Distribution and "Good Policy"

By Dave Anderson:

Brad DeLong asks why good long-term macro policy is not politically popular. I think the answer is one of the distribution of visible and discrete benefits versus the visible and discrete costs. He asserts the following:

From the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones.

The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue.....In that scale and context the bonuses of Goldman Sachs are rounding error. And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk: as Federal Reserve Vice Chair Don Kohn said, ensuring that a few thousands investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans--and tens of millions outside the United States--at risk.

The big valid complaints about policy over the past fourteen months are not that it has run up the national debt and not that it has rewarded the princes of Wall Street, but rather that it has, if anything, been on too small a scale--that we ought to have done more.

Yet these policies appear, somehow, to be political losers in Washington right now: nobody is proposing to do more along the same lines. This is strange: usually when something works the natural impulse is to do it again.

So we have a big puzzle: Just what is going on in America? Good policies that are working to boost production and employment without causing inflation ought to be politically popular, right?

I think there are a couple of things going on here. The first is that the policies are being conflated in the American electorate's mind between TARP and everything the Federal Reserve is doing and ARRA. The second is that these policies are mitigating the suckitude; the objective economic conditions still suck donkey balls. People may be seeing the second derivative of unemployment turn positive but jobs are scarce, benefits are getting destroyed, pay is flat and nothing seems to be working correctly, including or especially Congress and the US government. Some of the last is a deliberate electoral and political decision by the Republican Party, but a decent chunk of that is the inability of the Democrats with massive majorities to get anything worthwhile done. Credit card reform was done this summer --- so what, the interest rates on my credit cards got jacked up, health reform is a mess, bankers are making billions in the pre-exisiting hostage taking situation, and food stamp usage is on the rise.

People at not particularly good at rationally analyzing the macro-economic counter-factual. When there are illions of dollars in the discussion, eyes can easily glaze over and people can take to rational ignorance or at least bounded rationality and outsource their economic forecasting to the nerds who actually do that for fun. Instead they look around, see illions spent and note that the last couple days of the month are still tight or increasingly tighter. They see another big wave of foreclosures coming. They see loan modification programs not working. They see cramdown getting killed. Every other ad on the radio is for a debt relief firm. They see a major employer go out of business in their town.

Finally, the people who seem to be benefiting from the stimulus, the Wall Street bankers, are about as popular as syphillis right now. Everyone else is in pain, the the bankers ar partying hard again. What Brad terms good economic policies may be good in the aggregate, but distribution matters. I do not earn money directly related to GDP growth. At best that is a third order concern for my personal well-being. My major concern is finding a job, and there are no jobs. Instead the benefits of TARP (which people are rationally conflating with ARRA) are concentrated to the same idiots who got us into this mess, and there has been no structural change. Even if these measures produce GDP growth, GDP growth has done jack-shit for most people over the past generation; wages have stagnated, debt has increased, risk has increased and variability has increased. If that is the result of "good policy" I can understand why "good policy" is not politically popular --- it does not have a wide base of supporters in the electorate past the large donor class.