Working Papers

Bryan Caplan’s The Myth of the Rational Voter

Bryan Caplan’s The Myth of the Rational Voter turns on the distinction he draws between the familiar rational choice theory concept of rational ignorance and what he calls rational irrationality: the idea that there are weak or no incentives to behave rationally in the political arena.  This runs counter to standard public choice theory, but Caplan argues that this explains the failure of political behavior to parallel market behaviour. 

I’m not sure that Caplan’s attempt to distinguish between rational ignorance and rational irrationality succeeds in the end.  It mostly just relocates the standard cost-benefit analysis of rational choice theory from the costs and benefits of acquiring information to the costs and benefits of holding and indulging irrational beliefs in the political arena.  Caplan notes that to the extent that standard rational choice theory wrongly emphasises the former, ‘this is a failure of economists rather than a failure of economics.’ 

Caplan suggests that one way of raising the economic literacy of the median voter is plural voting for the well-educated and eliminating efforts to increase voter turnout.  Caplan’s view implies that political-economic outcomes should be decidedly worse in a country with compulsory voting like Australia than in a country like the US, where voting is voluntary and electoral participation is correlated with education.  Australian and US economic literacy levels are likely to be very similar, but the economic literacy of the median Australian voter should be lower than that for the median US voter.  Yet as a generalization, the two political systems produce qualitatively similar public policy outcomes.  Indeed, in some policy areas, such as regulation of the financial system and retirement incomes policy, the Australian political system has produced decidedly better outcomes than in the US.  For a book that aims to explain ‘Why Democracies Choose Bad Policies,’ I think this is a significant problem.

Caplan’s book includes a nice dig at the fever swamp Austrians of the Mises Institute.  Caplan argues against the caricature of economists as market fundamentalists, noting that only the Mises Institute crew comes close to giving substance to the caricature:

Both Mises and Rothbard have passed away, but their outlook – including Ph.D.s who subscribe to it – lives on in the Ludwig von Mises Institute.  But groups like these have basically given up on mainstream economics; members mostly talk to each other and publish in their own journals.  The closest thing to market fundamentalists are not merely outside the mainstream of the economics profession.  They are way outside.


posted on 06 October 2007 by skirchner in Economics, Politics

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The ALP, Interest Rates and Truth in Advertising

The Labor Party has pulled the on-line advertisement we highlighted late last week:

LABOR has had to withdraw an online advertisement which said a Kevin Rudd government would cut interest rates.

The ad was a tougher version of ALP policy, which is to keep “downward pressure” on interest rates.

A party spokesman said the ad was not properly authorised.

Labor’s Google advertisement headed “Interest Rates in 2007” read: “Families today are carrying record debt. Labor will force rates down.”


posted on 03 October 2007 by skirchner in Economics, Financial Markets, Politics

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Running the CPI-Interest Rate Gauntlet

The failure of the Prime Minister to visit Yarralumla over the weekend means that he chosen to run the gauntlet of the Q3 CPI at the end of October and the November meeting of the RBA Board.  Terry McCrann has been highlighting the implications:

JOHN Howard has ignored the ‘message’ from Reserve Bank governor Glenn Stevens, first ‘revealed’ in these columns on August 14.

That he should consider, seriously consider, holding the election on October 20.

After ‘sitting out’ a trip to Government House in Canberra on Sunday, literally at Telstra stadium in Sydney, the earliest practically the election can now be held is November 10.

Why should he have considered that Saturday in October? Because it came before the next official inflation figures, released on Wednesday October 24.

And Stevens had made it absolutely crystal clear in the RBA’s quarterly monetary statement in mid-August that if it was a bad inflation number, the RBA would lift rates again in November.

Here is what Glenn Stevens said on the subject at his last appearance before the House Economics Committee:

If it’s clear that something needs to be done, I don’t know what explanation we can offer to the Australian public for not doing it.  I don’t think there’s any case for the Reserve Bank board to cease doing its work in the month the election is going to be.  I doubt that members of the public would see that as appropriate.

Of course, it is by no means obvious that having interest rates front and centre in an election campaign is a negative for the government.  But having decided to run the gauntlet, the risk of an interest rate rise argues for an election at the end rather than the beginning of November.


posted on 02 October 2007 by skirchner in Economics, Financial Markets, Politics

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‘Force Interest Rates Down’

One of the Labor Party’s Google Ads that have popped up to the right of this post:

Interest Rates in 2007.  Families Today Are Carrying Record Debt.  Labor Will Force Rates Down.

Clicking on to Kevin07.com.au, I could not find how Labor proposed to ‘force’ rates down, but it’s an interesting verb choice.  Even the government’s claims about interest rates in the 2004 campaign did not go that far.

