Jonathan Pedde's assertion that "simple policy rules" would be more effective than discretionary powers ("The Discretionary Illusion," April 10), specifically with respect to the government's macroeconomic stance, is a dubious claim that has little basis in fact. While the current system is admittedly far from perfect, a rules-based framework is not the answer for our present economic dysfunction.
There's a reason why our government incorporates both discretionary and rules-based policy avenues. Quite simply, broad rules can be successfully applied through the bureaucracy to deal with a wide range of issues. This is essentially how the executive branch functions a bureau like the Environmental Protection Agency receives a specific mandate from Congress outlining what rules it can make and then writes and enforces regulations that are specific to its policy domain.
Rules-based policies work well when the problems are relatively simple. For complicated issues like macroeconomic policy, however, solutions need to be delicately calibrated and require discretionary powers. This is partly why institutions like the Federal Reserve exist to provide stability and the capacity for flexible reactions to events within the system that don't have a pre-programmed response. Pedde makes the "interest rate rule" sound basic, but there is a great deal of mathematics and economic intuition that goes into the Fed's monthly interest rate target, such as tweaking the money supply just enough to slow down inflation in good times and to kick-start the economy when a downturn looms.
To equate the "Great Moderation" with the Fed having devised some overarching scientific method for implementing macroeconomic policy implies that the economy is something that we understand and can manipulate at will. But if there is any lesson to take away from the 2008 financial crisis, it's that the modern global economy has become highly complex and interconnected. By extension, it is entirely subjective to classify the discretionary response to the financial crisis by both Congress and the Fed as a failure. The Fed's policies, including the purchase of Treasury bonds and the maintenance of extremely low interest rates, cannot be singled out for failing to rein in unemployment more effectively. Only time will allow the economy to recover from the enormous structural shocks of the last five years.
In fact, there is no evidence to suggest that the cold and calculating logic of a rules-based system would have prevented the financial crisis in the first place. The "rules" that dominated economic policy during the "Great Moderation" had to be abandoned to rescue the entire economy from the brink of collapse. Additionally, "rules" in other sectors of the government namely the Securities and Exchange Commission and other financial regulators were largely ignored in the run-up to the crisis and were helpless to douse the flames in its aftermath. Our conclusion should be that rules are only as effective as those who are enforcing them, underscoring the need for discretion among policymakers, especially in such dire circumstances.
Pedde's argument also entirely discounts the positive economic and psychological effects of the government's fiscal stimulus program. The fact that it is difficult to make an empirical case about the effects of the stimulus obscures the intangible value of legislation like the American Recovery and Reinvestment Act and how much worse things might have been without government intervention. Opponents of the stimulus largely ignore the psychological trauma and terrible precedent that could have been set had the government stood by and done nothing. I wouldn't advocate such an expansion of power becoming routine, but when the very foundations of our economy are shaken, the government must be able to exercise discretionary power as the final arbiter of reassurance and stability.
Pedde is right to admit that there are potential theoretical arguments against any given policy rule this is exactly why their adoption poses problems in the broader structural context. In this country, we've got a Congress that constantly struggles to produce effective rules given the constraints of politics. Across the Atlantic, we have institutions like the European Union, whose common currency rules have so curtailed members' discretion that they have been left with little choice apart from brutal austerity. All told, the creation and implementation of "simple and straightforward" policy rules is a foolish pipe dream.
