Why Politicians Don't Listen to Economists: First Meeting of Economic Policy Club Takes Place at HSE University
Participants of the HSE Economic Policy Club discussed why politics often serves the interests of a small group of people to the detriment of the welfare of the majority of citizens, and also why the government ignores recommendations from economists. At the same time, economic policy always redistributes resources, and it isn’t possible to achieve the optimal solutions suggested by economic theory.
The HSE Economic Policy Club held its inaugural meeting on September 30, 2021. Yuri Simachev, HSE Director for Economic Policy, moderated the first meeting. Martin Gilman, Professor of the Faculty of Economic Sciences and one of the club’s founders, commented on the complex and important task of putting economic theory into practice, something that is often difficult to convey to decision makers. For example, a current topic of discussion among economists is whether inflation in Europe and the United States will be short-term or long-term. The outcomes of this discussion are critically important for the development of future economic policy, explained Professor Gilman.
HSE Vice Rector Ivan Prostakov called the club a platform for communication—something which has been lacking in recent months.
HSE Vice Rector Ivan Prostakov
The club will help us to maintain our contacts, including international ones. It is impossible to develop the university and the research centre without exchanging opinions. Ideas about the economy are changing and developing, and our club will reflect the multidisciplinary nature of the university. This is a new and promising format.
Iikka Korhonen, Head of the Bank of Finland Institute for Economies in Transition (BOFIT), presented a report entitled ‘When benign social planners turn non-benign: Why is policy so often different from economists’ recommendations?’
Mr Korhonen drew participants’ attention to the fact that politicians often do not follow economists’ recommendations or economic theory, which focuses on solutions aimed at improving general welfare.
Iikka Korhonen, Head of the Bank of Finland Institute for Economies in Transition (BOFIT)
The idea of socio-economic policy, which aims to maximize general welfare, appeared 100 years ago, but it is often not implemented in foreign trade, R&D, or the allocation of subsidies to producers and consumers.
Dictators usually don’t care about the general populace, and govern mainly with a focus on increasing their own income. However, even in democratic states, where politics by definition should reflect the needs of the country's citizens, policies to improve general welfare are not implemented, Mr. Korhonen explained.
Civil servants and government officials may have a different understanding of economics than economists, he said. If an existing policy profits a group with significant power, then that group will invest in blocking reforms. In a perfect world, the winners compensate the losses of the losers, but this doesn’t always happen in reality, sometimes due to the complexity of compensation mechanisms.
Mr. Korhonen also added that it is not always possible to predict who will suffer losses from economic liberalization and increased competition, which makes it difficult to plan and implement reforms.
Politicians often fear that reforms aimed at improving general welfare will take too long and reduce their chances of re-election. Mr. Korhonen recalled the ‘Jones Act’ adopted in the USA around 100 years ago. At the time, the government—officially acting in the interests of national security—decided that all coastal sea transportation should be carried out by ships made and registered in the United States, and crewed by US citizens or residents. But, in fact, this became a measure of support for American shipyards, which deprived the shipbuilding industry of incentives to develop and led to an increase in prices. However, when initiatives to repeal the Jones Act are proposed, congressmen and senators from Virginia (where American shipyards are located) block them. As a result, the interests of 107,000 people employed at shipyards are better protected than the interests of millions of consumers suffering as a result of high prices for transportation and goods.
Another example is Iran, a country rich in energy resources where fuel consumption is subsidized by the state. Despite low prices, the level of fuel consumption is low, and smuggling to countries with higher prices is widespread. According to Iikka Korhonen, fuel and food subsidies in Iran comprise 22% of its GDP.
When the subsidies were partially reduced in the early 2010s, prices rose and consumption decreased, but the saved funds were only partially allocated to increase social spending. This caused unrest in the cities, and the reforms were suspended.
‘What should economists do in such situations, to really develop economic policy so that the majority wins? This is often a difficult question. We need knowledge about specific sectors of the economy and countries,’ Korhonen said.
According to Martin Gilman, economists agree when discussing fuel subsidies and the Jones Act, but disagreements can arise when discussing government measures regarding economic policy and their compliance with economic theory. He stressed the importance of both knowing theory and understanding reality in order ‘not to fall into the corporate narrative.’
Andrei Spartak, Head of the Department of International Trade and Foreign Trade of the RF at the Russian Foreign Trade Academy, noted that globalization and the active development of new technologies have caused increasing divergence between real policies and economic forecasts and theory. Protectionism is becoming a political measure rather than an economic one, and can sometimes be extraterritorial in nature. ‘It is important to make decisions that may go against theory, but which allow us to move forward,’ he said.
Natalya Volchkova, Professor at the New Economic School and Director of the Centre for Economic and Financial Research, highlighted the fact that many decision makers are guided by intuition. But even experienced managers often make mistakes because they don’t conduct theoretical training. At the same time, she admitted that theory is not perfect: ‘We have a lot of static results, but we don't know the best option when things are in motion.’
Alexander Daniltsev, Director of the HSE Institute of Trade Policy, believes that it is necessary to have a detailed understanding of the use of theory to solve practical problems and the application of theory to specific cases.
Alexander Daniltsev, Director of the HSE Institute of Trade Policy
The decisions made in foreign trade almost always differ from the optimal solution because they are compromises.
In turn, Sergey Pekarski, Dean of the HSE Faculty of Economic Sciences, noted that economists are not always able to convey their knowledge to decision makers.
Iikka Korhonen added that the quality of economic instruments and solutions will always be a matter of dispute. But he believes that these issues should be discussed, as this helps to develop new arguments for choosing an economic course. Otherwise ‘we may find ourselves trapped in groupthink.’
Yaroslav Kuzminov, HSE Academic Supervisor, remarked on the importance of the conversation, which demonstrated the possibility of resuming broad domestic and international economic discussions. He stressed that economic policy always redistributes resources, and that it isn’t possible to realize the optimal theoretical solutions. However, this does not always lead to the correct conclusions. Economists, knowing that the state listens to them attentively, can end up with too narrow a focus. According to Mr. Kuzminov, society pursues other ideals apart from the optimal economic solutions.
Yaroslav Kuzminov, HSE Academic Supervisor
In addition to economic growth and the fair distribution of welfare, there are criteria for social and political stability that do not always coincide with the even distribution of welfare.
According to Mr. Kuzminov, national sovereignty, the global position of the state, and the need to maintain a technological lead are also contributing factors, as is the drive to preserve the natural environment and the sustainability of human existence. People who develop and evaluate policy focus on these issues. There are also various players in international trade who pursue non-economic goals.
Economists should learn to talk to people with different understandings of development goals. It is necessary to highlight the limits of achieving sustainable social development, to understand technological frontiers, and to learn to combine all of these factors with the optimal economic conditions. ‘We should allow those who promote other interests to intervene. Then we will be less traditional,’ said the HSE Academic Supervisor.