Cyclical policy

Cyclical policy is the set of economic policy measures aimed at acting on the economy in the short term.

“Cyclical policy is the set of actions of public authorities intended to regularize the overall development of the economy”.

Short-term policy always has an objective (acting on economic activity in a way deemed desirable by the public authorities).

One of the main aims of cyclical economic policy is to analyze the causes of unemployment.

We can say that certain cyclical policies are of liberal inspiration. For example, fighting against unemployment by reducing the minimum wage, which means that we think that unemployment is due to a cost of labor that is too high.

Others are of Keynesian inspiration. For example: fighting against unemployment by increasing the minimum wage. This means that it is believed that unemployment is due to a lack of effective demand.

The public authorities are therefore seeking, through a set of measures, to act in the short term on economic activity in such a way as to restore the “major balances” (prices, growth, employment, external balance).

The measures taken are very varied.

Examples of measures relating to a recovery policy:

.Significant increase in the minimum wage,

.Increase in the salaries of civil servants,

.Increase in the amount of family allowances, etc.

This has the aim of reviving demand, in the hope that this will limit the rise in unemployment.

Examples of measures relating to an austerity policy:

.Increase in interest rates,

.Reduction in public expenditure,

.Increase in taxes and/or social security contributions.

The objective is to curb demand and curb monetary creation so as to limit inflation and restore the external balance.

However, economic policy does not only have short-term effects: economic measures often also have an effect on economic and social structures, and it is sometimes very difficult to distinguish between the two aspects.

Knowing the short-term policy conducted by a State at a given time not only makes it possible to identify the difficulties recognized by the country itself, but it also allows us to see the political choices of the public authorities.

Example: faced with high unemployment, the State decides to reduce the amount of employers’ social security contributions (economic policy measure). How to interpret this decision? We can think that the analysis which is made is of liberal inspiration: by lowering employers’ social security contributions, the cost of labor is immediately lowered to encourage employers to hire.

Another example: in the second half of the 1980s in France, the imbalances concerned employment (high unemployment), prices (high inflation) and foreign trade. The State has chosen to tackle inflation (competitive disinflation policy): this reflects a political choice, since by curbing the rise in prices, we hoped to regain better competitiveness and therefore restore the external balance, but at the price, at least in the immediate future, of possibly growing unemployment.

Reading these policies

There is no single indicator for measuring economic policy. It can be apprehended, for example, through the evolution of the balance of the State budget or interest rates.

It can be estimated that, until the end of the 1970s, short-term policies were Keynesian in inspiration, that is to say that a slowdown in economic growth was interpreted as coming from a lack of demand (demand for consumer goods and services and demand for producer goods).

The public authorities therefore had to conduct a recovery policy by distributing income, increasing public consumption and/or lowering the interest rate (fiscal policy and monetary policy).

Conversely, when companies were unable to meet the increase in demand, inflation developed and made necessary the intervention of the State to slow down the growth of demand, by inverse economic measures.

Since the beginning of the 1980s (the mid-1980s, more in France), faced with the failure of Keynesian-inspired policies to resolve the crisis which had developed after 1973, the public authorities have implemented more liberal inspiration.

Due to the difficulties coming from dysfunctions on the markets, it is necessary, as much as possible, to let the markets function freely so that the prices and the competition can play their roles.

We thus move away from purely economic policies. In this framework of analysis, the main objective of economic policy is to restore competition, with the State having to disengage as much as possible.

But, in the short term, this results in the reduction of public expenditure, taxes. Thus, in the USA, a high budget deficit has been maintained for years, and it has been an important support for economic activity… from a Keynesian point of view!

Finally, for the European countries, short-term policy is today strongly constrained by the existence of the European Union: the States can no longer do exactly what they want.