I think that having good data, good statistics-and the United States generally has better macroeconomic statistics than most countries-and having good economists to interpret those data and present the policy alternatives, has a substantially beneficial effect on policymaking in the United States.
Introduction to Macroeconomics (Part B)
by
Charles Lamson
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Macroeconomic Concerns Three of the major concerns of macroeconomics are:
Government policymakers would like to have low inflation, high output growth, and low unemployment. They may not be able to achieve these goals, but the goals themselves are clear. Inflation and Deflation Inflation is an increase in the overall price level. Keeping inflation low has long been a goal of government policy. Especially problematic are hyperinflations, or periods of very rapid increases in the overall price level. Most Americans are unaware of what life is like under very high inflation. In some countries at some times people were accustomed to prices rising by the day, by the hour, or even by the minute. During the hyperinflation in Bolivia in 1984 and 1985, the price of one egg rose from 3,000 pesos to 10,000 pesos in 1 week. In 1985, 3 bottles of aspirin sold for the same price as a luxury car had sold for in 1982. At the same time, the problem of handling money became a burden. Banks stopped counting deposits---a $500 deposit was equivalent to about 32 million pesos, and it just did not make sense to count a huge sack full of bills. Bolivia's currency, printed in West Germany and England, was the country's third biggest import in 1984, surpassed only by wheat and mining equipment (Case & Fair, 2004). Skyrocketing prices in Bolivia are a small part of the story. When inflation approaches rates of 2,000 percent per year, the economy and the whole organization of a country begin to break down. Workers may go on strike to demand wage increases in line with the high inflation rate, and firms may find it hard to secure credit. Hyperinflations are rare. Nonetheless, economists have devoted much effort to identifying the costs and consequences of even moderate inflation. Does anyone gain from inflation? Who loses? What costs does inflation impose on society? How severe are they? What causes inflation? What is the best way to stop it? These are some of the main concerns of the macroeconomists.  A decrease in the overall price level is called deflation. In some periods in U.S. history and currently in Japan, deflation has occurred for more than two decades. While price cuts look good to consumers, steadily falling overall prices can lead to a cycle of low corporate investment and sluggish wages (Fujikawa, Megumi. March 19, 2021, "In Japan, They're Still Worried about Deflation, Not Inflation". The Wall Street Journal). The goal of policymakers is to avoid prolonged periods of deflation as well as inflation in order to pursue the macroeconomic goal of stability. Output Growth: Short Run and Long Run Instead of growing at an even rate at all times, economies tend to experience short-term ups and downs in their performance. The technical name for these ups and downs is the business cycle. The main measure of how an economy is doing is aggregate output, the total quantity of goods and services produced in the economy in a given period. When less is produced (in other words, when aggregate output decreases), there are fewer goods and services to go around, and the average standard of living declines. When firms cut back on production, they also lay off workers, increasing the rate of unemployment. Recessions are periods during which aggregate output declines. It has become conventional to classify an economic downturn as a "recession" when aggregate output declines for two consecutive quarters. A prolonged and deep recession is called a depression, although economists do not agree on when a recession becomes a depression. Since the beginning of the twentieth century, the United States has experienced one depression (during the 1930s), three severe recessions (1946, 1974-1975, and 1980-1982), and a number of less severe, shorter recessions (1954, 1958, 1990-1991, and 2001). Other countries have also experienced recessions in the twentieth century, some roughly coinciding with U.S. recessions and some not. There is more to output than its up-and-down movements during business cycles. The size of the growth rate of output over a long period (longer, say, than the typical length of a business cycle) is also of concern to macroeconomists and policymakers. If the growth rate of output is greater than the growth rate of the population, there is a growing amount of goods and services produced per person. So, on average, people are becoming better off. Policymakers are less concerned not only with smoothing fluctuations in output during a business cycle but also with policies that might increase the long-run growth rate.  Unemployment You cannot observe the news on radio, TV, the Internet, or print media without noticing that data on the unemployment rate are released each month. The unemployment rate---the percentage of the labor force that is unemployed---is a key indicator of the economy's health. Because the unemployment rate is usually closely related to the economy's aggregate output, announcements of each month's new figure are followed with great interest by economists, politicians, businesspeople, and policymakers. Although macroeconomists are interested in learning why the unemployment rate has risen or fallen in a given period, they also try to answer one more basic question: Why is there any unemployment at all? We do not expect to see 0 unemployment. At any time, some firms may go bankrupt due to competition from rivals, bad management, or bad luck. Employees of such firms typically are not able to find new jobs immediately, and while they are looking for work, they will be unemployed. Also, workers entering the labor market for the first time may require a few weeks, or months, to find a job. If we base our analysis on supply and demand, we would expect conditions to change in response to the existence of unemployed workers. Specifically, when there is unemployment beyond some minimum amount, there is an excess supply of workers---at the going wage rates, there are people who want to work who cannot find work. In microeconomics theory, the response to excess supply is a decrease in the price of the commodity in question and therefore an increase in the quantity demanded, a reduction in the quantity supplied, and the restoration of equilibrium. With the quantity supplied equal to the quantity demanded, the market clears.
The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium---that something prevents the quantity supplied and the quantity demanded from equating. Why do labor markets not clear when other markets do, or is it that labor markets are clearing and the unemployment data are reflecting something different? This is another main concern of macroeconomists. *CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, 7TH ED., PP. 378-380* end |
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