Today's campaigns are more about convincing voters of some nebulous but valuable personal qualities of the candidate than they are about substance. In the recent US presidential debates, the contestants have aimed to project intangible leadership qualities rather than discuss challenges the successful candidate will face. We have seen little informed debate about the economic issues and budgetary decisions ahead.
It is hard to blame the politicians and their legions of advisers for this - they are, after all, playing to the crowd. The problem is encapsulated in a joke about how John Kerry, the US presidential challenger, has been saying that George Bush's middle initial "W" was appropriate because "W stands for wrong, the wrong direction for America". But, as cynics point out, how many Americans know that the word "wrong" starts with "w"?
While we can at least hope most people can spell, the same cannot be said for the general level of financial and economic literacy. The problem is evident at every turn. Take trade policy. Politicians cannot but support protectionist measures. The costs of international trade are borne by a small number of easily identifiable people who organize and become vocal. In contrast, the benefits are more diffuse, spread over the entire population. Trade with Asia means cheaper clothing and electronics for everyone at the same time that a small number of manufacturing workers lose their jobs. If people understood the benefits of international trade as well as they do the rules of a favorite sport there would be solid support for trade liberalization.
The difficulty of constructing a rational trade policy pales in comparison with the real problem facing the government: long-run budget sustainability. If the US government had to adopt the generally accepted accounting practices required of corporations, we would realize that unfunded liabilities arising from future medical care and social security payments run to more than four times gross domestic product. We need an informed debate about what, as a society, we should do about the government's promises in this respect. Such a discussion might start with three key questions: First, how big should the government be? Second, what are the government's duties? And third, who is going to pay for it?
A sensible policy debate addresses all three points. Issues about size of government and the division of various tasks must clearly be left to politicians but are important subjects for public debate. On tax, for instance, maybe we should follow the example of monetary policy independence and consider removing tax policy from the political realm. It is easy to envisage changes to the current system that would make an independent tax policy board feasible. We could, for example, shift to collecting revenue using a consumption tax. Such a system could be implemented using a national sales tax. In the same way that the central bank sets the short-term interest rate, the tax policy board would determine the consumption tax rate.
Taking important policy decisions away from elected officials and giving them to technicians is fundamentally inconsistent with representative democracy. It is only possible if the population is sufficiently knowledgeable to appreciate the trade-offs faced by these independent authorities. Central banks meet less resistance when they raise interest rates because people understand they are doing it to keep inflation under control. If we could impress upon the general public the importance of budgetary sustainability, we could do the same thing there.
This problem is crying out for a national discussion, but that need will not be served by a political campaign filled with slogans and recriminations bereft of any real substance. The bankruptcy of the current public discourse can be traced to the lack of financial and economic literacy. Until the vast majority of people understand that price controls create shortages, that trade deficits must be paid for by borrowing from abroad and that we must find a way to pay for medical care of an ageing population, we will get nowhere. The job of our leaders is to educate people as well as debate the direction we need to go.
The writer is Professor of Economics and Finance at Brandeis University, Massachusetts, and a Research Associate at the National Bureau of Economic Research.