"A fundamental misalignment between political incentives and economic requirements"

Arnold Kling highlights a very important aspect of the current economic mess.

What markets and the economy need are policies that resolve uncertainty. That way, people know who is going to take a hit. Most important, they know where they can invest with confidence going forward.

What politicians need are vagueness and opacity. Having a clear, well-defined policy exposes the politician to the people who are hurt by that policy. Thus, instead of producing a balanced budget today, you produce a plan to produce a plan to balance the budget down the road. Instead of restructuring sovereign debt, you make a commitment that everyone will be made whole, without explaining how that commitment will be honored.

For example, the United States managed to make its insolvent banks whole (for now, at least), using a massive subsidy from the Fed. ... Naturally, this subsidy was made as vague and opaque as possible. The Fed will tell you that this was necessary to prevent runs on the weakest banks. But in fact the motivation was much more that the Fed wanted to avoid the political resistance that would have built up had people actually known what it was doing.

There's more at the link. Bold print is my emphasis.

That's about the best explanation I've heard yet for why our politicians can talk a blue streak about them, but can't seem to actually do anything to solve our economic problems!





Peter