Tuesday, November 25, 2014

Why Are Governments Paralyzed?

MILAN – It is no secret that the global economy is struggling. Europe is in the midst of a crisis whose root cause is a structurally flawed monetary and economic union. The United States, emerging slowly from a financial crisis and widespread deleveraging, is experiencing a growth slowdown, a persistent employment problem, an adverse shift in income distribution, and structural challenges, with little effective or decisive policy action.

Meanwhile, among the major emerging economies, China’s reform process is on hold, pending a leadership transition this fall that will clarify various internal interests’ goals and power relationships. India, which has lost reform momentum, is experiencing an economic slowdown and a potential loss of investor confidence.

The negative effects of these problems are now interacting, feeding back on themselves, and spreading to the rest of the global economy. And yet, despite a palpable sense of concern that something is very wrong, the prognosis for significant change is bleak – and deteriorating.

What accounts for the apparent lack of effective policy action across a broad range of countries and regions?

One line of thinking blames a “leadership vacuum” – a common diagnosis in Europe. Elsewhere – especially in the US – polarization and ugly zero-sum politics are thought to discourage potentially capable political leadership.

But, absent further analysis, the leadership vacuum becomes a catchall explanation. What we need to know is why new political leadership in democracies like France, Britain, Japan, and the US has produced so little change.

A second explanation addresses that question: While bold action is required, the complexity of economic conditions, and disagreement about the right policy responses, implies a risk of serious error. For professional politicians and policymakers in such circumstances, less may be more. On this view, risk aversion both reflects and reinforces a divergence between individual incentives (the desire to be reelected, reappointed, or promoted) and collective needs (fixing problems).

A third answer is that policy instruments are simply ineffective in today’s conditions. There is some merit to this claim. Economic deleveraging takes time. The restoration of sustainable patterns of growth requires years, not months. Expectations may be out of line with the underlying reality. But the absence of a quick solution does not mean that nothing can be done to improve the speed and quality of recovery.

Vested interests may also play a role. Technological innovation and global market forces have produced a decisive shift in income toward capital and the upper 20% of the income distribution, often at the expense of middle-income groups, the unemployed, and the young. The beneficiaries of these trends may have accumulated enough political influence to maintain the status quo, highlighting distributional issues that have generally received too little attention in understanding policy responses or their absence.

There are structural explanations for policy inaction as well. Governance systems and constitutional structures differ in the extent to which they require broad consensus for official action, or to change policy direction in response to shocks or shifting conditions.

Some argue that the more constraining political systems work well in stable times, but perform poorly under volatile conditions like those prevailing today. Others support constrained government on the grounds that it protects everyone from waste, rent-seeking, and interference with freedom of choice, and that, when needed, inspired leadership can build the required consensus to address changing circumstances. High hurdles to major shifts in policy direction force officials to make a convincing case.

That is an inherently difficult task at a time when rapid change in the global economy has left many still trying to understand what is happening and what it all means for growth, stability, the distribution of income, and employment. In the face of such complexity, it is not surprising that genuine policy disagreements lead to extended debate and relatively little action.

Moreover, the technocratic elements of government must often be balanced against democratic accountability. In every society, individuals with special training and expertise are appointed to perform technically complex functions. Their freedom of action is constrained by time limits and reappointment procedures that determine the nature and degree of their accountability to elected officials and the public. There can be too little freedom of action (populism) or too little accountability (autocracy).

The necessary balance may vary according to local conditions. For example, many China observers believe that accountability there needs to increase at this stage of the country’s economic, social, and political evolution. Others argue that Western democracies have the opposite problem: a surfeit of narrow, politically assertive interests leads to underinvestment and poor tradeoffs between present and future opportunities and performance.

This brings us to a crucial obstacle: Government, business, financial, and academic elites are not trusted. Lack of trust in elites is probably healthy at some level, but numerous polls indicate that it is in rapid decline, which surely increases citizens’ reluctance to delegate authority to navigate an uncertain global economic environment.

Loss of trust probably has multiple causes, including analytical failure: central banks, regulators, market participants, rating agencies, and economists almost all failed to detect rising systemic risk in the years preceding the current crisis, much less to take appropriate corrective action. But a more important cause is a suspicion that elites are placing their own interests above shared social values.

Claims that our leadership, institutions, analyses, or policy instruments are inadequate to the task at hand surely contain a kernel of truth. But the deeper problem is a breakdown in precisely such values and goals – that is, a weakening of social cohesion. Restoring it will require analysts, policymakers, business leaders, and civil-society groups to clarify causes, share blame for mistakes, pursue flexible solutions in which costs are shared equitably, and, most important, explain that hard problems cannot be solved overnight.

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    1. CommentedMarc Sargen

      The world is paralyzed because there are no easy answers any more. There has been 20 years of unbalance trade, growth, government debt, and monetary policies.
      Because of bubbles & debt most of the old tools that governments have used in the past have been used & they are now in unstable positions but tasked to do more. It is hard for the debt ridden to spend more, for the austere to grow, or for the world to all be net exporters to grow their own economies. We are not trying to get a solid growth base with out doing too much collateral damage, but it still means that many will get hurt in the process.

