Decision inertia

Econblogger Scott Sumner, extends an excellent comment on one his posts which raises the issue of policy "stickiness", or what I have long thought of as policy inertia.

That there is such a thing as policy inertia is clear from history or from observation of the world around us. An example of policy inertia is that, during the Pacific War, it was decided to base a Royal Navy task force at Singapore, Force Z. It was to be a fairly standard force of aircraft carrier (HMS Indomitable), battleship (HMS Prince of Wales), battlecruiser (HMS Repulse), and support ships (four destroyers). Unfortunately, HMS Indomitable ran aground in the Caribbean en route. Yet the deployment of the rest of the Task Force went ahead anyway. As a result, Force Z lacked naval air support and HMS Prince of Wales and HMS Repulse were sunk by Japanese aircraft off the coast of Malaysia. (Yes, Admiral Tom Phillips was a dill who did not believe in airpower and failed to call for the RAF air support that was fueled and waiting, but the lack of an aircraft carrier made Force Z much more exposed to air attack in the first place; Mediterranean experience being that even a small number of fighter aircraft could break up attacks on ships even if the attacking aircraft were also supported by fighters.) There was a good reason why an aircraft carrier had been originally assigned to a task force operating in such open waters and HMS Indomitable's mishap should have changed the deployment decision, but policy inertia kicked in.

Generally, changing a policy involves higher institutional transaction costs than keeping with the current policy. People have to come to a new agreement, orders have to be changed, new arrangements worked out, etc. If reputation or credibility effects operate, the costs rise further. If changing the decision involves increased uncertainty (e.g. because past experience provides little or no guidance), that raises costs again; further increasing the policy inertia.

Policy inertia (or policy stickiness, in economic jargon) is an observable tendency of organisations and, if one thinks about it, not a surprising one.

Indeed, a certain amount of price stickiness can be understood as being a form of policy inertia, not merely within the firm but also the signaling and other costs involved in communicating changes in existing arrangements with its customers/clients.

Taking it further, policy inertia is an institutional form of cognitive inertia; the tendency to continue with patterns of action or beliefs in an unconsidered fashion. There has to cognitive inertia, we simply do not have the time or cognitive capacity to continually re-assess every decision; so we use habits, routines and other cognitive shortcuts. Similarly, organisations would find it very costly to reconsider every decision all the time. Particularly when you consider the signaling costs to their own staff and other stakeholders and the problematic effect on expectations.

Of course, if you are a central bank and essentially a single decision (monetary policy) is your raison d'etre, then policy inertia is less acceptable. Alas, reputation affects are likely to be particularly strong (and, sadly, get worse the worse economic conditions get since the amount of avoidable economic misery your policy failures are causing mounts and so the greater the implied humiliation in changing policy).

Either way, policy inertia (or what we more broadly might call decision inertia) should be a feature of institutional and macro-economic analysis.