A Reponse to KK

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One inaccurate prediction and the critics are ready to jump! This from my QJPS co-editor-in-chief Keith Krehbiel (originally posted as a comment):

Nolan’s update makes me wish I had taken the time to write up the various reasons I disagreed with his original, refreshingly out-on-a-limb comment. But now I’m thinking, ‘Prediction is easy, especially about the past, so should I bother?’

Well, even with 100+ days behind us, there is still plenty of future ahead of us, so I’ll venture a somewhat different genuine prediction than Nolan’s (“genuine” as in, about events yet to come). I would be interested in seeing counterpart expectations generated from alternative theories that take a “strong parties” perspective.

Here is a strict version of my expectation. New Specter will be just like Old Specter, voting with the Democrats sometime and Republicans others, and with a much more even split than most/all other Senators. In short, the Specter switch won’t matter at all. This is what the pure version of Pivotal Politics, for example, would say. Not many people would buy this, however, so let’s take it a step farther by trying to incorporate Nolan’s electoral observations into my essentially take-elections-as-given theory.

Specter switched parties for transparent electoral reasons, so to see what difference it makes in governing, one has to size up whether and how his electorally induced preferences will change as a result of the fact that he now has to win his seat from the left side of the Pennsylvania electoral median rather than from the right side. Models of electoral competition don’t speak very directly and generally to this situation, however it is difficult to concoct a plausible scenario in which New Specter ends up right of Old Specter, and it’s easy to do the opposite, so let’s just accept the assertion (nowhere disputed to the best of my knowledge) that New Specter IS now playing to a more leftish audience than Old Specter. (This quasi-theory based assertion is certainly consistent with Nolan’s data, too.) How does this parties-in-electorate induced preferences shift affect what policy comes out of the Senate, the Congress, and ultimately the Government?

Returning now to the theory of government, suppose Old Specter was THE filibuster pivot (probably true on a few issues at least). Now, in light of his left-shifted electorally induced preferences he is no longer the filibuster pivot. Who is? Again, hard to say definitively, but it’s easy to characterize qualitatively: a Senator, such as Snowe or Collins, who has preferences very close to Old Specter — so close, in fact, that it’s hard to imagine there being any measurable impact on policy outcomes. In short, the Specter switch will matter a tiny bit at most. All it does is shift the filibuster pivot “one person” to the left, and even with an ostensible vanishing moderates problem in the Senate, there are still enough moderate Senators that there just isn’t that much policy space between, say, a Old Specter and a Snowe.

My prediction in brief. We’ll see plenty of gridlock — much more than the 100-day-high pundits have prognosticated. Furthermore, if and when major legislation is passed, it will happen via major compromises that make the final product look much more like what Old Specter wanted than what Speaker Pelosi and Majority Leader Reid want.

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Footnote: In case anyone wonders what role party discipline plays in this forecast, the answer is none. The idea of Harry Reid disciplining Specter strikes me as comical on its face. I am reminded of an anecdote from a Republican Leaders Office staff meeting I attended in the early 1990s. Minority Leader Bob Dole ran the meeting. Arlen Specter had placed a hold on a bill that Dole was ready to move, given his negotiations with then Majority Leader George Mitchell.
Dole: Still stalled?
Staff: I’m afraid so, Senator. You know Specter: he’s an independent thinker.
Dole: He’s independent.

The problem with prediction is that an ex ante good one can turn out to be wrong and a lousy one can turn out to be just as accurate as a broken clock is twice daily. So let me try to defend my original prediction as the better one ex ante even if may eventually concede that Keith’s was more accurate.

As I originally pointed out, Keith’s prediction that Specter would not move much isn’t really borne out on data from other party switchers. Of course there are many reasons to be skeptical of the data. Perhaps the best is that almost all of the switchers are Southern Democrats who become Republicans. So it might be incorrect to forecast Specter’s positions from the behavior of politicians in a completely different context. But I would maintain that the contexts are quite similar where it is the Northeastern Republicans on the short end of a regional realignment. Keith, on the other hand, finds the forecast objectionable mainly because Specter is one ornery cuss (I’d love to include that as a variable).

