As the United States plunges further down into the maelstrom of the 2020 election, the long-held truth of politicians and economists is becoming clearer: politicians are not economists, and no self-respecting economist would become a politician.
Between the Democrats and Republicans, 2020 has become a clash of promises and grand visions. Policies are being touted as cure-alls for the ills of American society. However, without a grounding in sound economic theory, politicians run a significant risk of creating problems while implementing solutions.
Taken individually and placed in a vacuum-sealed echo chamber, each possible solution sounds as though it could be a silver bullet. But what happens when each policy is applied in reality? Consider two prevailing policies and proposals: rent control and protectionism.
In recent months, California has been wrestling with the idea of state-wide rent control. Despite almost every economist explaining that such measures would violate the law of supply and demand, leading to a housing shortage, which is the root cause of homelessness, the state passed the necessary legislation.
Interestingly, but not surprisingly, the cities and states with the highest average housing costs also have the strictest housing laws. New York City and California boast some of the highest rental rates and the largest homeless populations. While most economists would point and say that more housing is needed to meet demand, which will increase competition and drive costs down, city and state politicians are prompted to make broad gestures to their constituents without concern or knowledge of reality.
For the 2020 election, several candidates and legislators are proposing nationwide rent control, despite the clear warning signs from our nation’s largest cities. There is some evidence that rent control could provide temporary protection from rent increases in the short run, which politicians will generally point to as evidence of a successful policy. The long-term effects, however, are largely ignored as developers are disincentivized to build new housing, leading to a shortage and a slow, but steady, cost increase. By ignoring the total impact, politicians can paint a glowing image as they seek reelection or higher office.
Republicans are not blameless when it comes to economic policy. A party known for its free-market attitudes, unwavering in its tenacity when confronted by unions and protectionists, have pivoted with the advent of the Trump Administration. Tariffs and taxes were once called primary causes of the Great Depression and its prolonged duration, but have suddenly become a staple of the Republican Party.
Much like the Democrats’ rent control proposal, there is an initial benefit in the short term with regards to protectionist policies. US Steel saw an immediate rise in productivity and value, securing several hundred jobs. As these policies pervade, however, Americans are beginning to see higher prices from otherwise inexpensive imported goods, as well as domestic products that require the importation of raw materials. The Trump Administration’s current policies are estimated to cost the average American household an additional $400 to $1,000 annually. But on the campaign trail, you will only hear about American jobs that are being saved by the dozens at the expense of millions of Americans.
While both policies seem small in scale, their effects are felt greatly by those who were supposed to benefit. And despite all common sense, more extensive proposals are being churned out every day, including the Green New Deal, Medicare-for-All, and further escalation of our current trade war. Greater pressure will be applied to consumers and employers, leading to a natural response from the marketplace: decreased employment and productivity, and stagnated growth and wages.
One of the most difficult obstacles in adopting sound economic policies is proof of concept. When a politician’s job is on the line, the knee-jerk reaction is to interfere, rather than relinquish power. But examples are all around us. Consider the small country of Estonia.
The former Soviet state, which languished under Communism, took immediate action with its new-found independence. “The political agenda included monetary reform, the creation of a free-trade zone, a balanced budget, the privatization of state-owned companies, and the introduction of a flat-rate income tax,” said Luis Pablo de la Horra with the Foundation for Economic Education. This fresh commitment to free-market capitalism, after suffering under the polar opposite of Communism, has led Estonia to become one of the wealthiest nations in Europe.
The United States is more than capable of adopting similar policies and relinquishing control of the economy to the marketplace. It simply requires an understanding of high school economics and a deliberate trust in the capabilities of the individual. Without this basic knowledge, we are condemned to continue puttering along under harsh conditions that prevent each person from achieving their greatest measure of personal wealth and fulfillment.
