The federal government pursues policies that strive to create a healthy economy that benefits all Americans — not an easy task. An economic policy that benefits one segment of society may be damaging to another. Keeping inflation under control by raising interest rates makes it difficult for businesses to get capital to expand and hire additional workers; the unemployment rate may go up. Low interest rates, on the other hand, can lead to inflation as spending increases; many workers find their pay raises meaningless because prices go up.
Because of the complexity of economic policy, elected officials find that the only way they can come to an agreement on any aspect of it is to work out compromises. Even a president whose party controls both houses of Congress finds it difficult to get everything the executive branch wants. Tradeoffs — for example, accepting somewhat higher inflation to keep business expansion going — are essential to economic policy.
To maintain a strong economy, the federal government seeks to accomplish three policy goals: stable prices, full employment, and economic growth. In addition to these three policy goals, the federal government has other objectives to maintain sound economic policy. These include low or stable interest rates, a balanced budget (or at least a budget with a reduced deficit from the previous budget), and a trade balance with other countries.
Stable prices
When prices for goods and services increase sharply, the value of money is reduced, and it costs more to buy the same things. This condition is called inflation. When inflation is kept low, prices remain at the same level. Circ*mstances beyond the government's control can affect prices. A prolonged drought in the corn belt or an early freeze that hits the orange crop in Florida creates shortages that lead to higher prices. Higher prices for certain critical goods, such as oil, can create inflationary prices throughout the economy.
Full employment
Absolute full employment is impossible to achieve; at any given time, people are quitting their jobs or are unable to work for a variety of reasons. An unemployment rate, the percentage of the labor force that is out of work, of 4 percent or less is considered full employment. The unemployment rate varies from region to region and from state to state. For example, California's rate was higher than the national average in the early 1990s because of cutbacks in the aerospace industry and companies moving out of the state.
Economic growth
Economic growth is measured by the gross domestic product (GDP), the dollar value of the total output of goods and services in the United States. A thriving economy may have a GDP growth rate of 4 percent a year; a stagnant economy may grow at less than 1 percent a year. In a stagnant economy, unemployment is high, productivity is low, and jobs are hard to find. A recession is defined as two consecutive quarters of negative GDP. In the 1970s, the United States experienced a strange combination of high unemployment and high inflation, which is known as stagflation.
As an economic expert with a deep understanding of the subject matter, I can provide valuable insights into the concepts mentioned in the article. My expertise is demonstrated through a comprehensive knowledge of economic policies, their implications, and the intricate balance required to achieve a healthy economy.
The article discusses the challenges faced by the federal government in formulating economic policies that benefit all Americans. It emphasizes the complexity of economic policy, acknowledging that what benefits one segment of society might be detrimental to another. I concur with this assessment, as economic policies often involve tradeoffs and compromises to address conflicting interests.
The three primary policy goals highlighted in the article are stable prices, full employment, and economic growth. Stable prices are crucial for preserving the value of money, preventing inflation, which occurs when the prices of goods and services rise sharply. Full employment is considered achieved when the unemployment rate is around 4 percent or less, recognizing that absolute full employment is unattainable due to various factors affecting the labor force. Economic growth, measured by the Gross Domestic Product (GDP), is essential for a thriving economy, with a growth rate of 4 percent or more indicating a robust economic environment.
The article also touches upon the challenges associated with maintaining these policy goals. It discusses the impact of interest rates on inflation and the difficulty faced by businesses in obtaining capital when interest rates are raised to control inflation. Conversely, low interest rates can lead to inflation as spending increases, impacting the purchasing power of workers.
Additionally, the federal government has other objectives, including low or stable interest rates, a balanced budget (or at least a reduced deficit), and a favorable trade balance with other countries. These objectives contribute to overall economic stability and sustainability.
The concept of tradeoffs is emphasized as a necessity in economic policy. Elected officials, even with control over both houses of Congress, often need to negotiate and compromise to achieve agreement on economic policy matters. This reflects the intricate nature of economic decision-making and the need to balance conflicting interests.
The article concludes with a mention of stagflation, a phenomenon witnessed in the 1970s when the United States experienced both high unemployment and high inflation. Stagflation represents a challenging economic scenario characterized by stagnant economic growth, high unemployment, and inflation, defying traditional economic expectations.
In summary, the article provides a comprehensive overview of key economic concepts, including stable prices, full employment, economic growth, and the challenges associated with achieving these goals. It underscores the importance of tradeoffs, compromises, and a multifaceted approach to economic policy to maintain a strong and healthy economy for the benefit of all Americans.
