Thursday, March 14, 2013

1. Bad incentives 2. ? 3. Crisis!

By Robert H.

I am made very nervous by public choice stories that end in doomsday.  Take these examples: 1. As soon as the people realize they can vote themselves subsidies, they will vote themselves more and more until the economy collapses.  2. Because a possible debt crisis is a long way off but tax hikes and budget cuts happen now, politicians will always face pressure to please current voters and hurt future ones, never getting serious about the deficit until crisis is upon us.  3.  If markets start poking up interest rates and servicing our debt becomes a crushing burden, the fed will feel pressured to enact looser and looser policy to keep rates down until an inflationary disaster.

To state the obvious, in a rich, transparent democracy like America, there is a huge and powerful constituency that wants to avoid doomsday (everyone) and widespread access to good data about the likelyhood of doomsday.

So, to take one example, are politicians pressured to borrow now at the expense of future generations?  Probably.  Will this lead to a fiscal crisis?  Probably not.  You would expect rational voters likely to see a fiscal crisis in their lifetime push for balanced budgets.  If it looks like the debt to GDP ratio won't be sustainable in 20 years, maybe the 80 year olds don't care (they will be dead by then).  But the 20, 40, and maybe 60 year olds do.  As we approach fiscal crisis danger territory, older and older voters should start getting politically involved for austerity until the fiscal crisis is averted, later than would be optimal but far earlier than is dangerous.

Because the constituency against doomsday is so large and powerful, it is hard to tell public choice stories where rational actors end up dooming America.  Doomsday takes either 1. Ignorant voters (and why do you think you are so much smarter) or 2. Bad institutions that a.  hide key facts from voters, b. make coordination hard (IE, climate change is a global problem but there are no global institutions capable of dealing with it), or c. Put power in the hands of people who prefer doomsday to the alternative (IE, ruling junta would rather control a collapsing economy then risk losing control of a free one).  I would say Europe has suffered from a mix of all three factors under 2, hence the crises there.

No comments:

Post a Comment