For Politicians, Bad Ideas are Low Risk and High Reward

– September 10, 2019 Reading Time: 4 minutes

The only way to stop the flood of dumb policies, like Trump’s trade war, and policy proposals, like those of Bill DeBlasio, Elizabeth Warren, and others too numerous to mention, is to make them more accountable, to induce them to place significant “skin in the game.”

As matters stand now, kooky policies are low risk and high reward, which of course is exactly the type of asset investors strive to find (almost always in vain in real markets). Maybe a policy will appear to pay off and the proposer will join FDR and LBJ in the pantheon of statist heroes. But even if not, elites will be fine personally.

They might lose an election but will publish 6 or 7 figure memoirs and get 4 or 5 figures to talk for an hour, shake some hands, and share war stories about how their inane (insane?) policy would have worked were it not for some evil politicians on the other side of the aisle and their access to deep, dark pools of ill-gotten cash.

The tough question is not should we, but how to make politicians and other policyholders truly accountable for the mistakes they make. I once publicly suggested that policymakers at the Treasury and the Fed be made, as part of their terms of employment, to hold all of their assets, or at least their retirement assets, in the form of FRN and Treasury bonds so that they would have an incentive to keep inflation and budget deficits in check. I’ve also called for top regulators (and business executives) to be paid largely in deferred compensation that would be reduced or eliminated in the event that their policies were shown to contribute to crises or lower growth. Lots of devils, though, lurk in the details.

Another idea is to pass a Constitutional amendment that basically says that nobody knows how a policy will work in the real world, so any new policy has to be tested first, on a small scale when applicable, and with a sunset clause (automatic end date, unless explicitly renewed) when the scale must be national. That, of course, would raise the possibility of forcing the proposer to live in his or her utopia/dystopia during the experiment. So okay, Bernie, you think universal healthcare is a good idea, you have to live in the area that volunteered to test the idea (say, I don’t know, Vermont) and receive all of your healthcare there, under the same provisions as everybody else.

That could be construed as a death sentence, but that is the whole point about skin in the game. Politicians and policymakers must suffer real-world consequences that better align their incentives with those of the ruled. That would serve as the ultimate check against misuse of the power of the state.

Perhaps the most direct, flexible, and voluntary way to align interests would take the form of a wager or bond. I’ve recently recommended the posting of corporate malfeasance bonds for corporations that wish “to put their money where their mouth is” in terms of constraining their future behavior regarding the use of slave labor in their supply chains, or other untoward activities, and see no reason why the same concept could not be extended to politicians.

Here is what I mean.

Say a policymaker thinks that a wall between the United States of Mexico and America would help the latter country. Let him or her detail when and how that claim will be assessed and to post bond for some percentage of his or her net worth to be paid if the project does not meet or exceed its goals. The wager, as it were, would be entirely voluntary and at least would serve as a signal of the proposer’s seriousness. Obviously, the policy proposal of somebody posting their entire net worth is worthy of more consideration than one backed by .000001 percent, regardless of the policymaker’s wealth level.

Policymakers with a negative net worth could post a dollar figure to be paid in the unlikely event that they land another role in a popular reality TV show. Or, they could promise to resign or not run for re-election if, say, their trade war fares badly.

Statists will howl that more closely aligning the incentives of rulers and ruled will reduce policy innovation, but of course that is the entire point. I once recommended that policymakers follow a version of the Hippocratic Oath and first, do no harm. If Americans expected the proposers of all serious policy proposals to post performance bonds, we would have to sort through many fewer dumb ones because politicians would be more inclined to think in terms of voluntary exchange, competitive markets, or non-profit or mutual solutions, instead of the top-down, heavy-handed, economically dangerous proposals that have grown too commonplace of late.

Am I missing something? If so, please explain it to me in clear, cogent, reasoned language in the comments. If not, please join me in chanting, “Put your money where your mouth is, put your money where your mouth is!” anytime some politico announces some big “plan” to fix this, that, or the other.

Robert E. Wright is the (co)author or (co)editor of over two dozen major books, book series, and edited collections, including AIER’s The Best of Thomas Paine (2021) and Financial Exclusion (2019). He has also (co)authored numerous articles for important journals, including the American Economic Review, Business History Review, Independent Review, Journal of Private Enterprise, Review of Finance, and Southern Economic Review. Robert has taught business, economics, and policy courses at Augustana University, NYU’s Stern School of Business, Temple University, the University of Virginia, and elsewhere since taking his Ph.D. in History from SUNY Buffalo in 1997. Robert E. Wright was formerly a Senior Research Faculty at the American Institute for Economic Research.