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NNEWSEWSLLINKINK Vol. 6, No. 3 IDEAS AND UPDATES ON PUBLIC POLICY Spring 2002 Game theory, coming to a theater near you Summer's here! Let the Hollywood games begin or his brilliant portrayal of the same strategy, the whole group will mathematician John Nash in be worse off, as everyone’s profit margin A Beautiful Mind, Russell F shrinks. Crowe won critical acclaim. Nash’s contribution to game theory Based on the popular biography by Sylvia — one that bears his name — finds that Nasar, A Beautiful Mind won the Oscar for in a particular game, if each player’s Best Picture in March. choice of action is a best response to the Nash’s is a classic story of the actions taken by other players, then this triumph of the human spirit over set of strategic choices comprises an adversity. equilibrium. Having pioneered work early in his In the OPEC game, if the member career in the emerging field of game nations do not have a mechanism in place theory, Nash overcame schizophrenia to guarantee cooperation, individual and, in 1994, along with two colleagues, members will find it easy and tempting won the Nobel Prize for Economics. to charge low prices. If everyone is The science of strategy, game when confronted with a set of choices on how charging a high price, one player will theory, attempts to understand, in to price their products. For example, consider benefit by charging a low price and mathematical terms, the actions of the incentive for an individual member nation securing more market share. If players in a set of games. Game theory of the Oil Petroleum Exporting Countries everybody is charging a low price, then examines the options for cooperation (OPEC) to cheat on pricing and production it is hardly profitable for someone else and competition between two or more agreements. If all OPEC members charge a high to do differently. Thus the low pricing players. The applications of game theory price, an individual member will be tempted option for every player is the best are numerous. Economists are interested to undercut prices a little and steal market share response to everybody else’s incentive to in game theory because it helps them from fellow members. But if everyone follows understand how competitors behave continued on page 4 From the Executive Director IN THIS ISSUE Trading principle for plunder on Beacon Hill Letters to the Editor eeding frenzy. That’s the settlement money and other funds, as explained on Readers respond to BHI........2 best description of how the ourF website: www.beaconhill.org.) Massachusetts legislature That’s a cut of about 0.7%. For a household that News F has dealt with the supposed made $50,000 in 2002, it’s the equivalent of having to FY '03 budget crisis. It would be funny if Florida STAMPs out sales tax get by on $350 less in 2003. No big deal, right? "reform"....................................3 it weren’t so dismaying. But the Massachusetts legislature, egged on by the Here’s what has happened: Because media and some business groups, has turned this of a temporary revenue shortfall, brought minor spending cut into a very big deal indeed. Analysis about by 9/11, the economic slowdown Fanning worries about “draconian” budget cuts, the Welfare reform, caseloads and and a weak stock market, the state would legislature is turning a $150 million spending cut into unemployment in MA ..........6 have to cut spending from about $22.80 an excuse for raising taxes by more than $1 billion. billion in FY '02 to about $22.65 billion in In 2000, Massachusetts voters overwhelmingly BookMark FY '03, in order to avoid raising taxes. approved ballot measures to cut the income tax to 5% (This calculation assumes that the state Beyond the Dot.coms: would draw on reserves, tobacco The Economic Promise of the continued on page 5 Internet, reviewed.........................7 BEACON HILL INSTITUTE Letters to the Editor Braintree volunteer program taxes, ways could be found to close the gap wants. If Mr. Belanger can see our other between spending and revenue, even in this arguments as “brilliant,” we hope he can makes "no economic sense" financial crisis. Some relatively painless means see this one as at least reasonable. It is easy to agree with Mr. Arlos on Editor: have already been suggested – like reducing the the desirability of ending free tuition for I am writing to express my concern lottery payout by $274 million, using $146 state employees attending state colleges. with the article entitled “Working off million from the tobacco settlement and taking There is little reason to believe that doing taxes” in your latest newsletter. I think $800 million or more from the estimated $2 so would undermine the state’s ability to the program is terrible economics and billion in the state’s so-called rainy day reserves. attract capable