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13/3/2015 Buttonwood: Polls apart | The Economist
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Feb 28th 2015 | From the print edition
Buttonwood
Polls apartVoters face constraints on their economic choices
THE row about whether to modify Greece’s bailout has provoked claims that democracy isbeing ignored. The electoral mandate of the Syriza party, it is said, is being overridden byGreece’s creditors.
In fact, there have always been limits on voters’ freedom to pursue their desired economicpolicies. The first is on the ability of the majority to tax the minority, be it highearningindividuals or companies. Clearly there is some point beyond which higher taxes lead tolower revenues, as effort is discouraged. There is no general agreement over the point atwhich diminishing returns set in, but in an age of mobile people and firms, the threshold isprobably lower than it used to be.
The second limit occurs when countries become dependenton international creditors for finance. They cannot force thosecreditors to roll over their debts, nor can they dictate the termson which they borrow. Countries are free, of course, to defaulton their debts; eventually creditors forgive (or forget) and startlending again. In the short term, however, default is likely tolead to budgetary constraints. Voters may end up withausterity after all.
Economic regimes have also evolved over time, aselectorates have changed. Before 1918, when the franchise inmost democracies was limited to the propertyowningclasses, politicians favoured a lowtax, small state. After 1918universal suffrage brought pressure on governments tointervene more heavily in the economy, providing health care, education and insuranceagainst unemployment. Taxes rose accordingly.
After 1945 the experience of the Depression persuaded most governments to opt forKeynesian demand management, allowing deficits to expand in order to ward off recession.But the policy broke down in the mid1970s in the face of simultaneous high inflation and
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13/3/2015 Buttonwood: Polls apart | The Economist
http://www.economist.com/news/financeandeconomics/21645244votersfaceconstraintstheireconomicchoicespollsapart 2/3
unemployment (“stagflation”). The policy regime took the blame: politicians had given in tothe temptation to set interest rates to gain electoral advantage and this allowed inflation tobuild.
Central banks then became the drivers of economic policy, using interest rates to managethe cycle. This made them unpopular when inflation was being squeezed out of the systemin the late 1970s and early 1980s. But as inflation fell and interest rates came down, thecentral bankers were lauded as clever technocrats who had delivered the “greatmoderation” of steady growth and low inflation.
This change was an explicit step away from democratic control of economic policy.Admittedly, governments still define central banks’ mandates and hire the people in charge.But voters who dislike the policies of Janet Yellen and Mario Draghi—the two mostimportant economic decisionmakers in America and Europe—have no direct way of gettingrid of them.
The financial crisis has made central bankers even more useful than before. After 2009most politicians in the developed world were unwilling or unable to deliver fiscal stimulus.Central banks could both provide monetary stimulus and act as willing buyers forgovernment bonds through quantitative easing (QE), making it easier to fund deficits. Thedeal has appeared virtually costfree: it has not produced the hyperinflation that somepredicted. (How all this monetary support is unwound is another matter.)
However, voters in the European countries that opted for the single currency do not have adomestic central bank. It is only now that the European Central Bank is embarking on QE.And, of course, such countries have not been able to devalue their currencies, a step thathelped Iceland on the road to recovery.
The economic critique of the euro zone is wellknown. It is foolish to create a singlecurrency without political or fiscal union. But would Greeks really like the kind of Europeansuperstate that could easily make big fiscal transfers? They might find themselves just aspowerless as they now feel in their negotiations with creditors. Greece, after all, would havea very small weight in a eurozone electorate.
This points to a wider problem. National politicians come to power on the back of economicpromises made to their domestic electorates. But the forces that determine whether theireconomies prosper are global, not local—whether the Chinese economy slows down orspeeds up, what happens to oil supplies and so on. National politicians will be blamed forthe adverse effects of those forces, even though they are not under their control. Thecorrosive effect is to add to voters’ cynicism about politics and undermine support fordemocracy.
Economist.com/blogs/buttonwood
From the print edition: Finance and economics
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