10.3.3—Macroeconomic government failure

Macroeconomic government failure occurs when policy produces a worse outcome than the feasible alternative because of poor information, delays, unintended incentives, capture, political short-termism or implementation limits.

Policy makers cannot observe potential output, the multiplier or the natural rate perfectly. A well-intentioned policy can arrive after conditions change, amplify a cycle or shift costs to another objective or group.

Stimulus designed for a recession that has already ended may create excess demand and inflation; an austerity package based on an overestimated multiplier may depress output more than expected.

Government failure does not imply no role for policy; compare the actual policy with the market outcome and with the best feasible alternative, not with perfection.