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Democratic Accountability and the Economy

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.

Reader Discussion

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on July 27, 2017 at 11:26:11 am

There is very little that government policy can do to increase economic growth and employment in the sort term. Most of what it can do is invest in new technology, which has a latency of about 40 years. Most of the growth of the 1990s was the result of government investment in R&D in the 1960s, especially the space program. It is a fundamental mistake to give credit to incumbents for economic prosperity. That is the "rooster syndrome": giving credit to the rooster crowing for the rising of the sun.

Redistribution policies generally have a negative effect on economic growth, and can also trigger a collapse of the world financial system.

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Jon Roland
on July 27, 2017 at 14:05:22 pm

Who is accountable in DC? In my view nobody is. That is an spending town. Just like Las Vegas these folks go there to throw more money away instead of solving the problem. Take a good look at what's going on right now. They want to keep that smelly fish ACA rather than go back to what we used to have. Hospitals are raking in millions, and we are getting shafted with the bills. Then DC does Nothing. Time to send them packing. Accountability in government institutions in general is non existent. That is why the taxpayers end up with the short end of the stick.

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Abelardo Aguilu
on July 27, 2017 at 14:05:47 pm

John:

Thank you for the recognition of the "effects" of the Reagan era tax cuts. At long last someone makes note of this. I would also add to the list of spurs to the economy, the cumulative effects of savings within the 401K program that provided significant capital to spur investment (and some stock price inflation, of course). The aggregate of all those $20 bills invested by millions of workers reached critical mass.

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gabe
on July 27, 2017 at 14:07:07 pm

Yes, but AARP rakes in hundreds of millions, all the while posturing itself as an advocate for we pensioners.

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gabe
on July 28, 2017 at 09:59:14 am

[I]t is not what people don’t know. but what they do know that isn’t so, that is most damaging to self-government.

“[I]t’s not what he doesn’t know that bothers me, it’s what he knows for sure just ain’t so.” Walter Mondale (October 7, 1984), attributing quote to Will Rogers, New York Times (October 8, 1984) p. B4.

“The trouble with people is not that they don’t know but that they know so much that ain’t so.” Attributed to Josh Billings (Henry Wheeler Shaw) by The Oxford Dictionary of Quotations, 3d ed., p. 491 (1979). Not verified in his writings.

- “What little I do know I hope I am certain of.” (p. 502)
- “Wisdom don’t consist in knowing more that is true, but in knowing less that is false.” (p. 430)
- “I honestly believe it is better to know nothing than to know what ain’t so.” (p. 286).

Josh Billings (Henry Wheeler Shaw), Everybody’s Friend, or Josh Billing’s Encyclopedia and Proverbial Philosophy of Wit and Humor (1874) (spelling corrected)

“The man who never looks into a newspaper is better informed than he who reads them, inasmuch as he who knows nothing is nearer to truth than he whose mind is filled with falsehoods and errors.” Thomas Jefferson to John Norvell, 1807. ME 11:225

“To know yet to think that one does not know is best; Not to know yet to think that one knows will lead to difficulty.” Lao-Tzu (6th – 4th century BCE), Tao-te-ching, bk. 2, ch. 71.

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nobody.really
on July 28, 2017 at 10:16:18 am

nobody:

Great quotes. Do you think you could make a *yuuuugge* distribution of these same quotes to the entire Federal (and State) bureaucracy. It could be helpful.

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gabe

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.