Now is not the time for passive economic policy
Updated: Mar 21, 2021
Explaining the reliance on hindsight
The ongoing pandemic highlights a culture in society of waiting for events to occur before planning on how to regulate or react to the changes. Hindsight is a wonderful gift in many cases and allows changes to be made for the future but operating on autopilot ensures preventable situations are badly handled. Countries with a short average government length are particularly at risk of short-run policy focus because governments are unable to pursue long-run objectives if they struggle to stay in power, so prioritise public focus and turn a blind eye to risky activity. The government is constantly chasing the private sector’s latest creations, attempting to grasp control over the activities. The current model of a reactionary state waiting for disaster to strike before leaping into action is a mindset that is past its time due to a rapidly evolving society.
Financial products and the conduct of business have evolved to include speculation on social platforms seen by Elon Musk’s tweets holding power over markets but also the broader introduction of complex products such as CDOs which contributed to the financial crisis. The key to regulation begins with understanding the products and algorithms then introducing rules to maintain order. In the case of technology and social media industries, the major firms (Apple, Alphabet, Amazon, and Facebook) have a total market capitalisation of $5.4 trillion and grew up outside government scrutiny with many calls for regulation only coming after distinct phenomena such as “fake news”. Social media is a unique case since it was championed initially as an excellent spreader of information, but it is only after many years that there is a realisation of misinformation and a desire to limit this. The case of Cambridge Analytica nearly 5 years ago now helping Donald Trump to swing voters by carefully targeted advertising caused divisions because no laws were in place for this specific scenario meaning that regulators were on the back foot, causing widespread controversy as a result.
Source: Alex Brandon/Getty Images
Hiding behind academia
The justification for more advanced techniques in the financial system and additional rigour is a benefit of academic advancement but also creates a stark divide between society and institutions. Financial institutions and the government have increasingly adopted a rather condescending view by justifying decisions with the phrase “it’s complicated”, but this has evolved to the point where the financial institutions can operate in ways that governments don’t understand themselves and have little power to regulate. The increased use of mathematical techniques in financial products has greatly limited the number of people that understand these products and so even regulators often simply accept the changes if they struggle to understand them. Ignorance on the part of the state represents the human quality of shying away from concepts in areas of little knowledge and so the state is ill-prepared to respond effectively. Regulators are ineffective at curbing activities in a legal grey area since the employment prospects are better in general for those with the required skills in the financial sector itself, so barring altruistic motivation, the institutions will continue to have the upper hand with innovation.
The need for proactivity
Governments aiming for re-election will aim to ride the highs of their time in office rather than curbing potentially risky long-run activities, meaning that inter-temporal planning is poor, and the financial system is at risk. Health and safety legislation illustrates this view in society as new laws are only introduced after a disaster, leaving behind an inquiry into root causes to ensure it is not repeated. However, imagine a disaster of irreparable magnitude, one which could melt the financial system past the point of repair. It is part of life that some consequences can’t be fixed and the autopilot setting of the state will ultimately end in tears whilst the financial system slips further from its grasp. Proactivity is encouraged from a young age and now it’s time for the state to look ahead and protect the future instead of reeling from past mistakes.