The Goodhart Rule: Worthwhile goals that don't pan out.

• Author: Carey, Merrick

In March 2021, Bloomberg BusinessWeek published an essay on economist Charles Goodhart's 1975 law that "any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes."

The examples cited in the Bloomberg article are interesting, but they are mostly through a regulatory and microeconomic prism. The most important use of Goodhart's law might be in targeting public policy goals. What happens when a giant nation like America, with a gargantuan public sector, decides to focus on such a goal?

In its article, Bloomberg notes the 2 percent inflation goal the Federal Reserve Board, and other central banks, have been targeting. And of course, that target has been shredded in 2021 as the Fed pushed on it so hard that we're experiencing inflation rates three times as high. Now the goal will be the reverse: to get down to 2 percent inflation, rather than up to 2 percent. And the Federal Reserve's massive efforts on the way up may make coming back down a long, painful fight.

Another example of Goodhart's Law applied to public policy might be what happened to America's housing sector in the early twenty-first century. As a society, we decided to target dramatic increases in homeownership starting after World War II, escalating in the 1990s and early 2000s. The full force of the federal government (and many state and city governments) was brought to bear on this seemingly indisputably good idea. And the housing market collapsed in 2008, taking down the rest of the economy with it. The premier homeownership lending agency, Fannie Mae, drove the power of Washington right into the center of the housing boom, and then its collapse.

As a society, we push as many people as possible to get a college degree. Statistics demonstrate that if you obtain a college degree, you will likely make more money. Again, a huge federally backed apparatus rushes in to provide loans to eager students and their families wanting to get ahead, while federal and state governments also pour billions into colleges and universities for every imaginable field and study. And what happens? Millions of students get saddled with crippling debt with above-market interest rates, setting them way back in their lifetime goal of financial success. Many of those students don't even graduate from college, yet still hold that debt. And during recessions, they get creamed. Now the taxpayers have been called in to bail them out, just as they did in the...