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Why Promised Spending Cuts Never Happen

Monday March 12th, 2012   •   Posted by Craig Eyermann at 6:22am PDT   •  
Cheese, Glorious Cheese!

Source: USDA

The blog Kids Prefer Cheese is one of the real gems in the world of blogs dealing with economic topics. It’s primarily written by a pair of economists writing under the pseudonyms “Angus” and “Mungowitz” (in reality, “Kevin Grier” and “Michael Munger“), and what makes the blog so good is the authors’ use of humor to explain why the world is the way it is.

To that end, Angus recently explained why the promises of today’s politicians to cut spending in the future never result in spending being cut in the future (“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.

This is a key insight into the behavior of politicians, and especially, today’s politicians. It also hints at a way it might be possible to significantly reduce today’s excessive government spending through a jujutsu kind of strategy, where the instincts of politicians might be used against themselves to achieve meaningful deficit and national debt reduction.

But that’s another post for another time….

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March 2012