Does the government have an incentive to create income imbalances?
December 4, 2009
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Posted by Michael S. Langston
Over @Rueters Blog, Felix Salmon has a recent post titled, Why the Plutocrats will return where he makes an interesting point:
…Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer….
Now I don’t believe in a big conspiracy, but I do pretty much believe in the selectorate theory… I say pretty much only because I’m still digesting all the information as well as the proofs, but basically the theory utilizes game theory and historical data to model political institutions, governments, leaders, etc, etc & their behaviors. It has also been used as a predictive tool for the CIA, DOD, and others through one of the primary author’s (Bruce Bruce Bueno de Mesquita) work with amazing accuracy (here).
As one who loves understanding critical thinking, I was at first very skeptical towards the idea that math could model international predictions well. Which isn’t to say I think math is limited, I do not. For instance, I firmly believe that if we could ever measure all the variables in a dice throw, we could accurately predict the outcome. Therefore the issue isn’t one of math, but of the ability to model such complex systems.
For the die throw, it’s an issue of accuracy. Sure, we know the air pressure to the thousandth degree, but why not the millionth? Billionth? For predictions through modeling behavior, the complexity is not only accuracy since people’s motives aren’t always clear, but in the interactions with additional groups of people as well. The number of interactions which might be analyzed in a group of only 5 people is 120, with 6 – 720, with 535 people in congress…. 535!
With computers of course we can crunch very large data sets these days in smaller and smaller amounts of time, but the theory is also powerful due to its simplicity. It states that leaders will pay back those people that helped them become leaders in order to stay leaders. This seems fairly intuitive and agrees with most understanding of incentives, but from here they can make predictions based upon the ration between what they call W, the Winning Coalition, and S, the selectorate or those who can affect who the leader is.
To start with, we assume the leaders real ability to incentivize those in the winning coalition is to tax and spend. They bring in revenues and use those revenues in such a way as to stay in power. The have only two ways to allocate those resources, either through private expenditures or public spending.
The corollary with W/S is that when W is small as compared to S, the revenues spent will be mainly private and conversely if W is large compared to S, expenditures will be mostly public.
So if we take mainly free societies of today, where the selectorate is made up of the voting population which is usually only constrained by age, the winning coalition is theoretically 50% + 1 voter of the selectorate. Due to the shear size of W in this case, the leaders incentives line up with public spending because she would be unable to to spend enough on each member of the coalition privately to ensure re-election.
Conversely in more closed systems, where the selectorate is controlled to a great deal (Iran, China, etc) and even if you are a member of the selectorate, the winning coalition is controlled and smaller, spending private money can keep the smaller coalition in tact.
Following the model and Mr. Salmon’s post on returning to a plutocracy, it makes sense that putting people into poverty can actually align with the incentives of our government. The more people in need of assistance means keeping power is easier as more people are in need of the public expenditures.
I’m not saying I agree with all of this it total just yet, but at first glance Mr. Salmon’s intuitive thoughts seem to be backed up by known game theory modeling to present a interesting conclusion which I think goes to further underscore the idea that limited government is required for long term societal health.
Categories: Critical Thinking, Economics, Game Theory, Politics
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Tags: Chaos, Critical Thinking, Economics, Game Theory, government spending, Incentives, Interesting, Math, People/Blogs, Rueters, Selectorate Theory, Taxes, Thought Provoking
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