Principles of Economics Chap36 Six debates over Macroeconomic Policy
Nov 01, 2014
Principles of Economics
Chap36 Six debates
over Macroeconomic Policy
What we have learned in macroeconomics
2
Chap 25
Chap 26 Chap 27
Chap 28
Chap 29 Chap 30
The level and growth of productivity and real GDP
How the financial system works and How the real interest rate adjusts to balance saving and investment
Why there is always some unemployment in the economy
The monetary system and how changes in the money supply affect the price level,the inflation rate, and the nominal interest rate
Chap 31 Chap 32
Extension of this analysis to open economies to explain the trade balance and the exchange rate.
GDP
Financial system
Unemployment
Monetary system
Open Economy
Chapter Key words Contents
Chap 33 .Discussing some of the important facts about short run fluctuations in economic activity and introducing a basic model to explain those fluctuations.
Aggregate demand and aggregate supply
Chap 34 ・How monetary policy influences aggregate demand. ・How fiscal policy influences aggregate demand
Aggregate demand and aggregate supply
Chap 35 ・rela>onship between infla>on and unemployment The short-‐run trade off Between Infla>on and Unemployment
Proposi>on (and percentage of economists who agree)
1. A ceiling on rents reduces the quan>ty and quality of housing available.(93%) 2. Tariffs and important quotas usually reduce general economic welfare.(93%) 3. Flexible and floa>ng exchange rates offer an effec>ve interna>onal monetary
arrangement.(90%) 4. Fiscal policy(e.g., tax cut and/or government expenditure increase) has a significant
s>mula>ve impact on a less than fully employed economy. 5. The United States should not restrict employers from outsourcing work to foreign
countries.(90%) 6. Economic growing in developed countries like that United States leads to greater levels
of well-‐being.(88%) 7. The United States should eliminate agricultural subsidies.(85%) 8. An appropriately designed fiscal policy can increase the long-‐run rate of capital
forma>on.(85%) 9. Local and state governments should eliminate subsidies to professional sports
franchises.(85%) 10. If the federal budget is to balanced, it should be done over the business cycle rather
than yearly.(88%)
Ten Principles of Economics
Ⅰ.How People Make Decisions. 1:People Face Trade-offs. 2:The Cost of Something Is What You Give Up to Get It. 3:Rational People Think at the Margin. 4:People Respond to Incentives. Ⅱ.How People Interact. 5:Trade Can Make Everyone Better Off. 6:Markets Are Usually a Goodway to Organize Economic Activity. 7:Governments Can Sometimes Improve Market Outcomes. Ⅲ.How the Economy as a Whole Works 8:A Country's Standard of Living Depends on its Ability to Produce Goods and
Services. 9:Prices Rise When the Government Prints Too Much Money. 10:Society Faces a Short-Run Trade-off between Inflation and Unemployment.
4
Six debates over Macroeconomic Policy
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: Policymakers should try to stabilize the economy
• The development of macroeconomic theory has shown policymakers how to reduce the severity of economic fluctua>ons.
• When aggregate demand demand is inadequate to ensure full employment, policymaker should boost government spending, cut taxes, and expand the money supply.
• Such policy ac>ons put macroeconomic theory to its best use by leading to a more stable economy, which benefits everyone.
Con: Policymakers should not try to stabilize the economy
• Monetary policy and fiscal policy do not affect the economy immediately but instead work with a long lag.
• Too o_en, policymakers trying to stabilize the economy do just the opposite. – The Great Depression of 1930’s, Lehman shock in 2008 etc
• Economic policymakers should refrain from intervening o_en with monetary and fiscal policy and be content if they do no harm.
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: The government should fight recessions with spending hikes
Barack Hussein Obama Franklin Delano Roosevelt
Pro: The government should fight recessions with spending hikes
• Economists have understood that the fundamental problem during recessions is inadequate aggregate demand. – Monetary policy is the first line of defense against economic downturns. – Fiscal policy is par>cularly useful when the tools of monetary policy lose their
effec>veness.
• Tradi>onal Keynesian analysis indicates that increase in government purchases are a more potent tool than decrease taxes. – When the government gives a dollar in tax cuts to a household tool than decreases in
taxes.
• Policymakers focused on three kinds of spending. – Shovel ready projects such as as repairs to highways and bridges. – Federal aid to state and local government. – Increased payments to the jobless through the unemployment insurance system.
Goods and services market
Labor Market Financial Market
Interest, money supply, Stock price, Exchange rate
Labor demand, Labor demand employment
Market type in macroeconomics Consump>on+ Investment + Government expenditure +export-‐import
Con: The government should fight recessions with tax cuts
Ronald Wilson Reagan John Fitzgerald "Jack" Kennedy,
Con: The government should fight recessions with tax cuts
• Tax cuts have important influence on both aggregate demand and aggregate supply. – Tax cuts increase aggregate demand by increasing household’s disposable supply and
inducing increased spending on investment goods. – When government reduces marginal tax rates, workers keep a higher frac>on of any
income they earn.
• There are various problems with increasing government spending during recessions. – Consumers understand that higher government spending, together with the
government borrowing needed to finance it, will likely lead to higher taxes in the future. – The an>cipa>on of those future taxes will induce consumers to cut back spending today.
