Economies don’t drift into crisis the way leaves drift downriver. They are steered—often gently, sometimes disastrously—by political choices. From housing costs to wages, inflation, healthcare prices, trade shocks, and climate risk, the pattern repeats: institutions and policies set the rules of the game, and the scoreboard (growth, jobs, prices) follows. A growing body of research—spanning comparative political economy, development economics, labor, antitrust, and climate policy—shows that most stubborn economic problems are, at their roots, political problems. (IMF)
Below, we map how this plays out, with evidence and case studies—and practical implications for voters and lawmakers.
1) The core idea: institutions make markets
A decade of cross-country work by Daron Acemoglu, Simon Johnson, and James A. Robinson argues that inclusive institutions—secure property rights, rule of law, open competition, broad political participation—produce better long-run economic outcomes than extractive, elite-captured systems. This research earned them the 2024 Nobel Prize in Economic Sciences and underpins Why Nations Fail. The takeaway isn’t abstract: who has power, and how they use it, is the engine of prosperity (or stagnation). (The Wall Street Journal)
Political incentives also move economies over the short run. The International Monetary Fund summarizes decades of evidence on political business cycles—pre-election fiscal sugar highs and other government maneuvers that can goose growth (and later leave hangovers). In other words, macro indicators respond to electoral calendars as much as they do to market forces. (IMF)
Watch: Daron Acemoglu on institutions and prosperity (lecture). (YouTube)
2) Housing: high rents are not a law of nature
Housing affordability is a policy choice—especially land-use and zoning. Two decades of empirical work show that restrictive zoning and permitting regimes suppress supply and push up prices, particularly in high-demand metros. Harvard’s Edward Glaeser and Wharton’s Joseph Gyourko demonstrated this years ago; newer syntheses from Wharton and the OECD reach similar conclusions. (NBER)
Experiments to unwind those rules are political, contested, and uneven:
Minneapolis 2040 ended single-family-only zoning and loosened rules. Early results were modest (duplexes/triplexes didn’t explode), but complementary moves—parking reform, upzoning corridors, and state protections against litigation—suggest implementation details matter. Mixed signals in permitting underscore that rule changes need time, financing conditions, and clean legal runways. (Axios)
California SB 9 legalized lot splits and duplexes statewide. Early uptake has been slower than advocates hoped due to financing, owner-occupancy provisions, and local implementation; courts and follow-on bills continue to shape the outcome. The political fight, not “market forces,” is the limiting reagent. (San Francisco Chronicle)
The lesson: when the price of shelter outpaces wages, start by auditing the rulebook. Supply constraints are primarily political. (NBER)
Video explainer: Short zoning primers on how rules drive prices. (YouTube)
OECD chart on housing cost burdens by income quintile (Society at a Glance 2024). (OECD)
3) Inflation: demand, supply—and policy
The 2021–2023 inflation spike was not a purely “natural” supply chain story; nor was it only stimulus. Careful estimates from the Federal Reserve and Brookings quantify both sides:
Fed staff research: binding supply constraints explained a large share of the 2021–2022 inflation jump and amplified loose monetary policy—policy and supply interacted. (Federal Reserve)
New York Fed work calibrates that aggregate demand shocks explained roughly two-thirds of model-based inflation through mid-2022, with fiscal stimulus a significant fraction of that demand effect. (newyorkfed.org)
Brookings analysis stresses supply-linked factors (delivery delays and elevated margins) dominated the surge, with “overheating” measures contributing less than widely assumed. Different models, same message: policy settings shape price dynamics through the supply context they meet. (Brookings)
None of this happens in a political vacuum. Central bank independence, fiscal packages, and automatic stabilizers are all political design choices. When we say “inflation,” we’re often debating which policy lever was pulled, how hard, and when. (IMF)
Watch: Business cycle explainers for non-specialists. (YouTube)
Fed paper figure on capacity constraints and price pressures (FEDS 2023-075). (Federal Reserve)
4) Wages, unions, and state labor law
Wage growth and inequality are not purely market outcomes; they’re mediated by bargaining institutions, labor standards, and enforcement—i.e., politics.
Right-to-work laws weaken union finances via free-riding, reducing bargaining power and lowering wage premia; new NBER work leverages state differences to isolate effects on wages. (NBER)
Federal Reserve notes and academic literature review the uneven welfare effects across right-to-work states; results vary, but the direction of wage compression is a recurring finding. (Federal Reserve)
Minimum wage evidence has matured: high-quality designs show small to modest employment effects on average, with clear distributional gains; meta-analyses and pre-committed designs catalog heterogeneity and where risks rise as the wage “bites.” That spectrum is a policy choice, not fate. (NBER)
When lawmakers set the rules of bargaining, they set the wage structure. That’s political economy 101.
