Risk, uncertainty, and political behavior

KNIGHTIAN uncertainty is the lack of any quantifiable knowledge usable for prediction about outcomes. It dates back to 1921 when Frank Knight distinguished between risk (measurable) and uncertainty (unquantifiable). Politics produces so much noise from time to time that calculating political risks becomes very difficult. The political process seems to be erratic, perhaps almost random. Whether it is really so is another matter. We have clearly entered a phase of international and domestic political risks – maybe even Knightian uncertainties – that may bear on the economy. I will try to convey a few ideas about political uncertainty and put forward a general idea about the economy.


It is an interesting phenomenon in many senses. First, there is the IYIP phenomenon. This is the first time in a decade a nationalist-cum-center right politician (Aksener) challenged the status quo of the conservative right. There was high hope that IYIP could manage to attract not only voters from the coastal and urban areas but also from the strongholds of the MHP in central Anatolia. I don’t have the full data yet but it looks like IYIP succeeded in the first task but much less so in the second. Second, both Imamoglu (Istanbul) and Yavas (Ankara) managed to run influential mayoral campaigns in 2019 based on a ‘winner’s claim’ – “I will be the next president”-type of self-confident standing – shored up by neo-populist promises. Also, they both are perceived as successful after more than a year in office. They managed to attract much more than what the CHP’s regular voting base could offer. Naturally, there is an upper limit to what they can achieve if they run for the presidency. Related to the IYIP phenomenon, Yavas seems to have a better chance than Imamoglu because Yavas can attract even some MHP voters in addition to CHP and IYIP.


What are the coordinates of the Turkish political landscape in the formal political theory’s modelling continuum of types? Assume we have risk, even Knightian uncertainty about the ex post fulfilments of political actors since Turkish politics is full of broken promises. Assume also that the agenda is at least two-dimensional. Are voters opportunistically rational as in homo oeconomicus or are they Wittmanesque, that is, ideologically-motivated before thinking about their welfare first and foremost. John Roemer proved 20 years ago that with Wittmanesque (partisan) actors, there is no equilibrium in the {Wittman, uncertainty, multidimensionality} case whereas the equilibrium is weak or fragile in the {Downs, uncertainty, multidimensionality} case. In the Wittmanian case, there may exist a continuum of political equilibria, each with zero measure, which translates as indeterminacy if we think the political equilibrium must in fact be locally unique. Thus, if Turkish politics can be portrayed as a policy space spanned by at least two elements – religion-cum-nationalism and economy – and if voters are uncertain about outcomes, assuming also that actors are ideologically motivated in the Wittmanian sense, we may face indeterminacy in the sense of failure of local uniqueness. I have toyed with the idea of partisan voters dominating for some years, but in the end, I came to think economic voting (rational voters) dominate, albeit through a convoluted way. Polls currently suggest that in a typical vein, c. 80% of the electorate is almost surely decided. In other words, before the undecided are distributed somehow, c. 80% of voters know what they will do if elections are held this week. Around 20% are undecided, but are they really undecided? There is a novelty, though, in addition to the increasing performance of IYIP in the recent polls. Youth don’t favor the AKP. In 2023, if elections are held on time, there will be almost 5 million new voters. This adds more uncertainty into the picture. It may truly be unquantifiable uncertainty because a lot of people will vote for the first time due to the demographic window.


As long as inflation doesn’t exceed a certain threshold, voters prefer growth over inflation, and so do governments. There is inertia in voting, but voters need not be fully sequentially faithful: the inertia coefficient is always less than unity, indicating strategic voting of some sort at the (20% maximal) margin. Voters swing to parties in the ideological/cultural neighborhood though: therefore, their loyalty is to the general path alone, not to the specific party that represents – and obviously modifies – their preferences. An incumbent party risks losing up to 5% of its support per annum in the run-up to elections if the economic factor disfavors it. In other words, voters cast their votes in a back-casting framework, their ‘rationality’ being a bit short-sighted and narrow, given ideological/cultural lenses that impute “meaning” to their choices. Probably, these stylized facts of the Turkish electoral cycle explain why there is a very high likelihood that elections are (almost always) held ahead of schedule. Politics through the looking glass would certainly be an adequate rendering of recent strategic moves, but then who is Alice and where is Wonderland? All in all, we should be careful to avoid portraying the current power game as either a unimodal, single-peaked (therefore reflecting transitive or consistent preferences) game or as admitting a one-dimensional agenda only. It has become complicated, if not yet too complex, and there exist more than two major actors. What we witness is rather an amalgam of cooperation and competition, bargaining and coercion, secularism and laicism, religious reaction and ill-fated republican modernism, modernity (rural-Islamic type), and haves and have nots. These are translated into the international scene via the Greater Middle East and North Africa.


Politics is about income and wealth distribution, taxation, and public spending. All too often governments overspend and over-borrow. Is the ability of the government to borrow limited by its capacity to tax? Is Ponzi finance doable for an infinitely lived government? The standard answer to the first question is based on the government solvency constraint and states that taxes constrain borrowing whenever the long-run after-tax rate of interest exceeds the long-run real rate of growth. Otherwise, bond financing would lead to instability in the sense that the asymptotic variances of the price level, the real stock of money, real wealth, the nominal interest rate, the real rate of interest and the inflation rate would all be infinite. Only current output would have a finite asymptotic variance. What this says is the present discounted value of the terminal government debt should be non-positive in the limit, if the system has an infinite life. This implies in turn that the sum of the present discounted values of all future primary surpluses (i.e. surpluses excluding interest payments) needs to be as large as the outstanding stock of public debt, foreign and domestic. In the end, government spending can’t be negative, it can only equal zero as the absolute lower bound. Hence, the maximal amount a solvent government can borrow is a fortiori constrained by the present discounted value of future taxes – net of transfers. The answer to the second question is equally a classic: Ponzi finance is feasible only if the long-run after tax rate of interest on government debt is smaller than the long-run real rate of growth. But interest income may or may not be taxed: if interest income is untaxed, Ponzi finance can only be possible if the economy is dynamically inefficient, provided that the economy is deterministic and admits perfect foresight equilibrium. If the economy is stochastic, i.e. if uncertainty prevails, then Ponzi borrowing becomes doable only if the equilibrium is Pareto suboptimal, even if dynamic efficiency obtains. Unless full intergenerational insurance can be safely assumed to exist, such an economy will be Pareto-suboptimal in a sort of natural way. Furthermore, in such a setting Ponzi finance can be Pareto improving. We have here a theoretical rationale going beyond Ricardian equivalence – or lack of it thereof.


What has been said in the last paragraph may look impenetrable, but it is in fact deceivingly simple. Yes, governments can borrow endlessly, unless their debt ratios are far too high or debt is clearly unsustainable; after all even Greece could float. It is precisely in this sense that all types of borrowings will endure. However, there will be a price in terms of higher interest rates, other sweeteners required, and from time to time CDS spread enhancements. We are now permanently on the slope conducive to snap elections, whether in H2 2021 or H1 2022. It is indeed a climate Frank Knight would point to as an example of politico-economic Knightian uncertainty. •

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