John Kerry seems well on his way to the Democratic nomination. It is time for him to start thinking about how to avoid the winner’s curse.
Two petroleum engineers coined that term decades ago when they studied petroleum leases auctions in the Gulf of Mexico. It was highly uncertain whether any particular tract contained oil.
Companies with the most accurate estimates of oil deposits did not win auctions. Instead, firms that were wildly over-optimistic got the bid and usually lost money.
Economists have since applied the idea of a winner’s curse to fiber-optic cable in the United States, the latest generation of cell phones in Europe or multimillion-dollar athletes like Alex Rodriguez. High bidders for all have lived to rue the day.
What does this have to do with John Kerry? Simply put, there is a political version of the winner’s curse. It occurs when candidates like Kerry criticize incumbents like Bush for failing to increase employment, keep health costs down or balance the budget. Forceful critics often win and then must deal with the problems themselves.
In the interest of disclosure, I am a Democrat who for sometime has supported Kerry as the best of a pretty mediocre bunch, so I am not a dispassionate observer.
I cringe, however, when Kerry waves the bloody shirt of lost jobs. What will he do? Cut taxes in a different way from Bush to stimulate the economy? Erect trade restrictions to cut imports of goods or services from Asia? These cures are worse than the illness.
Moving toward a balanced budget might foster business investment because it would remove a huge source of uncertainty for firms. Yes, rich chief executives like lower personal income taxes. Many, however, can see beyond that to the longer-term effects of federal red ink. Burgeoning deficits don’t bode well for economic stability, growth of output or long-term business profits.
That may be true, and the Keynesian stimulus effects of deficits are highly overrated by the public. Nevertheless, Kerry cannot wave a magic wand to make the labor force grow quickly or without costs. We are in the aftermath of the biggest financial bubble in our economy since the late 1920s, and there are no free lunches.
Nor will rebalancing the budget be a piece of cake. Bush is disingenuous, to say the least, in blaming deficits on recession, war and national emergency. But some of the burgeoning revenues that balanced the budget in the late Clinton years came from taxes on an unsustainable bubble. Returning to balance will pose hard choices for both parties.
So will fixing health-care financing. The details of candidate Kerry’s health proposals available on his Web site show greater insight than his “blame HMOs and drug companies for everything” stump speech. If he repeats the stump speech often enough, however, he will create expectations that will inevitably be dashed when post-inauguration reality sets in.
This is turning out to be an interesting campaign. Much can happen between now and November. All candidates need to beware of the winner’s curse as they flail at each other in the months ahead.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.