The Tinbergen model simplifies a complex reality. One complication involves a crucial point of logic that Tinbergen noticed: You cannot have more policy goals than you have instruments to accomplish them. It's like the algebraic rule you learned in high school: you cannot solve a problem of simultaneous equations if you have N+1 unknowns and only N equations. If you want to achieve fast economic growth and slow inflation you need at least two instruments available for you to manipulate. Otherwise, you will be forced as in algebra to harshly compromise the goals, achieving only one of them, or both of them, but in an incomplete fashion. Monetary policy for example may be good for keeping inflation low but rotten for getting the real growth rate of the economy up (better accomplished, the evidence leans, on the supply side). A government that has only monetary policy to use as an instrument of control is as clumsy as a heart surgeon who has only a scalpel to pierce the chest. A rational economic policy pursues the optimal mix of policy goals with the appropriate array of instruments.
Public Choice and Problems of Lags
The Tinbergen model doesn't say anything concrete about politics. It doesn't say how politicians literally or concretely come to determine goals, or rank them. Does the acquisition and ranking of preferences happen in conversation with senior citizens at the Macy's Day Parade? Does it depend who gives what and when to the campaign fund? Ultimate goals are, to repeat, assumed to be given--as if falling from the sky and not from Heaven, or from any particular theology about it. This is hardly surprising: Tinbergen himself was one of the rational, secular experts who would tell politicians how to achieve their goals, not which goals they or others should try to achieve. Tinbergen was the expert. And in the conventional positive science/normative science dichotomy-and in his many scientific and worldly successes-one can say that Tinbergen modeled "the expert" extremely well.
But the Tinbergen model is just a model, and can be elaborated. Public choice is a branch of economics invented in the 1960s and 1970s by the American economists James Buchanan, Gordon Tullock, Mancur Olson and their students, such as Richard Wagner. "Public choice" attempts to extend the Tinbergen model to explain the choices politicians make. In other words, it brings politics into the economic model itself, instead of assuming that the political objectives are wholly "exogenous" (determined by non-economic factors). The main idea of the so-called Public Choice School is that just like everyone else, politicians are guided by personal interests (such as getting votes to stay in power). The idea makes one suspicious of the intentions of politicians, of course, since it suggests that special interests take precedence over general interests. The public choice economists therefore oppose active policy making by the government and prefer that politicians be restricted by wider, constitutional law.
In the public choice approach to economics the policy makers are themselves self-interested. They have an interest in being everybody's favorite politician. The implication is that politicians should be leashed by strict rules.
Recall the theory of a political business cycle from Chapter 30. In line with the arguments of public choice, when election time nears, the incumbent president will intervene in the economy to boost economic performance and thus warm up voters for the ticket. Harder, more controversial decisions-what to do about same-sex marriage, stem cell research, the school drop out rate-will be delayed until after the election. Unfortunately this prediction has a good deal of empirical support.
But even if you assume that policy makers are guided by public interest, implementing economic policy isn't easy. One problem, already mentioned in Chapter 30, is that of the time lags between the conception and the creation of a policy. A president and his economic experts recognize the problem after it happens, take some time to decide what to do, act, and then wait for the impact to be felt. But by the time all this happens the original problem may have changed. Before deciding on a policy, the policy maker has therefore to take into account three lags: the recognition lag, the implementation lag, and the impact lag.
The recognition lag is the time that policy makers need to recognize that economic conditions call for action.
Consider what you find in the daily newspaper. The signals the paper sends about the economy are many and mixed. One leading indicator, such as the Dow Jones Industrial Average, may be up, while another, new housing starts, perhaps, is down. Unemployment may be dropping but the number of layoffs remains high. It is hard to tell from such signals whether the economy is coming out of a recession or slipping further into it. Is the dip in the unemployment rate permanent or just a fluke? The real data won't be in for a few months, maybe half a year. Time will tell. A few months from now the signals may tell you where the economy is today. By then it may be too late to act effectively.
The implementation lag is the time that governmental authorities need to implement the policy.
When a problem is recognized, the desired changes in the policy instruments usually cannot be implemented that very day. (Open market operations, an instrument of monetary policy, are an exception.) The economists have to make their calculations. Think about that in the context of making new fiscal policy. If the economists suggest a policy of increased taxes, Congress and the President have to reach agreement, the tax laws need to be rewritten, the tax forms printed and sent out, the IRS informed, and the citizens need to comply. Each step takes time, often measured in months or years, and filled with hazards (including compliance with tax law). Congress will argue long over taxes. Standoffs with the President are common. People cheat on taxes.
When economists advise a change in the money growth, by contrast, the lag may be relatively short. The Federal Open Market Committee (see also Chapter 26) is in charge and the Committee operates autonomously, without the direct intervention of politicians. The Committee meets Mondays and Wednesdays and is otherwise on call so it can order changes immediately.
The impact lag is the time that elapses between the implementation of the policy and the desired change in the ultimate goal.
It takes time for people to pay their taxes, or for a change in money growth to affect economic growth, inflation, and the other targets. Like a huge oil tanker, the economy responds only slowly to the turning of the wheel.
Because of these time lags policy makers run the risk of missing the target. Bringing a policy to bear on the economy at just the right moment is like you trying to shoot and hit a flying clay pigeon with a shotgun: actually, it's worse. It's more like trying to hit a flock of flying clay pigeons with a shotgun, a BB gun, a bow and arrow, and a sling shot-simultaneously. Inflation and unemployment are moving targets, but so are some of your intermediate targets, such as interest rates and new housing starts. One of the oldest and deepest complaints about an activist policy--a complaint associated in American economics with Milton Friedman--is that "policy" is just too hard to pull off. It sounds like a good idea for government to react from moment-to-moment to altering conditions in the economy. But if the lags are, as Friedman puts it, "long and variable," then a mechanical rule, a predetermined rule of action, or constitutional restrictions on the public choices may be better.