Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Discerning the Problems with Discretion

Imagine a politician making the case to you for discretionary policy. She tells you that discretion must be better than following rules because discretion gives her flexibility to respond to changes in the economic environment by tweaking policy in the best possible way. Discretion allows her to pursue the same policy as if she was constrained by rules while also giving her many other options.

In short, she doesn’t see why she should tie her hands unnecessarily. In this section we give a couple of compelling reasons – and they have nothing to do with keeping her hand out of the parliamentary expenses trough (or, perhaps more appropriately, moat!).

The fact is that, although discretionary policy may sound like a good deal, most economists are sceptical about it for a number of reasons. Not least, that policy makers have discretion regarding whether they follow through on previously announced policies.


Allowing politicians off the leash

The ideal politician is a benevolent figure. When looking at any problem, she collects all relevant information about the issues, considers everyone’s preferences and finally chooses the option that best serves society as a whole. This is an important function because no one else has the time to find out about all the different functions of government and then sit down and think about what would be best.

You’re probably thinking something like ‘Yeah right, if that’s what a politician is, then I’ve yet to meet one’.

Economists share your scepticism – they know that politicians are only human and face particular incentives that affect the way they make decisions. In fact, a whole branch of economics exists called public choice theory, which looks at how self-seeking politicians and policy makers behave.

Here are two examples to show that economic policy is just too important to be left to the whim of whoever happens to be in political power today.