Sunday, June 3, 2012

Why politicians are driving us off a fiscal cliff

Anyone who has read this blog knows that I worry about entitlements, the automatic spending programs that are growing much faster than our ability to pay for them.  I have run out of metaphors ("fiscal train wreck," "demographic time bomb," "debt explosion") trying to warn politicians, and my friends who vote for them, about our unsustainable entitlements.

But last week I read an article in Forbes that explained why my entreaties are falling on deaf ears.  It even has a name, the "Curley Effect." Coined by Economists Edward Glaeser and Andrei Shleifer in 2002, it is the political strategy of “increasing the relative size of one’s political base through distortionary, wealth-reducing policies.” Here is how it works:
... Let’s say a mayor advocates and adopts policies that redistribute wealth from the prosperous to the not-so-prosperous by bestowing generous tax-financed favors on unions, the public sector in general, and select corporations. These beneficiaries become economically dependent on their political patrons, so they give them their undivided electoral support—e.g., votes, campaign contributions, and get-out-the-vote drives.

Meanwhile, the anti-rich rhetoric of these clever demagogues, combined with higher taxes to fund the political favors, triggers a flight of tax refugees from the cities to the suburbs. This reduces the number of political opponents on the city’s voter registration rolls, thereby consolidating an electoral majority for the anti-wealth party. It also shrinks the tax base of the city, even as the city’s budget swells. The inevitable bankruptcy that results from expanding expenditures while diminishing revenues can be postponed for decades with the help of state and federal subsidies (“stimulus” in the Obama vernacular) and creative financing, but eventually you end up with cities like Detroit—called by Glaeser and Shleifer “the first major Third World city in the United States.”

Its the incentives, stupid, which are similar in Nashville, in Detroit, and in Washington DC.

HT: John Tamny


  1. The Forbes article is here:

  2. And there's this:

    The first running of the IndyCar Detroit Grand Prix since 2008 was red-flagged this afternoon after a piece of the track started to crumble, causing driver James Hinchcliffe to go flying into the wall. ..., he was not happy about it. Indy's return to Detroit's Belle Isle course was supposed to be another signal of the rebirth of the American automaker. Instead, it's just been a reminder of Detroit's failing infrastructure....

  3. Wealth-reducing policies can't simply be drawn into a left vs. right comparison, however, as this article illustrates:

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