Government Macroeconomic Intervention: Conflicts Between Aims

Governments often face the challenge of pursuing multiple macroeconomic objectives simultaneously. Two frequently conflicting aims are achieving full employment and maintaining a stable balance of payments. This section explores these conflicts in detail.

Full Employment vs. Balance of Payments Stability

Full Employment refers to a macroeconomic state where the maximum number of people who want to work can find employment. It is generally considered a desirable goal as it reduces poverty, increases national income, and boosts confidence.

Balance of Payments (BoP) is a record of all economic transactions between a country and the rest of the world over a period of time. A current account deficit occurs when a country imports more goods and services than it exports, leading to a drain of domestic currency. A large current account deficit can weaken a country's currency and potentially lead to economic instability.

The conflict arises because policies aimed at boosting employment can often worsen the balance of payments, and vice versa.

Policies Affecting Full Employment and Balance of Payments

Here's a table summarizing policies and their potential impact on both objectives:

Policy	Impact on Full Employment	Impact on Balance of Payments
Expansionary Fiscal Policy (Increased Government Spending, Reduced Taxes)	Generally increases employment. Increased government spending directly creates jobs. Reduced taxes leave more money in consumers' hands, boosting demand.	Can worsen the balance of payments. Increased demand leads to higher imports. If the increased spending is financed by borrowing, it can increase demand for foreign currency, weakening the domestic currency.
Expansionary Monetary Policy (Lower Interest Rates)	Generally increases employment. Lower interest rates encourage borrowing and investment, boosting economic activity and job creation.	Can worsen the balance of payments. Lower interest rates can lead to capital outflow (investment in other countries), increasing demand for foreign currency and weakening the domestic currency. Also, increased domestic borrowing can lead to higher imports.
Contractionary Fiscal Policy (Reduced Government Spending, Increased Taxes)	Generally reduces employment. Reduced government spending directly reduces jobs. Increased taxes leave less money in consumers' hands, reducing demand.	Can improve the balance of payments. Reduced government spending lowers demand for imports. Increased taxes reduce disposable income, potentially leading to lower import demand. Can also strengthen the domestic currency.
Contractionary Monetary Policy (Higher Interest Rates)	Generally reduces employment. Higher interest rates discourage borrowing and investment, slowing economic activity and potentially leading to job losses.	Can improve the balance of payments. Higher interest rates attract foreign capital, increasing demand for the domestic currency and strengthening it. Reduced domestic borrowing also lowers import demand.

Examples of Conflicts

Example 1: Boosting Employment through Increased Government Spending

Suppose a government decides to increase spending on infrastructure projects (e.g., building roads and bridges) to create jobs. This will likely boost employment. However, the project will require importing materials and equipment, leading to a higher current account deficit and potentially weakening the domestic currency. This could make imports more expensive and contribute to inflation.

Example 2: Stabilizing the Balance of Payments through Contractionary Policy

If a country has a large current account deficit, the government might implement contractionary fiscal and monetary policies (e.g., raising taxes and interest rates) to reduce demand and imports. This will help improve the balance of payments but will likely lead to a decrease in economic activity and potentially higher unemployment.

Policy Trade-offs

Governments must carefully consider the trade-offs involved when pursuing macroeconomic objectives. There is no easy solution, and the optimal policy will depend on the specific circumstances of the economy. Often, policymakers aim for a compromise, attempting to achieve some degree of progress on both fronts, even if it means slower progress on either.

For instance, a government might implement policies that aim to reduce the current account deficit gradually while also providing some support for employment through targeted training programs or incentives for businesses to hire.

Conclusion

The conflict between full employment and balance of payments stability is a fundamental challenge in macroeconomic policy. Governments must carefully weigh the potential benefits and drawbacks of different policies and consider the overall economic context when making decisions. Understanding these conflicts is crucial for analyzing macroeconomic policy debates and evaluating the effectiveness of government interventions.