The Indicator from Planet Money - How Political Instability Affects The Economy

We're only seven days into the new year and we're off to a bumpy start. But as chaos rages through the capitol, the stock market and other signs of economic growth continue.

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Content Keywords: indicator stock market Dan drezner politics growth

This is the indicator from Planet Money. I'm Stacey Vanek Smith, like most people yesterday. I watched the events unfolding in Washington DC in shock watching an angry mob of President Trump supporters storm. The Capitol building was not something I ever expected to see and frankly. It was a really scary moment things felt really unstable really fragile and our country just felt very vulnerable and unstable at that moment. And also I was confused because the stock market went up and and I know I know that the stock market isn't the economy. I know that all the time and it's it's true still the stock market is an economic signal and I wanted to understand more generally. What is the relationship between economic growth and political instability?

The call of Dan drezner. He's a professor of international politics at the Fletcher School of Law and diplomacy at Tufts University. He also writes for the Washington Post after the break a conversation with Dan drezner about economic growth political instability and the economic indicators that he is watching.

Daniel drezner is a professor of international politics at Tufts University. He's also a contributor to The Washington Post at Daniel. Thank you for joining us at my first question is I'd love to know what was going through your head as you were watching all of the events unfold at the Capitol yesterday.

When I was watching it what I kept thinking was the slippery slope this country has been on for the last decade it while what happened yesterday was an order of magnitude worse. If you think about it ever since the Tea Party Revolt of 2010 the government the federal government particular has been convulsing in occasionally threatening not to raise the debt ceiling shutting the government down political polarization in Congress leading to a gridlock in frustration and eventually the election of Donald Trump as president. So their ways in which what happened yesterday, it's the culmination of underlying trends that we've experienced for the last 10 20, even 30 years clinical instability on countries economies and generally not surprisingly. It's not good. But what it What is the relationship there between political instability and

Economic growth Prosperity, there is no denying. The fact that the political stability is correlate with economic growth and political instability is correlated, usually with with economic stagnation and make some sort of intuitive sense. If you think about it, you put yourself in the mindset of an entrepreneur or CEO or even an individual whose thinking about doing something like buying a house anytime you are making a large investment you are taking a risk right particular things. That's not terribly mobile. And so when you do that the question you obviously want to ask is will my property rights be respected will I have legal rights? Will National policy makers not do things like shut down the government or you know, pursue Reckless economic policies. And so anytime you lose faith in the government's ability to credibly commit to generally robe.

Economic policies you were going to ask no more risk-averse Manner and now multiply that risk-averse behavior by every firm or every individual household buyer and you can understand why suddenly if instability really seems On The Rise you're going to have people hoarding cash rather than actually spending on things that they want to spend in the economy.

So a lot of of the US economy's place in the world does really depend on truss like the dollar is kind of they called The Reserve currency of the world. I mean dollars would have used internationally. Also, you know, we sell a lot of government bonds. Like that's a refund a lot of our government in that requires International investors to sort of trust that it's like a little loan from the government. So, I mean, it doesn't like those two things are so dependent on trust and that, you know are Connie really rests on those things. You see that being jeopardized or not so much in evidence for this you can take a look at the fact that generally speaking, you know, the last couple of years we've seen Global Financial centres Rock by a lot of geopolitical shocks. Think about what's happening in Hong Kong over the last three or four years. Think about what's happened in London as a result of brexit. These haven't necessarily had appreciable impacts on these Financial Center.

Mike over the long-term, but at least in the short-term know and the question becomes can that trust be restored. In fact again goes to the United States and so in some ways my concern is not what yesterday's events mean for tomorrow. My concern is what yesterday's events and all of the events that led up to it mean for the next decade or two. What what concerns are those like, what are you what do you see as kind of the potential danger playing out of in the next 10 years?

One potential danger is it polarization continues to get work local polarization continues to get worse? That's one possibility and related to that is the fact that we had wild swings in terms of control the government. Both parties have become somewhat more polarized and what this means is that the change from let's say the Obama Administration of the Trump Administration mean some pretty radical policy ships were going to see some reversals come once Joe Biden is inaugurated on January 20th, the ability of the United States to credibly commit to anything in the circumstances going to be deteriorated and that again is going to lead to more risk aversion. I mean that does seem like it would affect things like trade policy for sure that is a lot of instability happening every four years like every you know, all these policies getting over turn.

Radically different views on things. What are like some possible effects of that? Well, obviously the question becomes do you want to invest in the United States or do you think I'd rather cater the global market where I'd rather locally-sourced production because I can't count on good that I'm producing United States being exported reliable. Is there an economic indicator that you're going to be keeping your eye on or that sort of especially interesting to you at this moment.

Let me think.

Yeah, foreign students coming to the United States. Do you have to take it for granted for a long. Of time things that the US has been uncontested in dominance in higher education be one example of this if foreign students who previously would have wanted to study at MIT or Caltech suddenly think I don't want to risk coming to the United States. It's not safe there. I will instead go to Beijing then suddenly you're looking at an erosion of one of the long-standing US comparative advantages. It's worth remembering that you know, the US has been unpopular in the world before. I mean, you know, we're all old enough to remember what things were like, let's say the fall 2008 when the US was widely blamed for being responsible for the 2008 financial crisis when Barack Obama took over however, generally speaking approval ratings of the United States and the rest of the world recovered from the bush years and you actually saw a surge.

A student wanted to study in the United States and the interesting question, you know once Joe Biden is inaugurated as if you see a replay what happened in 2009 or does the rest of the world look at this as an irreparable breach of international politics at the Fletcher School of Law and diplomacy at Tufts University and is a regular contributor to The Washington Post Dan. Thank you for talking with us. Sure. This episode of the indicator was produced by Nick Fountain and fact-checked by Shawn saldania. The indicator is edited by Patty Hirsch and is a production of NPR.
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