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Is democratic process incompatible with developing sound economic policies?

The Republican and Democratic conventions to nominate their presidential candidates for the 2012 election will take place within the next two weeks. Much attention is focused on the differences in the policy platforms. How will they impact the economy in the short-run and in the long-run? What will position of the new administration on contentious social issues? Instead of debating the merits of the two platforms, the goal of this note is to consider whether the timing of electoral cycles in a democracy is conducive to formulation of effective economic policies. In United States election are held every four years for the President. A third of the Senate is elected every two years for a six year term. All members of the House of Representative must face election every two years. In short there is an election every two years and, while politics is local, these elections can change the balance in the Senate and the House of Representative and impact continuation of economic policies. In parliamentary democracies like that of the United Kingdom, a cabinet can continue as long as it has the majority in the parliament and, if no party or coalition of parties has majority support, fresh elections must be conducted. If the division within the legislature reflects entrenched opinions among the public, then even after election, it will not be possible to form a stable government. Thomas Hobbes in the seventeenth century argued that political power comes from the consent of the governed. Writing shortly after, John Locke shifted the focus to the economic consequences of political decisions and wanted the state to protect the property rights (including earnings from work) of individuals. For Jeremy Bentham writing in the next century, maximizing the collective welfare of the individuals should be the sole criteria for public policies. These not necessarily consistent views provided the inspiration for the democratic movements in Europe and America.1 From this perspective, national economic policies are based on the aggregation of the preferences expressed by individuals. Can it lead to short and long-term policies that are effective in achieving economic goals? Mainstream economic analysis as developed in the nineteenth and twentieth century assumes that individuals are rational and on each occasion choose the ones whose outcome are preferred to others that are feasible. Each time an individual goes to the store, he will choose the basket that he prefers to others he can afford. For a choice of career or the level of savings for retirement, she will look at feasible paths over life-time and select the preferred one. Recent findings in behavioral economics question whether individual choices are so rational. The urge for immediate gratification overwhelms long-term plans that the individual himself has selected. Commitments made on New Year Eve seldom last into February. The temptation to spend now leads to repeated shortfalls in savings plans and the individual ends up with savings inadequate to meet the lifestyle she wants on retirement.2

Public policies require reconciling the choices individual prefer. Since one platform acceptable to all is not feasible, politicians have to make a choice: they package their policies to make it attractive to as many voters as possible, hoping that it will get them elected. The myopia noted in individual choices will push political parties to offer programs that offer immediate benefit like a tax break or increase in social security payments while postponing the pinch of the costs. After election they face two types of difficulties. Opposition to individual components of the platform makes it practical to implement each and every one of them. Economic conditions change and policies that that were appropriate at election time are no more so. Successful democracies have an ongoing institutional process that continuously adjust policies to meet emerging political and economic challenges. Economists Acemoglu and Robinson have marshaled considerable economic evidence that political order that is inclusive and gives incentives to everyone to invest in the future are the ones that succeed over time.3 While Locke argued that the role of justice was to protect private property, Acemoglu and Robinson claims that societies that guarantee the right will prosper. If public is confident that the government is not kleptocratic, they will be tolerant of departures from pre-election platforms to achieve political compromises or to face unforeseen developments. The parliamentarians who stood for opposing policies agree not to block a legislative agenda that does not hurt their interests too much or go against beliefs that they hold passionately. This process will work only if the public and their representatives can find a range of issues on which they are ready to compromise. If strongly held religious, ethnic, social and economic beliefs divide the voters irreconcilably, then democracy, regardless of the claims made by political philosophers, is bound to become dysfunctional. This happened during the Civil War years in the United States and during the interwar years in Europe. Less troublesome example is the dysfunctional political system in Belgium. In India, widespread corruption, a type of kelptocracy by public servants and politicians, have created a public furor outside the democratic process; whether democratic process will respond and diffuse the anger or whether it will destabilize one of the vibrant democracies of Asia is yet to be seen. Passionately held views on social policies and concern over increasing indebtedness of the government have increased the rancor in the recent political debate in US. Hopefully it will die down and the process of compromise will get the upper hand after the election.
1.

For a short readable summary of the views of Hobbs, Locke and Bentham , see Opportunities and choices: Understanding our economic decisions (2011), pp.13-14.
2.

see Opportunities and choices: Understanding our economic decisions (2011), pp.157-60. Acemoglu, Daron and James Robinson, Why Nation Fail (Crown Publishers, 2012).

3.

Rama V. Ramachandran
http://www.visualeconomicanalysis.info/index.html Facebook: Ramanomics
Copyright 2012 Rama V. Ramachandran

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