But Keith’s real objection is the insinuation that it matters whether Specter becomes Diane Feinstein’s ideological soul mate. He points out that the preferences of the filibuster pivot are likely to shift only a small amount, say to those of Olympia Snowe. If it were just a straight-up Arlen-for-Olympia trade, I agree it would not be a big deal. But let me raise two objections. The first is a quibble: once Al Franken is seated, the NOMINATE data show that the switch is Olympia for Ben Nelson. A bigger jump, but, I concede, not a huge one (but to paraphrase a Mel Brooks movie, it’s good to be Ben Nelson).

The second objection is a more serious methodological one. On any given issue, there is considerable uncertainty about how an individual senator might vote (especially the moderate ones). So the deterministic predictions of the Pivotal Politics model may understate the effects of the shift I had forecast for Specter. Let me clarify with a simple example. Suppose Specter had not shifted. After Franken is seated, support for a key piece of Obama’s agenda is as follows: 57 support it with probability one, 47 oppose it with probability one, and 6 support it with probability .5. This is a fairly plausible scenario (it is close to what the Stimulus bill would have been if Franken had been in the Senate). The probability that the bill achieves cloture and passes is equal to the probability that at least 3 of the undecided support it or .656. Now suppose that Specter had become one of the core supporters so that passage requires only the support of at least 2 of the 5 remaining undecideds. Now the probability of success is .813. While the probability of change we can believe in only goes up about 15%, it is certainly more than “a tiny bit at most.”

There is one thing that Keith and I do agree on. The effects of internal party pressure (i.e. whipping) on Specter’s behavior are likely to be second order or non-existent (that was the main punchline of the paper with the data on party switching).

Soon I hope to share some thoughts about what political scientists might learn about the role of parties from Arlen Specter.

Politico Arena

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I will occassionally participate in Politico’s Arena. Today’s question was “In the wake of the stress tests, are you more or less distressed about American’s banks?”. I responded

If I were a shareholder in a large bank, I would be considerably less distressed today. If nothing else, the whole process reassures private investors that the Treasury and Fed are committed to handling the bank solvency issue in a way that is favorable to equity and bondholders. As a taxpayer, I remain concerned that their approach may not be the least costly or efficient alternative. In particular, I worry that if the banks do not succeed in raising the needed capital privately, we will have just substituted one form of nationalization (FDIC-style restructuring) with a worse one (the government as majority shareholder).

Although the results of the stress tests were as inflated as Ivy League grades, I am confident that that the process was very informing to regulators about the risks that remain. So I hope at least the Fed and Treasury will have a better idea about what steps will be necessary if the economy deteriorates significantly more than the rather mild “worst-case” scenarios used in the evaluation.

For the rest of the discussion, go to www.politico.com/arena.

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Prediction is Hard (Especially about the Future)

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So my earlier prediction that Arlen Specter would become a Democratic stalwart in the Senate has not fared so well. First, he voted against the budget (I wrote that off to his already established opposition to that spending plan as it would have seemed too opportunistic to switch on that!) Then he reasserted his opposition to Obama’s health care proposals and card-check unionization. And then he dropped the bomb: saying the Minnesota courts should “do justice” and seat Norm Coleman (Specter says he forgot what team he was on — switch parties after 29 years and it slips your mind!)

Of course, my prediction about the repercussions if he didn’t become a Democrat’s Democrat was correct. The Democratic caucus, under considerable pressure from liberal interest groups, voted not to recognize his seniority (at least until after such point as he was elected as a Democrat). This makes it increasingly likely that Specter will face a primary challenge from Joe Sestak who will be well funded by the liberal groups who despise Specter for his work on the Judiciary committee over the years.

Even if Specter had moved further to the left, it is not that unusual for the receiving party to be somewhat inhospitable to a switcher. Many of the southern Democrats who switched parties as that region went Republican were challenged or defeated in primaries by purer conservatives. As the Northeast goes Democratic, Republican switchers probably shouldn’t expect much better treatment. Of course, the Democrats are taking a bit of a gamble that Sestak can beat Toomey head-to-head.

