Preventing Bad Policy

The general consensus by economists and policy makers is that the 2016 United Kingdom European Union membership referendum (brexit) will have negative consequences:

IMF says Brexit ‘pretty bad to very, very bad’

The Brexit delusion

Brexit is a needless complication, an attempt to fix something, that while flawed (especially about immigration), isn’t yet sufficiency broken to justify such drastic measures, especially at a time when Europe’s economy is already weak. The effects of Brexit are manifested in decreased business confidence, falling real estate prices, flight to safety (government bond yields fall and private debt yields rise), and increased volatility both in equities and currencies. Because the economic consequences of Brexit are so unpredictable, banks have become very skittish, and lending activity has slowed and cash reserves have surged. The total indirect consequences beyond the initial shock to the stock market and economy may total a trillion dollars over many years, until the entire thing is sorted out.

Brexit is what I would call ‘bad policy’, designed to fan populist appeal but bad for the economy. A government needs systems in place, or at least some what to dissuade, potentially disastrous populist policies.

One solution is to put the super-rich in power, who have the most to lose socioeconomically if things go wrong and thus in self-preservation will try to enact’ good policy’ that is stabilizing, not populist policy that is potential destabilizing. Less wealthy politicians have less to lose as a consequence of their actions and hence are more inclined to appeal to the whims of the masses for easy votes. For example, a 90% tax on the rich may win the support of Britain’s bottom 50%, but it may hurt the economy significantly by encouraging divestment and slowing business activity. As in the case of Trump, populism can work well if the desires of the people happen to be aligned with the best interests of the economy and state, an example being the large near-unanimous public support for the war on terror following 911, but no assurances can be made that the public will know what is best, and as Bryan Caplan has shown voters tend to be irrational and ill-informed of issues. Eliminating commonwealths, constitutions, parliaments, and other forms of democracy, replacing it with some type of autocracy or oligarchy, is another solution, in order to immediately veto bad ideas like Brexit. The nice thing about a constitutional republic, vs a direct democracy, is it makes sweeping referendums much more difficult to pass. Only congress can make drastic changes to the law and decisions, such as constitutional amendments and impeachments, not average voters.

How about stock options tied to performance, not just for private companies but for high-ranking government officials, giving policy makers a financial incentive to enact ‘good policy’. Generally, the S&P 500 is a good proxy for the heath of the US economy, although it is vulnerable to large gyrations due to speculation. But the obvious problem with this is it may encourage ‘short-termism’ – creating inflation to boost the stock index past the performance threshold at the expense of the longer-term health of the economy. To bypass this the threshold may be adjusted for abnormally high inflation. For example, if the S&P 500 is at 2000 and the 4-year performance threshold is set at 2200, if the CPI is 5% per-annum (3% higher than the long-term average), the threshold becomes 2320. Having richer politicians may also reduce corruption, for much the same reason cheating is so rare among professional athletes, who are well-paid, compared to college athletes who are not.

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