In Banking crises and political survival over the long run – why Great Expectations matter, Jeffrey Chwieroth and Andrew Walter argue that citizens have a) become more demanding of government since World War Two, and b) more unforgiving of governments unable to effectively respond to financial crises. From the paper;
Before 1946, banking crises do not heighten the risk of partisan spell termination. Everything changes after 1945, however, when banking crises sharply and significantly raise the risk of government loss of office for all countries. Moreover, it is in executive-dominated democracies where this effect is most significant – in such cases, the risk of losing office given a banking crisis is about three times higher than non-executive-dominated democracies. But the risks are greatest after 1945 in cases where there is a relatively high degree of diffusion of political power: governments in countries with relatively high numbers of veto players suffer risks of losing office given a banking crisis about six times higher than in countries where political power is more concentrated. Our results also suggest that citizens are generally unforgiving of incumbent governments in financially open economies.
But I find this bit particularly interesting: “Finally, great expectations may themselves be destabilising.” My interpretation: Voter expectations that government will “do something” to stabilize the macroeconomy have strengthened the incentive for government to bailout troubled financial institutions. That, in turn, creates moral hazard, too big to fail, and a less risk averse financial sector.
But why have voters become more demanding? Maybe because since World War Two, Keynesians have made great claims about the fiscal capabilities of government to prevent and deal with economic shocks and smooth the business cycle. Voters are merely asking politicians to walk the walk down the path Keynes laid. And despite Keynesian failures, the public’s belief government should take action remains strong.