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.

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1. The economy is incredibly complex

The economy is big, strange, and complicated. In fact, the vast complexity of economic problems can make them impossible to understand for many people. Not all politicians come from a background that includes an extensive background in economic study, and even those who come from entrepreneurial or business backgrounds may not have a firm grasp on the nuances of the housing market, or even student loan interest rates.

And this doesn’t even begin to get into international economic affairs, which can amplify the level of complexity at an exponential rate.

It’s important for policymakers to try and take into account the long-reaching effects that any changes have. Some may think getting rid of Social Security is a good idea, but without a doubt, that would create a giant ripple across the entire economic landscape.

Nobel Prize-winning economist and New York Times columnist Paul Krugman provides some interesting insight into this issue. Krugman says that nobody truly understands debt, the economy, and what is actually going on. Perhaps by realizing that they will never truly have a grasp on the economy, policymakers can use that realization to their advantage. Embrace the uncertainty, and see what can be done for the sake of experimentation. Course-corrective action can always be taken, and it’s better than doing nothing at all.

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2. Knee-jerk reactions

Whenever something happens on a macroeconomic scale — be it a bad jobs report, the stock market crashing, etc. — there is always the need for politicians to try and make something happen, even if that means attempting to conjure up some economic action using voodoo magic. The negative side effects of economic problems bait policymakers into acting too quickly, or acting when no action should be taken at all.

There are times, however, when action is definitely called for. As the financial crisis led to a global economic meltdown, there was a need for regulators to step in and make adjustments. That was a severe circumstance which required swift and decisive action.

There are also times when the government overreaches, and by becoming too nosy, it ultimately can become a drag on the economy. Case in point: Take a look at the current state of affairs with electric carmaker Tesla. Tesla is absolutely throwing the luxury car segment for a loop, yet it faces legal battles in all directions. By over-regulating the way cars are sold, the government is actually getting in the way of the free market.

The economy, as discussed, is incredibly difficult to gauge. There are peaks and valleys in every aspect, and bumps in the road are to be expected. Just because the stock market has a bad day or week doesn’t necessarily mean that regulators and policymakers need to enact some kind of action that could be harmful down the road.

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3. Overconfidence

Instead of letting the markets sort themselves out and letting the “hidden hand” take control, regulators can try to force their hand to try and implement some kind of change, which may backfire if they’re not careful.

In short, policymakers are too confident in the ability of policy actions to actually affect the economy in the way they expect.

There can be a whole bunch of reasons as to why this happens. It could be that overzealous politicians are eager to prove their worth, and push through bad changes. It might just be that they truly don’t understand the ramifications of their actions. Or they could be playing into the hands of special interests. No matter the reasoning, those making policy changes are often very confident in the fact that things will turn out how they expected.

If, as a nation, we trust in the capitalist and free market system, then we have to actually trust the market to bring us to the best place economically. There is no magic formula for how close or far regulators should remain to private industry, as there are most certainly times for intervention and times to let things take their course.

The issue we are seeing now is over-zealousness on both sides of the coin. Some policymakers are all too eager to over-regulate, while some are far too wavering in their trust of business and industry to self-police, or to take corrective action when it is required. By defending and pursuing ideologies instead of striving for actual economic success, these approaches can hurt everyone.

All policymakers can truly do is do their best, and expect the unexpected. The problem is that even the unexpected can be unexpected.

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