Originally published in The Hill, December 11, 2017.
As the Republican tax plan grinds through Congress, President Trump has an opportunity to offer a few changes which could alter the legislation to make it more acceptable to fiscal conservatives, permanently eliminate recurring debt ceiling debates, and put him firmly in control of the congressional agenda for years to come.
The central problem today is Congress’s propensity to spend money the country does not have, and spend too much of it on favored interests and too little on economic growth. As Jake Novak complains in a recent CNBC op-ed:
It’s becoming more and more clear to that disapproving public that members of Congress from both parties see holding office as a means to control the power of the purse to reward friends and attack enemies. Cutting spending means cutting what they see as their rightful power. So they’ll never really do it. Our money and wealth is theirs to use as they please, even against us.
What can we do? How do we motivate legislators to treat taxpayers’ money with the same care as taxpayers do themselves?
The answer is simple. Align the incentives.
Whether the economy does well or poorly, whether policy initiatives tank the economy or blow out the deficit, the wages of senators and congressmen are the same pitiful, fixed amount — about as much as a first year associate makes at a leading law firm. (Indeed, just to push the point home: NBC’s Megyn Kelly makes more than the entire Senate combined.)
If we instead want legislators to maximize growth and minimize debt, we need to pay them for doing so. That simple. An incentive plan would not necessarily stop the negative effects of the pending tax legislation. It would not prevent legislators from voting for new entitlements or force them to balance the budget. Indeed, no one would be precluded from voting their party or conscience. But members of Congress will incur a real cost to themselves and their families if the underlying policies are profligate or hurt the economy — and that will influence behavior. It is one thing to be generous with the taxpayers’ money, another to be generous with one’s own bonus.
With it, the whole debt ceiling debate would disappear. Increasing debt will mean dwindling bonuses, so if legislators need to increase the debt ceiling, voters will know they really mean it. For the first time, politicians will have some skin in the game, which is far more important than the kabuki theater surrounding regular increases in the federal borrowing limit.
How big a difference could incentives make? As with so many seemingly innovative policies, Singapore shows the way, having successfully implemented performance-based pay decades ago. The results are striking. In 1985, GDP per capita (in purchasing power parity terms) of the US, Germany, Italy and Singapore were all clustered within a narrow range. Singapore held the bottom slot at $26,000, with the US at the top at $34,000. Today, Singapore’s per capita GDP is $83,000, well ahead of the United States at $54,000. Singapore’s output per person is nearly twice that of Germany. Italy is a third world country by comparison. The West has fallen behind. Far behind.
The lesson is clear. If politicians are allowed to use taxpayers’ money for generations without any personal incentive to use it well, over time, government spending will become bloated, inefficient, and drag down GDP growth to pitiful levels. That is exactly how Germany managed to become a woefully second class country in Singaporean terms.
Economists have fretted over low productivity growth and an aging population in the U.S. Perhaps the private sector will rebound with new technologies and save the day. But if it does not, those who follow policy have the sense that the easy reserves of economic growth are to be found in improving the efficiency and effectiveness of government spending and taxation. Incentive-based pay would unlock that potential, paving the wave for a generation of healthy economic growth, and restoring faith in government and confidence in America as a country with a future.
For Trump, it is a unique opportunity. No ordinary politician would ever conceive of suggesting that self-interest could possibly motivate politicians’ behavior. However, Trump has spent decades motivating politicians with cash. He knows better. If you want your bonus, Mr. Representative or senator, get to work and create legislation that puts the country back on a path to solid growth and reduces borrowing at the same time. In such a world, neither conservatives nor liberals would get everything they want, but both would have a huge incentive to work together towards fiscal sanity and prosperity.
This is how to drain the swamp. Steve Bannon is not alone in pinning the hopes for a more effective Congress on a change of personnel. But it is not about people. It is about incentives. Change the incentives, and there is no need to change the people. Without a change in incentives, however, incoming politicians will ultimately be claimed by the swamp, just like their predecessors. Rather than railing against venality, we need to use it as a tool to create faster growth and a more balanced budget.
President Trump has asserted that he “can be more presidential than any president that's ever held [the] office.” Here is an unparalleled opportunity. No other president in history, not one, would have had the guts to change the system at its roots. Here is the chance. Take it, Mr. President.