Wednesday, February 04, 2009

How Special Interests Hurt The Economy

The Sunday New York Times magazine had a very good article about the problems facing the economy right now and how they might be solved called The Big Fix . It is very long, with several parts. Although it is all interesting, one part stands out, part II called "THE UPSIDE OF A DOWNTURN."

Rahm Emanuel, Obama’s chief of staff, has said “You never want a serious crisis to go to’s an opportunity to do things you could not do before.”

Then the article mentions a very important economist.

"In the early 1980s, an economist named Mancur Olson developed a theory that could fairly be called the academic version of Rahm’s Doctrine. Olson, a University of Maryland professor who died in 1998, is one of those academics little known to the public but famous among his peers. His seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.

In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods."

The big question now is are the special interest groups going to stop the economy from recovering or is this crisis a chance to take some power away from special interests. The article mentions how the banking and finance industries are the special interest groups that are the major cause of the current crisis (which is a debatable point). But this issue illustrates an important sub-field of economics.

The sub-field of economics that studies politics and how special interest groups is called "public choice." For my students that want to know more about this, if you are in ECON 1301, see pages 343-346 in the main book by Tucker. If you are in 2301, see pages 307-312 in the main book by Tucker. If you are in ECON 2302, read pages 122-124 in the main book by Miller.

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