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Banbury Cross

a pillow for lost thoughts...

Archives for: January 2015

How to balance a budget

The proverbial overspending of governments throughout the Western world has been a problem for most of the past 100 years. Now that the issue is coming to a head with national balance sheets on the brink of collapse and central banks going to extraordinary measures to keep the interest rates from exploding, we should seriously consider the way our political system operates. The sincere and effective effort to reduce government spending should be part of this debate. Something beyond the usual good intentions and empty declarations.

The debt in terms of GDP has been creeping up to the point of no return. Japan is running on fumes and an increase of interest rates on its 10Y note by 1% would trigger an instantaneous implosion. The Greek problem has been the staple of the global financial equation for the past 5 years. Italy, Portugal and Spain are barely keeping their head above water. So how do we force politicians to behave reasonably.

It is known that people respond best to stimuli. Most employers will tell you that a reward one receives for one's efforts should be proportionate to the quality of work. If we accept the premise that a large part of politicians job is taking care of the public purse, then we can set up a regime in which it will be desirable for politicians to behave like good stewards.

The principle is very simple. The larger the deficit, the worse job the politicians did. So the most natural idea for the correct incentive is for them to have their pay depend inversely on the size of the deficit. For every percent of the deficit, I would subtract certain multiple of it (say 5 times for easy calculation) from their pay.

Here is how it might work.

Let's suppose that the deficit is 1% and they make 100k. Then we would subtract 5x1% = 5% and they would take home only 95k. But if the deficit was 6%, then we'd subtract 5x6% = 30% and they'd bring home only 70k. That would make them think twice before spending like drunk sailors.

Now if only we could find politicians with balls big enough to implement it.

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