From the beginning of the 1980s through 2007, the world experienced a long economic expansion, characterized by a steady expansion of GDP, employment growth, and modest inflation rates.
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The question that we are left to ponder over is as most economists got used to this kind of situation, was it likely that policy makers became complacent about regulating these economic bubbles that began emerging in the 1990s and in the early 21st century?
The honest response to this is yes. Policy makers became complacent in some ways.
For a country like the United States of America, it has witnessed significant changes in its real output over a number of years. For instance, just before the Second World War, it experienced yearly changes in its real GDP.
However, over the following few decades, these fluctuations in real output stabilized. What is important to note therefore is, all policy makers have certain goals that they look at for a stabilization policy.
They are; a stable expansion in real GDP, a stable level of commodity prices, and a moderate growth in the employment levels.
However, what is disturbing is that it is not so clear how such milestones can be achieved leading to some sort of disagreements.
If at all monetary and fiscal policies could add an economic stimulus when there are economic slowdowns and also be restrictive when there are inflationary booms, the ups and downs in the business cycle would significantly reduce.
There are those with the view that policy makers need to respond to changing economic conditions and develop policies in a manner that will boost economic stability.
However, others believe that such use of monetary and fiscal policies as a countenance to the changing economic environments may be harmful than beneficial.
However, they agree that carrying out a macro policy in a stable way is a difficult task. This turns out to make them develop long term policies and may make them complacent yet some policy changes may be required.
History has it that some practical problems may arise in regard to policy makers developing policies appropriately as and when needed. The first one relates to time.
In this regard, too much time is required to identify the correct timing for a policy change, more time to implement the policy change, and additional time for the change to begin impacting the economy.
The second problem relates to forecasting. Owing to the time issue, policy makers have to be aware of what the economic situations might be in the next half or full year.
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These aspects serve to prove the point therefore that when there is stability in real GDP, employment, and there is modest inflation, policy makers might indeed become complacent.
Crisis management always has some sort of impact on the long term strategic policy making. History has it that economists and policy makers often respond to crises by instituting and developing policies that have an effect on the problems faced then.
The implication is that since policy making is a time related issue, once policies have been developed around that particular crisis, complacency sets in until another form of crisis arises necessitating a policy change.
Therefore, it is significant to quip that it is inappropriate to focus policy making around certain forms of crises.
A good example of crisis management is through the Volcker rule. It gained prominence around 2008- 2009 specifically to ensure that any financial crises are managed and regulated in future years.
It gains its roots from the Great Depression, a period after which saw many banks assuming many financial risks that led to unfathomable problems.
The result was the formation of policies that were suited for crisis experienced then but would not salvage the whole problem. However, inflation was moderated in the Volcker years to low levels.
During the Volcker years, the kind of response witnessed of the monetary policy towards inflation was strong and stable. However, during this time, the economy went through hard shocks that negated some of the gains that had been achieved during this time.
However much was done to ensure that as the bubbles in the economy remained fixed, their intensity would be regulated to be in perfect fit with the average volatility over the years.
By so doing, the levels in the pricing substantially reduced instead of going up as could have been expected; there was employment growth, and really good levels of production output.
As evidenced during this time, inflation for instance reduced by 3%. There are policy actions that are still worth pursuing.
However such actions should not be anchored on crises but proper strategies to cover future occurrences that might occur. According to history, crises are not the best policy forecasts.
The growth in economy is good. However, growth in GDP, employment, and reduction in inflation is not necessarily a blessing. Policies are always important and as shown in the paper, policy makers might sleep on their job.