LEE: Dis-incenting gridlock in Washington

The compensation that politicians care about most is what we should attack. Photo: K St NW, Washington, D.C./Wikimedia

WASHINGTON, October 17, 2013 – Last night’s averted Federal budget catastrophe is nothing to celebrate. Just like not falling off a cliff is nothing to celebrate. Congress’ already abysmal approval ratings won’t and shouldn’t improve anytime soon. This then is a great time to try a new way to improve Congressional efficiency, which in turn may eventually improve those ratings. 

Last January, Congress passed a bill that would cut lawmakers’ salaries if the two chambers didn’t pass a budget resolution. It never needed to become law because Congress immediately passed a budget. The idea was good, but insufficient for the long term. 

The truth is that cutting pay can only work so well because many in Congress are already rich, some extremely so. The others have reasonable expectations for getting rich after leaving office from the plethora of corporate and lobbying opportunities that will await them.

For these reasons, the normal incentive to move your butt when ordinary folk face the prospect of losing money is greatly diminished among those who inhabit Congress. There is a better way to incent Congress, though, which I learned, oddly enough, from teaching finance. 

The backstory: Every time my students entered one of the many investing competitions available to them, all hell would break loose. Portfolios of just one or two stocks were common. There were portfolios of just gold. Others had only one currency. They were demonstrating no practical understanding of what I was trying to teach. 

So I tried something different. I wanted to see if my students’ risk appetites would diminish if I placed a true disincentive before them. Almost all investing challenges like our investment competitions suffer from one key shortcoming: Players have nothing to lose. In evaluating contestants only on how high their portfolios jump, such contests practically beg players to bet the farm. My students were merely playing the game according to its logical calculus. 


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This time, I introduced a risk calibrator: Students who wished to play must pay. I didn’t want their money. Instead, I required them to wager a currency of much greater value than the few dollars most of them have. I required them to wager a number of points of their final grade. 

Each player had to decide how many points of their final grade they would put at risk. Bet big and beat the S&P 500 and a B student becomes an A student. But bet big and lose, and a B student becomes a C student or worse. In the end, only a handful of the nearly 200 students attempted my crucible. Wonderful. Risk of loss evidently does have a dis-incenting power. 

On Capitol Hill, we should similarly make members of Congress risk something of greater value than the $174,000 that members of the House and Senate make. Let’s face it, that’s chump change on K Street and especially on Wall Street. Some of my students make that much within three years of graduation. 

Far better is to incent them to work together by limiting their access to their re-election campaign funds. Now that’s risk!


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It’d work like this. For every week that they don’t pass a budget, they lose ten percent of whatever amount is in their campaign coffers for the next election cycle. After three weeks, even long-term incumbents will face primary challenges. After six weeks, they’ll start updating their resumes. After nine weeks, antidepressant manufacturers start raising earnings forecasts.

And if we wanted to be truly draconian, we could send the confiscated funds to the other party’s National Committee, although the Supreme Court might rule that cruel and unusual punishment. 

I defy anyone to produce a better incentive for them to work together or a better dis-incentive from stalemating. The only downside is that I may require lifetime Secret Service protection.

 


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Michael Justin Lee

Michael Justin Lee from the faculty of finance and the Center for East Asian Studies at the University of Maryland, teaches, speaks and writes at the intersection of global finance and politics (with occasional tangents off on one or the other).

He is the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). A veteran Chartered Financial Analyst, he served as Financial Markets Expert-in-Residence in the U.S. Department of Labor. He can be followed at www.michaeljustinlee.com

 

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