Alessandra Bonfiglioli (PhD, Stockholm) and Gino Gancia (PhD, Stockhold) are both Barcelona GSE Affiliated Professors. Last year, they jointly published an article titled “Uncertainty, Electoral Incentives and Political Myopia” in the Economic Journal.
IS THIS THE RIGHT TIME TO ADOPT POLICIES FOR THE LONG TERM?
In this recent article, Alessandra Bonfiglioli (UPF) and Gino Gancia (CREI) argue that periods of high economic uncertainty like the current one are particularly favorable for the adoption of long-term policies, such as fiscal stabilizations and other structural reforms. The reason is that high uncertainty implies that economic performance and electoral outcomes depend more on luck and less on policy choices. This makes politicians less reluctant to adopt policies with current costs but future benefits.
In their model, when the ability of politicians and their policy action are not perfectly observable, citizens tend to vote based on economic outcomes. As a result, politicians are induced to act myopically, choosing too few long-term policies (which have current costs but future benefits) in an attempt to improve economic performance and hence raise their probability of re-election. This is in line with a famous statement by the former Eurogroup president and Luxembourg prime-minister Jean-Claude Juncker, “we all know what to do, we just don’t know how to get re-elected after we’ve done it“. When uncertainty increases, however, the extent to which politicians can affect the state of the economy is reduced and, as a result, so too are their incentives to manipulate the probability of re-election through shortsighted policies.
This theory is consistent with several observations. First, empirical studies show that economic performance affects the chances of re-election of an incumbent politician. Second, the authors provide new empirical evidence from 20 OECD countries suggesting that a long-term policy such as fiscal discipline (measured by the variation in the deficit/GDP ratio) is indeed higher in periods of high economic volatility (measured by the variance of the output gap). The results suggest that a 1% increase in volatility is followed by a 0.35 percentage point reduction in the deficit/GDP ratio.
For more information on their work, check out the BGSE research video below and article here.