You would think Labor might have learned from the government’s experience that there is no point in making the claim that a government can lower interest rates.  The direction of Australian interest rates is determined by business cycle and international influences over which the government (and even the RBA) have very little effective control.

posted on 28 September 2007 by skirchner in Economics, Financial Markets, Politics

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The Median Darlinghurst Voter

Federal Liberal MHR Malcolm Turnbull has been out endogenising the preferences of the median Darlinghurst voter ahead of the federal election.  His latest newsletter to Darlinghurst and Paddington residents in his seat of Wentworth includes the following headings: Supporting the Gay and Lesbian Community; Whales – Think Globally, Act Locally; Solar Panels and Green Vouchers; and Supporting Good Urban Design.

posted on 18 September 2007 by skirchner in Economics, Politics

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Turnbull and Costello

The Labor Party continues its selective leaking of its internal research, which Glenn Milne seizes upon with barely disguised glee:

ONE of the finest political demographers on either side of politics has spelled out for the first time the brutal arithmetic that suggests Malcolm Turnbull is facing inevitable defeat if he stays in the seat of Wentworth—a scenario that means he will never be leader of the Liberal Party or prime minister.

It is a non-sequitur to say that defeat in Wentworth ‘means he will never be leader of the Liberal Party or prime minister.’  But it is true that Wentworth is a marginal seat, even with the effective margin of 4.5% suggested by the Labor Party’s research, which is larger than the 2.6% margin based on the 2004 federal election result and subsequent redistribution. 

Turnbull’s fate is tied in with that of the government as a whole.  Post-war experience suggests that only very large two-party preferred swings are sufficient to ensure that enough seats change hands to change the government.  Turnbull will likely retain Wentworth if the government is returned, but lose if the government loses office. 

Like many others, Milne probably hasn’t given much thought to the implications of a change of government for the leadership of the federal parliamentary Liberal Party.  It is hard to imagine Peter Costello having the stomach for the job of opposition leader.  Even as Treasurer, he complains bitterly about the opportunity cost of the job and this cost will rise dramatically in opposition.  Costello could be expected to decline the leadership and leave politics shortly thereafter.  In a contest of frustrated ambition, Costello would be a clear winner.

posted on 11 June 2007 by skirchner in Politics

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Rudd Gets the Mackerras Kiss of Death

One of our favourite political contrarian indicators is ringing alarm bells:

FUTURE history books will note that John Howard was one of two prime ministers (the other being Ben Chifley) whose governments were defeated as a consequence of abusing Senate power, one of two (the other being Stanley Bruce) to lose his own seat at the general election defeat and one of two (the other being Robert Menzies) to serve 10 years in the top job.

Mackerras’ enthusiasm for writing history before it has actually happened is matched only by his enthusiasm for the past:

I remember 1950 as though it were yesterday.

Of course, some of us also remember 2004:

”[Mackerras] pendulum swings to Kerry landslide” (The Australian, 1 November 2004).


posted on 08 June 2007 by skirchner in Politics

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Australian Economists Repudiate Kyoto

The latest media stunt by the anti-modernist Australia Institute has backfired, with Warwick McKibbin noting on ABC Radio that only 10% of those eligible to sign the economists’ petition in support of Kyoto actually did so.  McKibbin was a particularly notable non-signatory, given his expertise in climate change policy. 

UPDATE:  Damien Eldridge explains his reasons for not signing.

posted on 28 May 2007 by skirchner in Culture & Society, Economics, Politics

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The Economy and the Polls: A Rational Choice Perspective

Australia’s incumbent federal Coalition government is struggling in the opinion polls ahead of this year’s federal election, despite some of the strongest economic conditions in the post-war period.  Treasurer Peter Costello likes to boast of his role in ‘managing a trillion dollar economy.’  As Andrew Leigh notes, we must have all missed Australia’s transition from a market to a planned economy!  It is likely that voters are aware of this distinction, even if Peter Costello is not. 

There is some evidence to suggest that economic data has predictive power for the incumbent two-party preferred vote share at the federal level.  Yet rational choice theory would also lead us to expect the two main parties to fully endogenise the preferences of the median voter ahead of the federal election.  The modifications that both parties have made to their industrial relations policies in recent weeks are consistent with the predictions of the median voter model.  Opposition leader Kevin Rudd’s claim to be a ‘fiscal conservative’ is similarly an attempt to endogenise the preferences of the median voter.  Rudd’s political skill lies largely in not differentiating himself from the federal government, unlike former leader Mark Latham, who actively sought to differentiate himself on issues such as school funding and health.

This model still fails to explain why the opposition should enjoy such a strong lead in the polls, since the model is more consistent with voter indifference, with actual election outcomes a random walk.  However, it is noteworthy that betting and prediction market pricing of the election seems closer than that suggested by the opinion polls.  As Bryan Palmer notes:

The book makers are saying that if the same 2007 Federal election were repeated 20 times, John Howard would expect to win 9 elections and Kevin Rudd would expect to win 11. It is still a close contest.

As Andrew Leigh’s research has found, markets such as these may have better predictive power for election outcomes than opinion polls and economic data. 

