Reform and Be Re-Elected

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Yves here. I suspect many will take issue with the cheery view expressed in this article. The authors contend that reformist candidates in the post-crisis era do better at polls than status quo types. That makes sense, but the authors appear to define “reform” in terms in more modest terms than most readers would deem to be sufficient. But this finding sounds correct, intuitively. Look at Elizabeth Warren. Even though she has made great use of her Senate bully pulpit, and has kept a focus on bank re-regulation, her policy proposals, such as her student loan fixes, have been cautious. A frame-breaking reformer, such as a Huey Long, would require a far more divided electorate with geographic concentrations of radicalized voters to be viable.

By Marco Buti, Director General, DG Economic and Financial Affairs, European Commission, Alessandro Turrini, Economist and a Head of Unit, DG Economic and Financial Affairs, European Commission, and Paul van den Noord, Economist, Autonomy Capital; Associate Fellow, Chatham House. Cross posted from VoxEU

Structural reforms are presumed to deteriorate a government’s chance for re-election. This column, which is an update from earlier work, provides evidence of just the opposite – the odds of re-election are larger for reformist than for non-reformist governments. This holds if the financial system is not overly regulated and an adequate social safety net is present.

The former Eurogroup president allegedly said, “We all know what to do but we don’t know how to be re-elected once we have done it” (The Economist 2007). In an earlier VoxEU column (Buti et al. 2008), we argued that the presumed electoral risk for a reformist government – based on the statement by Mr Juncker – is largely unfounded, in particular if a number of conditions are met. Based on electoral and structural reform records for 21 OECD countries over the period of 1985-2004, we found that electorates generally do not discriminate between reformist and non-reformist governments, although the electoral approval of reforms is stronger when the financial system works effectively and an efficient social safety net is present. More sophisticated econometric testing broadly confirmed these findings (Buti et al. 2010), which we interpret as follows:

• Well-developed and properly regulated financial markets allow households and firms to seize the opportunities created by structural reforms at an earlier stage, bringing forward benefits that often materialise with lags.
• They also help the reallocation of factors of production towards new activities spurred by structural reforms.
• Moreover, the availability of a wider range of investment opportunities improves risk-sharing and permits consumption-smoothing in the face of policy shocks, making agents more resilient to reform-related temporary income or job losses (notably in the case of labour market reforms).

Of course, the consumption-smoothing and risk-sharing roles are not unique to financial markets. If well-designed, social security and social protection systems may play a similar role, and hence soften the resistance against structural reform.

The Record Before and After the Crisis

Our earlier work was based on pre-crisis data. Do our conclusions still hold when taking crisis period data into account? To examine this, we updated our dataset on 20 OECD countries to include the period 2005-2012, based on the same (but updated) sources, most prominently the World Bank Database on Political Institutions data (to determine when incumbent government chief executives were re-elected), various OECD structural reform indicators in the fields of pension, labour market, and product market (to define the reformist nature of governments), and the Fraser Institute indicator of financial freedom (our gauge of the role of financial markets).

Three stylised findings stand out:

• The popular perception that incumbent governments have been punished for the crisis is not rejected by the data.

Pre-crisis – that is over the period 1987-2007 – there are 131 elections in our dataset, of which in 76 (58%) the incumbent government was re-elected, and in 55 (42%) it was not re-elected. Post-crisis – that is over the period 2008-2012 – there are 29 elections, of which in 14 (48%) the incumbent government was re-elected and in 15 (52%) it was not re-elected. So the (unconditional) probability of being re-elected appears to have fallen after the crisis, most likely as a consequence of the crisis itself, as supported by the econometric evidence indicating a significant effect of economic growth on the probability of re-election (Buti et al. 2010).

• Another popular perception – that electorates have penalised reformist incumbents particularly hard in the wake of the crisis – is, however, disproved by our data.

Pre-crisis the re-election probability of reformist governments was slightly smaller than the probability of re-election of all governments taken together. Post-crisis it is the other way around – reformist governments were more likely to be re-elected than all governments taken together (see Figure 1). The difference in probability is presumably not statistically significant, not least since post-crisis the number of reformist governments that faced elections is small – six in total, of which three were re-elected (all in the Eurozone). But it surely does not suggest that abstaining from, instead of embarking on, reform is the best route for the incumbent to win the next election. Such a presumption is corroborated by econometric tests: Updating the Buti et al. (2010) probit model with post-crisis data, whether governments were reformist or not remains non-significant in determining the probability of re-election.

