Goals of economic policy 535the depression as businesses made less money, wages fell (for those who were still
working), production fell, and real debt increased (that is, when wages were falling by
30 percent, it was much harder to pay off debts, because they couldn’t be repaid with cheaper
dollars). American policy makers were concerned about possible deflation after the Great
Recession of 2008–2009, but those fears subsided as inflation remained at a low level.^6
Typically, unemployment and inflation are not high at the same time. The unusual
period of relatively high unemployment and inflation in the 1970s generated two new
economic terms to describe this phenomenon: “stagflation” (a stagnant economy with
inflation) and the “Misery Index” (the sum of the inflation rate and the unemployment
rate). The Misery Index started to creep up in 1970–1971, and policy makers were
desperate to do something about it. President Nixon wanted to halt inflation in its
tracks, in part to help his reelection chances in 1972. He announced a 90-day wage
freeze in 1971, followed by wage and price controls after his reelection. The experiment
was abandoned in 1974 when it became obvious that interfering with market forces in
these ways was not working.^7 From that point on, fighting inflation has largely been left
to the Federal Reserve, which raises interest rates to cool down the economy. We will
discuss this process later in the chapter.Promotion of the Free Market and Growth
The American economy is a capitalist system, which means that most economic
decisions are voluntarily made between individuals and firms for their mutual benefit.
The government generally stays out of most economic activity, except to regulate the
market when it produces too much of something that is not in the public’s interest, such
as pollution or unsafe products. Economists tout the advantage of the free market as
promoting the most efficient use of resources. Economic growth is also a central goal.
Growth is seen in an increase in gross domestic product (GDP), a measure of the
nation’s overall economic output and activity. A growing economy provides a better
standard of living for each generation.
Though government does not get directly involved in most economic transactions,
it can provide the foundation for a strong free market and economic growth. The
government protects property rights so that businesses that invest in the growth of
their company know that another firm or the government cannot appropriate their
property. Property rights also cover intellectual property, which is protected by patent
and copyright laws. If entrepreneurs know that they will benefit from their own
discoveries and labor, they are more likely to put in the countless hours required for
innovative breakthroughs in science, technology, and medicine. The government also
guarantees the security and transparency of capital markets through the oversight
of the Securities and Exchange Commission and provides a secure banking system
through the Federal Deposit Insurance Corporation and the Federal Reserve System.
Critics of the government’s focus on the market and growth claim that the free
market often produces inequality and that growth doesn’t measure well-being. This
was a big issue in the 2016 Democratic presidential primaries as Bernie Sanders made
income inequality the centerpiece of his campaign. But historically, the United States
has not focused as much on this economic policy goal as many other Western nations
have. As a consequence, the United States ranks 115th in the world (out of 156 nations
in the study) in income equality, just behind nations such as Cameroon, Guyana,
Thailand, and Iran, and it has become less equal than Europe in the distribution of
wealth (see Figure 15.2).^8 Other critics of the focus on growth include environmentalists
who advocate a “small is beautiful”^9 approach and point out the environmental costs
of economic growth. In addition, there are economists who question the traditionalgross domestic product (GDP)
The value of a country’s economic
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