From the perspective of a rational voter, there are few substantial differences between the Coalition and Labor on monetary and fiscal policy and a diminishing amount of product differentiation on industrial relations.  Since the last federal election, it is also likely that voters have learned that international and cyclical influences are more significant in the determination of interest rates than anything the government might do with the federal budget balance.

posted on 24 May 2007 by skirchner in Economics, Financial Markets, Politics

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Peter Costello as ‘Old-Fashioned Christian Socialist’

At the same time that Treasurer Peter Costello has been branding opposition leader Kevin Rudd a socialist, Jennifer Hewett finds that Peter Costello is not above a bit of old-fashioned Christian socialist resentment either:

An aggrieved Peter Costello certainly won’t be breaking out the champagne to celebrate with Allan Moss or Nicholas Moore.

Their $30 million-plus salaries will fuel the Treasurer’s anger with what he regards as a culture of greed and arrogance at the multi-multi-millionaires factory.

Costello doesn’t like investment bankers much in general. But the uber-bankers at Macquarie, in particular, represent all that most irritates him.

How, he wonders, can these guys justify earning so much while giving so little back?

Those who know the Treasurer well have learned to expect a private tirade of vitriol about Macquarie whenever the bank’s name comes up.

“He sees people benefiting from his hard work on the economy, enjoying the fruits of the Government’s labour and earning obscene amounts of money that he could never earn,” says one insider.

It’s not so much that Costello wants to earn or spend such vast sums of money himself. His Baptist upbringing in Melbourne has moulded him as much as it has his brother Tim, chief executive of World Vision Australia.

Even if their careers have gone in different directions, Peter Costello still finds personal excess distasteful, rather gross. And it’s not just a matter of disliking Sydney glitz.

What really rankles the Treasurer is what he regards as the sheer and grotesque imbalance in the money equation, given how hard he believes government ministers work. None more so than himself….

Another problem is that the Treasurer sees investment bankers as not actually producing anything.

...unlike politicians.

posted on 16 May 2007 by skirchner in Culture & Society, Economics, Politics

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‘Healthy, fat and comfortable on their iceberg’

An Australian graduate student, her polar bear photo and the Disneyfication of politics.

posted on 22 March 2007 by skirchner in Culture & Society, Politics

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Intrade Australian Federal Election Contract

Intrade is offering a contract on the outcome of the Australian federal election due later this year.  Only one contract done so far, with Labor bid at 55.  This should make an interesting complement to the local bookmakers, assuming Intrade can attract enough liquidity to the contract.

posted on 15 March 2007 by skirchner in Financial Markets, Politics

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Too Busy to be Treasurer

Professor Stephen Bell, author of Money Mandarins, on the delay in filling vacancies on the RBA Board:

I think everyone agrees it took a hell of a long time.  One possible interpretation was the Treasurer was just busy and didn’t get around to it.


posted on 15 February 2007 by skirchner in Economics, Politics

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‘I am an old-fashioned Christian socialist’

Kevin Rudd, like the Labor Party itself, can’t decide whether he is a socialist or not.

As Paul Kelly notes:

It is disappointing that Kevin Rudd has given heart to the economic throwbacks with his rhetoric attacking “market fundamentalism”. This panders to the focus groups, short-term politics and ideological convictions that only consign Labor to a dead end…

Depicting John Howard as a neo-liberal is the staple for “true believer” dinner tables but bunkum as an analysis of Australian politics. Howard has not won four elections by being a neo-liberal.

The task of the next ALP government will be to cut the fat from government spending, expand competition policy, de-regulate the universities, introduce more market signals into health, education, transport and energy, eliminate red tape from business, simplify the tax and industrial systems, cut marginal tax rates, encourage the welfare to work transition, invest more in education and training, encourage entrepreneurs in the market place and aspire for a more competitive economy. Railing about market fundamentalism is a stunt.

Rudd’s choice is clear. He can either present as a serious economic policy-maker or engage in the populist positioning that has damaged Labor for too long.

posted on 15 December 2006 by skirchner in Politics

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Lunch with Mark Latham

Former federal Labor minister Barry Cohen, on lunch with Mark Latham:

Latham also has memory lapses. He forgot to mention what happened during lunch. Having raised three sons, we should have known better than leave my wife Rae’s prized piece of porcelain on the coffee table. Oliver, a two-year-old, picked it up and smashed it into a thousand pieces - at his father’s feet. It was not Oliver’s fault, but ours.

Rae showed remarkable restraint. White knuckles, an intake of oxygen and a gurgled “Oh, dear”, was her only indication of pain.

Mark showed even greater restraint. He didn’t even notice. No apology. No “I’m sorry”. No attempt to clean up the debris. Nothing. It was a minor incident in life’s rich tapestry but it revealed the true nature of Mark Latham.

As he departed, the First Lady hissed through gritted teeth: “If that bastard ever becomes leader of the Labor Party, I’m voting Liberal.” She kept her promise. Fortunately for Australia, she was not alone.

posted on 26 September 2006 by skirchner in Politics

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