Debates About Macroeconomic Policy Essay

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Introduction

Debates about macroeconomic policy will tend to focus on a couple of different schools of economic thought – the classical school and the Keynesian school, or derivatives thereof. One of the major debates that arises is with respect to whether or not government should increase spending in order to fight recessions. This debate also relates to things like having a balanced government budget. The latter is policy in many jurisdictions, mainly in the United States, reflecting a particular fiscal policy view of the classical school, which the Keynesian view is more often reflected in national-level policy, especially outside of the United States.

Increased Government Spending

With respect to how to best handle a recession, increased government spending is typically viewed as a yes/no decision. Keynes argued that government spending should be increased in order to help manage a recession, and this view is opposed by classical economists. Perhaps the most obvious recent example of this debate being put into practice came during 2009, when during the depths of recession, President Obama sought to increase spending to help stabilize the economy, and this was opposed by Republicans. There was obviously a political dimension to this as well, but the roots of the conservative position lie in the economic debate.

Keynes is credited with popularizing the philosophy that government spending can be used during times of recession to bolster the economy. The underlying principle is that the economy is comprised on a number of different growth drivers – government spending, business investment, net exports and consumer spending. In a recession, consumer spending and business investment decrease, and this means that if all else is equal, the economy will decrease as well. The government can, however, offset this decrease with an increase in government spending. Furthermore, there is a multiplier effect to an increase in government spending – certain businesses will have to expand to serve increase government spending, and more people can be employed.

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Both of these will feed more spending. Essentially, the increased government spending will create something of a virtuous cycle, a positive feedback loop that will counter the negative feedback loop of the recession (Investopedia, 2018).

This view of deficit spending is often a mischaracterization of Keynes precise prescription for maintaining full employment. Keynes argued that "the scale of investment should be equal to the savings which may be expected to emerge…when employment, and therefore incomes, are at the desired level." In other words, Keynes argued only in favor of deficit spending during times of recession, but was otherwise in against it. This socialization of spending was to be focused on temporary measures and only in times of recession in order to maintain as close to full employment as possible (Brown & Collier, 1995).

The classical view, or more accurately the neoclassical view, is that the markets should be left to find equilibrium, and that this would provide a better allocation of resources in the long run. Deficit spending, or indeed substantial influence of government in any form, would lead to inefficient allocation of resources. Government intervention will necessarily create distortions in the economy, meaning that even in times of recession it would be ultimately harmful for government to intervene (Khan & Aziz, 2011).

In essence, these two positions in the debate are approaching the issue from very different, and incompatible, perspectives. First, the Keynesian approach is very pragmatic, seeking to maintain full employment in the short run, and does not take into consideration to any real extent the desire to leave economic outcomes in the hand of the market. Equilibrium, in this view, is not necessarily going to occur quickly, and in any….....

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