• Victor Bolles

The Non-Economics of Political Impasse

Well the Super Committee talks have failed to resolve the budget impasse. What a surprise! As if the goal was actually to resolve a severe economic problem rather than establish the party positions for the upcoming 2012 elections (while putting opponents in the worst possible light). This should be clear to everyone (and not just us cynics) from the fact that none of the draconian cuts demanded by the failure of the Super Committee take effect until 2013, after the election of a new Congress and possibly a new President. Then all bets are off and we will be back to square one. So 2012 is shaping up to be a year of hard fought and, often, rancorous debate. Will it be a year of reasoned argument regarding the economic future of our country and transforming the nature of our democracy or will it just be a stale rehash party positions which have long been cast in stone.

Unfortunately, none of the current hubbub has anything to do with economics or solving economic problems. It’s only about the two main parties pandering to their political bases; the Democrats trying to buy votes through entitlement largesse and the Republicans trying to curry campaign donations through tax cuts. None of this is based on any sort of sound economics no matter in which camp you pitch your tent.

Keynes believed in deficit spending but even he realized that there were limits and constraints to this strategy. Unlimited deficits would lead to socialism as Keynes noted; “Only in the event of a transition into Socialism would anyone expect government expenditure to play a predominant role year in year out”. Anyone with even a modest understanding of discounted future cash flows knows that the current and future locked-in entitlement obligations will bankrupt not only the wealthy but also the middle class and eventually the poor, casting our nation into third world status. Protecting entitlements from the budget debate makes closing the budget gap difficult when entitlements represent 40% of total budget outlays. How are we supposed to close that gap when entitlements represent 60% or 70% of total outlays?

On the other side of the coin, Hayek never touted tax cuts as a means to restore economic equilibrium and full employment. His remedy was market forces and the passage of time. The truth of this is confirmed by the $2 trillion of corporate cash sitting on the sidelines during this painfully slow economic recovery. It’s not high taxes keeping this money on the sidelines earning basically nothing. Even a highly taxed low return is better than giving up a substantial portion of your capital. The problem is uncertainty. Democrats are eager to note that America’s period of fastest growth (the post-World War II period) occurred during a period of relatively high taxation. But the confidence of the populace after defeating the axis powers was the over-riding force behind economic growth in this period, not the tax policy.

So not only are our elected representatives at an impasse, they are not even discussing the main issues that can make an economic difference. Perhaps, if political solutions to economic problems don’t work very well, we should try economic solutions to political problems as economics appears to be at the root cause of our current situation. If we can change the incentives of our representatives (or those trying to influence them) then perhaps we can get them to act in the national interest instead of narrow political interests. A good example would be the line item veto. If special interests knew that a specific piece of legislation designed for their benefit could be excised at the stroke of a pen, they would not be very motivated to lavish a lot of donations on officials that can’t deliver the goods. This would take more lobbyist money out of the election process than any law regarding campaign donations.

In fact, in all our discussions of the dysfunctionality in Washington, there has been no serious proposal to reform how congress operates. If congress is part of the problem why isn’t reform of congress on the table for discussion? Maybe it’s time to get at the root of the problem (i.e.; politics) before we try and tackle some very serious and difficult economic problems. Many elected officials and those running for office view 2012 as a time to try and gain an advantage over their political rivals, not as a time to discuss the serious issues that face our country. Maybe it’s time to send a message to Washington.

Publius, November 23, 2011

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