Everyday Economics

Squeal or Deal?

Why the Whitewater defendants and the CIA should study economics.

Suppose you’re a convicted Arkansas felon with some juicy private information about the president of the United States. An aggressive prosecutor offers to purchase that information with a lenient sentencing recommendation. Do you take the deal?

If all your motives are selfish, you’ll probably first make some discreet inquiries to determine whether the president is prepared to outbid the prosecutor–say with the promise of a full pardon.

But suppose it’s an election year, and the president can’t risk granting a controversial pardon in the midst of the campaign. If you choose to remain silent, you’ll have to wait till after the election to collect your reward. Do you dare wait that long?

A lot depends on just how juicy your information is. If you know enough to trigger an impeachment, the president won’t dare cross you. You might as well sit tight, confident that you’ll get your freedom on the second Wednesday in November.

On the other hand, if the offenses you know about are embarrassing but short of impeachable, you’ve got to make the best deal you can right away. Once the election has passed, your leverage at the White House will be severely limited. You’d better call the prosecutor.

There’s also a third hand: You might know nothing at all. Then, assuming you can’t get away with bogus accusations, your only option is to serve your time in silence.

Consider the two Friends of Bill who now await sentencing. At the moment I write this (though not necessarily at the moment you read it), reports indicate that Jim McDougal is negotiating with special prosecutor Kenneth Starr while Susan McDougal adamantly refuses to cooperate. From those reports I conclude that if Susan knows anything, she knows a lot more than Jim does. Her silence means either that she knows nothing or that she knows enough to extract a high price for her silence. If she knew a middling amount, she’d be following Jim’s lead.

That analysis is an excursion into the branch of economics called game theory–the study of strategic behavior. Unfortunately, game theory is notorious for its ability to generate radically different conclusions in response to small changes in the underlying assumptions. Thus I have only a moderate degree of confidence in my deductions.

Other branches of economics yield far more reliable predictions, and the theory of competitive markets is the most reliable branch of all. So that’s the branch we should climb out on if we really want to use economics to get at the truth about the scandals surrounding the Clinton administration.

I’m not sure how to apply competitive-market theory to Whitewater, but fortunately there is no lack of additional scandals to analyze. Take the case of the late Ron Brown, who was accused of selling favors to the Vietnamese government for a price of $700,000. Those favors, involving arrangements for international trade, appear to have been worth many millions of dollars to the Vietnamese. In other words, if the stories are true, then the Vietnamese got a fabulous bargain.

F >abulous bargains don’t come along every day. When they do, it’s usually because of heavy competition among many sellers. If Ron Brown had been the only administration official willing and able to sell out to the Vietnamese, he could have extracted a price commensurate with the multimillion-dollar value of his product. So by selling out for a mere $700,000–if he really did–Brown revealed his expectation that competitors (presumably other high-ranking officials with the means to influence trade policy) were prepared to undercut him.

I don’t know whether Ron Brown was guilty. But economic theory tells me that if the charges against him were accurate, there must have been others in the administration who shared his ethical laxity. Those others are presumably still in office. It might be worth an attempt to ferret them out.

Similar reasoning could be useful to investigators who are concerned with national security leaks. It would, for example, be interesting to determine whether the Aldrich Ames spy case was an anomaly or a symptom of widespread corruption in the CIA. Ames sold information to the Soviets for a price of $4.6 million. As with Ron Brown, we’d like to know whether Ames was a monopolist or one of many sellers in a competitive marketplace.

One way to find the answer is to begin with a different question: How much was Ames’ information worth to the Soviets? If it was worth only 4.6 million, then the Soviets were paying top dollar, indicating that Ames was the only willing seller. That would be reassuring. If, on the other hand, the information was worth many times $4.6 million, then Ames sold cheap, suggesting that he was forced to underbid a host of potential competitors. In that case, those potential competitors constitute an ongoing security risk.

One way to find out whether the CIA has been infiltrated by moles is to conduct elaborate investigations of employees and institutional procedures. A much faster, cheaper, and more accurate way might be to investigate whether Aldrich Ames offered his customers a bargain.

More generally, when someone is behaving surreptitiously, we frequently have to guess what he’s up to. We can’t hope to guess right all the time. But we can strive to make our guesses consistent with all the evidence and with the basic laws of human behavior. In that enterprise, a little economic theory goes a long way.