    2. CommentedDaryl Davis

      Governments become paralyzed by attempting to represent too many people with far too disparate concerns. An ideal system of government, therefore, ensures civil rights and the protection of person and property to all, but then allows local communities to express their unique cultural values.


    3. CommentedGary Marshall

      Thanks Michael for adding absolutely nothing to the discussion. Most don't care to hear anymore about the problems. They have heard enough of them. They just want to know what the solution is.

      So what is it?


    4. CommentedZsolt Hermann

      I think the answer to the main question in the title can be best described with Einstein's famous quote: "One cannot alter a condition with the same mind set that created it in the first place".
      And the first paragraph of this article is a good example, examining our global problems in a fragmented, isolated, local way, as if there was no connection in between them.
      All those local problems exists but they all have the same root, our inherently selfish, subjective nature that forces us to plan, and execute everything solely for self fulfillment, self profit, which mentality is best crystallized in our present constant quantitative growth, expansive, exploitative economic model and the governing structure supporting it.
      The seemingly local problems are simply the reflections of the actual culture, traditions, the make up, the "superficial clothing" of those regions.
      Governments are paralyzed because this system has become self destructive after we passed the tipping point, since this system we stubbornly push forward is unnatural and unsustainable.
      Today all the methods, "solutions" that seemed to work before, simply dig us even deeper into crisis, but we still try to use them as we are unable to exit our little, black, subjective bubbles.
      In order to fill the "leadership vacuum" we need people who are capable in seeing the system as a single whole, in its totality with all of it connections, intricacies and the principles, natural laws influencing them.
      We are all capable of achieving such a "vision" but first of all we have to abandon our present thinking and attitude, and start examining the whole, living world system from another angle, instead of a subjective, self calculating angle through a mutually responsible, cooperative angle.

        CommentedGary Tucker

        Perhaps this is an idea that encompasses many of the points made in your comments.


        It is an idea for a mutual fund, a management company and a foundation covering the globe. It would also include 6 publicly owned property management companies that would each cover a designated region by dividing the world in to 6 development regions.

        These 6 companies would provide funding for building infrastructure projects, within their respective regions while at the same time remaining debt free.

        It is simply an idea for a mutual fund, a very large mutual fund, based somewhere such as the Cayman Islands. It is run by a management company 80% owned by a foundation and 20% owned by a publicly owned company that also owns a construction management and back office IT company to manage projects funded by the foundation.

        With a management fee of between 1 and 1.3% annually, and a fund of assets of between 12 and 24 trillion dollars one could easily see the types of numbers available to the foundation and management company. This could indeed provide non government, non borrowed stimulus funding for projects worldwide.

        The fund and foundation would also be, in a real sense, be providing a much needed service to some 150+ nations and the international monetary system worldwide.

        The foundation would initially provide money for clean water projects worldwide. It would also provide money for the planting of tree's etc and other projects to counter global climate change.

        In order to appreciate the true effectiveness of the idea one must abandon all old preconceived ideas of size.

        It is envisioned that with a wide acceptance of the fund as a repository of cash, stocks, bonds and such from virtually every country and region of the world, originally by banks, sovereign funds and other financial institutions that the amounts being discussed could be in the trillions of dollars.

        This would act not only as a major alternative to the dollar and other currencies as a reserve "asset", it would hopefully tend to moderate such wide swings in values over time.

        The other consideration is that many individuals and companies that are involved in capital flight from their own respective countries could make it their first stop to place all those assets in the fund. They investor could then withdraw such equal value of currencies over time while the fund would be able to return much of that capital to the country of origin over time.

        It is just the spreading of risk across an entire globe that makes the fund, as well as the clients, each get the value that the fund has to offer by the spreading of not only the risk but the length of time horizon inherent in the fund.

        As to the 6 regional development companies, these would replace the governments role in many cases for stimulated spending on projects in down cycles while cutting back in times of boom. As the regional development companies are not only covering every nation in an entire region, they would also be interconnected with at least 2 other regional development companies in partnership ownership's but would also have mutual investment relationships with the mutual fund as well.

        They true value of this group of companies is that they 1. Divide the world into 6 regions for the purpose of regional investing and risk spread. 2. They are in no way connected to any government or governments except for the investment by certain governments in the unit trusts and development company shares. 3. They are all publicly traded and are open to ownership by all those who qualify as owners. 4. They all are based upon the financial principle of no debt to the organizations. 5. The primary focus of all of the companies and organizations of this group is to foster development among the very lowest economic countries in the world, but by the pooling of resources they are able to not only create growth in these countries but by also moving up the development nation ladder in the way of trade of goods and services.

        The beauty is it could well be on its way to creation almost overnight. It just needs initial investors and entrepreneurs. Unfortunately the key is that it would only work with one single organization as such an entity. 10 similar organizations would defeat the entire purpose.

