## A PLACE FOR POLITICS

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### Economics, distributional effects, and compensation
- Economic policies and trends that increase aggregate social welfare can create concentrated losers as well as diffuse winners; this produces controversy even when aggregate gains are large.
- Free trade: "Virtually all economists believe that most economies could be improved by removing barriers to trade." Benefits accrue to consumers and exporters; firms and industries that cannot compete with imports suffer.
- The standard economic remedy is compensation: tax those advantaged (exporters, consumers) to help those disadvantaged (for example, autoworkers), leaving society "better-off, only in a more equitable fashion."
- In practice, compensation occurs far less often than economic theory recommends because it is politically costly and difficult to implement.

### Practical obstacles to compensation
- Timing and intergenerational issues:
  - Compensation sometimes requires one generation to compensate another (for example, asking future generations to contribute to costs of tackling climate change).
  - One mechanism is government borrowing so that "debt-service payments fall on future generations," but this risks "debt burdens that are not sustainable" and may be limited by financial markets unwillingness to fund excessive debts.
- Uncertainty about who will be helped or harmed:
  - "There is almost always uncertainty about how a complex economy will react to change."
  - Legislators are wary of subjecting constituents to unknown risks.
- Credibility problems:
  - Governments can promise compensation, but democratic turnover and administrations that do not keep promises undermine credibility.
- Nonpecuniary concerns:
  - Economic analysis focuses on material/pecuniary impacts, but people value nonpecuniary things that are hard to price (community, culture, belonging).

### Community collapse and non-economic losses
- Deindustrialization example:
  - Postwar US manufacturing flight left "rusting steel mills and scarred communities" in the Northeast and Midwest; society overall became richer, but many communities still deal with deindustrialization consequences.
  - When factories close, towns risk a downward socioeconomic spiral: incomes decline, property values and property taxes plummet, local services suffer, social fabric unravels, and public-health crises can follow (for example, the "epidemic of 'deaths of despair' by alcoholism, drug abuse, and suicide").
- Coal-region example:
  - The decline of the coal industry—driven by environmental concerns, technological change, and climate policies—"has devastated entire areas."
  - One World Bank study found that "of 222 Appalachian coal counties, only four had managed to remain 'economically viable'."  
- Migration and attachment:
  - Encouraging internal migration to areas with jobs is often infeasible: declining home values reduce mobility; nonpecuniary ties (family, friends, traditions) bind people to place.
  - Individual decisions to stay or leave depend on others' decisions: "Why stay if everyone is leaving? Why leave if everyone is staying?"

### Politics as the mechanism for weighing hard-to-price values
- Politics allows society to weigh consumer benefits (cheaper clothing, cars) against human and community costs (collapse of towns in Ohio, the Meuse Valley, south Yorkshire).
- Political outcomes reflect intensity of preferences:
  - "In the political arena, intensely held views matter more than those that are held only lightly—and that is probably as it should be."
  - Examples: elected officials more likely to protect industries with low-wage workers; city dwellers willing to pay more for food to help sustain family farmers.
- Trade protection or farm subsidies may be defensible politically even if they reduce aggregate economic efficiency, because politics captures nonmarket values that economists cannot precisely price.

### Analytical and policy implications
- Recognize limits of purely economic valuation:
  - Economists can price many things but "not on everything of value"; community, culture, and family are often "priceless" in practice.
- Use politics to reveal social valuations:
  - Democratic politics provide information about how society balances competing values, including nonpecuniary attachments.
- Policy design should account for:
  - The political feasibility and credibility of compensation schemes.
  - Uncertainty in economic outcomes and the distributional path of change.
  - Nonpecuniary costs borne by communities when industries decline, which may warrant policy responses beyond conventional monetary compensation.

*Jeffry Frieden, Rethinking Economics, March 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/frieden.pdf_