What Governments Do, Don’t Do, and Can’t Do

Where the action takes place

When you consider what ‘government policy’ really means, most tend to think of actions made by government on production, distribution, consumption and identity issues, and rightly so. Public policy mainly concerns both the formulation of goals across these many areas of life and implementing ways of achieving these goals (Australian Public Policy, Fenna). 

What gains little attention is the concept of inaction as a considered public policy stance. Governments making a conscious choice not to interfere in a policy area can be as important as the deployment of their scarce resources (attempting) to improve some part of our lives. There is no doubt that government has a role to play in our market economies; whether it be regulating (eg. to maintain market competition), investing (in key infrastructure), or taxation/subsidies (situations of market failure) to yield a certain social and/or economic outcome. However, there are many areas of our lives that government should just stay out of; for example, minimising government interference in our personal economic choices is, in my opinion, vital to our economic prosperity. We are the best judge of what we need and want in our lives, and hence we are in the best position to maximise our utility (economics speak for our ‘satisfaction’) with the limited personal resources at our disposal.

The current political climate surrounding fiscal credibility – arising due to the unsustainable budget deficits and government debt racked up by south European nations – means that frugality and fiscal conservatism is the new trend amongst the world’s finance ministers. In Europe, governments have been forced into austerity by two powerful forces: (1) the market via spiralling yields on their government debt, and (2) by the IMF and ECB. This has had spill over effects to Australian political discourse and economic policy. There has been clear shift from the spruiking of spending programs on middle-class entitlements under the Howard-Costello government, to gloating about caps on annual spending growth and surpluses in 2012/13 under the Gillard-Swan government.

The positive bi-product of this trend is that the Australian government can’t afford to interfere in areas of social and economic policy where, in other circumstances, they would be all too happy to intervene. In most cases, this is a very good development, as governments usually make a mess of things, even when they have the best intentions. Long may fiscal conservatism continue!

Governments can’t control the economy (even if sometimes they wish they could):

Economic policy is clearly an area that government gives a considerably amount of attention– not only because it affects the standard of living and quality of life of their people, but more importantly because it can single-handedly decide an election. The most common statistic used at the moment is one surrounding the US economy and election results:

No American president since Franklin Delano Roosevelt has won a second term in office when the unemployment rate on election day topped 7.2%

This statistic should make Obama a little worried. What is truly amazing is the underlying assumption being implied by this quote – that US presidents can actually control the performance of the US economy, and hence the unemployment rate itself. The problem is that we live in market economies that cannot be controlled by our politicians.  Of course, governments can implement economic policies (tax structures and spending priorities) to indirectly affect the outcome of the overall economy. The problem is “neither theory nor practice provides a wholly reliable guide to how these levers…actually work; or indeed, whether they work at all” (Fenna).  The harsh political reality is the general public do not care about these technicalities – their voting is still shaped considerably by their personal economic situation and that of their families at the time they arrive at the ballot box. Ultimately, I find it incredible that political careers are created, maintained and destroyed by the largely independent workings of the economic business cycle. Politics is a tough business.


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6 thoughts on “What Governments Do, Don’t Do, and Can’t Do”

  1. Great read. It will be interesting to see whether Obama actually pulls the victory off despite unemployment clearly being above the magic rate of 7.2% on Election Day. I think there’s a bit more to that number though as some studies have shown that it’s the change in the rate over a period of time in the lead-up to voting that has some significant predictive power.

    Still, I agree with you Dean about the misguided implication that the President’s actions can directly impact economic variables. But in this climate of sensationalist media looking for headline figures to make immediate judgements, it’s all we’ve got.

  2. That’s actually a really good point, whether its the president that makes the economy or the economy that makes the president. Mr. Bush immediately springs to mind as the prime example of this – people were making so much in 2004 that they just didn’t care.

    And as for Mr. Obama, I do hope that people don’t make decisions based on statistical coincidences: That would be a very bad world to be in.

  3. @Hungy

    Not so sure that it is a statistical coincidence. You have to remember that in the US they do not have compulsory voting.

    Angry/scared people are much more likely to vote. Obviously people who are unemployed are likely to be angry about it; people living in a country where if they lose their job, are likely to remain unemployed or experience significant difficulty finding a new job, are likely to be terrified of this happening to them. Also the unemployment rate is synonymous with low economic output/growth which also means a lot of people running business may be on the brink of failure. etc etc

    When you consider that there is a sudden influx of these voters, many of whom may not usually vote, it is not hard to see how this can tip the scales against the incumbent. The key thing here is that people do not realise that there is often very little correlation between their plight and the actions of the President.

  4. There is actually already research in this area. Alberto Alesina and Howard Rosenthal have a book about the relationship between the US business and political cycles: http://www.amazon.com/Partisan-Government-Political-Institutions-Decisions/dp/0521436206/ref=sr_1_3?ie=UTF8&qid=1335346317&sr=8-3

    Basically they argue when Democrats come in they introduce expansionary policy which leads to growth in the first two years but leads to inflation and low growth second two years so Republican wins reducing inflation leading to downturn in the first half of their term before returning to trend in second half leading to a reelection.*

    They incorporate voters inability to distinguish competency and events unrelated to government action that nevertheless have affect on the economy into their model.

    *Alberto is known as a conservative economist. He’s actually (in)famous for a journal article on expansionary austerity.

    • I don’t think that assessment holds up very well when you consider the historical reality of the US political cycle.

      It’s crude to just say that Democrats come into power and introduce expansionary policies – in the early years of the Bush Administration, the budget deficits skyrocketed under a program of tax cuts, prescription drug benefits and two wars. Coupled with a low interest rate, this created ideal conditions for a while until the Financial Crash.

      And considering there is such a limited sample of elections to analyse, it’s crude to say that Republicans always win re-election. The more accurate interpretation of history is that Presidents usually win re-election, unless facing extraordinary circumstances or failures – Bush Sr. (3rd party candidate), Carter (Iran hostage crisis, Stagflation), Ford (Watergate).

      There are numerous models that try to model the economic cycle to predict electoral outcomes, and none have proven completely accurate, because they can’t evaluate the intangibles like campaign strategy and likability.

  5. @David
    Great point. That is the key problem of not having a compulsory voting system: people are only drawn to voting if they are significantly engaged in politics at the time (a dwindling group as people become less engaged with the “lying, devious” politicians; but still significant one in US), or if they are in a dire/potentially dire political situation which angers them enough to get off the couch one Saturday and go out to vote.

    It also means politicians are drawn to the extremes (left or right) to engage their core political base – something which Romney has struggled to do during the Primaries. I’m glad Auatralia has a compulsory voting system that pulls political parties to the more moderate centre on most issues; it makes the politics less interesting but definitely means rational decisions on important public pollicy issues are more likely to be made.

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