On the importance of independent, objective policy analysisRoundup
tags: Economic Policy
I have written about the dangers of making economic policy on the basis of ideology rather than cold, hard economic analysis. Ideologically-based economic policy has laid the groundwork for many of the worst economic disasters of the last 200 years.
●The decision to abandon the first and second central banks in the United States in the early 19th century led to chronic financial instability for much of the next three quarters of a century.
●Britain’s re-establishment of the gold standard in 1925, which encouraged other countries to do likewise, contributed to the spread and intensification of the Great Depression.
●Europe’s decision to adopt the euro, despite the fact that economic theory and history suggested that it was a mistake, contributed to the European sovereign debt crisis.
●President George W. Bush’s decision to cut taxes three times during his first term while embarking on substantial spending connected to the wars in Afghanistan and Iraq, was an important driver of the macroeconomic boom-bust cycle that led to the subprime crisis.
In each of these four cases, a policy was adopted for primarily ideological, rather than economic reasons. In each case, prominent thinkers and policy makers argued forcefully against adoption, but were ignored. In each case, the consequences of the policy were severe.
So how do we avoid excessively ideological economic policy?
One way is by making sure that policy-makers are exposed to a wide range of opinions during their deliberations. This method has been taken on board by a number central banks, where many important officials are either foreign-born or have considerable policy experience outside of their home institution and/or country. Mark Carney, a Canadian who formerly ran that that country’s central bank, is not the first non-British governor of the Bank of England in its 320-year history. Stanley Fischer, who was born in southern Africa and has been governor of the Bank of Israel, is now the vice chairman of the US Federal Reserve. The widely respected governor of the Central Bank of Ireland, Patrick Honohan, spent nearly a decade at the World Bank in Washington, DC. One of Honohan’s deputies is a Swede with experience at the Hong Kong Monetary Authority; the other is a Frenchman...
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