Monday, February 16, 2009

Politics Matters Too...

For those of you who wonder why: "Well, if you economists are right, why are we in such a mess???" Well, the answer is two part. First, economics, as much as we would like to think differently, is an inexact science. We are generally pretty good at getting directions of change and identifying driving forces...but precise (correct) answers are not usually forthcoming. But, and probably much more importantly, economics is embedded in the broader political world. Consider this article...especially this passage:

Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.

Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits. (My emphasis added)

Here is an illustration of how politics affects economic outcomes by changing the "rules of the game." Ultimately, politicians are not so much concerned about correct courses of action as reelection. This is not to say they are nefarious...just looking out for their own interests. This is an important lesson for both amateur and professional economists. For the amateur, don't forget that economics must operate in a political world. For professional economists...ditto.