3 Reasons Politicians Keep Getting Economic Policy Wrong

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It’s not easy to regulate an economy. In fact, it might not really be possible at all – at least not to do it well, what, with bureaucratic lag and all.

Yet it is important that we have regulatory officials, analysts, and economists keeping close tabs on the numerous powers at work to make sure things don’t fall into complete disarray. Almost everyone can agree that fiscal and monetary policy can and should be guided — at least to some extent — in the direction we deem most beneficial for the nation and world at large. But the outright refusal of Republicans, Democrats, Libertarians, and others to work out compromises has left us all in a state of flux.

There are a number of ways policymakers sway the flow of the economy. At its most basic level, the government has an effect on monetary policy through money supply and interest rates, fiscal policy via taxing and spending, and legal regulatory framework. All of these play an important part in what happens to the economy every day. For example, the financial markets, although showing vast improvement over a few years ago, are still incredibly sensitive to every move bureaucrats make.

The truth is that the economy is so large, complicated, and chaotic that it is poorly understood. Even the world’s best economists disagree on fundamental economic ideas like rationality, and accurate economic forecasts are effectively a myth. 

Policymakers, then, certainly do not fully understand the implications of changing monetary or fiscal policy. However, because of the enormous political pressure faces by policymakers, they often become convinced that some particular change in policy will cure what ails us, and the public often buys into the idea.

So why is that? Why does it seem that our policymakers are clueless, especially when it comes to the economy? For example, many people believe lowering taxes or eliminating the deficit would magically cure the economy, but this is just not true. In practice, often, taking on debt is what actually keeps the economy afloat in the first place, particularly during times of strife — like the past financial crisis and recession.

Here are three reasons that may help explain why our policymakers are seemingly clueless.