Voters disappointed by the election outcome may seek consolation in the work of Edward Prescott, the 2004 Nobel laureate in economics and former longtime University of Minnesota professor.
One of the topics Prescott focused on was the importance of credibility in economic policy-making. Prescott found that, in a world where households and businesses make important decisions based on their expectations of what government will do, credible policies are important to economic growth and efficient use of resources.
Consistency is an important factor in achieving credibility with the public on policies. Policies that oscillate erratically between alternative approaches create uncertainty. Uncertainty forces households and businesses to act defensively. They must arrange their affairs not only to maximize their well-being under existing policies, but also to minimize the harm to their self-interests should policies suddenly flip-flop. Self-defensive allocation of resources is seldom the most efficient way to do things.
President Bush will continue in office for another four years. He will enjoy majorities in both houses of Congress, something true during only half of his first term. Moreover, while the Republican majority in the Senate is thin enough that some compromise with Democrats will be necessary, Bush is the first Republican president since Eisenhower’s first term to face such a favorable Congress. He should be able to continue policies initiated in his first term.
While frequent turnover in government does not doom economies to failure, one can easily identify cases where turbulence was associated with bad policy-making. Six different presidents occupied the oval office from 1958 to 1978. While employment, output and incomes grew strongly in the mid-1960s, that prosperity rapidly became the “stagflation” of the 1970s, with high and rising inflation, high unemployment, shortages of key goods and the beginning of a 30-year slump in productivity growth.
Simple-minded assignment of cause and effect is always dangerous, but in the 1960s and 1970s, presidents found it easy to blame economic problems on the actions of their predecessors, whether justifiable or not. Voters were as confused as were investors.
One also could look at countries such as Italy, where the duration of governments often was months rather than years from 1950 through 1990. Or, look at Brazil, which has gone through twice as many heads of its central bank since 1985 as the United States has since 1935. Neither country enjoyed consistent policies; neither country had a stable currency or consistent income growth.
Of course, those disappointed with Bush’s re-election will protest that policy consistency is only a virtue when the policies in question are sound ones. There lies the rub — critics and supporters agree that the president sticks to policies once he has adopted them. Bush will stay the policy course more than any other president in recent history.
Many, however, think that the president’s fiscal policies are not prudent and that they will cause increasing harm to the economy the longer they continue. To anti-deficit hawks, the harmful effects grow exponentially as the duration of large deficits increases.
Even so, the election outcome brings a situation increasingly rare in U.S. political history. When one party controls both the presidency and the Congress, evading responsibility for harmful outcomes of bad policies is much harder than when the two branches are controlled by different parties or even when the two houses of Congress have majorities from different parties. One cannot play the too-common game of blaming failure on the other horses in harness.
Many U.S. citizens fail to realize how much our presidential-congressional system differs from the parliamentary systems used in most other nations. In parliamentary systems with two major parties, there is no split between the executive (prime minister and Cabinet) and the legislative. A majority in parliament automatically gives a party control of the executive branch. Responsibilities for policy outcomes are more obvious and more squarely assigned.
As students, we in the United States learn that our system’s checks and balances are intentional and a virtue. They are a virtue in that they dampen policy swings. But checks and balances have a downside. They obscure who bears responsibility for what. That certainly won’t be a problem in the next two years and probably not in the next four.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.