Economics

A government's best long-term plan can look like a mistake every single day it's followed

Finn Kydland and Edward Prescott showed that a policy which is optimal when announced can stop being optimal once people have already reacted to it — tempting policymakers to break their own promise for a short-term gain. A government that vows low inflation gains credibility, but then faces constant temptation to print more money anyway once wages are already set. The insight, that discretion can be worse than binding rules, won them the 2004 Nobel Prize in Economics.

Finn E. Kydland, Edward C. Prescott, Rules Rather than Discretion: The Inconsistency of Optimal Plans — Journal of Political Economy, 1977

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