There are many real-world examples where economic logic runs into political walls. These are cases where sound economic decisions are hard to implement because of political resistance, short-term thinking, or public perceptions.
The one most currently in the public eye is between free trade and protectionism. Economists from Adam Smith onwards have known that free trade leads to growth and prosperity. Public perception, unfortunately, is that cheap imports threaten local jobs. Populist politicians are ready to seize on this perception with promises to use tariffs to make imports more expensive. The voters who support them think that tariffs will hit foreign companies, not realizing that they themselves will pay the tariffs in the form of higher prices.
Another perennial is the prospect of rent controls. Shortage of rental properties leads to high prices and calls for legislation to cap rents. The economic answer would be to increase the supply by measures designed to make it easier to own and rent property. Rent controls, by contrast, lead to properties being taken off the market or deteriorating over time as not enough money is coming in to properly maintain them. Politicians bid for the votes of current tenants at the expense of future would-be tenants who face lengthy waiting lists.
The cutting of subsidies, especially on items such as food and fuel often produces an immediate political backlash. Subsidies rarely make economic sense because they distort the markets and hide real demand with artificial prices. They are, however, popular with those who benefit, and there are votes to be gained by bidding for their support. Removing them can lead to protests, strikes, or even government collapse, as seen in places like Nigeria, Egypt, or Indonesia. In 2012, Nigeria tried to remove fuel subsidies. It made economic sense but sparked nationwide protests and forced the government to backtrack.
On climate change policies, the economic logic supports putting a price on carbon to help internalize environmental costs. The political difficulty is that voters and industries affected, such as fossil fuels, resist, especially in regions economically tied to those sectors. Few economists would support Net Zero, but virtue-seeking politicians and their supporters do, leading to increased costs all round. France’s 2018 attempt to raise fuel taxes for climate reasons triggered the nationwide Yellow Vest protests. It makes economic sense to simplify tax codes, broadening the base to make the system fairer. The problem is that every exemption or benefit in the current code has its supporters to fight for it politically. It makes no economic sense to drive the wealthy, who already pay most of the income taxes, out of the country with punitive tax rises, but there is popular political support for this, perhaps largely based on envy.
Pension reform is a minefield of political booby-traps that economic logic cannot deal with. As populations age, pay-as-you-go pension systems become unsustainable and need reforms such as raising the retirement age. The political difficulty is that people really don’t like hearing that they’ll have to work longer or get less money. Older voters, who are politically active, can sway elections. France, this time in 2023, saw massive strikes erupt over Macron’s attempt to raise the retirement age from 62 to 64.
The UK has a chronic housing shortage, especially in London and the South East. Loosening planning laws such as green belt restrictions would increase supply, lower rents and house prices, and boost productivity. The political difficulty is that local residents (NIMBYs) often resist new developments, especially in affluent Tory strongholds, and MPs fear backlash from their core voters. The result is that governments talk about building more homes, but little actually changes. The 2020 planning reform proposals were watered down after Conservative MPs rebelled.
HS2 provides a classic case of where politics beat back economics. The ability to work from trains cast doubt upon claims that faster travel would increase productivity. Politicians wanted to be seen to boost transport infrastructure and reduce regional inequality - a key “levelling up” goal.
In practice HS2 has faced ballooning costs, environmental concerns, and massive political pushback, especially from communities along the route. The result has been that after over a decade of planning and spending billions, the northern leg of HS2 was scrapped in 2023, removing many of the proposed benefits.
It is well to recognize, in the age-old struggle between political aspiration and economic reality, that while politicians can pass laws and economists cannot, sometimes reality gives a helpful push to the latter.
Madsen Pirie