STABILIZATION POLICIES: GOALS AND COSTS

Can we maintain high-level employment without inflation? Almost everyone agrees on this as a major goal. Depression and mass unemployment bring waste and human misery. Inflation erodes the value of savings and may lead to disruptive speculation. But there is less agreement on how to achieve this combined goal. And if we must give up one goal to achieve the other, how shall we decide which should give way?

On such complex problems, we don’t know all the answers. But economics as an empirical science has made great headway in recent decades, both in building better analytical models of the economy and in checking out these models through extensive empirical investigations. Forthnately , by now there is substantial agreement (far more than the general public often realizes) on some broad lines of monetary and fiscal policy to help achieve stable growth. We may not know exactly what leads people to venture over their depth in swimming, but we can agree that it’s good policy to have a competent lifeguard on duty. In the same way, there remain disagreements about the causes of unemployment and inflation, but the disputants still agree on some major policies to minimize these problems.

This chapter looks in detail at some of the major goals of economic policy and at the issues involved in choosing among them. It tries to clarify the goals, and to present modern empirical evidence on the advantages and costs of each of the major goals. Then the next four chapters consider specific governmental monetary and fiscal policies to help achieve the goals—mainly to stabilize the economy at high employment without inflation.

ECONOMIC ANALYSIS
AS THE BASIS FOR POLICY

Economic policy is concerned with how we can make the economy serve us better. Economic analysis (that is, economic theory) is the necessary foundation for sound economic policy. Chapters 5 to 9 have been devoted largely to economic analysis—to developing theoretical models that help to explain the levels of aggregate demand, real output, employment and prices in our basically private-enterprise economy. Now comes the chance to use the theory that you have learned. For this is the theory that should provide a foundation for deciding what governmental policies are most likely to help us achieve our economic goals.

Chapter 3 stressed that there are four big steps to follow in thinking through most policy problems.

1. First, define the problem. This usually involves two parts: (a) understanding the existing situation, and (b) clarifying the objectives you want to achieve through policy action. You need to get a clear picture of where you are and where you want to go.

2. Second, map out the main alternative ways of achieving the stated objectives—the main alternative paths from where you are to where you want to be.

3. Third, analyze carefully the alternative policies outlined broadly in step 2, and make a judgment as to which promises to help most in achieving the goals specified in the first step.

4. Fourth, check your solution, both for flaws in your own analysis and against past experience. History has a way of throwing light on flaws in even the most careful analysis of con temporary problems.

THE GOALS

OF STABILIZATION POLICY

There is widespread agreement on two overriding goals for domestic macro-economic policy.

1. High-level employment of men and machines, avoiding the wastes of large-scale involuntary unemployment.

2. A reasonably stable price level. Many, though by no means all, would add two others:

3. More rapid economic growth.

4. Maintenance of “equilibrium” in our international balance of payments. Virtually everyone agrees, moreover, that policies to achieve these goals must be consistent with a high level of freedom for individuals and businesses in our economic life. Our basic presumption in favor of extensive economic freedom establishes a framework within which generally acceptable governmental policies must fit, except for periods of war or other national crisis.

The basic analyses of economic growth and of international economic relations come later, in Chapters 15 to 18 and 37 to 40, respectively. Thus, this chapter and the immediately following ones are focused on the central problems of maintaining high employment and a stable price level in the domestic economy.