Six Debates Over Macroeconomic Policy

1) Should policymakers try to stabilize the economy? 2) Should gov't fight recessions with spending hikes or tax cuts? 3) Should monetary policy be made by rule or discretion? 4) Should the Central Bank aim for zero inflation? 5) Should the Gov't balance its budget? 6) Should the tax laws be reformed to encourage saving?

Pros: more stable economy benefits everyone, so policymakers should use monetary and fiscal policy to stabilize AD, output, employment Cons: policy must come before changes to work properly, if it doesn't can make things worse. leave economy to readjust itself

Spending: each $ of gov spending directly adds to AD; taxes only a part of it goes to AD b/c consumers save part of it; fed $ to states ensures workers keep public jobs tax cuts: increase AD. can increase AS, rapid spending increases may be wasteful and require future tax increases

anti-discretion: power can be put in hands of bad central bankers; possible abuse (political business cycle); increase interest rates; time-inconsistency pro-discretion: flexibility to react in unforeseen events; time-inconsistency& political business cycles are not that big of a deal; difficult to specify rules

Pro: costs of inflation would have temporary costs (high unemployment) but long term success; costs of having inflation can have large impact Con: costs large to move from moderate to zero inflation (every 1% of reduction in i; lose 5% GDP); some of inflation's costs could be reduced thru more widespread indexation

Pro: debt places burden of future generations; deficit crowds out investment, reducing growth and future living standards; peacetime debt is unsustainable Con: burden is exaggerated; cutting deficit can reduce education/ human capital/ living standards; the debt-income ratio higher than actual debt; refocuses attention from other programs like Social Security

Pro: 10 principles; standard of living depends on production of G&S; more saving = capital accumulation = more productivity and living standards Con: people respond to incentives; tax system discourages saving (double taxation, high rates) increase income tax w/ consumption tax to increase the incentive to save