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Wednesday, December 7, 2011


Theo Vermaelen, a professor of the elite French University Insead, illustrates a central point regarding government and human nature.

Incentives matter.  For politicians, too.  He says we should pay them for fiscal discipline.

His plan is to compensate politicians with bonds issued by the countries they rule. Then they bear the risk of their actions in the form of actual, real financial losses. 

Professor Vermaelen writes that this "could be used to provide a counterweight to politicians' tendency to buy votes with other people's money".  Does that sound Tea Party-ish to you? It does to me.

His sentiments are a reaction to what insurers refer to as moral hazard.  Politicians are inclined to take more risk with taxpayer money because spending increases their pleasure (chances of re-election) more than the pain of the bills they incur.  After all the bills could be pushed into the future seemingly forever. 

Professor Vermaelen's comments trigger a second thought, this one a mere synaptic stroll: politicians often do not represent their constituents well. Economists refer to this as the agency problem. 

People (taxpayers or stockholders) may think they've hired an agent (politicians or management) to carry out their instructions faithfully. But the agent has his or her own personal goals that often conflict with their employer.  Those personal goals get in the way.  Hence, in the political case, runaway spending results.

And this leads to a third closely related point: government has its own economic interests separate from its citizens.  When those interests are not perfectly aligned, government pursues its objectives first. Citizens are treated as neglectable supplicants.

Read Professor Theo Vermaelen's piece.

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