The Corner

Political Derivatives

Three years ago, free markets finally rejected the illusion that “structured finance” could efficiently parcel away financial risk.

Yet Washington is operating under the illusion that “structured politics” can efficiently parcel away electoral accountability. 

Remember one of the drivers of the 2008 financial crisis. Clever financiers thought that through derivatives, banks and other large financial institutions could transfer credit risk to third parties that were of the financial system but somehow outside of it.

That didn’t work. The risk boomeranged right back to the banks, forcing massive bailouts.

Now, clever politicians think that they can transfer the responsibility of deciding what kind of spending we’re going to cut — entitlements to pay for the past, or infrastructure investments to pay for the future — to a committee that is of the political system but also somehow outside of it.

It’s a political derivative — and it won’t work. Come December 23rd, the results of this political derivative will boomerang right back to the politicians and the nation. 

And remember: Politicians purposely — and foolishly — manufactured this particular crisis so that they could show how forward-thinking they were in saving us from it. No wonder financial markets — also in turmoil because of Europe right now — are skeptical of the exercise and the outcome. 

To top it off, even as Senate and House leaders hammered out the debt agreement earlier this week, Washington moved entitlement spending in the wrong direction.

As Greg Pfundstein reminds us, the Obama administration declared that women should be able to get birth control from their insurance companies for free — no co-payments, no deductibles.

But to control health-care spending — a big part of the future spending path — people are going to have to pay more for their own health care, with insurance largely reserved for catastrophes. 

It’s not just birth control. It’s any drug or medical innovation that improves a person’s lifestyle.

Why should a middle-class person expect other people — whether indirectly through regulated private insurance, or directly through the government — to support his or her ongoing birth-control medication, Lipitor prescription, sleeping-pill prescription, or allergy-alleviation prescription?

Why not also expect fellow citizens to pay for haircuts and personal high-speed Internet access?

Unless a person is destitute, he or she should have the power to determine how to spend his or her finite resources. That is how markets decide how to allocate these resources. 

The political class, though, is telling people that they can transfer the cost of their own lifestyle choices to some third party — even as the politicians are telling themselves that they can transfer the cost of their own political choices to some third party.

But these new exotic derivatives don’t erase risk, only rearrange it, often temporarily — and derivatives often amplify the risk when it comes right back. 

— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.

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