Politics and Economics: Can’t Have One Without the Other

By

John F. Phillips, MA

It’s been my experience that politics and economics make strange bedfellows. The two are so intermingled that it is difficult at times to separate the two. We are seeing this as governments attempt to deal with the political ramifications of the economic devastation caused by the coronavirus pandemic.

In order to better understand the symbiotic relationship that exists between politics and economics, it is beneficial to understand the functions of the two disciplines in terms of how they relate to each other and feed off of each other.

There are many definitions of politics that political scientists consider when talking about the role that politics plays in society. One particular definition that is appropriate in terms of how it relates to this discussion is that politics is the struggle over the allocation of good and services in a society. Under the parameters of this definition, politics is a zero sum game with winners and losers, a struggle over who gets what, a zero sum game.

If politics is the struggle over the allocation of goods and services, economics can be defined as the financial conditions (markets, trade, production, etc.) under which the decisions over the allocation of good and services are made. As we have seen time and again, the decisions to provide fiscal stimulus to businesses and individuals that will drive economic activity, while working to control and eliminate corona virus are influenced by political considerations brought about electoral and legislative politics. While this is especially true in the United States as it deals with a presidential election, it also applies, to a lesser extent to UK and EU policy making.

The Dilemma of Balancing Politics and Economics

This symbiotic relationship between politics and economics has defined the parameters of the response to corona virus. EU nations enacted strict lock downs to prevent the spread and were relatively successful in meeting that goal. Unfortunately, countries like Italy and Spain were hard hit despite these actions. At the same time governments reacted to the economic consequences that the lock downs imposed by enacting programs that provided varying degrees of economic stimulus, providing financial safety nets for citizens and liquidity and access to credit for businesses and the financial markets.

In the UK, Prime Minister Boris Johnson was slower to react to the crisis caused by the pandemic. Some of the decisions that were made were grounded in the more populist approach to politics that Mr. Johnson practices and are reflective of similar approaches taken by the United States, particularly with respect to mask wearing and economic shut down. To his credit, Johnson was able to enact financial support programs for businesses and workers that prevented the cratering of the UK economy, while at the same time taking actions that slowed the spread of the virus.

Contrast EU action to that of the United States. Since the beginning of the pandemic, there has been a convoluted response by political leadership. The federal response consisted of mixed messages; one day, the federal government claimed that it had ultimate authority to compel states to follow federal response guidelines. on another day, the federal government was passing responsibility for response to state governors and local officials. To its credit, the federal government was eventually able to ramp up production of needed medical supplies and medications, an effort that was hampered by supply chain disruptions caused by the pandemic.

After an initial economic shutdown designed to stop the spread of the virus, unemployment skyrocketed to levels not seen since the Great Depression. In order to relieve the economic as well as political pressure brought about by the shut down, states were pressured to reopen state and local economies before the virus was fully under control. This resulted in a renewed spread of the virus that resulted in record levels of cases and deaths and the re-imposition of restrictions on economic and social activity .

The United States did well in its initial reaction to the immense hardship that the economic shutdown caused. The Congress acted swiftly to pass an economic stimulus package that increased unemployment benefits, provided a one time stimulus payment to individuals and families, and passed payroll protection legislation to help businesses remain financially viable until they could reopen.

Unfortunately, the expiration dates for these programs has passed and Congress and the President have become bogged down in a political struggle over another stimulus package while the further opening of the economy and school openings have been driven, in my opinion, more by political campaign considerations than by public health considerations. The reasons for this is a subject for another time, but it’s fair to ask whether US government reaction to the pandemic would have been different if it hadn’t been an election year in the United States.

In all cases, the governments of the EU, UK and US are trying to walk a tightrope, trying to balance economic/political considerations while shutting down society to control and eliminate a pandemic. There are no easy answers.

Where Do We Go From Here?

How do we manage the symbiotic relationship between politics and economics while trying to eliminate a pandemic? Governments recognized that economic stimulus was critical to sustain the economy and passed programs that would keep individuals, businesses, and financial markets viable while dealing with the public health crisis as it played out.

This goal was accomplished by injecting massive amounts of money and credit into the economy. The US Federal Reserve enacted interest rate and quantitative easing strategies that provided easy access to capital for businesses. On a more microeconomic scale, payroll protection programs and small business loans were enacted in the US to keep businesses from closing, allowing them to maintain payrolls even while people were temporarily laid off during the shutdown. Individuals and families also received one time stimulus checks to sustain liquidity and provide for individual needs. Legislation was also passed that granted moratoriums on evictions and the repayment of federal student loans.

