Gone seem to be the days when Western political leaders viewed credibility as their greatest asset. From the presidents and prime ministers down, many representatives of the political class are increasingly decoupling from their electorate. What are the reasons for this crisis-prone development – and what are the consequences?
On the one hand, today’s social media obviously favor extreme statements compared to factual, fact-based analyzes. In a polarized media world and often divided societies, politicians are more interested in feeding their radicalized base than offering moderation and compromises.
On the other hand, forecasts are often wrong. For example, the assertion that inflation is only “temporary” may have been reasonably plausible at the beginning, but has become more dubious with each passing month. In addition, citizens often have a different understanding of “temporary” than economists. Many citizens associated the term with “quickly over” – but then saw that inflation rates even continued to rise.
Since new economic data often have to be revised later, even a description of the current situation can be misleading. For many citizens this is likely to cause considerable annoyance as long as they hardly know anything about the “provisional nature” of the data. In addition, politicians hate bringing bad news to the people. They prefer to blame their political opponents or economic enemies such as the oil and gas industry for the problems.
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Every time gasoline prices soar, the political left claims it is the result of a producer conspiracy. The problem: the alleged conspiracy usually turns out to be a mere, unprovable assertion. Even if the OPEC cartel tries to profit from market shifts, the price at the pump is ultimately subject to the forces of supply and demand.
Economic illiteracy is widespread
The inability to see this is an expression of widespread economic illiteracy. Most voters simply have too little time or expertise to make subtle distinctions between “high” and “rising”, “net” and “gross” or “short term” and “long term”. What aggravates it is that, unlike economists, politicians usually do not give much thought to nuances.
To bring inflation back into play: For economists, statistical offices, central banks and finance ministries, inflation means that prices are going up. But for the general public, inflation means that prices are uncomfortably high in relation to their budget. Let’s assume that the US consumer price index, which recently rose more than six percent year-on-year, would drop to zero in the next twelve months – many people would still have the feeling that inflation was not under control because of the previous price increase has not been reversed.
Or think of how economists and statistics agencies define “recession”. According to the simplified rule of thumb, a recession occurs when real, inflation-adjusted gross domestic product falls for two consecutive quarters. If the economy grows again afterwards, the recession is over. Economic laypeople, on the other hand, believe that a recession will only end when the good times begin again and there are many jobs. It is precisely for this reason that a slow economic recovery is so painful for those in power.
The difference between net and gross also creates a lot of confusion. One illustrative example is the claim that the rapid phase-out of fossil fuels will create millions of new jobs. The billion dollar government subsidies for wind and solar energy, for example, are left out – not to mention the jobs that are being lost in the fossil fuel sector.
Budget tricks hide the real cost
Politicians also lose credibility when they use budget tricks to hide the true costs of laws and are caught doing it. In order to accommodate as many measures as possible in his ten-year, 1.75 trillion dollar program “Build Back Better” (BBB), US President Joe Biden assured that numerous measures would expire after just a few years.
However, whoever believes that will be blessed. Even the Republican President Ronald Reagan knew: “Nothing lasts longer than a temporary government program.” If one realistically assumes that the entire BBB program should run for a full ten years, the costs rise from 1.75 to almost five trillion dollars as calculated by the Congressional Budget Office. The US national debt then increases by another three trillion dollars.
Of course, it’s not just the US Democrats who resort to budget tricks. When Reagan’s budget director David Stockman failed to push through enough spending cuts to meet the legal mandate of a balanced budget in a few years’ time, he added a famous asterisk to his draft: “Spending cuts will be decided later.”
Biden, who is coming under increasing pressure from rising inflation rates, likes to say that BBB will, if it comes into force, reduce inflation. However, that’s a pretty questionable claim. But even if it were true, it relates to inflation developments over the next few years – and not in the coming weeks or months. After all, it would be downright absurd to claim that massive additional government spending would quickly reduce short-term inflation in an economy that is already close to full employment.
Politicians have to accept the laws of arithmetic
What are the conclusions from these findings? First of all, politicians should refrain from trying to override the laws of economics and arithmetic. Promises such as “It all costs nothing” may initially go down well with some of the voters. But if the accounts are then settled later, the rude awakening follows – and the population’s trust in the political class continues to erode.
In order to raise the level of politics, it is essential to overcome the economic illiteracy of large sections of the population. A kind of “business lesson” in schools would be the most suitable means for this. Then it would be more difficult for politicians than before to dazzle the people with empty political promises. Especially in the system competition with authoritarian or dictatorial states, western democracies will increasingly depend on the people’s enlightened trust in the political class. The motto must be: facts instead of fake news. Credibility must again become the greatest good.
The Author: Michael J. Boskin is Professor of Economics at Stanford University.
More: Why forecast models don’t respond to reality.