Politics Are Like The Business Cycle

And we need similar tools to fight downturns

US quarterly economic activity from FRED since 1990. (1) The left shows quarterly GDP over time and (2) the right shows quarterly GDP growth rates. Note the linear trend on the left and cyclical pattern on the right.

Our current understanding of the economy is built upon two trends in economic growth: (1) in the long run the economy grows due to technological innovation and (2) in the short run there is a cyclical pattern known as the business cycle. We can see both these facts in the graph above.

Economic management amounts to creating a system that can foster the technological innovation that drives long term growth and manages the short term business cycle, preventing occasional dips from turning to deep, scarring recessions that take us off the long run growth path.

In the world of economics there are tools for both.

Long run innovation is fostered through a capitalist system of free but regulated markets that align incentives to both fund promising technology and reward those who create it.

Short term fluctuations in the business cycle are buffeted against using (1) automatic stabilizers, (2) countercyclical fiscal policy, and (3) monetary policy from the Federal Reserve.

When an economic downturn hits, taxes automatically adjust to people’s income and unemployment insurance increases (automatic stabilizers), and the Federal Reserve will lower interest rates to try to boost investment and help consumers feel wealthier from lower mortgage and interest payments (monetary policy). Republican administrations will typically enact a tax cut while Democratic administrations will use government spending as fiscal stimulus (countercyclical policy). These all work to lessen the impact of downturns in the business cycle.

We have a system that is able to more or less automatically course correct in the short term through the guardrails above and push us on the right long term path. The great thing is that (outside of fiscal policy) it doesn’t rely on who is in power or other circumstances beyond the empirical reality of where the economy is.

Conceptually, our political system actually functions similarly to how the economic system does. There is both a long term upward trend and a short term cyclical nature.

Our politics have improved over the long term. We have moved beyond slavery and overt segregation, codifying laws against them in the Constitution, built an international democratic system, and allowed same sex couples the right to marry among other things.

We have witnessed a less violent political climate, with fewer assassinations and attacks on political figures as well. It is quite clear that today things are more democratic and liberal overall than they have been in the past as minorities, women, and every American have more rights today.

But there is a sense that we are regressing on these factors in the past couple years, and that is unquestionably true. We have seen the reduction in voting rights and a turn towards a Supreme Court that is enabling entrenchment of the powers that selected them through gerrymandering. There is a reactionary pushback to some of the progress we saw in the recent past, which is an illustration of the more general cyclical pattern we see in politics.

Given that these two trends exist, the question is what system have we set up to ensure the political process continues on a long term growth path akin to the management system we have set up for the economy?

It turns out that we don’t have a system with the same tools and adjustment mechanisms in our politics. Most of the well functioning of our political process hinges on norms and good-faith politics, and nothing in turn ensures these norms are held in place.

Through the system of checks and balances we have in theory a rule of dividing power amongst the various branches of government. Congress, for example, has a mandate to check the executive branch, but we have seen that nothing forces congress to actually act on this mandate, and to do so requires politicians to act faithfully in this regard.

The real silence of congressional members on things like the family separation crisis, racist statements made by the administration, and impugning of the investigation into potential Russian collusion in the election show the emptiness of this norm.

These past couple years have exposed the fallacy in expecting our norm dependent process to hold up under the current age of polarization and tribalism. Just look at the recent congressional hearing of Peter Strzok to witness the overwhelming retreat into tribalistic politics as opposed to demonstrating a concern for investigating the intentional hacking of our election by foreign agents.

Just like macroeconomic researchers spent decades trying to design an economic management system that could smooth out the business cycle and promote long term growth, we need to invest in designing mechanisms in our political system that check the short term swings that come with changing political regimes.

Things like term limits on Supreme Court justices to prevent it from becoming out of step with a changing electorate, passing laws to explicitly codify norms like presidents releasing their tax returns, and enforcing the idea of one person one vote are good steps.

But there is a larger need to decouple things to limit the power that any individual actor can have.

Adding term limits fits under this umbrella because it would decouple the prospect of lifetime appointments from presidential elections and reduce its influence on voting behavior.

Another example would be automatically drawing congressional districts through nonpartisan boards or computer simulations to reduce the incentive for gerrymandering and institutionalizing the ability to advantage one’s own side.

We need to redesign the system in order to reduce the salience of power grabs and anti-democratic behavior.

Designing these solutions will take time and won’t be easy, but every system needs reform to ensure it stands the test of time. We have recognized the importance of buffeting downturns in the economy, and it is time we do the same with our political system by removing the reliance on well acting individuals in the functioning of the system.

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News and ideas worthy of discourse. Fundamentally informative and intelligently analytical.

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Vinod Bakthavachalam

Vinod Bakthavachalam

I am interested in politics, economics, & policy. I work as a data scientist and am passionate about using technology to solve structural economic problems.

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