Polls apart

THE row about whether to modify Greece’s bail-out has provoked claims that democracy is being ignored. The electoral mandate of the Syriza party, it is said, is being overridden by Greece’s creditors.

In fact, there have always been limits on voters’ freedom to pursue their desired economic policies. The first is on the ability of the majority to tax the minority, be it high-earning individuals or companies. Clearly there is some point beyond which higher taxes lead to lower revenues, as effort is discouraged. There is no general agreement over the point at which diminishing returns set in, but in an age of mobile people and firms, the threshold is probably lower than it used to be.

The second limit occurs when countries become dependent on international creditors for finance. They cannot force those creditors to roll over their debts, nor can they dictate the terms on which they borrow. Countries are free, of course, to default on their debts; eventually creditors forgive (or forget) and start lending again. In the short term, however, default is likely to lead to budgetary constraints. Voters may end up with austerity after all.

Economic regimes have also evolved over time, as electorates have changed. Before 1918, when the franchise in most democracies was limited to the property-owning classes, politicians favoured a low-tax, small state. After 1918 universal suffrage brought pressure on governments to intervene more heavily in the economy, providing health care, education and insurance against unemployment. Taxes rose accordingly.

After 1945 the experience of the Depression persuaded most governments to opt for Keynesian demand management, allowing deficits to expand in order to ward off recession. But the policy broke down in the mid-1970s in the face of simultaneous high inflation and unemployment (“stagflation”). The policy regime took the blame: politicians had given in to the temptation to set interest rates to gain electoral advantage and this allowed inflation to build.

Central banks then became the drivers of economic policy, using interest rates to manage the cycle. This made them unpopular when inflation was being squeezed out of the system in the late 1970s and early 1980s. But as inflation fell and interest rates came down, the central bankers were lauded as clever technocrats who had delivered the “great moderation” of steady growth and low inflation.

This change was an explicit step away from democratic control of economic policy. Admittedly, governments still define central banks’ mandates and hire the people in charge. But voters who dislike the policies of Janet Yellen and Mario Draghi—the two most important economic decision-makers in America and Europe—have no direct way of getting rid of them.

The financial crisis has made central bankers even more useful than before. After 2009 most politicians in the developed world were unwilling or unable to deliver fiscal stimulus. Central banks could both provide monetary stimulus and act as willing buyers for government bonds through quantitative easing (QE), making it easier to fund deficits. The deal has appeared virtually cost-free: it has not produced the hyperinflation that some predicted. (How all this monetary support is unwound is another matter.)

However, voters in the European countries that opted for the single currency do not have a domestic central bank. It is only now that the European Central Bank is embarking on QE. And, of course, such countries have not been able to devalue their currencies, a step that helped Iceland on the road to recovery.

The economic critique of the euro zone is well-known. It is foolish to create a single currency without political or fiscal union. But would Greeks really like the kind of European superstate that could easily make big fiscal transfers? They might find themselves just as powerless as they now feel in their negotiations with creditors. Greece, after all, would have a very small weight in a euro-zone electorate.

This points to a wider problem. National politicians come to power on the back of economic promises made to their domestic electorates. But the forces that determine whether their economies prosper are global, not local—whether the Chinese economy slows down or speeds up, what happens to oil supplies and so on. National politicians will be blamed for the adverse effects of those forces, even though they are not under their control. The corrosive effect is to add to voters’ cynicism about politics and undermine support for democracy.

^{Economist.com/blogs/buttonwood}