Macroeconomic Debates

1. Stabilization policy (see also Chapter 34)

• The case for: "animal spirits"
• The case against: policy lags, "do no harm"
• Automatic stabilizers: tax system, unemployment insurance

2. Monetary policy

• The case for a rule: avoid the political business cycle, time inconsistency of policy (Phillips Curve) ... (e.g., allow money to grow with GDP)
• The case for discretion: allows policy flexibility

3. Zero inflation

• The case for zero inflation: inflation has costs (e.g., shoeleather, menu costs, confusion, redistribution of wealth, bracket creep)
• The case against zero inflation: the benefits of zero inflation relative to moderate inflation are small, reducing inflation to zero would require a disinflationary recession, risk of deflation

4. Balanced budget

• The case for: debt is a burden on future generations, crowding out
• The case against: it requires contractionary fiscal policy during  a recession

5. Encourage saving

• The case for: saving leads to long term economic growth, current tax law discourages saving twice
• The case against: cutting taxes on saving is inequitable, saving behavior is inelastic