Tuesday, June 18, 2013

Politics Versus Economics

As I follow the news and talk to others with differing view I come to the conclusion that what we call politics too often is actually or should be called economics. For example, not something I discussed with retirees this weekend, the Illinois Pension Crisis. That is only one of two links of the article, because it's that good. It's not about my topic, but a perfect illustration of the problem.

There are political decisions and economic decisions. Too often we let the same people make both decisions while they are not skilled in both areas. For example, a political decision would be to offer a pension to public employees because they will not qualify for social security and because 40 years ago pensions were common. Another political decision would be how to fund the pension, through a tax or fee of some sort I assume. The economics of the problem would be deciding how big the pensions would be based on service time and earnings while employed as well as how big the tax needs to be to cover the pension.

Maybe I am ignorant of the problem, but in my view economics are relegated to a back room in politics.  For the record, before the Great Recession economics was just as bad or even worse than the rest of us at predicting the lethargic future economic realities because they are humans living the same lives we are.

There is a scene in Wall Street where they are talking about the overfunded pension at, I believe, Blue Star Airlines. I have a feeling that in the 80s there were many "overfunded" pensions. Somewhere along the way someone or some people changed a few percentage points in projections based on the most recent data and pensions became "overfunded". The point being at some point the information and experience used to make decisions was not based on the best and total information available. My guess is that a few eager people showed this to their "bosses" who were politicians in an effort to please them and the result was lower taxes and increased spending on other programs instead of on funding the pension. Again, if left to their own economic devices I would guess that the changes year to year in terms of benefits accrued to public employees and taxes charged to the general public would only change minutely along economic lines. However, given the firestorm that is politics this kind of $100 billion issue becomes a political hot potato of the week after years of failing to make the small changes that would make a big difference later in the future.

A success story on the other hand would be moving the retirement age for full Social Security benefits form age 65 to age 67. Nobody give that little transition much thought, but it's genius. We are saving billions, maybe trillions as a country because of that little economic decision in 1983. It's been 30 years, maybe we should do something like that again?

In short, some decisions can be backed up by financial numbers as viable and others as not viable. Taking those realities into consideration in "political" situations has the potential to make significant positive impact on the economy and the country.

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