Rules, Discretion, and Reality
Both with respect to inflation and productivity, macroeconomic performance in the last decade or so has been disappointing. Promises of policymakers to improve things have been frequently thwarted, not only in terms of inflation and growth, but also in terms of achieving targets for such summary measures of policy as the budget deficit or the money supply. Moreover, critics have charged that policy failures are to blame for many of our economic difficulties. The net effect has been to raise the practical question of whether the political process as now constituted can produce good economic policies. The last decade or so has also been marked, more than coincidentally, by substantial professional criticism of conventional neoKeynesian macro models and the theory of policy associated with them. One of the major punch lines of this research is that activist macroeconomic policy is misguided-indeed, at best it is seen as ineffective and at worst highly counterproductive. As a consequence, the so-called new classical economists argue that policymakers should avoid activism or and instead be guided by simple rules. The issue of rules vs. discretion, has, of course, been a source of long-standing professional debate and, while the new classical economists have provided some additional intellectual ammunition for rules, this hardly serves to explain the apparent popular resurgence in advocacy of rules. Recent interest in rules is reflected in the emphasis on monetary targeting, in proposed legislation-even constitutional amendments-for controlling the federal budget, and in attempts to untarnish the gold standard. This paper reviews the current state of the rules vs. discretion debate. I. The Nature of Policy: Some Preliminaries