Tuesday, April 09, 2013

The Upper Hand and Political Leadership: The Role of Reagan and Thatcher as Causal Macro Effects

Paul Krugman examines whether Margaret Thatcher deserves credit for England's strong years during the 1990s.    Here is a quote:
"Well, there’s a bit of a problem: Thatcher came to power in 1979, and imposed a radical change in policy almost immediately. But the big improvement in British performance doesn’t really show in the data until the mid-1990s. Does she get credit for a reward so long delayed?"
I think the big issue here is one of expectations and how political leadership affects expectations in negotiation games.    There is a famous Seinfeld Episode where George attempts to obtain "the Upper Hand" in a relationship.   In a game theoretic sense, both Reagan and Thatcher helped to achieve the "Upper Hand" on aggressive labor union demands and this created an economic environment where jobs were created.

This issue is playing out now in Los Angeles in the race for Mayor.  Both candidates are good people who would be fine Mayors but both appear to be beholden to the unions.  Facing this reality, will there be private sector job growth in the City of Los Angeles over the next 4 years?  In this age of rapidly changing market opportunities, firms need the flexibility to fire at will. If they anticipate that they can't fire, then they won't hire and we become Greece and Spain.   Both Thatcher and Reagan signaled that a regime shift had taken place in labor markets and this flexibility (and thus convergence between the real world and the neo-classical model of perfectly competitive labor markets) offered medium economic growth benefits.