2012-12-05

The economic consequences of an economically irrational decision-making system

Amidst the hype surrounding the "fiscal cliff", some calm voices have emerged to challenge the fear mongering. One of them is Stephanie Kelton, an assistant professor of macroeconomics, finance, and money and banking at UMKC. Kelton has pointed out that the cliff is in large part a manufactured crisis. She suggests we start to address it by (among other things) repealing the Budget Control Act of 2011, whose key provisions established the cliff in the first place. She further suggests that the government should spend, and generally avoid tax increases, in order to increase the GDP (the oft-ignored denominator in debt-to-GDP ratio)—basically the opposite of what a lot of the mainstream pundits are advising.

I now want to take a step back and look at this issue from a very different perspective. The gravest danger in any calamity like this is not that we fail to fix it, but that we fail to detect underlying causes (i.e. calamity generators). Join me for a bit of abstract thinking...

Let's assume that Kelton is correct, and society is generally convinced that we need to implement the policies she's advocating. How do we do that? Well, primarily by electing people to public office who we believe will implement those policies. But imagine we're faced with an election for some highly influential position, and the preferences look like this:
33% Keltonite 1 > Keltonite 2 > Boehnerite
32% Keltonite 2 > Keltonite 1 > Boehnerite
35% Boehnerite > others
In this election, a massive 65% majority of the voters wants Keltonite policies. But if we use the ordinary vote-for-one "Plurality Voting" system, the Boeherite candidate wins with 35% of the votes. The lives of hundreds of millions of people are then significantly worse because of an obvious defect of the voting system.

But this is preventable! There are numerous other ways to vote. And voting systems can be objectively measured for "economic efficiency" using a metric called "Bayesian regret", which effectively measures average voter satisfaction. Here are some sample Bayesian regret figures from William Poundstone's book Gaming the Vote (2008).



Observe that a change from Plurality Voting to Range Voting (aka Score Voting) or Approval Voting virtually doubles the improvement gotten by the invention of democracy in the first place (the performance of Plurality Voting minus the performance of random non-democratic selection).

And these systems are very simple. Approval Voting just uses an ordinary ballot, but lets voters vote for as many candidates as they wish. The candidate with the most votes still wins. Score Voting is like Yelp reviews—you rate the candidates and the one with the most points wins. Not as simple, but more expressive.

So the question is, why aren't these economists who want to save the world talking about voting reform? If they're interested, I recommend they check out The Center for Election Science.

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