This strategy was also partly driven by the political considerations of running for re-election during an economic recession as well as by the concerns about the impact that the pandemic was having on the economy. Americans vote their pocketbook and Republicans were running on the strong US economy that existed before the pandemic.

The EU, in a radical departure from past policies of fiscal restraint in the face of other EU economic crises, passed, under the leadership of Germany and France, a comprehensive corona virus economic package, establishing a EU credit policy to sustain EU economic activity while it continues to deal with the pandemic. German Chancellor Angela Merkel took considerable political risk to promote a policy that was so contrary to German political opinion concerning German support for struggling European economies. According to data from the International Monetary Fund, Germany has enacted various forms of economic stimulus and direct payments that comprise 40% of GDP. The US, in comparison, is at 14.8% GDP (Wall Street Journal, 8/26/20, Benoit and Fairless, “Germany Boosts Already Hefty Coronavirus Stimulus”).

Unfortunately, there are long term consequences for the short term actions taken to prop up the economies of the US, EU and UK. Sher Mehta, Founder and CEO of Virtuoso Economics, a macroeconomic consultancy based in London and Delhi, India, has done some excellent analysis of the economic challenges facing political leaders and policy makers as we move forward:

“Two key challenges policy makers face today is to ensure that the liquidity crisis does not transform into a solvency crisis and thereafter, into a banking crisis, and that not only banks, but that firms and households must have continuous availability of liquidity. Further, if the spread of the corona virus is not countered soon by policy makers worldwide, the aforesaid shocks can transform into a financial shock that will ripple across the global economy, but also lead to a serious banking crisis in several countries, with deleterious on the real economy and labor markets.” (Sher Mehta, 05 Apr 20, “Corona Virus and the Impending Global Recession of 2020, www.businessworld.in Published 27 Aug 20)

While the economic stimulus was justified, it has created massive government debt as well as burdensome debt obligations for corporations and other small and medium sized businesses at a time when economic recovery is stalling after initial steps toward recovery. At some point, the butcher’s bill will come due. Companies are going to have to service this debt at some point. What will be the economic impact if companies cannot recover due to the financial stress imposed by the continued presence of the pandemic?

Defaults will put considerable stress on banks and other financial institutions as well as central banks and the federal government. The business closings and job losses due to companies cutting jobs in order to survive will significantly impact unemployment and threaten the liquidity and security of many who live pay check to pay check with little or no savings, a situation that is more prevalent than political leadership would like to admit. If people aren’t working, they can’t spend, pay rent or mortgages, repay personal loans, or, in some cases feed their own family. In consumption based economies like the US, UK and the EU, the economic, political, and social impact of long term job loss would be catastrophic. As Mehta argues, individuals, as well as businesses need to maintain liquidity to survive. How do we do that without threatening their long term economic survival; how do we prevent the long term economic threat that short term solutions create? Again, there are no easy answers.

There has to be the political will to enact the programs that will allow government and society to meet the economic challenges that lie ahead, all the while doing what needs to be done to eliminate the threat posed by the continued presence of the pandemic. Economic activity, as we know it from the past, cannot resume until the pandemic is controlled and treatments exist to protect the population. That has to come first or all of the stimulus and liquidity already injected into the economy will mean nothing long term, Politicians, especially in the United States, cannot just wish the pandemic away.

This means that difficult choices will need to made when it comes to the allocation of goods and services, the conflict inherent in political decision making. The economy has to provide the resources that allow the political choices to be made. It’s kind of like economic triage and it takes political courage and a willingness to tell people what they need to hear rather that what they want to hear. In this struggle, there will be winners and losers. It’s hard and a price is going to be paid. Can political leaders meet the moment, or are we going to go over the cliff because of a lack of political courage and will?

As the late Charles Krauthammer used to argue, we have to get our politics right because politics impacts everything. The ash heap of history is littered with examples of societies who didn’t get their politics right, which led to their demise, from Nazi Germany to the Soviet Union. Will political leadership begin or continue to make the difficult political choices that will end the pandemic and restore long term economic vitality and stability, allowing us to return to “normal life” as we knew it before the pandemic? Our future, and in some cases, our lives, will depend on it.

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