Archive by Author | Alex Copulsky

Congress & The Mundane Scandals to Come

Somewhat to my own amazement, the Krehbelian analysis that Congress will not repeal Obamacare continues to hold up.  It just died in spectacular fashion, on the Senate floor in the dead of night, the type of spectacle that’s not supposed to happen.*  The relevance of McCubbins’ work got me thinking about another sleeping dog that won’t be pretty when it wakes up – Congressional oversight.  McCubbins’ theory is that, basically, Congress acts as a “fire alarm” – it tends to lie pretty much dormant but activates with a vengeance when something goes wrong, blame needs to be laid, and fingers get pointed.

The expanding Russia scandal aside, the Trump administration will create tremendous numbers of scandals.  Think of the Bush-era Minerals Management Services scandal, with Interior workers doing cocaine and cavorting with prostitutes in exchange for contracts, but much much worse.  The criminal negligence the Administration has shown towards ethics, conflict of interests, and staff competency virtually guarantees the next few years will be marked by enormous wrongdoing at virtually all levels of government.  And unlike the Russia scandal, there is little incentive for Republicans in Congress to run interference for the Administration here.

When these inevitable scandals arise, it will provide an opportunity for Congressional Republicans to make themselves look good, at the expense of the President, but without taking him on directly.  When it turns out that some Trump flunky has been accepting bribes from the Chinese in order to rig trade negotiations (choose your own nonsense adventure here), it will be a very big deal.  The President will either have to sit silently by and fume or try to defend these aides/Cabinet secretaries at great political expense, while Republicans get to polish their images as crusaders for good government.  Even if nothing comes close to the guy at the top, it will rightly do enormous damage to his perceived competence.

Who knows – perhaps the President will use his hardheaded business expertise to whip the government into shape.  But if I’m betting money,  I’d bet a fair bit on something going extremely wrong, like Katrina-level wrong, over the next few years, after which minimal scrutiny reveals a virtually endless well of malfeasance tempered only by incompetence.  And I think there’s little chance Trump will find Congress willing to act as his lawyer in the court of law or the court of public opinion.

 

*: The majority party doesn’t call votes it’s going to lose. Citation: all Congress scholars, though I suppose Cox & McCubbins most prominently.

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Policy change & the empty Presidency

It’s June 19, 2017, and the Senate is hurtling towards a vote next week on a major healthcare bill written in secret that most Republican Senators haven’t even seen.  In what would normally have thrown a giant wrench in the gears, last week the President castigated the initial House bill (AHCA) as “mean” and “coldhearted” and exhorted the Senate not to sharply cut coverage.  Instead the Senate is ignoring him and moving ahead seemingly careless of the President’s policy preferences. I wrote a few months ago that I found the passage of Trumpcare unlikely – I still do!  I think it’s worth digging into some of the odd behavior of the actors involved and putting down a marker on why I’m skeptical of the AHCA’s chances.

Republicans were apparently stunned when the President dragged the AHCA despite touting it two weeks before, but they shouldn’t have been.  The President has no real ideological orientation or commitment to internal consistency, which he views as a positive.  I viewed this as presenting a major problem for crafting legislation – legislators wouldn’t go out on a limb for someone who would have no compunction sawing it off after him.  I thought Republican Congresspeople would think through the game a few moves ahead, but apparently was too optimistic:

In the House Ways & Means Committee markup today, there was discussion among a couple of Dems and Republican members, with a Democrat saying: “See, we told you your health care bill was mean. Now the president agrees with us.”…A number of members of Congress have told Axios that Trump and Pence lobbied the bill like nothing they’d ever seen, using superlatives such as calling it a “great bill.” Members who Trump urged to take a risk and pass the bill are now seeing him turn his back on them. One member said Trump was on the phone urging people to support it, and “for him to turn around and do this, it’s stunning. I can’t believe it.”

So this incident is both why the Senate is ignoring his policy demands and why legislating will be difficult.  Senator McConnell rightly sees that there’s no reason to make policy concessions to the President’s stated demands, as his statements today don’t necessarily indicate anything about his preferences tomorrow.  At the same time, moderates facing tough re-election campaigns are likely very anxious about the prospect of a President who might easily turn on them.  They can (also correctly!) see that giving him a concession with a vote here will likely earn them nothing.  Now, the Senators may still be muscled into it the way the House was, but there’s an additional risk – Trump might actually veto the bills.

