From the way politicians blabber politically correct economic rhetoric – promising job creation, recovery, stimulus, etc. – it may surprise you to learn that most economic theorists didn’t consider the state as an economic agent in their models until the mid-20th century. In the 1960s, Public Choice Theory began to postulate how politicians and government bureaucrats acting in rational self-interest were actually a powerful economic force.
While ever evolving, the basic premise is this: politicians are budget-maximizers and above all else want’ to increase their personal wealth. They will pursue any action or policy that increases their potential to amass personal wealth. Sometimes that means supporting special interest groups and rent-seeking (the economic term for financial exploitation through creative regulations), throwing out their vows to only pursue actions in the public’s interest and to further the aims of democracy. Sometimes it means a politician will play nice to please voters so that they can stay in power for another term, especially when the media or an opposition party is particularly sharp.
The basic point is this: anything a politician can get away with, he or she will try to get away with. The goal for public choice theorists is to try to game the system, so that politicians can get away with as little exploitation as possible. The climate can be improved by increased transparency, government watchdog groups, political opponents and conscious voting. However, from experience we also know that politicians are much better at evading detection than we are at rooting it out.
It doesn’t help that much of profit-maximizing behavior occurs right in plain sight. Put in the right political spin and appeal to the right special interest voting block, and a piece of terrible legislation can get passed with popular support. A politician can get poor factory workers to support free trade barriers by spinning it as a way to protect jobs, conveniently neglecting to mention that the result is higher prices for all consumers and retaliatory tariffs that prevent exports, thereby hurting sales and threatening the factory jobs anyway. Of course, the politician’s goal all along was to please the factory owners who also happen to be large campaign contributors. We’ve all heard different versions of this story a hundred times from politicians all over the spectrum and at every level of government.
It can be confusing to think about how government can affect the behavior of the economy at all. After all, the aggregate economy consists of hundreds of billions’ of dollars’ from’ private transactions all over the world, very few of which are actively monitored by any government. How could any institution hope to affect individual behavior?
A convenient, if inaccurate, way to look at it is by equilibrium theory. Think of the economy as a giant pool of water. In the absence of any disturbances, the pool will sit unperturbed at the surface, even though there is plenty of activity going on underneath – water molecules bouncing around, hitting each other, falling due to gravity, etc. A balanced economy is much the same way (if you simplify the way an economy works). There’s always a lot of activity going on, but under perfect market conditions the surface is apparently still. The supplies of goods are moving around, but they are always where they need to be when they need to be there, and for a price that the consumers are willing to pay. Note that this model does not assume that everybody can get what they want for the price they want but, in the aggregate, things are stable. Suppliers and consumers are happy and can get what they need and, generally, what they want.
Now picture that pool of water and splash some water into it.’ Maybe’ it was caused by’ some new technology coming onto the market. It sploshes the pool around because consumers are not sure how much the new product is worth to them, suppliers are unsure of where to ship the new technology, but eventually these problems get sorted out, the pool settles and the economy returns to equilibrium.
What governments do is prevent the pool from settling down and returning to equilibrium; they can splash water in, take it out or simply stir the whole thing around. They can redistribute money around, propose financial regulation that changes how supplies are allowed to be distributed (how money gets around is every bit as important as the travel of goods). They can ban products that consumers want or subsidize products that it thinks consumers should want. With all this sloshing and stirring, politicians can easily game the system to benefit themselves. And, as long as they know how to frame it in the right language or get the right support from the right people, even convince the public that its a positive thing.
In reality, however, our equilibrium picture is inaccurate. Information does not travel through a market economy as efficiently as we’d like to think and so our economic pool does plenty of sloshing around on its own. Economic forces are not as predictable as physical ones, and so the analogy must stop. Sometimes, the government does a good job coming up with regulation that improves the equilibrium picture over the long term. For example, by protecting property rights the government makes stealing capital and ideas illegal. This allows people to leverage their possessions for capital – like mortgage a home – without worrying if the bank is going to steal it even if you’re paying your debts.
Some government actions are not so clear. The financial crises represents a huge breakdown in the way housing and financial markets worked, and there is strong evidence that indicates government policies created incentives that generated at least some of the bad behavior in the financial sector. Now, the big debate is that the government wants to toss more water around, increasing their presence in financial, health care and automobile sectors – which already have plenty of intervention already. The economic pool is getting deeper all the time, but we still can’t predict what wave patterns will form or how to bring the pool to equilibrium.
The government can do some interesting and clever things to lull the economy into stable growth, but given what we know about public choice theory, we must continue to question the politician’s motives and goals – which can be cleverly hidden in pretty rhetoric. Politicians – and even economists – like to sound more definitive than they really are about such things, because it is’ in their interest – but not the public interest’ – to do so. Before demanding a politician support x policy for y reasons, try to understand your reasons for doing so. Are you basing this off of political rhetoric? Your own self interested motivations? A peer-reviewed political science research paper? Before insisting on throwing more water in the pool, try to think critically about what the long term effects could be – in the end, we could all get very wet.
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