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Using Game Theory to “Solve” Government Spending
Posted By Barry Ritholtz On February 26, 2013 @ 7:15 am In Politics,Psychology,Taxes and Policy | Comments Disabled
“Don’t tax you. Don’t tax me. Tax that fellow behind the tree.”
-Louisiana Senator Russell Long.
The famous Russell Long quote above reflects a basic truth about politics: Many people want other people’s taxes to go up, but not their own. The same is true for spending: Other programs are wasteful, but not our favorites. City dwellers find agricultural supports wasteful, Farmland dwellers think the same of subsidized mass transit. Programs in other people’s districts are expensive and unnecessary, but those in ours are crucial and required.
This is no way to run a country.
If we were smart, we would apply our understanding of human nature to resolve spending and tax issues. Game theory* is a study of strategic decision making — how “conflict and cooperation between intelligent rational decision-makers” leads to certain outcomes.
Basic game theory could help us with these issues, if we think about it intelligently. How? By stopping the taxing and spending cuts of that fellow behind the tree — and instead force people to raise their own taxes and cut their own spending.
If I were advising the President of the United States, I would make the following suggestion: He should announce a 20% spending cut over the next 10 years. Create a panel — Treasury Secy, Veep, House Speaker, Senate Leader, FOMC rep — to oversee the effort, but with one crucial twist. Instead of the usual cutting, the twist is to use each State’s Congressional delegation must decide what gets cut. Both of a states Senators and all of the Congressmen form a working group to decide how federal revenues, benefits, expenses and costs that flow TO THEIR OWN STATE will be cut.
There would be 50 state working groups elect their own leaders, determine what their own priorities are. If they want to do polls or surveys, its up to them. They get no budget for this, it comes out of their own congressional staffing budgets.
There is no fellow behind the tree any more. Each state delegation determines their own residents’ fate.
The CBO determines how much money flows to each state from the Federal Government. This includes entitlements like Social Security and Medicare, spending on Education, as well as Defense Contracts and other financing. It this includes FEMA.
Each of the 50 state delegations reports back to our original panel, who works together to reflect all of this in one coherent budget. (No earmarks allowed) Any group that fails to submit a plan simply gets across the board budget cuts gets. (You can consider a 5% penalty for those who fail to submit a plan).
All of this literally forces a balanced budget cut by making personal sacrifices — not dumping it on other people. It eliminates the hypocrisy of deficit peacocks who vote for every budget buster and then disingenuously present themselves as concerned about debt.
But most of all, we find out the priorities for government spending by the people of this nation — and their elected representatives. Don’t like military spending? Cut it in your own state. Against Social Security? Cut aid to the elders in your own State. Have a problem with FEMA? Opt out of it.
One of the biggest problems with wrestling the Federal Budget under control is the tendency for it to be so abstract — its all about that other fellow. A simple solution to a complex issue.
What do you think?
* Roger B. Myerson (1991). Game Theory: Analysis of Conflict , Harvard University Press, p. 1. Chapter-preview links, pp. vii-xi.
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 Game Theory: Analysis of Conflict: http://www.amazon.com/exec/obidos/ASIN/0674341163/thebigpictu09-20
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