My title is “chief economist,” not “chief political scientist.” I walked away from a career teaching political science—more modestly referred to as “politics” by my then employer—29 years ago this month. Through most of my subsequent career, I’ve been able to downplay the focus of my formal education and depend on experience and autodidactic efforts to develop an understanding of the interplay between economic forces and ways in which governments, businesses and households finance themselves. That all worked quite well until fairly recently.
Over the last few years, I’ve been asked to comment more and more frequently on the political scene domestically and internationally—especially regarding Europe. To some extent, the influence of politics on the economy is unfortunate, as many of us would prefer that markets move to their own logic of supply and demand without the interference of political considerations and pressures. But markets have always depended on governments to provide certain essential services, such as defense and fire protection, which allow the markets to offer valuable goods and services. Figuring out what those essential government services are, and what valuable goods and services the markets should and should not include, have always required some political process to figure out whose side should prevail in the inevitable conflicts that result.
Those conflicts—especially in the U.S.—have historically been resolved on the margin, and with consistent gains in prosperity, they mostly get resolved by giving each of us a bit more of what we want (loyal readers will remember my federal flood insurance policy). The debate now in both the U.S. and Europe, however, is more fundamental. In the U.S., we are starting to confront the limitations on how much government should do and for whom, and Europeans are confronting decisions that will determine whether some 60 years of political and economic integration should continue or be reversed—it can’t stay where it is.
Sorry, I won’t resolve those questions now. But I will suggest that we try to think rationally about how these questions may affect our investment decisions. We may find this difficult to do for two reasons. First, as difficult as it is to assign value to an investment, it is far easier, and we are far more experienced in doing so, than we are at extrapolating the unknowable results of a future election or summit meeting into economically consequential results. Second, and more tractably, we have political opinions and principles that make it difficult to recognize that electoral or policy outcomes that we don’t like might actually co-exist with surprisingly favorable investment outcomes. I say more tractably because once we recognize that markets respond to their own logic and not always to our personal policy preferences, we’ll do a better job of dealing with the first problem, as well as figuring out who will win from outcomes we support, as well as those we don’t much like. That’s going to be our task—at least through the remainder of this year.