5) Market power, antitrust, and the price you pay
Rising corporate markups and concentration have macro implications: lower labor share, weaker investment, and potentially higher prices. De Loecker and Eeckhout’s work put this on the map; subsequent studies probe the size and pass-through. Whatever the exact magnitudes, antitrust policy—merger scrutiny, digital platform rules, non-compete bans—is a political throttle on market power. (NBER)
Economic policy uncertainty, too, is measurable and matters for investment decisions. The Baker-Bloom-Davis index captures how policy chatter moves real options; the effect is political by construction. (NBER)
6) Trade shocks aren’t “natural disasters”—they’re choices with winners and losers
The China shock literature shows how rapidly rising import exposure depressed wages and employment in exposed U.S. regions for a decade or more, with limited offsetting job creation elsewhere—again, distributional pain with weak adjustment policy. That distributional pattern is a policy failure, not an iron law of trade. (American Economic Association)
New reporting on follow-up research highlights a grim twist: places eventually diversified, but many displaced mid-career workers did not recover earnings or trajectories. The adjustment policy that could have smoothed transitions (wage insurance, mobility support, retraining with placement) was thin, intermittent, or poorly targeted. That is politics, not markets, deciding who carries the cost. (The Wall Street Journal)
7) Health care: the most political prices in America
The U.S. spends far more per capita and as a share of GDP on health than peer nations—and gets middling to poor outcomes on many measures. That gap is not a mystery of biology; it’s a function of fragmented finance, weak price regulation, and political resistance to bargaining. OECD and Commonwealth Fund data document both the spending outlier status and performance gaps; federal data show U.S. health spending hit $4.8 trillion in 2023. (OECD)
Policy is shifting: the Inflation Reduction Act authorized Medicare to negotiate prices for select high-spend drugs. CMS and KFF document the first waves of negotiated drugs and legal challenges—classic political economy. The fiscal and household impacts will flow from how that negotiation, and its expansion, is implemented. (CMS)
Health System Tracker chart comparing U.S. spending per capita vs. OECD peers. (Health System Tracker)
8) Student debt: designed outcomes, not accidents
Federal lending design, quality assurance, and accountability rules shaped where debt exploded—especially at lower-quality, higher-risk institutions. Brookings’ Adam Looney and Constantine Yannelis lay out how policy architecture drove bad outcomes. The Fed’s household surveys capture borrower stress and perceived value. Change the rules (eligibility, underwriting, accountability), and you change the debt map. (Brookings)
Federal Reserve “Economic Well-Being of U.S. Households” charts on student loan burdens (2024). (Federal Reserve)
9) Climate and energy: the price of carbon is a political number
Climate risk is the ultimate externality. Putting a price on it is an administrative act—no less political for being technical. In 2023, EPA updated the social cost of carbon (SCC) to roughly $190/ton (central estimate, 2020 dollars), a fourfold jump from the prior federal working group value. That single number materially changes cost-benefit calculus for energy, transport, and industrial rules. (epa.gov)
Meanwhile, carbon pricing instruments (taxes and ETS) raised a record ~$95–$104 billion globally in 2022–2023, with coverage expanding to roughly a quarter of emissions—but still far below prices consistent with Paris goals. Whether those signals scale is a question of political coalition-building, not engineering. (World Bank)
World Bank “State and Trends of Carbon Pricing” coverage map. (World Bank)
10) Comparative policy: active labor markets and shock absorbers
Countries that treat job loss as a public problem, not a personal failing, tend to recover faster and with less scarring. Active labor market policies (ALMPs)—job-matching, training tied to employer demand, wage subsidies—have heterogeneous effects, but meta-analyses and OECD reviews show they work when well-designed and governed. Germany’s Kurzarbeit (short-time work) is a canonical example of a political decision that preserved attachment to firms during shocks. (OECD)
The nuance matters: governance quality determines ALMP effectiveness, and targeting and timing are everything. That’s an institutional competence story—again, politics. (SpringerLink)
11) Case file: what different political choices buy you
Nordics vs. U.S.: Higher union coverage, stronger automatic stabilizers, and ALMPs trade some pre-tax inequality for higher mobility and employment resilience. That’s not “culture”—it’s law. (OECD)
EU vs. U.S. drug prices: Centralized bargaining and reference pricing vs. fragmented markets and statutorily limited negotiation until recently. That’s a statute book difference. (Commonwealth Fund)
U.S. metros: Places that liberalize land use (parking minimums, missing-middle housing) eventually see more attainable supply; those that don’t, don’t. The timing and magnitude depend on financing cycles and legal friction—both political. (Pew Charitable Trusts)
12) Practical implications: diagnosing the political roots
