People in the U.S. have indicated in recent polling that their number one policy priority is “strengthening the economy,” as reported by Pew Research Center. It was the most cited concern by 73% of respondents across the political spectrum. This issue may mean different things to different people, and the ways to achieve it are diverse. A stronger economy may include new businesses, wage growth, low unemployment, low inflation and thriving financial markets.
According to The New York Times, “Economic policies, governmental actions, and political stability have a profound impact on a nation’s economy, while economic conditions, in turn, shape political landscapes.” The Regulatory Politics and Policy course in Murray State University’s online Master of Public Administration (MPA) with a concentration in Economic Development program equips students with the knowledge and skills needed to navigate the complexities of policy.
How Public Policy Affects Economic Growth
Government policies, regulations and fiscal measures play a vital role in shaping the economy. Taxation and government spending have a direct impact on economic growth, investment and consumer behavior. The monetary policies put in place by central banks impact interest rates, the money supply and inflation. Trade agreements, infrastructure development and industry regulations are political decisions that also affect economic growth.
Global events such as geopolitical conflicts, trade disputes and financial crises also have economic consequences. To help mitigate the effects of these types of external forces, domestic economic policies that demonstrate diversification, flexibility and preparedness are crucial.
Outside of the U.S., respondents from 24 countries surveyed also ranked economic reform among the top 10 issues of concern. Issues like taxation, jobs, inflation and wealth inequality, along with infrastructure and services like electricity and clean water, are all seen as benefiting from economic reform.
Political Stability Is Key to Economic Growth
Investors and businesses keep a watchful eye on political stability. When there is transparent governance, respect for the rule of law and consistency in economic policies, domestic economic growth is fostered. However, unrest and frequent policy changes have a chilling effect, resulting in market slowdowns and economic uncertainty.
When political leaders are responsive to the electorate’s concerns, they can impact economic policies and priorities. Public sentiment about socio-economic issues like income inequality and environmental issues can influence public policy.
Economic Activity Reflects Public Sentiment
In a free market economy, consumers and producers mold the economy. What people, businesses and governments want to buy and sell often results in policy changes. The two main ways the federal government responds to economic activity are through fiscal and monetary policy changes.
As governments monitor and respond to economic activity, they may try to engineer economic growth or prevent negative economic growth by enacting policies that will help create jobs, increase wages, support financial market performance and ensure corporate profitability.
Monetary policy involves lowering or raising the federal funds rate, as was done during the pandemic when the rate was quickly reduced to 0%. Another monetary policy affecting the economy is when the Federal Reserve buys and sells government securities.
Fiscal policy controls spending levels and resource allocation. Changing tax rates, introducing tax incentives and adjusting spending help promote economic prosperity. An example is the government’s response to the COVID-19 pandemic when it issued stimulus checks to encourage spending and economic activity.
Achieving Economic Growth and Stability
Following the global pandemic, fiscal policy has made great progress toward normalization. Due to the pandemic’s economic contraction and massive government support, public debt surged in 2020. However, according to the International Monetary Fund (IMF), fiscal deficits have declined since pandemic-related fiscal measures ended.
The IMF states that, “amid high inflation, tightening financing conditions, and elevated debt, policymakers should prioritize keeping fiscal policy consistent with central bank policies to promote price and financial stability.”
Tightening up fiscal policy slows down the increase in interest rates, which helps control borrowing costs. However, the IMF warns that fiscal policy may need to intervene swiftly if economic activity weakens, and unemployment rises.
Today’s fluctuating economic climate presents opportunities for those interested in municipal development and building private-public partnerships. Learning how public policy and the economy work together is the basis of policy analysis. Murray State University’s online MPA in Economic Development program gives students a foundation for restructuring market incentives to leverage private investment, developing community-based businesses, affordable housing and financial institutions.
Learn more about Murray State University’s online MPA in Economic Development program.
