Important contemporary issues in economics in 2009 include the use of fiscal and monetary policy in response to economic downturns, the domestic effect of global trade and the economic effects of environmental damage.
How They Do It
Economists and policy makers examine contemporary economic issues in studies, working papers and at meetings such as an annual symposium in Wyoming, sponsored by the Federal Reserve Bank of Kansas City.
Economic crises such as the Asian financial crisis of the late 1990s and the global economic collapse of 2008-09 pose challenges for policy makers who grapple with the appropriate type of response. Global economic integration lends greater poignancy to the consequences of economic slumps. Increased world trade, the globalization of financial services and closer relations among the economies of the world mean that recessions and depressions are harder to contain within a particular nation or region. The 2008 financial crisis originated with the bursting of a bubble in the U.S. housing market, but spread worldwide.
An important consideration for policy makers and economists is how governments should respond to economic crises. Advocates of fiscal largess, which involves increased government spending, contend that this response stimulates the economy. Critics, however, contend that government spending could exacerbate the problems in the long run by increasing inflation and government debt. Proponents of monetary policy claim that central banks are better positioned to manage economic slumps through control of nations’ money supplies. Critics of this approach have responded that monetary policy’s effects take too long to be felt. Interest rate changes by central banks, for example, can take more than a year to be fully felt throughout the economy.
Around the world, nations have lowered barriers to trade with other countries, leading to a larger global marketplace. Expanded free trade, coupled with improvements in technology, have made it possible for consumers around the world to access a greater variety of goods and services. A central principle in economics is that trade benefits all parties involved, but concede that the benefits do not come without costs. Cheaper foreign goods can threaten domestic producers of those goods, possibly resulting in lost jobs. Protecting domestic industries is an argument often used by governments to justify protectionist policies. The major industrialized nations of the world have eliminated most tariffs and other barriers to trade, while developing nations have more of a mixed record. Agriculture is the primary sector of the economy in which most protectionist policies remain in place, even in the leading economic powers.
Pollution is a classic example of what economists call an externality, defined as a consequence of economic activity that affects parties beyond those directly involved in a given transaction. Environmental degradation is a consequence of increased industrial activity. Governments must balance issues of environmental protection with those of economic growth. Reducing environmental damage while still preserving growth has led to the growth in so-called “green” technologies and jobs.
- Principles of Economics (3rd edition), N. Gregory Mankiw, 2003