• Our earlier finding – that a reformist government is more likely to be re-elected if financial freedom and/or the social safety net is large – remains intact.

As shown in Figure 2 over the whole sample period high financial freedom and a large government size are both conducive to a comparatively higher-election probability of reformist governments.

Figure 1. Probabilities of re-election and no re-election

reform election charts 1987-2007 v. 2007 to present

Figure 2. Probability of re-election of reformist governments

reform odds of reelection 1987-present

What Lessons Can We Draw?

The creation of the banking union and the development of financial markets as a complementary channel to banks for financing the real economy are generally welcomed as an important step forward towards easing the fragmentation of the financial system in the Eurozone. This is an important achievement both from the point of view of economic efficiency – i.e. by promoting the effective flow of funds across the monetary union – and financial stability. Our findings add a – perhaps unexpected, but potentially very important – third dimension to the considerations of efficiency and stability.

• They suggest that improvements in the functioning of the banking and financial system promote the electoral reward for structural reform.

The above findings have an important implication. If reform activism indeed does not hinder the re-election of incumbent governments, further synergies within the ‘consistent trinity’ of policies in the Eurozone – genuine banking union, symmetric macroeconomic adjustment, and deep structural reforms (see Buti 2014 and Buti et al. 2014) – may emerge. The banking union and the better functioning of the financial system it will entail over time – by fostering the electoral incentives for incumbent governments to embark on structural reforms – would also support growth and macroeconomic adjustment. Moreover, growth would permit the sustainability of adequate welfare models, which, as our work suggests, would further heighten the electoral rewards for structural reform, thus reinforcing the virtuous circle.

Last but not least, a virtuous circle of this kind, once set in motion, would facilitate the task of the coordination of economic policies at the supranational level – e.g. in the framework of the Macroeconomic Imbalances Procedure and the European Semester. Indeed, the perceived conflict between ‘national’ and ‘European’ policy objectives would fade.


It may be true that governments are reluctant to embark on bold structural reforms for electoral reasons, but we find that those governments that dared to carry out reforms have not suffered worse electoral outcomes than those who did not dare. In fact, electorates tend to reward reformist governments in certain cases, notably if electorates can rely on effective welfare systems to protect them against social hardship, and if well-functioning financial markets help frontload the benefits of structural reform and diminish their short-run cost. This suggests that, looking forward, financial system repair and the preservation of an effective welfare system would contribute to further contain the risk of reform inertia. We can, therefore, add a ‘consistent trinity’ to the list: There are no conflicts between sustainable social welfare systems, well-functioning financial markets, and electoral support for structural reform.

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  1. Cindy K

    I have a slightly different perception about the link between reforms and re-elections. At times the general public is hit hardest by the reforms intended for their emancipation and that translates into loss of votes. The Eurozone countries may or may not have taken the right decisions, but the public has been unforgiving. This has essentially resulted into rise of dangerous right wing extremism, which is quite scary.

    1. trish

      “At times the general public is hit hardest by the reforms intended for their emancipation.”
      emancipation from what exactly? jobs? a safety net? intended for their emancipation? or for the kleptocrats?

      “reforms” in the Eurozone often meant austerity (along with privatization/ resource-grab, erosion of their safety nets) all on the backs of the populace, after the bailout of kleptocrats. Same kind of stuff here.

      Any public support for “reformers” pushing these “reforms” seems due, to me, (OK, except maybe Iceland) to understandable public anger/desperation and ignorance combined with the standard lines of the elite channeled through the MSM about necessary-cuts/ belt-tightening government-excess ( ie pensions) while taking care of those at the top like the financiers. and perhaps also because the other options suck.

      There are countless instances- here, there, in Europe, Latin America- where the public has supported what is really against their interest, due to understandable anger combined with ignorance and a useless media and limited options.

      But anyway, I think one needs to be wary of the words reform, reformer…

  2. Keith Ackermann

    I hate to sound negative, and it’s really nice Yves puts these things up, but everything I’ve read from VoxEU is all about maintain the status quo. They may say otherwise, but this paper is a good case in point: it begins with a meme of low regulation, doesn’t actually point to data (just vague counts of loosely defined electoral classes), and ends with a few incestuous references. It looks like a think tank circle jerk.

