Concerns that (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech….

Which translated means, the US, one of their main agents in their research, has an economic dynamism (here & here)which results in the US never directly competing with other countries’ lower paid labor:

…Judged by export shares, the United States and developing countries specialize in quite different product
categories that, for the most part, do not overlap. Moreover, even when exports are classified in the
same category, there are large and systematic differences in unit values that suggest the products made
by developed and developing countries are not very close substitutes—developed country products
are far more sophisticated….

& this of course isn’t the only research making such conclusions (here & here).

But that’s not all.  We’ve seen historically that creating obstacles to free trade can hurt us severely (here):

One of the major causes of the Depression was Congress’s passage of the Smoot-Hawley Tariff, which was signed into law on June 17, 1930. Smoot-Hawley placed tariffs on more than 20,000 imported goods. It halted the recovery from the 1929 downturn and resulted in retaliatory tariffs from U.S. trading partners and a decline in U.S. imports and exports of more than 50 percent….

Though not all would say cause (here):

“The best estimates are that the multiplier is roughly 2. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for only about 21% of the total decline in real GDP.”

Irregardless, the research and economist communities agree on the benefits of free trade (here):

A 1990 survey of economists employed in the United States found that more than 90 percent generally agreed with the proposition that the use of tariffs and import quotas reduced the average standard of living….

Congress’ answer to all of this? A trade war with China (here):

The Democrat-backed bill passed by 348 to 79, and targets countries that hold down the value of their currencies, as many accuse China of doing….

The Senate’s answer?  A trade war with China (here): 

The chairman of the Senate Finance Committee said Wednesday that the upper chamber is “poised” to legislation meant to hammer China for its currency policies…

To paraphrase an axiom:  With economic heavy weights like this as friends, who need enemies… but I’m sure there’s no way they’ll screw up health care, right?

The President? A trade war with China…. sort of no.  While he’s pushing China just as other presidents have (here):

The Obama Administration believes that China needs to take steps on rectifying its currency value, White House Press Secretary Robert Gibbs said….

He hasn’t stated he would sign anything and other administration officials are pushing different views (here):

Treasury Department Secretary Timothy Geithner said there was “no risk” of a global currency war during a wide ranging interview with Charlie Rose Tuesday evening….

Intelligently, he’s keeping his options open in this very way.  Though I’m not sure I want to bet that he continues down the road of economics considering his approval ratings., but a smart move overall.

Though under great stress, we humans tend towards the flight or flight response. True leaders however, can use these difficulties against themselves to provide both motivation and a sense of urgency to gain the ingenuity required for such challenges.

This is understood well in society. Like business leaders who understand innovation can be helped significantly by design constraints (here):

Great designers understand this. Charles Eames says design is all about innovating around constraints. And it’s the constraints – the scarcity – that fires the designer’s creativity. Smart business people “get it” too. Amazon founder Jeff Bezos embraces self-imposed scarcity saying, “One of the only ways to get out of a tight box is to invent your way out.”

They understand that principle of economic scarcity. As do military leaders. Sun Tzu notes in the Art of War:

For to win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill.

For President Obama, the Tea Party & the Republicans taking back control of the House of Representatives could give him the opportunity to display true deft.

Assuming it does happen as predicted (here via the Philly Inquirer) however, the President is accorded a tough task ahead.

He would now have the body responsible for appropriations bills (all spending bills much start in the House & they are very important. For instance, they can kill health care by simply not funding it….) mainly in place due to running against him. Secondarily, while they don’t wish to be seen as obstructers, their willingness to work with Obama will be small even without their election strategy. Because any bill passed, regardless of how/why, if it turns out to be a good or well liked idea, Obama will naturally take credit to further his chances for re-election in 2012.

& the Democrats know that neither the President nor health care is a selling point for this election, even if they are communicating differently. The facts are that se hasn’t really made many direct candidate speeches, just backyard BBQs in key districts in key states. They are essentially, and correctly, playing against their weakness – his popularity.

Not a bad strategy in the short term, but I think people have heard him speak enough and any celebrity (yes, while the President is certainly more important and more powerful than any normal celebrity, s/he is still a celebrity) runs the risk of over saturation.

Irregardless, with Obama, the question is can he live inside those constraints?

What we know is given a new landscape, the answer for tomorrow’s question will not be the same answer as today’s. I think if he can push himself with a sense of urgency, surveys the landscape to see what he has and what he can accomplish with what he has. Then uses both the sense of urgency and strategic thinking by changing his game plan when the field of battle changes…. well, then we’ll see a real leader who may live up to his Nobel Peace Prize (here).

Or said more succinctly, it’s a crappy state of affairs you might find yourself in Mr. President, but challenges is how leaders prove themselves.

