Anthony Michael Bertelli

Risk and Return in British Politics

This week, my frequent collaborator Peter John will be presenting the first paper in a larger project on the prioritization of public policies by governments at the European Political Science Association meeting in Dublin. We argue that governments seek to enhance their chances of re-election by managing their risks from attending to particular policy problems. In this way, government is like an investor making choices about risk to yield returns on its investments of political capital. We claim that the public provides signals about expected political capital returns for government policies, or policy assets, that can be captured through expressed opinion in polls.[1] While always approximate, these price signals are at times noisier than others meaning that uncertainty in the environment in which governments must choose policies correspondingly differs. The amount of attention that a government gives to a policy domain, or what we call its investment level in a policy asset, generates return to political capital but also risk due to the variance of each asset and the covariance among them. The nub of our theory is that strategies of statecraft consider risk and return in their policy portfolios and uncertainty in the public’s policy valuation. We think this is a novel way for examining policymaking and leadership in government.

Drawing from a wealth of data in the UK Policy Agendas Project with which we are involved and a host of other sources, we test our claims in the UK between 1971-2000.  The graph below shows return to each of five policy asset classes throughout the period as well as price signal uncertainty from the public.
Note the stable and low returns associated with environmental policy compared with the high but volatile returns from economic policy.  The public’s price signal for the former is rarely uncertain while for the latter it is far noisy.
We hypothesize that the resulting risk in the portfolio and returns to political capital investment impacts election results.  One important finding in the project thus far is that both risk and return predict election outcomes: when the government reduces risk and achieves a higher return, it gets a better electoral outcome. An interesting twist, consistent with claims about voter learning in the representation literature, is that the electorate in retrospect rewards governments for taking on risk.  When the public is uncertain about its policy priorities and price signals are noisy, the government gets a delayed reward for prescience in its policy emphasis.
In addition to the paper that Peter will present in Dublin on Thursday, we are writing a book-length manuscript over the summer.

[1] There is, of course, no political market where voters go continuously to the polls with high turnout and assess individual policies. This is arguably the central difference between the study of politics and of economics. However, we claim that citizens can express opinion that we measure through frequent polls. Governments endeavor to learn such information and take it as a price signal for its policy assets. With that information, sometimes noisier than others, government makes investment choices.