    1. Yves Smith Post author

      Most of mainstream economics is like that. Its purpose is to justify the current order. It may be a tad more obvious at VoxEU since the pieces are short and are write-ups of research. If any were deemed think-tank worthy, the findings would be more artfully presented.

  3. John

    “….but we find that those governments that dared to carry out reforms have not suffered worse electoral outcomes than those who did not dare.”

    Specifically what ‘reforms’ are we talking about? And which governments did and did not commit to structural reforms? Earthquake shattering electoral changes are extremely rare, no matter the commitment to ‘structural reform,’ whatever that is suppose to mean.

    I will be a bit more specific on what is meant. As everyone knows structural reforms is code for austerity — raise labour costs, slash pensions, cut government payrolls, raise taxes, and the latest ‘reform’ for us here in Belgium — a ‘sandwich tax’ on kids. Yep, that is the most recent reform’ our fearless leaders have bestowed on families with school age kids here in Belgium. The tax is to help defray the cost of school monitors when kids are at lunch because teachers can’t do it — actually, it is not in their contract.

    From what I can see from the author’s post, it is nothing more than CBO like modeling. It is not to be taken seriously. However, the post is a reflection on how the EC is so disconnected from reality. Pain on the street across Europe is just a data point on a spreadsheet for these folks and not to be discussed in any meaningful way.

    Committing to ‘structural reform’ by the political elite has been a very bad experience for millions of Europeans who are just trying to get by.

  4. Nathanael

    Oh, the overall election trends are very clear. People aren’t happy with the “status quo”, and so “re-regulate the banks” candidates and parties are getting lots and lots of votes.

    In European countries with proportional representation, this is likely to lead to a change in government sooner rather than later. HOWEVER:

    — Hungary’s Fidesz has eliminated democracy in Hungary and basically prevented any other parties from running, using Communist-era Soviet techniques. Gonna be hard to get a reform party elected now.
    — In Ireland, the *four* largest parties are complicit in the status quo, and it’s taking a while for a fifth party to arise as competition
    — In Spain, the current government has decided on military crackdown tactics
    — The UK doesn’t have proportional representation, so it’s very hard for a fourth party to get started

    Of course, when the status quo is broken, reform candidates get elected and re-elected. If they can get to that point. Major trouble lies in structural issues in the election systems. You can’t get elected if you can’t get nominated by your party first, or if your party can’t get any traction in the news media.

    The US has a particularly sclerotic and dysfunctional system, involving a malapportioned Senate, filibusters, a gerrymandered House, the Electoral College, and a locked-in two-party system. It is very non-responsive to desire for reform among the populace. The US system *may* still respond to this desire, but not until the last minute — the point at which nobody cares whether their vote is “wasted” and everyone marches out to vote for Third Party Candidate Nobody Has Heard Of. We’re actually getting closer to that. The illegal detention of the Green Party candidate for President wasn’t a good sign, though.

  5. Jack Lohman

    This nation’s #1 problem is greed at the top, and politicians who feel free to accept campaign bribes for favored voting. The ONLY solution is public funding of campaigns, and a 100% turnover in November.

  6. paulmeli

    Unfortunately, “reform” generally means the citizens give up something now for some vague future benefit that rarely produces net benefits for the majority. Reform has proven to be a race to the bottom.

  7. Banger

    Wow! This is vague. Ok, even if we have a good definition of real reform (not the usual fake versions) we can elect people who promise it but once they get near power they are threatened and bribed out of it or, like Obama, were just pretending to favor reform. And so it goes. Minor piecemeal reform is useless when extra-legal means can be used to stop anything from happening. Reform must be draconian or nothing at least in terms of basic power-relations and economic issues. Reform is working fairly well with some social issues like gay marriage and marijuana legalization which are of absolutely no consequence in terms of the power-elite.

    1. trish

      or those who might truly reform can’t access to the system, the voters. like in a one, er two, party system like ours (with a complicit MSM).