The Specter of a Filibuster-proof Majority

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Arlen Specter’s relationship with the right-wing of his party never been good. But he’s managed to keep the conservatives sufficiently at bay to win five Republican Senate primaries. But as the Republican Party becomes more conservative and retreats from the Northeast, his position became untenable. Even if he had been able to move right to fend off his second consecutive primary challenge from conservative Pat Toomey, he would have been extremely vulnerable to a Democratic candidate in the general election. So his decision to switch parties is not terribly surprising.

The big question today of course is the extent to which Specter’s switch will affect the success of President Obama’s legislative agenda. Of course, as many have already pointed out, the switch plus the probable seating of Al Franken would bring the Senate Democrats to the magic filibuster-proof majority of sixty.

But because there is no guarantee of Democratic unanimity on many of the more controversial aspects of the president’s agenda, the effect of the switch ultimately depends on how much Specter moves to the left as he tries to position himself within his new party. Keith, Howard, and I once published a paper that among other things estimated how much party switchers shifted on the liberal-conservative continuum. We found that on average party switchers moved 28 percentile ranks on a liberalism scale. Thus, a Democrat at the 40th percentile on liberalism would move to the 68th percentile. In the 110th Congress, Specter was the 55th most liberal member of the Senate. With the addition of new Democratic senators, he is probably the 62nd most liberal. Consequently, if he shifts the average amount, he’ll be the 34th most liberal. Such a move would put him solidly within the Democratic fold near Herb Kohl and Diane Feinstein. He would probably rank more liberal than his fellow Pennsylvania Democrat Bob Casey (even on issues other than abortion).

That’s just the average effect. There are reasons to suspect that Specter might go even further left. After all, he has to make party activists forget that he voted for the Iraq War, supported Bush’s judicial nominees, and was Anita Hill chief inquisitor (memories are long for these sorts of things). He has to avoid a serious Democratic primary challenge, and he has to raise a lot of money from groups and individuals who have pumped millions into past attempts to defeat him. So Obama just doesn’t get an extra vote for his agenda, he gets an easy vote.

The New CEO Survival Guide

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For better or worse, the United States is moving into an era where the government will be more involved in the economy and in the day-to-day decisions of American corporations. These entanglements will range from greater regulation of economic activity to temporary interventions like bailouts to substantial long term governmental holdings of equity.

Unfortunately, much of the debate on the question of how far the government should go has either been ideological or about the economic costs and benefits of particular interventions. Unsurprisingly, the ideological debate has pitted those who believe that government should never intervene in the private economy as a matter of principle against those who believe that government intervention is justified in any case where market allocations deviate from “socially” desirable outcomes. Somewhat more interesting are the economic debates about which forms of government intervention are most likely to achieve desired ends. A good example is the Krugman-Summers smack down over the Treasury’s toxic asset plan.

What I have long felt was missing from these debates is an assessment about the long term political ramifications of different types of government intervention. More specifically, I worry about how we can prevent certain forms of intervention from over-politicizing corporate decision making and turning the economy into one giant “pay to play” scheme.

Take the decision of the Obama administration’s decision to condition further aid to General Motors on the ouster of its CEO Rick Wagoner. Regardless of Wagoner’s merits or deficiencies in leading GM, the move sets a dangerous precedent in what it teaches other CEOs. Other CEOs presumably learned that their jobs may ultimately depend as much on their “political approval rating” as much as their economic contribution. CEOs will go to even greater lengths than they currently do to curry political favor and connections. More former politicians will be added to corporate boards and executive suites to provide insurance against ill political winds.

Of course, one might argue that such problems aren’t present in many European states where the government’s role in the economy is much more extensive. But there are many reasons to believe that those experiences will be hard to translate to the U.S. case. The first is history. There is ample evidence that corporate political activity has grown proportionately to the increased level of the government intervention in the economy. The second is our system of campaign finance that gives corporations foolproof opportunities to cultivate political connections. But the real problem may lie much deeper. Our entire political structure with its geographic basis of representation and relatively weak political parties makes it relatively easy for corporations and CEOs to build strong protective coalitions among legislators who are naturally inclined to represent narrow special interests.

