Why Washington Is Broken

Congressman Delaney has an Op-Ed in The Washington Post about our broken Congress and a bill to fix it. As he writes,

Representative democracy is in crisis in the United States. One of the three pillars of our system of government — the legislative branch — is failing. The current Congress has shut down the federal government, bickers constantly and increasingly does not speak broadly to the American people. Obvious problems, from a struggling middle class to a flawed tax code to crumbling roads and bridges, go unaddressed. The American people have certainly noticed; according to Gallup, 80 percent disapprove of Congress

We can’t let 535 people continue to limit the progress of a nation of more than 300 million.

After two decades spent gaining a data-driven perspective in the private sector, I believe that problems on this scale are usually caused by structural failures. Our electoral process has created perverse incentives that have warped our democracy and empowered special interests and a vocal minority. Congressional dysfunction is the logical result of closed primaries, too many gerrymandered one-party seats and low-turnout elections.

To address these problems, I filed the Open Our Democracy Act in July. If passed, the legislation would mandate open primaries for House elections, begin the process of national redistricting reform and make Election Day the equivalent of a federal holiday.

Addressing Delaney's solution to the problem of "broken government" starts with figuring out what's wrong. Delaney doesn't pay much attention to this issue, but I'm happy to do the work for him. Or at the very least, I'll quote some guys who will do the work for him. The key here is understanding the US is a presidential republic, and that this form of government is actually a pretty terrible form of democracy.

We often talk about the "greatness" of American democracy, but we're a huge outlier. There have been quite a few presidential democracies in Latin America. All of them have failed. Basically, the US is the only presidential democracy to have remained stable for a substantial period of time, and there's some very particular reasons for that. I'll get to that in a second. But first, what's so bad with our government? The great Yale Political Scientist Juan Linz identified four key problems back in 1994 in his classic book The Failure of Presidential Democracy. To quote Mainwaring and Shugart's review:

First, in presidential systems, the president and assembly have competing claims to legitimacy. Both powers are popularly elected, and the origin and survival of each is independent from the other. If a majority of legislators favor policies different from those the president pursues, a dramatic conflict between the assembly and the executive can erupt. “No democratic principle exists to resolve disputes between the executive and the legislature about which of the two actually represents the will of the people” (p. 63). Linz argues that parliamentarism obviates this problem because the executive is not independent of the assembly. If the majority of the assembly favors a change in policy direction, it can replace the government by exercising its no-confidence vote.

Second, the fixed term of the president’s office introduces a rigidity that is less favorable to democracy than the flexibility offered by parliamentary systems, where governments are not elected for a fixed term of office but rather depend on the ongoing confidence of the assembly. Because under presidentialism the chief executive cannot bolster his or her authority either through a vote of confidence or by dissolving the parliament to call new elections, presidential leadership can be weaker than that provided by some prime ministers. Presidential constitutions often manifest a contradiction “between the desire for a strong and stable executive and the latent suspicion of that same presidential power” (p. 55). Moreover, it is extremely difficult to remove a president from office, regardless of his/her level of competence and support among legislators and other relevant political actors. By virtue of their greater ability to promote changes in the cabinet and government, parliamentary systems afford greater opportunities for resolving disputes. Such a safety valve may enhance regime stability. 

Just as presidentialism makes it difficult to remove a democratically elected head of government who no longer has support, it usually makes it impossible to extend the term of popular presidents beyond constitutionally set limits. Although such provisions are not inherent in the regime type, most presidential constitutions bar presidents from serving successive terms. Presidents therefore have relatively little time to pursue their projects and, as a result, are often tempted to try to accomplish a great deal in a short term. “This exaggerated sense of urgency on the part of the president may lead to ill-conceived policy initiatives, overly hasty stabs at implementation, unwarranted anger at the lawful opposition, and a host of other evils” (p. 66). 

Third, Linz argues that presidentialism has a winner-takes-all logic that is unfavorable to democratic stability. In parliamentary systems, “Power-sharing and coalition-forming are fairly common, and incumbents are accordingly attentive to the demands and interests of even the smaller parties” (p. 56). In presidential systems, the direct popular election is likely to imbue the president with a feeling that he/she need not undertake the tedious process of constructing coalitions and making concessions to the opposition. Moreover, “The danger that zero-sum presidential elections pose is compounded by the rigidity of the president’s fixed term in office. Winners and losers are sharply defined for the entire period of the presidential mandate... The losers must wait at least four or five years without any access to executive power and patronage” (p. 56). 

Fourth, Linz argues that the “style of presidential politics” is less propitious for democracy than the style of parliamentary politics. In contrast to prime ministers, a president is called upon to be both the head of state and the head of government, and the exigencies of these two roles at times are in conflict. The president’s sense of being the representative of the entire nation may lead him/her to lamentable intolerance of the opposition. The absence in actual presidential systems of a monarch or a ‘president of the republic’ deprives them of an authority who can on occasion exercise restraining power (p. 62)."

