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

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How Political Instability Affects The Economy

How Political Instability Affects The Economy

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UNIDENTIFIED PERSON: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

STACEY VANEK SMITH, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. Like most people yesterday, I watched the events unfolding in Washington, D.C., in shock. Watching an angry mob of President Trump's 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 I know that the stock market isn't the economy. I know. I hear that all the time. And it's true. Still, the stock market is an economic signal. And I wanted to understand I guess more generally, what is the relationship between economic growth and political instability?

So I called up 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.

Daniel, thank you for joining us. 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.

DANIEL DREZNER: When I was watching it, what I kept thinking was the slippery slope this country has been on for the last decade - that while what happened yesterday was an order of magnitude worse - you know, if you think about it, ever since the Tea Party revolt of 2010, the government - the federal government in particular - has been convulsing - you know, occasionally threatening not to raise the debt ceiling, shutting the government down, political polarization in Congress leading to gridlock and frustration and eventually the election of Donald Trump as president. So there are 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.

VANEK SMITH: I know that there have been a lot of studies on the effect of political instability on countries' economies. And generally, not surprisingly, it's not good.

DREZNER: Yeah.

VANEK SMITH: But what is the relationship there between political instability and economic growth, prosperity?

DREZNER: There is no denying the fact that political stability is correlated with economic growth, and political instability is correlated, usually, with economic stagnation. And, you know, it makes some sort of intuitive sense. If you think about it, you know, put yourself in the mindset of an entrepreneur or a CEO or even an individual who's thinking about doing something like buying a house. Any time you are making a large investment, you are taking a risk - right? - particularly if the investment's...

VANEK SMITH: Yeah.

DREZNER: ...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 policymakers not do things like shut down the government or, you know, pursue reckless economic policies? And so any time you lose faith in the government's ability to credibly commit to generally robust economic policies, you are going to act in a 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.

VANEK SMITH: So a lot of the U.S. economy's place in the world does really depend on trust. Like, the dollar is kind of - they call it the reserve currency of the world. I mean, dollars are sort of used internationally. Also, you know, we sell a lot of government bonds. Like, that's how we fund a lot of our government, and that requires international investors to sort of trust that it's like a little loan from the government. So, I mean, it does seem like those two things are so dependent on trust and that, you know, our economy really rests on those things. Do you see that being jeopardized or not so much?

DREZNER: No, I don't see that being jeopardized at all in the short term. And you know, if you want evidence for this, you can take a look at the fact that, generally speaking, you know, over the last couple of years, we've seen global financial centers rocked 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.

VANEK SMITH: Yeah.

DREZNER: These haven't necessarily had appreciable impacts on these financial centers. Now, it might over the long term, but at least in the short term, no. And the question becomes, can that trust be restored? And so that, 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.

VANEK SMITH: What concerns are those? Like, what do you see as kind of the potential danger playing out over the next 10 years?

DREZNER: One potential danger is that polarization continues to get worse - political polarization continues to get worse, that, you know, 10 years from now, we'll be talking about, well, at least Donald Trump didn't do this, or Donald Trump didn't do that. That's one possibility.

And related to that is the fact that we've had wild swings in terms of control of the government. Both parties have become somewhat more polarized. And what this means is that the change from, let's say, the Obama administration to the Trump administration means some pretty radical policy shifts. We're going to see some reversals come once Joe Biden is inaugurated on January the 20. The ability of the United States to credibly commit to anything in this circumstance is going to be deteriorated. And that, again, is going to lead to more risk aversion.

VANEK SMITH: 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 overturned and radically different views on things. What are, like, some possible effects of that?

DREZNER: Well, obviously, it'll affect trade. It'll also probably have a profound effect on investment. Again, the question becomes, do you want to invest in the United States or do you think I'd rather cater to the global market or I'd rather locally source production because I can't count on goods that I'm producing in the United States being exported reliably?

VANEK SMITH: Is there an economic indicator that you're going to be keeping your eye on or that's sort of especially interesting to you at this moment?

DREZNER: Let me think - yeah, foreign students coming to the United States.

VANEK SMITH: Oh, interesting.

DREZNER: So the U.S. has taken for granted for a long period of time things that the U.S. has been uncontested in. Dominance in higher education would 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 are looking at an erosion of one of the long-standing U.S. comparative advantages.

It's worth remembering that, you know, the U.S. 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, in the fall of 2008 when the U.S. was widely blamed for being responsible for the 2008 financial crisis.

VANEK SMITH: Yeah.

DREZNER: When Barack Obama took over, however, generally speaking, approval ratings of the United States in the rest of the world recovered from the Bush years. And you actually saw a surge in - of students who wanted to study in the United States. And the interesting question, you know, once Joe Biden is inaugurated is, do you see a replay of what happened in 2009 or does the rest of the world look at this as an irreparable breach?

VANEK SMITH: Dan Drezner is a professor 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.

DREZNER: Sure.

VANEK SMITH: This episode of THE INDICATOR was produced by Nick Fountain and fact-checked by Sean Saldana. THE INDICATOR is edited by Paddy Hirsch and is a production of NPR.

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