Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Edmund Phelps wikipedia , lookup
Economics of fascism wikipedia , lookup
Economy of Italy under fascism wikipedia , lookup
Early 1980s recession wikipedia , lookup
Non-monetary economy wikipedia , lookup
American School (economics) wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Monetary policy wikipedia , lookup
Business cycle wikipedia , lookup
Theory versus Reality Chapter 18 McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Theory versus Reality • No matter how hard we try to eliminate it, the business cycle seems to persist – What’s the ideal “package” of macro policies? – How well does our macro performance live up to the promises of that package? – What kinds of obstacles prevent us from doing better? 18-2 The Policy Tools Type of Policy Fiscal Monetary Supply-side Policy Instruments Tax cuts and increases Changes in government spending Open market operations Reserve requirements Discount rates Tax incentives for investment and saving Deregulation Human-capital investment Infrastructure development Free trade Immigration 18-3 Fiscal Policy • Fiscal policy: The use of government taxes and spending to alter macroeconomic outcomes • Fiscal policy refers to deliberate changes in tax or spending legislation 18-4 Who Makes Fiscal Policy? • Fiscal policy expands or shrinks the structural deficit to give the economy a shot of fiscal stimulus or fiscal restraint – Structural deficit: Federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy 18-5 Who Makes Fiscal Policy? • Fiscal stimulus: Tax cuts or spending hikes intended to increase (shift) aggregate demand • Fiscal restraint: Tax hikes or spending cuts intended to reduce (shift) aggregate demand 18-6 Monetary Policy • Monetary Policy: The use of money and credit controls to influence macroeconomic outcomes • Monetary policy tools include – Open-market operations – Discount-rate changes – Reserve requirements 18-7 Monetary Policy • Keynesians believe that interest rates are the critical policy lever • Monetarists believe money supply is the critical variable and that it should be expanded at a steady, predictable rate to ensure price stability at the natural rate of unemployment 18-8 Who Makes Monetary Policy? • Monetary policy is made by the Federal Reserve’s Board of Governors • Twice a year the Fed provides Congress with a broad overview of the economic outlook and monetary objectives 18-9 Supply-Side Policy • The focus of supply-side policy is to provide incentives to work, invest, and produce • Supply-side policy: The use of tax incentives, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services 18-10 Who Makes Supply-Side Policy? • Supply-siders argue that marginal tax rates and government regulation must be reduced in order to get more output without added inflation • Deciding whether to increase spending is a fiscal policy decision; deciding how to spend available funds may entail supply-side policy 18-11 Idealized Uses • Fiscal, monetary, and supply-side tools are potentially powerful levers for controlling the economy • Depending on the situation, they can cure the excesses of the business cycle and promote faster economic growth 18-12 Case 1: Recession • Output and employment levels are far short of the economy’s full-employment potential • Keynesians emphasize need to increase aggregate demand by cutting taxes or boosting government spending – Modern Keynesians acknowledge that monetary policy might also help 18-13 Case 1: Recession • In the Monetarists view, the appropriate response to a recession is patience – So long as the velocity of money (V) is constant, fiscal policy doesn’t matter • As sales and output slow, interest rates will decline and new investment will be stimulated 18-14 Case 1: Recession • Supply-siders emphasize the need to improve production incentives – Cut marginal tax rates on investment and labor – Reduce government regulation – Focus any government spending on long-run capacity expansion 18-15 Case 2: Inflation • Keynesians would address an inflationary GDP gap by raising taxes and lowering government spending, shifting AD leftward – Keynesians would also increase interest rates to curb investment spending • Monetarists would simply cut the money supply 18-16 Case 2: Inflation • Supply-siders would point out that inflation implies both “too much money” and “not enough goods” • Look at the supply side of the market for ways to expand productive capacity 18-17 Case 3: Stagflation • Stagflation is much more of a gray area, since attempting to address recession or inflation individually can make the other problem worse – Stagflation: The simultaneous occurrence of substantial unemployment and inflation • Knowing the causes of stagflation may help achieve the desired balance 18-18 Case 3: Stagflation • If prices are rising before full employment is reached there may be