[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

significant periods of deflation since the Great Depression of the 1930s, and many
were concerned that falling prices would again be associated with depressed economic
conditions. Many pointed to the experience of Japan, where deflation had
accompanied a decade-long recession during the 1990s. The Federal Reserve under
Alan Greenspan had shifted policy in early 2001 to help stimulate economic growth
by lowering interest rates, but by 2003, interest rates were almost down to zero, and
some feared that the Federal Reserve would be unable to provide further stimulus.
Concerns lessened during 2004 as the economy continued to grow, unemployment
edged downward, and fears of deflation disappeared. With the economy expanding,
Federal Reserve policymakers gradually began to raise interest rates as they focused
on preventing an upswing in inflation.
As this book goes to press in 2005, two major macroeconomic issues are dominating
the news. President Bush has made Social Security reform a major part of his
domestic agenda. Both Democrats and Republicans agree that some changes must
be made to the Social Security program to ensure its future financial health, but
the two parties differ significantly in the ways they want to change the program.
Some of the issues at the heart of this debate will be discussed in Chapter 38. The
second major issue is the federal government’s budget deficit. Tax cuts and spending
increases since 2000 have led to massive deficits. The impact of government
deficits on the economy will be studied in Chapter 25.
“Deflation” was a concern that occupied
policymakers in the first years of the
twenty-first century.The U.S. economy
had not experienced severe deflation
since the Great Depression of the 1930s.
THE THREE KEY GOALS OF
MACROECONOMIC PERFORMANCE
For more than half a century, the American government has been formally committed
to achieving a number of important macroeconomic goals. As the Employment
Act of 1946 states, the “Congress hereby declares that it is the continuing policy and
responsibility of the Federal Government . . . to promote maximum employment,
production, and purchasing power.” These goals were further defined in the Full
Employment and Balanced Growth Act of 1978, better known as the Humphrey-
Hawkins Act, after the bill’s chief authors, Senator Hubert Humphrey (D-Minn.)
and Representative Augustus Hawkins (D-Calif.). The Humphrey-Hawkins Act formally
makes it the policy of the federal government to “promote full employment
and production, increased real income, balanced growth, a balanced Federal budget,
adequate productivity growth, proper attention to national priorities, achievement
of an improved trade balance through increased exports and improvement in the
international competitiveness of agriculture, business, and industry, and reasonable
price stability.”
Three of these aims have come to represent the key goals of macroeconomic
policies—full employment, economic growth, and price stability. Full employment
ensures that all those willing and able to work can find jobs; economic growth ensures
that material standards of living will rise; and a low and stable rate of inflation
aids individuals in planning for the future. Macroeconomists are constantly studying
the causes of slow growth, unemployment, and inflation. Understanding
the causes of these problems is the first step toward designing policies to improve
macroeconomic performance.
THE COMMITMENT TO FULL EMPLOYMENT AND GROWTH ∂ 481