The pundits who have incorrectly predicted government actions in this time of economic stress next turn to their "Plan B" -- criticizing the decision. Those who incorrectly forecast that "the Fed was in a box," for example, turned next to complaining about the wisdom of the actual decisions. The pundit switches from a discussion of what will happen, to what should have happened.
Those who doubted the ability of Congress and the Administration to pass an appropriate fiscal stimulus package were the quickest to criticize the result. The typical complaint about the rebate and corporate incentive plan is that it is "election-year pandering" to voters.
A Google search for "fiscal stimulus" and "pandering" generates nearly 27,000 hits. A quick review reveals that the understanding of representative democracy is at the general level of those who have not yet taken the Freshman Poli Sci class.
Their reasoning is as simple as the phrase itself. They are politicians (therefore crass and venal). They are running for election. They'll do anything. They vote to send checks to people.
A Closer Look
A thoughtful reader should be skeptical of this reasoning. Imagine that you were a member of Congress. Most of the people think the country is entering a recession. Some even fear a depression. Consumer confidence is declining. The average citizen, including the voters in your district, expect some kind of action. Meanwhile, economic experts inform you that a fiscal stimulus package could either avoid or mitigate a recession if it were timely, targeted, and temporary. Alternatively, you could do nothing.
Is it a surprise that elected representatives would act? Would we want a democracy where the public was ignored?
Underlying Theory
This is actually an old question. Is an elected official a delegate or a trustee? It is called the Burkean Dilemma, after an 18th-century Member of Parliament, Edmund Burke. In a speech to voters in 1774 he put the issue quite clearly:
...it ought to be the happiness and glory of a representative to live in the strictest union, the closest correspondence, and the most unreserved communication with his constituents. Their wishes ought to have great weight with him; their opinion, high respect; their business, unremitted attention. It is his duty to sacrifice his repose, his pleasures, his satisfactions, to theirs; and above all, ever, and in all cases, to prefer their interest to his own. But his unbiased opinion, his mature judgement, his enlightened conscience, he ought not to sacrifice to you, to any man, or to any set of men living. These he does not derive from your pleasure; no, nor from the law and the constitution. They are a trust from Providence, for the abuse of which he is deeply answerable. Your representative owes you, not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion.
Current Applications
If a leader thinks that the voters are not well-informed, the mission is one of leadership and convincing. Failure to do so often leads to ballot-box justice.
- The Iraq war presents such an issue for the Bush Administration. We took a closer look at Vice President Cheney's attitude toward the Iraq polls on Election Stocks.
- Free trade is a key issue of this sort. Experts see the advantage, but the general public does not.
- Immigration has a high component of emotional public reaction, often in conflict with the facts.
- Plans to help with foreclosures, currently moving through Congress, are opposed by many whose focus is making sure that mistakes are punished.
Predicting the outcome of decisions on these issues is not easy. The decision makers are balancing public opinion with their own assessment of the merits. To lead, or to follow?
Conclusion
Since few market pundits have a background in government and public policy, they embrace simplistic models. Despite this, the analysis is often delivered in a smug and superior tone. It is probably effective in reaching the lowest common denominator of reader, who also lacks any relevant theoretical knowledge.
Our investment edge comes when we can identify policymakers who respond to issues by leading public opinion rather than by following. The various plans to help the housing market are all good examples. Some people expect action. Some want no "bailout", a theme emphasized by Sen. McCain today.
We expect a bill to pass, but unlike the fiscal stimulus package, the scope is likely to be limited. The electoral considerations also help to explain why the Fed has been more active and creative in its responses, and perhaps, why we expect so much of the Fed as opposed to the President.