    2. sufferin' succotash

      The late lamented Richard Mellon Scaife was a living example of the political system’s decay. A pure-and-simple rentier (Piketty couldn’t have invented the guy) creating a constitutional crisis simply by throwing masses of money (100s of millions) at venal and/or frightened politicians. The only reforms that could possibly prevent people from him from exercising that kind of power would be 100-percent estate taxes or nothing but complete public funding of all election campaigns. This is beyond economics; it’s a question of preserving the integrity of the political system itself.

  8. Dan Lynch

    Re: “A frame-breaking reformer, such as a Huey Long, would require a far more divided electorate with geographic concentrations of radicalized voters to be viable.”

    Ummm, Huey was elected in one of the most conservative states in the country. He was a uniter, not a divider. You know all those rural social conservatives who support the Tea Party? — well they voted for Huey back in the day. Along with blacks, and the urban working class, and generally most of the 99%.

    Huey focused on helping ordinary people and fighting corporate power. He believed that only a fool would campaign on divisive social issues. T. Harry William’s biography of Huey is a must read for any serious student of American politics.

  9. NotTimothyGeithner

    The true obstruction to reform is the electorate perceives Democrats to be liberal. Gore and Kerry ultimately failed because they didn’t pre-existing notions. Bill Maher said it best when he pointed out that Al Gore discussed the environment every year of his adult life but 2000, and Gore was perceived as a status quo dolt and spineless when the GOP ran on change. Nader and youth support for Bush existed because Gore didn’t support the outside perceptions.

    Obama ran on universal healthcare, ending the Iraq war, raising taxes, and accountability. Change was the message, and the guy wound up with over 65 million votes.

    If you ask voters, they just project onto candidates based on preconceived notions. Liz Warrens ideas on credit card reforms are good and she is a professor from taxachussetts (let’s just switch to using comrade already; my dad always said Mass. was the most reactionary place in the country), and voters who are hungry project onto her. If she came out and said, pot is good and the surge in Afghanistan was wrong she would be more popular.

    The problem with outsider parties is they seek to fill a void already filled in the minds of voters. Admittedly, this is anecdotal, but I use to do the democratic grunt work, voters are both savvy and stupid. If you went out and asked low info Democratic voters about ACA, they would compare it to European health care systems because it’s how it’s been portrayed to them. They just know Europe has a great system, and now they have insurance. What they see is white people who aren’t smart enough to be president bringing the president down because it sounds like a good deal. The Democratic elite have supported this.

    They have also heard the GOP echo chamber about how awful Canada is. Most people have never been. All they know is what they hear, so as they experience ACA, these voters will conclude socialism failed. The outside parties are stuck because they are seen as cranks because voters are already primed to think Obama is a super liberal. What is the point?

    I think the 2006 cycle is really important. The GOP was never really popular up to that point (there was a 9/11 sheen), but the Democrats had no alternatives. GOP polling dropped with the SS pivot, rising violence in Iraq, and Katrina. Democratic polling never went up except one. When John Murtha said the Iraq War was a mistake, Democratic polling surged despite no one else saying anything, and Democrats weren’t punished for voting for the surge because they are perceived as antiwar. They had done nothing to stop it and applauded every cruelty, but one voice changed the democratic fortunes because people have preconceived notions.

    Going back to Warren, there is a sense women would be more peaceful, so she is very likely believed to be a hippie. A challenger from the left would be seen as a crank.

    Schaevo was a stunt which strengthened GOP support among boomers and seniors.

    1. Nathanael

      You’re actually describing the phenomenon where people are hungry for decent alternatives and will *jump* at the *slightest hint* of one (e.g. Murtha saying the Iraq War was a mistake).

      This is dangerous because fascists are awfully good at presenting what look like decent alternatives. It’s critical for actual alternatives to win before the fascists win.

      The old institutions which we have spent so much time criticizing are dead institutions walking and are, in some sense, unimportant for the future; they are destroying themselves through sheer idiocy, madness, and incompetence. The real question is whehter we will manage to establish a functioning democratic set of replacements or whether the situation will be hijacked by a Napoleon.

  10. Eureka Springs

    So thankful to read so many falling somewhere between wariness and outright contempt for “reform”.

    Nixon had to break into Dem HQ to find out their strategy. Nowadays… hacks can do it to anyone, from anywhere, anytime. The duopoly operates in a manner which suggest they both are owned by those with the same interests and largely know exactly what each “side” will do.

