Experimental Economics

The U.S. presidential campaign has provided a blueprint for economic change - and not only in America.

Tuesday's presidential elections in the United States have been dubbed by commentators, as well as other Americans with whom I have spoken, as the most important since 1980, when Ronald Reagan was elected and changed the face of governance in the Western world.

As I write these lines, I do not know whether Barack Obama will be occupying the White House for the next four years or whether, come January, the moving vans of Mitt Romney's family will be showing up at 1,600 Pennsylvania Avenue, Washington. Some analysts have been claiming that, when it comes to the economy, there is no major difference between the two candidates in terms of how they would handle things in practice. But such an attitude is the product of cynicism, motivated in part by the disappointing reality that the Obama administration did not deal with the economic crisis it inherited as it should have. The cynics have also witnessed perpetrators of financial crimes who have escaped punishment and see that the cozy relationship between Wall Street and Washington hasn't changed. But all this is not entirely true.

Even if the occupant of the White House for the next four years does not keep the promises he made during the campaign - something those disappointed in Obama's performance as president are already familiar with - the presidential campaign has provided a blueprint for change and for a new relationship between the government and the governed - not only in the United States. One example in the Israeli context worth mentioning is the so-called trapped profits law that passed the Knesset this week. It gives multinationals a tax break on sending profits home in a bid to encourage them to pay a modest tax rather than having the profits sit in Israel. It shows how absurd it is to portray the battle between Democrats and Republicans in the United States as one between free-market principles on the one hand, and big government and "socialist interference" on the other.

The free market does not mean freedom

Taxing foreign corporations is being portrayed as running counter to the free market, and the failure to tax or providing a tax break, as the trapped profits law does, is touted as encouraging business initiative. But in practice, the trapped profits law can be described as blatant government intervention. Instead of having large businesses play by the same rules that apply to everyone else, the government is intervening unilaterally and giving them an advantage over small local enterprises without pull. This so-called free market is not freedom per se, and when we look to our economic future we need to remember that what politicians and big business are selling us in the name of the old order is a deception.

The bankruptcy of the argument made by both Prime Minister Benjamin Netanyahu and the Republicans in the United States in favor of small, lean government that simply lets the market and the business world get on with things is revealed when they intervene in favor of the narrow interests of the few. On the other hand, even though since the election of George W. Bush in 2000 the United States has lost much of its political, economic and cultural influence around the world, Tuesday's American elections could pave the way forward for new norms around the world. Even if the person elected president last night is not the one showing the way forward, the United States could still serve over the next four years as a kind of laboratory for a social, political and economic pilot for the next 20 years.

Change is no longer just the stuff of an American campaign slogan. It must come in small doses, in the gradual way The Economist magazine implored the world's leaders to implement. Otherwise it will come with a shock, in a crisis the aftermath of which is not clear. The U.S. elections are coming in the fifth year of a global economic crisis, which the American economy, the largest in the world, has not really managed to recover from. Unemployment is at a historic high, and the recovery is coming painfully slowly.

If it looks like the Americans are in relatively good shape compared to the Europeans and have growth rates of 1% to 2%, it's mainly because we are taking a macroeconomic bird's-eye view. A closer look, at the consumer level, shows a less-encouraging situation in which millions of Americans have lost their jobs and their homes. And when it comes to fiscal responsibility, responsible government spending is essential to a country's economic well-being. But responsible policy requires the smarts. Ireland and Spain went into the global crisis with budget surpluses, but how did that help them? Israel ran a deficit with plans to decrease it and has thrived through the global crisis. Germany boosted its deficit at the beginning of the crisis and was spared unemployment and recession.

The Scandanavian model is not a model

The highly touted Scandinavian model is not guaranteed to work in places like Israel and the United States. The Americans would in any event surely not dare to adopt a model in which government provides 50% of economic output, but for the time being, Americans are paying big-time for their low taxes. Satisfaction over government services in the United States is among the lowest in the Western world. And despite a free market, small business owners still find it harder to get financing than major banks, which get a free pass from the Federal Reserve.

All of this cannot continue much longer, and whoever was elected last night should know this - and not forget it for the next four years.