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Posted at 3:25 PM ET, 12/28/2010

Democracy, deficits, and 'preemptive fiscal adjustment'

By Jonathan Bernstein

I'm a big fan of a series of posts Matt Yglesias has written about what he calls "preemptive fiscal adjustment" (previous posts here and here). I think it's a good topic for thinking about incentives and democracy, which I'm going to try Q & A style.

Q: Why are deficits problems for the political system, anyway?

A: Politicians respond to incentives.  Short run, the direct effects of lower taxes and higher government spending are noticeable, and voters like both things.  Thus there's an incentive for governments organized around responding to political incentives to run deficits.

Q: Then why do politicians ever care about deficits?

A: Short answer: the bond markets.  Incumbent politicians, above all, have an incentive to keep the economy running well.  Government deficits can produce inflation, which makes voters unhappy...or higher interest rates, which can harm economic growth and can result in a lot of politicians losing their jobs.  In 1990 and in 1993, Democratic Congresses and Presidents George H.W. Bush and Bill Clinton believed that lowering deficits would directly affect economic growth.  So the answer is really "the economy," and the markets function as signals to politicians.

Q: Shouldn't we deal with long-term deficits well in advance, so that painful short-term adjustments aren't necessary?

A: As Yglesias says, such "preemptive" deals are highly unlikely, because they impose immediate costs on politicians (who will be blamed for unpopular spending cuts or tax increases, even if they don't take effect yet) with not only no tangible short-term benefits, but no short-term benefits at all.  Moreover, deals aren't written in stone; pols who make preemptive deals may find that they lose their jobs and that their replacements blow up the deficit again.  In my view, that means that politicians would be foolish to make such deals absent other, more pressing reasons (see: the bond markets, above), but I suppose not everyone would agree.  In some situations, it might be a good gamble for a party with a temporary majority to try to "lock" in their long-term preferences even knowing nothing can ever be really locked in.

Q: Doesn't that mean that democracy is hopeless?

A: Nope.  It just means that we'll get deficits up to the point where politicians feel the short- and medium-term costs of running large deficits are larger than the short- and medium-term costs of cutting spending and increasing taxes.  Fortunately, recessions are really bad for pols, so they're going to try hard to avoid them.

Q: So it all just magically works out?

A: Hey, I didn't say that!  The markets may or may not be efficient signals.  Politicians may or may not be good at interpreting and acting on those signals.  For the United States, there's always the chance of divided government, with mixed incentives for incumbents.  The whole thing may well be a lot less efficient than if technocrats did it without politicians being involved -- that is, without democratic control. (Although that's not certain; I'll bet on the pols, but as far as I know we have no strong evidence way or another.  Technocrats have their own set of perverse incentives and other limitations.)   There may be long-run costs to running deficits that don't produce any kind of warning signals -- personally, I don't believe that's the case, but I'm not an economist.   As with so many other topics, Churchill's slogan about democracy works here, too.

Jonathan Bernstein writes about American politics, political institutions and democracy at A Plain Blog About Politics, and you can follow him on Twitter here.

By Jonathan Bernstein  | December 28, 2010; 3:25 PM ET
Categories:  deficit  
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Mr. Bernstein, were you part of Ezra Klein's Journ-O-List?

Posted by: clawrence12 | December 28, 2010 3:39 PM | Report abuse

"The whole thing may well be a lot less efficient than if technocrats did it without politicians being involved -- that is, without democratic control."

That is called China and we are undergoing a massive experiment now. Will their one party crony capitalism work better than our two party crony capitalism? Don't worry say the Republicans, people worried the Asian Tigers with their multi party crony capitalist economies would beat us and that didn't happen, for the most part anyway (and it isn't as if history ended). We have defeated the Soviet version of Communism in part because of the way they set up and we fought Cold War 1.0

It is going to be interesting to see how having a country that uses a one part crony capitalist economic model that is fully integrated with our own and the rest of the world's banking and monetary policies is going to work. All of this is to say it isn't the least bit clear we have democratic control of our relationship to our deficit.

Posted by: shrink2 | December 28, 2010 4:11 PM | Report abuse

@Clawrence: "Mr. Bernstein, were you part of Ezra Klein's Journ-O-List?"

I have it on good authority that he was, and he was also a freemason. And a shriner.

Make of that what you will. But at least you don't have to keep asking.

@shrink2: "Will their one party crony capitalism work better than our two party crony capitalism?"

Short-run? Yes. Long-run. No.

"All of this is to say it isn't the least bit clear we have democratic control of our relationship to our deficit."

I think it's pretty clear that we don't. Or, we did, but we gave that away for eeeeeasssssyyyyyyy credit! China is like America's Mo' Money Cash Payday Loans. Or TitleMax.

