Three Paths for Indebted Democracies

CHICAGO – Democratic governments are not incentivized to take decisions that have short-term costs but produce long-term gains, the typical pattern for any investment. Indeed, in order to make such investments, democracies require either brave leadership or an electorate that understands the costs of postponing hard choices.

Brave leadership is rare. So, too, is an informed and engaged electorate, because the expert advice offered to voters is itself so confusing. Economists of different persuasions find it difficult to reach a consensus about the necessity of any policy. Consider, for example, the cacophony of arguments about government spending: is it the only thing keeping depression at bay, or is it moving us steadily down the road to perdition? The debate does not lead to agreement, moderate voters do not know what to believe, and policy choices ultimately follow the path of least resistance – until they run into a brick wall.

The build-up of public debt in industrial countries (which was rising briskly well before the Great Recession pushed it to near-unsustainable levels) reflects this kind of calculus. The public rewards democratic governments for dealing with the downside risk caused by competitive markets – whether by spending to create jobs or by rescuing banks that have dodgy securities on their balance sheets.

Even if inaction (or action oriented towards the longer term) is the best policy, it is not an option for democratically elected politicians, whom voters expect to govern, which inevitably means action with the potential for quick results. A sympathetic press amplifies heart-rending stories of lost jobs and homes, making those counseling against intervention or advocating longer-term fixes appear callous. Democracies are necessarily softhearted, whereas markets are not; government action has expanded to fill the gap.