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Daniel Diermeier, the IBM Professor of Regulation and Competitive Practice

Kellogg professor on NPR

In an interview on ‘All Things Considered,’ Daniel Diermeier discusses spiraling government spending


4/7/2011 - Why do governments spend beyond their means? Kellogg Professor Daniel Diermeier tackled that question April 6 on the National Public Radio show “All Things Considered.”

Countries all over the world have been struggling with mounting deficits. But while Britain’s Parliament in October announced sweeping budget cuts, the U.S. Congress recently voted to extend the Bush-era tax cuts for another two years — even as the nation confronts a deficit of $14 trillion.
  Read Professor Diermeier's article "Ballooning Budgets: Why federal budgets grow, but rarely shrink" in Kellogg Insight
   


Diermeier, a professor of regulation and competitive practice at the Kellogg School, and Pohan Fong, a professor at the City University of Hong Kong, have developed a new model that suggests that nations under parliamentary rule might have an easier time cutting back than countries under a presidential system. It also explains why federal budgets expand, but rarely shrink.

“Traditionally, when economists look at things like budgets, or public finance issues more generally, they ask themselves, ‘What are good approaches to make sure that these budgets are more efficient?’” Diermeier notes.

But creating the most efficient budget is rarely the top priority for politicians who need to respond to pressure from constituents. “These budgetary procedures are really implemented by politicians who have their own interests,” he says. “These people interact in a strategic setting, and that setting is driven by the rules of the country’s constitution. Game theoretic models can help us understand how these rules shape policy outcomes. In the case of budget cutting, especially when it comes to entitlement programs, political bargaining can lead to inefficient outcomes.”