How Does Macroeconomic Policy Fit Into The Picture Of Any Country's Economic Policy?

The major task of macroeconomic policy today is to diagnose the condition of the economy and to prescribe the right medicine. As an example, consider the economic issues discussed during the 1966 presidential debates. Unemployment and inflation were both low, as the economy had avoided both recession and high inflation for several years. However, most observers were concerned about the stagnation in the rate of growth and real wages.

As the incumbent, President Clinton argued that the appropriate approach was to continue to reduce the budget deficit while improving human skills. He and his economic advisers reasoned that reducing the government deficit would increase national saving, increase national investment, and thereby increase the growth of potential output.

The Republican challenger Robert Dole preferred to rely upon supply side economics, cutting taxes and expenditures and reducing regulatory burdens. The idea behind this approach was that lower taxes would stimulate saving, investment, and innovation. Skeptics argued that the tax cuts would raise the government deficit and crowd out private investment. The supply side respond that the enhanced incentives would lead to much more rapid output growth, with growth revenues largely offsetting the lower tax rates.