Comes a provocative idea from across the Atlantic — France, no less.
It’s an idea born out of frustration over Europe’s unsustainable public spending and debt crisis. It could just as well be applied in the United States.
Simply put, it’s this: Let’s pay politicians more when they run economically sound countries.
Don’t slap your foreheads in disbelief just yet.
We owe this suggestion to Theo Vermaelen, a professor of finance at Insead, a graduate school of business in France.
Vermaelen, in The Wall Street Journal, offers it up as a refinement to the two main solutions taking shape in Europe: Under one, eurozone bonds could be issued to collectively cover a portion of member countries’ debt. The other gives unelected bureaucrats the power to reject national budgets.
(Germany’s Angela Merkel pushed the second plan hard, and based on last week’s revised but tentative European Union treaty, it looks like she’s going to get her way. In an aside, Vermaelen noted that some in France “are wondering whether Germany, after several failed attempts, will finally unite Europe — and this time without firing a shot.”)
But Vermaelen thinks these solutions focus too much “on the stick and not enough on the carrot. By punishing countries instead of their leaders for violating EU budget constraints, those responsible walk free.”
Vermaelen builds his idea on a proposal from Bruegel, a Brussels think tank. It suggests letting eurozone countries issue “blue bonds” and “red bonds.”
Eurozone members would jointly back the blue bonds, which would allow countries to borrow up to 60 percent of their gross domestic products.
More than that and they would have to issue red bonds. The red bonds would be backed only by a country’s national treasury. Thus the red bonds would usually trade at higher yields, which inversely drives down their prices.
Vermaelen wants to give politicians — those responsible — some skin in the game: As a big part of their compensation, they would either get the better blue bonds or the riskier red bonds, depending on whether their countries stay below a 60 percent debt-to-GDP ratio.
Are you running a country where spending gets out of control, where taxes don’t raise enough revenue for the spending you want, where you have to borrow a lot of money and push your debt ratio over 60 percent? You get those red bonds.
If not, you would be compensated in blue bonds.
Vermaelen adds another wrinkle: The bonds would have to be held for five years but would be convertible. So say you’ve been paid in red bonds. Enact policies to drop the debt below 60 percent and those bonds would turn blue.
Run a country recklessly and the blue bonds you’ve been paid with become red.
“Politicians would be well compensated when their countries are perceived as solvent,” Vermaelen writes. “They would take heavy losses if their countries fell into serious financial difficulty.”
After the failure of Congress’ deficit reduction supercommittee, maybe the United States should also adopt such a system.
But given the punitive mood of the country, we might want to turn it on its head.
Let’s instead cut our leaders’ pay when they take the country over the 60 percent level.
Say by half. That would get their attention.
Let’s also extend the system so it covers not just legislators but the president, Cabinet members and lower-level bureaucrats. They have as much if not more say over our debt.
One argument against such a system is that sometimes the country needs deficit spending that would break the 60 percent level — in wartime, or when we decide to roll out Keynesian cannons to fight a recession.
But that’s also an argument for it. If the country faces such crises, regular people are called upon to sacrifice and suffer.
Shouldn’t our leaders, if they take us to war, also make some sacrifice to the cause? And if we’re in a recession, shouldn’t they share in the cutbacks in living standards?
Might they favor better policies to head off a recession in the first place? Or act more quickly once one starts?
By the way, the U.S. gross debt-to-GDP ratio is about 100 percent, up from 62.3 percent in 2007.
Bonus round
One might agree with President Barack Obama’s contention in his speech in Osawatomie, Kan., that this is a “make-or-break moment for the middle class.” But his policies certainly don’t measure up to the progressive rhetoric.
His call for a modest payroll tax cut isn’t going to save the middle class. Nor will a small tax increase on millionaires. Nor will the approval of his consumer protection bureau appointee.
If he really believes what he was saying in Kansas, he needs a much more aggressive agenda. And the political smarts to pull it off.
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