Uninsurable Risk: Adverse Selection and the Politics of Scandals

American politics lately has been centered on SCANDAL! In particular, President Obama has been at the center of several well-publicized controversies, ranging from Benghazi to the IRS to the Department of Justice.

The politics of scandal is interesting.  For example, in none of the current scandals is there any real evidence that President Obama “did” anything directly (for example, as opposed to the crack-smoking scandal in Canada).  Rather, the questions center (appropriately) on whether the acts of subordinates reflect a general, if latent, policy/stance of the Obama Administration.  In all cases, the worry is essentially that the Obama administration is concerned with “political gain” at the expense of “good policy.”

Setting aside the difficulty of defining “good policy”—a ubiquitous problem that bedevils presidents from both parties—the “math of the politics of scandal” is similarly ubiquitous and bedeviling.  A potent view of the politics of scandal is provided by the notion of adverse selection. In particular, the adverse selection view of political scandals provides a useful understanding of why scandals are both inevitable and, more intriguingly, “important” even when the events directly associated with them are not necessarily so.

In a nutshell, adverse selection refers to situations in which there are multiple types of politicians (or any other agent), some of whom a given voter would prefer not to have in office, but the voter can not directly distinguish between the types.  Adverse selection is perhaps most visibly demonstrated in insurance markets: the insurance company would prefer to insure low risk individuals (e.g., good drivers), but provides a product that is necessarily particularly attractive to high risk individuals (bad drivers).

In the conventional view of politics, individuals who seek office are ambitious: campaigning is a costly and generally risky activity, and even holding office is not particularly remunerative. Accordingly, a degree of vanity or policy motivation is almost a sine qua non for a high profile political career.

Politicians who seek policy change are accordingly viewed with some suspicion: in order to secure public support for a new policy, a politician will seek to persuade voters that the policy is in their interest(s).  However, the costliness of campaigning, etc. and our belief that some politicians are accordingly driven by vanity or personal (rather than, or in addition to, “altruistic”) policy motivations implies that we view many such persuasion attempts with skepticism.  This is the first order effect of our awareness of the adverse selection problem: if there were no adverse selection problem, then we could rightly defer to the politician’s proposal.  (This protomodel can serve as a microfoundation for Richard Fenno’s famous “Home Style” argument: politicians seek to credibly emulate their constituents so as to ameliorate their constituents’ perceived likelihood of the adverse selection problem.)

The “politics of scandal” is a second order effect of adverse selection, in the sense that scandals, and the various courses they tend to run (e.g., slow burn, quick flame out, absolute barnburner, etc.) can be thought of as representing decentralized audits (or, perhaps, “sniff tests”) that politicians face from time to time.  If there were no adverse selection problem, a credible reform of consulate security would (or theoretically should) “end” the Benghazi scandal.  Similarly, if there were no adverse selection problem, replacing Michael Brown at FEMA would have quieted the backlash against President Bush following Hurricane Katrina.

So, what does the math of adverse selection tell us about scandal?  Well, the details of the model of course matter a lot, but a couple of generalizations are pretty robust.

  1. Scandals will be prolonged when the politician is already suspected of being a “bad type” and, furthermore, the scandal will be prolonged by and promoted towards those voters who are already suspicious of the politician.  (Call it the Kanye effect?)
  2. Admitting the failure and taking the blame for it can (will?) end the scandal.  This is because, under the typical adverse selection setting, the notion that the scandal is informative is precisely because the politician is actively trying to conceal his or her type. (Definitely call this the “Bay of Pigs/Janet Reno” effect.)
  3. Scandals will be prolonged when the act(s) in question have a high probability of revealing new information about the politician.  That is, a scandal that strongly contradicts closely held beliefs of the politician’s supporters about the “true nature” of the politician (e.g., the AP subpoena scandal for Obama or the Rush Limbaugh prescription drug scandal) will be prolonged precisely because those opposed to the politician have a greater incentive to push, dig, and promote it.  To take the contrapositive, it is unclear that Obama would be (politically) harmed even if it came out that he personally audited and harangued tea party 501(c)(3) groups.  (Taking a similar example from the past, call this the “Dick Cheney’s Secret Task Force Effect.”)  (Also, as a mathofpolitics point, note that this is related to—in the sense of being the mathematical dual of—the “It Takes A Nixon To Go To China” class of signaling models.)
  4. Scandals are more prolonged when it is more plausible that the politician knew about the problem before it happened.  Of course, the famous saying that It’s not the crime, it’s the cover-up seems to suggest otherwise.  In reality, the saying is making exactly this point.  The reason that the cover-up was so important (as, similarly though less spectacularly, was the Whitewater/Lewinsky impeachment fiasco with President Clinton) is that the cover-up activities, the obfuscating, the dodging are all consistent with a “bad type” reluctant to reveal this fact.

In the practical terms of the three aforementioned Obama imbroglios, these generalities suggest to me the following rough-and-ready-and-completely-seat-of-the-pants ranking of their “seriousness” from least to most serious:

  1. (Least) Benghazi,
  2. IRS,
  3. (Most) AP subpoenas.

This post is already arguably too long, but I’ll quickly list the empirical characteristics that helped me make this list in light of the four generalities above:

  1. Attorney General Holder is still in office and presumably a close confidante of President Obama.  Note that Attorneys General are Ground Zero for modern Cabinet-level scandals. (Sorry, Department of the Interior, the heydays of the 19th and early 20th Century are currently no more but, that said, never forget the now-disemboweled Marine Mineral Service and the Deepwater Horizon disaster.)
  2. The AP scandal is arguably distinctly “unDemocratic”—particularly in light of its obvious analogies with the various Nixon scandals (also applies to the IRS scandal even more directly, though the IRS was significantly reformed after Nixon’s fiascos).
  3. It’s not clear how Obama can come out “against” the AP scandal (for example, see this).  This is a bit complicated, but it is thin needle to thread to be against the AP scandal and against potentially-national-security-compromising leaks of classified information.

So, Obama rightly has his work cut out for him.  If it were me, which it most definitely ain’t, I don’t know what I’d do.  Probably obfuscate, wait for the public to become disinterested in subpoenas and journalists, and pray for a happy, healthy, and well-covered royal birth.

With that, I leave you with this.