8.6 Government and the Economy

Why would government want to get involved in the economy? Nearly every government—conservative or liberal, managed or market-driven—has the same objective: Creating the conditions whereby people can live materially satisfying lives. (As I explained to students in China once, people all over pretty much want the same things: Food, clothing, a roof over their heads, maybe some nice clothes to look pretty on the weekend.) Consequently, most governments typically have three goals in terms of economic management: full employment, price stability and economic growth. If citizens have jobs, they’re happier; if prices are rising too fast, they’re less happy. Growth allows these things to happen even as population grows, and also means higher standards of living. Growth sometimes gets a bad name, though it doesn’t necessarily mean that the suburbs are sprawling across the forests, fields and farms. Full employmentAn employment rate in which everybody who wants a job has one., meanwhile, doesn’t mean zero unemployment. It means that everybody who wants a job has one. In practical terms, that means 3–4 percent unemployment, as some people will be between jobs and some people may be just taking a break. Price stability means a relatively low level of inflation, say, under 3 percent. And if the economy is doing well, the party in power gets the credit and gets to stay in office a while longer.

Economic growthAn increase in the output of goods and services. is an increase in the output of goods and services. It tends to mean more jobs and higher incomes for people, and also access to goods and services on which to spend that income. It’s worth noting that there are in fact only two sources of economic growth: gains in population, and gains in productivity. Gains in population tend to mean an increase in demand, which drives up prices and encourages more supply. Firms hire more workers, who have more income to spend on themselves and their families. Gains in population, however, also generate externalities—more pollution, less open space, more traffic, higher housing prices (a great thing if you’re selling a house, not such a good thing if you’re buying one).

Aside from Chairman Mao in China after World War II, governments typically no longer actively encourage population growth as a matter of policy. Population tends to grow when times are better, as people can afford families, such as during the Baby Boom that followed the post-World War II economic expansion in the United States. In more recent times, however, in industrialized nations such as the U.S., Japan and Europe, birth rates have fallen. Whereas in agricultural societies more children can mean more farmhands, in industrial societies children are an expense. A couple of kids is good; a bunch can get kind of spendy.