On managing expectations
Expectations matter. A lot. Stable institutions in a context of trust are necessary for liberal prosperity. In this sense, the work of government is to manage expectations–to maintain a stable strategic framework within which plans can be formed and cooperative action successfully coordinated over the long term. That is why, for instance, I think quickly restoring a legal and administrative framework for functioning financial markets ought to be among the government’s chief priorities.
Yet I’m extremely suspicious of what strike me as intellectually contentious, ad hoc interventions into the economy aimed at expectation management. Countercyclical economic mood-control initiatives seem to me inconsistent with the maintenance of a general framework of stable rules — that is, they don’t take the importance of expectations seriously enough — while also smacking of illiberal state propaganda. It’s hard to draw a principled distinction between framework and ad hoc rules, but I think it’s intuitive enough. Steady, predictable expansion of the money supply seems like the good kind of expectation management, while fool-in-the-shower money supply management seems like the bad kind. Likewise, automatic stabilizers, such as the predictable increases in welfare and unemployment transfers during recessions, strike me as greatly preferable to freestyle panic-mode stimulus legislation.
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