Recent primaries indicate that some big changes are on the way in November for the Republican Party and quite possibly the nation.  There is still debate about whether the recent shift in political winds is driven by anti-Democrat sentiment or a more general anti-incumbent anger among voters. One thing is clear, though: legislators at the state and national level are on a spending binge that has gone out of control. Republicans accuse Democrats of spending far too much and running up deficits, while the Democrats criticize programs like YouCut for being too incremental. This discussion is as much about politics as it is about sound finance, which is why dollars keep stacking up with no end in sight.

Much of the country's fiscal angst has been focused on the Democrats. While the Tea Party movement is technically non-partisan and certainly includes many that have voted Democrat in the past, the candidates aligning themselves with the movement to gain support in recent primaries are entirely Republicans. Many claim that Democrats are simply intellectually bankrupt when it comes to economics. The Wall Street Journal indicated a recent study that certainly points in that direction. There is much more to the story than good grades in Econ 101, however. Democrats are quick to point out that the Bush administration was far from being the paragon of fiscal responsibility, and the same can be said of Republican-run state governments. Rather than a dearth economic or budgetary knowledge, it is incentives that drive the abuse of the public purse.

No matter how enlightened politicians are about the need for fiscal restraint and the dangers of deficits, they will act according to their incentives. Unfortunately, our current system gives legislators at the local and national level little incentive to rein in spending and every incentive to be irresponsible.  No matter what promises they make may along the campaign trail, officials' primary incentive is to remain in office once they have landed there. Even if policymakers have benevolent goals to provide for the public welfare and the knowledge to achieve them, they have to remain in office and gain political clout in order to make those dreams a reality. This means that our officials need to provide tangible benefits to their constituents in order to win their votes. But what of the cost?

For a number of reasons, elected officials rarely suffer the cost of economically foolish decisions and policies. The tricky thing about economics is that it takes time for the effects of actions to show up; this is why so many people get the story wrong. For politicians, it means that they can spend far too much and put unsustainable programs in place without ever having to worry about facing the consequences. Politicians only face costs in the form of voter approval; over spending does not affect their pocket book or bank account one bit. But when the failures of their policies do not become evident for many years, they avoid facing any costs at all. This means the politicians can secure votes by providing benefits to groups in the short term through programs like Social Security, Medicaid, etc., and be long gone before the full bill comes due.

The problem of "kicking the can down the round" and pushing costs onto future generations has been with us for quite some time in American politics, but it is just one of many. Another factor that insulates policymakers from the enormous economic and social costs of their irresponsibility is the asymmetrical relationship between the tangible costs and benefits themselves.  As I've said, politicians get votes by providing benefits to specific groups: big labor, immigrants, etc.  These benefits are said to be concentrated. That is, a few people receive a big benefit from the policy. The costs, on the other hand, are widespread. When legislators vote to create a social program, the fund it either by borrowing or levying taxes. Either way, the costs are dispersed amongst the entire electorate (we all pay either through higher taxes or the loss of purchasing power via inflation). This means that politicians will face strong pressure from some groups to increase spending for their benefit, while the majority of voters notice only a small difference in expenditures.

These are just a few of the incentive problems that appear when financial decisions are made through the political process. An important lesson is that politicians, no matter how benevolent, will respond to incentives. The only way to achieve policies that make economic sense then is to demand them as voters. Unless the a majority of voters are able to agree that we want and need less from government, Republicans and Democrats alike will just keep on spending us out of house and home.