4.5.4 Macroeconomic Policies in a Global Context

Reduce fiscal deficits & national debts

• Debt is not necessarily bad as it can be used to leverage growth - but unsustainable debt is bad
  • One study found that once debt exceeds 90% of the annual GDP, it becomes unsustainable very quickly
• With the recent willingness of Central Banks to print new money to facilitate quantitative easing, questions have been raised about the need to borrow to finance capital expenditure - why not print it?
• The use of austerity to reduce deficits & debts has long term effects & creates hardship for many households. It also increases inequality as many government services are cut e.g. 800 libraries have closed in the UK since austerity was implemented in 2010

Reduce poverty & inequality

• Countries have different approaches
• Some have a progressive tax system which helps to redistribute income based on financial need (means tested)
• Others have a progressive tax system plus free education & healthcare for all
• The measures taken to reduce poverty & inequality are very much influenced by political ideology & normative economics e.g. there is a strong bias against free healthcare in the USA as many people believe that equates to socialism
  • Meanwhile data shows that the healthcare system in the USA is one of the most inefficient in the top 50 wealthiest countries in the world

Changes in interest rates & the supply of money

• Central Banks can change interest rates & the supply of money based on the internal needs of their economies - & they often do
• However, sometimes they have to react to global dynamics that present problems e.g. the exchange rate may depreciate as other countries raise interest rates. They may wish to keep interest rates lower but to stabilise the currency they have to respond by raising interest rates
• There is also some debate about the extent to which the money supply can be controlled
• Different views exist on the role that an increase in the money supply plays in creating inflation 
  • Milton Friedman (a Monetarist) held the view that "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output"
  • This opposes the Keynesian view that inflation is the result of a change in output
  • The global money supply has increased enormously since 2010 as a result of quantitative easing e.g. between March 2020 & the end of 2021 the USA had increased the money supply by $6.3 trillion
    • In early 2022 inflation began to spike globally confirming the fears of many monetarists

Increase international competitiveness

• These typically include protectionism, currency depreciation & the use of supply side policies
• The effectiveness of these policies depends on the response of trading partners
• Policies to improve international competitiveness can result in creating internal domestic conflicts which are difficult to resolve e.g. by protecting the steel manufacturing industry in the UK, the cost of steel as an input for broader industry increases
  • Employment gained in steel manufacturing is very likely surpassed by employment lost in steel related industries as a result of the increased costs of production

Inaccurate information

• Data often lags reality as underlying economic conditions can change quickly
• Data on unemployment, inflation, GDP growth etc. is useful for identifying trends, but the reason for the trend may not always be clear & policy decisions may be based on incorrect assumptions

Risks and uncertainties

• Identifying risks & establishing the uncertainties contained within any policy decision can be a very difficult task indeed
• The risks may be greater than expected
• The uncertainties may not even be identifiable when the policy is instituted e.g. the impact of the Brexit vote contained many foreseen outcomes (e.g. loss of free movement), but there were also many uncertainties which were not recognised e.g. the need for many small UK firms to relocate operations to Europe in order to avoid excessive export costs

Inability to control external shocks

• As mentioned above, external shocks have a ripple effect on economies around the world & globalisation makes it very difficult to protect against them