Category Archives: Politics

Getting What You Pay For, or Why Policy Makers Should be Making More Money

worth every pennyIn catching up with a long neglected RSS reader, which I’ll blame on the holiday season, this post from December by Scott Sumner on how much of a premium is justifiable in order to secure competent and efficacious central bankers caught my attention for a couple reasons. First, I agree with it. Second, it tangentially relates to topics that surface quite often: pay and term limits for elected representatives.

Sumner:

I don’t care how much is costs, even if we have to pay FOMC members a billion dollars a year, we will save much more money in the long run if we can get “strong” central bankers (pun intended) who have the vision to see what needs to be done, and who understand that effective policies require explicit target paths for macro aggregates.

And Matt O’Brien, who Sumner directs to:

That’s another way of asking how long it will take the economy to return to trend. Here’s where things get really depressing. According to Fed Vice Chair Janet Yellen, we won’t get back to full employment until after 2018. If we assume the output gap will steadily shrink until then, that leaves us with roughly another $4 trillion in lost income. Maybe more. If [Sveriges Riksbank Deputy Governor Lars Svensson] really could double our recovery speed, he’d be worth $2 trillion to us. Even if that’s being wildly optimistic, something on the order of hundreds of billions of dollars probably isn’t. Tell me that wouldn’t be worth paying Svensson a billion dollars a year. Maybe more.

OK, so this isn’t an original argument by any means, but here it is: people respond to incentives.

As is the case with central bankers, although arguably less so, Representatives and Senators serving in Congress have really important jobs and their pay only reflects that to a certain extent.

Washington D.C. is commonly referred to as a revolving door, in that many public employees comprising the upper echelons of our governmental infrastructure frequently take up jobs in fields intrinsically linked to their roles in government. Congressmen become lobbyists, SEC heads and staffers become bankers, those working in defense become private contractors, etc. In many cases the flow is circular as people transfer back and forth from the private to public sector over the course of their career—you know, like a revolving door! While it’s reassuring that these people develop an unquestionable level of expertise in their fields, it’s troublesome considering the adversarial stance these jobs require them to take against their former friends, colleagues, and employers. Congress should be passing legislation most in line with the public’s wants and needs, the SEC should be prosecuting ill-behaving financial intermediaries, and the Pentagon should be awarding contracts based on merit only.

Paying our public employees more, while not being a door jam, would slow its revolutions. Many find this argument revolting. It’s understandable. Bureaucrats and politicians are unpopular! Yet it makes sense. There’s the benefit which runs parallel to Mr. Sumner’s line of reasoning; high pay attracts the best and most capable. That’s certainly important. Legislating and rule making isn’t easy and requires talented people. Furthermore, the pay of a job can be safely assumed to be positively correlated with its prestige. We would be attracting the best people with the added benefit of incentivizing their staying for an extended period.

In the case of Congress, though, there are second order benefits that in my opinion outweigh the first. A higher base pay is more likely to leave members less inclined to be lured away during or after their careers as policy makers to work for the very sectors and industries under their purview, for whose benefit or detriment they still wield disproportionate influence following their service. A legislator who’s spent his or her career crafting banking regulation as a member of banking and finance committees knows their way around the letter of the law, not to mention has personal relationships with the other members who do as well. They’re hugely valuable to those who are under the effects of this member’s legislation. Why isn’t the case that we pay this person such a sum that to take a job as a banking lobbyist upon retirement would require a vendetta or heart full of malice? Strip from them any semblance of economic necessity to work for them. Bid the price of our policy makers’ wages up to a level at which the costs outweigh the benefits for firms and trade groups to make the hire.

Examples abound, just recently we saw Evan Bayh and Chris Dodd immediately take jobs as big time lobbyists after their terms expired—Dodd as head of the Motion Picture Association of America and Bayh as a consultant for the clients of the law firm McGuireWoods. Jim DeMint, even more recently, left the Senate in the middle of his term to head up the Heritage Foundation, a movement conservative advocacy organization, where he’ll be making over $1million/year. The optics of career switches such as these foment distrust among the public, regardless of whether any harm is actually being done in the conduct of their business with each other. Unfortunately, the distrust itself begets damage because our institutions of governance are weakened through eroding support. By aligning our politicians’ self-interest with the outcomes we demand, we can reach a healthier and more stable equilibrium.

