Congress: The Inmates Are Running the Asylum
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The Fiscal Times
August 2, 2011

If you weren’t convinced already, the negotiations over the debt ceiling ought to have cleared up any doubt that Congress is becoming increasingly dysfunctional. But the debt negotiations are simply the latest and most extreme example of a trend on Capitol Hill toward the use of unbending rules, triggers, ticking bombs, and other devices to compensate for dysfunction and the inability to make progress on important issues.

When people have trouble making commitments and then sticking with the plan, they often turn to incentives to help them reach their goals. For example, people frequently announce their intention to exercise every day, give up sweets, or quit smoking to friends, family, and co-workers. This increases the cost of cheating – people you care about will think less of you if you can’t keep your word – and helps create the willpower needed to stay focused on the long-run objective. Putting the decision in the hands of a third party or putting money on the line—for example, a bet that you’ll lose 10n pounds by a particular date--can also help you resist short-run temptations that interfere with long-run goals.

Policymakers rely upon these mechanisms, too. Paygo rules for Congress, Taylor rules for the Fedtrigger mechanisms,  pledges, binding up or down votes on committee recommendations, and the like are all designed to induce or force policymakers to choose positions they might otherwise not support.

Binding rules and other mechanisms can help policy in several ways. For example, economists talk a lot about the importance of Federal Reserve credibility. When the Fed says it is going to hold the line on inflation, it matters whether or not it is believed. A commitment to a policy rule with an explicit inflation target can help the Fed gain the credibility it needs to conduct successful policy.

And rules such as Paygo—which require any tax cut or mandatory spending increase to be offset by a tax increase or spending reduction--are designed to overcome flawed incentives by forcing policymakers to consider how to pay for the benefits they hand out to constituents.

For example, when a member of Congress votes to cut taxes, it improves the chances of reelection, so there is a short-run benefit—for the member. But it’s often a future congressman who ends up having to close the budget hole (it’s as though I eat the cake, and you gain the weight). In this instance, the device helps improve policy.

Still, good old-fashioned discretionary policy is much better than an unbending rule. For example, balanced budget requirements have benefits, but they also magnify business cycles, so these rules carry an even higher cost. Having the discretion to run deficits in bad times and surpluses in good is much better if Congress can find the will to raise taxes and cut spending when business is booming.

In addition, balanced budget rules can cause rushed decisions if the statutory deadlines for achieving balance leave little time for careful deliberation. This is also a problem with mechanisms such as strapping a debt-ceiling bomb to the economy. These policies create an unyielding deadline and often produce an outcome that is far from optimal, perhaps even worse than doing nothing. The problem is that once the public has become convinced that these mechanisms are the only way to get anywhere, a view supported by recent history, they can be used to try and manipulate the outcome. This can lead to a very one-sided policy or, if the strategy fails, a policy mess that must be resolved by whatever means are available.

But there is an important unanswered question in all of this. Many of the factors that have caused policymakers to rely on these mechanisms when making decisions have always been present, yet in recent times the use of these devices appears to be increasing. Why is that?

University of Oregon macroeconomist Mark Thoma writes primarily about monetary policy its effect on the economy. He has also worked on political business cycle models. Thoma blogs daily at Economist’s View.