Thursday, January 29, 2009

Non-cooperative solutions 

I had read this list of 10 worst pork economic stimulus requests made by Minnesota cities yesterday but had not commented on it. While I think Tom Steward is a fine political observer and supporter of conservative causes, I'm not as keen of this particular list.

Imagine: You are a college student and a member of a group on campus. Your group is going out for pizza and the bill is to be shared. Common practice is to split the tab. The pizza arrives. What happens? Everyone grabs, eats quickly. There is no incentive to conserve. Even trying to look noble and restrain your appetite does no good, because others are also facing the same incentives and gorge themselves. Seeing this is hopeless, you do too. In economics, we would say the marginal cost of eating another slice is zero. If you paid by the slice, you'd eat less (MC > 0).

The same is true with this Conference of Mayors. The Obama Administration has said it wants to spend gobs of money. The marginal cost to you of proposing one more program is zero. Indeed, if you do not get any of the money and some other mayors do, your opponent in the next election will say you are ineffective because you didn't bring enough slices of pork pizza back home. Principled stands of "no pork" are expensive -- look no further than the beating some representatives here in Minnesota took for deciding against seeking earmarks.

If all the mayors could get together and decide the size of the stimulus package, it might not be as big as this one is because their fingerprints are on it. They might choose to cooperate if they could negotiate. Since the size of the package is already set, and since others are feasting, there is no incentive to hold back on your own requests. Thus waste abounds, from skateboard park to snowmaking machines. The incentive to be frugal has been killed in D.C.

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