One thing I find so disconcerting in most economic discussions taking place right now is the lack of consideration for the second-order effects of policies. Almost every government policy that effects economic policy has some unintended consequence that creates new economic distortions which then create new problems which are then inevitably treated with a new distortive policy, and so if goes.
To that end, it was nice to see an article that discusses one of those distortions.
The truth is that most economic behavior can be distilled to three principles. One, people generally act in their perceived self-interest. Two, people respond to incentives. Three, people are smart enough to apply some level of game theory to the first two principles. That third principle is the source of second-order effects, and it is remarkable how little the third principle is given consideration when policy makers form policy.
Unfortunately, Keynesian thinking has become so ingrained in the government and the media tha the first reaction to any problem is to assume reflexively that a new government policy is needed to combat that problem. Often this policy comes in the form of some new regulation, but while it might feel emotionally satisfying to think that there is an office full of wizened gurus somewhere able to create perfect policy, it is impossible. Not just improbable, but impossible, as any distortive policy will have distortive second-order effects. Of course, even if it was possible, there's not much evidence the government is run by wizened gurus.
Wednesday: FOMC Announcement, CPI
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