March 2, 2021

Economic View: Washington Should Try a Little Prudent Self-Restraint

This may just be a sign of democracy. We elect those who share our frailties. We Americans eat too much, take on too much debt, save too little and put off anything mildly unpleasant as long as possible.

Psychologists and behavioral economists have studied these kinds of problems for decades. We know, for example, that children have trouble waiting even for a few minutes to get three marshmallows if they can have one now, and they find it particularly hard if they have to look at those luscious treats while waiting.

We also know that people are more willing to exert self-control if they can defer the pain to the future. As Augustine famously prayed: “Lord make me pure, but not yet.” New Year’s resolutions are great examples of the resolve we can easily summon about our future selves, especially when suffering from a hangover.

Of course, experience tells us that resolutions rarely work for long. You may have to arrive early to get a spot in your Zumba fitness class the first week in January, but in a few weeks things will be back to normal at your health club. This is the essence of self-control problems. Our great intentions are fleeting.

Members of Congress realize that their institution has grave self-control problems, and they even agree about the cause: bad decisions made by previous Congresses, especially decisions made when the other party was in control.

Now, with the debt ceiling debate still fresh, it is not surprising that Congress and some voters are interested in making resolutions about the behavior of future Congresses. Unfortunately, there is little that has been done so far, or is under discussion, that should give anyone much hope that Congress’s promises will be any more effective than those we make on New Year’s Day.

Following Augustine’s dictum, Congress has mostly opted for future austerity. The cuts that will be imposed if the Congressional “supercommittee” cannot agree on a plan would not actually begin until 2013, and there is nothing to prevent future Congresses from undoing these plans.

The only reason to expect commitments being made now to have any effect is that they change the status quo: Congress has to act to undo them. But that puts these plans on exactly the same footing as the so-called Bush tax cuts that are scheduled to expire at year-end, 2012. Those cuts will expire unless Congress changes its mind.

Indeed, the celebrating by conservatives regarding their “victory” in the debt ceiling deal is as premature as the teeth-gnashing by progressives. All that has happened is that we have wisely chosen not to voluntarily default on our debts, at least not yet.

So it may be reasonable to ask whether there is something more substantive Congress can do to deal with its budget problems. A solution favored by many Republicans is to pass a constitutional amendment requiring a balanced budget. The plan’s appeal is easy to understand. It promises much-needed discipline, and best of all, it would take many years to approve. Maybe it should be called the Augustine amendment.

But do not be fooled. Even if the amendment could be put in place immediately, it would be a bad idea for two reasons. It wouldn’t work, and we wouldn’t want it to work.

To see why it wouldn’t work, just look at other governments that already have such rules in place. Start with states and municipalities. Even with balanced budget rules, they collectively have debt of about $3 trillion. Most states are sensibly allowed to issue bonds to cover major building projects such as roads and schools, but this can allow debts to mount. Yet these visible obligations are just a part of the problem. Debts of roughly the same magnitude are hidden in the form of underfunded pension liabilities once the official estimates are corrected for some dubious assumptions about risk. No balanced budget rule can prevent abuse via creative accounting.

If you think such rules would work better at the national level, look at Europe. When the European Union was formed, member states were required to limit annual deficits to 3 percent of gross domestic product. We are now seeing the difficulty of enforcing such rules.

More important, even if a balanced budget rule were enforceable, it would be bad policy. Consider the case of household spending. Most of us are faced with a lifetime balanced budget constraint. Unless we manage to die with negative net worth (or declare bankruptcy), the amount we can spend and give away during our lifetimes is limited to what we earn or receive as gifts.

Now, would it be a good idea for a family to adopt a rule that spending cannot exceed earnings in any calendar year? Obviously not. A prudent household should save during good years to allow for spending to exceed income in years with unexpectedly low pay or high expenses like college tuition.

Governments should follow the same policy. In booms we should run surpluses, as we did in the 1990s, a feat achieved with a combination of spending cuts such as welfare overhaul and revenue increases, some a byproduct of a stock market bubble. Those surpluses allowed for greater spending during the recession of 2001. But when that recession ended, the federal government did not begin saving for the next one. Instead Congress cut taxes and increased spending, leaving nothing saved when the 2008 financial crisis hit.

THAT history led to our current mess. With the excess capacity in the construction industry and millions of unemployed workers, we have the unique opportunity to buy roads, bridges and schools “on sale.” Instead of creating jobs now and improving our infrastructure for the rest of the century, Congress is debating futile resolutions about future chastity.

The bottom line is that in matters of governmental self-control there is no real substitute for willpower. If we want to balance the budget over time we are going to have to elect adults to Congress who are prepared to invest now in our country’s future and then, when the economy picks up, take the necessary steps to get spending in line with revenue. The question is whether politicians who act like adults can win elections.

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