Theorie Part 5

In Part I, we observed that the official policy aims for Germany include achieving growth, high employment, stable prices, and a favorable balance of payments (BoP). Similar lists of official policy aims can be found for most other countries as well.

• For instance, in Sweden, the overall objective of the government's economic policy is to create the highest possible level of welfare. This is pursued by contributing to:

  • A high level of sustainable economic growth and employment through structural policy.

  • A welfare system that benefits everyone through distribution policy.

  • Maintaining a stable and high level of resource utilization through stabilization policy.

• These objectives highlight the government's focus on promoting economic growth, employment, and welfare for all citizens while ensuring stability in resource utilization.

• Government policies, including those of the European Union and central banks, have diverse and sometimes imprecise aims. The key difference lies in their perspectives on how economies work, with a focus on either supply-side or demand-side policies.

European Union (Art 3 TEU)

The European Union's goals include establishing an internal market, promoting sustainable development with balanced economic growth and price stability, and creating a competitive social market economy with full employment and environmental protection. It also aims to combat social exclusion, ensure social justice and equality, and foster solidarity among member states. Additionally, the EU strives to establish an economic and monetary union with the euro as its currency.

European Central Bank (Art 127, TFEU)

1. The primary objective of the European System of Central Banks …shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union… The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.

2. The basic tasks to be carried out through the ESCB shall be:

   • to define and implement the monetary policy of the Union,

   • to conduct foreign-exchange operations consistent with the provisions of Article 219,

   • to hold and manage the official foreign reserves of the Member States,

   • to promote the smooth operation of payment systems.

German Bundesbank (before EMU)

The Deutsche Bundesbank's duties, as per the 1998 Bundesbank Act, include regulating money and credit to safeguard the currency, overseeing payments, and stabilizing the external value of the Deutsche Mark and the exchange rate.

The US Federal Reserve

The Federal Reserve's primary objectives, mandated by Congress, are to achieve maximum employment, stable prices, and moderate long-term interest rates in the United States. However, the Fed lacks explicit legal protection for its independence, and its goals, such as the 2% rule, are not fully operationalized. Its decisions can be overruled by Congress through legislation, and its status as a central bank is based on a simple law that can be changed by Congress as well.

Economic policy aims have evolved over time, now including concerns for the environment and achieving a more equitable distribution of income and wealth (the "magic hexagon"). Defining and measuring these new objectives is challenging, and adding more goals will increase conflicts among them exponentially.

• Economic policy can be viewed as following a (hopefully) consistent approach how to structure and regulate the economy, or can be seen as a more or less ad-hoc collection of single policy measures.

• Government can have a clear idea about how and to what extent they rely on the market as a coordination mechanism and in which policy areas they believe that the market is defective.

• The opposite ends of the spectrum are centralized planning and fully liberalized markets without government intervention.

• In reality, mixed models are operated, but the specific mix can be highly diverse and changing over time.

  • There are (some) markets even in „socialist“ economies where property rights are mostly allocated to collectives (the „state“, the „people“).

  • All market economies have state intervention and regulation (cf. Part I)

• In market economies, paradigms differ in the emphasis placed on microeconomic policies versus macroeconomic policies.

• Supply-side-oriented policies aim to facilitate production, investment, income generation, and economic growth for firms.

• Markets, in general, are considered efficient and should be supported to function optimally. This involves keeping taxes low and minimizing regulation.

• However, there are limitations to policy effectiveness due to policy conflicts, the Lucas critique, time lags, and the challenges arising from limited knowledge and information faced by policymakers.

• Often, problems arise from previous policy interventions and distortions of private incentives, leading to policy failures.

Summarized short:

Demand-side policies address deficient demand and market failures, using measures like public consumption, higher wages, and active monetary policy. They target limitations in market adaptability, unemployment, and coordination failures caused by externalities. Market failure often necessitates government intervention to address these issues.