Can policy makers really have an impact on the economy, create jobs and even lift economic growth, or rather, should they just stay out of the kitchen? That’s a question I used to ask myself. After all, I started studying economics in the late 1980s when much of the thinking in academia was that Keynesian economics had gone too far. Governments were far too involved in the economy, taxing too much, spending too much, and many putting in place one boondoggle policy after another. This led me to align with the monetarist, Chicago school, laissez-faire thinking—the less the government does in the economy, the better the economy will likely do.
A great read on this topic back then was Alan Blinders’ book, Hard Head Soft Hearts—still a worthwhile read today—, in which Murphy’s Law of Economic Policy was expounded. Everyone knows Murphy’s Law: “if anything can go wrong, it will.” But Murphy’s Law of Economic Policy takes a different twist:
“Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”
Professor Blinder exposed the many nonsensical policies that governments pursue, often ignoring the consensus view from economists. One of Professor Blinder’s examples is that of U.S. President Regan’s Reganomics—founded on the idea that tax rate decreases would lead to phenomenal economic growth and, in fact, raise tax revenues. If that rings a bell, the very same policy was implemented by the Trump administration in late 2017, with the very same result: predictably bigger deficits.
Of course, there are plenty of examples in Canada too, when policy makers ignore well established economic thinking and put in place bad or excessively costly policy. Often governments try to pick winners, which they’re typically very bad at; they prefer to spend money to encourage good behaviour rather than taxing bad behaviour (such as polluting); and they subsidize industries rather than leveling the playing field.
And who can blame the politicians? After all, politics is tough given that economic and political objectives are often at odds. Good policy is like medicine, it tastes bad in the short run, but pays off in the long run. Politicians often worry that voters will remember the sour taste the most.
Not all policies fail
Yet, there are clear instances when pursuing a targeted policy can lead to successful outcomes. My favourite example is Iceland’s investment in football (or soccer).
Iceland’s economy collapsed during the 2008–09 financial crisis. Its three major banks went bankrupt, plummeting the economy and the currency while leaving scores of service sector professionals unemployed. Despite having the steepest downfall during the financial crisis, its recovery was also remarkably quick and strong. A flexible exchange and expanded social safety net were largely responsible for enabling this—and, interestingly, part of the social programs’ expansion came in the form of increased spending on sports, such as football. Iceland aimed to increase the fitness of young and old alike by investing and promoting the sport.
In 2010, Iceland’s national football team was ranked 112th in the world; by 2016 they had reached 21st and qualified for the European Championships. They did so by investing in facilities and developing high-level coaches. Amateur participation in football swelled, as did the number of Icelandic pros securing positions with teams all over Europe. Iceland not only made it to the European Championships—they got through the first round unbeaten and beat England in the round of 16. For a nation of just over 300,000 people to accomplish such feats was remarkable.
Iceland’s economic and football success provide the evidence that governments can implement programs and policies to achieve targeted goals. It’s helped change my cynicism—Murphy’s Law of Economic Policy need not apply. Despite the reach of fake news and bad ideas, we have healthy debate in this country, enabled by evidenced-based research. It’s important that evidence reach the voters and the politicians, to encourage good policy choices that help drive our economic success.