An economic policy is an action taken to change an economic condition. A tax decrease to speed up the economy, mandatory anti-pollution measures, and quotas on foreign-produced items are all examples of economic policies.Economic policy is the result of a decision by a policy maker such as a business manager, state or local legislature, the Congress, voters, the president, or the Board of Governors of the Federal Reserve.3 In most instances of economic policy creation, several courses of action are available.
For example, a state’s legislature could choose to either increase, decrease, or leave unchanged its sales tax; there are several alternative methods for fighting inflation; and there are many options for easing a foreign trade problem.
It is important when selecting a policy to remember that each alternative carries consequences that may be further reaching than the problem itself. Take the problem of job loss in the auto industry due to imports of foreign-produced cars. A policy could be designed to discourage Americans from buying foreign cars by increasing the tariff (tax) imposed on vehicles as they enter the United States (thereby increasing their price), or by putting quotas, or limits, on the number of imported autos that may enter the United States. The result of this policy to slow down sales of foreign cars could be an improvement in American car sales and in employment for auto workers. But what about the other consequences?
Foreign nations could retaliate by taxing products the United States exports, thus decreasing employment in a different industry. Tariffs or quotas could reduce an important source of competition with U.S. auto makers, or lead to price increases on foreign cars that could worsen an inflation problem as the consumer is forced to pay more. The policy maker must select a course of action not only on the basis of the problem to be solved, but also on the basis of the consequences resulting from the chosen policy.
How Economic Policy Is Made?
A policy decision is based on the value judgment of the policy maker. In the case of foreign-produced automobiles, if the policy maker values jobs in the domestic auto industry as the most important consideration, an effort will be made to enact job-saving legislation. If the main concern is with inflation and the consumer, the policy maker will not favor tariffs and quotas. The question of granting tax credits for college tuition is another example of polio -making and value judgments. Families facing financial difficulties in sending their children to college may favor this type of tax break People who think that existing programs for granting aid to college students are sufficient may find this policy unimportant and oppose it.
Since economic theory explains how economic variables interact, and since economic policy- involves the manipulation of those economic variables, it is crucial that policy makers have some knowledge of these theories and their complexities. If policy makers do not understand basic economic principles, the consequences of their policy decisions could be disastrous. One benefit of a course in economics is that it enables you to evaluate better the consequences of policies and to judge how well or how poorly policy makers are informed.