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“Deficit Bias”

by Elaine Schwartz    •    Sep 17, 2011    •    360 Views

If anyone asks you about the “fiscal woes” facing the U.S., Japan and the EU, just say, “deficit bias.”

The 13th Geneva Report on the World Economy explains “deficit bias.” In the U.S., think about voting constituencies and how the political system has been unable to deal with an inefficient health care system and inadequate revenue. In Japan, an aging, less affluent, rural segment of the population has a disproportionate amount of voting power. And, as for Europe, you have a tradition of government spending and of bailouts that created moral hazard.

You can see where this is going. There is a tension between democracy and financial discipline. Although the political dynamic is varied, still, the results have been similar.

Here is the full report or you might want to read a summary in this article. In addition to “deficit bias,” the report extensively discusses solutions that they believe have to be nation-specific.

The Economic Lesson

Thinking economically about “fiscal woes” takes us to the margin. The problem is that one group enjoys the marginal benefit of spending while another experiences its cost. In the long run, though, all lose as society pays the cost through less growth and more unemployment.

An Economic Question: Select a specific group and then, using cost/benefit analysis, explain the impact of more government spending.

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