Why political baby steps trump sweeping changes | Guest post from Dr. Jerry Webman

This post was authored by Dr. Jerry Webman , who is a Senior Investment Officer and Chief Economist for NICSA Member OppenheimerFunds. He is the author of MoneyShift: How to Prosper from What You Can’t Control (Wiley, May 2012), an investor’s guide to profiting from change. This post is adapted from an article that originally appeared in the OppenheimerFunds blog.

Dr. Webman will be opening the NICSA 2012 General Membership Meeting with a keynote address titled, “Why Blaming the Government Isn’t an Investment Strategy.” For more information about the conference, which is being held in Boston on October 17 – 18, and to register, please go to www.nicsa.org/gmm.

I’ve enjoyed almost 30 years in the financial services industry and for most of that time I’ve been able to downplay the fact that my now-long-ago academic career was in political science.  Somewhat regrettably in recent years, I’ve been leaning more heavily on my poli sci background. As investors, lacking useful metrics for assessing the impact of political events on investment opportunities, or letting our political preferences overly influence our investment thinking, can be problematic: It often results either in our ignoring the implications of a political event, or exaggerating its importance.

While thinking about this conundrum, I recalled a concept from my poli-sci days called “incrementalism,” which might help clarify our thinking about policy issues. Political theorists maintain that pluralistic democracies—such as the U.S.—don’t make policy decisions by sweeping away what’s come before and implementing new solutions to big problems. The underlying thinking against making sweeping changes dates from the Founding Fathers’ plan to “set faction against faction” and move ahead with piecemeal adaptations that avoid the “tyranny of the majority.” Incrementalism means we tend to make, unmake, and remake an extended series of small changes to existing policies, and expect to make more changes in the future. Through that process, we reach good decisions, even if they lack the purity some advocates would prefer.

Take energy, for example. We’ve been talking about creating a national energy policy since at least the early 1970s and we still don’t have one. Nevertheless, it’s predicted that 2012 domestic crude oil production will reach its highest level since 1997. What’s more, in 2011, domestic imports of petroleum  sank to their lowest level since 1999, while exports achieved an all-time high. Success in domestic petroleum production may not be everyone’s dream of an effective energy policy, but it does suggest that one aspect of the underlying problem—our ever-increasing dependency on imported oil—has been mitigated while many of us weren’t even watching.

By contrast, we tend to choke when we try to fix a vast problem all at once. A couple of weeks ago, I  used healthcare reform as an example of trying to do more than the system can absorb. Another example would be the mandate of last year’s congressional “super committee,” which tried to fix a decades-old budgetary problem by locking a group of political adversaries in a room and asking them to compromise; what we got instead was a roadmap to a fiscal cliff of tax hikes and program cuts. Although these draconian measures were designed to be reversed, action has yet to be taken to do that, and they continue to threaten the economy’s expansion.

Incrementalism, however, has its shortcomings. Witness our tax code, which has incrementally acquired special interest preferences like so many barnacles on a ship’s hull and needs a major overhaul. The incremental process works best when there are many factions set against one another. It works least well in a highly polarized political arena, such as exists today. Polarization may be inevitable as a presidential election approaches, but I hope a few of our policymakers will take a copy of the Federalist Papers with them on the campaign trail and think about how we can start making some incremental progress with the nation’s issues.

Read more from Dr. Jerry Webman on the OppenheimerFund’s blog.

And check out NICSA’s YouTube 2012 GMM playlist — where you can see videos of Dr. Webman and other speakers on the agenda for the NICSA 2012 General Membership Meeting.

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