Tipping Point: Predicting When Voters Will Revolt

Posted on April 4th, 2011 by admin in Political Economy, Tipping Points

We just read Stephen Moore’s brilliant piece in the Wall St. Journal:

We’ve Become a Nation of Takers, Not Makers

He lays out some facts about the size of government relative to the private sector, to show why so many states and the federal government are nearing the point of financial collapse. In the case of states, which cannot print money as can the federal government, such collapse occurs when the state cannot pay its bills because revenues are dwarfed by its obligations. His article provoked our thinking about the limits, if any, to the size of government.

Government continually grows bigger. But how big, ultimately, can it get? What happens if every citizen becomes a government worker? What if  government collect 100% of all private income? Under what conditions will the electorate become furious at the governments it installed and from which they enjoyed so many “free lunches”? At what point does the electorate realize the government has become dangerously large, intrusive and grasping, and no longer legitimate? In other words, is there a tipping point at which voters switch from active annoyance with their government to rage and the urge to destroy it? We believe their is such a point, and it will occur if the Government takes too much of the voters’ money.

We think there’s a way to roughly analyze when the tipping point will occur. At this point, voters will become so infuriated that they elect radical reformers or even demonstrate violently.

In the last regard, fury is clearly possible when people feel personally threatened. For example, we can see how violence is rearing its head in Wisconsin, as unionists, desperately fearful their government union monopoly and their taxpayer-paid pensions will end, are formally threatening the livelihoods of small business owners throughout the state. The threats are intended to induce the owners to post signs in their stores supporting unions. Here are two links to the news reports:

(Wisconsin Unions Get Ugly, WSJ, 1 APRIL 2011)

Are Union Boycott Threats in Wisconsin Legal?

To understand the analytical framework, we turn to empirical economics, in which stylized games are played with real people and the results measured and compared to the initial theory. In the “Ultimatum Game” (UG), there are two players and a Referee. The Referee gives a sum of money (the Amount) to Player 1 who is told he can retain all the money for himself after an amount of Player 1’s choosing is offered to Player 2 and accepted. The catch is that if Player 2 rejects the offer, both Players get nothing.

In theory, Player 2 should accept an offer of any amount, even $.01, since the amount is better than nothing. Well, that’s theory. In real life experiments, it turns out that almost all Player 2’s require between 20% and 50% of the total to be offered before Player 2 accepts. There seems to be an innate concept of fairness or ego (pride) involved.

Note that if Player 2 rejects an offer from Player 1, it means Player 2 is making himself tangibly worse off on purpose, because the offer fails to satisfy an emotional need in Player 2’s own judgment. We claim that in this case, Player 2 reached his personal tipping point, at which emotion dominates rationality.

(A good summary of this game and its research results is given in Wikipedia.)

Now, consider the game in reverse: Player 1 gets all the money initially, as before, but now Player 2 makes the offer. Player 1 can keep only the amount remaining after Player 2 takes some for himself. In this Reverse Ultimatum Game (RUG), if Player 1 decides to accept the remainder, he keeps it, but if he rejects the remainder, both players get nothing. The RUG is essentially the same as the UG. We imagine if our analysis is correct, Player 1 in the RUG would need to retain 50% to 80% of the initial Amount.

Here is the leap to our tipping point problem: Label Player 1 the Electorate, and Player 2 the Government. The Amount is the total income earned in the country. Call the portion the Government takes taxes. When the Electorate refuses to accept the remainder after the Government takes taxes, then both Players get nothing. This is the tipping Point.  We say that this Tipping Point occurs when government takes between 20% and 50% of total income. Notice in this situation, since the Electorate cannot simply avoid taxes, their only response at their tipping point may well be rage leading to very strong outcomes. No one likes the RUG pulled out from under him!

Of course, we have applied a result in a one-time game between two individuals to a composite of a game played among millions of people with a single Player 2. Yes, this is a stretch, but it does illuminate that people really have inherent limits to what they can tolerate when shares are apportioned. These limits are experienced in a specific dimension, in this case, the amount of money the Government allows them to keep.

Given the fractional requirements illustrated above, we are at the tipping point of taxation.



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