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Belmont Club

Here I come to save the day

February 7th, 2009 - 3:10 pm

Wikipedia defines political risk the effect of government actors on the outcome of a business decision.

Broadly, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.”. Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection).”

The American Spectator argues that a the economic meltdown of 2008 was in part the result of bad government policy on the economy. From that perspective, the market is simply discounting the bad political decisions of the last 20 years.  It is reflecting the economic cost of accumulated blunders in the market. The Spectator argues that both the Republican and Democratic parties have been to blame. It writes, “neither political party, and no administration, is blameless; the honest answer, as outlined below, is that government policy over many years caused this problem. The regulators, in both the Clinton and Bush administrations, were the enforcers of the reduced lending standards that were essential to the growth in home ownership and the housing bubble.”

Some may disagree about the apportionment of blame, argue which government policies were at the root of the political risk but that doesn’t alter the fact that some government action partially caused our current woes. Without identifying the actual policies which have contributed to the failure, simply calling for more “regulation” is about as empty as calling for “more drinks” in a tavern where some of the liquor has been poisoned. If government is part of the problem, not everything government plans to do will be part of the solution.

Calling for “political reform” rather than for “more regulation” is probably a better way of characterizing what needs to be done to reduce the political risk which has crashed the system. The difference between these two concepts is an important one. But nobody wants to make that distinction when their ideological goal is to disculpate government from the fiasco. The name of the game is to throw the onus upon “evil capitalists” when what you want is simply more power. Tony Abbott(i), a former cabinet member under the Howard government, recently criticized current Australian Prime Minister Kevin Rudd’s proposals to turn the country into a guided economy.  His basic critique is simply this: how can the socialists be against chickens when they live on eggs?

As Prime Minister of Australia, Kevin Rudd has to be taken seriously even though he doesn’t deserve to be on the strength of this week’s extended essay in The Monthly. His declaration that “the great neo-liberal experiment of the past 30 years has failed” is pretentious and self-serving twaddle. It’s just not true, as Rudd himself must know….

With its crusading tone and almost total absence of argument from fact, Rudd’s essay is more of a religious sermon than a work of serious political and economic analysis. It involves three articles of faith: first, that the past 30 years has witnessed the triumph of extreme capitalist ideology; second, that this kind of capitalism has comprehensively failed; and third, that only social democratic political parties can be trusted to shape the future. All of these propositions are demonstrably false.

Ultimately it is an argument over whether the current economic crisis justifies the bureaucratic demand for more power over our money. The debate in Australia mirrors, on a smaller scale, the argument in America about the merits of Hope and Change in general and the stimulus package in particular. But the Costello piece also underscores the non-debate. Nobody wants to talk about which government policies got us into this problem in the first place. The conversation seems to be confined to ways in which government can get us out of it. And that is an incomplete analysis. To the extent that “political risk” — bad policies — got the world into this mess it makes sense that government must get us out of it. But it doesn’t automatically follow that anything government does will necessarily contribute to the solution. One of the ways government can “help” is to reform itself. That means an examination of the ways in which it contributed the “political risk” in the first place so that a good faith effort can be made to fix the problems.

Unfortunately, some politicians see the current crisis as an “opportunity” to push an agenda. They haven’t stopped to consider to what extent that agenda may exacerbate the very problems they are trying to solve. The WSJ captured the philosophy of the present administration in White House Chief of Staff Rahm Emmanuel’s remarks that “you never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.” Emmanuel subsequently proceeded to enumerate a list of social spending items some of which arguably sound like new versions of the same community housing spending which may have been one of the original “political risks” to start with. When asked whether the stimulus package had turned into a spending spree, President Obama acknowledged it with pride. “That’s the point. Seriously, that’s the point.”

But that’s not the point; not the point at all. And it’s a shame BHO doesn’t realize it and a greater shame if he does. The real question is whether current government solutions to the crisis contribute to political risk or reduce it. That means knowing what’s broke before applying the screwdriver to the screw.

Who knows what the future brings? But maybe we should look before we leap.

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(i) error corrected

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