Conventional wisdom – backed by a fair bit of statistical evidence – suggests that how governing parties and politicians fare in elections has a lot to do with how well the economy seems to be doing, on the day when people go to the polls. If growth seems strong, and unemployment low, people conclude that those in power are doing a good job. This is both misleading and dangerous.
It is misleading because the impressions that voters, pundits, and economists have about the strength of the economy can be out of joint with reality. More importantly, it is misleading because those in power are largely not responsible for current economic conditions. It is dangerous because it worsens the degree to which politics and policy-making focus on the short term. If you are desperate to have unemployment dip down before November’s election, you are likely to create policies that sacrifice long-term interests for short-term gains.
1) The people in charge are largely not responsible for it
Why does an economy like that of Canada or the United States grow quickly or produce jobs? Partly, it has to do with innovations in techniques and technologies. Partly, it has to do with global economic conditions. Partly, it has to do with demographic trends. Other factors involve include long-term policy evolution – such as the development of the tax system – and trends in global historical development. When the global economy experiences profound changes, some industries rise while others fall. Politicians can have some effect on this, through things like infrastructure and training investments, but it is largely outside their control.
And yet, voters behave as though the government of the day is ‘responsible’ for unemployment being at whatever level it is. Similarly, when they see the value of their retirement investments fall (possibly because it had been grossly over-inflated by excessive optimism earlier), they blame those who currently hold power. By behaving in this way, voters give credit for success to people who did not engineer it, and respond to failure by punishing those who are largely innocent.
Unelected central banks also play an important role in establishing the economic situation in which countries find themselves, though central banks are often (and intelligently) insulated from day-to-day politics, as protection against them being exploited for short-term political advantage.
2) Focusing on it creates bad incentives
Far more problematic than failing to properly assign credit or blame is creating an environment where short-term outcomes are overwhelmingly important. This has obvious implications for climate change. In the long run, relying on fossil fuel power profoundly threatens our prosperity, because it risks undermining the climatic stability that society depends on. In the short term, however, shifting away from fossil fuels risks increasing unemployment and raising energy prices for consumers – both results likely to make voters howl and throw out whoever is in office.
Just as corporate CEOs need to be judged on the basis of how they worsened or improved their company across the long-term – rather than on what quarterly results they cooked up – politicians and political parties need to be judged on the basis of how they contributed to society, as understood in a long-term way. Politicians who produce short-term growth while simultaneously creating peril for the future should not be rewarded, just as those who call for reasonable sacrifices now to avert larger catastrophes later deserve to be praised for their vision and dedication.
Also, while economic statistics do convey important information about how the level of human welfare in a society is changing, they are not a perfect reflection of everything that is important. They do not tell us whether we are burning up tomorrow’s capital for the sake of today’s consumption; they also fail to value critically important but non-financial goods and services, including all the ecological processes which are absolutely necessary for the continuation of human life (as well as human prosperity). Governments deserve to be judged for the long-term effect they have on such things, as well as the influence they have on jobs, incomes, and taxes.
Unfortunately, nothing like that seems likely to happen in democratic societies anytime soon.