would be higher. Actually, in Protestant families, you aspired first to the presidency of the nation, then to the presidency of the company, then to the ministry. In Catholic families, you aspired first to the presidency of the nation, then to the presidency of the union, then to the priesthood. All little black boys 50 years ago could aspire to the ministry or to a profession serving blacks -- one dentist, one doctor, one lawyer per town. These are cultural observations, but they tell us about how humankind is constantly striving to arrange itself in ways that will bring the best to the top, where the best can hope to pull the rest along. If we were to take a secret poll of the world on The Greatest Life Ever Lived, Jesus Christ would win hands down, not only among Christians, but also among Jews and Muslims.

The national electorate in fact made that choice when it gave us the calendar we use throughout the world, which radiates from the birth of Jesus. The single most important cultural message underlying that choice was that of the Good Shepherd, who will leave the 99 to find the one lost sheep. The most important political message was that one man, even of the humblest birth, can change the history of the world. That means you too, whether you were born dirt poor, or with a silver spoon, although the history of the world makes it clear that it is easier to be politically significant if you are born poor and find a way to climb to the top.

In the examples I presented about bond issues and referenda, we observed the efficiency of the political market in solving simple yes-no problems. The calculations involved in the Las Vegas flood channel were very simple. The calculations in Prop 13 were vastly more complex, but they were still binary. It was one idea, to be voted up or down. We should assume that the exact proportions of the vote were of importance too. If the vote had been narrow, 51-to-49, it is possible that Governor Brown, who had opposed the idea, would have said he would not lift a finger to execute it until the Supreme Court had spoken. As it was, the wide margin immediately prompted Brown to announce that while he still had his doubts, the voters had spoken, and he would do his best to carry out its provisions. In fact, in the several years that followed, the California economy was so strong that, when averaged in with the rest of the country, its strength gave national GDP statistics a positive glow. In other words, but for California, the national economy could have recorded an official recession.

When voters must choose a representative who will vote on a great many things on their behalf, rather than just one, the problem becomes more complex by orders of magnitude. We will thus move on to that discussion next week. As recommended reading this week, I suggest you go on to two short essays I wrote on "Thinking About Markets," which some of you who have been in SSU will remember from last year's summer session. They will help round out this lesson and give you firmer footing on the material that will follow. If sufficient questions come in during the next week, we will have a Q&A period. If not, we will move on to chicken-duck-parrot.