In Economic Policy, Feelings Matter

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Tyler Cowen has a rather provoking post entitled "Put reason aside, how would you feel?"  He offers the following thought experiment:


You meet an employed professional with a $300,000 house, $100,000 in the bank, a nice car, a few (illiquid) Renaissance paintings, and very nice shoes. His name is Fabio.

He is $60,000 in debt, which is about equal to his yearly income. An unanticipated ARM reset requires him to pay off that debt at a faster pace than expected, which means he must restrict his consumption.

He threatens to mistreat his longstanding girlfriend Angela, unless she works harder to maintain his previous level of consumption. Angela refuses to help much, citing a false economic theory in defense of her position.

Fabio's brother relentlessly attacks Angela's false theory. His cousin in Naples claims that Angela is obliged to help because she has benefited from being in the relationship.

Quibble all you want about how well the details of this thought experiment match the circumstances (obviously, it glosses the issue of how bad the German obsession with inflation has been for most of the periphery).  The important thing is that even in a crisis--maybe especially in a crisis--these sorts of considerations matter.  It matters whether the Irish and the Greeks think it's fair to undertake a massive austerity program that will have the effect of bailing out stupid German bankers who bought too much of their debt.


As I think I've said before, I used to cover financial crises (from America) and wonder why governments didn't do things that seemed so obvious.  The answer, I now realize, is that politicians can't just do the "obvious best" thing.  There is no such thing as a perfect rational maximizer in policymaking.

Politicians are always limited by what their voters think is fair.  The voters may be right, they may be wrong, but in the end (hopefully), they're still the boss.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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