The Politics of Overshooting in Advanced Economies

Session Submission Type: Full Paper Panel

Session Description

This panel examines policy overshooting, or policies which are “too successful” in achieving their objectives. When politicians adopt policies to generate economic growth, innovation, or other economic objectives, they often run the risk of overinvestment in or overreliance on certain sectors of the economy that can lead to unwanted economic outcomes. This form of policy overreaction has received increasing attention in the literature on political science and public policy, where it has been tied to financial crises and economic volatility. By increasing economic insecurity, delegitimizing elites, and destabilizing capitalism, policy overshooting has also played a contributing role in the rise of populism in advanced, industrialized societies.

This panel seeks to increase our understanding of policy overshooting by comparing a set of OECD countries in different policy domains, such as in innovation, financial, housing, and labor market and tax policy. While policy overshooting has attracted interest, cross-national comparisons remain rare. By fostering dialogue among a wider range of empirical case studies, we hope to highlight common dynamics or uncover variation in the logic of policy overshooting. Our panel seeks to address a set of larger questions important to the study of comparative politics and political economy: What are the conditions under which policy overshooting occurs? Are certain policy domains more prone to overshooting than others? How do policymakers create and respond to overshooting? Answers to these questions contribute to important debates on the rise of populism, inequality, and economic instability in advanced economies.

Paulette Kurzer will present first, focusing on the public policies which have led to soaring housing prices in the Netherlands. Her research highlights how a growth model based on export competitiveness is paired with a deregulated financial market that resulted in the over consumption of credit. Credit expansion was partly fueled by the internationalization of the Dutch banking sector after 1993 and partly driven by reforms of the postwar housing system. By 2009, Dutch banks were major European actors and home ownership rose in the Netherlands. However, the mortgage credit expansion contributed to the Netherlands’ worst recession since 1945 and it took years before the economy returned to growth in 2015.

Alexander Reisenbichler and Andreas Wiedemann broaden the analysis to the financial system more generally, addressing the question why policymakers in some countries have resorted to credit markets as private alternatives to public welfare, but not in others. They link their argument to a growing body of work on growth regimes and how they influenced these developments. They illustrate how policies that successfully stimulate credit have led to “opportunity hoarding,” where those able to access credit markets benefit over those that cannot, leaving the latter to rely on increasingly incomplete welfare states. This new form of inequality has widened social disparities in a range of areas from employment to housing. Their paper discusses these developments in the United States, United Kingdom, and Germany.

Darius Ornston examines overshooting in industrial policy, focusing specifically on the role of branding as a policy instrument in Iceland. Collective narratives about the country’s position in the global economy has become a potent and inexpensive instrument for industrial restructuring. Using Finland and Ireland as shadow cases, the paper demonstrates how branding is less institutionally demanding than strategic coordination and policy concertation, but potentially risky, contributing to a massive financial bubble in the mid-2000s and increasing Iceland’s vulnerability to any change in global tourism flows.

Wade Jacoby concludes by discussing tax and labor market policy in Germany. Major reforms in these policies aimed to bring down unemployment from worrisome levels in the early 2000s. Substantial overshoot soon boosted German exports to disruptive levels both inside and outside Europe, where they have stayed ever since. German labor markets did tighten dramatically, but public infrastructure was starved as German capital flowed abroad. German inequality spiked, but the politics of restoring balance to trade and capital flows has proved as difficult in Germany as it is in Japan or China, countries that also subsidize exporting industries by sharply reducing household income shares.

Lucio Baccaro, whose research on growth models, labor markets, and social policy has covered a wide variety of countries has volunteered to serve as discussant and chair.

Sub Unit

• DIVISION 15: European Politics and Society

Individual Presentations

• Policy Overshooting in Trade: The Roots of Germany’s Contentious Export Surplus - Wade Jacoby, Brigham Young University

• Dutch Policy Overshooting: An Export Led Model with a Liberal Credit Market - Paulette Kurzer, University of Arizona

• Branding as Industrial Policy: Economic Adjustment in Iceland - Darius Ornston, University of Toronto

• The Politics of Credit-Driven Inequality - Alexander Reisenbichler, University of Toronto; Andreas Wiedemann, Princeton University

Chair

• Lucio Baccaro Max Planck Institute for the Study of Societies

Discussant

• Lucio Baccaro Max Planck Institute for the Study of Societies