In short, presidential democracies are primed for conflict, lack the intra-government mechanisms for solving conflict, lack the democratic mechanisms for resolving conflict and encourage a type of politics that favors greater conflict. With this unfortunate disposition towards political conflict, a couple things tend to happen. The first route is gridlock. It becomes politically favorable to sabotage the ruling party whenever possible. Long-term gridlock causes extra-legislative points of power to emerge. For the US, this means an overactive President and Supreme Court that essentially creates legislation. Once this process no longer becomes tenable, the government dissolves, usually in some form of military junta.

Needless to say, we're lucky to have avoided it. And the saving grace of American politics through the twentieth century was the strange heterogeneity of its political parties. Largely, this was due to Democrats' willingness to accept apartheid as a cost for loyalty in the South. But it led to strange situations where incredibly liberal politician like Nelson Rockefeller were Republicans and incredibly conservative politicians like Strom Thurmond were Democrats. It wasn't surprising for people to reach across the aisle or for voters to have candidates they preferred in both parties. Both liberal and conservative ideologies were widely represented.

The breakdown of this heterogeneity is often attributed to civil rights, but I believe that it was inevitable regardless. This comes from the problem of "first past the post" (FPP) voting. In a voting system where a candidate is elected by a majority of the vote, voters are most likely to get their interests represented if they engage in strategic voting. This usually means to vote for the candidate most similar to your beliefs but also most likely to win.

What do I mean? Imagine a scenario with 4 candidates: Green, Democrat, Republican, Tea. I hope the ideological spectrum becomes clear. Voters pick the candidates most ideologically similar to them, and it turns out that the Democrat wins. This isn't all that bad for the Greens. They got their second-favored choice. For the Teas and Republicans, though, this is a disaster. The Democrat was their third-preferred candidate. So, the next time around, they drop their candidate and vote Republican. This leads to a conservative victory, since the liberals split the vote between their two separate candidates. In the end, this leads the Greens to drop their candidate, leaving us with a fiercely competitive two-party system.

Admittedly, this doesn't always happen so smoothly, but given enough feedback and enough iterations, an FPP voting system finds a sense of equilibrium between two ideologically pure parties. This pattern is empirically confirmed, which is why most countries don't actually vote this way. Those that do tend to have active movements in favor of alternative voting systems. This is what was happening in the UK not too long ago. But it hasn't happened yet in the US, and that's a huge problem. So we all engage in strategic voting. While this is the easiest way for everyone to get their views represented in Washington, this is the worst-case scenario for the American government.

So that's the gist of the problem. We have a government that can't handle conflict. We have a voting system that creates tons of conflict. We're stuck.

How do we get out of this? I don't really know. The last time the US had this much political partisanship was before the Civil War. That ended well. Things ended pretty poorly for most Latin American presidential democracies too.

You have to judge Delaney's recommendations from this perspective. These are all programs that I support, in the name of better democracy, but they only go so far. Gerrymandering is a problem, no doubt, but there would be plenty of partisanship due to Americans' ideological sorting. It turns out that liberals prefer to live with liberals, and conservatives prefer to live with conservatives. This process is known as ideological sorting, and it occurs both between states, and within states. By that, I mean that people tend to move to the state they ideologically prefer, and they tend to live in a ideologically comfortable part of that state. Once you take ideological sorting into account, gerrymandering doesn't have that large of an effect on partisanship.

Open primaries are a nice concept, but research on Louisiana and Washington shows that they have almost no effect and on the partisan composition of governments. Parties remain powerful even without party-driven primaries. This was the chief conclusion of the only expert witness in California's recent drive to create open primaries.

Expanding voting roles is a partisan issue. Democrats believe that they win when more people vote, and Republicans tend to believe that they do better when less people vote. It's hard to see how any self-interested political party would support policies that they know would harm them. Plus, there is a strong ideological current within more conservative circles towards less voter rights. This comes up in the Tea Party push to abolish the direct election of Senators. Nonetheless, research on voting patterns tends to show that total turnout really doesn't matter all that much. Bigger aspects of voter preferences, including punishing incumbent parties, have a much stronger effect.

Again, I don't think that Delaney is proposing something bad. I think these are good ideas, just as I think reducing money in politics is a good thing. But I'm not sure if there's any simple legislative fix to the fundamental problems in the US government. There are fundamental flaws within our democracy, and it will take constitutional amendments to solve them. Considering the current level of partisanship, these aren't all that likely to happen.

I hope that it can continue to limp on for a long while, with small bursts of legislative activity occurring during "wave" years. Otherwise, we'd be best off getting used to a state of permanent dysfunction.

