Objectives Often Conflict

1. Macroeconomic objectives can conflict, so pursuing one may worsen another.
2. A trade-off means gaining more of one objective only by giving up some of another.
3. Lower unemployment can come with higher inflation as demand rises.
4. Faster growth can worsen the current account as imports rise.
5. Faster growth can also raise pollution and deplete scarce resources.
6. Cutting a fiscal deficit can slow growth and raise unemployment.

The Inflation-Unemployment Trade-Off

1. Boosting demand to cut unemployment tends to raise inflation, and tightening to cut inflation raises unemployment.
2. In the long run the Phillips curve is vertical at the natural rate of unemployment, so the trade-off disappears.
3. This is why supply-side reform, not demand policy, lowers unemployment in the long run.

Short Run Against Long Run

1. In the short run, finite capacity forces sharp trade-offs.
2. In the long run, higher potential output can loosen them.
3. Supply-side policy can raise capacity and reduce some conflicts.
4. But supply-side measures work only slowly and their effect is uncertain.

Problems Facing Policymakers

1. Even a well-designed policy faces practical problems that limit what it can achieve.
2. Time lags mean a policy acts only after a recognition, decision and implementation delay.
   1. A stimulus decided in a downturn may arrive only after recovery has begun, making policy pro-cyclical.
3. Inaccurate forecasts and poor data mean policymakers act on an uncertain, out-of-date picture.
   1. Figures such as GDP are revised long after they are first published.
4. The response of households and firms to a policy is hard to predict.

Constraints on Policy

1. Limited policy room can bind, as very low interest rates leave little scope to cut further.
2. A high deficit and debt limit the scope for further fiscal support.
3. External shocks such as an oil price spike or a world recession lie outside a government's control.
4. The power of transnational corporations can weaken domestic policy.
   1. Through transfer pricing they shift profits to low-tax countries, reducing tax revenue.
   2. The threat of relocation can push governments to soften taxes or regulation.

Are these conflicts a permanent barrier to good policy?

1. The conflicts are real and often bind: with finite capacity, cutting unemployment or boosting growth can raise inflation or widen the current-account deficit, and time lags, poor data and limited fiscal or monetary room can turn even well-judged policy pro-cyclical.
2. But the constraints are not absolute: supply-side reform can raise potential output and loosen the trade-offs over time, automatic stabilisers and independent forecasters reduce mistakes, and international cooperation such as a global minimum tax can blunt the power of transnational corporations.
3. On balance, the conflicts limit what demand policy can do in the short run but are not a permanent barrier: how far they bite depends on the time horizon, the economy's spare capacity and the quality of institutions, so realistic policy manages the trade-offs rather than expecting to remove them.