How to make better economic policy choices

LONDON– The United Kingdom is entering its deepest recession in 300 years. Millions of jobs are at risk. And national debt has exceeded 100% of GDP. Now is hardly the time to explore the conceptual underpinnings of economic theory, right?
In fact, as governments everywhere are borrowing, spending, and regulating on an unprecedented scale, a deeper understanding of economic decision-making is essential both to accelerate the recovery and to avoid longer-term risks. That is why the UK Treasury’s new guidance on decision-making for transformational change is so welcome, and why finance ministries everywhere should follow suit.

In a recent study for the UK’s Better Regulation Executive, we found that, while public policy organizations are increasingly diversifying their approaches to decision-making, many remain overly reliant on static tools such as cost-benefit analysis. Such tools are ill-suited to understanding, predicting, and driving innovation and structural change in the economy.