When your skin is NOT at stake

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In all over the world, the governments dominate the economic scene. The way in which resources are spent determines whether or not full employment is a priority. Also, the taxes and fees collected influence most investment decisions, and the internal regulations promoted or supported at governmental level influence the economic activities. However, in economic theories, the government’s dominance over the economic environment is not significantly correlated. Most theories are limited to considering “government” as a rational entity, which role is to ensure macroeconomic balances, to anticipate and prevent possible imbalances. In each branch of the economy, the approaches focus on the impact of government on private decision making or the influence of government policies on macroeconomic aggregates. There is no significant progress towards achieving general and realistic behavioral rules for a rational government, analogical with the rules used to analyze the rational behaviors of consumers or producers. Consequently, the integration of government and private decision-makers into a general equilibrium theory has not yet been achieved.
The theoreticians in the economic field start from the assumption that decisions are made by rational individuals. Such a simplification is necessary to be able to make predictions about behaviors. Decisions taken at random or those that are not in any relationship between them cannot fit the known patterns. And the need to fit in the pattern comes from the fact that human actions can be anticipated and the relationships between them analyzed only if they can fit into the pattern.
What do we do, however, when rationality is not the functioning paradigm of the governmental decision maker, when the political interest or rather the politician determines irrational behaviors, sources of significant social or economic costs. What is the responsibility for promoting decisions that endanger or affect the social stability, the economic environment, the well-being of the people, the place hardly gained among the other nations?
On a personal level, none. The “skin” of the one who understands the exercise of power as an exercise of good will does not suffer, and, most of the times, on the contrary, is rewarded. The situation is not present exclusively in the government sphere, many “top managers” building their reputation in this way.
Thus, we come to the danger of evaluating decisions exclusively from the perspective of results. And when I say “results”, I do not mean sustainable growth, based on technology, productivity growth or smart resource allocation. I am referring to the easy growth, “made on the paper”, that it’s good to be shown in the election campaign or the semester analysis sessions and that lasts about as long as the election campaign or, respectively, the one for collecting the bonus.
Here is an example, which, in order not to customize, I chose it from another space and time. Let’s say the CEO of a company that has all its operations in the Cayman Islands decides to increase the financial performance of the company by canceling all that hurricane insurance means, considering that the amounts, not small at all, can end up with additional profit. Nature is generous and in the first year there were no hurricanes. The company saves the insurance premiums, the figures look good and the profit is significantly increased. Shareholders receive higher dividends, executive bonuses are supplemented, employees are satisfied. The dilemma can arise during the analysis conducted by the Board of Directors, where the CEO, who saved significant amounts, should receive a bonus or be fired?
Let’s contextualize a little. The history of the place shows that since 1871 and so far a hurricane has hit the Cayman Islands every two years and a quarter. In other words, there is a 44% chance that a hurricane will devastate the area within a year. The estimation is based on 148 years of observations, and in the last 20 years the percentage increases by 2 points every 5 years analyzed.
In our example, the increased profit was generated by assuming an extremely high risk, which, statistically, cannot be supported further. The CEO had no control and no ability to predict whether and when a hurricane would hit the islands. His decision was “blind”, which exposed the company to a major risk and, yes, he was lucky. Analyzing the results only in the context of the risk, easy to observe or without taking into account the risk exposure, we are at the mercy of the hazard. Success is mistakenly attributed to the “manager” and not to providence or nature, simply.
Today, we reward the CEO, in the generic sense. He is the politician, the official or company manager who takes very high risks for society, institutions or companies without a court to sanction him. And here I refer to the personal sanction, that one that forces him to use a prudent approach when managing problems. Today, in one form or another, he receives the “bonus” and, because he is aware of what he has done, leaves in glory to a warm place, provided by the grateful “shareholders”. No way of assuming responsibility here. I met this type of managers whom I called “butchers”, with all the respect to the butcher’s profession. I found the analogy thinking of the farmer who does not wait to achieve benefits from the milk given by a cow – through higher processing, eventually – but cuts it and sells the meat. Sure, the immediate profit is significant, but the “business” disappears.
At the state level, Greece seems the perfect example. For decades, politicians have struggled to raise wages and provide facilities and fundings. The compulsory vote “forced” them to satisfy a very large number of voters. And they did this without seeing beyond their mandate. The state has reached bankruptcy and has been rescued by the European Union partners. Which is what is happening now on the mioritic plains. The opposition is silent, because, on the one hand, it does not want to attract the opposition of the mass of voters and, on the other, it knows that the excesses cannot be sustained endlessly and hopes for the collapse of those in power. Of course, they will settle this attitude, even if it helps them to take power …
The economy is likely to react more quickly and visibly to other areas. The desire for “GDP” and economic growth, play with figures, salaries and pensions do not have a long life, and “revenge” is hard. Unfortunately, those who will “pay” for these costs of irrationality are not those in power or officials who, consciously, have supported and implemented irrational policies. The settlement will predominantly reach the poor layer of society, exactly the one that promoted and sustained the irrationality as a way of governing. And because their skin is not at stake, those who had power all this time will tell, over the years, on the beach in Monaco, about the “performance” of their government.