Transcript | 5. lecture: Fiscal alcoholism (Ľudovít Ódor) - University for modern Slovakia

Welcome. Last time we were talking about the reasons why politicians always go back to deficits so as the alcoholic goes back to his bottle. Today we will discuss the manner in which to treat this addiction by signing contracts with oneself. Surely, we have to distinguish governments that mean it seriously (at least at the beginning) from those that do not.

Imagine that you will make a new year’s vow on 01 January that you will lose 10 kilos weight throughout the year (if your weight is alright, try to imagine that you would give up some bad habit). Despite the fact that you really mean it, only rarely do such vows last longer than a couple of weeks. Are we therefore liars? Not necessarily, it is only that the “planner” outweighed the “epicure”. These two have been enemies forever. The rational planner decides that from tomorrow on he will not eat sweets or light any cigarette. When tomorrow comes, the epicure spots a sweet cake or smells cigarette smoke and whereas he decides more based on emotions and current use he can make of the situation – the vows are gone. The planner has been defeated.

You could say that it is part of life and we will get to grips with it. Do not settle for that! If we really do mean losing weight or waking up early, let’s give the planner more powerful weapons by increasing costs for breaking the vows and reinforce the obligations. E.g. at the beginning of one TV show on losing weight the contestants were taken pictures in their bikinis. If the contestants had not lost the determined amount of weight, the pictures were released during the evening broadcast of the show. Apart from one, all of them lost more than the set limit. The epicure thus got afraid that the pictures might be seen by a neighbor, colleague or fellow students.

Now try to imagine early mornings. We have decided to go jogging at seven a.m. When the alarm goes off in the morning, it is easy for the epicure to just press the snooze button and continue sleeping. However, you can also find such alarm clocks, which fall off the bedside table after you press the snooze button and they roll off and hide elsewhere in the room. Until you find it, you will be already wide awake.

Microeconomic studies have shown that if the obligation mechanisms are determined well, the chance to succeed with vows is markedly bigger. How can they be well determined? I will state the webpage stick.com as an example. You will trick the epicure within four simple steps: Set your goal, i.e. losing 10 kg weight. Secondly, set the fine. This is usually represented by an amount of money that you have to pay in case you do not fulfill your vow. It does matter whom you will pay the money to. You can pay to charity, a football team that you hate or you can give the money to your annoying neighbor if you do not succeed (which I am sure, you would not like to do). The third step comprises the choice of a referee (usually friends), who would check up on the fulfillment of your vow. It would be too easy if you checked the results yourself. The epicure could e.g. preset the scale on minus five kilos. The fourth step is the choice of supporters who can follow your partial results and say: “You are doing great.”

Let us move on to the budget. We promise better administration of economy; however, we always find ourselves having one extra glass of our drink. What can we do about fiscal alcoholism and about being prone to deficit? Why not try the same practice as in microeconomics? Now this does not mean shooting pictures of Finance Minister in bikini. Let’s rather find another obligation mechanism which will increase costs for politicians if they swerve out of the “responsible track”.

We follow the procedure as stated in the above example:

1. First of all, the government should set its pace at which it wants to perform consolidation. That represents setting the goal. We will write it down into a law so that it gains on importance (in form of fiscal rules).
2. The second step is constituted by determining fine. We may think in the framework varying from the risk of losing reputation to bordering sanctions in case of e.g. fall of the government.
3. In this step, one has to choose the referee. This could be represented by an independent Council for Budgetary Responsibility .  
4. Finally, it is necessary to determine supporters. In this case they should be represented by the public. On the one hand, public finance should be more transparent; on the other hand, the public should become more familiar with costs for irresponsible monetary policy. We surely do not want to rob our own children or grandchildren by a constant creation of debts.

From what we have so far been shown, correctly set motivation and obligation mechanisms help the planner win over the epicure. This, however, only counts on the understanding that we mean it seriously with our plans. Let’s try to put this in practice and let’s hope at the same time that the politicians will try it as well.

The upcoming lectures will focus in more details on the ways how to mix the right ingredients into the act on budgetary responsibility: transparency, fiscal rules and an independent institution for budgetary assessment.