Projected as the winner of New Hampshire Primary, front-runner GOP Presidential Candidate Mitt Romney delivered a speech in front of his supporters on Tuesday January, 11 2012 in New Hampshire.
While I was listening to the speech, I wads remembered my lectures in previous semester. Is there any relationship between the speech and economic theory? Intending to answer my silly questions, I took more notice on what Mitt Romney was trying to deliver. Thus, if you have same concern, you may continue to read this blog.
That Victory Speech
I found full text of his speech on this website. After that, I tried to find particular sentences having “doable meaning” in terms of economics theory (not only rhetorical/metaphorical sentences) or in strategic management point of view these selected sentences are not vision/mission level statements but rather action level statements. Then I chose two of the selected sentences for my further analysis, I call these as pledges, as follows.
Pledge 1: “…President Obama wants to put free enterprise on trial… I stand ready to lead us down a different path, where we are lifted up by our desire to succeed, not dragged down by a resentment of success…”
Pledge 2: “…He enacted job-killing regulations; I’ll eliminate them…”
Discussion
So, I try to explain the speech in terms of economic theory of regulation. Firstly, I recommend you to read my other article about theories economic regulation. This discussion is based on the more adequate theory which is Economic Theory of Regulation (ET) firstly proposed by Noble laureate George J. Stigler.
1. ET says that regulation is like economic good. There are sellers/suppliers and buyers and it has equilibrium demand and supply.
So, it can be shown that Mitt Romney as a candidate of supplier of regulation (including policies) was trying to sell his product to demanders/buyers (the voters and the financial supporters/firms). I thing we already aware that to win the race a candidate must have sufficient votes and to achieve it a candidate needs to collect adequate money to support candidate’s campaign. From the excerpts of Romney speech, we know that Romney tried to treat his buyers (the voters and firms). Generally, for the firms, he convinced them that he will not put free enterprise on trial (Pledge 1), whilst for the voters he promised that he will enacted job-killing regulations (Pledge 2). It is assumed that if Romney wins the presidential election and then he wants to realize his pledges (his victory speech). Furthermore, ET also says that Romney’s utility consists of (a) remaining in his office through maximizing political support (to be elected) and (b) redistributing wealth trough regulation.
In fact, demanders (voters and firms) compete for their own interest (gaining the most benefit from the regulation). Voters concern about reducing price of real good in market (such as lower electricity rate, telephone rate, gasoline price, etc), in economics theory it can be achieved through competition and it means setting price where firm’s profit is zero. On the other hand, firm’s interest is how to increase the profit, generally it means setting price such as monopolistic market. In short, voter and firm interest are inversed. In fact, this condition becomes constraint for the supplier to maximize its utility (Ups, it sounds like a constraint maximizing problem in economics theory).
So, when Romney gets first utility (elected), regardless the constraints, he will realize his promise by making certain regulation at which so that (real) voters get more benefit and producers get worst off (remember about Pareto Optimality, we can not make one better off without making other worst off). Wait, of course the producers complain “Hey, I gave you the money for campaign”, in fact the constraints exist.
Romney must recalculate his second utility. So, his modest choice is setting policies so that price falls between competitive price desired by voters (means zero profit) and monopolistic price demanded by producers (means maximizing profit)[1].
Here we can conclude that typically producers who operate in competitively industry or monopolistic industry request to be regulated because they will get relatively biggest benefit. Simple diagram below hopefully explains more.
2. Major result derived from ET: regulation biases toward small interest groups with higher per capita benefits from regulation.
Simple meaning from above statement is that regulations will be pro-producers (pro-firms). Back to Romney’s Speech, we can conclude that Pledge 1 will likely happen because main demanders are firms. Here I have a simple guess, one of the demander for the Pledge 1 is AT&T because (a) Obama administration already stated that they will block the AT&T merger (in fact my lecturer told me about this in the class J); and (b) telecommunication is a relatively competitive industry therefore it likely needs “a protection” (see previous section of this blog).
“Does it mean that the telecommunication price will be increased?”
I don’t think so. In this case, AT&T needs specific policy not an increasing tariff rate (so that hopefully the policy will increase AT&T profit). It also needs to be emphasized that price-notion in this discussion is not merely increasing price of goods or services through regulation but can be in the form of policies (permits, licenses, entry barriers, and so on). However, indirectly I can say that it will end up with increasing in price too.
“I am a worker, so, at least Pledge 2 also will likely happen, is it right?”
Well, sorry to say that we need to have more information about Pledge 2 (such as in what industry, type of regulation, etc). I have not mentioned this before, actually Pledge 2 imposes not only to the voters (workers) but also the firms (on which the regulation will affect). So, if both of them (impacted voters and firms) become Romney’s supporters, simply we can conclude that the firms (small interest groups with higher per capita benefits) will get the most benefits and Pledge 2 will unlikely happen (this is extremely conclusion but not always be the case).
So far, this is a dull and inaccurate explanation on my silly question on Mitt Romney’s Victory Speech. Comments and suggestions then become important parts to make this more precise and meaningful.
References:
1. Loomis, D. G. (2011). ECO 335 Economics of Regulation and Antitrust. Lecture Notes .
2. Sonmez, F. (2012, January 10). Mitt Romney’s New Hampshire primary speech (TEXT). Retrieved January 12, 2012, from The Washington Post Website: http://www.washingtonpost.com/blogs/elec…
3. Viscusi, W. K., Harrington, J. E., & Vernon, J. M. (2005). Economics of Regulation and Antitrust. MIT Press Book.
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