When Politics Fails

Ezra is absolutely right to say that our failure to respond in any coherent way to the economic crisis is a deep political failure:

“This is a failure of politics. Like with global warming, with health care, with the national debt, with immigration. It is further proof that we have a calcified political system incapable of responding to either long-term threats or short-term crises. The electoral and partisan incentives have made actual action too dangerous and rendered obstruction everyone’s easy second choice. And in politics, you just about never get your first choice. And so the Republicans killed this bill. Without their cover, the Democrats couldn’t save it, because politically, they couldn’t take ownership of it.

It’s easy enough to imagine a society running atop a stable economy even when it has an unhealthy politics. And it’s simple enough to see how an unstable economy can be calmed through concerted action by an effective political structure. But an economy in chaos and a political system in paralysis? What happens then?”

Good question. Our dysfunctional politics places some good options off the table, makes others much more difficult to implement than they would be otherwise, and prevents us from adopting those decent options that remain to us. Consider, for instance, Brad DeLong’s suggestion that we “go for the Swedish plan.” I think that if we can’t get a bill passed this week, we should do exactly that. But it would be a lot harder to implement here than it would there, and not just because our problems are much larger, and in certain ways more complicated.

More below the fold.

Here’s a brief description of what Sweden did:

“As in the US, the Swedish financial crisis was also preceded by a property bubble, which was pricked by a rise in real interest rates. Severe stress in the financial system and the economy were to follow. In each of the three years 1991, 1992 and 1993 Swedish gross domestic product fell in real terms, at an accumulated rate of about 5 per cent.

In response, the Swedish government set up an agency to recapitalise the financial sector. Bank shareholders were not compensated. But the Swedish government did not bail out all banks, only a subset. They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged. And those that were bailed out had to write off their bad debts first. All depositors were covered by an explicit government promise of compensation. The goal was to minimise the cost to the taxpayer, and it succeeded. It turned out as one of history’s most successful financial system bail-outs.”

Leave aside the difficulty of getting something like this through a Congress significant numbers of whose members think that any intervention by the government would be the first step on the Road to Serfdom, and many more of whom, including some Democrats, would get very nervous about intervention on this scale. Just focus on one piece of this plan: “They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged.”

The Swedes, that is, entrusted to their government the task of deciding which banks should be saved and which should be allowed to go under. Imagine what would happen if we tried that here. Hordes of lobbyists would appear, begging for special favors for their banks. The temptation for various officials to intervene in the process would be enormous. Even if they resisted that temptation, all sorts of people would probably assume that various decisions about which banks to let fail and which to bail out had been made on political grounds. Some commentators who made this case would be bought and paid for, but others would be either political opponents of whoever was in charge, or people who just assume that government officials are corrupt by definition.

Things would be all the more difficult because we would be very unlikely to get the kind of bipartisan cooperation that the Swedes had. Carl Bildt, who was Prime Minister at the time, believes that this was crucial:

“What is clear in both cases is that a rescue plan is not possible without achieving bipartisan consensus, which is indispensable for regaining confidence in the markets.

We were able to achieve this in Sweden. Consensus lasted throughout the whole process of restructuring the banking system. We never faced demands for going back to the heavy regulated markets of the past or for permanent state involvement in managing the financial sector. On the contrary, due to an organized and well-managed restructuring, it was possible to preserve the advantages of the deregulation of the 1980s, and, when the market conditions made it possible, privatize the banks as well as the credit stocks.”

Note that the reason Bildt mentions demands for heavily regulated markets, etc., is that the opposition in this case was the Social Democrats, who would have made just those sorts of demands had they tried to use all their bargaining power to extract concessions. Compare that to House Republicans’ attempts to use the present crisis to force further cuts in the capital gains tax, and ask yourselves just how likely it is that they would conduct themselves like grown-ups if we tried to do what Sweden did.

Stefan Ingves, now a Director of Sweden’s Central Bank, and Director General of the Swedish Bank Support Authority during the crisis, adds:

“A very basic issue for the success of any systemic bank restructuring is the ability to get political decision makers to recognize that there is a problem, that the problem is severe, that it requires quick and resolute actions, and that the problems largely are technical rather than political in nature. How lucky we were in the Nordic countries to have governments able to make tough decisions and leaving most of the implementation to a group of civil servants (statstjansteman) and technical experts. In other countries, vested bank owner and borrower interests sabotage such actions through political interference, corruption and intimidation of courts and officials, etc. Necessary political decisions such as loss sharing and the allocation of public support funds are hard to come by, even in cases where the governments have the financial capacity to provide the resources. It is much easier to do nothing and wish the problems away.”

How lucky they were, indeed.

It is not impossible to get political decision-makers who can come together in crises, evaluate their options clearly, and act. It just takes a citizenry who insist on being represented by adults, media who actually inform them, and politicians who do not drive them to cynicism by abusing their trust.

Until then, though, a lot of good options will be much, much harder to implement than they would be otherwise. The Swedish model is one of them.