Adair Turner's account of financial markets is insightful but misunderstands the role of the state in creating financial crises.
Ray Fair, a fine Yale economist, has the best economic model for predicting the outcome of presidential and congressional elections. The model has the virtue of simplicity, weighting incumbency, length of time a party holds the Presidency, and news about the economy on growth and employment relatively shortly before election. It has not been perfect in predicting each party’s share of the two party vote, but it has been good–good enough to be taken seriously outside the academy. The New York Times in fact devoted a whole interview to him, sadly marred by the seeming inability of the interviewer to understand why, Fair, despite being a Democrat, used his model to predict a Republican victory!
But the relative success of his model makes one doubt how strong is democratic accountability for the economic performance of government. Few, if any economists, would say that the news about growth and unemployment shortly before an election is a good proxy for that party’s economic stewardship. Business cycles are not in the control of the government. And perhaps more importantly, the most important policies a government undertakes likely take longer than a few years to bear fruit. Thus, the tax cutting policies of the Reagan era may be largely responsible for the prosperity of the Clinton years as businesses and people invested more. And the entitlement spending launched in one era may not have the substantial adverse budgetary impact until long after. The point is not a partisan one. If Obamacare makes the economy better by letting people move more easily between jobs, as its advocates claim, those effects have not yet been fully felt.
Even worse, Fair’s findings give politicians incentives to juice the economy by well-timed spending, even if that spending is not efficient and would not help the economy long term. There is some evidence that politicians attempt to do just that. This kind of fear is the main justification for trying to take central banking outside of politics, because a partisan central banker could engineer an artificial boom for the governing party with resulting higher inflation and likely lower growth in the long run. And studies have confirmed that independent central banks are good for controlling inflation. But note that this independence isn’t democratic accountability either, but instead a deferral to expert guidance. Electoral democratic accountability over the money supply appears not to be part of the choice set of good governance.
Of course, it is not really possible to take the politics out of fiscal and entitlement decisions of government. But Fair’s model suggests that democratic accountability for these aspects of economic policy is not strong either. The people (or at least swing voters) appear to base their support on a wrong picture of the relation of the government to the economy, as if the President were an engineer driving the economy in real time. This image may be relatively modern myth that is part of the continuing damage of New Deal ideology. As in many areas of politics, it is not what people don’t know but what they do know that isn’t so that is most damaging to self-government.