Clowns in Congress and a budget circus of our own

The US shutdown defies explanation, while our own annual set-piece is in need of reform

The last-minute deal to lift the US government shutdown and looming debt default has merely delayed the necessary decisions – and even then only until February. Photograph: Patrick T Fallon/Bloomberg

The last-minute deal to lift the US government shutdown and looming debt default has merely delayed the necessary decisions – and even then only until February. Photograph: Patrick T Fallon/Bloomberg

Fri, Oct 18, 2013, 01:00

It seems that it is not just in our own country that formulating budgetary policy is hard. Our difficulties might
be thought of as small beer compared to what is going on in America. The
last-minute deal to lift the government shutdown and looming debt default has merely delayed the necessary decisions – and even then only until February.

Just why the Republican Party has engaged in its near-suicidal tactics is something of a mystery: there are plenty of theories but even insiders are hard-pressed to come up with a coherent explanation.

The simplest narrative is that these people are crazy: they threatened an implosion of the US economy in the hope of getting a repeal of President Obama’s Affordable Health Care Act, a piece of legislation that has been passed by Congress, signed by the president, approved by the Supreme Court and followed by the re-election of Mr Obama. The really interesting question is why the Republicans thought they could get away with it.

In a week that saw the Nobel Prize in Economics shared by a pioneer of behavioural finance, there is an interesting parallel between the antics of the conservative wing of the Republican Party and the observed behaviour of some investors – ones who typically lose money.

Behavioural theorists have several identified traits of lousy investors. When investors find the world too complex to analyse, they often develop “heuristics”: rules of thumb that can often fly in the face of logic. Sometimes these rules of thumb work, but when they don’t the results
can be disastrous. For example, financial models in the US in 2007 always
embodied the rule of thumb that “house prices never go down”.

Poor investors are always over-confident: they believe their own press releases. In fact, they often possess a whole raft of psychological biases: they only see data that confirms their beliefs; they often double-up – “irrational escalation” – when they should, in face of compelling evidence, fold; there is even an “ostrich” bias, where the imagery explains itself. My guess is that many members of Congress would not make good investors.

Primary election
One or two commentators have suggested that the behaviour was, in fact, rational. If the only objective of a politician is to be re-elected, the hijacking of many congressional districts by extreme conservatives has led to a peculiar form of blackmail: an instruction to their Congressman to blow up the US economy or they will be deselected at the next primary election (it’s called being “primaried”).

If there is any element of truth to this, it speaks to just how dysfunctional policymaking has become. Or maybe I am merely exhibiting my own “just-world bias” when I think that politicians can behave better than this (or maybe it’s just naivety).

Another explanation has focused on the familiar fight over economic spoils: Washington has grown accustomed to battling over splitting an economic cake that typically gets bigger every year. Pessimistic commentators think that we are witnessing a new type of battle, one that is struggling to come to terms with
an economy that no longer grows.

Weird behaviour
A somewhat extreme hypothesis sees at least one belief of some conservatives receiving validation by their own behaviour: the “creationists” who reject
Darwin’s theory of evolution have made their point more eloquently than they realise. Their weird behaviour argues against the idea that human beings are evolving, at least in a positive way.

Whatever the explanation, we are a long way from rational policymaking.
The democratic process seems to have failed, presenting democrats with an
acute dilemma. While the handing over of monetary policy to technocrats has not offended (many) democratic sensibilities, the idea that we should abdicate spending and taxation policies to unaccountable bureaucrats is thought to be a step too far.

Our own little budgetary circus this week adds to an overriding impression that something is fundamentally wrong with whole process: it is crying out for reform. At the very least, consideration should be given to abandoning the annual set-piece. Within a medium-term framework, the tweaking of fiscal and spending decisions should be a continuous, through-the-year process. The quality of both debate and decision-making would be enhanced by a calmer structure.

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