Politics Is The Very Reason Fiscal Policy Doesn’t Work In Recessions

It’s a delightful idea, that if we put all the wise people in a big room and get them to chew over society’s problems then they’ll come up with optimal solutions. Reality doesn’t quite work that way as every legislature on the planet shows us. So it is with this idea of Keynesian demand management. Our specific example being this idea that in a recession the government should go spend more so as to get us out of the recession.

Sure, we can – and people do – construct the models which show us that this works. Let’s allow the truth of those models at this point. Now let’s try applying those models to the real world. How do these decisions actually get made?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]There are vast institutional differences between technocratic central banks and the politically volatile legislatures that control spending and tax policy. Let’s bear in mind that a typical advanced-economy recession lasts only a year or so, whereas fiscal policy, even in the best of circumstances, invariably takes at least a few months just to be enacted.[/perfectpullquote]

Well, that’s one reason. A reason that’s redoubled when we hear that argument that it should be infrastructure spending that gets the loot. We’ve so encumbered the process of actually building anything with licences and permissions that we just cannot turn on such spending in time to make any difference. There’s as Obama found out, a distinct lack of shovel ready projects.

But there’s more to it than this:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]In some small economies – for example, Denmark (with 5.8 million people) – there is a broad social consensus to raise fiscal spending as a share of GDP. Some of this spending could easily be brought forward in a recession. In many other countries, however, notably the US and Germany, there is no such agreement. Even if progressives and conservatives both wanted to expand the government, their priorities would be vastly different. In the US, Democrats might favour new social programmes to reduce inequality, while Republicans might prefer increased spending on defence or border protection. Anyone who watched the US Senate confirmation hearings last September for supreme court justice Brett Kavanaugh cannot seriously believe this group is capable of fine-tuned technocratic fiscal policy.[/perfectpullquote]

Or as we might put it. The problem with political control of the economy is the gibbering maniacs we end up with as politicians. It’s not a system that works.