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Ratchet Effect – How the Old Maximum Becomes the New Minimum

by: michael r. shannon | published: 12 05, 2010

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The Oxford Dictionary of Economics defines the Ratchet Effect as: “A tendency for a variable to be influenced by its own largest previous value…the ratchet effect implies that variables are more sticky in one direction than the other.” Think of it as one of those notoriously unreliable DC Metro escalators that only go in the direction conservatives don’t want to travel.

This is the spending mindset the Republicans face in Washington, DC next year.

The Iron Triangle of big government spenders — Democrats, media & feeders at the federal trough — turn every attempt to cut spending into trench warfare.

For the Triangle the ratchet of government spending only moves toward more spending. The old guaranteed maximum spending ceiling from the past Congress — designed by experts to educate children, eliminate poverty, drain the oceans, reduce obesity, cure cancer, beat up bullies and reparate for racism — becomes the new skinflint minimum spending, insufficient to meet all the unmet needs discovered during the next Congress.

And the fight does not have to involve the big programs like Social Security. The Triangle fights as hard for pennies as it does for dollars.

Buried in the “Stimulus,” was a shovel–ready project that involved shoveling money toward government employees who commute on Metro.

Back in the days of want and privation, during a Republican administration, federal employees were given $120/month as a gift from taxpayers to finance their travel. Taxpayers, who were hoping the Escort’s bald tires on would hold out another month, were comforted by the knowledge government workers got $ 1,440/year to pay for their subway ride.

The “Stimulus” increased the monthly handout to $230. The new spending level was justified as a “one time boost” set to expire on Dec. 31, 2010.

Approximately 170,000 federal employees signed up for the program, which cost roughly $192 million over two years.

How giving money to people who were already riding Metro was going to stimulate the economy is something of a mystery.

They couldn’t use the extra money to buy breakfast burritos to enjoy on the train, because eating so much as a French fry is illegal. (An ordinance I heartily support, by the way.) Did Obama’s experts predict federal employees would be so grateful for the extra largess that they would commute twice each morning?

Now that they’ve been enjoying the money for almost two years, the ratchet effect begins and it comes as no surprise there’s a fight to perpetuate the bonus.

The ratcheteers at the Washington Post describe the natural expiration of a TEMPORARY increase in a taxpayer subsidy as “a direct hit of $1,320 annually.”

Let’s see, if I win the Virginia Lottery, and I elect to take my winnings in monthly installments, is it a “direct hit” when the lottery winnings stop? Can I demand the Commonwealth extend the payments because I’ve become accustomed to spending the money?

Why no interviews with Oklahoma taxpayers overjoyed that their handouts to government employees will be cut nearly in half; Nebraska taxpayers thrilled by this start on deficit reduction and federal workers who understand they will again enjoy the taxpayer–financed subsidy that was just fine as recently as two years ago?

But that ignores the ratchet effect where even a one–time increase is viewed as a down payment on permanence.

So the fight to keep the money begins and we see the Iron Triangle in action. Metro will begin an ad campaign “warning” federal workers of the benefit expiration and urging letters to Congress. The contractor who waited by the revolving door and hired the staffers who wrote that portion of the “Stimulus” bill, will use those same staffers to lobby Congress for an extension. And mass transit “activists,” who feed on government grants, complain the return to the old subsidy levels will “force” commuters into their cars and “subsidize” gridlock.

And the ratchet clicks on.

Maybe the expiration would cause Metro commuters to join carpools. That keeps cars off the road, reduces crowding on Metro, saves taxpayer dollars and generates a sense of community and shared enterprise during the daily commute.

Sort of it takes a village to get to work.

This ratchet mindset is what makes reducing the size of government so daunting. It’s easy for Congressmen and Senators to extend the spending and keep the staffers in their office happy, while only soaking each taxpayer a few pennies.

I hope the new Republican House will be a conservative House, with the courage and determination to wage the big spending fights and the small spending fights.

Because without that determination the ratchet effect combined with the Iron Spending Triangle is going to bankrupt the rest of us.

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