PPE Reading Group – September 5th, 2017

The PPE group engages in weekly conversations with diverse points of view in an effort to deepen our understanding of the intersection between politics, philosophy, and economics

This week in the Philosophy, Politics, and Economics reading group, we read and discussed the first couple chapters of Richard Wagners, Deficits, Debts, and Democracy: Tangling with Tragedy of the Fiscal Commons. Wagner discussed causes as to why the United States has been continually running deficits since the 1960’s. On the discussion board, the conversation center around two main topics: Short term over long-term thinking and the prisoner’s dilemma of budget making. Next week, the group will be reading and discussing “Collective Action and the Evolution of Social Norms” by Elinor Ostrom and “The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development” by Barry R. Weingast.

Click “continue reading” for a selection of our conversation:

Long Term and Short Term thinking:

Jim Brennan:

As stated by Wagner (p.3), until the mid 20th century the standard was for there to be a surplus in normal times, and deficits were anomalies that only occurred during times of depression and war. That ended more than fifty years ago, and we are now in a period of constant deficit.

Katherine Bonn:

 The presence of budget deficits in excess of a reasonable amount – reasonable in this case deemed 3% of a given country’s GDP by the EU – does in fact imply a crisis on the fiscal commons. For the past 50 years, public prudent conduct, living within one’s means as defined by Smith, has been seemingly ignored when national budgeting is concerned. As emerging economists we are prompted to ask why is this so?

Kevin Dowling:

The illogical preference for short-term benefit over greater long term cost seems to me to be a commonly found human pathology reflected in the organizations we create. As a general principle, economists expect firms (& individuals) to engage in cost benefit analysis when making decisions. However, the calculation becomes more difficult when the range of time being considered is expanded.

Renato Morais:

I read Kevin’s post and I could not agree more. I would like to add that in the political area, where the fiscal budget and many other decisions like the social security benefits system are made, this problem is even larger. The average person does make decisions in which the long term cost completely outweighs the short term benefit, however I would argue that politicians make this type of decisions more often than the average person, because they are incentivized to do so. I am not referring to decisions that impact their personal life, but decisions that impact the government and society.

Carly Rademacher:

I fear that “functional finance” is choosing short-term solutions in neglect of long-run outcomes. At some point these debts are going to have to be payed and the deficit will have to be reconciled. I fear that the short-term behaviors we witness in a political system that has so heavily integrated itself into fiscal policy will simply push this necessity off to the next generation and the next and the next until the debt becomes unmanageable.

Sarah Starkey:

 Wagner makes it clear in his text that he feels most people are far more invested in the short-term future than the long-term. With the ever-changing hands of government, it is not unlikely that this “long-term” goal has been seemingly ignored.

Is the Federal budget like a prisoners dilemma?

Patrick Moloney:

Social Security is designed to affect every individual, so everyone is affected by the outcome of political decisions. This establishes Social Security as a sort of prisoner’s dilemma – we are dependent on others. Through aggregate decision-making, it is not far off to compare this directly to the prisoner’s dilemma – there are two choices for a voter to make by the end of elections (Democrats and Republicans are far from covering the entire spectrum of policy options, but they do serve as opposites for one another towards spending on programs A,B,C.)

Nicholas Billings:

 The model of the prisoner’s dilemma can also be adapted to fit, in that all have some desire to see the fiscal commons preserved — but all have a greater desire to see those resources put toward their favored objective. The issue with the prisoner’s dilemma, however, is that the fiscal commons are not depleted because of a communication problem. The undesirable outcome in the classic game occurs because the parties cannot collaborate to devise their strategy, and therefore both arrive at suboptimal outcomes.

Allana Hall:

 The dispersed costs and concentrated benefits of many government expenditures make financial decisions seem relatively insignificant from an overall perspective, with voters averse to raising taxes and politicians that respond directly to their sentiments.

 Katherine Bonn:

… most people are not in favor of raising taxes to finance current necessities. The politicians, consequently, raise current budgets so that the public can reap the benefits and instant gratification, while postponing costs to later generations….

 Kevin Thomson:

I’m not sure what I think of this, but there is an argument out there that continue deficits are fine. Interest rates are low, US treasuries are an international standard, so why not? If you were offered the same interest rates as the US, you were always going to be the same age (assuming the American gov. doesn’t end in the near future) wouldn’t you take it? In that case, the budget isn’t really a commons because nothing is being depleted and there is no long term sub-optimal outcome that mirrors a commons/prisoners dilemma system.

Jim Brennan:

The argument can be made that it is fine to run deficits consistently as long as it is an acceptably low amount, in order to finance expenditures that will be sufficiently beneficial. However, if deficits are the normal mode of government spending and there already exists a considerable debt, what is to be done in case of war or depression? There is no cushion of reserves to fall back on, no leeway in government spending.

 Katherine Bonn:

The question now to ask is: how can we solve the tragedy of the fiscal commons? Is it not possible given the complexity of the state and need for public goods? Are we able to migrate back to a system of sound finance through reducing deficit spending over time?