The Issue With Government Intervention

Politics simply has no place in dictating macro policies...

Keynesian economists have always been and continue to be the biggest pushers for government intervention because as far as they are concerned, the so called invisible hand is far from adequate. They also believe that left to its own devices, the economy might take much too long to correct itself in periods of economic downturn. While that is true, some believe that self correction will be more healthy for the economy and people will tend to learn more. The other issue with having government intervene in the macro economy is that we can usually predict their steps and tend to act before they take those steps, acting sometimes in ways that neutralize the effect of whatever policy government undertakes or in ways that render the policy move ineffective (the Ricardian equivalence for example). Of course I believe in the necessity of government intervention as far as wealth distribution is concerned as the socialist that I apparently am, but government intervention should be kept to its barest minimum, particularly concerning the workings of the macro economy.

At the risk of sounding like a paranoid cynic, government is typically made up of people with private interest that intend to exploit their position of power for private gains- physical or otherwise. Because of the selfishness of their interest and the temporariness of their tenures, government typically takes unfortunate policy steps that might be of great disadvantage to its people. The thing about these so called unfortunate policies is that they are made to appeal to people, and people hardly ever see the looming danger or are too consumed by the present benefits to give the unavoidable future consequences much thought (a concept psychologist refer to as the Present Bias). One can find a presidential aspirant planning to cut taxes for instance to appeal to the electorates when the country appears to be taking on more debt. Government is incredibly shortsighted and most leaders mostly care about the 4/5 or 8/10 years during which they are in office and this can prove a great hindrance to effective policymaking. There is also the amount of influence the private sector has over policy makers. In the U.S for example, large corporations appear to have government wrapped around their fingers and so many weren't too shocked when government at the time decided to spend public funds inefficiently by bailing out banks that took excessive risk, creating the problem of moral hazard, all while running a large deficit.

Fiscal policy is difficult to implement as it takes convincing the relevant policy making body (congress/assembly/parliament) about the appropriateness of the policy. There is also the process of first having to formulate the intended policy and putting it through various tests to ensure its soundness before presenting it for approval. After convincing other law makers, certain steps then have to be taken, all ordered, in preparation for the implementation. Before policy makers actually get to the bringing to life of their policy plans, time has passed and the economic turmoil might already be abating although there might be no indication of this at the time.

Most people including myself prefer monetary policy since we can argue for Central Bank independence. Monetary policies also take almost no time to implement compared to fiscal policy. Apart from that, it is more difficult for the Central Bank governor to use his/her position to further private interest when he/she has a board (made up of a practical number of people-unlike with fiscal policymakers) to consult with on all policy issues. Independent Central Banks are also arguably more warded off from special interest groups

Politics simply has no place in dictating macro policies.