Macroeconomic Policy and Sustainability

A Broad View of Macroeconomic Policy Goals

Let us review some of the basic functions of macroeconomic policy, broadly conceived.

1. Economic stabilization, avoiding excessive inflation or recession – the best known function, which has often but mistakenly been viewed as the only appropriate goal for macro policy.
2. Distributional equity, which played an important role in early Keynesian analysis and in the work of Sraffa, Kaldor, Joan Robinson, and Kalecki.
3. The achievement of broad social goals, such as income security, education, and universal health care. These were integral to "New Deal" Keynesian policies, but have become incidental in economists' purely quantitative analysis of the macroeconomy.
4. Providing a stable basis for economic development. The dynamics of economic growth were explored by Harrod and Domar and later Solow. These theorists generally assumed that growth was good, considering an ultimate steady-state economy only as a theoretical construct. More recently, ecological economists such as Daly have suggested that growth should be limited and that a sustainable economic scale, rather than exponential growth, should be the goal of macroeconomic policy. Within mainstream economics, the development of endogenous growth theories, taking into account the role of human and potentially of natural capital in long-term growth, provides another perspective on the importance of policy determinants of growth.

The recent macroeconomic crises in Asia and Japan suggest that the first function is more important than implied in the modern, laissez-faire-oriented approach to macroeconomics. The tendency of unregulated capitalist economies to excessive cycles of boom and bust, emphasized by Keynes and dismissed by New Classicists, has been re-explored by Krugman in the light of the Asian crisis.

The importance of the second and third functions has been emphasized by critiques of International Monetary Fund (IMF) and World Bank structural adjustment policies, including those by Joseph Stiglitz. Contractionary macroeconomic policies have devastating effects on social equity, as well as on income distribution, with the heaviest burden of economic contraction being borne by the poorest. Expansionary, export-led growth is no panacea: growing income inequality and loss of social safety nets threatens the "success stories" of rapidly developing nations such as China. Issues of fairness in distribution and social investment need to be included in a redefined set of economic policy goals.

Regarding the fourth function, even the World Bank acknowledges that the scale of global growth poses enormous environmental problems for the twenty-first century. Whether or not Daly's approach to growth limits is adopted, it is clear that economic growth needs to be steered in an environmentally sustainable direction, implying some degree of macroeconomic planning (not in the sense of a centrally-planned economy, but in the sense of indicative planning for long-run energy and resource use, as implied for example by the Kyoto process).

All four functions, not just the first, will be important in the macroeconomics of the twenty-first century. This will require a rethinking and reorientation of both theory and policy, at the national and international levels.