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Wednesday, April 5, 2017
How to Make the Government Behave Itself
It will surprise no one to hear that politicians do not always act in the public's interest. Elected officials, like all human beings, are selfish and acquisitive creatures. Therefore, if office holders are given an incentive to act in a manner that is destructive to the common good, public servants will readily evolve into public menaces. Alas, bad incentives lead to bad outcomes, and, lamentably, bad incentives are quite plentiful in the realm of politics. As a consequence, governance is not nearly as good as it theoretically could be.
This is an instance of what economists call the principle-agent problem. Elected representatives, the agents, are supposed to act on behalf of the citizens, the principles. Therefore, they are given the right to spend the citizens' money and to regulate the citizens' lives. Yet, aside from the crude and imperfect mechanism of elections, policymakers have very little incentive to fulfill their fiduciary duty of acting in the public's best interest. Because of this incentive structure, they are very likely to put their own self-interest before the interests of the public.
Yet, the tale of incentives does not have to be a sad one. On the contrary, it can be quite cheerful. For, just as bad incentives can bring about bad ends, good incentives can bring about good ends. Thus, if we improve the incentive structure faced by our representatives, we can enhance the quality of policy and improve the lives of ordinary Americans.
How can this be accomplished? There is no silver bullet. However, in this matter, the public sector may learn a great deal from the private sector. In large corporations, it is standard for executive pay to be linked to firm performance. So, if the firm does well, the people who run the company are rewarded. This helps to ensure that the interests of the shareholders and the interests of managers are aligned. As a result, the CEO and his underlings are much less likely to make bad decisions or to knowingly implement internal policies that are damaging for the company.
There is no reason this same basic technique could not be used for members of Congress. Just as CEOs are rewarded for strong firm performance, senators can be rewarded for strong national performance. Admittedly, this is somewhat more difficult for countries than it is for companies. In an investment context, everyone wants pretty much the same thing, money. In a national context, the question is more complicated because different people value very different things. Some people think public health is paramount. Others prize literacy above all else. However, in spite of our differences, there are some things most of us can agree on. For example, most of us would agree that, all else being equal, more economic growth is better than less economic growth. If you do not already believe this, I strongly recommend that you google the correlation between per capita GDP and any other significant quality of life measure. If we have more money, we can afford to spend more on art, clean air, and all the other things that make life worth living. Therefore, the promotion of economic growth is clearly in the national interest.
But how would we go about rewarding members of Congress for fostering economic growth? One possibility would be to link the salaries of members of Congress directly to the latest growth numbers. Under this scenario, a strong quarter would equal a fat congressional bonus and a weak quarter would equal a thin congressional bonus. This approach would be easy enough to implement but would also be highly problematic for a number of reasons. For one, quarterly fluctuations usually have nothing to do with federal policy and are instead determined by other largely unpredictable factors. As a result, instead of encouraging lawmakers to implement sensible policy, we would merely be handing politicians an annual lottery ticket. A more serious potential concern is that this approach could possibly encourage dangerous short-termism. Some policies, such as loose monetary policy, unsustainable exploitation of the environment, or deficit spending, can boost short-term economic performance while harming long-term growth prospects. We do not want to encourage our leaders to try and make a quick buck at the expense of future generations. Instead, we want to encourage them to act as responsible stewards of the nation's prosperity.
Therefore, I recommend giving members of Congress long-term equity in the nation's economy. This could be accomplished through the creation of special GDP indexed treasury bonds. Like traditional treasury bonds, these bonds would constitute a promise of future cash payment from the Federal Government. However, unlike traditional bonds, these would have no face value and would have no fixed interest rate. Instead, the bond would promise to pay a fixed percentage of nominal U.S. GDP at some date many years in the future. Illustratively, a GDP indexed bond for .000001% of nominal 2017 U.S. GDP would be worth approximately $180,000. In actuality, none of these bonds would come to maturity in the present year. Instead, they would only pay cash twenty or thirty years down the road.
At the end of each congressional term, every member of Congress should be issued one of these bonds. If the nation's long term economic prospects improve, the value of the bond can be expected to increase. If the nation's long-term economic prospects deteriorate, the value of the bond should be expected to decline. The direct result of this would be that every member of Congress would be financially invested in the success of the country. Therefore, if they enact policies that severely curtail growth, they would be acting against their own self-interest. This would help to better align the interests of lawmakers with the interests of the public.
What is more, these bonds would constitute a valuable new tool for assessing the impact of policy proposals. It is widely recognized that financial markets are better at processing information and making predictions than individual commentators or models. Therefore, if these bonds were traded on the secondary market, fluctuations in their value could provide vital insight into the likely economic consequences of various proposals and global developments. This information could provide guidance to policymakers and the public alike.
The total cost of this incentive pay system would amount to perhaps a few billion dollars per year. This is an incredibly trivial sum compared to the trillions that can be gained through better public policy. Therefore, this is a highly rational use of taxpayer money that ought to be pursued.