One day, we hope, we'll be smiling in our car with a fist full of cash saying: "We got our title back with TitleMax!"

That being said, democracies may produce more robust long-term economies, but they don't produce tremendous national frugality. We may, in the end, produce more wealth to spend, but we still have few checks on our humongous appetite to spend it.

Posted by: Kevin_Willis | December 28, 2010 4:29 PM | Report abuse

Kevin, I agree, about the freemasonry part .

Posted by: shrink2 | December 28, 2010 4:50 PM | Report abuse

"Will their one party crony capitalism work better than our two party crony capitalism?"

Short-run? Yes. Long-run. No.
Really? I'm still trying to figure out what in the American model is going to turn things in our direction, because it looks like China is just getting further ahead each year. When I look ten years in the future, I see that not only will China surpass us in economic growth, but so will India. That doesn't look like we're catching up to me.

Posted by: 12BarBluesAgain | December 28, 2010 5:00 PM | Report abuse

I read a poster, possibly on this blog, make an interesting observation. This poster was conservative and was disgusted with the alleged laziness of the unemployed. The poster said that unemployed should move to China for work. The unemployed would be easily employed and have food and shelter.

Putting aside the silly idea that China would open its borders to let other people move in to take jobs, this poster implicitly admits that jobs are now the domain of the Chinese. I think that Americans are coming around to admitting we have lost the "job war" and this poster was ahead of the curve.

Posted by: 12BarBluesAgain | December 28, 2010 5:09 PM | Report abuse

"But now I was in a Chinese city for Chinese people. Native urbanites walked their well-groomed collies on the hills, waltzed in parks at dusk and practiced martial arts on rain-swept plazas at midnight. And rural migrants took up bamboo poles and skeins of rope to join the so-called “stick-stick army” of porters, looking to haul bags of groceries or sacks of concrete mix along unnavigable inclines."

This from 'Lost in China', an interesting travel piece on how life urban China is going...

Posted by: shrink2 | December 28, 2010 5:33 PM | Report abuse

my my, this is mostly just plain wrong.

Do politicians respond to pressure? of course, but let's look at how that pressure works.

Basically our big spending problem arises from the "focused benefit, diffused cost" issue. An example: The labor leaders sitting at the table with the city council use this to the max. The unionized city employees are focused well enough to get a juicy contract. the taxpayers are too diffuse to resist and they are represented by someone who would rather be a city councilman than a productive member of society so the deals keep getting made.

AARP? Same dynamic. the seniors are organized and they get their focused benefits. The taxpayers are diffused and must again live with politicians who will screw them for the sake of campaign contributions and super bowl tickets (or the equivalent thereof).

The bankers screwing the people? Easy, Anthony Mozila was part of a group that recieved focused benefits. Chris Dodd cared more for his personal wealth than the concerns of a diffuse group of taxpayers. Hence the system collapsed while we were paying the government to keep an eye on it. Mr dodd isn't a senator anymore, but why should he care? he'll be well cared for by his cronies.

but leave us not be bitter. Oh no.

Posted by: skipsailing28 | December 28, 2010 5:52 PM | Report abuse

"That is called China and we are undergoing a massive experiment now. Will their one party crony capitalism work better than our two party crony capitalism?"

One, oligarchy doesn't necessarily mean cronyism. Cronyism is always bad since it means people advance based on something other than merit.

Second, it depends on who the oligarchs are. If you have two different universes, one where GWB is the Emperor of America, the USA obviously will be worse off than a universe where Obama is the Emperor of America.

Posted by: DDAWD | December 28, 2010 6:09 PM | Report abuse

And the republican party declares aloud that they are there to 'serve the banks' -- and so they do.

the system collapsed under total republican control of the government. these were the people we were 'paying to keep an eye on it.'

Posted by: fiona5 | December 28, 2010 6:12 PM | Report abuse

You guys got it wrong. Both parties believe in the magic of a buried hot air balloon. If they keep digging the hole deep enough, eventually they will uncover the balloon.... and float comfortably back to the surface.

Hey, it's all I can figure out. The only other explanation is they are all straight-up morons elected by people who like them that way.

Posted by: baldinho | December 28, 2010 9:43 PM | Report abuse

Before November 2010: furious teabaggers on the news every night screaming about the deathly danger of deficits.

December 2010: GOP insists on budget-breaking tax breaks for millionaires, deficits be damned. Teabaggers' silence is deafening? Where's the outrage, teabaggers.

Bunch of hypocrites.