So one has to worry that excessive intervention may turn our economy into a collection hyper-politicized entities like Fannie Mae and Freddie Mac. Of course, it would be another matter entirely if government-forced CEO ousters were to be a rare event going forward. But Tim Geithner told Katie Couric that the same fate may await other bailout CEOs.

Transition Race – Update

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Despite the remaining hole in his cabinet at HHS, Obama has maintained his slight lead over George W. Bush in my presidential transition race. On March 25, 2001, Bush had confirmed appointees sitting in 19 of my list 64 top positions. As of yesterday, Obama had filled 23. His advantage stems both from his retentions in DOD and that he was two months faster in filling top jobs at the Department of Justice.

Given the economic crisis, however, it is still somewhat worrisome that Geitner remains the only Senate confirmed appointment at Treasury. While it is true that Bush did not fill the deputy and undersecretary positions until August of his first year, the times seem to call for a little more haste. Yet, as of yesterday, the nomination of only one the remaining top three positions has even been referred to committee.

A Response from Josh

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Three quick responses to Nolan’s piece:

1) If we were really serious about adjusting income tax rates for cost of living expenses, then the best way to do this would be to index the marginal tax rates to cost of living by region. Politically, though, this is bound to be a non-starter. But rectifying it through deductions is at best a messy indirect way of addressing the problem: one additional big global form of consumption that Nolan fails to identify is savings for retirement.

2) Reducing the rate at which high income earners can write off tax deductions, in my opinion, is there simply as a way to get an extra tax increase on high income earners into the budget without having to vote directly on a higher marginal tax rate, as he gets his current tax increase just by letting the Bush tax cuts expire. With Nolan’s previous post in mind, though, I’d think supply-siders would actually prefer this kind of tax increase (to, for example, simply raising the highest marginal tax rate to 41% instead of 39.6%), as it doesn’t reduce the incentive to work. What it does do is reduce the incentive to participate in activities the bring about tax write offs. The most popular topic to talk about in this regard in charitable giving, although I think this is kind of red herring. I’ve seen reports of studies saying that people reports tax considerations as very low on their priority list when considering charitable giving, but of course this could be subject to all sorts of response bias. Would be very interested to see if anyone had data/studies on whether changing the marginal tax rates has an effect on charitable giving by the highest wage earners?

3) What is potentially more interesting, however, is that it could begin to address one of the more distortive elements of the US tax code, which is the massive subsidy given to home buyers as opposed to renters. The justification for this subsidy has been that it helps promote an “ownership society” by making it easier for people to move from being renters to home owners, but of course the recent criticism has been that it helped inflate the housing bubble. Seen this in light, the Obama plan is potentially very clever: it keeps the subsidy for low wage earners, but for higher wage earners it might make them think twice about taking on a larger mortgage. So ostensibly it shouldn’t have much of an effect on most potential home owners entering the market, but might control some of the excess at the upper end of the market in the future.

Another Random Thought about Obama’s Tax Plans

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One of the features of the U.S. income tax system is that despite very considerable variation in the cost of living across regions the tax rate schedule is uniform across the country. Consider my favorite two states: Texas and New Jersey (how many people can say that?). Based on state level estimates of cost of living, the same consumption bundle costs 35% more in New Jersey than it does in Texas. Nevertheless a New Jerseyan and a Texan with the same dollar income will pay the same dollar amount in taxes. But the Texan will pay 35% less in terms of local consumption. Consequently, the tax system violates an important principle: two people with the same ability to pay should pay the same taxes.

Of course, there are a lot of factors that offset these differences. First, unlike politics, not all consumption is local. Both the New Jerseyan and the Texan pay the same for their EuroDisney vacation. But enough consumption (especially housing) is local so that large differences remain.

Within the tax code itself, the major offset to these differences has been on the deduction side. New Jersey housing costs more so that the New Jersayan has a bigger mortgage deduction than a Texan. It costs more to sustain her local charities so the New Jerseyan may give more to charity. Her state government costs more for a given set of services so she pays more state taxes and gets a larger deduction.

But with its phase outs of itemized deductions, the Obama tax plan moves in the direction of exacerbating the regional differences in “real” tax liabilities. One of the ironies (that soon may not be lost on his administration) is that many of the states that are most affected by this inequity are those that strongly support his election.