13
Jul
10

The Budget, Intentional Action, Commitment and Entrechment

I figured I could get a lot of birds with one stone on this post.

I decided to try and familiarize myself with some of the statistics about the federal budget, and I the June report from the CBO is very clear and intended for a layperson like myself.

The basic story I got was that debt as a percentage of GDP was very high in WWII, but that we did a good job in reducing this number over the next thirty odd years. I don’t know if this reduction was due to policy or just a rapidly growing economy. In any case, there wasn’t much debt compared to the amount of value our economy was generating, and the low point was around 1974. Then debt as a percentage of GDP grew again, with an average of about 40% for most of the last thirty years. Given that, the debt that Bush left the country with wasn’t that bad, and it didn’t even really grow much during his entire presidency (something that was definitely news to me since he initiated two wars). With Obama, the debt rose pretty rapidly and its now near 60%. However, this is mostly due to a shrinking economy (which hurts revenue) and the increased spending that recessions automatically generate due to increased unemployment claims, etc.

Anyway, the CBO predicts things will go back to normal soon, and that under a fairly conservative estimate, debt to GDP ratio will not change too rapidly over the next twenty years.

Still, my bigger and broader question: how will the debt to GDP ratio EVER get back to a reasonable level? In other words, I agree with people (who I guess are liberals at this point) that there really isn’t much harm to spending right now. It won’t really change things and the spending will increase GDP and thus increase revenue (partially, but not completely offsetting the spending). The long term difference is almost nothing. But this is because reducing the debt is an intertemporal action problem. At any one time, there’s no real reason to reduce the debt, but if we don’t do something, the debt to GDP ratio will eventually become high (probably raising interest rates and maybe, if other countries get worried, even spiking them). So, what to do?

I think one answer that has been ruled unconstitutional is entrenchment. In this scenario, one congress limits spending that a future congress can do. This is a really nifty trick because current politicians would not suffer any consequences from advocating such belt-tightening, but everyone would gain from a little foresight regarding this problem. For example, paying down the debt means less interest payments and so more of the budget each year is available to be spent on great stuff like roads, internet access, schools, and maybe new planes and bombs (if you’re into that stuff, I’m not really). One way entrenchment could be effective would be to mandate an almost imperceptibly small reduction in the debt to GDP ratio each year in the form of lower spending or higher taxes or whatever. As I said, politicians could commit to such a change without paying any real costs, but the long term effect of small reductions in the form of lower interest payments could be enormous. All sorts of specific proposals using entrenchment are possible.

As I said though, the supreme court ruled the constraint of a future congress by a present congress unconstitutional, and so to use entrenchment, there would have to be an amendment to the constitution. Good luck with that.

The notion of entrenchment also has an analogue in a philosophical problem concerning intentions. We sometimes intend to do something in the future, which is to say, we make up our mind that something is to be done at a certain future time. This lets us plan our actions more efficiently. For example, if I commit to going on a trip in two months, I don’t have to prepare everything at once. I can wait and buy a plane ticket one day and the hotel the next. This lets me maximize my time and also save money (if increased shopping time results in lower costs, which seems very plausible).

Intentions then are a type of interpersonal entrenchment. We let our current versions of ourselves make rules for future versions of ourselves. So, sitting full in my chair, I can decide not to have dessert in four hours time. The problem is of course that our intentions are unstable, because we can cheat against them. I might intend not to eat dessert, but when the time comes, go ahead and eat it. That’s why we have commitment devices, like leaving the room or throwing out leftover dessert right after dinner. Congress faces the same problem, without commitment devices to help them, they are always free to reconsider their options later, and so reconsider in favor of spending, because people are biased toward the present.

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