Self-correcting policies

Fiscal and monetary policies with specific forecasted benefits are not affected if the expectations are not delivered. For example, a tax regime change – such as a tax increase with an explicit goal of deficit reduction will stay in place even if the deficits increase as a result of the policy change. Economists and policy makers alike have too high a confidence in their ability to forecast the future precisely. Thus, they embark on policy changes with precise arguments as to why and how the policy change should be effected. As has become clear from many previous experiments, policy changes do not typically deliver what they intended to do. There are two major reasons for this: First, the effects of a policy-change on the macroeconomic system depends on not only its direct influence but also its interactions with attributes that drive the complex system and second, it is impossible to forecast future conditions – such as growth, demand, inflation etc. – which may be dramatically different from the present regime in which the policy is enacted.



A self-correcting policy – one that becomes null and void if its intended effects are not realized is one way to tackle this problem. This may substantially reduce the gaming that goes on in the chambers of the law-makers, where one party or the other rushes to enact policies within favorable time windows. In this case, any policy-change will require a threshold minimum goal of both expected outcomes and the timelines and if the actual observations are lower than the goals within allotted time, the policy is nullified. For example, a minimum expectation of a tax increase in the presence of a spending freeze may be a decrease in deficit within a time window. If the deficit is the same or higher in the window, then the policy becomes void.



A more aggressive mechanism will be a policy reversal in the presence of a goal with a minimum expectation of neutrality. For example, if a tax increase policy is met with an unexpected increase in deficit, it should automatically reverse with a subsequent reduction in taxes. This will keep law-makers from random and poorly thought out policies.