The paralysis in government

A worker at the construction site of a metro station in Chennai, India. Among emerging economies, China’s reform process is on hold, pending a leadership transition, while India is experiencing an economic slowdown. The negative effects of such problems are now interacting, feeding back on themselves, and spreading to the rest of the global economy. — PHOTO: REUTERS

By Michael Spence And David Brady

IT IS no secret that the global economy is struggling. Europe is in the midst of a crisis whose root cause is a structurally-flawed monetary and economic union. The United States, emerging slowly from a financial crisis and widespread deleveraging, is experiencing a growth slowdown, a persistent employment problem, an adverse income distribution shift, and structural challenges, with little effective or decisive policy action.

Meanwhile, among the major emerging economies, China’s reform process is on hold, pending a leadership transition this autumn that will clarify various internal interests’ goals and power relationships. India has lost reform momentum and is experiencing an economic slowdown and a potential loss of investor confidence.

The negative effects of these problems are now interacting, feeding back on themselves, and spreading to the rest of the global economy. And yet, despite a palpable sense of concern that something is very wrong, the prognosis for significant change is bleak – and deteriorating.

What accounts for the apparent lack of effective policy action across a broad range of countries and regions?

One line of thinking blames a “leadership vacuum” – a common diagnosis in Europe. Elsewhere, especially in the US, polarisation and ugly zero- sum politics are thought to discourage potentially capable political leadership.

But, absent further analysis, the leadership vacuum becomes a catch-all explanation. What we need to know is why new political leadership in democracies like France, Britain, Japan, and the US has produced so little change.

A second explanation addresses that question: While bold action is required, the complexity of economic conditions, and disagreement about the right policy responses, imply a risk of serious error. For professional politicians and policymakers in such circumstances, less may be more.

On this view, risk aversion both reflects and reinforces a divergence between individual incentives (the desire to be re-elected, reappointed, or promoted) and collective needs (fixing problems).

A third answer is that policy instruments are simply ineffective in today’s conditions. There is some merit to this claim.

Economic deleveraging takes time. The restoration of sustainable patterns of growth requires years, not months. Expectations may be out of line with the underlying reality. But the absence of a quick solution does not mean that nothing can be done to improve the speed and quality of recovery.

Vested interests may also play a role. Technological innovation and global market forces have produced a decisive shift in income towards capital and the upper 20 per cent of the income distribution, often at the expense of middle-income groups, the unemployed, and the young.

The beneficiaries of these trends may have accumulated enough political influence to maintain the status quo, highlighting distributional issues that have generally received too little attention in understanding policy responses or their absence.

There are also structural explanations for policy inaction. Governance systems and constitutional structures differ in the extent to which they require broad consensus for action, or to change policy direction in response to shocks or shifting conditions.

Some argue that the more constraining political systems work well in stable times, but perform poorly under volatile conditions like those prevailing today. Others support constrained government on the grounds that it protects everyone from waste, rent-seeking and interference with freedom of choice, and that when needed, inspired leadership can build the required consensus to address changing circumstances. High hurdles to major shifts in policy direction force officials to make a convincing case.

That is an inherently difficult task at a time when rapid change in the global economy has left many still trying to understand what is happening and what it all means for growth, stability, the distribution of income and employment. In the face of such complexity, it is unsurprising that genuine policy disagreements lead to extended debate and relatively little action.

Moreover, the technocratic elements of government must often be balanced against democratic accountability.

In every society, individuals with special training and expertise are appointed to perform technically complex functions. Their freedom of action is constrained by time limits and reappointment procedures that determine the nature and degree of their accountability to elected officials and the public. There can be too little freedom of action (populism) or too little accountability (autocracy).

The necessary balance may vary according to local conditions. For example, many China observers believe that accountability there needs to increase at this stage of the country’s economic, social, and political evolution. Others argue that Western democracies have the opposite problem: a surfeit of narrow, politically assertive interests leads to underinvestment and poor trade-offs between present and future opportunities and performance.

This brings us to a crucial obstacle: Government, business, financial and academic elites are not trusted. Lack of trust in elites is probably healthy at some level, but numerous polls indicate that such trust is in rapid decline, which surely increases citizens’ reluctance to delegate authority to navigate an uncertain global economic environment.

Loss of trust probably has multiple causes, including analytical failure: central banks, regulators, market participants, rating agencies and economists almost all failed to detect rising systemic risk in the years preceding the current crisis, much less to take appropriate corrective action.

But a more important cause is a suspicion that elites are placing their own interests above shared social values.

Claims that our leadership, institutions, analyses, or policy instruments are inadequate to the task at hand surely contain a kernel of truth. But the deeper problem is a breakdown in precisely such values and goals, that is, a weakening of social cohesion.

Restoring it will require analysts, policymakers, business leaders and civil-society groups to clarify causes, share blame for mistakes, pursue flexible solutions in which costs are shared equitably, and, most importantly, explain that hard problems cannot be solved overnight.

Michael Spence, a Nobel laureate in economics, is professor of economics at New York University’s Stern School of Business and senior fellow at the Hoover Institution. David Brady is deputy director and senior fellow at the Hoover Institution and professor of political science at Stanford University.

PROJECT SYNDICATE

18 Aug, StraitsTimes

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