Rick Perry: Investment Banker

Nate Silver tries to understand the rationale behind Governor Perry's decision to stay in the race and the different implications each scenario has for Perry's chances in South Carolina. In Silver's piece, there are two scenarios: one in which Perry makes a highly-informed decision based off of information that implies a comeback and one in which Perry makes a poorly-informed decision based off of a disconnect from reality.

However, a better way to analyze the decision may be to look at incentives - and in this analysis Rick Perry's incentive portfolio looks a lot like an investment banker's: little downside paired with large potential gains. First, like an investment banker, he's playing with other people's money. Second, given the structure of the Texas state government, it's not like he's missing out on pressing business in Austin. Third, he has no political capital at risk as he likely remains unpopular among many Republican state legislators and among many Texans in general.

As for potential gains, they do exist. South Carolina's Republican electorate matches closely with the Governor's key demographic: Southern Evangelicals. And, as Jonathan Martin points out (via Nate Silver), the party elite of the conservative wing of the Republican Party may not be fully convinced of Senator Santorum's ability to challenge Governor Romney over the long-haul, meaning a potential bump for Perry.

So what are the implications of this analysis? Well, nothing. All we see is an actor making rational decisions based off of imperfect information. Perry's decision to stay in the race doesn't mean that his campaign has some private information that says that his chances of winning South Carolina are good. It just means that he has no reason not to stay in the race and every reason to stay in the race.

The Recurring Theme

Paul Krugman takes on John Cochrane taking on Paul Krugman in the always-sexy debate over Ricardian equivalence. Krugman notes that Cochrane doesn't even seem to know the definition of the proposition that he's defending as he defines Ricardian equivalence as

the theorem that stimulus does not work in a well-functioning economy

It's worth noting that the textbook definition of Ricardian equivalence (literally, from my Macroeconomics textbook) is

the proposition that changes in the government budget deficit caused entirely by changes in (lump-sum) tax collection have no effect on the economy.

But the biggest problem with Cochrane's analysis isn't his definition, it's his lack of understanding of Keynesian economics (the recurring theme). Krugman touches on this, but I think it's worth expanding upon. In Cochrane's analysis, the $100,000 that is lent to the family could have just as easily been lent to someone else. In normal times, this is true. But Keynes didn't write about normal times, Keynes wrote about times of economic crises and in times of economic crises that $100,000 isn't being lent to anyone. It's just sitting in a bank vault waiting until the economy improves.

Which is the point of the Keynesian stimulus: to take resources that would otherwise be idle and put them to work.