EQ Vol.12: The Disregarded Economist: Barriers to Economic Policy Implementation

Contributing Writer: Eric Alberts | May, 2022

In the United States, citizens have the opportunity to participate in their government and influence policy decisions through voting. It’s not often that you hear someone critique this basic premise of our government. On paper, it is perhaps the best system in the world. But a small addition to my first statement reveals a problem that is not often discussed: in the United States, citizens have the opportunity to influence policy decisions through voting, even if they have absolutely no understanding of the policies about which they are voting. An area where this has become an increasingly prevalent issue is in the world of economics. Economic policy decisions are crucial to battling issues such as the climate crisis. Through economic policy, we can shift incentives and correct market failures by applying costs to the destruction of the environment. There are decades of accumulated knowledge and proof of efficacy of certain environmental-economic policy solutions, yet many of these policies have never come to fruition. It’s like giving a student all the answers to an exam and them still answering questions wrong.

A classic example is carbon-pricing policies. In general, carbon-pricing policies incentivize the development of green energies by putting a price on a firm’s ability to pollute. This idea was first introduced in 1973 by British-born engineer David Gordon Wilson, who proposed a tax on large, polluting firms’ CO2 emissions. Since then, carbon-pricing has moved to the forefront of economic research. In accordance with economic theory and decade’s worth of data from small-scale implementation, economists have essentially reached a consensus on these policies: they are both effective (reduce emissions) and efficient (cost-effective). However, small-scale implementation of these policies is not enough, and international coordination and stronger policies are needed to reach acceptable emissions standards. Carbon-pricing policies, unfortunately, are just one instance of economic academia being ignored on the political stage. So, what exactly is the barrier between economic knowledge and policy implementation? I argue that there are two main factors: economic illiteracy and the political economy. 

Survey studies show that the majority of the adult population has a basic understanding of economics, but struggle when it comes to specifics and policy implications. Voters make decisions based on their preconceived notions about what certain economic policies are trying to achieve, which are oftentimes completely misguided. For example, in a 2019 survey conducted by Hunger Free America, over 70% of self-identified Democrats supported increased federal spending on the U.S. food stamp program, SNAP. However, economic research indicates that the most effective policy at reducing hunger is direct cash assistance, or Universal Income. By voting for politicians who support increased spending on SNAP, these voters are unknowingly upholding a program that has proven to be ineffective in comparison to programs in other developed nations. Economically illiterate voters view the problem too simply: food insecurity is a major problem in the United States, so increased spending on the current nutritional assistance program must be a desired policy. The issue is that this is not the best policy; The U.S government has the capability to be much more effective at reducing food insecurity. This example illustrates the problem of economic illiteracy perfectly: voter decisions are not based on concrete results from policy implementations, but rather on whether or not their preconceived idea of a policy fits their moral values. To most left-leaning voters, a politician who disagrees with increased spending on SNAP does not care about poor people. Similarly, to right-leaning voters, a politician who proposes a carbon tax does not care about business owners and the free market. The reality is that in both of these cases, the voters have a fundamental misunderstanding of what these policies actually achieve. Of course, it is unrealistic to expect every one of these left-leaning voters to read the countless publications on SNAP and its alternatives, just as it is unrealistic to expect every right leaning voter to research all the economic implications of a carbon tax.

Figure 1

The interplay of our Democratic institutions with self-seeking individuals, political parties, and interest groups is the other side of the policy implementation barrier. Economic-environmental policy decisions are made by political representatives with compromised interests, not economists. Just as most voters do not consider the concrete results of economic policies, neither do politicians. Instead, politicians devote time, energy, and money into figuring out which policies will garner support from their voter base, rather than figuring out what policies will reach their intended goals. The two-party system creates a grouping of economic policies under the labels of “Democrat policies” or “Republican policies” so that voters do not evaluate their stance on policies individually. And just as these voters are influenced by the two-party system, politicians are confined to certain ideologies in order to maintain support within their party. In other words, politicians are hesitant to support certain policies which may not align with their political party for fear that they will lose their party’s support. One can compare the Democrat and Republican parties to factories producing inelastic goods: they continuously produce politicians to represent their seldom-changing set of policies, and their voter bases vote for (consume) these candidates without second thought. If these politicians shift their rhetoric and offer support to policies on the other side of the political spectrum or to more extreme policies, they are cast out of their party (defective) and demand from their voter base disappears. 

Figure 2

To put a cherry on top, money is a major influencer in the political economy and is a determinant of what policies we see politicians supporting. Corporations, labor unions, single-issue organizations, and other interest groups spend billions of dollars hiring lobbyists who advocate on behalf of their clients for certain policies. In the case of the environment, there are two sides trying to influence the direction of policy: environmentalists and businesses with non-renewable energy interests. Interest groups on the environmentalist side consist of non-profit organizations and businesses with renewable energy interests. Contrast this with interest groups on the other side, which consists of mega-corporations like ExxonMobil, Chevron, BP, Shell, and others, and the most pertinent issue with environmental policy implementation is revealed. Renewable energy interest groups are simply not able to compete with large, polluting firms on the political stage, leading to disastrous effects. During the last midterm election, non-renewable energy interest groups outpaced renewable energy groups thirteen to one in terms of political giving. While it is difficult to quantify the exact impact that lobbying discrepancies have on the outcome of legislation, some experts believe it is one of the most significant contributors to stalling climate action. In 2009, a national emissions cap-and-trade scheme (a form of carbon-pricing) called the Waxman-Markey bill passed through the house of representatives but failed in the senate. Researchers concerned with why this bill failed hypothesized that lobbying was a major player, so they attempted to quantify the impact it had through research. They estimated that lobbying decreased the probability of the bill passing from 55% to 42%. In other words, lobbying was likely the deciding factor as to why we failed to implement a national emissions cap-and-trade scheme. 

The issue I have presented in this piece is an incredibly frustrating and complex one with no simple solution. To approach this problem, one would need to completely re-envision the structure of our democracy and redetermine who is responsible for economic policy decisions. If we wanted to separate economic academia from politics, one idea is the creation of “economic administrations.” Similar to how the Federal Reserve Board of Governors is appointed, the president would appoint an independent group of economists to make economic policy decisions for a certain number of years. This would limit political bias, as the group would consist of pure academics whose decisions are not being influenced by lobbyists. However, attempting to increase the input of economists in policy decisions is a slippery slope, as the trade-off is a less direct say in government from individual citizens. Perhaps some of the more feasible ideas come in the form of increasing economic literacy. Specifically, increasing general understanding of how economics intersects with everyday life and political outcomes. I believe an introductory economics course should be mandatory at every high school, and students should learn about market failures and inefficiencies our current economy is facing. This would lead to increased awareness of the intersection of economics and environmentalism and promote more informed voter decisions. Individual citizens having a voice in politics is a critical part of freedom for many Americans, but we must accept that this comes with tradeoffs. In the words of Nobel prize winning economist George Stigler, “The public has chosen to speak and vote on economic problems, so the only open question is how intelligently it speaks and votes.”


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Read the full article at: https://issuu.com/uwequilibrium.com/docs/eq_final_2022/7