Politics Matters

One thing I’ve learned from the crisis is that the politics of economic intervention to stabilize the economy is far more important than I realized. When you teach stabilization policy out of textbooks, it’s easy, you just say that the government cuts taxes or increases spending, that the Fed takes this or that action, and then calculate the result (or, more likely, show it graphically). The politics, e.g. the distributional consequences of the policies, are rarely if ever mentioned.

The importance of the politics started to dawn on me as I began to observe the reaction to the bank bailout and the stimulus package on this blog and elsewhere. For example, I was traveling from Seattle to Victoria by ferry and I overheard a conversation from the group sitting behind me. There were two couples, I’d place pretty good odds they showed up in either a Volvo or a Prius, and the conversation turned to the economic stimulus. They said how worried they were about the debt — all that spending Congress was going to do — and how we would pay it off? They were very emphatic, and clearly very worried about this. They said many things that seemed to come out of the anti-stimulus playbook, and at several points it was all I could do not to turn around and try to straighten them out. But I decided there was more value in listening to how they felt about the bank bailout and stimulus packages, and it was an eye opener. They were very much opposed to the actions that had been taken. I heard a similar conversation across the aisle from me on a plane trip not too long after that, with the health care plan at the forefront of worries, and at other times as well, but it really hit home when I was watching a Duck game with some friends who are very liberal, very populist, and very much working class. They hated the bank bailout in particular — it was seen as a bailout for the wealthy — and I was quite surprised at the degree to which they opposed this policy. The anger in their voices was evident, and they had no interest at all in listening to my explanations of why the bailout policy was done this way, and how it would help everyone. Where’s my bailout I heard again and again. The attitude was that the rich got bailed out — as always — but the people who could have actually used the money got nothing but the bills. There was no sense whatsoever that they believed bailing out the banks had saved Main Street from an even worse fate — this was nothing more than a scam to funnel money to the rich. As far as I could tell, they simply did not believe that the bank bailout would help them in any way. But they would be asked to pay the bills.

The result of this — and it’s something I’ve written about several times — was to wonder about this “trickle down” approach to policy. Why not help people pay their bills directly instead of letting them go under and then bailing out the bank when households cannot repay loans? Economically it isn’t that much different from the banks’ perspective — they get the money they need to survive either way, it’s simply a matter of who gets the money first.

The point I’m making is a simple one. We have a responsibility to make sure that both monetary and fiscal policy are still there for future generations. If we do things now that are economically justified, but political disasters, then the next time policy is needed it won’t be there — the policies won’t have the public support that is needed for politicians to get behind them. As we calculate the value of enacting a policy, politics matters. We have to take account of the costs to future generations of potentially not having these policies available due to the political opposition that might come about as a result of our actions to try to stabilize the economy. For that reason, we need to think a bit harder about the distributional consequences of policies that are put in place during a crisis. If, when the next crisis hits, we try to repeat the actions taken this time, the political opposition will likely stand in the way — there is little support for a repeat of current policy (and I do not believe that resolution authority is enough by itself to prevent the need to bail out banks in a severe crisis). There are alternatives to helping the well off and hoping it trickles down — there are trickle up alternatives that help middle and lower class households directly — but we haven’t put enough effort into developing these policies. That needs to change.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

Visit: Economist's View

Be the first to comment

Leave a Reply

Your email address will not be published.