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Thursday, February 28, 2008

Destabilization Policy

In Econ 401, intertemperal choice models have been touched on just enough to to make me think about the effect of time on public choice. One of the most critical factors in determining the best use of monetary policy is the delay involved in virtually every step in the process. In responding to a recession, by the time the accurate data has been collected and interpreted, it is quite possible the recovery will already be on the way, and this is only the data! Add in the time it takes for a consensus and the wait for the next meeting, and stabilization policy may soon become very destabilizing.

The Fed is arguably an Aristocracy, capable of moving fairly quickly, and even they have the significant timing problems mentioned earlier. Applying these same issues to a representative democracy, there are clearly some potential problems. Take the obvious example of the new "economic stimulus". It took about six months from the initial concerns and actions of the Fed for the Congress to pass the plan. Even though it has been over a month since, the checks are still months away. The dangers of this delay are that, again, stabilization policies could become destabilizing.

This applies to just about every policy the government can make, including national security. Public opinion clearly demanded a more active foreign policy after 9/11 and supported a war with Iraq (at least to the necessary degree). Now in retrospect, the public has changed its mind, and a less aggressive policy is considered better. It is unfortunately easy to see the possibility of the public's opinion changing slowly over five years while the body count increases until they demand a pullout right when there begins to be progress. If it takes five years to change their minds in one direction, it will take more time then we possess to consider the possibility of progress. Barack Obama says under his leadership we will "be as careful getting out as we were careless getting in", I hope he's right, or this could be one of the most tragic examples of Destabilization Policy.

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