Tobold's Blog
Thursday, July 07, 2016
Moral hazards of the republic

Most of my readers when asked under what form of government they live would probably reply that they live in a democracy. But in reality there is a qualifier to that, we don't live in direct democracies, but rather in representative democracies, otherwise known as republics. We don't decide on laws or govern ourselves, but we elect representatives who staff the legislative and executive branch for us. In many cases that goes even one step further: We elect representatives who then elect key persons in government, like a president, chancellor, or prime minister.

What struck me as odd since the referendum on the Brexit was that many of these key persons, key political leaders on both side of the leave and remain debate, have either stepped down or are expected to do so soon. So basically the British first voted for different parties, who chose various political leaders, who got the ball rolling for the Brexit referendum. And now that the result of that referendum is in, those political leaders step down and leave others to deal with the mess.

For me that falls in the economic definition of moral hazard, the effect that somebody might be willing to take a high risk because he is protected from the consequences. The prime minister retires with a hefty pension, why somebody who wasn't responsible for holding a referendum will have the very hard job of negotiating the exit of the UK from the EU. One thing that is certain is that nobody will be happy with the result of those negotiations, because neither the Europhiles nor the Eurosceptics will receive all they might hope for. And whoever is in government in the coming years in the UK will be blamed. Even the key political leaders of the Leave campaign like Johnson and Farage will not be held responsible for any negative consequences of the referendum, but will probably continue to snipe from the sidelines at whoever will be in charge.

That isn't unique to the UK. If you believe the latest statistics, there is a 77% probability of Donald Trump losing the US presidential elections. At which point he will probably simply go home and not involve himself much more with the Republican party. Somebody else will be left with the rather unenviable job of sorting out a deeply divided and rancorous Republican party.

The problem is well known in economics with regards to CEOs of companies. They can do extremely risky moves endangering the company they lead, and if it goes wrong they'll fly out on a golden parachute. So some measures have been proposed and some implemented where the CEO is paid in shares that can't be sold for a while, so if he causes a long-term drop in share price he is suffering some consequences himself. I wonder whether it would be possible to implement something similar for political leaders, like linking their pension to future GDP. As it is they can just cause all sorts of problems with risky actions, without having to fear the consequences.

"If you believe the latest statistics, there is a 77% probability of Donald Trump losing the US presidential elections."

Where do you get these numbers? The most recent polling from Rasmussen has Trump leading 43 to 39 over Hillary.


So many people seem to be assuming that the Republican party will "learn their lesson" after a Donald Trump disaster, that this was just some crazy outlier. The second place Republican nominee, Ted Cruz, is just as crazy and probably crazier than Trump. The "rational one," John Kasich, took 4th place in a 3 man race, with only a small portion of Republicans voting for him even when he was the only "rational" candidate left.

What's more, I feel like Trump has laid out a blueprint for gaining the nomination that more than a few Republican candidates in 2020 will try. "Thoughtful and reserved" doesn't work, that's "low energy." Crazy and loud is what gets you the news coverage, what pulls in the motivated voters.
This site does a lot of statistical analysis of U.S. politics and has the 77% you are looking for:

The Rasmussen poll is an outlier from a heavily Republican leaning polling firm. They are the only ones who have Trump in the lead out of a LOT of polls. The average is about a 5 point lead for Clinton:

Fivethirtyeight breaks it down state by state to give you more detailed odds:
Expand the states listing in the FiveThirtyEight site to see why nationwide polls are a bad way of predicting election outcomes. Big states like California might have millions of Trump voters, but they won't count in a winner-takes-all system. But they do count in nationwide polls.
I seem to remember that in old rome the consuls had to bring in all their wealth into the state and only got it back after their term ended, scaled with their success (which could be negative, in case of misconduct or bad "statesmanship")

I can't find it on the english wikipedia page, but the german one mentions it.