It only seems insane if you think that the President cares about policy!  It would likely result in a burst of positive press if he told them to “come back with a better deal” and means he wouldn’t have to defend an unpopular bill at political cost to himself.  It would be entirely on-brand. Furthermore, he could count on friendly media to defend his decision and the substantive policy would win some support from Democrats.  I don’t think this is likely, but his general disengagement from the process means it’s certainly an imaginable outcome.

Traditionally theories of Congress depend on spatial ideal points or party cartels but if anyone involved in this game thinks that the President’s utility function depends on moving policy closer to his policy ideal point or protecting the GOP majority, they are playing with fire.

The Empty Presidency

The President of the United States just unprecedentedly intervened in a spat between two American allies…via Twitter.

Secretary of State Rex W. Tillerson and Defense Secretary Jim Mattis initially tried on Monday to smooth over the rift, with Mr. Tillerson offering to play peacemaker and Mr. Mattis insisting it would have no effect on the campaign against the Islamic State.

Less than 12 hours later, however, Mr. Trump discarded that approach by putting his thumb on the scale firmly in Saudi Arabia’s favor. His tweets, which a senior White House official said were not a result of any policy deliberation, sowed confusion about America’s strategy and its intentions toward a key military partner.

The most interesting thing about this isn’t actually the intervention, which appears to be firmly in line with the new administration’s reflexive pro-Saudi leanings.  It’s the question of credibility this raises.  The President seems to almost be going out of his way to ensure that statements from the Secretary of State & Defense are not taken seriously, as they cannot speak for the administration.

On the other hand, the President cannot plausibly claim to speak for the administration either.  The White House is very likely to execute an embarrassing climb-down from the President’s tweet-rant against Qatar*, leaving in place…what, exactly?  Any future policy pronouncements that have gone through deliberation and the inter-agency process are just as liable to be contradicted by the President.  And any future Presidential pronouncements are likely to be rejected by his own staff & bureaucracy.   If push comes to shove, the US stance on this and other commitments like, say, NATO’s Article V, are completely unclear.

In a real sense, no one can credibly claim to speak for the position of the US government.  Which is an interesting challenge that I think is under-rated relative to the actual “policy positions” held by the President.

*: This is all so weird, for the record.

Flexibility vs. Credibility in Strategy

Sometimes the key ingredient in equilibrium is trust.

One under appreciated aspect of the current administration is how much outcomes can change without policy change. The current dispute over the Obamacare CSR payments is an excellent case study – the Trump administration says it will continue to make the payments but vacillates between pledging to make them and threatening to withhold them as a lever for negotiation with Democrats.  This seems implausible, since a lot of people would lose health insurance and the Administration would rightly be blamed.  It’s a bit of a dead man’s switch.  The actual desired end state – what the Administration wants to happen with the payments – is totally unclear.

So – if you’re an insurer whose profitability depends on the payments coming in, what would you do?  You certainly can’t count on the payments coming in, certainly.  If the payments are large enough to present a very substantial upside or a major part of your business, you might gamble – but if the downside risk is high you’d get out and not expose yourself to an unquantifiable uncertainty.  The last thing an insurance CEO wants to tell her shareholders is that she incurred major losses due to a Republican President cutting Obamacare subsidies; after all, what else would she expect?  And so while the policy remains in place, the outcome changes.

Trump says that he likes to be unpredictable – and this has some upsides.  He has a genuine point that his complete unpredictability and lack of ideological commitment offers a lot of flexibility.  By constantly changing his positions on policy issues, it allows him the freedom to do whatever seems most advantageous today without worrying too much about path dependence in the future.  This is a big strength for obtaining his goals, particularly if they change over time. However, he makes a grave mistake when he says that it offers him total flexibility.

There are many policy outcomes that can only be obtained with a credible commitment – the CSR payments are one, and NATO is another.  Even though the NATO policy is currently nominally the same as under Obama, Trump’s lack of credibility on the issue substantially weakened the deterrence value of the alliance.  Constant ambiguity on the issue doesn’t offer the US the choice between “no NATO commitments” vs. “a strong NATO deterrent”, it offers the US the choice between “No NATO commitments” vs. “a weak NATO deterrent”.

