Combating the Deficit Asymmetry
Jan 18, 2011

Combating the Deficit Asymmetry

There is a fundamental asymmetry in politics that leads to excessive indebtedness. It is politically prudent to increase services and to lower taxes while cutting services and raising taxes is very unpopular. The result is this consistent pressure to increase the deficit; lo and behold, most governments have enormous deficits.

The question becomes: what changes can we institutionalize that combats this force and limits the excesses of deficits as a political inevitability. There is some merit to the idea of changing the culture - perhaps by popular demand to do so given the apparent chronic failure - however, the strength of this enduring and nearly universal phenomenon is such that the fickle tides of popular momentum do not appear sufficient on their own to curb this. Hence the need for more institutionalized reform, at least in part. Political movements that push to change the culture of deficit spending are still important and can be considered alongside the reforms.

There is actually quite a lot of institutional reforms one could implement that accomplish this but the problem is going to be that there is a tradeoff in the subsequent effectiveness. If one puts restrictions that make it harder to pass certain types of legislation we may have lowered the effects of the asymmetry but are not much better off if it is really hard to pass good bills. At the logical extreme, making it impossible to pass any bill would vacuously fix the asymmetry entirely. Given how so much of our political system makes it very difficult to pass effective bills (take senate filibustering in the US, for instance), we must be careful to respect this balance.

One major institutional reform sometimes proposed is to require legislative bills to be deficit neutral by law. Thus any bill to, say, cut taxes must be financed by, say, a cut in services. This is analogous to laws that sometimes exist at the municipal level which make planned deficits illegal. Usually this is restricted to certain classes of bills such as discretionary spending so one retains the ability to, say, increase military funding without financing in a war. One can further lessen this reform by allowing deficit creating bills if they are not increasing the deficit faster than previously - indexed to inflation. This allows one to accept the cost of existing continually deficit creating parts of government without making it worse.

Regardless of these exemptions, the one of the main problems of this proposal is as indicated that it makes bills massively harder to pass. An absolutely excellent proposal that, alone, would pass easily may not get passed because noone can agree where to make the unpopular service cuts or tax increases to pay for it. Insisting on only nonnegative financed bills inhibits the ability of this excellent measure to pass.

Cutting deficits is important and, long term, governments ought to be sustainable. However, there are many issues where short term investment results in a net positive long term. If the roof is leaking or if a kid needs to go to college, going into debt now is the best path forward for long term well being. We thus must ensure our system is not so rigid that in times of either great need or great opportunity for investment that we cannot accept short or medium term debt for this. The issue is preventing long term, structural, increasing debt. This is the second main issue with the deficit neutral bill requirement.

The Keynesian perspective illustrates this time frame well. Keynes argues for government spending during recessions which (this is the key other side often forgotten) is paid from savings and cutting spending during booms. It is a medium term approach that requires governments have the flexibility to write bills taking on short term deficits while being fiscally responsible in the long term.

To deal with these shortcomings, I propose to modify the above idea in the following way. Normally, have the fully financed requirement in for certain classes of bills. However, one can make exceptions to this requirement by requiring, say, a 60% majority instead. What this does is in times of need or whenever there is a clear consensus that a measure is positive even thought it isn't deficit neutral, it can still pass with the larger majority. Hence we avoid the most egregious of the "inhibits passing bills" problem. Yet it retains a significant pressure to force most bills to be neutral when they can't get the supermajorities. This is a balance between the two desires, but a reasonable one.

One can amend this further by allowing the decision to be procedural. The legislature could vote with a supermajority to treat an issue as outside the deficit neutrality rules but still have the final legislation - once ruled exempt - be voted on by a normal majority. This allows for law makers to agree via super majority that a specific issue is important enough to warrant exemption while not overly inhibiting passage by requiring the super majority for the final vote. The normal political process that determines details of bills remains as is in this scenario. In the case of a recession, say, law makers can agree via supermajority to pass a package of Keynesian spending bills, and then argue the details normally.

The basic asymmetry that exists which push politicians towards supporting deficit increasing policies needs institutional reform to directly combat.  This proposal curbs the worst of the excesses of deficit spending by forcing fully financed bills without impeding too far the ability to make important legislation in times of need or strong agreement.

Related Posts: A progressive approach to fiscal responsibility

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