Better governance would benefit American business

Economists of different ideological stripes will differ on whether the Biden administration’s economic policies will be better for business than those of a second Trump administration. But putting aside differences over policy, the new administration could hardly fail to be more transparent, predictable and effective than the one currently in place, and this should encourage investment, productivity and economic growth. 

My perspective on this comes from more than 30 years of monitoring and analyzing financial crises in emerging market and developing economies. Anyone in the emerging markets business will tell you that these crises are most likely to arise, and are most difficult to resolve, when: governments follow imprudent and haphazard economic policies; policies and personnel choices are dominated by political considerations; and the apparatus of government is too dysfunctional to effectively implement even those policies that might help put the economy back on a stable path. 

But even during more tranquil periods, better public governance promotes greater prosperity. Toward that end, the World Bank has developed a measure of government effectiveness based on surveys by diverse organizations. It is described as capturing “perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation and the credibility of the government’s commitment to such policies.”  

Quite clearly, economic prosperity is associated with higher government effectiveness; notably, this correlation appears to be even stronger among mature economies such as the United States than among the less developed ones. And equally clearly, the Trump
administration’s policy management has failed by the standards of the checklist for government effectiveness reproduced above.

In its botched response to the coronavirus, its chaotic pursuit of trade wars and its nomination of singularly unqualified candidates for important positions (such as governor on the Federal Reserve Board), to cite just a few examples, the current administration’s economic policymaking more closely resembles that of Brazil’s Bolsonaro or Turkey’s Erdogan than that of a normal advanced-economy government. And these shortcomings have had significant economic consequences, including the disruption of trade-sensitive industries in 2019, and a more widespread pandemic and resultant economic distress in 2020.

To be sure, the strong correlation between governance and income shown in the chart above does not indicate the direction of causality. It is likely that higher incomes promote better government as well as vice-versa. But research indicates that higher government effectiveness is associated not only with contemporaneous income but also with subsequent growth in
income, and that is more telling.

It is reassuring that as of 2019, as indicated in the chart, the United States still occupied a very favorable position in the government effectiveness rankings. This likely reflects the strengths of our country’s institutions and non-political civil service, as well as the fact that at least some of the Trump administration’s most glaring shortcomings had not become as apparent until this year. But another four years could have caused serious harm to our economic policy management, weighing on our recovery from the pandemic recession and dimming the long-term outlook for American prosperity.

Of course, we don’t know how economic policy management under the Biden administration will fare. But early signs – the formation of the coronavirus task force, the list of high-quality candidates for key positions – are promising, and the bar for improvement is exceedingly low. Observers of all political persuasions should be encouraged by this prospect. 

Steven Kamin is a resident scholar at the American Enterprise Institute (AEI), where he studies international macroeconomic and financial issues. Before joining AEI, Dr. Kamin was the director of the Division of International Finance at the Federal Reserve Board.