Watching all these scenarios for impossible “grand bargains” to emerge, my thoughts turn to an impossible dream . . .
. . . imagine politics playing out via regularly scheduled electoral contests between two political parties. And imagine that while the interest group coalitions behind the parties have a wide array of concerns, the voters are primarily interested in the growth rate of their real disposable income. Consequently, voters react poorly to cuts in spending, react poorly to increases in taxes, and react poorly to sluggish economic growth. What’s more, at these regularly scheduled elections one party “wins” and the other party “loses” at which point the “winning” party gets to make policy decisions until the next election. It seems to me that in such a system a governing party in office at a time of depressed output and near-zero nominal interest rates would calculate that the political penalty of deficit cutting measures exceeds the political reward of boosting growth by lowering interest rates. After all, rates are near zero so there’s no gain to be made this way. But if in the future circumstances changed and some combination of higher output and bigger deficits created a situation in which faster growth was worth paying the price for program cuts or tax hikes, then they’d cut the deficit. Then I wake up and . . .
. . . we have a broad elite consensus that American political institutions are perfect but the government needs to immediately enact short-term deficit cutting measures that have zero economic benefit and are therefore politically damaging to those who enact them and therefore must be enacted via a “grand bargain.”