Difficulties in Formulating Macroeconomic Policy :: Economics Policy Making Essays

Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker. Policy makers are continually trying to formulate policies that will help the economy achieve these objectives. However, there are numerous difficulties which policy makers are faced with. In a democratic society like the UK, the macroeconomic objectives are not under the sole control of the Government. For example, the level of employment depends on the decisions not only of the government (e.g. for employment in the public sector) but also of private firms as to how many workers they wish to employ. Also, membership to international organisations (i.e. WTO or EU etc.) means that the international regulations and directives must be adhered to and cannot be altered. Therefore, the freedom of action of the policy maker is restricted, as the new policy must function along side existing international policies. Most policies are designed against the background of a theoretical model. However, there is no ‘true’ model and so different policy makers and economists may have different views to certain economic variables. Therefore, each policy maker will formulate different policies based on their views in order to achieve the same objective. For example, Keynesians view that consumption expenditure depends upon current disposable income. Whereas Milton Friedman argued that consumption is related to permanent rather than current income. He was therefore more sceptical about he usefulness of a tax change for stabilisation purposes than one who believes that consumption depends on current disposable income. Policy makers usually use Fiscal policy to alter the level, timing or composition of government expenditure and/or the level, timing or structure of tax payments. And they use Monetary policy to alter the supply of money and/or credit and also to alter interest rates. But some policies are not always successful; a good example was the decision to use monetary policy to solve the liquidity trap. This policy aimed to reduce interest rates and stimulate investment