William_T._Bianco,_David_T._Canon]_American_Polit

Goals of economic policy 533

As our political leaders debate how best to support a growing economy, it becomes

increasingly important to understand the economic policy-making process. Which side

is right about trade policy, and what should the government do, if anything, about trade

deficits? More generally, what is the proper role of the government in a free market

economy? How do political players deal with the conflict that is inherent in economic

policy making?

Goals of Economic Policy

Public policy is a course of action pursued by government to address a specific

problem. Economic policy makers thus attempt to influence the economy with

specific goals in mind. This section will examine those goals, and later in the chapter

we will look at the tools used to pursue the goals. The most important tools are fiscal

policy—taxing and spending policy that is created by Congress and the president—and

monetary policy—control of the money supply and interest rates, which is primarily

the domain of the Federal Reserve System, or “the Fed.”

Many economic policy goals seem obvious, such as full employment (clearly,

it is better to have more people working than not working). However, it may be

less obvious why other goals, such as promoting stable prices and market growth,

are important for the economy. These varied goals are often difficult for policy

makers to pursue simultaneously because there are trade-offs among some

of them.

Full Employment

Employment seems like a good starting point for a healthy economy. If people have

jobs, they pay taxes and do not depend directly on the government for support. Despite

this, full employment was not an explicit goal of economic policy until 1946, when

Congress passed the Employment Act. Leaders were concerned that with millions of

World War II veterans returning and the wartime economy gearing down, the nation

might slide back into the economic depression that had created so much hardship in

the 1930s. Although the act was largely symbolic (it did not create a guaranteed right to

employment), it did create the Council of Economic Advisers (CEA), which provides

the president with economic information and advice. A more concrete effort to ensure

that returning veterans could find jobs was the 1944 Servicemen’s Readjustment Act

(the GI Bill). By the time this law expired in 1956, it had provided low-interest home

mortgages for 2.4 million veterans and higher education assistance to 7.8 million

veterans. Today the government seeks to support the creation of as many jobs as

possible by maintaining a strong economy. By early 2014, the number of American

workers finally reached the level of employment before the 2008–2009 recession,

but policy makers disagreed over whether more government action was necessary to

stimulate more job growth.

On a technical level, “full employment” does not literally mean that everyone is

working. Instead, economists consider a 4 to 4.5 percent unemployment rate to be the

level of full employment, or the “natural rate of unemployment.” This accounts for

the substantial portion of potential workers who are not looking for a job, and a certain

amount of “frictional unemployment” when people are between jobs.

EXPLAIN THE MAIN

PURPOSES OF GOVERNMENT

INVOLVEMENT IN THE

ECONOMY

public policy

A course of action pursued by

government to address a specific

problem.

fiscal policy

Government decisions about how to

influence the economy by taxing and

spending.

monetary policy

Government decisions about how to

influence the economy using control

of the money supply and interest rates.

full employment

The theoretical point at which all

citizens who want to be employed

have a job.

economic depression

A deep, widespread downturn in the

economy, like the Great Depression of

the 1930s.

Council of Economic Advisers

(CEA)

A group of economic advisers, created

by the Employment Act of 1946, that

provides objective data on the state

of the economy and makes economic

policy recommendations to the

president.

It’s a recession when your neighbor

loses his job; it’s a depression

when you lose your own.

—President Harry Truman

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