        I have begun publicizing the idea as my ability to create interest in a private level has been impeded, not by the idea, but by my lack of economic, educational and CV to take a more leadership role in presenting and leading the concept.

        As you noted Einsteins comment, "the way out of a problem is not by the way that got us in" is pretty much covered in this idea.

        It has been the lack of treating the worlds problems in more of a regional and indeed world wide problem instead of a collection of 150 national problems that need a singular solution to each nation different from all of their regional neighbors and the rest of the world.

        The solution to China and Europe and Africa and elsewhere may indeed be solved by the simple idea of Chad and Haiti pooling their money and then another nation and another until there is enough to spread risk, reward and a more stable and interconnected economic system worldwide. And again it is not in any way a government program.

    5. Commentedjames durante

      This is a thoughtful article raising many salient points about the current crisis. But it peters out at the end. When the interests of common people have been actively undermined by ceo's, financiers, managers, bureaucrats and the two political parties and when the result is a level of economic inequality not seen since the Great Depression, there is only one thing that can restore confidence: an effective, populist political figure. Such political leadership requires a blunt assessment of the adverse interests of the wealthy class and the need to confront that class directly via progressive taxes, regulation and affirmative social programs.

      Obama is Clinton II. Like his predecessor, his matchless rhetoric of populism is only matched by the complete absence of the qualities of a champion of common people. Imagine Obama or Clinton saying this in a prominent speech during the campaign for a second term: " We had to struggle with the old enemies of peace--business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me--and I welcome their hatred. " (Roosevelt)
      Or this from a farewell address: "We are not left to conjecture how the moneyed power, thus organized and with such a weapon in its hands, would be likely to use it. The distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands can not yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States."

      Is it too late for another Jackson or Roosevelt?

    6. CommentedAllan Hauer

      As a professional scientist, I often wish that a more “technocratic” approach would prevail in our search to solve society’s problems. But then an obvious mandate like “fix the lack of trust” hits me between the eyes. In the socioeconomic world it seems that some sense of balance or equilibrium is so often a principal goal
      I believe that much of the current lack of trust is part of a visceral reaction to the complexity of modern society. Rigid, ideological thinking promises easy, quick answers and unfortunately many find this picture beguiling. I’m actually quite hopeful though and part of the reason lies in American history.
      The theme is that the search for balanced, carefully measured solutions to our challenges is far more than just bland compromise. There is vitality and strength that comes from a blending of perspectives and America has found this “sweet spot” in many of its greatest successes. It’s truly a matter of the combination being greater than the sum of its parts. For some, balanced thinking is the same as scientific reasoning – completely free of ideological rigidity. America has had outstanding success in science and technology and this is a key part of the national foundation. It’s no accident that many of our founding fathers had a deep interest in science. But the real key for our nation’s future is creative, innovative thinking that spans the space from the workshop or laboratory to the rural healthcare cooperative, from the Yankee Town Hall meeting to the National Weather Service. There are also natural deeply rooted principles that blend the individual and community, the singular genius with collective inspiration, the spark of free markets built on an educated, healthy society.

    7. CommentedCharles St Pierre

      Governments are not paralyzed. They are acting according to the wishes of their true masters, the wealthy elites of the world. They are functioning as giant wealth pumps, taking money and assets from the middle and working classes and transferring it to that same wealthy elite. Especially in the US, government has been doing this for the last thirty years, mainly through a combination of inadequate taxes on the wealthy and the accrual of high public debt, which is money owed to the wealthy.

      The increase in inequality of the past decades has been engineered by the powerful. It is not accident, nor ‘technology,’ nor ‘globalization.’

      Far from being ruled by responsible stewards, we are ruled now by kleptocratic rent seekers, who can never have enough, and whose every calculation is short sighted gain. What we see around us, the economic malaise, the slashing of governmental services, the social decay, is just a stage in our accelerating decline, as our masters, in their greed, consume the very foundations of their tower, and slowly strangle the goose that lays their golden eggs.

      As for avoiding the chaos into which we are descending, it is simple: The wealthy must swallow the bitter pills of forgiveness of debts, and higher taxes. This is, in fact, the only useful course of action for governments to take, but because they are ruled by the wealthy, one they refuse.

    8. CommentedMark Pitts

      The biggest financial failures to date are surely Fannie Mae and Freddie Mac - both of which were regulated directly by Congress. And while the crisis was unfolding the government class traded on inside information for their own personal accounts, with total impunity.

      The public has learned that the government class has no more interest in the public good than businesses. And so the public now trusts neither.

    9. CommentedFrank O'Callaghan

      They make important points. The lack of trust is an understatement. The financial elites have taken such an amount from the global economy and wasted such a great proportion in conspicuous consumption but even more in non productive activity such as empty bureaucracy and pointless wars that a lack of trust might be considered naive.

      At times like this the world is preparing for a major readjustment. Unsustainable situations all have one thing in common: they end.