Good Economics from Bad Politics? Not Likely!

How Do You Get Good Economic Policies From Bad Politics?
http://www.vanityfair.com/politics/features/2008/11/stiglitz200811

The web site above is for an article by Dr. Joseph Stiglitz, the Columbia University Economics Professor who writes for Vanity Fair, among others. Dr. Stiglitz, who has won a Nobel Prize, has been writing with increasing pessimism about the consequences of the policies of the past eight years, and it is well worth reading, although sobering.

The only thing that disturbs me about the piece is the tendency for Dr. Stiglitz to stop with the economic questions themselves, and to not examine the question of how our political system could produce such terrible policies in the first place. It might be “politic” during an election to blame everything on George Bush, but doing so might distract us from the deeper problem that has evolved in the American political system.

Most Americans (including most economists) would agree with the following: that doubling the national debt in just eight years is not a wise public policy; that becoming the world’s largest debtor nation is not wise public policy for the United States, particularly when our debt is held predominately by such uncertain “friends” as China, Russia, the Oil Régimes, etc; that creating entirely unregulated and unsupervised financial markets are a risky proposition, given the capacity for greed of those involved with those institutions. In fact, most Americans would today agree with much and perhaps most of Dr. Stiglitz’s arguments.

If that is the case, then how did we get into this mess in such a short time? That is the question that Dr. Stiglitz and most economists fail even to address, much less answer. Unfortunately, until we answer it, we will not get to anything approaching the policies that Dr. Stiglitz would advocate or that the American people would approve. These grotesque economic politics are not accidents; they are the perfectly logical extension of a political system that is dangerously imbalanced in the direction of creating just these types of policies.

I have been making this argument for well more than a decade, most elaborately in a book my son, Ben, and I wrote and published in 1994, called The Politics of American Discontent (John Wiley and Sons). Our argument is relatively simple (and supported in the book with copious statistical information):

• The monetary costs of modern political campaigns began to increase dramatically following the advent of television and radio as the dominant means of communicating with voters, a change that really accelerated in the 1960’s and beyond.
• The primary sources of the largest financial resources for campaigns came from the highly organized national and state “interests” who wanted to affect policy to direct money and policy support to their “interests.” We call these “lobbies” and they come in a wide variety – the oil lobby, the military-industrial complex, the ethanol lobby, the teachers’ lobby, etc. They all operate in much the same way.
• These “interests” are very rational about their campaign contributions; they primarily support incumbents by a factor of 15 to 25 to one over challengers because they want “certainty” of access after the election to those who win, and incumbents almost always win.
• Recognizing this symbiotic relationship between the incumbents and the special interests, the incumbents use this motivation to amass huge campaign war chests designed to discourage challengers from opposing them because the opponents do not have access to such funds.
  o The Incumbents receive historically unprecedented “permanence” in office, with no effective opposition and re-election rates approaching 100 percent for Congress and the States.
  o The “special interests” gain regular, continual and unfettered access to decision makers (incumbents) to influence public policy to promote their interests, e.g., more public money, contracts, lower taxes, more favorable tax treatment, less regulation, etc.
  o The public receives a nearly continuous completely one-sided flow of paid and unpaid propaganda from the incumbents to promote themselves, to distort the process that is producing the policies, and to insure that the voters like them, even when their institutions fail – all paid for with the money from the lobbyists.
• The “net policy effect” in most States and federally is to inflate spending (and future underfunded and unfunded liabilities) by an amount significantly greater than the public wants, that the tax system will support, or that good economic policy dictates, and in ways that are destructive to the longer term interests of America and future generations, i.e., our beloved (if unprotected by us) grandchildren.
  o The problem is compounded by the ability of the incumbents to vote the public benefits in the form of increased Social Security and Medicare today, where the benefit is an “unfunded liability” where the cost has been transferred to future generations who will have to pay for it and where the recipients pay little or nothing. This is taxation without representation at its very best – our grandchildren do not get to vote on their own indebtedness. How charitable of our ethical office holders!
  o The problem is compounded with public employee salaries, one of the largest special interests, where the incumbents vote pension increases to employees without requiring the funding in form of higher taxes to pay for them.

The net result is a badly corrupted and broken democratic political system! That is the primary cause of the past eight years. We have the policies that the incumbents of both parties delivered; and they delivered those policies directly to the special interests that funded their campaigns to insure their permanence in office as incumbents. The “special interests” that are funding the incumbents, at every level of office, are twisting public policy slowly and surely to favor themselves, to the detriment of what the public finds acceptable or what good economic policy might suggest.

We are in the midst of a very competitive Presidential election, and we are looking at a major shift in the strength of the Democrats in Congress. This creates the illusion of more competition and choice than is the case. Most incumbents in Congress will be returned despite the fact that 75 percent of us believe that Congress is doing a lousy job. Almost every incumbent will be returned in States like New York and California where the legislative process has been broken for years, and fiscal crises occur virtually every year.

Economics is a science that, for the most part, fails to take into account “political variables,” except as factors outside the models. But I was trained as a Political Scientist, which is a much less exact science, and I will say unequivocally to all economists that unless you can address the process above, you cannot get to anything approaching “optimal” economic policies. You can advise as much as you like what needs to be done, and it will eventually be twisted all out of kilter by the process of influence that exists because of the ability of special interests to purchase the loyalty of incumbents in office.

When the Democrats assume control, the process will begin all over again but with a slightly different constellation of special interests. The special interests are generally pretty bi-partisan in who they buy, contributing to both sides of the aisle in the states and federally

The policies that Dr. Stiglitz and so many other economists decry – massive deficits, huge debt, massive unfunded liabilities, uncontrolled spending, etc. -- are simply symptoms of a deeper political problem, just as a high temperature is a symptom of more serious illness.

The deeper problem (the "cause" as it were) is the unfettered influence of special interests of all kinds that is purchased through campaign contributions to incumbents and paid off with subsidies, favoritism, tax breaks, and the like to those interests after the election. We will simply never fix the economic symptoms unless we fix the political disease. This political disease is deeply entrenched; so entrenched that it has corrupted the morality of values of those in the system, creating a world in which “spin” is a substitute for candor and truth, when winning is worth so much financially that the social costs of winning are simply ignored, and where greed is the new public morality of office holding. Americans know this, frankly, and that is why they are so disgusted with politics and the people in it.

The system will continue to produce massively irrational (for our children and grandchildren) deficits and debt, and even greater unfunded liabilities, as long as the special interests can buy whatever they want from the government with the loyalty of incumbents they have purchased with their campaign contributions. It would be nice if we could focus on the cause, for a change, and not simply the effects.

Just my opinion,

Gordon Black