Tuesday, June 23, 2015

All Economics is Local

Microeconomics drives macropolitics

Twitter exchange with Ben Pershing of National Journal got me thinking about that old adage, "All politics is local."

I'm not sure why this is a revelation for me only now; perhaps because I was trained as an economist and tend to think big and in the aggregate.

Individually and collectively – whether in business or as a sports team fan – we like certainty: Will I have a job tomorrow? Will my kid be admitted to college? Will my customers come back? Will the Orioles make the playoffs? (Definite uncertainty on that last one.)

National politics and economics should focus on the big picture to add certainty to our collective well being. But macroeconomic data masks local economic activity – both the good and the bad. As we debate carbon emissions and trade policies at the national and international levels, emotions run deep at the local level.

Coal production continues to fall as environmental rules come into effect and consumers switch to less costly and less maligned natural gas. West Virginia is a distant second in the nation's coal production with about 12 percent of the national total; statewide the coal industry accounts for only 4 percent of total employment. But in Logan County mining, quarrying, and oil and gas extraction are 20 percent of economic activity with ripples flowing through to construction and other industries.

And as our economy naturally evolves and consumer preferences morph, it's hard to distill those changes from trends in comparative advantage and trade patterns. While trade with other nations free of restrictions is beneficial to consumers and producers alike at the national level, there can be pain at the local level. Removal of a Japanese tariff of nearly 800 percent on imported rice is a boon to efficient American rice farmers but removal of American sugar import duties and quotas take business from U.S. sugar beet producers.

I'm an advocate of free trade, of producers/consumers bearing the full cost of their production/consumption (e.g., carbon tax), and of allowing the economy to change without the government picking winners or playing favorites. But I'm also a realist: those affected by economic change realize hardships. And because we have a representative-based federal government, local politics bubble up to national policy.

Helping local fading economies transition to dynamic new economies will help some, but not all locals have the skill to do so. Labor mobility will help some, but not all will let go of home. For all my disdain of politicians this is their dilemma: if you focus nationally and forget the locals, the locals will remove you so you cannot address national issues.

Economists usually recommend simple, broad remedies for economic malaise. Successful politicians often have to hold the voters' hands and their own noses while fighting off rivals. And I haven't seen many people with three arms.