structural unemployment • High taxes or costly regulations might contribute to stagflation • Stagflation may arise from an external shock • No familiar policy tool is likely to provide a complete cure 18-19 Fine-Tuning • At one time, it was felt that policy could finetune the economy to assure prosperity – Fine-tuning: Adjustments in economic policy designed to counteract small changes in economic outcomes; continuous responses to changing economic conditions • The economy’s track record does not live up to the high expectations of fine-tuning 18-20 The Economic Record – Economic history is punctuated by periods of recession, high unemployment, inflation, and recurring concern for the distribution of income and mix of output Source: Economic Report of the President, 2009 and Congressional Budget Office 18-21 The Economic Record 18-22 Why Things Don’t Always Work • Four obstacles to policy success: – – – – Goal conflicts Measurement problems Design problems Implementation problems 18-23 Goal Conflicts • Most often goal conflicts originate in short-run trade-off between unemployment and inflation • The goal conflict is often institutionalized in the decision making process – The Fed is traditionally viewed as the guardian of price stability – The President and Congress worry more about people’s jobs and government programs 18-24 Goal Conflicts • Distributional goals may conflict with macro objectives – Anti-inflationary policies may require cutbacks in programs for the poor, the elderly, or others – These cutbacks may be politically impossible • All policy decisions entail opportunity costs 18-25 Measurement Problems • The processes of data collection, assembly, and presentation take time • At best, we know what was happening in the economy last month or last week • An average recession lasts about 11 months, but official data generally don’t confirm its existence until 8 months after one begins 18-26 Forecasts • In designing policy, policymakers must depend on economic forecasts — informed guesses about what the economy will look like in future periods • Those guesses are often based on econometric macro models, which are mathematical summaries of the economy’s performance 18-27 Leading Indicators and Crystal Balls • Many people prefer to use leading indicators – Leading indicators are things we can observe today that are logically linked to future production – One of the most popular is the Index of Leading Economic Indicators • Others disregard economists’ forecasts and use their own “crystal balls” 18-28 Policy and Forecasts • Forecasting the economic future is made more complex because forecasts, policy decisions, and economic outcomes are interdependent Budget projections Economic forecasts Policy decisions External shocks 18-29 External Shocks • An external shock can disrupt the economy and ruin economic forecasts • The very nature of external shocks is that they are unanticipated 18-30 Design Problem • Suppose the outlook is bad and we want to steer the economy past looming dangers • We need to design an economic plan • It is difficult to predict how market participants will respond to any specific economic policy action 18-31 Implementation Problems • Even if the right policy is formulated, there is no assurance it will be implemented • Congressional deliberations can stall or derail fiscal policy • Even if it is implemented, there is no assurance that it will take effect at the right time 18-32 Time Lags • There is a danger that the policy will get enacted well after the problem it was created to fix is gone D e l a y Problem emerges D e l a y Problem recognized D e l a y Response formulated D e l a y Action taken Policy impact noticeable 18-33 Politics vs. Economics • A particular policy may be right for the economy but might never be enacted due to political pressures • Congress tends to hold fiscal policy hostage to electoral concerns • Politicians often rely on the Fed to take the unpopular actions necessary to fight inflation 18-34 Hands On or Hands Off? • We haven’t been able to make all the minor adjustments necessary to fulfill our goals completely • Everyone agrees that discretionary policies could result in better economic performance 18-35 Hands On or Hands Off? • Some argue that the practical requirements of monetary and fiscal management are too demanding and thus prone to failure • Proponents of a hands-on policy admit the possibility of occasional blunders, but emphasize the greater risks of doing nothing when the economy is faltering 18-36 Hands On or Hands Off? • Historically, the economy has been much more stable during the time of discretionary policy (as opposed to earlier times) • Even though it’s impossible to reach all our goals, we can’t abandon conscientious attempts to get as close as possible 18-37 Theory versus Reality End of Chapter 18 McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.