What it means, perhaps we should again connect the conduct of politicians to their well-being... ;-)

There are two major problems with making the political "elite" to do the things we want:

1. The society is never united. The nation as a uniform entity, where everyone is equal, can exist only in dreams. There are always groups of people with a practical turn of mind who serve their own ends and goals. One of the groups -- politicians -- may say all they want about public good yet they cater to their own agenda. This is why I don’t pay much attention to the propaganda politicians spout.

Although I am in favor of political systems like the ones in Japan and Singapore. They seem more or less fair. Some kind of a good attitude towards common folks exists over there.

2. It is impossible to make people, who make laws, to feel consequences for their own actions unless a direct democracy exists in your country in one form or another. Basically, legislators write their own checks. They are the ones to decide on their own salaries. Not the common people. If you want to change the state of affairs, we must push for greater control over the government on the part of common folks.

I hear a great deal of referendums is held in Switzerland. Besides, it is a digital age. Direct democracy can be a thing these days. Collecting votes and processing them can be done at little to no expense.
@kaybek As several people already linked to where I got my data from, I don't need to do it again. Never trust a single poll!

What it means, perhaps we should again connect the conduct of politicians to their well-being... ;-)

Extra Credits on YouTube proposed to link the salary of politicians to the median income of the country. Sounds like a good idea to me. For the case of Cameron, the pension should be linked to the median income as well.
"Extra Credits on YouTube proposed to link the salary of politicians to the median income of the country"

Do you have an equivalent for the expression "If you pay peanuts you get monkeys" in Belgium?
The problem is that this would encourage even shorter term thinking than we already have. You don't want to discourage leaders from accepting short term pain for long term benefit.

For example, we want our leaders to be willing to hurt median income in order to reduce carbon emissions and reverse climate change. We want our leaders to raise taxes or reduce benefits for healthcare and retirement support to make those programs sustainable. But our leaders fear the public response to short term pain too much to shoot for long term gain, even without any impact on their own finances. Linking their assets to gdp growth or whatever would make this even worse.
Many people seem to indicate(with their replies) that they think that the UK will only be dealing with a single entity in terms of "negotiating" with the EU, which is not a "single" entity. There's the European Parliament, the European Commission, the European Council and, if I'm not mistaken, 27 member states in all. The UK is also not a "single" entity. You have Ireland, Scotland, Wales and hundreds of local councils and Whitehall departments who will want their say in the negotiations.

Also, Cameron stepping down was a direct result of his election platform from the beginning. He promised as part of his election campaign, that if elected, he would offer the public a referendum vote on the Europe issue. He gambled and lost. Instead of pay, the focus should be on why the UK, EU and other organisations require so many "figureheads" as representatives when they are clearly not needed. Who is actually being represented here, citizens or corporations/special interest groups with interests based solely on their profits?
@NoGuff Congratulations, NoGuff, you are actually the first person on Earth ever to accuse the European Union of being pro-business, pro-profits. :)
I think it might involve more hubris than profits, along with a healthy dose of over-realized, self-importance more than anything. But hey, where do the immigrants flock to when times are bad where they come from? And those immigrants need representation once they get to where ever it is they go. Surely were not talking about an identity crisis in the UK, are we? After all, hate crimes have increased 8% since the Brexit vote.

At least you caught the sarcasm in that last sentence. :)
Actually it's 400%
The problem isn't politicians being "evil", it's voters being stupid. No one held a gun to anyone to vote leave (or remain). They did it on their own. Just like no one forced anyone to vote Trump on the pre-eliminary (by the way have you checked the policies of Ted Cruz?!)

Politicians operate with 8-years old messages because that what work. They offer retarded policies because that's what get them re-elected. If you want better government, don't try to somehow limit the politicians from doing stupid, at best you get genuinely stupid politicians instead of the current evil ones who fake stupidity.

The solution is taking the voting right from the stupid voters. How can you decide who is stupid? Those who are too stupid to care for themselves (=poor) are the ones too stupid to vote.
Companies are ultimately just a vehicle for increasing shareholder wealth. Governments are run for the betterment of their country and the world. How would you you measure performance? Wealth, happiness, pollution, equality, research, education standards, prison population, unemployment, or lifespan?
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