Lamppost Theory

Ever heard of economists and politicians opening two contradictory views about matters that are largely related to the economy and wondered how can politicians digress from what’s being suggested and claimed by people who’ve been formally trained for years to deal with economic issues? Well, that’s not an unusual situation after all and it is this incongruity between what is suggested by economists, from their years of experience, and what is actually done in reality by politicians, that unlatches the scope for research in the realm of what’s known as ‘The Lamp-Post Theory’ in economics. Never heard of it before? Needn’t worry because, this article, through real-life examples shall explore this theory further and present to you what this relatively new theory, yet centuries old reality, is all about.

At this point in time, economists are ambivalent about the robustness of the Indian economy. They repeatedly claim that the statistics of the economy are unreliable because the methodologies used for measuring growth and employment, have been changed under political influence. Ergo, comparisons with the past no longer stand valid. The numbers, as per some world renowned economists, are being used to mislead the masses, who lack the capability to understand the technicalities behind them. A group of 108 economists and social scientists, in March 2019,including nobel laureate Abhijit Banerjee, JNU professor Jayati Ghosh, Jean Dreze etcetera, had said in a statement, “…any statistics that cast an iota of doubt on the achievement of the government seem to get revised or suppressed on the basis of some questionable methodology.”

However, politicians on the other hand believe, the numbers they are releasing, are true indicators of the economy’s well-being and give a perspicuous visualization of the country’s economic prosperity thereby corroborating the ruling party’s success in running the economy adroitly.The situation in the USA is not very much unlike that in India. President Trump is zealously jolting the country into ‘trade wars’, much in defiance of the advice of almost all economists. Following the same league, the other political leaders of the US are opposed to enacting a ‘carbon tax’, a remedy for climate change supported by a large number of economists including Janet Yellen, Marty Feldstein etcetera, from around the world.

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Coming back to the scenario in India, many economists have reiterated that two of the government’s policies viz. ‘Demonetisation’ and the flawed implementation of the GST- ‘Goods and Service Tax’ have taken a severe toll on the country’s economy and the resulting slowdown in economic growth has affected a wide section of the masses. These economists, including ex-Prime Minister Shri Manmohan Singh, have espoused the need to rationalize the exorbitant GST rates even if it results in short term revenue loss, as that is extremely essential to provide the much needed boost to the consumption trends and businesses in the country. However, the GST rates in India continue to be one of the highest, as well as very complex, with different slabs of 0%, 5%, 12%, 18% and a prodigious 28%, while Singapore has just one GST rate of 7% and Canada of 5% on supplies of almost all goods and services and a Harmonised Sales Tax of 15% applicable only in certain cases. Such cases of utter mismatch between what politicians do and economists suggest, and the resulting discord between the two, exemplify what is known as THE LAMPOST THEORY IN ECONOMICS. In the words of the world renowned Princeton economist, Alan Blinder, “Politicians use economics the way a drunk uses a lamppost- for support, not for illumination.” “That’s not exactly a recipe for good policy”, he adds. ‘Politicians routinely ignore the best advice of economists’ and ‘economists blame politicos for spouting superficial slogans, operating with short-time horizons, sacrificing broad national interest to narrow parochial interests, and more.’ ‘Using’ economics to show only what you want to be seen is no better than ‘misusing’ the subject.

Blinder further claims that politicians and economists come from two totally ‘different civilizations-civilizations that don’t communicate with each other very well’. While what might technically be the best for the economy, might not be the best politically; because sometimes economists tend to ignore the political costs of implementing a policy but, the consummate politicians in their quest for power can hardly ever be courageous enough to take any such step that would affect their ‘vote-banks’ adversely. For instance, ‘Carbon-tax’- basically a tax levied on the carbon content of fuels and carbon emissions trading to monetarily compensate for the negative externality arising from the combustion of fossil fuels, though widely accepted as one of the major solutions to reduce carbon emissions and save the environment from further degradation, would barely ever be implemented by any government because it would deleteriously impact the factory owning industrialists, with whom political parties in every country have a more or less closely intertwined and symbiotic relationship. Same is the issue with the concept of ‘rent-controls’- a system of price control that limits the maximum rent any landlord can charge in a particular area. There’s unanimity amongst almost all economists that rent controls do no good for the economy and on the contrary might even have certain negative impacts on the society. When rent controls are placed below the equilibrium price level, it results not only in contracted supply of housing residences but also makes the apartment owners spend less on the maintenance of their rental-units. The well acclaimed economists, Ben Bernanke and Robert Frank, in their book ‘Principles of Micro Economics’, that’s popularly used as a basic guidebook for Economics 101 courses in many universities across the world, explicitly mention that, due to rent-controls enacted by the legislators in New York, ‘….it is not uncommon to see “finder’s fees” or “key deposits” as high as several thousand dollars.’ Moreover, in markets with rent controls, owners can illegally engage in discrimination against potential tenants on grounds of race, religion, sexuality et cetera without having to suffer any further economic penalty.

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This is not practically feasible for them in markets without rent controls, as carrying out any such discriminatory acts would essentially mean a reduction in demand followed by economic losses for the owners. However, rent controls have again come up as an important election issue in the Oregon enacted a law last year which placed a statewide cap on rent increases. New York passed the Housing stability and Tenant Protection Act of 2019 thereby augmenting the existing tenant protection rules and also drawing the flak of landlords. The entire debate in favour of rent control’s is based on one major point- ‘to make housing more affordable for the masses’. But many economists claim that rent controls are a blunt instrument to address income disparity and declining federal housing support. Nevertheless, politicians tend to endorse it. The repercussions emanating from such dysfunctional relations between economists and politicians can only be mitigated if both the parties are willing to learn from each other and respect the ultimate common aim of ‘maximizing welfare’ for the society as a whole. At the same time, it is essential to promote education amongst the electorate so that they can taken well informed decisions for themselves. While economists depend on well established theories, new ideas and experimentation spanning over a long time period, politicians heavily count on public sentiments to maximize their electoral outcomes within a comparatively short time frame. Take the case of international trade. While all economists favour ‘open markets’, politicians only tend to support exports and not imports as much, because that would potentially reduce jobs in the country. In Blinder’s words, ‘that’s bad economics but good politics.’ Unless this difference is understood and respected by both the sides and efforts are taken to work in tandem with each other to make ‘illumination’ the goal, the ‘lamp-post’ would continue being used as just a ‘pole’ for ‘support’.

-Rhea Banerjee

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