Picking Pareto’s Losers
I was having an interesting conversation about inequality
and political corruption with an economist (I know, it sounds like the start of
an esoteric joke) when he said, “(the) economist’s gold standard is Pareto
improvement or loss.”
What, I hear you cry, is a Pareto Loss? At the risk of disappointing my friend (who
is very likely on to me anyway) I freely admit that I had to look it up.
“Pareto” was Vilfredo Pareto (Vilfie, to his friends?)
a 19th and early 20th Century Italian economist who later
turned to sociology. A “Pareto
Efficiency” is a essentially a state of equilibrium, an allocation of resources
in which it is impossible to make anyone better off without taking from someone
else. A “Pareto Improvement” is when
reallocation makes at least one person better off without taking from anyone
else. And a “Pareto Loss” occurs when
the aggregate loss to others exceeds the benefit to the person or group
benefitting from the reallocation.
To return to the conversation, I posed the following
hypotheticals:
My town government owns a building in a prime location
that it offers to the public for $10M cash, thirty days. The appraised value is, say, $15M, but the
government has a bond coming due and needs cash quickly and can’t wait for an
extended appraisal, due diligence, and bidding process.
I know it's a great deal, but I don't have
$10M. Jim, the richest man in town, has
the money and can do the deal He reaps
the benefit of the below market price.
Or, suppose a new Mayor and Town Board are elected,
and Jim is their major campaign contributor.
There is no financial crisis, but the new Mayor pronounces himself all
about “privatization” and so before the new drapes are installed in his office,
he calls Jim and as a thank you, cuts a secret deal with him—no outside
bidding, and the same steeply discounted price ($10M for the $15M building.)
To me, as a citizen, the first example is just the
way life is. Jim is rich, I’m not, the
town has an immediate need, and, as my late father used to say “money comes to
money.” I don’t see either a political
or moral dilemma. The second example I
find outrageous. High-roller Jim buys a
few politicians and, in return, gets a huge gift of public assets that could
have been used for roads, schools, sanitation and cops.
My economist friend, however, in viewing it purely
from a professional perspective, didn’t agree. Even a corrupt bargain was not, in and of
itself, problematic. “So what? It's just a transfer. The city used to have the
building, now the financier has it. It
doesn't change the level of output, just the distribution.”
As you might have expected, I reacted to this. I
wondered if this was simply a public/private thing (and he was a good
capitalist) so I reimagined the situation as my personal property company
selling the building to Jim on the below market terms, after Jim bought a very
expensive convertible for my supposedly loyal manager. In an excess of understatement, I added I
would be very irritated.
Again, while he understood the irritation, as a
professional, he was unmoved: “Pareto improvement or loss. This is neither, it’s
just redistribution.” My problem was one
of psychology and political science, not of numbers.
So, what do ostensibly soulless economists care
about? “(T)he worst part of political influence by the rich is value destroying
corruption. For instance, suppose he's
allowed to demolish the building and construct a 100-story condo where it
doesn't belong. Then society as a whole is worse off--the benefit the developer
derives is less than the social cost. It's Pareto loss.”
“Value-destroying corruption.” Now we have a metaphor we can use. He’s an economist. I’m politically oriented. From that perspective, I would argue that my
friend, in claiming the politically motivated sweetheart deal doesn’t, per se,
destroy value, may be missing something critical.
Politics, by definition, creates winners and
losers. But governing shouldn’t be about
reward and punishment. We should expect
those who lead us to improve things. In
short, if they are going to put their thumb on the scale in favor of one group,
they should do no more than accomplish Pareto efficiency, and optimally, a
Pareto Improvement.
Of course, that is (without the Pareto fetish)
essentially what they claim they do.
When a Republican pushes for more for the wealthy, he couches it in
terms of “job creation.” Democrats speak
more generally about redressing inequality, but the more sophisticated support
better education, vocational training, and infrastructure which, in the long
run, would give more people the ability to succeed, create and consume. In effect, parties differ on approach but
both are saying essentially the same thing, which roughly translates to
“support my pals and it will be good for everyone.”
Except, we all “know” that’s a lie. These folk really don’t care about everyone,
they only care about those people who pull the lever for them, or, more
importantly, write them a nice check. Knowledge of that dirty deal that the
Mayor did with big-bucks Jim can induce a sort of lawlessness among the general
population. People don't report income,
they barter, they pay cash to avoid sales tax, they cut corners. Instead of fearing moral opprobrium and worse
if they are caught, they feel stupid if they obey the rules while everyone else
isn’t. So, that $5M gift to Jim of
public assets, even if it’s just at first “re-distribution” can be amplified by
a thousand small acts of non-cooperation and become a Pareto Loss.
That process seems to be accelerating. One of the
real dangers of this constant lurching back and forth between the parties, with
wave elections suddenly installing single party-dominance, is that there’s a
pent up demand for special favors. That demand is being met by newly elected
politicians taking care of theirs first and always, swiftly and often
ruthlessly.
Yet, the spoils system isn’t new by any means. What seems to have changed is something
larger, yet harder to quantify. It’s a
sort of willfulness to take and a deafness to the legitimate concerns of
others.
You saw a hint of this on Tuesday, when Ralph Hall,
the 91-year old Texas Congressman, was defeated in the Republican primary by
Tea Party candidate John Ratcliffe. Hall’s sins basically boiled down to age
and a (perceived) unseemly tendency to be a little too much of a
gentlemen. His leaving closes the door
on an era; in January 2015, there will be no more WWII vets in Congress.
If you think that kicking the old coot out the door
is something to celebrate, I would suggest you might be wrong. Because what Hall takes with him is a little
bit of the mindfulness that Milton Glaser was talking about last week. The Greatest Generation had a consciousness
that came from shared experience and often painful sacrifice. Pols and partisans they surely were, but they
were also open to other ideas and collaborative solutions.
I’m not an economist, but I feel pretty secure in
saying that the passing of their way of thinking will lead to a Pareto
Loss. I don’t think I need to point out
who will be the losers.
May 30, 2014
Michael Liss (Moderate Moderator)
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