Friday, June 1, 2012

A Constitutional Amendment

In one of the strangest comments ever heard in a presidential campaign Mitt Romney said he would like to change the constitution to:
(H)ave a provision in the Constitution that in addition to the age of the president and the citizenship of the president and the birthplace of the president being set by the Constitution, I’d like it also to say that the president has to spend at least three years working in business before he could become president of the United States.‘”
Of course the blogosphere erupted with commentary on the apparent silliness of the idea that would have disqualified virtually every top ranked president, and rightly so. Romney, like so many politicians, seems willing to say anything that will get him to the magical 50.1%. The most common frame for such a statement is that government should be run like a business and so by extension, businessmen make good public servants. Let’s examine this wrong headed proposition.
Economic theory tells us that rational decisions, the assumptive behavior of profit maximizing individuals like businessmen, are based on three signals that Romney and others who advocate a business approach to government respond to:
1. Individuals practice rational maximizing behavior – they behave in such a way as to do as well as possible for themselves. This suggests they run a business to maximize return on investment.
The reality is that we often act in ways that do not maximize our own private utility and a world in which operated that way would be dismal indeed. A more accurate view of human behavior was described by Robert Trivers in 1971 where he outlined how seemingly non self interested behavior can have long run benefits for the individual performing an altruistic act and by extension, benefit the community. This flies against the face of short-term economic maximizing behavior as advocated by business proponents. The world is not comprised of selfish self-centered individuals looking out for “number one” and in fact, works better when that is not the case. One might wonder where the signals for altruistic behavior would come from if not for the existence of a public regarding class.  The business model frame makes no provision for community beyond a collection of consumers vying for the most product at the least cost. If you think a national health care system is good for the community, the business frame offers nothing in the way of achieving it although it may have something to say about doing so efficiently.
2. Consumer demand – we are willing and able to state what we like and don’t like. As such, entrepreneurs respond with various widgets at various prices so that varying segments of the consuming public can express preferences.
This begs the question of quantifying public demand in the absence of clear market signals. In others words, how do political entrepreneurs know consumer preferences? Answer – they don’t. The current system is so badly broken one could be forgiven for thinking voter preferences reflect the values of Koch brothers or the OWS movement. The hallmark of political leadership is not bending to the will of the vociferous minority. It is having a vision that sometimes goes against the grain and being willing to adopt an unpopular stand. Romney shows no indication of being able to do this, Obama only rarely. In any case, the business model is a poor construct for transformational leadership that expands civil rights, protects the environment, and extends consumer protection.
3. All decisions must account for tradeoffs – in a world of limited resources, we are faced with internalizing the opportunity costs of our choices. Faced with normal budget constraints, we prioritize our purchases in such as way as to satisfy number one above.
Of course, this is an overly simplistic description of the world of business and the public sector. In fact, as consumers, we are often irrational (just think about your last impulsive purchase) and as decision makers, we are often just plain wrong.  We frequently depend on heuristics that rely on intuition or faulty logic. Psychologist Daniel Kahneman, in his new book “Thinking Fast and Slow”, discusses his research on how we think in two ways: consciously (slow) and subconsciously (fast). His conclusions are startling – we are often and unconsciously wrong for all sorts of reasons. These findings are just as true for businessmen as anyone else. Two traits account for this. First, we are, for the most part, lazy in our intuitive thinking. We rely on past experiences to form quick opinions with very little in the way of reflection or critical thinking. Second, we tend to be very risk adverse to counterintuitive findings. Hard decisions are not part of our genetic makeup. Again, those from the world of business enjoy no comparative advantage over nonbusiness types with respect to our ability to weigh risk, costs, or benefits. In fact, they likely have a smaller frame of reference than others given their cultural proclivities toward short term profit. 
The take home message is that the assertion that government should be run like a business is nonsensical. The cues, laws, and considerations of “clientele” suggests there is little overlap at least in the big picture. That said there are clearly lessons from business practices that can apply in the public sector (reform institutional incentives) just as there are public sector practices that are applicable to the world of private business (more transparency of business practices – especially overseas).
The emphasis in this election seems to be on the “job creators” as the solution to our economic doldrums. As we are so often reminded, small business create 65% of jobs in this country. Unfortunately, half will fail within five years. Wouldn’t you think we could find a better model to emulate?

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