I did a google search for policy driven economy. Apparently no Princeton professors, or any other Keynesian charlatans, have defined or declared it, so I shall. It will be my small contribution to the field. No, it’s not as profound as others, but I think it will suffice.
First, I will define a “policy driven economy”. It is one in which policy is used to direct market forces towards some outcomes, and away from others. It is not central planning or socialism, as those make no use of market forces and further explicitly reject or forbid market forces from acting. It is more akin to mercantilism, but mercantilism in its original guise, was nationalist (Fichte’s Closed Commercial State):
in which Fichte propounds a curious blend of socialist political ideas and autarkic economic principles.
A policy driven economy uses market forces. A perfect example is the policy of an “ownership society”, whereby the government subsidized home purchases through the tax code for example, and through monetary policy artificially driving interest rates to historic lows. Thus, no consumer was forced to buy a home, but through policy incentives, driven that direction.
It is tantamount to a cattle drive. Look, several hundred head of cattle, each weighting upwards of one thousand pounds, will simply not go where you force them. And a few men riding horses haven’t the power to do it. Cattle haven’t enough brain power to understand that were a rancher to shoot a few wayward cattle, that they ought tow the line or else. Force, or the threat of force will simply not work. Neither will it in a market economy.
However, cattle simply follow. All it takes is to “guide” them, to get them moving, and they just go. They can easily be trained, or at the least, easily led. And that DOES work in market economy.
It works for cattle, as cattle haven’t the slightest concept what awaits them at the end. And when one considers the housing market bubble, herd mentality seems very apropos.
Buyers, tempted by low interest rates, were able to borrow far beyond their means. Inflating home prices created artificial wealth which led them to borrow against their “equity”. Note, I do not say “take money out” as it specifically was not real savings and there was no money per se, in the house. Buyers were also motivated to “buy now” before home prices went higher. All of this was artificial, but it is clearly markets being led by policy. No force was applied, but sadly, same as cattle, they were led and one might argue, to the same destination.
Cash for clunkers is another example of policy driven economy. In fact, I doubt there’s any sector of the economy where markets are not driven in some direction other than their natural course.
Sadly, the policy driven economy is wildly popular with both political parties because it affords them the best of both worlds. They can achieve their desired centrally planned goals while still paying homage to the free market. And yes, any policy driven economy is full of broken windows.