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Making the economy safe for politicians

11 January 2012 By Edward Hadas

“It’s the economy, stupid”. The words date from Bill Clinton’s 1992 presidential campaign, but the basic idea that political shifts are the visible manifestations of hidden economic developments was first articulated by Karl Marx, who wrote before the word “economy” had its current meaning. When he declared, in 1848, that “The history of all hitherto existing is the history of class struggles”, the notion was truly revolutionary. It has become a commonplace. Pundits ferret out economic causes for everything, politicians strive to present voters with economic good news and careful studies show that economic trends influence elections.

Like most often repeated generalisations (“Germans are orderly” or “an army marches on its stomach”) the claim that politics is fundamentally about economics has some truth to it. But I think pundits, politicians and voters would all benefit from a bit of revisionism. It’s not always the economy, and when it is, politicians cannot do much about it in a hurry.

Start with the expert commentators. I’m thinking of the people who confidently declare that the Arab Spring was caused by the increased cost of food. Or the ones who explain the poor performance of Vladimir Putin’s party in the recent Russian parliamentary election as a reflection of stagnating average incomes. The invasion of Iraq? It was the oil, stupid. The rise of anti-immigrant parties in Europe? Look no further than the job market.

Such claims cannot be disproven, since they concern motivations which are unknown to the actors themselves. I may think that I want to get rid of a kleptocratic government or that I’m uncomfortable with the president’s autocratic tendencies but I’m just being, well, stupid. Idealism and xenophobia are mere covers for a calculation, possibly erroneous, of economic self-interest.

But it is the pundits who are being simple-minded, if not devious. Most of the leaders of the Arab revolts had prospered under the old regimes and the recent elections in Tunisia and Egypt have been won by parties which have a clear religious agenda but only vague economic plans. When protesters say they thirst for justice and when voters indicate they desire holiness, there is no good reason to think their stated views hide a more ignoble reality. An excessive focus on economic issues makes the pundits unreliable guides. They should remember that economic issues are sometimes crucial in people’s lives, but more often not.

Politicians do need to worry about the economy, if only because government spending in the G7 group of rich countries was equal to 45 percent of GDP in 2011, according to the OECD. The political decisions on how those sums will be extracted and spent – not to mention the laws and regulations which shape the private economy – are crucial for the economy and important for the nation.

Politicians too often exercise their economic responsibilities in an irresponsible way. It takes years for policies that encourage investment, innovation and employment to bear fruit, but leaders often focus on creating enough good news to win the next election. That often leads them to increase fiscal deficits. That may seem painless for a while, but eventually politicians have to choose between fiscal austerity, which make them unpopular right now, and continued fiscal recklessness, which will wreck the economy quite soon. Greek and Italian politicians were not up to making the choice. The best they could manage was an agreement to let non-political, technocratic governments introduce sensible but painful policies.

There is a better way. Politicians should stop trying to work economic magic. That means they should admit – publically and loudly – that the only sustainable way to produce desirable statistics on incomes and unemployment in any month is to have made the right decisions many years ago. Consistent and sensible economic policy is the best support for durable prosperity.

Of course, politicians behave the way they do largely because voters seem to demand it. The American political debate is particularly disheartening to anyone with a minimal knowledge of economics. The nation’s combination of high fiscal deficits, stimulative monetary policy and a persistent trade deficit is an invitation for disaster, but neither Democrats nor Republicans are willing to admit it. They are following polls and focus groups, which tell them recklessness is OK.

The irony is great. If politicians were willing to teach and voters to learn, governments could put their economic houses in order. Of course, the transition would be much easier if politicians had not spent decades putting off virtuous behaviour until after the next election, but in a rich country such as the United States the pains of getting policy right would still be modest, especially in comparison to the woes that will come whenever foreigners stop funding the government. Then it really will be the economy, thanks to some remarkable – and avoidable – stupidity.

 

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