The Texas Miracle Myth

The NYT had a article this week discussing a book that defended the "Texas Miracle", the idea that Texas has had solid economic growth in recent years and therefore its policies should be mimicked elsewhere. Paul Krugman had already dissected this idea last year, noting that Texas's growth is mostly explained by increasing population (both migrants northward out of Mexico and Central America, as well as the long-term gradual drift of Americans to the south and west), combined with the recent commodity boom. Texas's fortunes have always waxed and waned with oil booms and busts.

However, Krugman's key critique lies here.

"What Texas shows is that a state offering cheap labor and, less important, weak regulation can attract jobs from other states. I believe that the appropriate response to this insight is “Well, duh.” The point is that arguing from this experience that depressing wages and dismantling regulation in America as a whole would create more jobs — which is, whatever Mr. Perry may say, what Perrynomics amounts to in practice — involves a fallacy of composition: every state can’t lure jobs away from every other state."

This, folks, is a classic prisoner's dilemma. Sure, it is a "win" for Texas if it can kill a $30/hour labor job and Michigan by turning it into an at-will $12/hour in Texas. Texas's economy will grow a bit, Michigan's will shrink by more, and the nation loses as a whole on a number of levels. Should then Michigan retaliate and undercut Texas, thus "winning" the job back at $11/hour and causing "growth"? It is clear here what is going on is that Texas is defecting in a prisoner's dilemma, which does in fact work in the short term to maximize one's gains. However, as I mentioned before, if your answer to a political issue is to defect in a prisoner's dilemma, you are almost certainly wrong. In the long term, it is a losing strategy for everyone.

Writ large or small, this same pattern keeps occuring. Almost all nations are engaging in a tit-for-tat game of poaching jobs from one another by subsidizing, bribing, gutting regulations, or stomping on labor. Likewise, it is sicking to watch blue states Oregon and New York bend over backwards to offer the biggest wet-kiss subsidies in order to capture "Project Azalea", a multi-billion dollar next-gen semiconductor factory. This stuff doesn't "create" jobs. That factory is going to be built regardless. It is only a question of who poaches the jobs from whom, and for how much the taxpayers will be on the hook.

This kind of job poaching can be framed as a "race to the bottom", which can never be won, and only fools enter. Sadly, playing this game is a core element of the Republican party's economic platform.

The Prisoner's Dilemma

If there were one idea I could drill into the head of everyone on earth, it would be the prisoner's dilemma. I am complete serious in saying that if you don't know what I mean, that you should read the rest of this post, and then spend the next couple hours further studying the topic. The prisoner's dilemma, or more broadly game theory, is an absolute necessary component of understanding politics, economics, biology, and human relations.

So what is a prisoner's dilemma? Essentially, it is any scenario where two people or groups interact in such a way that

...

If they cooperate, both do well

If one cooperates but the other double-crosses the cooperator, the cooperator is screwed and the betrayer makes out very well

If both double-cross the other, both do poorly

....

The problem with a prisoner's dilemma is thus: no matter what the other party does, you are better off if you betray them. If they cooperate, you do very well, rather than merely well, if you cheat. If they betray you, you are screwed if you cooperate but make out merely poorly if you cheat as well. So if you are the self-interested person of the economics textbook, you cheat. Unfortunately, the other party faces the exact same incentives you do, so if they are self-interested, they cheat as well. Hence, everyone winds up doing poorly, rather than everyone doing well, as would happen if they cooperated. Game theory is simply the extension of this to more complex systems, with repeated encounters, memory, multi-party, etc. The key thing to note here is that depending on the payouts, self-interest does not lead to optimal outcomes.

So is the prisoner's dilemma relevant to the real world? Absolutely. An oft-cited example is the observation that male peacocks have huge tails that both attract females and make them vunerable to predators. Why don't they all cut (or evolve) their tails in half, maintaining their pecking order but making all of them safer? Because it's a prisoner's dilemma. Why can't the US and China agree to cut carbon emissions? It is a prisoner's dilemma. Why do states keep offering corporations "incentives" in order to poach jobs from one another? It is a prisoner's dilemma. Why do athletes dope? It is a prisoner's dilemma.

Note that a key element of most prisoner's dilemmas is ranking. Prisoner's dilemmas often arise when what matters is not ones absolute performance, but relative performance. Any improvement in your performance lowers everyone elses' relative performance, forcing them to do more just to get back to where they were. But once they do, everyone is putting in more effort but in the same place they were before. Variants on this theme riddle every aspect of human (and biological) endeavor, and to understand and identify them as prisoners' dilemmas brings some level of clarity to the issue.

Unfortunately, prisoners' dilemmas are hard to resolve, requiring repeated rounds of trust-building, acts of faith, and a few well-timed (but clearly explained) sticks being used to push the laggards from behind. However, if you find yourself in a prisoner's dilemma and are arguing for defection, you really need to reflect on what the end game is. Sure, defecting might work in the short term and you might even be able to drag forth evidence supporting such. In the long run, however, defection only leads to ruin for all. It is always a good idea to examine your political beliefs, identify any lurking prisoner's dilemmas, and ask yourself if you are arguing to defect. If you are, you are probably wrong.