Political Economy

The Dictator’s Handbook IV: Rule Now, Someone Else Pays Later

Oct 10 '11

Bruce Bueno de Mesquita and Alastair Smith are professors of politics at New York University. They write about the choices facing leaders in “The Dictator’s Handbook” (Public Affairs Press, 2011). The following is the fourth in a series of guest posts by Bueno de Mesquita and Smith applying the arguments in _The Dictator’s Handbook_ to provide a different way of thinking about current events:

Shoddy accounting and deceitful business practices are to blame for our woes. That is what politicians would like us to believe. It is certainly true that bankers and businessmen wrote loans they suspected would not be repaid; they buried debt on the balance sheet; and, in extreme cases, committed outright fraud. These actions, and hundreds of others like them, provide rewards today, accruing costs that must be paid in the future. Why run up so much debt? Easy, paying costs in the future is someone else’s problem. It certainly won’t be the executive’s problem if she does not survive at the top today. Business leaders happily – and smartly – mortgage their firm’s future to ensure that they retain control now. Lavish payments even when performance is poor is the norm, not the exception.

As much as politicians chide business leaders, they too love debt. It lets them buy loyalty now. Repayment is some future leader’s problem. Politicians hate to pay as they go. They love to make expensive promises that they don’t have to fund. For instance, politicians love to pay public sector employees with modest wages and fantastic defined pension benefits. This means less to pay today on their watch and more to pay on someone else’s tomorrow. What could be better!

A simple calculation reveals why politics, whether in corporations or government, heightens the desire for debt. Consider the consequences of government borrowing with a simple example in which there are 100 voters, all of whom pay taxes. Suppose a politician borrows $1000 today at 10% interest and spends that $1,000 to benefit her supporters who represent half the voters (the democratic ideal). Each of the 100 citizens must pay $1 in interest each year until the loan is repaid. The borrowed money is spent on pork that benefits only the 50 voters who favor the politician. That is equivalent to $20 per supporter, with half the cost paid by non-supporters. Imagine that the politician can hold office with the backing of just 10 voters. The same borrowing and spending policy now results in an extra $100 per supporter. Politics makes debt attractive, especially when few are needed to keep a leader in power. As the number of essential supporters contracts, eventually the market’s willingness to lend becomes the only constraint on debt.

Governance reforms are the most effective way to prevent government finances being held hostage by markets and to stop politicians piling up hidden debts. Doing away with gerrymandering would make Congress beholden to more voters. This would diminish, but does not eliminate, politicians’ desire to incur debt.