    At some point doesn’t everyone knowing the truth, except we the rubes, make honesty an attribute, even dare I say a necessity? How do we break this systemic staph infection of secrecy and lies? If we are all going to be surveilled so many ways we cannot even count them all…. why the F*** aren’t we insisting all these pols, parties, and most especially gov’t operate entirely openly since we have to do so?

    Aside from the necessity of establishing public campaign finance only… I see these two areas (money/corruption – secrecy/lies needing more than just “reform”. Talking about reform is like talking about dark matter…. supposedly it exists, but we don’t know what it is.

  11. Oregoncharles

    Before I read the article: ” A frame-breaking reformer, such as a Huey Long,”. Opinion on Long seems to be sharply divided between “real populist” and “dangerous fascist” – granted, he could have been both. This reference reflects the former characterization; can someone suggest a good source on the subject? Yves? I don’t usually read biographies, but I would in this case if it’s recommended. He’s a long-standing puzzle, and potentially a model.

    And then there’s the rest of the sentence: “a far more divided electorate with geographic concentrations of radicalized voters to be viable.” We don’t have that? Allegiance to the existing major parties is plummeting and polls show very high discontent, as they should. Sounds like an opening to me.

    1. Yves Smith Post author

      The differences in opinion in America, when you get outside identity group politics issues, are actually pretty narrow, particularly on economics and redistribution. With no real left in the US, and no fascists (the real jackboot kind you see in Golden Dawn) the spectrum here really is not as large as in many countries with multi-party systems. The Republicans and Democrats exaggerate their differences for effect.

      1. Oregoncharles

        As a Green Party activist, I’m all too aware that the R’s and D’s “exaggerate their differences”; more precisely, rhetoric aside, they keep their functional differences largely restricted to “cultural” issues the plutocracy doesn’t care about.
        OTOH, there’s now a huge gap between what a great majority of Americans support, from single-payer health care to hemp legalization, and what the Democrats support. Even a lot of Republicans are well to the left of the Democratic Party, though they don’t realize it, partly because of those cultural issues and mainly out of sheer habit.

        If we could ever get Americans to vote on issues, including economics and redistribution, there would be an electoral revolution – possibly followed by a coup, speaking of “jack-booted” fascists. That seems to be a nearly insuperable challenge, though. I blame complacency and habit.

        I’m very much afraid we’ll shoot right past the chance for electoral change and go straight to the torches-and-pitchforks stage, winding up like Syria. It doesn’t have to be like that, depending a bit on the military, but I think it’s now a very real possibility. 2016 may well be our last chance.

        So what was Huey Long, really? Or is there no real answer to that question?

  12. Stuff your fireworks

    One day in the not too distant future I’m going to wake up and I won’t be in the USA – not because I’m traveling but because the USA is gone, rolled up like a tent and carted off. I will reside in the region where I chose to live, and it will comply with the minimal standards of the civilized world – because it wants to, and without three gigatons and a parasitic federal police state, it has to. The world will be a safer place.

    Electoral politics will have played no role in this evolution. Reform will not figure. The change will have been effected at a stroke by the shared disgust of insiders and the public. I had a ringside seat for that once: it was great, watching it destroy the Warsaw Pact and COMECON. The NATO Pact and CORPECON is next. I want to be in on that too.

    That is my sole remaining aspiration. Nothing else matters.

    1. 1 Kings

      Amen. Though I don’t think our dear leaders will be as civilized as Gorbachev.
      Now, cue the Metallica song..

  13. Barbara Duck

    Elizabeth Warren has crossed over into book land, that’s the focus now, buy my book like so many. I don’t dislike her at all and she ran a good campaign, but the battle to be fought is way above her head and like most others they can only go after the low hanging fruit as regulators can’t do anything about computer code as they don’t understand the guts of how it works. I wrote to her myself trying to get educate her when she recommended reinstating Glass Steagall as it’s better than nothing, but not a real long term fix and more of a band aid with what we have running out there today. I wrote about it last year and you need to get to the models and algorithms and all in government don’t seem to have any data mechanics logic and so we sit and the money making algorithms keep moving as the smart folks model around the verbiage with code and it just keeps rolling.

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