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Economic Policy (Macroeconomics) Overview

In a Nutshell

Normally, the market economy functions pretty well on its own -- Adam Smith's invisible hand and all that.  But what happens when the economy gets out of balance, when overall economic health suffers due to big macroeconomic problems like recession or inflation?  Should the government step in to try to right the ship?  Or should it keep from interfering, allowing the economy to work out its own problems?

Between 1929 and 1933, the American economy broke down worse than it ever has before or since.  Upon taking office in 1933, at the lowest moment of the Great Depression, President Franklin Roosevelt argued that the federal government should take aggressive action to combat the economic crisis. Ever since, large portions of the public have demanded that the federal government develop policies to combat periodic swings in the economy. Most commonly, this means that policymakers must respond to the twin dangers of inflation and recession.

To address these problems, the president and Congress design fiscal policies aimed at stimulating or calming economic growth. In addition, the Federal Reserve Board, a quasi-independent set of bankers and economists, sets monetary policy to correct the economic problems they perceive.

These policy answers to economic problems are neither simple nor perfect. Politicians endlessly debate how best to target the tax and spending measures that make up fiscal policy. In addition, they often find themselves at odds with the Federal Reserve Board, whose analysis of the economy may differ. In other words, at times the fiscal policy of the president and Congress and the monetary policy of the Fed can work at cross purposes to one another.

Finally, since the economy is a constantly changing web of transactions and relationships, no policy decision can be permanent. The best course of action one day can produce a new set of problems the next. The president, the Congress, and the Fed must constantly reassess the economic policies they set to make sure they don't create more problems than they solve.

Why Should I Care?

Bill Clinton’s campaign managers were relentless in reminding the Democratic presidential contender that the economy should be the central issue in the 1992 election. And they were right. Just a year earlier, President George H.W. Bush had enjoyed record approval ratings after winning the first Iraq War: 89% of the public gave thumbs up to his job performance. But just a year later, with the economy struggling and the first President Bush unable to convince the public that he had a handle on the problems, his job approval numbers plummeted to 29%.

Bush's fate -- he lost that election to Bill Clinton -- tells the story.  Like it or not, politicians must pay attention to the economy if they hope to win and hold office. The problem is that most politicians do not have extensive backgrounds in economics; only one in five congressmen has a degree in economics or a related field.  Even if their hearts are in the right place -- which isn't always a given, of course -- they might craft economic policies that would make things worse instead of better.

Therefore every politician and would-be politician could probably use at least a crash course in economics. Do you have what it takes to sit in the Oval Office?  Read our analysis and then play the game yourself to find out whether you'll go down in history as an FDR or a Reagan -- both popular presidents who oversaw strong economic growth -- or as a Herbert Hoover, who took the blame for failing to solve the Great Depression?  

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