Streetwise Professor

July 18, 2011

Only Suckers Enter Into Unenforceable Bargains–Especially If They Are “Grand” Ones

Filed under: Economics,Politics — The Professor @ 2:52 pm

The character Wimpy in the old Popeye cartoons was famous for the line: “I’ll gladly pay you Tuesday for a hamburger today.”  Wimpy Obama would never play for such piddling stakes as hamburgers, or promise to pay as soon as next Tuesday.  His version is: “I will gladly make a two trillion dollar spending cut in 2020 for a trillion dollar tax increase today.”

The obvious problem with such “grand bargains” is that they a) they involve one party performing first, by making a commitment that is hard to reverse (by raising taxes, which is costly to reverse),  and b) have no mechanism to enforce the promise by the other party to provide something of equivalent value at a later date.  Only suckers make deals with Wimpy to pay today exchange for the promise of getting paid back in the (distant) future, when that promise cannot be enforced.

In commerce, the development of credible legal systems, or private enforcement mechanisms (e.g., commodities and securities exchanges), or private arrangements to enforce performance (e.g., exchange of bonds or collateral) was required to support a viable trade in asynchronous promises, such as credit arrangements or forward contracts.  And even in the presence of such institutions, many deals that would be mutually beneficial if consummated and performed do not get done because these mechanisms are too costly.  For instance, some kinds of obligations are non-contractible, because courts cannot verify performance.  So those deals don’t get done.

In politics, long term deals involving asynchronous performance are much more difficult to achieve because it is much more difficult–and often impossible–to enforce them.  Current political actors can seldom bind future ones: tomorrow’s Congress can just reverse a decision made by today’s, for instance.

A famous paper by Marshall and Weingast argues that many features of Congress, such as dominance by committees, can be explained as mechanisms that make trades between Congressmen more enforceable.  (Not that that’s necessarily a good thing, because many intra-Congressional bargains are deals between A and B to steal from C.)  But even these mechanisms cannot support all mutually beneficial bargains, and what’s more, as Marshall and Weingast note, institutional changes in the 1970s undermined the power of the committee system and therefore shrunk the set of deals that could be enforced.

In the current debt limit standoff, the problems of enforceability are insuperable.  There is no way in hell to make Obama or the Congressional Democrats or future Congresses or future presidents live up to promises to cut future expenditures.   And to put it mildly, Obama’s incentives to promise today and renege tomorrow are huge.  He wants a deal today to reduce the salience of debt and deficits as a campaign issue in 2012.  If that succeeds, and he is reelected, he has every incentive to renege.

Which means that the only feasible deals are those that involve contemporaneous performance–e.g., raising taxes and reducing spending in this year.  Feasible for non-suckers, that is.  And if that deal is not acceptable to Obama, then there should be no deal whatsoever.  It would be better to raise the debt ceiling with no strings attached, and fight it out on the tax-and-spend issue in 2012.

And it is pretty clear that Obama is not serious about contemporaneous spending cuts.  All of his programs–including idiocies like high speed rail and his various greendoggles–are sacrosanct.  He has offered up a risible $2 billion in specific cuts for 2011.  He keeps bleating about how any cuts will throw the nation into some sort of Dickensian nightmare.  Funny, I lived when the government spent 19-20 percent of GDP, and it didn’t seem all that Dickensian to me.  My grandmother wasn’t ejected into the cold.  And kids went to college.  Really!  I’m pretty sure about that, having taught them in their multitudes well before government spending totaling 25 percent of GDP was considered the bare minimum for a humane society.

No, Obama operates under the ratchet theory of government.  Once ratcheted up, spending cannot ratchet down.  Spending that was not missed yesterday is imperative tomorrow, once it has been adopted today.  Which means that doing any deal based on Ratchet Man’s promises that he will cut future spending is a mug’s game.

Addressing the nation’s long term–and not really that long term, actually–danger of government insolvency cannot be done in the context of annual budgeting.  The crux of the problem is entitlements, and attacking that problem requires fundamental restructuring of the programs, where this restructuring will likely require features (e.g., supermajority requirements) that make it difficult for future Congresses and administrations to renege on the commitments inherent in the legislation mandating the restructuring.

That will not happen while Obama is in office.  Period.  Which is exactly why 2012 is the only thing that matters, and that doing a deal today or forcing a triggering of the debt ceiling that will have extremely unpredictable economic and political consequences is foolhardy.   Unfortunately, those who desire most ardently to cut back on government and its growth are those who most ardently press for a deal or a showdown that could lead to a shutdown.  Although the frustration is understandable, this is short sighted and counterproductive.  It is vital to keep the big things in mind, and to avoid battles that risk the war.

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  1. I just do not see how this ends well. If BO is re-elected then game over. If BO is not re-elected do you really think the fundamental issues will be addressed in a reasonable manner by whomever is in the White House in conjunction with Congress and a supportive public. Sadly it seems to me we have passed the tipping point since Obama took office and there will inevitably be a catastrophic failure of the US system. This suggests that BO has already accomplished what he set out to do. What will come after I have no idea but BO certainly knows what he wants to rise in place of the current system.

    As soon as US credit is downgraded and debt service becomes an even larger percentage of tax revenues it will be bad and very quickly. I am sure some will elect to leave the US so long as they can do so with wealth intact. There may be calls for secession. California is already so far gone culturally and politically that it is in many ways not now part of the US as many people know the US. Illegal to sell goldfish, teaching gay history in kindergarten, etc, etc. There is even widespread talk in Socal proposing secession from the state.

    As I understand it nearly 50% of US households are not paying any Federal Income Tax. This group certainly has incentive to see others pay more taxes to maintain or to even increase entitlements. Their are factors in play that could lead to the Balkanization of the US. In order to arrest these trends would take nearly miraculous leadership and I do not see anyone in play that fits the bill. BO has done a spectacular job of dividing the country.

    Comment by pahoben — July 18, 2011 @ 6:12 pm

  2. The Republicans are economic terrorists.

    It’s really as simple as that.

    Comment by Sublime Oblivion — July 18, 2011 @ 7:23 pm

  3. I do not think your supreme leader agrees with you. Putin seems to consider the US Federal Reserve as economic terrorists in their support of this administration’s policies.

    Their is one Republican that articulates fiscal conservatism well and that is Marco Rubio whose family suffered at the hands of the Soviet puppet regime in Cuba.

    Comment by pahoben — July 18, 2011 @ 7:38 pm

  4. The Republicans only control one leg of government.

    Comment by Jeff — July 19, 2011 @ 4:19 am

  5. It doesn’t look as though the bond market is reacting to any of this.

    Comment by pahoben — July 19, 2011 @ 6:07 pm

  6. I’m a little late to this party, but when the President says he’s proposing to cut some amount of spending, does it really mean anything at all? Since his budget involved major increases in spending (something like $4.6T/yr vs. today’s $3.8T)and it was rejected in the Senate 97-0, I figure he isn’t offering to cut relative to that number. I also assume he hasn’t implicitly accepted the House’s budget by offering to cut spending relative to that. The Senate has not produced a budget, so he clearly isn’t offering to cut relative to that. So is he saying, in essence, that he’s willing to cut $X from some number that he has in his head and which he will not divulge? It seems as though he can simply point to any level of future spending and say that it is less than some number that it is less than and proclaim success. Am I missing something?

    Comment by John — July 21, 2011 @ 12:00 pm

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