workers. And, let’s face it. terrible social policy and am very In addition, most citizens have their own This practice discriminates against private surprised to find an article praising this favorite pet peeve when it comes to state universities like Suffolk. On the other program in your newsletter. For a local spending. Their suggestions may save hand, we’re a little less eager to eliminate government to raise taxes to a confiscatory relatively small sums but these sums add up to state public relations offices. Considering level only to then turn its senior citizens substantial amounts. I would eliminate all how difficult it is to pry information out of into wage slaves at minimum wage in public relations and press secretaries from state state officials, it’s nice to have somewhere order to save their homes is abominable. agencies. to go where they can’t duck your questions. Furthermore, the work they do (according It would save over $10 million a year to As for the exact economic losses the to the article) is not wanted or needed by eliminate free and cut-rate tuition at state forthcoming tax hikes will inflict, the the town to the extent that it is available; colleges for government employees and their trouble is that no one else wants even to clearly an indication that the economics dependents. These colleges belong to all the ask that question, much less answer it. makes no sense. Also, to replace union people of the state, and fairness dictates that jobs (even partially) at union wages with one group should not automatically receive non-union workers at minimum wage is financial benefits for which other people must underhanded union-busting, a violation compete. of any fair-minded collective bargaining The citizens of Massachusetts are not NewsLink is published quarterly agreement. selfish. They would not mind higher taxes if by the Beacon Hill Institute for Pub- I urge you to do some logical analysis they knew that all methods of increasing lic Policy Research at Suffolk Uni- of this program as you have so brilliantly productivity and eliminating waste and special versity. The Beacon Hill Institute fo- done in so many other areas of economic, privileges had been addressed. And neither are cuses on federal, state and local eco- political, and social policy. I look forward our citizens stupid. They can see through the nomic policies as they affect citizens to a future article that really “makes sense gloom-and-doom predictions that they are and businesses, particularly in Mas- for everyone.” asked to swallow so that public officials will sachusetts. The institute uses state- have an easier time extracting additional taxes. of-the-art statistical, mathematical Philip Belanger A fiscal crisis like the present deserves and econometric methods to pro- via e-mail statesmanship and it deserves sacrifice, but that vide timely and readable analyses sacrifice does not have to come from the that help voters, policy makers and children or the poor or the sick or the elderly. opinion leaders understand today’s Raising taxes should not be Nor should it come first from the taxpayers. leading public policy issues. first resort Peter G. Arlos PUBLISHER Editor: Berkshire County Treasurer DAVID G. TUERCK I do not know whether the Beacon Pittsfield Councilman-at-large EXECUTIVE DIRECTOR Hill Institute’s estimate that state tax increases will hurt the economy of EDITOR Massachusetts and cost jobs is accurate. BHI replies: FRANK CONTE The Institute has calculated that to keep We don’t think things work as Mr. DIRECTOR, COMMUNICATIONS & IS the income tax at 5.3% would cost $1.4 Belanger charges. As we see it, local billion in lost wages, result in 32,000 lost government is going to extract either money (ISSN 1094-0707) jobs, and cause $244 million in lost capital or the equivalent in donated time from seniors spending during the first year. Other tax ©2002 Beacon Hill Institute for and everyone else who pays taxes. So better hikes are estimated to have equally Public Policy Research, Suffolk that it offer a choice — pay or work — to devastating effects. University, 8 Ashburton Place, taxpayers. Seniors often have more time than What I do know is that the state does Boston, MA 02108-2770. Voice: money, and, under this program, they get to not have to risk such a scenario. If the (617) 573-8750; fax: (617) 720-4272; choose where they’ll work. When they pay first response of elected officials in e-mail: [email protected]; web taxes, on the other hand, the government takes difficult fiscal times were not to raise site: http://www.beaconhill.org. the money and spends the money where it PAGE 2 / SPRING 2002 NEWSLINK STAMP analysis informs debate on Flordia tax reform ast February, the Florida 6 percent sales tax such as legal work, The BHI analysis also found that the House of Representatives accounting and shipping.