THE POLITICAL ECONOMY OF ECONOMIC POLICY

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THE POLITICAL ECONOMY OF ECONOMIC POLICY

The COVID-nineteen pandemic strikingly illustrates the intersection of politics, economics, and other considerations. Public health experts have long warned that the world was likely to face a major pandemic and called for greater preparedness. Yet policymakers who have to focus on the next election find it difficult to invest the time, money, and political capital to address the abstract possibility of a future crisis. And so most of the world was unprepared for a global public health threat of the magnitude posed by the novel coronavirus.

As the pandemic has raced across the world, the policy response has continued to be tempered by political realities. Some members of the public, and some policymakers, have resisted the recommendations of public health experts, hoping for relaxed restrictions and a return to normalcy before the dangers have passed. At the same time, business interests have pressed for exceptions to benefit themselves, and for substantial subsidies-bailouts-to help them through difficult times.

At the international level, government responses to the pandemic illustrate the difficult politics of worldwide cooperation. A global pandemic requires a global response:

microbes do not respect borders. A coordinated international response is clearly the best way to confront an international public health emergency. Yet policymakers under pressure from their constituents have diverted resources away from other countries, banned the export of food and drugs, and hoarded essential supplies. Each of these measures-popular as they may be to national publics-imposes costs on other countries. In the final analysis, the lack of cooperation makes everyone worse off. Such international institutions as the World Health Organization attempt to coordinate a cooperative global response to the global crisis-but they can be powerless in the face of potent nationalist political pressures.

Every government faces tough decisions about the appropriate measures: what restrictions to impose and when to loosen them, where money will be spent and how it will be raised, and what national concerns can be limited to favor international cooperation. These decisions have to take into account public health recommendations, economic considerations, and political constraints. Just as the policy response to the two thousand seven to two thousand eight financial crisis varied from country to country in line with local political economy conditions, so national policy responses to the COVID-nineteen pandemic vary for health, economic, and political reasons.

Politics at play

This hotly contested policy response to a universal threat is no surprise to political economists. It happens all the time. For example, just about every economist believes that small countries would be better off if they removed all barriers to trade. Yet unilateral free trade is practically unheard of, and no country in the world today pursues it. Why not? More generally, why do governments have so much trouble getting economic policies right? Why does the advice of independent observers, analysts, and scholars go so often unheeded?

Politics is the usual answer, and the answer is usually right. But that is too vague-like saying that some countries are rich and others poor due to economics. Exactly how does politics keep governments from making better policy, even in the face of imminent crises? What does that tell us about how economic policy can and should be made?

Political economy is about how politics affects the economy and the economy affects politics. Governments try to pump up the economy before elections, so that so-called political business cycles create ebbs and flows of economic activity around elections. By the same token, economic conditions have a powerful impact on elections. Political economists have uncovered the simple (perhaps disturbing) fact that the rates of economic growth and inflation are all the information we need to predict quite accurately the results of the

WHAT IS POLITICAL ECONOMY?

Second-best can be best

POLICIES, POLITICS, AND PANDEMICS

Bottom line

Overview

The document explores how political realities influence economic policies during crises like the COVID-19 pandemic, highlighting the resistance to expert recommendations and the pressures from various interest groups. It argues that the intersection of politics and economics complicates the formulation of effective policy responses to shared global threats.

Key Points

1The COVID-19 pandemic reveals the challenges faced by policymakers in balancing public health and economic interests
2Political pressures often lead to suboptimal economic decisions despite expert recommendations
3Concentrated interests can overshadow diffuse public interests in policy-making
4Political economists analyze the bidirectional influence between politics and economics to understand government behavior
5International responses to global crises like pandemics demonstrate the necessity of cooperation despite nationalist pressures

Details

Authors: Jeffry Frieden
Category: Social Sciences

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