Political Entrepreneurs

The Economic Engine of Political Change

Manufacturing Crisis: Illinois Pension Systems Edition

November 26th, 2012 by Edward Lopez

In the book, we tackle the big question whether crisis is necesary or sufficient for significant reform. Many people seem to think so, including Milton Friedman and Chicago’s Mayor Rahm Emanuel. As we write in chapter 1, political entrepreneurs can often be seen attempting to building the perception of a crisis:

If you listen to politicians and pundits enough, crises both real and imagined will become exceedingly common. That’s because madmen in authority are expected to act in response to a crisis, and the bigger the crisis the bigger the change expected—or allowed.
(Madmen, Chapter 1, p.7)

To wit, a business association named the Commercial Club of Chicago has recently issued a forecast of the state’s public employee pension system, arguing that liabilities are growing without controls and the system has become “unfixable”. Why is a business association worked up about pension liabilities? Because without reform, the price tag is set to land in the laps of taxpayers.

The Club is promoting reforms that limit the state’s liabilities, including an end to cost-of-living adjustments, a cap on base salaries used to calculate pension benefits, an increase in retirement age, and shifting costs of education employees’ pensions to school boards.

These measures have serious teeth to them. Just ask Stanford finance professor Joshua Rauh, interviewed by Russ Roberts here on Econ Talk. (In short, because pension funds assume an 8% annual return, they are far more underfunded than most people think. The 50-states combined liability is not $1 trillion but more like $4 trillion. Just ending COLA’s would trim that by up to 40%).

Political change happens when circumstances lend themselves to entrepreneurship that exploits emerging fissures in the structure of ideas, institutions, and incentives. Often a crisis situation (or what Acemoglu and Robinson in Why Nations Fail call a “critical juncture”) actually does create those reform-ripe circumstances. Which is why we so frequently see politicians and pundits working very hard to create a perception of crisis, whether or not a real one lies beneath.

But as we argue in the book, crisis is actually neither necessary nor sufficient for political change. This will be another blog post forthcoming in the next day or two.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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