Absence of financial incentive detriment to debt negotiations

By DAVID MOON, Moon Capital Management, LLC
July 31, 2011

As a part of evaluating potential draft picks, NFL teams administer an intelligence test to prospective professional football players, called the Wonderlic test. Some players have scored famously low on this exam. Darren Davis, a running back from Iowa State, reportedly scored a four out of 50. Georgia wide receiver A.J. Green managed a 10.

The average person scores around 20. Offensive tackles score highest in the NFL, with an average of 26.

In our culture, we tend to equate outstanding verbal communication skills with intelligence. Often it is the primary or sole factor on which we judge a candidate for political office – or football player in a media interview.

Based on watching the debt-limit negotiations in Washington compared to collective bargaining negotiations between the NFL owners and players union, I would be curious to see the Wonderlic test results of our elected officials.

The United States currently increases its debt about $3.5 billion a day. Four years ago every member of Congress, President Bush and candidate Obama should have been able to see this coming.

Even A.J. Green should have been able to see this coming.

While Congress and the President postured and made threats, the NFL reached a deal well in advance of its drop dead date. What was the difference?

Financial incentive.

The NFL players and owners needed a season in order to make money. What difference does it make to John Boehner’s family if the US debt rating is downgraded or the US Postal Service pension plan isn’t funded this month? He still gets paid.

And if he and the President get voted out of office next fall, they each immediately begin receiving a lifetime pension benefits.

I’m sure they would rather keep their current jobs, but the financial downside for negotiating failure isn’t as personally devastating as it would have been for some “stupid” football player.

If the backup linebacker for the Tennessee Titans doesn’t play this fall, he doesn’t get paid. Jerry Jones doesn’t want to refund $128 million of ticket revenue.

Financial incentive certainly isn’t perfect, but it is better than the complete absence of it. We have relied on little but the patriotism of 536 politicians to ensure wise decisions – to our collective detriment.

Fortunately, this contrived budget crisis has done little but expose – not create – weaknesses that already existed. Three lessons are obvious.

The US no longer issues the safest debt in the world; interest rates in this country are at risk of increasing; and US politicians are better at grandstanding and pandering than they are at leading.

These are weaknesses we knew, or should have known, without the artificial deadline of a debt ceiling. These are also weaknesses or vulnerabilities for which you can prepare your investment portfolio. You should have been prepared for them long before the debt limit discussions dominated the daily news.

Those three weaknesses are not things that might happen. They have already happened – and they happened long before August 2.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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