Abstract
Abstract This paper uses hysteresis to develop the concept of policy lock-in and lock-out. Policy changes may near-irrevocably change the economy’s structure, thereby changing the distribution of wealth, income and power. That may lock-in policy by changing the political equilibrium. Exit costs that block policy reversals also cause lock-in. Conventional thinking treats policy as a dial which is adjusted according to the economy’s state. Policy lock-in questions the dial formulation and raises new issues for optimal policy design. It also offers insights into economic and political crisis theory. Policy lock-in is illustrated with examples that include tax policy, government spending, the euro, globalization, and the neoliberal policy experiment.
Highlights
This paper explores the notion of lock-in and lock-out via economic policy
Changes to the economy’s structure generate changed economic outcomes concerning distribution of wealth, income and power, and those economic outcome changes in turn induce changes in political outcomes. The latter effect has been emphasized by Palley (2013, Chap. 12) and Acemoglu and Robinson (2013), both of whose analysis is highly complementary to the proposed framework of policy lock-in
The current paper aims to apply it to the theory of economic policy
Summary
This paper explores the notion of lock-in and lock-out via economic policy. The paper argues that policy decisions may irrevocably or near-irrevocably change the structure of the economy, thereby changing the economy’s characteristics and performance. If there exists a switch-off threshold that reverses the change, the lock-in process is standard two-sided hysteresis. If there is a switch-off threshold, the system corresponds to standard hysteresis and the economy can shift between policy regimes according to the evolution of the state of political sentiment.
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