November 24, 2006

Government Spending Via a Credit Card Due from our Future Generations

Italian Minister of Economy & Finance Tommaso Padoa-Schioppa [120K PDF]:

I now come to the last and conclusive theme of my argument. Controlling expenditure always has to balance technical arguments and constraints, with the legitimate and competing claims (often drawing on very different ideological Weltanschauungen) on the resources managed, directly and indirectly, through the political processes. Balancing the two elements is a difficult exercise, as I experience on a daily basis.

Political economists have blamed the difficulty on the fact that the time-horizon of a typical political cycle is shorter than the one relevant on average for the society as a whole, in turn leading the legislature to attribute a smaller weight to the long-run implications of public expenditure policies than it would be socially desirable. Empirical evidence shows that discretionary public expenditure tends to rise before the elections irrespective of the political orientation of the incumbent government, and also in spite of the weak evidence of a relation between the size of pre-election spending and the election outcomes. The politicians’ short horizons and the long lag between reforms and their beneficial effects gives rise to a pervasive tension in expenditure control.

For Faust, the lure of Mephistopheles’ services is greatly enhanced by the fact that the price – albeit a terrible one – is to be paid later. For politicians, the lure of the support obtained through public expenditure is similarly enhanced by the fact that public debt will be paid (o reneged) by next generations, often well after the end of one’s political career. As to myself, having inherited a public debt larger than GDP, and having committed myself and my government to comply with sound fiscal principles, I scarcely can afford even to contemplate the possibility of accepting Mephistopheles’ services.

Fascinating and powerful!

Posted by James Zellmer at November 24, 2006 10:07 PM | Subscribe to this site via RSS:
Posted to Taxes