Learning to Love the Bubble

I just got back from vacation, where I did a lot of reading. (You can check that out here, if anyone cares)

I've been taking a break from explicit economics and politics books for a little while, since the debate has been feeling a little stale since the election. I think a lot of people are feeling the same way about domestic issues and fiscal issues in particular, and I don't think that it will last very long. But despite my efforts, I keep getting drawn back into that old aphorism: you can talk the boy out of the economics, but you can't take the economics out of the boy.

So, you can't imagine my delight when, after going through books on the evolution of technology and nonlinear systems, I stumbled across this gem, a conversation with "practicing theoretician" Bill Janeway. While the speech covers some liberal standards like the role of government, it also has some wonderful points about financial instability, speculation and complexity.

Here's the basic message: an economy is structured around its technologies.* That technology is supported by basic scientific research. Since much of that research does not show any short- or medium-term economic function (number theory took 55 years to lead to Google), some major institution, either the government of state-supported monopolies, has to provide it. While this kind of research is a public good, it can be considered relatively wasteful from a short-term, profit-oriented economic standpoint. There's not many opportunities for profit-seeking firms in competitive markets to make this investment.

But without these investments in fundamental research, technological growth stalls out.** We're seeing some of that right now, since we've become stingier and stingier about fundamental research since Reagan. During the Bush years, public funding for research universities declined by 20 percent. The current fiscal environment is obviously not helping anything.

Everyone here has heard this argument from me in the past. It's standard liberal boilerplate. But here's where this starts to get interesting.

The process of translating fundamental research to technologies, i.e. the basic economic process, is inherently nonlinear. An apt metaphor is phase transitions in a thermodynamic systems. For example, we can look at a piece of ice and say that it's going to melt, but we have incredible challenges when trying to predict the physical structure of the puddle of water that will emerge once that ice melts. What's more, basic substances exhibit all sorts of surprising behavior during phase transitions. Hydrogen is probably a superhot liquid metal on Jupiter. At certain levels of pressure and temperature, water (normally a non-conductive substance on its own) has incredibly high energy densities and conductive properties.

We can say similar things about entrepreneurship and its role in the greater economy. We know that technology drives economic progress, and we know that technology is essentially the application of fundamental scientific research to solving human problems. But it is nearly impossible to say what form that research will successfully take. It was not possible, in the 1960s, to see how cryptography will translate into America's largest online retailer, but that's exactly what happened.

Because of this fundamental uncertainty, economies must depend on speculation in order to spur the economic process of innovative entrepreneurship. This process is chaotic. Three out of four startups fail. Those that succeed offer returns that follow power laws instead of any sort of normal distribution. As Jack Altman explains, almost all of positive returns in the venture capital industry is concentrated among of very small number of firms. As he writes,

Venture capital is one obvious manifestation of power law distributions, but we see this phenomenon all over. In industries susceptible to the “superstar effect”, such as sports, movies, or politics, the outcomes of top performers tend to follow a power law curve. The best baseball player makes a lot more than than the 100th best player, who makes much more than the 1,000th best player. “A-list” actors do dramatically better than “C-list” actors, who do dramatically better than struggling artists in Manhattan. The president has much more power than senators, who have much more power than local officials, who have much more power than me.

When you take your time to think this concept, one conclusion is inevitable: bubbles are a natural part of financial activity. We've seen that in countless economic experiments already. Anytime there's uncertainty, people will become speculative. When they speculate, group psychology and feedback loops will cause asset prices to dramatically escalate from "fundamental value." People will fixate on their ability to buy and sell with the momentum, "flipping" assets instead of investing in a traditional buy and hold pattern. In fact, the appearance of bubbles are likely a necessary feature of reaching any sort of price equilibrium in the market at large. People need to get burned before they learn.

What's more, bubbles are an important and healthy part of the economy. They encourage innovation, as they flood emerging fields with venture cash. Even after they burst, the innovation they spurred remains in place, and the few companies that win the bubble race become mainstays of the economy for years to come. This includes Amazon and Google from the tech bubble, just as RCA, GE and IBM were important components of the postwar US economy. In both historical cases, speculation helped create the foundation of longterm growth.

Of course, this isn't meant to be an apology for all bubbles, as some clearly threaten the financial system more than others. But the inescapable fact is that speculation is an essential part of all market economies. We should be designing an economic system that embraces shocks instead of one that avoids them. In other words, we should be seeking ways of making economies robust. Recent research from the Fed mines this field, George Soros generated a lot of interest talking about something similar, and there's a field forming around "complexity economics" that essentially advocates the same thing.

Although complexity economics has been mostly hype for awhile, it has a persistent habit of reasserting itself into the national conversation. Maybe conditions are right for a better understanding of the economy as a dynamic system, with policies designed to encourage dynamism instead of surpress it. If not, at least complexity serves as a welcome break from the monotony of the current national economic debate.

*The details of this can be found in The Nature of Technology by W. Brian Arthur.
**This is a riff on Tyler Cowen's argument in The Great Stagnation.