Total lack of credibility is not a completely insane choice, but requires the principal to put a very high value on the option value vs. a less-flexible choice with higher expected value.  It’s certainly notable that no other US President has ever gone this route, as it has a lower payoff than picking choices and sticking with it – but that is under the assumption that the principal’s utility function is the same from day to day.  If you don’t know what outcomes you’ll favor tomorrow, chaos might be a rational choice!

Complementary and Contradictory Economies of Scale

The odd thing about economies of scale is that they operate on both the revenue and the cost side, and the two do not have to coincide.
I’ve been digging into some of the literature on network effects, which can drive positive economies of scale – e.g., Facebook is a lot more valuable because all your friends are on it.  This is common in many current-generation software companies based around networks, and the promise pitched to innumerable venture capital investors.  Many competitive spaces based around networks are natural monopolies for this reason, in that the value proposition to the largest player is naturally higher than its competitors.  The rich get richer.
In traditional industries, positive economies of scale are ubiquitous on the cost side. As your brand gets bigger, you can e.g. shift from expensive contract manufacturing to more inflexible but lower-cost in-house manufacturing.  For many traditional industries the economies of scale are highly positive on the cost side but next-to-nothing on the revenue side – the value of Tide is unaffected by whether your neighbor uses Tide.  For consumer brands that are big enough, the revenue economies of scale can turn negative due to reasons of market saturation, fashion, and taste.
A bit of a novelty are businesses with the opposite problem – strongly positive economies of scale on the revenue side and negative economies of scale on the cost side.  For example, a two-sided marketplace where an app mediates physical activities.  As the business gets bigger, issues like liability (legal and PR) become commensurately bigger.  For businesses where the profit model is based on externalizing internal expenses, e.g., shifting insurance and maintenance costs from the service provider to the service operator, that becomes less practical as the firm gets too big.
It strikes me that many of the current-generation sharing-economy companies fall into this category of wrong-way-round economies of scale.  When there are network effects to drive growth but difficult physical realities to work around, it could turn out to be easy for a company to outgrow its economics.  For example, if there are positive cost economies of scale for operating a car-dispatch service, why were there no globe-straddling car-service companies beforehand?  The contradictory economies of scale suggest a natural boom-and-bust cycle where operating cash flow plummets inexorably while revenue (and need for operating cash!) explodes.
Also a fun question – on a conceptual (not accounting) level, is paying to acquire a competitor in a marketplace business a capital or marketing expense?

Time After Time – Why Time & Uncertainty Make Legislating Difficult

In my last post on the GOP Healthcare debate, I mentioned “time consistency” and I wanted to delve a little deeper into that question and the problem facing GOP leadership.  I’d suggest this time-consistency issue is actually a major problem for the GOP in putting together an ambitious policy agenda on more than just healthcare.

Cox & McCubbins named possibly the driest and most boring theory in the already-dry field of Congress studies – the “procedural cartel“.  This theory of Congress suggests that party coalitions basically act like law firms or investment banks; “senior partners” (Paul Ryan, Mitch McConnell ) issue orders to “associates” (rank and file) under the expectation that loyalty will be rewarded and success shared.  Passing legislation is a classic collective action problem – legislators want goals, e.g., Obamacare repeal, but only want to cast a risky vote if the party will be on their side.  Parties choose leaders in order to provide coordination for this and related problems.

This all hinges on trust.  Legislators need to trust that the tough votes they cast today will result in support  – political cover, funds for reelection, etc. – from the party mechanism tomorrow.  That trust that leaders won’t turn around and screw the legislators is time consistency.  I think the Republicans face two big time-consistency problems: one is the character of the President, but the other is the nature of partisan media and this will likely bedevil Democrats when they take back Congress.

First and most obviously – the President is clearly untrustworthy.  He’s not an ideological conservative and has a short time horizon, and legislators should have little confidence he will expend political capital on them next November in exchange for a vote they’re taking today.  He may well see more short-term political benefit to turning on the AHCA – and on them.  Even on the most basic risk-assessment level – the man doesn’t pay his contractors. He’s a walking, talking, tweeting time-consistency problem.

