Over the last series of articles we have looked at how different types of government policies can have an impact on the growth of an economy as a whole. However, the successful implementation of monetary and fiscal policies is not as easy as it might initially appear on paper. By far the biggest threat to a government intervention into the economy is the consumers which it is trying to impact, and their ability to understand and evaluate those policies themselves. Specifically, if the population base of a given economy has the insight to interpret an economic policy in a way that compromises its credibility, it is possible for that plan to be undermined by the foresight of individuals within that economy itself.
As mentioned in previous articles, there are a number of ways in which personal investors can take advantage of economic policies to ensure that they benefit from the government’s involvement. However, if the government in power does not have a solid track record of implementing strong economic policies, or if the public does not actually believe that the measures being taken are enough to have a positive result in the economy, they may start taking additional measures on their own which will inadvertently counter-act the policies themselves.
For example, if a government implements a monetary policy that reduces interest rates over the short term, but the consumers do not believe that these rates will be able to stay at those levels for a reasonable period of time, people might limit the amount of debt that they take out at the lower rates, so as to protect themselves from future rate hikes. The end result is that the policy has failed to increase the supply of money available in the economy.
While the credibility of a government’s ability to implement a strong economic policy is mainly based on the ability of the public to understand and interpret the way that such a policy fits into the overall economic environment, it is also important to understand that these interpretations of the economic policy will also be subject to the perceptions of that public. Since economic policies tend to be slow to organize, implement, and monitor, it can sometimes be a problem when the public is not able to see immediate results from the policy itself.
Specifically, if the public sees that an expensive monetary policy is implemented, but does not see any results in the first few periods of its implementation, it is possible that the public might begin assuming that the policy is not effective, and begin saving up their own capital in order to protect themselves from the potential fall out of that policy not working out. As such, we need to be aware of the overall economic sentiment that surrounds a given policy’s progress, and understand how it is that individual reports updating the public on the impacts of these policies will be scrutinized by the public.