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Minnesota 2020 Journal: The Zero-Sum Game

April 04, 2014 By John Van Hecke, Publisher

Conservative fiscal policy is rooted in the idea that the economic pie’s size never changes. Public budgets, therefore, must also remain fixed, locked in place regardless of demographic and economic factors. And, gain may only come from loss. For winners to win, losers must always lose.

Nothing could be further from the truth yet this concept substantially guides Minnesota’s public policy environment. We see it in the minimum wage increase debate. We find it in property tax relief arguments. We observe it in the very conceptualization of Minnesota’s biennial budget: increasing a public budget results in diminished personal resources. Until we get past this fallacy, Minnesota’s growth will always be compromised.

A zero-sum game is an economics concept that resources are fixed. One party’s gain may only come from another party’s loss. The gain-loss equation must always balance. While this concept has an attractive simplicity, much like reducing an algebra problem to its core elements to facilitate answering, it’s also wrong. As mathematician John Nash revealed in game-theory, there is need for and application of zero-sum games but understanding the zero-sum gain’s misapplication is key to refuting the underlying fallacy.

Economies are not closed-loop systems. They grow and contract. Human activity translates into economic growth as people act on financial impulses and incentives. Understanding this phenomenon requires distinguishing addition and subtraction from multiplication. Economic activity is a multiplicative activity, not a function of addition.

Economies are measured by the value of their inputs and outputs. If Minnesota’s economy is $100 and it grows by five percent, the starting value for the new measuring period is $105. A year later, new valuation is determined and the difference between the starting and ending figure is calculated, announced as a percentage increase.

More importantly, economic inputs—capital, labor, overhead—create a multiple of the dedicated inputs. Under a zero-sum game, if adding all the inputs yields a sum of 100, then output can also be no more than 100. For the output to exceed the input in this equation, the input must be devalued prior to its inclusion in the formula. Because the equation must balance, the input factors can’t combine for more than the output factors. Because economies are multiplicative, each input multiplies the impact of the others. The outcome is growth.

Conservatives, for all of their insistence on market-oriented solutions, seem to miss this point.

Public budgets are, themselves, economic multipliers. They do not replace market activities but because public spending is a function of public priorities backed by publicly generated dollars, those dollars' economic impacts are multiplied in the economy. If I pay somebody $10 for an hour of snow shoveling, that $10 conservatively translates into $20 of new economic activity as the shoveler makes additional purchasing decisions. The worst thing is the absence of economic activity. If I don’t shovel my walk, the larger economy loses the spending activity driven by my wage payment. Economic activity stagnates or even shrinks because I do nothing.

We recently observed this phenomenon in Keynesian economic stimulation. In a recession, normal economic activity stalls and even reverses. The government borrows money, invests in public stimulative spending to jumpstart the return to mean. Doing nothing maintains the slow-down as spending shrinks. Belt tightening might be a good short-term strategy for a family but its part of larger chain of activity that makes living with less permanent rather than temporary.

Minimum wage increase opponents apply the zero-sum game fallacy to fight the proposed wage increase. The hospitality industry has been particularly out front. They argue that paying minimum wage workers more will result in spending less on some other facet of the business. However, other costs—food, electricity, insurance, dish soap—increase regularly. Restaurant owners respond by raising menu prices and creating value that extends past the food consumed. They don’t testify before legislative committees that dish soap’s rising price will put them out of business.

Don’t get sucked into the zero-sum game trap. Minnesota’s economy is not a card game with a winner emerging at one or more loser’s expense. Even this relatively recent recession, the worst economic period since the 1930s Great Depression, wasn’t long lived. The contraction quickly corrected but subsequent growth rates were unusually slow, creating the illusion of continued contraction. Minnesota’s economy grew, it just didn’t feel like it was growing.

Treating the economy and, in particular, public budgets, as elements in a zero-sum game only serves to intensify consumer pain rather than alleviate it. Growth is always the goal. Everyone does better, as the late Senator Paul Wellstone sagely observed, when everyone does better.

Let’s discard the zero-sum game fallacy. It has no place in Minnesota’s public policy debate. Addressing real problems like wage stagnation and income’s concentration into fewer, wealthier hands, properly focuses the mind and, by extension, guides smart policy decisions. To move Minnesota forward, be smart.

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