Political Entrepreneurs

The Economic Engine of Political Change

Why We Need the Madmen in Authority

July 31st, 2014 by Edward Lopez

Did you know that Oklahoma is ranked 28th in population but in 2011 had one of the nation’s largest unfunded pension liabilities? The Reason Foundation’s Pension Reform Newletter carries an interview with Oklahoma state legislator Randy McDaniel, who explains:

OPERS is the state’s second largest retirement system. In 2010, the system had a $3.3 billion unfunded liability, … The big picture is the state had over $16 billion in total unfunded liabilities.

In a reform process entering its fifth year, Rep. McDaniel has succeeded in requiring new COLAs to be fully funded up front and, more significantly, converting the state plan from defined benefit to defined contribution, a phase out that will begin with new state hires as of November. This nicely illustrates the point that an institutional change can improve the incentives of both political and economic decision makers — that is, both the governors and the governed.

Gilroy: How will HB 2630 benefit taxpayers and reduce the state’s financial risk? What were the most effective arguments in favor of reform?

McDaniel: When you have a defined contribution plan, there are no new unfunded liabilities created from that point forward. The argument becomes what happens to the existing plan, and we were able to overcome that concern with data illustrating the financial commitment to the existing defined benefit plan, as well as the new retirement system.

An issue that is overlooked in the mathematical data is the issue of political incentives to harm the system by making unsustainable financial promises. Unfortunately, those incentives are real, and they greatly impact the situation we face today. It’s easy to make promises when someone else is going to have to pay for those promises at some point in the future.

So the two great benefits to the taxpayers are: (1) we know what the costs of the new system are going to be and we can plan for it; and (2) it greatly reduces the political situation that has led to the condition we’re in today. [my emphasis]

The interview continues on the process of reform, which was gradual. Beginning in 2010, Rep. McDaniel saw that the state’s unfunded pension liabilities would cause major fiscal and public relations problems in a few years. In a process that he described as “hard work,” McDaniel first began drawing attention of his fellow legislators to the mounting problem, then he built a consensus within the prevailing political context, and finally he sustained the “tenacity” to follow through on the administrative implementation of the reform.

Rep. McDaniel is in good company, as several other states have begun a trend of reforming public pension plans. As Wayne wrote here on PE back in January 2013.

report by the National Conference of State Legislatures focuses only on pension reforms for public workers and teachers, covering the brief period of 2009-2011. It turns out that 43 states took at least some steps at pension reform. Of particular note are the reforms put in place in Michigan, Rhode Island and Utah.

In these three states and elsewhere, the common element is a move to replace a defined benefit pension with something approaching a defined contribution plan. The employee chooses a contribution level and the employer (the state) also makes a contribution up to a certain percentage of the employee’s salary. Of course, many private-sector employers made this move long ago (see, e.g., 401Ks and employer matching).

Our framework helps to grasp the forces behind these reforms. First of all, where are the academic scribblers? Good question. In fact, for a long time scholars have been working on the problem of state pensions and honing reform ideas. Joshua Rauh is a great example. Also, in their 1977 book, Democracy in Deficit, James Buchanan and Richard Wagner scrutinize the very political incentives that Rep. McDaniel refers to. Academic work has been a key intellectual input to politicians and bureaucrats who in turn work to implement pension reforms.

As for the intellectuals who adapt and amplify academic ideas? The best example in this case is the Reason Foundation’s Pension Reform project whose newsletter published the McDaniel interview. Other think tanks and policy experts have chipped away at this issue for a long time. Grant making foundations also have supported efforts, such as the Pew Charitable Trusts ongoing study, “The Widening Gap” .

All these different players have a role in bringing about significant reform. We need the madmen in authority because it is often their hands that grip the levers of institutional change. Granted, it is often the courts and private groups that bring about change. The top-down, from-the-ivory-tower is one way it can work. But when it does, and when political change happens through government, at some point every good idea needs a good politician behind it.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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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