Thursday, March 08, 2012

Unicorns & Rainbows

Ezra Klein has identified why the government didn't "fix" the great recession; Politics:

The compromise was clean and obvious: Investments and tax cuts now, coupled with a much-larger deficit reduction package that would kick in once unemployment fell below, say, 7 percent. 

 What doomed this package wasn’t a theoretical divide. I spoke with many freshwater economists who thought a package like this would be sensible. Rather, it was politics wot (sic) done it. 

 This type of storyline refuses to recognize the simple brutal fact that current politicians cannot commit future politicians to a specific course of action. The proposed "package" was simply not credible because the back loaded pain is unenforceable.

Advocates of deficit reduction (I'm not saying that it's the right policy) could clearly see that the only policy that would actually happen for sure was a big increase in the deficit and were completely rational in opposing such a plan.

Absent a credible commitment mechanism, promises of future actions are basically worthless. This is an example of the "asynchronous exchange" issue Oliver Williamson has elucidated. Some call it the "St. Augustine problem" ("Lord grant me chastity, but not just yet")

The phenomenon doesn't rely on there being different politicians in place when the deficit reduction is supposed to kick in. The exact same politicians can simply decline to enforce their previous agreement.

Let's see what happens to the "automatic" sequestration.

If you really want deficit reduction (again, I'm not saying that it's the right policy), all you can do is try to get it done NOW.


Anonymous said...

You could say the same thing about an agreement with simultaneous tax increases and spending cuts. If one side or the other gets some greater advantage in the future, they can erase what they don't like.

In practice cuts in SS-Medicare-Medicaid promise to be more durable than cuts in discretionary spending. (In that case any projection beyond the coming year is meaningless, IMO.) So dessert now, spinach later is not crazy.

-- Miracle Max

Unknown said...

i think you got the rationale wrong, when obama came in christie roemer said the most effective way to get the economy growing would be tax cuts. Great said Pelosi and Reid, but we must only give them to the lower income groups. "That would not work" said Roemer as more than 50% of discretionary spending is in the hands of the top 20% income group so we have to give them a big cut. "DOA said Pelosi and Reid and thus we got infrastructure spending, nothing shovel ready and a disaster IMHOl.