Moreover, like most taxes, those in the future will likely cause a variety of deadweight losses.
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: Monetary policy should be made by rule
• Discre>on in the conduct of monetary policy has two problems. – Poli>cal Business Cycle: Central bankers are some>mes tempted to use
monetary policy to affect the outcome of elec>ons. – Time Inconsistency of Policy: Central bankers tempted to renege on their
announcement of price stability to achieve lower unemployment.
• One way to avoid these problems with discre>onary policy to commit the central bank to a policy rule.
• An ac>ve rule might allow some feedback from the state of the economy to changes in monetary policy. – To increase monetary growth by 1 % for every percentage point that
unemployment rises above its natural rate.
Con: Monetary policy should not be made by rule
• There may be pikalls with discre>onary monetary policy, but there is also an important advantage to it. – In the 1930s, banks failed in record numbers. – In the 1970s, the price of oil skyrocketed around the world. – In October 1987, the stock market fell by 22% in a single day. – From 2007 to 2009, house prices dropped, foreclosures soared, and
the financial system experienced significant problems.
• Despite much research examining the costs and benefits of alterna>ve rules, economists have not reached consensus about what a good rule would be.
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: The central bank should aim for zero infla>on
• Infla>on confers no benefit on society, but it imposes several real costs. – Shoeleather costs associated with reduced money holdings. – Menu costs associated with more frequent adjustment of prices. – Increased variability of rela>ve prices. – Unintended changes in tax liabili>es due to nonindexa>on of the tax cost. – Confusion and inconvenience resul>ng from a changing unit of account. – Arbitrary redistribu>ons of wealth associated with dollar-‐denominated debt.
• One advantage of a zero infla>on target is that zero provides a more natural focal point for policymakers than any number.
Con: The central bank should not aim for zero infla>on
• The benefits of zero infla>on are small, whereas the costs of reaching zero infla>on are large. – Es>mates of the sacrifice ra>o suggest that reducing infla>on by 1 %
requires giving about 5% of one year’s output.
• A lille bit of infla>on may even be a good thing. – Some economists believe that infla>on “geases the wheels” of the
labor market. Because workers resist cuts in nominal wages.
• Some>mes the economy may need nega>ve real interest rates to provide sufficient to aggregate demand – an op>on ruled out by zero infla>on.
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: The government should balance its budget
• The most direct effect of the government debt is to place a burden on future genera>ons of taxpayers.
• Budget deficits→ nega>ve public saving → lower na>onal saving → raise real interest rate→ to fall investment →smaller stock market
• U.S government debt as a percentage of GDP increased from 26% in 1980 to 50% in 1995. – During this period, U.S experienced neither a major military conflict
nor a major economic downturn.
Con: The government should not balance its budget
• The problem of government debt is o_en exaggerated. – Although the government debt does represent a tax burden on younger
genera>ons, it is not large compared to the average person’s life>me income.
• Cri>cs of budget deficits some>mes assert that the government debt cannot con>nue to rise forever, but in fact, it can. – As long as the government debt grows more slowly than the na>on’s
income, there is nothing to prevent the government debt from growing forever.
• As long as the deficit is only moderate in size, there will never be a day of reckoning that forces the budget deficits to end or the economy to collapse.
Six debates over Macroeconomic Policy
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should the government fight recessions with spending hikes rather than tax cuts?
3. Should monetary policy be made by rule rather than by discre>on?
4. Should the central bank aim for zero infla>on? 5. Should the government balance its Budget? 6. Should the tax laws be reformed encourage Saving?
Pro: The tax laws should be reformed to encourage saving
• Unfortunately, the U.S system discourage saving by taxing the return to saving quite heavily.
• The double taxa>on substan>ally reduces the return to the stockholder, thereby reducing the incen>ve to save.
• A switch from income to consump>on taxa>on would greatly increase the incen>ve to save.
Con: The tax laws should not be reformed to encourage saving
• By reducing the tax burden on the wealthy who can take advantage of these accounts, they force the government to raise the tax burden on the poor.
• There are ways to increase na>onal saving other than by giving tax breaks to the rich. – Instead of trying to alter the tax code to encourage greater private
saving, policymakers can simply raise public saving by reducing the budget deficit, perhaps by raising taxes on the wealthy.
Why we should study economics
• It will help you understand the world in which you live.
• It will make you a more astute participant in the economy.
• It will give you a better understanding of both the potential and limits of economic policy.
29
Advice from Kynes
「経済学の研究のためには、非常に高度な天賦の才といったものは必要ない。経済学は哲学や自然科学に比べればはるかに易しい学問といえるだろう。にもかかわらず優れた経済学者は非常に稀にしか生まれない。このパラドックスを解く鍵は、経済学者がいくつかの全く異なる才能を合わせ持たなければならない、という所にある。彼は一人にして数学者であり、歴史家であり、政治家であり、哲学者でもなければならない。個々の問題を一般的な観点から考えなければならないし、また抽象と具体を同時に兼ね備えた考察を行わなければならない。未来のために、過去に照らし、現在を研究しなければならない。」
『雇用、利子及び貨幣に関する一般理論』より