Ask “what rule makes this expensive?” Housing? Look at zoning, parking minimums, and permit friction. Healthcare? Look at price-setting power and bargaining bans. Education? Look at lending rules and accountability. Climate? Look at whether emissions are priced anywhere near social cost. (NBER)
Follow incentives, not slogans. Election cycles nudge fiscal behavior; policy uncertainty chills investment; market power expands unless checked. These are not “market failures” that fix themselves. They’re political equilibria that require political change. (IMF)
Measure what matters, then lock it in. Independent evaluation of ALMPs, housing outcomes post-reform, and drug price negotiations can create feedback loops that improve policy over time. Countries that do this well outperform. (OECD)
Frequently cited myths—versus what the evidence shows
Myth: “High housing costs are just demand.” Evidence: Supply constraints from zoning and land-use rules explain much of the variance in expensive metros. Politics sets supply elasticity. (NBER)
Myth: “Inflation was just supply chains” or “just stimulus.” Evidence: Both demand and supply mattered; policy interacted with constraints. The split varies by model, but the mechanism is political. (Federal Reserve)
Myth: “Trade always creates winners who compensate losers.” Evidence: Without explicit policies, compensation rarely happens; the China shock’s local scarring persisted for a decade. (American Economic Association)
Myth: “U.S. healthcare is pricier because it’s better.” Evidence: The U.S. pays more and underperforms on many outcomes; fragmented financing and limited bargaining drive prices. (Commonwealth Fund)
Related videos (context and explainer content)
Institutions & prosperity: Acemoglu lectures on Why Nations Fail. (YouTube)
Political economy basics: Short explainers on business cycles and policy. (YouTube)
Housing policy: How zoning rules shape affordability. (YouTube)
Policy playbook: turning political problems into economic solutions
1) Housing supply truce. Legalize “missing-middle” housing statewide, end mandatory parking near transit, time-limit permitting, and pair upzoning with by-right affordability bonuses. Guard reforms from litigation whipsaw via clear state preemption where necessary. Evidence says this is the fastest way to bend the rent curve over time. (NBER)
2) Targeted stabilization, not sugar highs. Codify fiscal rules that smooth cycles (automatic stabilizers, capped discretion near elections), and empower independent fiscal councils to grade pro-cyclical budgets. Political business cycles are real—design around them. (IMF)
3) Competition policy with teeth. Modernize merger review for digital and data-driven markets, prohibit anticompetitive non-competes and no-poach agreements, and fund antitrust agencies to litigate. The macro effects (investment, labor share) justify it. (NBER)
4) Labor standards that raise floors and build ladders. Pair minimum wage increases with earned income tax credits and enforce wage theft laws; protect organizing rights where states have weakened them. The weight of evidence shows distributional gains with limited average job loss when well-calibrated. (NBER)
5) Health prices need bargaining. Scale and protect Medicare drug negotiations; extend reference pricing and transparency tools; scrutinize hospital consolidation and site-neutral payments. The U.S. won’t tame medical inflation without political will to bargain. (CMS)
6) Shock absorbers for globalization and automation. Make wage insurance, relocation grants, and demand-linked training permanent and automatic in downturns and trade shocks. The cost of not doing this is visible in the China-shock literature. (American Economic Association)
7) Price the externality. Adopt carbon prices consistent with updated SCC estimates, recycle revenue to households and clean investment, and backstop with standards where politics blocks pricing. It’s cheaper than paying disaster bills forever. (epa.gov)
Bottom line
When rent spikes, when paychecks lag, when hospitals and drugs cost more every year, when factories shut down, when storms get pricier—those aren’t acts of God. They reflect the rules we write, enforce, or duck. Economies are political machines; they produce what they’re built to produce. If we want different economic outcomes, we don’t scold markets—we rewrite the rules.
References
Acemoglu, Johnson, and Robinson’s institutions research and Nobel coverage. (The Wall Street Journal)
IMF on political business cycles; election-year fiscal dynamics. (IMF)
World Bank Worldwide Governance Indicators overview. (World Bank)
Baker, Bloom, Davis: policy uncertainty index (NBER Working Paper 21633). (NBER)
All claims above are grounded in primary research, official statistics, or reputable institutional reports published or updated through 2025. Where debates remain (e.g., inflation drivers, markup magnitudes), we acknowledge credible disagreement and cite representative work on each side. Readers can follow every link for the underlying evidence.
Where this goes next
If you want us to dig into New Hampshire–specific levers—zoning preemption vs. home rule, hospital consolidation in the Upper Valley and Seacoast, labor standards, or local student-debt risk—say which lever you care about, and we’ll build the evidence deck and a plain-English legislative roadmap keyed to the state.
