Chapter 23 - Six Debates Over Macroeconomic Policy

23.1: Should Monetary and Fiscal Policymakers Try to Stabilize the Economy?

Pro: Policymakers Should Try to Stabilize the Economy:

• Monetary and fiscal policy can stabilize aggregate demand
  • Including production and employment
• When aggregate demand is inadequate to ensure full employment
  • Policymakers should boost government spending, cut taxes, and expand the money supply
• When aggregate demand is excessive, risking high inflation
  • Policymakers should cut government spending, raise taxes, and reduce the money supply
• Not only do all these points lead to a more stable economy, it benefits everyone

Con: Policymakers Should Not Try to Stabilize the Economy

• Monetary and fiscal policy do not affect the economy immediately
  • It works with a long lag
• Monetary policy affects aggregate demand primarily by changing interest rates
  • Affect spendings, residential and business investments
  • But many households and firms set their spending plans in advance
  • Takes time for changes in interest rates to alter the aggregate demand for goods and services
• Fiscal policy works with a lag because of the long political process that governs changes in spending and taxes
  • In order to make changes in the fiscal policy, a bill must go through congressional committees
  • The house, the senate, and signed by the president

22.2: Should the Government Fight Recessions with Spending Hikes Rather Than Tax Cuts?

Pro: The Government Should Fight Recessions with Spending Hikes:

• The key to ending recessions is to restore aggregate demand to a level consistent with full employment of the economy’s labor force

Con: The Government Should Fight Recessions with Tax Cuts:

• Tax cuts have important influence on both aggregate demand and aggregate supply
  • They increase aggregate demand by increasing households’ disposable income
  • If tax reduction takes the form of an expanded investment tax credit, they can induce increased spending on investment and goods

22.3: Should Monetary Policy Be Made by Rule Rather Than by Discretion?

Pro: Monetary Policy Should Be Made by Rule:

• Discretion in the conduct of monetary policy has two problems
  • Abuse of power
  • Bankers are tempted to use monetary policy to affect the outcome of elections
  • Might lead to more inflation than is desirable

Con: Monetary Policy Should Not Be Made by Rule:

• Alleged problems with discretion are largely hypothetical
• Bankers are trustable with their words because they can achieve credibility over time by backing their words with their actions

23.4: Should the Central Bank Aim for Zero Inflation?

Pro: The Central Bank Should Aim for Zero Inflation:

• Trade-offs will improve
  • No need for a trade-off between inflation and unemployment
• A policy that comes with temporary costs and permanent benefits
  • Benefits of zero inflation in the future
• Zero provides a more natural focal point for policymakers than any other number

Con: The Central Bank Should Not Aim for Zero Inflation:

• When the economy goes into recession, all incomes do not fall proportionately
  • The fall in aggregate income is concentrated on those workers who lose their jobs
• Inflation allows for the possibility of negative real interest rates
  • If inflation is zero, real interest rates can never be negative as well

22.5: Should the Government Balance Its Budget?

Pro: The Government Should Balance Its Budget:

• U.S. federal government is indebted
  • Can place a burden on future generations of taxpayers if there’s no set budget
• When the government runs a budget deficit and issues government debt, it allows current taxpayers to pass the bill for some of their government spending on to future taxpayers
• Budget deficits represent negative public savings
  • Lower the living standard for future generations

Con: The Government Should Not Balance Its Budget:

• The problem with government debt is often exaggerated
• Misleading to view the effects of budget deficits in isolation
• Critics of budget deficits sometimes assert that the government debt cannot continue to rise forever
  • But it can- the nation’s ability to pay the interest on the government debt grows over time as well
  • Nothing to prevent the government debt from growing forever
  • As population growth and technological progress cause the total income of the U.S. economy to grow over time

23.6: Should the Tax Laws Be Reformed to Encourage Saving?

Pro: The Tax Laws Should Be Reformed to Encourage Saving:

• When the saving rate is higher, more resources are available for investment in new plant and equipment
  • Larger stock of plant and equipment raises labor productivity, wages, and incomes

Con: The Tax Laws Should Not Be Reformed to Encourage Saving:

• Tax changes that reduce the taxation of capital income reduce government revenue
  • Lead to a larger budget deficit
• Economic theory does not give a clear prediction about whether a higher rate of return would increase saving

\