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Power to the representatives

23 June 2016 By Rob Cox

A few years ago, it took the voters in my Connecticut hometown five tries over three months to approve the annual municipal budget. By the end of the process, townsfolk were so fed up that 71 percent of them didn’t even vote on the fifth iteration. That meant that 156 people, or less than 1 percent of the electorate, ultimately decided whether to pass the $106 million spending bill.

While of consequence to just 27,000 New Englanders, the episode illustrates one of the key problems with direct democracy – it allows for tyranny at the hands of the minority. That is one reason why the men who drafted America’s Constitution went the other way, opting instead for a representative form of government: think Rome over Athens. And it’s why referendums like the one the British people are engaging in right now are a terrible idea.

How democracy works best is an ancient debate, but there’s no doubt that plebiscites undermine the representative version of it. Indeed, Alexander Hamilton, currently the hippest founding father, told the New York ratifying convention of 1788 that “it has been observed by an honorable gentleman, that a pure democracy, if it were practicable, would be the most perfect government. Experience has proved that no position in politics is more false than this.”

In the parallel world of corporations, there are also arguments about how much so-called shareholder democracy makes sense. A company’s owners elect representatives who occupy the boardroom. Votes on big mergers generally come all the way back to them, but it’s easy to see why companies resist efforts to dictate smaller strategic choices, like how many breadsticks to serve customers.

The basic idea is that shareholders elect directors, they choose managers, and they make the decisions. Bring too much back to all investors and business soon becomes cumbersome and bosses lose accountability. It’s one of the perils of shareholder activism that focuses too narrowly.

So it is, more or less, in a nation’s affairs. Nonetheless, rule by referendum is in vogue around the world, as the Initiative & Referendum Institute Europe, a think tank that favors them, observes. The British vote on EU membership may inspire copycats in the Netherlands, and even France. Italy is planning one in October that could collapse its government. And the treaty signed on Thursday in Havana to end 50 years of war between the Colombian state and FARC guerrillas needs to go to referendum.

Sadly, all of this gives politicians another way to avoid accountability for their actions. Some governments have avoided making difficult fiscal decisions, instead shifting responsibilities for economic policy to unelected bodies like central banks. Throwing nuanced matters like Brexit and other live examples to the people also shows elected representatives abrogating their responsibilities.

It’s also bad for business. Debates about policy – whether economic, trade, fiscal or defense – are fractious affairs at the best of times. Conducted in parliament or Congress, they can create volatility in financial markets, hold back investment, delay hiring and stall purchases of plant and equipment by businesses.

Putting the entire weight of a one-off decision down to a single day’s popular vote massively amplifies the risk. It means fickle sentiment can easily sway the outcome, and it divorces one issue from others when they might best be considered together. Moreover, under direct democracy, thoughtless populism and special interests are more likely to carry weight. That’s especially true when voter turnout is low.

California’s experience with people’s initiatives illustrates the problem. Ever since Proposition 13, which capped property taxes, was passed by 63 percent of voters in 1978, the Golden State’s finances have been a mess to balance – initiatives to raise taxes elsewhere or cut spending aren’t so popular. That vote has become so firm a fixture in the legislative firmament in California that no politician dares revisit it today.

British Prime Minister David Cameron didn’t have to bring his country’s EU membership to the ballot box. It was a political decision that has arguably slowed investment into the UK and damaged British financial assets, even if it has also brought the pros and cons of the union to the fore.

That may be what happens in Italy, too. Prime Minister Matteo Renzi has pledged to put constitutional reforms to an up-or-down vote in October. If voters reject them, Renzi – who has brought relative stability to Italy and boosted market confidence in the country – has promised to resign. That in turn risks another European crisis.

Colombia’s President Juan Manuel Santos, speaking last week at a World Economic Forum meeting in Medellin, said his country is expecting a surge in foreign direct investment once it ends hostilities with the leftist rebels of the FARC. But investors attending the forum said big infrastructure projects will only happen once the deal is blessed at the ballot box. And many Colombians may find the détente emotionally difficult to support, even if their heads say otherwise.

The UK’s Brexit vote isn’t strictly binding on the government. But ignoring the outcome would be dangerous for the political classes – just as so-called “say on pay” votes at U.S. companies generally sway boards even though they are merely advisory.

Those votes offer another argument for the risks of direct democracy, too. They tend to provoke changes in corporate pay policies even when fewer than half of shareholders demand it, if the minority is large enough. That’s also the case with referendums. Even if the UK’s Cameron gets the “remain” vote he has campaigned for, the views of the large losing camp will have to be taken into account in future dealings with Europe – and vice versa if there’s a “leave” vote. Whichever way Britain votes, everyone concerned may come to wish it hadn’t.


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