The timing of economic policy

Leandro Mortenegro

A reader recently suggested I write about the speed with which government policy can affect the economy. I’ve only lightly touched on this topic before, but it is both timely and interesting, and rich with theory and empirics.

The best place to begin is with a timeless warning about the role of public policy on the economy. The 20th century economist Friedrich Hayek warned that government had almost none of the available information needed to effectively plan economic growth. He did so in several books and papers, and I think he argued most convincingly that central planning of economic activity necessarily would result in wasteful, ineffective policies. We have an abundance of federal, state and local programs that bear out his predictions.

Maybe the best examples of this are workforce development spending and investment subsidies to businesses. After a half century of research, there’s scant evidence that either of these expensive programs generate benefits that exceed their costs.

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