Macroeconomic policy

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Macroeconomic policy is concerned with the use of the instruments of fiscal policy and monetary policy to counter the destabilising effects upon the economy of an economic shock such as commodity price surge, a banking panic or the bursting of an housing price bubble. It is about decisions taken in anticipation of, or in response to, a downturn in economic activity, and it is also about decisions concerning the fiscal consolidation measures needed to correct an increase in the budget deficit resulting from such a downturn. The decisions required in both cases concern the selection of instruments and the determination of the magnitude and timing of their application.

## Overview[edit]

The major influence upon macroeconomic policy is the understanding of the workings of the economic system that has been brought about by the study of macroeconomics, but its conduct tends also to be influenced by political ideologies, by attitudes to public debt, and by reflexive and analytical responses to the outcomes of previous policy applications.

## Historical background[edit]

Recessions and lesser fluctuations have punctuated the growth of the major economies from time to time since the 18th century, but there was no policy response to any of the recessions of the 19th century or before. In the early 20th century, the prevailing attitude to recessions was the teaching of the Austrian School led by Friedrich Hayek in London, and supported by eminent American economists. It was held that to stimulate consumption through inflationary policies would perpetuate artificial demand and delay any real cure. Harvard's Joseph Schumpeter argued that there was: :" a presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future;" - and that "depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."[1]. That was the view of United States Secretary of the Treasury, Andrew Mellon, (who has been quoted as advising President Hoover that the depression would "purge the rottenness out of the system") and it was shared by Britain's Chancellor Phillip Snowden.[2] They agreed that expansionary monetary and fiscal policies should be avoided because they would reduce investor confidence and hinder the resumption of private investment.

The first example of an active macroeconomic policy was the New Deal response to the Great Depression of the 1930s, although it involved a fiscal stimulus that was small by comparison with the loss of output that had occurred. By the 1940's, however, John Maynard Keynes' proposal that governments should counter downturns in demand by cutting taxes or increasing public expenditure, had achieved the status of orthodoxy, and a Keynesian consensus dominated the macroeconomic policies of the developed countries for two or three decades following the second world war.

## Recent developments[edit]

1. ↑ Joseph A. Schumpeter, Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism (Transaction Publishers, 1989), 117.
2. ↑ Paul Kugman: The Conscience of a Liberal, New York Times November 7 2007