Now, this is contingent upon your definition of what it would mean to be a better functioning Congress. Democrats and Republicans aren’t going to suddenly start agreeing with each other and usher in a centrist fantasy era. That’s not in the cards. However, if better functioning means a Congress that is less cozy with industry groups, less beholden to their largesse and employment opportunities, then we’re on the right track.

Which brings me to term limits. Term limits are prescribed as a means to limit corruption. This analysis entails a misunderstanding of what drives corruption, as people perceive it. Many think that simply being in D.C., living that “Beltway life”, naturally corrupts our representatives. That could be true, although that isn’t really a falsifiable hypothesis so who can say for sure! It follows, then, that the solution is to get them in and out; they’re voted in, go to D.C., do their job, and leave, allowing voters to put fresh blood in. Career politicians are evil.

I disagree. Again, politicking and legislating is hard. Weirdly enough, freshman members of congress go through an extensive training course upon their election, before their term starts. There’s a lot to know. Is the country better served by having a perennial team of amateurs running the show? A better question, I suppose, is whether they would even be running the show. Term limits wouldn’t apply to those in the background, such as staffers, who would have more experience and clout in a legislature constantly cycling through those who are supposed to be in charge. The same applies for lobbyists, who suddenly take on an air that says “let me show you the ropes around here, kid.”

Furthermore, a term limited member of congress has to do something after being a congressman. Most can’t just call it a life and retire. This puts them in a situation in which they are more dependent on others for, again, largesse and jobs following their service. Together, high pay and tenure provide a positive incentive to do a good job.

The political science literature agrees, term limits don’t accomplish much in the way of more effective governing.

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What Hath Austerity Wrought?

The politics of austerity is evolving and will continue to do so if the euro zone’s second biggest economy, France, elects a new government. Further evidence is on display in the Netherlands, where Mark Rutte recently tendered his resignation as support for his government’s newly proposed austerity budget collapsed.

Below is a chart from Business Insider showing the growth of real gross domestic product from 2003. Concentrating on the United Kingdom, I’ve added a line showing the clear shift away from stimulative fiscal policy to austere fiscal policy. Another thing this line clearly demarcates is the exact time of the 2010 parliamentary elections and the formation of a new Conservative government, headed by David Cameron, that swept into office on a campaign of reigning in government expenditures.

Note the cutoff in positive growth, the flattening of the line. Not surprising, really. You don’t magically increase aggregate demand in an environment in which private actors are overwhelmingly deleveraging by cutting the only type of spending your economy has going for it–government spending.

Now compare this recession to the Great Depression.

To put it plainly, the UK isn’t doing well. And neither are any other countries that have adopted policies of austerity in the aftermath of 2008, save perhaps Germany for dissimilar reasons.

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BREAKING: Social Security Nothing Like Ponzi Scheme

Of course, rudimentary logic will never stop a crank.

[Mother Jones]

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They got him a cake; It said “No” in pretty icing

The Onion:

WASHINGTON—After months of heated negotiations and failed attempts to achieve any kind of consensus, President Obama turned 50 years old Thursday, drawing strong criticism from Republicans in Congress. “With the host of problems this country is currently facing, the fact that our president is devoting time to the human process of aging is an affront to Americans everywhere,” said Senate Minority Leader Mitch McConnell, who advocated a provision to keep Obama 49 at least through the fall of 2013. “To move forward unilaterally and simply begin the next year of his life without bipartisan support—is that any way to lead a country?” According to White House officials, Obama attempted to work with Republicans right up until the Aug. 4 deadline, but was ultimately left with no choice except to turn a year older.

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One Graph to Rule Them All

This, from a couple of weeks back by YouGov, does a fair job of explaining why policy leans to the right when Republicans are equipped with adequate leverage, and why we’re still staring down the barrel of self-inflicted economic doom. It’s too bad that adequate leverage is so easy to come by in our system.

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