“It’s the economy, stupid!”
The above is the phrase Bill Clinton used in the presidential campaign against W.H. Bush in 1992. Clinton’s campaign advantageously used the economic recession prevailing then in the United States. He succeeded in winning the election. Since then, “it’s something, stupid!” has become part of American political culture. “It’s the deficit, stupid,” for instance.
This episode indicates the reality of a clear connection between politics and the economy, which is the topic of this column. Since public policy is produced through political processes, for a better understanding of public policy, it is crucial to understand the relationship between the economy and politics. The PPE programs in England and America emphasize such an approach. PPE represents philosophy, politics and economics. I wish to follow such an approach in my columns.
History of political economy shows that economic activities influence political actions. F.D. Roosevelt‘s “New Deal” in the 1930s was in response to the Great Depression. In the twenty first century, the governments in advanced economies will exert greater efforts to protect the environment and to provide even more government health care benefits to its citizens.
On the other hand, one cannot study economic policy without taking into account political influences, and one cannot completely understand politics without comprehending economic influences. Government policies on unemployment compensation, the minimum wage, health care, and the level of national debt are all the result of political decisions that affect the economy. Ask yourself why Japan has a higher national debt than the U.S. or the Republic of Korea.
Then, how are political decisions made? Public choice or benevolent despot? In democracies, government decisions are made by some collective decision-making procedure; usually by elected representatives. The purpose of public choice and public finance is to understand how voters’ choices are translated into economic effects. One example in public choice is the median voter theorem in majority rules. However, our understanding of one-party political systems, such as in China, is poor.
Society consists of conflicting interests. And the result of public choice better be optimal or efficient in the Pareto sense. (See No.1 in this forum for Pareto efficiency.) One impediment to efficient decision-making is that policy makers may have no good way of measuring the citizens’ demand for the public good or government service. They may not have enough information to do so. The government sector uses a huge portion of the nation’s resources. Even in a market-oriented country like the United States, the government sector is one third of GDP. Considering the importance of the size, voters’ understanding of the political issue is crucial for an efficient outcome.
Politics involves complex exchanges that compound already complicated market exchanges. While study of the market is concerned with efficiency, the goals of public policy in a democratic society include equity as well as efficiency. Most people put a high value on fairness. As a result, a policy may move away from an optimum. Public policy has to answer questions like: what is each person’s fair share of the tax burden? However, what is fair is a value judgment. In this effort, people first should agree on the underlying facts. Then there is some hope. Although there may be conflicting interests, there are many shared values on which the populace can find common ground.