The Importance of Macroeconomic Objectives

The Importance of Macroeconomic Objectives

1. Full employment, or low unemployment

Although this objective was not considered so important in the 80s, when unemployment rose to over 3 million, it is still considered important by most economists, and the current Labour government have certainly made the goal of full employment more prominent.

It is important to keep unemployment levels as low as possible. High unemployment is expensive for the government and, therefore, for the taxpayer. For every unemployed person, there are two costs to the government. First, the unemployed worker will be entitled to benefit, and if he/she is young, or older but remains unemployed for a long period of time, he/she will be offered training under the 'New Deal'. Secondly, there is the less obvious cost of the loss of income tax revenues the worker would have paid in work. These workers would have been paying VAT as well through their purchases. Put together, some economists have estimated that the cost to taxpayers of each unemployed person is up to £9,000 a year.

Full employment, or low unemployment

There are other costs of unemployment. There is the cost to the whole economy in terms of wasted, unused resources. The existence of any idle resources means that the economy will be at a point within its production possibility frontier (PPF).

Unemployed workers (young men, in particular) may create other external costs in the economy, like crime for example. The governments of the 80s always dismissed the coincidence of rising crime figures and rising unemployment. Was it really a coincidence, given that many of the new unemployed were young school leavers with no experience in work?

Finally, there is the personal human cost to each worker. In the short term the unemployed worker has to put up with the loss of earnings, although this may be balanced by redundancy payments. But in the long run, the long term unemployed will find it harder and harder to find a job, as they find that the skills they have become less relevant and they have had no new training.

2. Price stability

Some would say that the main reason why the control of inflation is so important is that if inflation gets out of control, the economy stops growing. If inflation rises, the Monetary Policy Committee (MPC) is forced to raise interest rates. Consumers will stop borrowing to spend and firms will stop borrowing to invest. The housing market will slump, and along with it all the home improvement consumption that goes with it. Manufacturers exports will become less competitive. The economy may well drop into a recession.

Many economists worry about the redistributional effects of inflation. Periods of high inflation cause redistribution from savers to borrowers. Inflation erodes the real value of all money. Hence, if you are a net saver, the real value of your savings will fall, which is bad for the saver, but if you are a net debtor, the real value of what you owe will fall, which is good for the borrower.

The interest rate that is earned on one's saving will usually be higher than the inflation rate, but there have been times when the rate of interest does not keep up with the inflation rate, and so savers are paid a negative real interest rate. The best example of debtors gaining from inflation is the housing market.

Most of your parents will have 'made' money on their house. Of course, they do not 'realise' (i.e. get their hands on) this gain in wealth whilst they live in the property, but their mortgage remains relatively constant (especially if they are on a fixed rate mortgage) as their earnings rise over the years. Also, they can borrow against the increased value of the property to buy a car, go on holiday or extend the house.

Economists do not like this redistribution from savers to borrowers. It penalises thrift, which is a bad thing for the economy because, over the long term, the amount of investment in an economy is closely related to the amount of saving.

There are two minor costs of inflation. 'Shoe leather' costs refer to the time wasted (and worn shoe leather!) searching the market place for the lowest price. This is much harder when inflation is high. High inflation tends to coincide with variable inflation and, therefore, very unstable prices.

'Menu costs' refer to the costs of inflation to businesses in terms of continually having to change their menus, price tags, vending machines, etc. due to the continually changing price.

3. High (but sustainable) economic growth

Some would say this is the most important of all the objectives. Why? Since economic growth leads to improved living standards. Obviously this is good for the inhabitants of an economy.

Unfortunately, there always seems to be a trade-off between efficiency and equity in an economy. The most efficient economies in the world have grown the most and their inhabitants have experienced the best standards of living. But these economies tend to have the most unequal distributions of income. The competitive world of the free market creates winners and losers. The winners are exceptionally rich, but the losers can be worse off in absolute terms as well as relative terms unless the government's welfare state is generous.

To be fair, though, successful economies tend to grow so much that the standard of living of the poorest households in the economy still tends to rise. This was known as the 'trickle down' effect.

As the national cake gets bigger, the poor may well be getting a smaller slice (worsening distribution of income), but that slice will still constitute more cake as time goes by.

4. Balance of payments in equilibrium

For developed economies with mature and free capital markets, balance of payments disequilibria are not so important nowadays. If a developed country has, for example, a current account deficit, it can usually attract enough foreign investment on the capital account to balance their books. In other words, they can finance the deficit.

Some economists argue that it is a bad thing, but more in the sense that it is a sign of the uncompetitive-ness of the economy's industries. Economies with continual current account deficits are not 'paying their way' in the world.

The problem lies with developing countries that experience large current account deficits over a long period of time. They may simply not be able to finance this deficit. They need to pay for the imports in the currency of the country from whom the goods are bought. The US dollar is usually accepted worldwide. If they can't earn enough US dollars to pay for their imports, can't attract the foreign investment and can't convince other countries to lend them money, then they will be in trouble. Countries in this much trouble can knock on the door of the International Monetary Fund (IMF) looking for funds. These will only be lent under quite severe economic conditions, like keeping government spending down to a prohibitively low level.

Current account surpluses might not seem so bad (I'd prefer my bank account to be in surplus rather than deficit!), but they do mean that the economy is sacrificing consumption at home for exports abroad. Also, they can be bad for the simple reason that one country's surplus is another country's deficit. It is probably best not to ruin a country to which you export. Also, one doesn't want to sour trade relations, otherwise you might provoke a trade war (The USA and Japan have a lot of history here - see the previous Learn It). The USA and the EU are currently arguing over the labelling of products that contain genetically modified (GM) materials.