Why Romney, Obama must drop the fear-mongering

In both the presidential debates and in their political ads, President Obama and Mitt Romney have a common goal: Make voters afraid of the other candidate’s economic policies. And sure enough, polls show nearly two-thirds of Americans will base their vote on fear for their own financial security.

The fear factor is rising in the presidential contest, polls find, when this election really should provide the certainty of a consensus on how to revive a sluggish economy mired in doubt.

More than a competition of two visions of the economy, the 2012 race is seen as a contest in which each side paints the other as beholden to groups trying to gain or preserve favors from government. While a competition of special interests may be natural in a democracy, if taken too far voters will also see the future of the economy determined by political blocs – unions, the wealthy, ethnic groups, seniors, Wall Street, etc.

An economy needs to run on basic rules applicable to all and driven by some sort of political center. Only then will individuals make the long-term investments in training, technology, and new business.

Before he became Federal Reserve chairman, Ben Bernanke warned that small-business owners will delay investments if government seems fickle on taxes and regulation. That problem has been especially true since 2001. The United States has seen two recessions, big shifts in tax rates, and elections every two years that created a zigzag in influence between Democrats and Republicans.

The appearance of rising political whim in government control of the economy creates more than just uncertainty. It also leaves the impression that government will rescue powerful constituents of either party, thus giving those interests a leg up in the economy. This can dampen the spirits of investors and divert capital away from truly productive enterprises.

Two big examples are the 2008-09 bailouts of both the big banks on Wall Street and the autoworkers unions during the General Motors rescue. Both rescues required the government to use strong-arm tactics outside the usual rule of bankruptcy law.

Even now it’s not clear if the 2010 Dodd-Frank financial-overhaul law will prevent another bailout of “banks too big to fail.” (About half of the banking industry’s assets remain concentrated in five institutions.) As a result, lenders still favor big banks on the belief that government will bail them out again in another crisis.

In a study last year, Deniz Anginer of the World Bank and A. Joseph Warburton of Syracuse University estimated the implied subsidy for big banks has been about $4 billion a year based on a perception they would be saved. Other economists put the figure much higher.

When credit unfairly flows more easily to big banks, it distorts lending away from smaller banks, which are a better source of new jobs. In recent months, several members of the Federal Reserve have called for reducing the size of banks in order to help the economy.

Such examples of warped economic incentives often arise from the political dynamics of using fear in campaigns and from candidates promising favors to special interests.

Voters must not let fear guide their choices. The economy needs to be guided by shared and principled views of government’s role, not pandering by candidates or the phobias they want to create.