Black & White Politics
- Trump, Le Pen, Wilders et al feed on voters’ economic ignorance
- There is an information asymmetry between voters and politicians
- To stop the bad guys, let’s teach good economics
Over the past few months, many people have tried to come up with an explanation for the rise of populism and nationalism – the way the rhetoric of Trump and Sanders, Le Pen and Wilders, seems to resonate throughout the world.
But there’s one contributory factor that people are reluctant to admit to: that the voters don’t know what they’re doing.
By this, I don’t mean that the public are too stupid to have a say in their own government – the argument made in the House of Commons yesterday by Kenneth Clarke. I mean the failure of economic and political education whereby the forces that have driven the world to prosperity in the last century have gone unnoticed by voters.
Much of this can be explained by what is known as information asymmetry. This economic theory explains that markets break down when one party has more information than their counterpart in a transaction.
The classic example is a used car salesman and an ignorant buyer. The salesman has a better knowledge of the true value of their car relative to the customer and is able to take advantage of him or her – creating an inefficient market.
In some markets, information asymmetry is so pervasive that you would be fortunate to realise that anything has gone wrong at all. The governing of nations falls into this category.
As the world becomes a progressively more complex place, voters are being asked to understand an ever-expanding range of policy points. And those policies are not proposed on their merits, as ways to secure long-term benefits for the people, but in order to gain a short-term election victory.
This is where another economic concept comes in: the principal/agent problem. This occurs when a principal hires an agent to act on their behalf, but the agent instead behaves in a way that serves their own self-interest.
Politicians are, effectively, agents hired on the voter’s behalf. But as we all know, they often tend to follow their own interest rather than ours.
On some issues – particularly social policy – this is not actually so much of a problem. On topics such as euthanasia, abortion, gay marriage, drug legalisation and so on, politicians may go along with the majority view, whether out of pragmatism or moral conviction. Or they may vote against it, pleading their conscience. Either way, the process takes place out in the open.
But when it comes to economic policy, the situation is different. It tends to contain underlying concepts too complex and specialised for most voters to grasp. Making informed decisions on trade, immigration, government spending and taxes all require at least an elementary knowledge of economic theory.
This information asymmetry allows politicians to pursue the re-election incentive without needing to pursue the good governance incentive – for example by buying votes via economic policies that privilege one group over another, or deliver a short-term boom at the expense of a long-term bust. This creates a political market failure.
Allied to this is the problem that picking a side in politics has become comparable to choosing a favourite football team: they tend to demand blind faith in and unquestioning support of their chosen solutions.
But one of the most widely disregarded truths in politics is also one of the simplest: that as Thomas Sowell said, “in economics, there are no solutions, only trade-offs”.
As a topical example, Trump’s followers would surely be surprised to learn of the extreme consumer cost and industrial inefficiency that protectionism brings.
We have to look at the unseen as well as the seen, this is not as difficult as it sounds because bad ideas are rarely without precedent. As Robert Colvile pointed out on CapX recently, Barack Obama’s experiment in implementing tariffs of between 25 and 35 per cent on Chinese tyres saw 1,200 manufacturing jobs salvaged, at a benefit to the economy of $48 million a year. Seemingly, a great accomplishment – until you factor in the loss to US consumers of over $1 billion dollars of value in higher prices, resulting in the decimation of 2,500 retail jobs.
Now imagine those tariffs were instead set at 45 per cent, and covered all Chinese products – that is what Trump sold voters. Alongside the obvious diplomatic fallout, and high possibility of economic retaliation, the prices of goods would skyrocket, obliterating consumer spending and creating an uncompetitive domestic industry with no incentive to innovate.
So why has it persisted as a policy? Because of information asymmetry: the benefits to grateful manufacturers are obvious, but not the costs to retail workers and consumers.
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*YOUTUBE — Angela Merkel was lambasted over Germany’s open-door migration policy by Donald Trump last night.
The president-elect said that German Chancellor Mrs Merkel had made a ‘catastrophic mistake’ by allowing 1million migrants into her country – and he predicted that the European Union will fall apart.
In comments that will trigger alarm in Berlin and Brussels, Mr Trump said that he fully understood why Britain had voted for Brexit and he thought others could follow suit.