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Public ignores warnings from 'worrywart' leaders

By Raghuram Rajan: 0 Comment(s)Print E-mail Shanghai Daily, March 1, 2012

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[By Zhou Tao/Shanghai Daily]

On a recent visit to Europe, I found economists, journalists, and business people frustrated with their politicians.

Why, they ask, can't politicians see the abyss that yawns before them, and come together to resolve the euro crisis once and for all? Even if there is no consensus on what a solution might be, can't they meet and thrash out a plan that goes beyond their repeated half-measures?

It is only because of the European Central Bank's bold decision to lend long term to banks that we have seen some respite recently, or so their argument goes. Politicians, in contrast, are failing Europe by being forever behind the curve. Why do they find it so hard to lead?

One answer that can be easily dismissed is that politicians simply don't understand the gravity of the situation. Political leaders need not be economic geniuses to understand the advice that they hear, and many are both intelligent and well-read.

A second answer - that politicians have short time horizons, owing to electoral cycles - may contain a kernel of truth, but it is inadequate, because the adverse consequences of timid action often become apparent well before they are up for re-election.

The best answer that I have heard comes from Axel Weber, the former president of Germany's Bundesbank and an astute political observer. In Weber's view, policymakers simply do not have the public mandate to get ahead of problems, especially novel ones that seem small initially, but, if unresolved, imply potentially large costs.

If the problem has not been experienced before, the public is not convinced of the potential costs of inaction. And, if action prevents the problem, the public never experiences the averted calamity, and voters therefore penalize political leaders for the immediate costs that the action entails.

Even if politicians have perfect foresight of the disaster that awaits if nothing is done, they may have little ability to persuade voters, or less insightful party members, that the short-term costs must be paid.

Talk is cheap, and, in the absence of evidence to the contrary, the status quo usually appears comfortable enough.

So leaders' ability to take corrective action increases only with time, as some of the costs of inaction are experienced.

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