by Roger Koppl
In the mathematics of “optimal control theory” you can sometimes get a system to slam violently between two extremes. You alternate between stepping on the gas as hard as you can and slamming the brakes on full. Mathematicians call such violent swings a “bang bang solution.” With today’s bill to tax the AIG bonuses at 90%, Congress is making bang bang policy. Bang! Take this money. Bang! Give it back.
When even the government’s fiscal policy is subject to such discretionary change, we’re in trouble. When the government uses its discretion to influence the market, it acts as a “Big Player.” Bang bang policy is an extreme example of such discretion. Congress has become a Big Player jacked up on methamphetamine. The trouble with Big Players is that you never know where they’re headed. Instead of paying attention to supply and demand in your corner of the market economy, you have to pay attention to the psychological twists and turns of the Big Player. After all, today’s supply and demand conditions don’t mean much when the Big Player can override them on a whim. But the twists and turns of Big Player psychology are inherently impossible to predict. Thus entrepreneurs are less able to plan and more eager to curry favor with the Big Player. Economic efficiency, relative scarcity, and product innovation grow increasingly irrelevant to business success. Bang bang policy is no way to “stimulate” a weak economy. It’s a pretty good way to increase the arbitrary power of the state, however.