Tag Politics

A political leader and his role in setting the economic policy

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The word Politician, a political leader, originated from the Greek word “Polis”. A politician is an individual who affects public decisions, such as decisions on the economic policy. A politician is either an individual who already serves in a government or which seeks to be elected to serve their nation or community.

The role of a politician in setting the economic policy is very prominent. According to standard economic theory, technocrats (e.g. economists) provide recommendations on the economic policy choices to a political leader who, in turn, make economic policy choices which are implemented by a bureaucrat.

Therefore, a politican is actually involved in making the economic policy choices. This is different from bureaucrats who implement the policy choices of politicians.

A politician, as a role player in the government, earns some resentment from the general public due to the perception that politicians are driven by desire to maximize votes for their next election rather than by serving the interests of the public. This is, of course, true in some cases and not in others.

Political business cycle theories (models)

A politician is a human being and has feelings, dreams, goals, desires and agendas, like any other person from any walk of life. Therefore, it is only natural that a politician may be driven by a personal agenda. This must always be kept in mind. Especially since standard economic theory assumes that a political leader is driven by the goal of enhancing the well-being of a nation rather than by desire of personal gains.

Some economic theories, however, attempt to explain a politician’s actions as guided by attempt to maximize votes. Such theories are called political business cycle theories. Political business cycle theories are further subdivided into the partisan model and opportunistic model.

PARTISAN MODEL

Based on a politician being a “partisan” of the party that he or she belongs to. Each party has different priorities and those priorities will significantly influence the economic policy decisions.

OPPORTUNISTIC MODEL

This theory was first proposed by Nordhaus. Nordhaus suggests that his proposed theory rests on 3 assumptions:

1 – The main goal of a politician is to stay in the office

2 – The current performance of the economy will affect election

3 – A politician has strong incentives to make economic policy decisions which will lead to expansionary monetary and fiscal policy to expand performance of the economy in the short run. This will be followed by contractionary monetary and fiscal policies to combat inflation (which occurred due to expansionary policies).

The criticism of the opportunistic model arises because it is unlikely that a political leader will be able to effectively manipulate economic performance in the short-term.

Empirical evidence does not explicitly and completely support models of the political business cycle.

 

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The economic policy decisions: who is behind them?

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We mentioned in the introduction to the economic policy that economic policy is a purposeful action (or purposeful non-action) by the government with the intent to affect economic behavior with the goal of achieving certain outcomes which will improve the material well-being of society. However, of what does government consists? Who really makes the decisions on economic policy?

It is generally accepted in the conventional economic theory that economists (technocrats) advice politicians with regard to the economic policy choices. Politicians than make economic policy choices which are implemented by public workers (bureaucrats).

Each of these sub-groups of the government have their own motivation behind making certain policy decisions and their motives must be recognized. A political leader (policy maker), for example, is generally motivated to increase his or her votes and to stay in the power. A bureaucrat is usually motivated to increase his or her budget which will increase his or her power.

Government sub-groups consist of real people with their own agendas, motives and goals, which are sometimes not aligned with the assumption the government always acts in the national interest with the goal of achieving economic stability and prosperity. This will distort the effectiveness and appropriateness of the economic policy choices.

Now let’s take a look at some sub-groups of the government which are involved in economic policy decision making.

In the articles that follow we will take a closer look at different groups which influence economic policy decisions. We will particularly discuss a political leader’s role and political business cycle theories. We will also take a closer look at the role of a bureaucrat, including the role of a technocrat, and their role in the economic policy decision making. Lastly we will address the role of the special interest groups within the context of their influence on the economic policy decision making.

Later, when we will discuss four models of economic policy making, we will look at the role of each constituent within each model in more aggregated format. However, we will start from looking at their roles in isolation:

The role of a political leader in setting economic policy is very prominent. According to standard economic theory, technocrats (economists) provide recommendations on economic policy choices to a political leader or group of politicians who, in turn, make economic policy choices which are implemented by bureaucrats.

The role of a bureaucrat in setting economic policy is instrumental. A bureaucrat is an individual who essentially implements economic policy set by politicians.

Special interest groups that exert an influence on economic policy decision-making include three main sub-groups: organized business groups, non-governmental organizations and organized labor groups.

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You may read this related article entitled “Who is behind Bush economic policy” for deeper understanding of how economic policy decisions are made in the real world.

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