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By Anonymous Mike, pseudonymously.

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Monday, November 17, 2008

I had a neat post about Obama and Christianity but I'll save that for another day.

Instead I want to look at choice. I think the average person when presented with a choice will think that the most important thing to do is to gather all the information needed to make the correct decision. Instead I think the most important thing is to make sure you are framing the choice correctly.

Alot of ink has been spilled in the field of rational actor theory on single-shot vs. supergames. The distinction is simple and is often described in introductory political science classes.

A single-shot game (or interaction) is a game that is played only once. You meet a guy on the street, he offers to sell you a apple, you agree and make the transaction, and then part company never to see each other again. A supergame is a game played time and again; you have a purchasing contract with a fruit vendor from whom you buy fruit on a daily basis. In the single-shot game, the seller may not mind off-loading on you a worm-ridden apple because he'll never see you again while in the supergame the fruit vendor knows that your satisfaction will dictate whether there are any future transactions.

Now let's look at the Arizona budget. The Governor's approach has two interlocking elements. The first is to low-ball the projected deficit: she did it for FY2008, for the original FY2009 budget, and for the current size of the hole in the FY2009 budget. One of the great communications from her office is an October 1st document from OSPB which outlines the pessmistic case for the FY2009 deficit as $800 million and then come back 5 weeks later and agree that the budget gap is actually at least $1.2 billion. Ooops.

The second element is to treat each problematic budget year separately; in short to treat each fiscal year is a single-shot game. The public reason is that recovery is just around the corner; revenue will recover in Spring 2008, for FY2009 revenue will increase 6.1%.... The two elements inter-lock because it allows her to push the idea that spending can be maintained on the current year budget because revenue will increase for next year's budget; all we have to do is get through this little rough spot.

Contrast that with viewing budgeting as a supergame. When the solution was devised for the FY2008 budget back in April, the basic outlines for the FY2009 were already clear. How much money should be borrowed through school financing and accounting tricks versus how much should be cut for FY2008 should have been based on the realization that several lean years were ahead. Spending cuts deferred were just that, deferred with compounded interest and not avoided. However the Governor was allowed to push the idea that recovery was around the corner.

So as we near a special session to deal with the FY2009 budget hole, which exists because of Democratic can kicking back in June, 6.1% revenue growth!, let's please look at the solutions through the prism of this being a multi-year problem. Arizona is heavily dependent on the housing market and the surplus inventories of housing may not clear until 2011. JLBC is not projecting revenue growth until 2011. To top it, the national economy is sliding into recession. So we're looking not just at FY2009, but also FY2010 and 2011 as well.

Let's get a number on how much we're in the hole for the next 3 years and then come up with the 3 scenarios ranging from optimistic to pessmistic of how large that number may be. Then let's find ways of attacking that number over that time period. We find there is simply not enough money to cut from the 55% of the budget that the Legislature can touch... what happens after that is anyone's guess but at least we would be working in the light.

Single shot games are for con artists, supergames are for leaders.