Should Policy Attempt to Avoid Financial Crises?
In this essay in the CATO Journal, Jeffrey Miron asks what our policy should be in fiscal "crisis."
The 2008 financial crisis and the 2007–09 recession have predictably spurred interest in how policy can avoid financial crises. A prior question, however, is whether policy should avoid financial crises. The answer might seem obvious. But I argue here that if policymakers focus on avoiding crises, they will generate undesired side effects and typically fail to avoid crises in any case.
His argument has four steps:
- First, avoiding crises is not, in and of itself, the right goal for policy.
- Second, as a matter of theory, the costs of crises are not necessarily large.
- Third, as a matter of evidence, the costs of crises do not seem to be enormous.
- Fourth, whatever the costs of crises, anti-crisis policies might be worse than the disease.