Temporary Policies Have Temporary Effects – And Sometimes That is Good News

Michael Giberson

Recent research has revealed that the “cash for clunkers”-policy boost to car sales did little more than rush car sales that would have taken place over the following several months, and no evidence was found of broader economic effects on employment or home prices due to the so-called stimulus effects of the spending. It is just one concrete illustration of the general policy experience that temporary policies have just temporary effects.  Usually this is interpreted as bad news for policymakers – their reach is smaller than they expect – but sometimes it is good news.

In today’s Wall Street Journal a coterie of prominent economists remind policymakers that “long-lasting economic policies based on a long-term strategy work; temporary policies don’t.” They continue:

The difference between the effect of permanent tax rate cuts and one-time temporary tax rebates is also well-documented. The former creates a sustainable increase in economic output, the latter at best only a transitory blip. Temporary policies create uncertainty that dampen economic output as market participants, unsure about whether and how policies might change, delay their decisions.

Short-term policies like temporary home-buyer tax credits and cash for clunkers create at most temporary blips in economic activity, and fail to spark much in the way of broader economic activity. As Jerry O’Driscoll, endorsing the op-ed, puts it at ThinkMarkets, “Let us once and for all be done with endless discussions of temporary policies with transient effects. They don’t work and they distract us from the business at hand.”

But there is one sense in which this criticism of temporary policy moves is good news for the current administration in Washington. Apparently the economic consequences of the current moratorium on deepwater drilling in the Gulf of Mexico have been smaller than expected.  Many companies are keeping crews in the Gulf, involved in activity not limited by the moratorium or perhaps just waiting it out. Because it is a temporary policy with a relatively clear endpoint, many companies are not making permanent changes as a result.

Admittedly, the document reporting the smaller-than-expected consequences was issued by an administration inter-agency task force. Nonetheless, the report closely examines unemployment claims in areas expected to be hit economically by the moratorium and also examines unemployment data from a much broader three-state area. The data examined support the idea that the effect of the policy, while costly for some, is smaller than projected in an earlier Department of Interior estimate.

Sure, smaller costs than expected doesn’t mean no costs at all. An estimated 8,000 – 12,000 people lost their jobs due to the moratorium, and smaller companies were especially hard hit. Smaller costs than expected also doesn’t mean the moratorium was a good idea. That is a separate, if related, question. And as the economists say in the WSJ, policy uncertainty surrounding temporary policies also can dampen economic activity. But as with temporary policies intended to have beneficial effects, which later are found to be less significant than expected, this temporary policy that was expected to be prudent-but-costly has been found to be less costly than at first thought.