Why Politics Should be Removed from the US Deficit (and Surplus) Policy

Over the last few weeks, we have all witnessed the train wreck that has culminated from all of the bickering going on in D.C. which ultimately ended in the US credit downgrade for the first time in history (at least since our recognition of this standard.) Now, about the only certainty going on in the aftermath is that there will be days, weeks... OK, years where we'll be hearing about who to blame this fiasco on. Take your pick: Democrats in the Senate, Republicans in the House, Tea Party folks, the President himself, and even the S&P itself (because there are those who think the downgrade was unfair.) Personally, I think all of the above have contributed in wreaking havoc, except the S&P. On that note, claiming the S&P downgrade as being unfair, is about like getting mad at your neighbors for calling 9-1-1 when your house is on fire. Moreover, placing blame now is about like wondering who started the fire or how it started, when what you really need to be doing is evacuating from a burning building. If the truth be told, the fire started long before this 112th Congress came into session. What they were arguing about wasn't that there was a fire, but how to pull the fire extinguisher pin and where to aim it. Now that they've failed to do that, let's run out of this burning building, catch our breath, and discuss where to go from here.


Despite where you put the blame, I think at this point we can all agree that the situation that we're in is a train wreck, and it is likely going to take quite a bit of time before we can solve this problem. Much like the ongoing problems that we face, nearly 4 years after the start of the recent economic troubles, it took a long time to get to where we are at, and it will take us some time to get us out. To make an analogy, we discovered that building houses on the slope of an active economic volcano, just wasn't a great idea. Thankfully, I think for the most part we were able to see this problem, take some recommendations from economic experts, and we've made some corrective adjustments. Time will tell how the ultimate outcome of these decisions will be. But, as it stands, I think most of us can agree that pulling back on reckless lending will help us overcome this problem.

Now today, what we face is a much bigger problem. I can say that my entire lifetime has been eclipsed by deficit spending. The couple of years in the late 90's where we had a "surplus" was just a mere blip on the radar. A lot of today's problems can be rooted in Keynesian economics. Perhaps, more aptly, I would say our problems lies within the misapplication of Keynesian economics within our federal government. I am personally a proponent of the theory behind the policy. I do believe it has been given a bad name, however, due to it's misapplication.

Keynesian economics is like this: Imagine a child wanting you to walk her to a park with a swing set, and in this case, you agree to go. Now, once there, she spots the swing set and runs over towards it, and hops on. As she swings, she has no problem getting things started on her own. Now, with the desire to go a little higher, and faster, she asks for a "push" so you agree and stand behind her at that perfect distance from the midpoint withe the perfect timing, and give her the correct amount of force.

Now, pause this scene in your mind for a moment. Imagine if you had stood closer to the midpoint. If you stood too close, it becomes increasingly difficult to push her back. In addition to that, although you can reach her, she is not in a position that is optimum to where your arms reach her back. Likewise, if you stand too far back, you simply cannot reach her at all. Now, once you've determined the correct position, you must match the frequency of the child swinging back. Pushing too soon, or too late can result in the opposite effect of what you are trying to accomplish. You can actually cancel out the force of her swinging which will result in her slowing down. Finally, let's assume you've figured out the correct position to stand in and the correct frequency, but now you must push her with the correct force. If you are pushing with too much force, suddenly, swinging is no longer fun for the child, as she begins to scream, begging to slow down, or worse yet, she looses her grip, and falls. Now, if you don't apply enough force, you might as well be sitting on the bench, watching her swing on her own.

Pushing a child on a swing is a very natural thing to do. Without being conscious of the physics behind it, most people can master this technique. Anyone that has mastered it, or otherwise has been on the receiving side of the beneficial push, will recognize that the enjoyment of the child, (and perhaps the one giving her the push) is maximized versus simply sitting on a nearby bench watching her swing by herself. Keynesian economics, in essence, is the practice of the government acting in the role of the pusher. This sounds great in theory, but when politics is involved, unfortunately, those variables, of distance, frequency and force are often mismanaged.

Right now, our nation is about like a family with two inept parents teetering on divorce, with three children all wanting a push on the swing set. Imagine the parents arguing with each other about where to stand, and how hard to push. The next thing you know, Dad gets hit in the jaw, because he is not paying attention, and suddenly their son is knocked off, and busts his nose on the ground. Now, you've got crying children, a bloody nose to clean up, and no doubt, some parents pointing their fingers at each, all to blame the other.

True Keynesian policy requires the dedication and finesse of a single person (or entity) with the best interest of the child (economy) in mind. Otherwise, with the misapplication, you might as well be sitting on the bench and let the economy swing itself, to minimize damage that can be done.

Currently, one part of the Keynesian economic equation that is controlled on a federal level is monetary policy which we have assigned to the Federal Reserve. Theoretically, the Federal Reserve acts in a non-partisan way to stimulate the economy, primarily by controlling the interest rates. If you set them too low, you risk over stimulating, and higher inflation, whereas if you set them too high, you can stifle the economy, and risk deflation. Economic stimulus and currency stability aren't the only roles of this federal institute, but they are no doubt, one of the more important ones.

