Major debates over Microeconomics Policy
Majordebates over Microeconomics Policy
Increasedgovernment spending to fight recessions
Thereare so many consumers who rely on borrowing to execute theirobjectives. Constraints of borrowing present themselves at times whenthe public is unable to borrow as much money as they desire. Thissituation usually happens during a recession, and not duringexpansion. There is a debate, therefore, as to whether people wouldrecommend a hike in government expenditures as opposed to a reductionin taxes. A hike in government expenditure means that the governmentwould be pumping more money into the economy by spending.
Theadvocates of the debate argue that the most effective way of fightingrecession is to increase government spending. They argue thatincreased spending increases aggregate demand since tax cuts may besaved rather than spent (Blanchard, Dell’Ariccia, & Mauro,2010). During the recession, the consumers tend to repay their debtswhile at the same time, save more. Therefore, tax cuts will not helpin fighting the recession since they do not translate to higherspending. Instead, it is government spending that would revive theeconomy. At times of recession, even if the tax cutoffs areincreased, only a few consumers will increase their spending. Most ofthe remaining consumers would opt to save.
Theadvocates argue that “you have to spend money so as to make money.”The advocates agree that when the government spends more it ispumping more money into the economy. Pumping more money into theeconomy will further stimulate consumer spending. The debatealso has critics who believe that reducing government spending, andincreasing tax cuts is the effective strategy of addressing therecession. The critics further argue that tax cuts expand bothaggregate demand and aggregate supply. The critics argue thatincreasing government spending would increase the people’sdependence on the government. The consumers may remain dependent onthe government even after the economy picks up (Krugman, 2009). Tothese critics, decreasing taxes scatters the spending power allowingthe economy to function naturally. An economy that functionsnaturally without the help of anyone can pull through recessionwithout burdening any of the stakeholders in that economy. Thecritics believe that increasing government spending only increasesthe size of wallet of those consumers who already have money, anddoes not help the low income earners who make a larger proportion ofthe economy. To them, the strategy is not fair to all consumers, andis such unacceptable. It is only through tax cuts that the governmentcan encourage spending across the board.
Inconclusion, both the strategies of increasing tax cuts and increasinggovernment expenditure tend to increase the GDP. An increase in GDPmeans a growth in the economy. To this extent, one may conclude thatthe two strategies are all able to address economic recession.However, I believe that the most appropriate way to address recessionis through the use of tax cut-offs. It is only through tax cut-offsthat everyone is encouraged to spend thus enabling the economy togrow faster. I also believe that increasing government spending doesnot necessarily increase the people spending. It may also increasepeople’s dependence on the government. Having people who depend onthe government for incentives is something that is not desirable toanyone. An economy where the consumers are dependent on thegovernment finds it very difficult to grow out of recession (Krugman,2009). The consumers can be empowered in such economies by increasingtax cutoffs so that they have additional funds for investing.Reducingfederal government’s discretionary powers
Thedebate is on whether monetary policies should be made by rule ratherthan through discretion. A discretionary power, in this context, isto say that the government will be applying the various policies atwill when it feels like. The advocates of this debate support thatthere is a need to reduce the government’s power of discretion.Instead, the advocates argue that the policies should be made by ruleof law (Krugman, 2009). Once these policies have been made, they areto be applied at all times. The already established polies must,therefore, be applied at all times regardless of the situation theeconomy facing.
Theadvocates support their stand by citing that discretionary policy cansuffer from incompetence, abuse of power and time inconsistency. Whenthe federal government is granted a lot of discretionary powers, itmay abuse the power by applying them only when it benefits it. Thegovernment can decide to use a policy so as to push for its interestsat the expense of other players in the economy. Regarding timeinconsistency, the federal government may decide to apply a policy atdifferent times. Time inconsistency makes it very difficult for theother players to understand the economy and make accurate economicprojections. Lastly, discretionary powers lead to the application ofincompetent policies in certain situations. Therefore, theseadvocates suggest that the discretionary powers given to the federalgovernment should be limited so as to reduce the level of governmentinterference in the economy.
However,there are those who criticize the motion by pushing for an increasein federal government’s discretional powers. To these critics, thediscretionary policy is more flexible compared to policies made byrule. The critics argue that the economic faces various circumstancesthat need to be approached differently (Taylor, 2012). It is only thediscretionary policies that are able to respond to the changingeconomic circumstances. When more discretionary powers are given tothe federal government, they will be able to apply specific policiesto address specific circumstances. In the eyes of the critics, thegovernment needs to be empowered to address the differentcircumstances that present themselves in the economy. Therefore, tothese critics, the policies made by law may not help at all times,and are thus, useless.
Insummary, there is always a tendency by the federal government toapply those policies that favor their objectives. The risk of powerabuse is something that cannot be ignored. As such I feel that thereis a need to reduce the federal government’s discretionary powers(Taylor, 2012). In as much as the economy faces differentcircumstances, I believe a novel policy can be developed that is ableto address the all the challenges that the economy may face.Atthe same time, I believe that giving discretionary powers to thefederal government is not entirely wrong. A federal government thatis able to enforce these powers efficiently may scale an economy togreater heights, especially in times of recession. When the power isonly used for the good of everyone, then the economy can berevolutionized easily through the use of discretionary policies.
Blanchard,O., Dell’Ariccia, G., & Mauro, P. (2010). Rethinkingmacroeconomic policy. Journalof Money, Credit and Banking,42(s1), 199-215.
Krugman,P. (2009). How did economists get is so wrong? NewYork Times, 2(9),2009.
NationalBureau of Economic Research. Retrievedfrom http://www.nber.org/links/gov.html
Taylor,J.B., (2012). Monetary policy rules work and discretion doesn’t: Atale of two eras. Journalof Money, Credit and Banking, 44(6),1017-1032.