The Game of Policy Making

Perhaps the most evergreen case of conflict has been between those voted to power and those who vote for them. Why do we hear many times that the policy that claimed to move the country out of recession was rejected by the politicians? Let us begin with the assumption that the policymakers are benevolent and try to do what is best for the economy. However, this assumption might get challenged. It may be the case that the policymakers and politicians act out of selfish motives, and it may not be in the nation's best interest. What the government does or how well a democracy performs is not the question here. The question is: How do macroeconomic principles apply here to make the situation clearer, and to what extent should the policymakers be restrained? With game theory's help, we can narrow down these situations into some games with different players.

THE GAME OF EXIT, VOICE AND LOYALTY




The game has the following legend:


E: Exit payoff for the Citizen

1: Value of benefit taken from the citizen by the state

L: State’s value from having a loyal citizen who does not exit the game

C: Cost of using voice for the citizen

This game has two players, the voter and the policymaker. A voter has the following three choices: to exit from the game, to voice their concerns or to remain loyal to the political party. The game begins at the left-most decision node, with the citizen deciding whether to exit, raise voice or maintain loyalty. If the citizen decides to exit, he receives his exit payoff (E), and the state keeps the benefit of one. If he decides to remain loyal, he accepts the loss of his benefit and gets a payoff, which we normalize as 0. In these circumstances, the state earns the benefit of 1 point that it took and obtains an additional payoff (L > 0) for retaining a loyal citizen who does not exit. This additional ‘loyalty’ payoff captures the notion that states value having a loyal citizen because having loyal citizens can make life easier for state officials by providing, what can be termed as, ‘legitimacy’ or simply by offering their support to help state officials stay in power.


Here we are dealing with a situation where the government is corrupt. In the words of Hirschman, the father of this theory, “ the model often applies poorly to collective action, since the costs of exit are frequently too high. When the government is corrupt, most actors have to choose between stating their opposition and suffering in silence, between voice and loyalty. However, voice is at its most effective when an exit is possible ( a therefore a realistic threat) but not so easy that people rush away as soon as performance declines. Voice then carries the threat of exit. A modicum of loyalty, of reluctance to leave, strengthens the corrective effect of voice.” In simple words, the voice will be more effective when the exit is possible, but not too easy. Though, some loyalty is needed to voice opposition. But if there is no loyalty and exit is impossible, people will have no choice but to suffer. Considering an even extreme case of absolute loyalty, no one will ever voice opposition. The ideal climate for social change is a society in which social or material conditions are such that people are not entirely satisfied, have some amount of loyalty that is not too extreme, where the exit is a possibility but not too easy.

The table below states different situations with their respective outcomes.



THE GAME BETWEEN POLICYMAKERS AND VOTERS

Many policy decisions revolve around the trade-off between short-run losses and long-run gains or between short-run gains and long-run losses. Taking an example of a tax cut, lowering tax today will boost economic activities and increase the general demand momentarily. But if it is not matched with equal decreases in government spending, they can lead to deficits in the budget. The situation will be that the taxes would be reduced, but the government spending stays the same. Let’s assume the voters to be shortsighted and the government’s aim to please the voters. Say the political party decides to cut taxes to please the voters. What must be the best time to do so? The first case can be to cut taxes a long time before the elections. Government makes the voters happy in the short run, but then after a few years at the time of elections, the deficits will start to show up in the books. This would make the voters unhappy, and they might not vote for the party again. Therefore, this is a bad policy. If the sole aim is to please the voters, the best time is just before the elections. This way, the aggregate demand increases, voters are happy, and they vote for the party again in power. Thus, we might expect a political business cycle, with higher growth, increased demand, on average, before elections than after.

THE GAME BETWEEN POLICYMAKERS


This game is concerned with the party in power and the opposition party. Let us take the case where the party in power wants to reduce expenditure but faces opposition in the parliament to spending cuts. One way of putting pressure on the parliament and the parties in power in the future is to cut taxes and create deficits. This strategy is known as "starving the beast.” As debts would increase over time, the increasing pressure to reduce the deficits will force the parties to cut on spending, something they would not have been willing to do otherwise. Another case may be where, for some reasons, the country is facing large budget deficits. Both the parties will want to reduce the deficits but would disagree on how to do it. One might want to reduce deficits by increasing taxes, and the other might want to do it by reducing spending. Both the parties will hold up on the hope that the other party will give up first. This will continue till there is an urgent need to reduce deficits, and, finally, one of them gives up. This is a situation of a “war of attrition”. Such hopes of the other party giving up leads to costly delays and the deficit reduction occurs a long time after.


Thus, seeing the political activities through an economic lens helps us narrow down the strategies into a game. The players may vary, but the constant aim is to use the best strategy, given what the other player does. This best strategy depends on the prediction of each other’s behaviour. Listing down the possible actions of the players not only helps them maximize their utility but also helps the game reach an equilibrium. One thing to understand while formulating a game is the difference between equilibrium and equity. Since our game is a part of a large public policy, we need to make sure it satisfies the needs of a welfare state. The job of game theory ends at equilibrium. It is politics and notions of democracy that take the game further and make it practical for the real world.


Since the effects of macroeconomic policy can be uncertain, policymakers should be careful with the consequences. There have to be some restraints on the policymakers as they are involved in games against either the public or among themselves. This might, sometimes, give an undesirable outcome, an outcome that is not suitable for the idea of a welfare state. Politicians might sometimes try to fool the shortsighted voters by choosing policies that involve short-run gains and long-run losses. Political parties may even delay some necessary decisions, hoping that the other party might make the adjustments. A solution would be a more aware population, better institutions to keep a check and a better structure of policymaking.

REFERENCES


  1. Should policymakers be restrained? Blanchard, Macroeconomics.

  2. Albert O. Hirschman. 1970. Exit, Voice and Loyalty.

  3. POWER AND POLITICS: INSIGHTS FROM AN EXIT, VOICE, AND LOYALTY GAME, Clark and Golder, University of Michigan.

Written By: Deshna Jain (deshnajain.08@gmail.com)

Edited By: Priyanshi Kapoor