THE ZERO-SUM AND MICRO - MACRO GAMES

I never lost a game. I just ran out of time.. ~ Bobby Lane

Money talks...but all mine ever says is good-bye. ~ Anon.

No, these aren't new events at the upcoming X Games. They've been played for quite some time in our nation's capitol. Washington continues live in its own self-contained bubble where priorities are all discordantly political and too rarely founded on what once-upon-a-long-time ago were termed the public interest - providing the greatest good for the greatest number of citizens. Instead, policy objectives are fractionalized, not collective, and principally aimed at narrow, special interests rather than a broad, public interest.

This private-interest political regimen is fundamentally different from policy-making for common interest, and is exemplified by the Republican's two focal points: (1) aiding the top 1% or 2% of income-earning citizens; and (2) significantly reducing government expenditures. Adding to the dissonance is the growing notion that "something has to be done" to get the country back on track towards greater economic growth, but it can't cost much, and certainly not me.

I think the metastasis of groups like the tea party is founded on the belief of more and more folks that the economic game is fixed against them, and they're losing. These people believe they're in a zero-sum game, where one person's (or group's) gains in an activity (say their participation in our economy) is balanced by the losses of other participants. In other words, there is not enough slices of the (economic) pie to go around for everyone who wants a piece so if one person/group takes a larger slice, that means there's smaller slices available for all other folks. It didn't use to be this way.

In more benevolent times, more people believed there was a positive-sum game, where everyone can benefit; when all participants end up with more than they started with – a bigger pie. A rising tide (of a sustainably growing economy) raises all boats. This is why President Obama's and Congress' principal policy goal should be to raise US economic growth sustainably and equitably to at least 3.2%.

But for the past 4 years, the US economy hasn't substantively grown; the average annual real GDP growth rate is a wretched 0.75%. In addition, 12.2 million people remain unemployed; the length of unemployment now is, on average, 38.1 weeks, that's almost ¾ of a year. Average productivity has risen over 38% during the past 16 years, but median wages have stagnated and increased only 16% since 1995.

So it's understandable why more people are seeing their future darkly. Aware of this anxiety, some politicians, offering fearful views of the future, proselytize that only by drastically reducing the burdensome government [except for entitlements like Social Security and Medicare-Medicaid], can individuals regain their economic well-being. What's one of the means such politicians are making their points? By playing the micro-macro game.

There is usually a big difference between macroeconomic policies' effects on us as individuals (micro effects) and on us all together as a nation (macro effects). The micro-macro game comes in many versions and is often played by politicians of various persuasions to confuse and distort the effects of proposed policy changes.

A prime example is the macro "fact" illustrated by the abysmally low overall (macro) rating that Congress gets from the public at large; only 9% of polled people now approve of Congress' performance – my real surprise is that it's as high as 9%. But, within the very "micro" voting booth, citizens continue to overwhelmingly re-elect their incumbent Congress-person. In 2010, 85% of incumbent House members were re-elected and 84% of Senators. As many commentators have said, Congress as an institution is held in very low regard, but in this gerrymandered world it's all the "other" Congress-people that's the problem, not my representative. Go figure.

The micro-macro game is constantly played by both parties in the policy arena as well. Consider the discussion that's occurring about the federal budget deficit and debt. The Repubs concentrate only on the macro future and dismiss the nation's current economic situation that has been adversely affecting large numbers of individual middle-class individuals and families. The Repubs' focus on now reducing discretionary federal expenditures to ameliorate our possible future macro debt (to "save the Republic" among other fantastic rationales) would magnify individual middle-class members' already-dire economic straits. Similarly, the Repubs insistence (until yesterday) on holding the US hostage by their threats to not renew the debt ceiling represent no sensible view of future consequences. By contrast, the Dems focus on the micro effects of changes to entitlement programs – like Social Security and Medicare-Medicaid – to reject any consideration of needed macro policy modifications so the programs can survive in the future.

The Dems dismiss the macro future (that shows ever-increasing entitlement expenditures due to aging Boomers and fewer Gen X'ers and Y'ers) when they utterly reject any consideration of incremental changes to these programs. They (mistakenly) state since there are no problems now with Social Security (SS) and these alterations would adversely affect individual senior citizens, no changes should be now made.  

Their over-emphasis of the current micro costs of changes is akin to a 5-year old threatening to hold her breath until she gets what she wants. After she is soon forced to gasp for a breath before passing out, she's in worse shape than before. [Sort of what happened yesterday when the Repubs, realizing they've been idiots about their debt ceiling shenanigans, finally caved – but only for 3 more months.]

A change that could help avoid Social Security (SS) and Medicare collapse is to make these benefits means-tested (eg, dependent on income level). Making such a change represents a fundamental adjustment to such entitlements, and thus goes against Democratic orthodoxy. But if the Dems continue to play the micro-macro game and refuse any changes to entitlements, the rest of us (like the 5 year old) will be much worse off afterwards.

Consider making incremental changes that involve means-testing entitlement benefits, say reducing Social Security benefits by 15% only for individuals making more than $120,000 per year. Such a change can have useful macro effects over time via the magic of fiscal multipliers. My guestimate of possible direct macro savings for Social Security is 3% of total SS benefits paid or $236M/year, not small change. But for these high-income individuals the effects will almost certainly be very modest. The 15% Social Security benefit reduction sounds sizeable , however for people earning more than $120k/yr will not likely be more than $377/month, since the maximum monthly Social Security benefit currently allowed now is capped at $2,513 for the highest-income people [$377 is 15% of $2,513]. This $377 reduction in monthly SS benefits is unlikely to meaningfully affect these high-income recipients of Social Security, because their monthly gross income is more than $10,000.
Will such a change "save" Social Security? Not by itself, but it would represent an important step. Achieving real savings in SS costs will require broader reductions in benefits, increases in the qualifying age, and/or removal of the ceiling on income that is subject to FICA (Social Security) tax. Any of these steps are an anathema for Dems.

Thus, saying that economically well-off high-income people will be hurt by minor benefit cuts – and a reason for not undertaking some form of means-testing SS benefits – is simply mistaken. However, the politics of such a marginal change in entitlement benefits, of course, are anything but incremental. And Dems seem willing to keep using the micro-macro game to waylay needed changes to entitlements, the same way Repubs do it for tax and spending changes.

Finally, politicians on both sides of the isle also use a variant of the Micro-Macro game to dismiss alterations that could benefit our longer-term (macro) structural deficit – or other issues. You hear it when a politician or a self-interested talking head states, "This possible change in policy is too small to solve our problem with [fill in the blank here], so we need to think of some other, more significant solution." My example above to begin means-testing SS benefits – just like the suggestion that SS benefits should be subject to a different COLA – would initially be met with howls of rage from Dems because changing anything to do with entitlements is verboten. But after that, politicians would (and did) say the new COLA, or my proposal, should be dismissed because it doesn't really solve the problem; its effect is too small for this large issue. You have to start somewhere, even if it's a small step.

This logical incongruence – stopping smaller changes because they're not large enough to "count", but not allowing consideration of significant changes – is used to stop any remedy from happening – just what the status quo, looking-only-at-the-present politicians want.

I guess we will continue to keep holding our breath.