Happiness and Economics: How the Economy and Institutions Affect Human Well-Being

CHAPTER 7 The Current Politico-Economic Process

Chapter 7 THE CURRENT POLITICO-ECONOMIC PROCESS 7.1 Introduction Usually politics takes place within the rules laid down by the constitution . Political actors, such as the government, the voters, interest groups, and public bureaucracy, take the “rules of the game” specified in the constitution as given, and pursue their interests within these confines. Thus, for example, the political parties in a representative democracy proceed from the assumptions that the parliament decides which parties are able to form the government, and that the parliamentary majority promulgates the laws. Therefore, in order to come to power, a political party must endeavor to get as high as possible a share of the citizens’ votes. The voters in turn know that once they have voted in the parliamentary elections, they have no constitutionally established direct say in political decision making. This chapter takes the basic framework of the political system—the constitution— as given. It looks at how the behavior of political actors in the current politico-economic process affects people’s happiness. In the literature, the effect of the politico-economic process on citizens ’ well-being has so far only been evaluated indirectly. Either it has been inferred from existing political conditions, such as the functioning of party competition, or it has been measured by looking at individuals’ reactions. The investigation of individuals’ reaction to, and therewith evaluation of, political outcomes has concentrated on the influence of macroeconomic variables. At least five approaches can be distinguished (see Frey 1991 for a more detailed description):  Popularity and election functions.  Political reaction functions derived from the behavior of governments and central banks. 122 CHAPTER 7  Retreat from society or at least from the official economy—for example, by working in the shadow sector.  Nonconventional political participation ranging from demonstrations to publicly motivated strikes.  Use of force—that is, all sorts of revolutions and coups d’état. Section 7.2 compares the results of the first two approaches— popularity, election, and reaction functions—to assess citizens’ wellbeing with results from happiness research. Section 7.3 reports more general evidence on political satisfaction and on the trust put in the government by the population; section 7.4 discusses how specific government policies affect happiness; and section 7.5 looks at how happiness differs among the parts of the population with different political orientations. 7.2 Individual Evaluation of Current Policy In many democracies, citizens’ voting for a certain party is the strongest instrument they can use to show approval or disapproval of past policy or proposed political programs. It reflects the citizens’ evaluation of the policy outcome, based on either past experience or future expectation. Thus, a government’s or party’s popularity, as measured in regular surveys or its reelection, signals the satisfaction of the population. This idea lies behind the empirical analysis of socalled election and popularity functions. As the political agents have an incentive to pursue citizens’ wishes in a democracy, their behavior reflects the desires of the electorate. Observed policy thus offers information on what is valued by the voters. Empirically, this relationship is captured by reaction functions. In both approaches—popularity and election functions as well as reaction functions—citizens’ satisfaction is linked to economic conditions. 7.2.1 Election and Popularity Functions The evaluation of economic conditions by the voters and their reaction in the voting booth or in regular political surveys are the subjects of an immense literature (for example, Paldam 1981, Schneider and CURRENT POLITICO-ECONOMIC PROCESS 123 Frey 1988; Nannestad and Paldam 1994). While these reactions can be attributed to various models of individual behavior, the “responsibility hypothesis” has fared best in empirical analyses. Voters are taken to express a general dissatisfaction when the economy is in a bad state and hold the government responsible. Citizens thus tend to vote in a sociotropic way—that is, based on their perception of the state of the macroeconomy rather than on their own economic experience. They also tend to vote retrospectively. Election and popularity functions have been estimated for a large number of countries and periods. While the sizes of the effects of the various macroeconomic variables differ, of course, it is nevertheless possible to indicate broad magnitudes. The influence of changes in the unemployment rate and in the inflation rate, in the share of votes cast, and in the popularity attributed to government are of similar sizes...