Another component of the equation is fiscal policy, which is controlled by Congress, and ultimately approved by the President. Unfortunately, what we have learned to call this policy is "deficit spending." It's been called that, because that seems to be the only part of Keynesian economics that is ever applied. We have not learned to master the other side of this theory, and that is to learn to save (or otherwise let off) during years of growth. The idea is of Keynesian economics is for the government to spend, or otherwise stimulate the economy when it is down, and to back off when it is growing.

Since I've been alive, and even prior, we tend to give the child a push when needed, but then we run with the child to the other side, and keep on pushing, even though the momentum of the child would have been enough to carry her to the opposite point, as well as enough to make it all the way back to where you originally pushed her. The problem now is that the person doing the pushing becomes exhausted very quickly and before long he or she would want to give up. This is how we've mismanaged these goals in the past. Both political parties are to blame here, as both sides have done their fair share in spending, whether it's on entitlement programs that are out of balance, or military spending, or through mismanaged taxes. If one party pushes too hard, the other party attempts to run out and grab the child to slow her down. The next thing you know these two parties are at each other's throats. The child is then forced to choose a favorite parent (through elections) but ultimately they lock horns once again, and no real progress is made.

Now, with our current fiasco, we have discovered that it seems that neither party can get along. The situation is so bad, that the only thing that they could agree on, is to disagree, and to hold off on any real decision making until the after the next election cycle, (or beyond) to end this fight. This is the reason why the S&P downgraded the US. It was the lack of true leadership. Call it brinkmanship, call bad politics, or whatever you want, at the end of the day, our elected leaders failed to deliver. The S&P is simply looking at the situation, and they are placing their bets on the side that says, "I don't think this is going to get any better anytime soon." I don't think anyone can blame them for that. If history proves to repeat itself, then we'll see the same fight all over again in 2013 and beyond, unless we change something.

I propose that we change who makes the decision on how much of a deficit, or surplus we have and perhaps to some degree how we get to that point. What if we removed politics out of this decision? In a way, having politicians deciding what is right or wrong here, makes about as much sense as having congress vote on whether or not to call for evacuations for a given city, to get out of the way of an approaching hurricane. As a weather enthusiast, I can tell you that the professionals at the National Hurricane Center (NHC), rely upon all sorts of models, and data to make their forecasts, which ultimately determines who, if anyone, needs to evacuate. I can't even begin to imagine the chaos if this were some political decision. I've seen people argue over which models are superior, in the comment sections of weather blogs. Like myself, these people are usually passionate enthusiasts, but most of them aren't experts. Ultimately, though, none of the models are perfectly correct, yet the NHC gives fairly accurate forecasts, despite this. They are able to do so, because they are experts. For you sports types, just think of these weather blog commenters in the same way you hear from Monday morning quarterbacks, armed with the latest statistics. Perhaps Congress is a step or two above being a Monday morning quarterback, but do they really have the best long term goals in mind? More importantly, do you think they really understand what the economic data means and what policies to implement?

On the monetary policy side of things, the Federal Reserve, acts much like the NHC. When you read their commentaries, and their reports, they are written from the standpoint of economics, oftentimes with dry language that gets to the point. They make their monetary policy decisions based on this economic information and not politics. (Sometimes they are even known to oppose the party that appointed them.) On the other hand, for fiscal policies, at best, they just provide advice to Congress. At the end of the day though, Congress must still decide on fiscal policies. Unfortunately, even the best of them have a propensity to miss the mark, simply because politics stands in the way. As I've demonstrated by my swinging child example, any variable that is off can actually be counter productive. Even the Federal Reserve has missed the mark in the past, but for each target they miss, they learn to better adjust their aim. The NHC, likewise does the same for hurricane forecasting. Each year, though, they fine tune their craft, and forecasts do get better.

The understanding of economics in many ways, is not much different than weather. So, why not have more experts involved with the decision making. Why not have experts that have goals that last more than 4 years? I know the idea of stripping this from Congress seems, perhaps like it is a step too far, as if we are removing power from the our representative government. But, then these days, it seems that we cannot afford to give them the responsibility either.

My initial thoughts on this are to put more of this fiscal responsibility into the hands of the entity that we currently call the Federal Reserve. Why? Simply because they already have the capabilities to "read" the economy. They have the best tools to decide when to push, and when to step back and they have the experience to use those tools. They implement this information every time they meet to make adjust monetary policy, why not do the same for fiscal policy? Perhaps Congress would have some role in making these decisions, and they should, but perhaps their policies should fit within the recommended range of this entity. If the entity says to raise the taxes, Congress would simply ask "how high". Or better yet, if they suggested to lower them, Congress asks how low, or for whom. When it comes to having a deficit, balance or a surplus budget, this entity could decide which policy to follow, and by how much, and pass that guideline to Congress. Congress at that point, would have to hash out the details as they have always have done, but keep within the prescribed range. Perhaps this entity could hash out the details ahead of time, and create a few variable plans, and hand those to Congress who would then vote on them based on what would best serve their constituents.

I think these ideas are certainly something worth debating. Ultimately, in order for this to work, you would have to give this entity some teeth, enough to enforce their guiding budget principles. Not doing so would all be a legislative waste of time. I have no doubts someone would bring up the constitutionality of such a measure. If that is true, then maybe this is something that should warrant such a change. I do know one thing though: the status quo is not getting the job done, and I'm afraid we are running out of time. This is just my idea, but if you think of something better, then by all means, let's discuss that. We cannot afford to sit around and do nothing.