Monday, May 11, 2009

Budget hawks lament: Politicians won't make "hard choices" to cut the deficit.

But, uh ... What hard choices?

Budget hawks, who for some reason had high hopes that Obama and the Democrats would bring fiscally responsibility to government after their sad experience with Bush and the Republicans, are becoming filled with angst.

The latest cause is not that last week Obama's much ballyhooed new spending cuts amounted to only a sub-token figure of $17 billion -- less than 0.4% of the 2009 budget that's surged to $4 trillion, and only 0.9% the 2009 deficit that's exploded to $1.85 trillion (by far the largest deficit the nation has incurred since it was fighting World War II) .

The cause is that the Democratic Congress instantly rejected even those trivial cuts...


President Obama's modest proposal to slice $17 billion from 121 government programs quickly ran into a buzz saw of opposition on Capitol Hill yesterday, as an array of Democratic lawmakers vowed to fight White House efforts to deprive their favorite initiatives of federal funds.

[example ... example... ]

Rep. Maurice D. Hinchey (D-N.Y.) vowed to force the White House to accept delivery of a new presidential helicopter Obama says he doesn't need and doesn't want. The helicopter program, which cost $835 million this year, supports 800 jobs in Hinchey's district. "I do think there's a good chance we can save it," he said.... [etc.] [WaPo]
"Congress still refuses to make hard choices", complain the budget-watch groups. EconomistMom (who works for the Concord Coalition but blogs independently) writes...

A Test in Not-So-Hard Choices First

... If Congress is not willing to support even these cuts -– given the demonstrated low net-benefit of these small programs and given the President’s recommendation/ blessing on these cuts -– then how are they supposed to go along with the really tough choices ...

Yes, yes, surely it seems like Congress is failing the "hard choice" character test yet again. But wait a moment....

Congress has been failing this character test for decades now -- at least since the early days of the Clinton Administration when it became clear that a massive fiscal crisis is coming around the year 2030 unless the long-term budget is seriously overhauled. One budget character test after another it has failed, big and small, over and over, year after year. Just like this one.

But can our elected Congress really be so completely devoid of people with character? I don't think so. And if for a generation Congress has made the same choice over and over, doesn't logic suggest that perhaps that choice is not "hard", that it's actually easy? Let's look at this choice a bit closer:

Suppose someone went to EconomistMom and said: "Diane, the deficit is huge, the debt is staggeringly large and growing only more so, the country is heading for fiscal crisis in 20 years. All dutiful, responsible Americans will want to stop this. So we propose that you and your husband voluntarily accept losing your jobs and becoming unemployed, so that your employers can donate your full salaries to the IRS to reduce the national debt. This will surely create hardship for you and your children. But you will help avert the coming fiscal crisis, as 20 years from now your responsible action will reduce the national debt by 0.000...01% "

I am reasonably sure that if offered that proposition she would reply: "No thank you. My husband and I have responsibilities to ourselves to lead constructive lives, and even more so responsibilities to our children. We prefer to keep our honest jobs. Goodbye now."

And I'm also fairly sure that would not be a hard choice for her to make! It might be one of the easiest of her life.

Yet budget hawks put that exact same choice to Congressman Hinchey -- that he should unemploy 800 people in his district, and very likely himself as #801, while receiving zero reward in return -- only to maybe create some very, very, small benefit for the nation some decades from now. When he refuses to go along, they lament that he lacks the character to make tough choices.

But it's not a tough choice for him, it's easy, and character has nothing to do with it.

What's failing in this situation is not Congressional character but Congressional incentives. The degree to which an economy is productive and efficient, and to which governance is productive and efficient, is determined by incentives, incentives, incentives.

Capitalism works better than any other economic system because it does the best job at providing incentives that — in the famous example of Smith — align the self-interest of the baker with the interests of those who buy his bread. With interests aligned, the baker provides good bread at a good price to benefit himself.

Democracy works as well as it does, when it works well (or in the words of Churchill, not so well but better than the alternatives) because it provides incentives that roughly align the self-interest of politicians with the interests of their constituents. With interests aligned, the politicians pass laws that benefit the polity to benefit themselves.

But in the political world we’ve entered of big government spending -- on a scale such as politicians through all history up to 60 years ago never dreamt of -- with politicians acting to get votes for the next election by making commitments that may stretch decades into the future ... there is zero incentive, absolutely none, aligning the self-interest of today’s politicians with the interest of future generations in sound long-term fiscal policy.

To the contrary, today's politicians face strong and clear incentives to loot the future for current gain -- and people always follow their incentives!

In capitalism, “owners” of property and businesses have a strong incentive to maximize the long-term, future value of their assets because it is reflected in their current capitalized value -— their wealth. So they have a powerful reason to counter efforts by others (from union workers to CEOs, and outsiders as well) to loot the value of their assets and businesses for short-term gain.

But in politics nobody has that long-term interest in protecting the future. Everything is to win that next election in two years. And then there is another in another two years ... and another ... No politician is on the hook for costs that land on the future, as capitalist “owners” are. No politician gets a reward today for improving the future, as capitalist owners do.

This is the real problem, and as far as I can see it has been totally neglected by budget-watch groups such as the Concord Coalition, Peterson Foundation, US Budget Watch and others. These groups provide good educational material, show what the future will be if we stay on our present course, and finger-wave about the politicians' fiscal irresponsibility.

But to be frank they have failed -- the fiscal situation has gotten much worse in spite of all their efforts -- because they have proposed nothing at all, zilch, that addresses the fundamental problem of giving Congressmen like Hinchey a reason to cut spending today for the sake of the future, an incentive to do so that works through the political system.

Without that, no amount of hand-wringing about fiscal irresponsibility or lamenting over Congress's insufficient character to make "hard choices" is going to change a thing.

Politicians elected to Congress do not see themselves as running a charity for the future through which they sacrifice jobs in their districts —- their own jobs, not least —- today for the sake of “a better world tomorrow”.

The goal of the "budget hawks" should be to develop self-interested reasons for Congress to bring the budget in line, and political rewards for it if it does. Incentives.

Without doing that, all the effort they put into their concerns is a waste. They should spend their energies on something else.

Because Congress will finally feel a real political incentive to bring the budget into order only in the late 2020s, when it will be forced to raise income taxes by, oh, 50% or so (and feel the incentive of the taxpayers' wrath). Not a day earlier. In spite of all the futile efforts of all the budget watch groups over the prior 30 years.

So, hey, budget watch groups, don't waste 30 years! Let's put some research into developing political incentives towards fiscal responsibility that politicians will feel! Let's create some "hard choices" for them for the first time.