Posted by: wagner3792 | December 28, 2010 10:56 PM | Report abuse

"Why politicians don't deal with deficit"

Because they aren't spending their own money: they are spending borrowed China-bucks whose value they intend to deflate to zero, along with your personal savings.

Posted by: greg3 | December 29, 2010 12:31 AM | Report abuse

Once upon a time there was a frog sitting in a pot of water slowly coming to a boil which he was too lazy to hop out of. Just before it started to cook him, the frog leaped out of the boiling water and lived happily ever after.

Now go to sleep because you've got a busy day tomorrow of fiscal irresponsibly and piling debt on your unborn grandchildren.

Posted by: politbureau | December 29, 2010 1:59 AM | Report abuse

Really??? Politicians don't deal with long term issues because they are losers at the pols. Courage to deal with big problems isn't rewarded. Ask the Dems that voted for health care.

Posted by: zcezcest1 | December 29, 2010 3:17 AM | Report abuse

There are many stunning technologies being developed at US universities. If America funded those technologies instead of wars, there would be a blizzard of stunning new companies. America has learned nothing from the crisis. It spends wantonly on stupid things. It does not invest and does not get its financial house in order. 40% of new jobs growth from 2003-2007 were in real estate. Jobs come from investing in seed capital (there is none - ask any of the 100,000 entrepreneurs who can't raise less than $1million for their companies), manufacturing tax incentives, R&D and developing new technologies into new products to manufacture in new factories. The House voted to spend $160 Billion on Iraq & Afghanistan ($438 Million per day). If that is how the nation spends money, there is not a single job coming and America will have a 10% unemployment for the next 10 years. Basic common sense. Nobody in Congress has a clue how to create a job.

Posted by: betterdays1 | December 29, 2010 3:26 AM | Report abuse

Clinton dealt with the deficit. Country was in the best fiscal and military shape it had been in since Eisenhower. Clinton's military, left to Bush as a legacy, took Afghanistan inside of a few weeks. His work was undone by Bush. Get rid of the deficit and we become rich and powerful again-but there's no incentive for one party to leave money in the till for the next election, just so the other party can steal it like happened in 2001 and 2003.

Posted by: dyinglikeflies | December 29, 2010 7:16 AM | Report abuse

Monty Python's proposal to close the budget deficit:
"I would tax all foreigners living abroad."

Congress' the last 80 years:
"I think both sides can agree, we need to tax the children too young to vote or who aren't born yet."

It's acceptable to run a deficit short term and pay it back medium-term. What's immoral is to run a deficit for an entire generation to be paid by the next one.

Posted by: WmarkW | December 29, 2010 9:22 AM | Report abuse

Voters don't vote for politicians who don't bring home the bacon. They don't vote for politicians who tell them they have to pay more taxes, or who tell them the federal government can't do for them what they require.

Of course voters will vote for their local politician who tells them he's going to cut spending on people in other states, other districts. But not their own.

We have the politicians We The People voted for. That anybody out there who votes, for democrats or republicans, can somehow think it's the politicians fault and not their own -- well, that's where the problem is.

The American Voter is to blame. Politicians are just the symptom.

Posted by: eezmamata | December 29, 2010 10:49 AM | Report abuse

@WmarkW " a deficit for an entire generation to be paid by the next one."

This was a problem never foreseen by our Founding Fathers. They were doing well enough just getting England off our backs and then setting up a power system based on balancing the leaders/Executive, rule makers/Legislative, and rule interpreters/Judiciary. What they had no idea they needed to include was time/legacy.

“We do not inherit the earth from our ancestors, we borrow it from our children.” - Haida Indian Saying

It is time to think about and experiment with adding time into our country's power equation. It is thoroughly immoral to act in bad faith on behalf of those not present because they are not even alive yet and cannot represent themselves.

Global warming is another such problem - we are only starting to feel the effects of our irresponsible actions, and we actively work against Good actions because we won't be around to suffer the consequences.

The bottom line is we acting in ways the rules of the game do not address - it is time to admit the rules ARE broken and really do need fixing.

Posted by: gfbj1 | December 29, 2010 10:49 AM | Report abuse

I agree with poster skipsailing28 who pointed out the "focused benefit, diffused cost" dynamic is even more important than the "near term benefit, long term cost" one.

I would also add that while both dynamics have been and continue to be in constant operation they have been augmented in relatively recent times by the rise of the Republican "starve the beast" political strategy which does NOT oppose deficits but actually uses them as an indispensable tool for cutting spending favored by Democrats. When it comes to tax breaks for the wealthy or funding for the military-industrial complex and expansion of the empire, deficits somehow no longer seem to matter so much.

Posted by: Adam_Smith | December 29, 2010 11:51 AM | Report abuse

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