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13FINALTHOUGHTSCopyright©2004South-Western36FiveDebatesOverMacroeconomicPolicyCopyright©2004South-WesternFiveDebatesoverMacroeconomicPolicy1.Shouldmonetaryandfiscalpolicymakerstrytostabilizetheeconomy?2.Shouldmonetarypolicybemadebyruleratherthanbydiscretion?3.Shouldthecentralbankaimforzeroinflation?4.Shouldthegovernmentbalanceitsbudget?5.Shouldthetaxlawsbereformedtoencouragesaving?Copyright©2004South-Western1.Shouldmonetaryandfiscalpolicymakerstrytostabilizetheeconomy?Copyright©2004South-WesternPro:Policymakersshouldtrytostabilizetheeconomy•Theeconomyisinherentlyunstable,andleftonitsownwillfluctuate.•Policycanmanageaggregatedemandinordertooffsetthisinherentinstabilityandreducetheseverityofeconomicfluctuations.Copyright©2004South-WesternPro:Policymakersshouldtrytostabilizetheeconomy•Thereisnoreasonforsocietytosufferthroughtheboomsandbustsofthebusinesscycle.•Monetaryandfiscalpolicycanstabilizeaggregatedemandand,thereby,productionandemployment.Copyright©2004South-WesternCon:Policymakersshouldnottrytostabilizetheeconomy•Monetarypolicyaffectstheeconomywithlongandunpredictablelagsbetweentheneedtoactandthetimethatittakesforthesepoliciestowork.•Manystudiesindicatethatchangesinmonetarypolicyhavelittleeffectonaggregatedemanduntilaboutsixmonthsafterthechangeismade.Copyright©2004South-WesternCon:Policymakersshouldnottrytostabilizetheeconomy•Fiscalpolicyworkswithalagbecauseofthelongpoliticalprocessthatgovernschangesinspendingandtaxes.•Itcantakeyearstopropose,pass,andimplementamajorchangeinfiscalpolicy.Copyright©2004South-WesternCon:Policymakersshouldnottrytostabilizetheeconomy•Alltoooftenpolicymakerscaninadvertentlyexacerbateratherthanmitigatethemagnitudeofeconomicfluctuations.•Itmightbedesirableifpolicymakerscouldeliminatealleconomicfluctuations,butthisisnotarealisticgoal.Copyright©2004South-Western2.Shouldmonetarypolicybemadebyruleratherthanbydiscretion?Copyright©2004South-WesternPro:Monetarypolicyshouldbemadebyrule•Discretionarymonetarypolicycansufferfromincompetenceandabuseofpower.•Totheextentthatcentralbankersallythemselveswithpoliticians,discretionarypolicycanleadtoeconomicfluctuationsthatreflecttheelectoralcalendar—thepoliticalbusinesscycle.Copyright©2004South-WesternPro:Monetarypolicyshouldbemadebyrule•Theremaybeadiscrepancybetweenwhatpolicymakerssaytheywilldoandwhattheyactuallydo—calledtimeinconsistencyofpolicy.•Becausepolicymakersaresooftentimeinconsistent,peopleareskepticalwhencentralbankersannouncetheirintentionstoreducetherateofinflation.Copyright©2004South-WesternPro:Monetarypolicyshouldbemadebyrule•CommittingtheFedtoamoderateandsteadygrowthofthemoneysupplywouldlimitincompetence,abuseofpower,andtimeinconsistency.Copyright©2004South-WesternCon:Monetarypolicyshouldnotbemadebyrule•Animportantadvantageofdiscretionarymonetarypolicyisitsflexibility.•Inflexiblepolicieswilllimittheabilityofpolicymakerstorespondtochangingeconomiccircumstances.Copyright©2004South-WesternCon:Monetarypolicyshouldnotbemadebyrule•Theallegedproblemswithdiscretionandabuseofpowerarelargelyhypothetical.•Also,theimportanceofthepoliticalbusinesscycleisfarfromclear.Copyright©2004South-Western3.Shouldthecentralbankaimforzeroinflation?Copyright©2004South-WesternPro:Thecentralbankshouldaimforzeroinflation•Inflationconfersnobenefittosociety,butitimposesseveralrealcosts.•Shoeleathercosts•Menucosts•Increasedvariabilityofrelativeprices•Unintendedchangesintaxliabilities•Confusionandinconvenience•ArbitraryredistributionofwealthCopyright©2004South-WesternPro:Thecentralbankshouldaimforzeroinflation•Reducinginflationisapolicywithtemporarycostsandpermanentbenefits.•Oncethedisinflationaryrecessionisover,thebenefitsofzeroinflationwouldpersist.Copyright©2004South-WesternCon:Thecentralbankshouldnotaimforzeroinflation•Zeroinflationisprobablyunattainable,andtogetthereinvolvesoutput,unemployment,andsocialcoststhataretoohigh.•Policymakerscanreducemanyofthecostsofinflationwithoutactuallyreducinginflation.Copyright©2004South-Western4.Shouldfiscalpolicymakersreducethegovernmentdebt?Copyright©2004South-WesternPro:Thegovernmentshouldbalanceitsbudget•Budgetdeficitsimposeanunjustifiableburdenonfuturegenerationsbyraisingtheirtaxesandloweringtheirincomes.•Whenthedebtsandaccumulatedinterestcomedue,futuretaxpayerswillfaceadifficultchoice:•Theycanpayhighertaxes,enjoylessgovernmentspending,orboth.Copyright©2004South-WesternPro:Thegovernmentshouldbalanceitsbudget•Byshiftingthecostofcurrentgovernmentbenefitstofuturegenerations,thereisabiasagainstfuturetaxpayers.•Deficitsreducenationalsaving,leadingtoasmallerstockofcapital,whichreducesproductivityandgrowth.Copyright©2004South-WesternCon:Thegovernmentshouldnotbalanceitsbudget•Theproblemwiththedeficitisoftenexaggerated.•Thetransferofdebttothefuturemaybejustifiedbecausesomegovernmentpurchasesproducebenefitswellintothefuture.Copyright©2004South-WesternCon:Thegovernmentshouldnotbalanceitsbudget•Thegovernmentdebtcancontinuetorisebecausepopulationgrowthandtechnologicalprogressincreasethenation’sabilitytopaytheinterestonthedebt.Copyright