Major Debates over Macroeconomic Policy

Major Debates over Macroeconomic Policy

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Major Debates over Macroeconomic Policy

Introduction

When it comes to macroeconomic policies, there are several debates on how they can help in preventing current and future economic issues. In our country, we have encountered a major recession, the Great Depression in the 1930s and the recession from 2008-2009. During both of these recessions, our government was able to work together to find solutions to help end these hard times for our economy by increasing government spending and balancing the budget of the government. Today, I will discuss the advocates and critics positions about increasing government spending and balancing the government budget. I will also state and defend the position that I have for these topics.

Increased Government Spending to Fight Recessions

When it comes to a recession, there are mixed feelings on whether or not the government should increase their spending to fight the recession. Recessions can have a huge impact on our economy. In the 1930s, we had the Great Depression, which was the worst economic downturn in U.S. history. The other big recession that occurred in the U.S. was the downturn of 2008 and 2009. For the Great Depression of the 1930s, the real GDP fell by 27 percent and unemployment was up to 25 percent (Mankiw, 2015). In the recession of 2008 and 2009, the real GDP fell by just 4 percent and unemployment was at 10 percent (Mankiw, 2015). We can see that the recession of 2008-2009 was nowhere near the magnitude of the Great Depression, but it still had a large impact on our economy. When the government increases spending to fight a recession, it has to be done in a way that is going to increase the aggregate demand. Pettinger (2017), “If government spending is financed by higher taxes, then tax rises may counter-balance the higher spending, and there will be no increase in aggregate demand.”

The monetary policy and fiscal policy are important when it comes to government spending during a recession. When the money supply is increased, the central bank is able to reduce interest rates. This in turn, reduces the cost of borrowing for investment projects, such as building new homes or businesses. The fiscal policy is used on top of the monetary policy to help with fighting recessions. The government cuts taxes, which in turn increases the disposable income of households so that they are able to increase spending. The fiscal policy is good powerful in this scenario once the Fed is unable to lower interest rates any further from the monetary policy. The reasoning for this is because if the Fed reduces interest rates below zero percent, then people will hold onto their cash rather than lending it out for negative interest rates, so the government relies on taxes and government spending to increase aggregate demand (Mankiw, 2015). There are critics, though, that believe increasing government spending will create higher interest rates rather than fight recessions. They also feel that the government spending more will create a budget deficit that is much bigger. I, on the other hand, believe that an increase in government spending is the right way to fight a recession based on the information provided above.

Balanced Government Budget

According to “Investopedia” (2018), “A balanced budget is a situation in financial planning or the budgeting process where total revenues are equal to or greater than total expenses”. Finding how to balance the government’s budget is not an easy task, as it takes much decision making and calculating on how the money will be spent. In order for the budget to be balanced, the expenditures and revenues must be equal. If the government followed a balanced budget, there would be a decrease in interest rates and an increase in savings and investments. The government today is far more in debt than it was three decades ago. According to Mankiw (2015), “In 1980, the federal debt was $712 billion; in 2012, it was $11.3 trillion. If we divide today’s debt by the size of the population, we learn that each person’s share of the government debt is about $36,000”. The government debt that we have is likely to burden the future generations of taxpayers. When the government runs a budget deficit and issues government debt, they are allowing the current taxpayers to pass some of their government spending onto the future taxpayers. This will only make the living situations worse for future generations. Such a deficit with the budget will also lower the savings of the public, which in turn creates interest rates to rise and investments to fall. There are of course times when running a budget deficit is reasonable. The most common cause for this would be from a war or when the economy goes through a recession.

Having a balanced budget could be a resolution to the budget deficit, as there would be more restrictions on government spending. Those that are critics to a balanced budget argue that the budget deficit is merely a small piece to the fiscal policy, so they are not concerned with it impacting future generations. I believe that a balanced budget would be better than allowing this budget deficit to continue to grow. The economy has been recovering from the recession of 2008-2009 and unemployment has continued to decrease, so there is no need to have such a budget deficit. Having a balanced budget would allow for greater national savings, investments, and economic growth. The future generations and those graduating college could enter into an economy that is more successful than the one we are in now.

Conclusion

This paper has identified two macroeconomic policies that are debated on by economists. We evaluated policies of increased government spending to fight recessions and a balanced government budget. As you can see these are topics that have both pros and cons to them, as we evaluated the advocates and the critics stances on these subjects. I also discussed my feelings on each of these topics and the reasoning behind the stance that I take for both increased government spending to fight recessions and a balanced government budget.

References:

Mankiw, N. G. (2015). Principles of Macroeconomics (7th ed.). Retrieved from The University of Phoenix eBook Collection database.

Pettinger, T. (2017). Impact of Increasing Government Spending. Retrieved from https://www.economicshelp.org/blog/2731/economics/impact-of-increasing-government-spending/

Investopedia. (2018). Retrieved from https://www.investopedia.com/terms/b/balanced-budget.asp