Rules of the game matter, even in politics

One of the many insights of economist and Nobel laureate James Buchanan is the importance of political rules in determining outcomes in politics. Throughout his career, Buchanan explained that if people wanted real changes in the political system, they need to reform the rules of the game rather than focus solely on changing the politicians involved in the game. His insights coupled with those of New York Times best-selling author Nassim Taleb on the importance of decision-makers having skin in the game raise some important questions about decision-making and policy implementation in the political system.

A recent book summarizing the ideas of Buchanan used the analogy of basketball to explain these concepts. The authors showed how simple rule changes like the introduction of the three-point shot and the shot clock fundamentally changed the nature of the game. For example, the introduction of the shot clock increased the pace and offensive nature of the game.

These insights about the importance of rules, led Buchanan to be a strong advocate for constitutional balanced budget amendments. He argued that allowing governments to borrow from future taxpayers (i.e. the next generation) who have no input or decision-making authority in order to finance spending today leads to both less effective decision-making and more debt accumulation. Buchanan’s insights also led to other movements focused on changing the rules of politics including term limits for politicians and constitutional limitations on government spending and taxes.

A recent analysis by Professor Livio Di Matteo of what an effective limitation rule on federal spending in Canada would have resulted in illustrates the power of changing the rules to achieve different results. A simple but effective rule limiting the growth in federal spending to the rate of inflation plus population growth, meaning that per person spending remains constant, would have resulted in a surplus of almost $40.0 billion by 2025-26 compared to current expectations of a $22.7 billion deficit. Put differently, introducing a rule that imposes mandatory fiscal discipline results in better and more responsible fiscal outcomes.

Let’s consider a hypothetical rule change to explore how such reforms could fundamentally alter politics and political outcomes. Assume that a rule, effective and difficult to change / ignore is adopted requiring federal parties to identify two or three core economic policies and/or goals they intend to achieve if elected. Further assume that the rule empowers the Treasury Board to withhold the pension benefits of the elected members of the government if it fails to achieve the goals set out for its government once its term is completed. Pension benefits for elected politicians are a considerable financial incentive so tying performance to this benefit creates what Taleb describes as “skin in the game.” Indeed, Taleb warns against anyone making decisions for others if they don’t face meaningful consequences from their decisions.

The Trudeau Liberals ran on a promise in 2015 of changing fiscal policies, quite decidedly, by purposefully using deficits to finance more government spending with an aim of increasing economic growth. Further, Trudeau committed that the deficits would only last three years (2016-17 to 2018-19) and total just over $25 billion.

In reality, the Trudeau government borrowed $51.9 billion during this period, slightly more than double what was committed to during the 2015 election. More importantly, a recent study demonstrated that economic growth in the 2016 to 2019 period was the lowest of any pre-recessionary period going back to Prime Minister Brian Mulroney, including Trudeau’s predecessor, Prime Minister Stephen Harper. In other words, contrary to the expressed goal of higher spending financed by borrowing leading to higher rates of economic growth, they were linked with the exact opposite: lower economic growth.

This contrast and the potential implications of the hypothetical rule outlined above leads to a host of interesting questions. Recall, the rule would have cancelled the pension benefits, which are considerable, for members of the governing party leading into the 2019 federal election. First, would the Trudeau Liberals have changed policies in 2017 or 2018 by tempering their spending and borrowing when it was clear they would have trouble balancing the budget by 2019-20 and that economic growth was declining, not improving? In other words, would the risk of members of the governing party losing their pension benefits for the four years of their government have changed their behavior mid-stream?

Second, and quite related, would the cancellation of their pension benefit and the clear declaration that the government failed to achieve their prioritized economic goals have led to a different platform in the 2019 election? Recall that the Liberals doubled-down on their policies of higher spending financed by borrowing in the 2019 election.

Third, and perhaps most interesting, would these rules have influenced the initial decision by the Trudeau Liberals to propose a marked change in fiscal policies in 2015 given the risks the members of the government would face if the changes didn’t achieve their stated goals? Put differently, would this rule potentially lead to more humble goals by campaigning political parties during elections given the link between their promises and their pension benefits?

While this is obviously a hypothetical example, it nonetheless illustrates how effective rule changes can influence incentives, behavior and outcomes in politics. This isn’t to say that balanced budget amendments, term limits, limitations on spending and taxes, or even the hypothetical linking of pension benefits with achieving stated economic goals are the best policies, but it does illustrate the importance of the rules of the game to explaining the outcomes of the game. Those interested in improving the outcomes of the politics should focus on changing the rules rather than just changing the party and people in power.