Honestly, I don’t think he’ll be able to do it. I think he’s too insecure (here) about himself and his handlers seem to know little more than an approval ratings drop equals time for Obama to give more speeches. & I don’t honestly think that’s likely to change…. but predictions are better left to Ms. Cleo.

What is likely however is the people around him understand exactly this point.  They do know it. The question is whether their emotions towards their beliefs (see: Confirmation Bias here & here) combined with the difficulty of telling a President who gives great speeches to shut up. Not to mention game theory predicts leaders to surround themselves with “yes men”.

All of that makes significant and required change seem unlikely, but I’d never count out someone who made it to the Presidency, nor, the team that helped him get there.

So Mr. President, here’s your chance.

…In what has to be either a sign of the end times or a sign of our bright future, Senator Barbara Boxer is in a tight race against former HP CEO Carly Fiorina…

While the true impact of the 2010 midterm elections is still ultimately up to a vote which hasn’t happened, the signs seem to all be pointing to good news based upon selectorate theory (DA post here):

..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….

…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….

The basic idea is that the leader will use their power to pay back those who helped them get elected and the larger that coalition is, the less likely that money can come in the form of direct payoffs.

Now theoretically, in a free election system, W is 1/2 of S + 1.  IE – in order to get elected I need 50% of the votes plus one.

What happens however, if the voters through their actions artificially limit W?

How can they you ask?  Easily actually.

Every 10 years post census, each state will redraw district boundary lines based upon population numbers.  The problem is this “redrawing” isn’t done based on some objective science or even just basic math, but based on politics.  The way it currently works is the party in power redraws the districts.

Typically, the only ones who argue against these plans are the parties out of power.  Historically, the minority party would go to court, but courts have answered these challenges by stating that unless specific acts of discrimination or such can be proven, political redistricting is not something the court will actively change.

The reasoning is that voters have recourse already, so legally speaking the point is moot.  Their recourse is to elect those who redraw the district boundaries.

Now in states that change majority party from time to time, there are incentives for politicians to not gerymander individual districts too badly, least they be on the receiving end next time.

However, in states like CA or TX, where one party dominates, there are no incentives for the party in power to do anything but draw district boundaries in such a way as to ensure they can maintain power.

This is how we end up with politicians like Barbara Boxer or Nancy Pelosi, who win their individual districts in landslide elections, but whose national approval rating is slightly higher than the IQ of a prune.

This is also the reason (here) “polls showing voter disgust, such as the dismally low congressional approval ratings, only show feelings.  The reality is even with rates of congressional approval as low as 16%, the rate for the election of incumbents is well over 90%.”

But his only works through voter ignorance.  The reality is voters are free to vote for whom they want.  Just because a district is redrawn to include mostly Democrat supporters, doesn’t mean those voters must vote for the Democrat.

We know the truth however for many voters is party loyalty and party identification are much stronger forces in their life than political analysis.

There are reasons for this as well, including the sheer complexity of the government itself.  This level of complexity means for a voter to be truly informed, a good deal of time is needed to sort through the information.  Time most people would rather spend with their families after work.  But I digress…. (read more about The Myth of the Rational Voter here via Cato)

The point is that while voters don’t have to vote party loyalty, the evidence is very strong to suggest they do.

Therefore - back to W/S as a ratio – if voters allow a district to always put a Democrat (or Republican) in that seat, they are effectively making the general election a formality whereas the real election is during the primaries.

This combined with the facts that primary voters represent a very small percentage of total voters & primary voters tend to be true believers, results is an artificial reduction of W in our ratio of W/S, ultimately reducing voter power.

While I tend to stay away from any predictions, the current trending of certain national Senate and Congressional races is showing a promising sign of reversing this trend for at least one election cycle.

Of course for now, these are only polls.  They only tell us what people think during a given time period and nothing more.  The true test for voters will be on election day:

Will voters stand up against incumbents?  Or will they do what they’ve done for the past couple of decades; complain about the worthless government while simultaneously voting to keep the same government?

…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 ratio 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.

The story really first appears as the auto company bail-out was in full swing in the US.  GM had pushed a reorganization plan that cut jobs in all countries.  With German Chancellor Angela Merkel getting pressure due to the global economic crisis and facing a re-election, Opel became more important than first assumed (@BusinessWeek):

….On Tuesday, though, German Chancellor Angela Merkel said Opel was not a “system-critical” corporation. “There are system-critical financial institutions,” she told her conservative party’s parliamentary group, according to the Rheinische Post newspaper. “But there are no system-critical industrial firms.” It was Merkel’s indirect way of saying that Opel is less important to Germany than its crisis-stricken banks. Her statements were intended to counter earlier comments made by the head of the left-leaning Social Democratic Party that Opel was indeed “system relevant.” She added, however, that Opel should be given a chance to survive and that like all companies, it has the “right to apply for state aid.”…

It not only became more important, but Chancellor Merkel started treating it as imperative to re-election (@France24.c0m):