Fiscal Cliff 2013: The Untold History

Political theater makes for good debate, and the fiscal cliff is no exception. But as we argue the merits of one policy or another, we’re missing something important.

Much of the political dysfunction we see on a regular basis has a systemic root; the way in which our political system makes decisions is subject to particular biases.

The original impetus for the debt ceiling was an amendment to the Federal Reserve Act of 1913 allowing the Fed to purchase U.S. debt. Empowering the Fed to directly hold U.S. bonds was a way to help finance WWI, but there was a fear that this might allow the government to issue dangerously high levels of debt in the future.

The solution was a statutory limit on debt: the debt ceiling. The only problem was that Congress just raised the limit whenever it pleased.

The whole exercise was something like bringing home a box of girl scout cookies and telling yourself that you’ll only have one each day; it was a rule waiting to be broken.

At this point, we’re only a few more cookies away from diabetes and so we’re finally getting our act together. But just like it’s hard to put down the box, it’s hard for the government to alter its behavior.

This kind of institutional momentum is not unique to legislatures. Bureaucracies tend toward perpetual mission creep and budget expansion through a logic of their own.

Bureaucrats have to justify their budgets each funding cycle or risk suffering cutbacks if they appear not to need all their allotted funds. Whether the official in question is an evil career bureaucrat or a faithful protector of the public good, both will be pushed to act the same way.

While the first is concerned with making the bureau as big and important as possible to support his self advancement, the second just cares about having the future resources to effectively serve the public, even if that means finding somewhere to spend a little extra now.

This example is instructive as it shows how two very different people in the same situation can be driven toward the same course of action, an important lesson for political reform.

Our biggest political problems are these kinds of flaws that encourage bad outcomes no matter who’s behind the wheel. These tendencies drive large parts of our political system in unsustainable, self-destructive directions until we either hit reality or reality becomes so apparent we manage to pull back.

In looking at the current situation, we have to realize that the fiscal cliff is not the real crisis; the fiscal cliff is the system’s best effort to turn back from the path to default or hyperinflation.

But if the drama is any indication, the system’s internal logic guarantees a difficult and costly process; that’s why the logic is what has to change.

While I have my own ideas on the matter, simply focusing attention on institutions would be a start. Ultimately, if we want to design better policy, we first need need better politics.