The other, more subtle issue is that partisan media now controls a lot of the influence once held by partisan leaders.  Republicans have no idea whether Breitbart will carry the water for them on a tough vote, and many suspect it won’t.  Partisan media has poorly aligned incentives, as they sell to an extremist (and small) audience and don’t necessarily care about the party’s fortunes every other November.  If the bill is received poorly, or if it collapses, members who took a tough vote may find themselves receiving fire from every angle and it won’t particularly matter if Paul Ryan offers them $1M from the NRCC for reelection.

If Republicans want to pass an agenda that will involve some very tough votes, they need to figure out a way to solve this issue.  Ultimately it comes down to the President – he needs to give some sort of credible signal of commitment to the agenda and to having the party’s best interest in mind.*  What would constitute such a credible signal? That’s a question for another day.

 

*: The President may not care about passing legislation – I suspect he does not.

Theories of Congress and the Rocky Road Ahead for Repeal-and-Replace

The House is currently debating healthcare reform and I think that it’s worth revisiting the current legislative process from a political science view.  The real fight has not yet been joined – there’s relatively little hope for liberal activists to stop the bill in the House, where intra-conservative discord is the main potential stumbling block.  The action will happen in the Senate, and there are a few different theories from political science that shed light on the difficult path ahead for the Republicans.

  • Home-state concerns drive votes:
    • The framework: Senators vote on parochial concerns for their state.
    • The takeaway: In this light, the bill is in serious trouble.  There are a wide variety of GOP Senators whose home states have benefited a great deal from Obamacare, ranging from Senator Cotton (AR) to Paul (KY).   There’s a diverse coalition of groups that will oppose the bill, and opposition will intensify as various stakeholders (hospitals, etc) lean on Senators.
    • The path forward: It is difficult to see a way around the sticking point – the Medicaid expansion.  Repealing the Medicaid expansion drives opposition from both moderate and conservative senators, but without the Medicaid expansion repeal the cost of the bill balloons, ruining Speaker Ryan’s plan to pass permanent tax cuts through reconciliation.
  • Politics is unidimensional and ideological: 
    • The framework: Senators vote on a left-right spectrum..
    • The takeaway: In this light, the bill is virtually doomed – the GOP Senate Caucus has actually moved leftwards since 2012, contrary to popular wisdom.  The pivotal Senator here is probably Dean Heller, already an avowed opponent of Medicaid expansion repeal, and there are indications it could be difficult to round up even 45 Republicans to vote for Medicaid expansion repeal.
    • The path forward: Replace-and-replace is DOA. Again, repealing Medicaid expansion is the blocking issue – it’s a fairly far-right position and may even be to the right of the pivot point in the House, depending on whether the GOP moves up the deadline to 2018 as has been discussed.
  • Politics is multidimensional and ideological:
    • The framework: Senators vote on a left-right economic spectrum and a second axis that seems to encompass social issues (e.g. abortion).
    • The takeaway: The bill isn’t dead!  A relatively right-wing healthcare bill can be moderated in the second dimension in order to move it into acceptable range for passage, potentially by, say, removing provisions that defund Planned Parenthood.
    • The path forward: Unfortunately for the GOP there’s probably limited room to do these sorts of issues through the reconciliation process – however, a leadership could potentially throw other bones to moderate members in follow-up bills.   The difficulty here is twofold – one is a time-consistency issue, where moderates would have to trust leadership to follow up, and the other is that anything else leadership promises would have to pass through regular order and is subject to a filibuster. Also, incidentally, the second dimension of politics appears to be collapsing in Congress so this may be moot.

In short – most schools of analysis suggest that repeal-and-replace is in trouble. The legislative strategy GOP leaders have chosen is extremely difficult, especially the rest of their agenda depends on a quick passage of this repeal-and-replace bill.  If I were a Republican, I would be concerned that Speaker Ryan does not appear to have considered the complexity of this endeavor – if timely passage is a necessity, he should have come to the table with a bill that was mutually acceptable to pivotal members in both the House and Senate.  This oversight does not bode well for the rest of their ambitious legislative agenda.