Birks – Mankiw Chapter 36: Six Debates over Macroeconomic Policy
Mankiw, N. G. (2015) Principles of economics (7th ed.) Ch.36
Principles of macroeconomics (7th ed.) Ch.23
Mason, OH: South-Western Cengage Learning
Six Debates over Macroeconomic Policy
When reading the chapter, here are some aspects to consider:
1. This final chapter presents general points for and against some commonly debated positions. Many additional points could be raised, but I will just mention a few.
2. On debate no.2, Mankiw describes monetary policy as the first line of defence. Milton Friedman talked of “long and variable lags” with monetary policy, suggesting that this made it unsuitable for stabilisation. Friedman suggested that it would be better to have steady growth in monetary aggregates related to the rate of growth in real output.
3. Mankiw also refers to government spending in Section 2a as being on goods and services. This is commonly represented by G in C + I + G etc.. The third type of spending that he describes is payments to the jobless. This is commonly referred to as transfers. It affects disposable income, and could be described as negative taxation. Even if it is likely that it will all be spent, it may reduce dissaving (using up of savings) by those on low income, so the total effect on spending may be less than the size of the benefit payment, thus working in a way similar to a tax cut.
4. Also Section 2a Mankiw gives some findings based on a model. A paragraph later he talks of the absence of a counterfactual. The counterfactual is important, and is commonly not observed (as the word would indicate). This is one of the reasons why models may be useful. They can at least give estimates of possible alternative outcomes.
5. In debate no.5 it is suggested that debt places a burden on future generations. Another perspective on this is that these future tax payments will be used to repay loans, so that the future generation is essentially repaying itself.
6. The sixth debate on tax incentives to encourage savings can be presented in another way. The UK used to have an “earned income allowance”, whereby income earned from labour was reduced by a factor of 2/9 before assessing income tax liability. A similar approach currently applies in several countries, including Singapore, where ‘earned income relief is a relief to provide recognition for individuals who receive income from work, trade, business, profession or vocation’ (Atkinson, 2009, p. 14).
7 In Section 6a Mankiw refers to some forms of capital income being taxed twice. This is not true for all countries. New Zealand and Australia both have imputation systems which avoid this.
Atkinson, A. B. (2009). Factor shares: the principal problem of political economy? Oxford Review of Economic Policy, 25(1), 3-16.
Commentary by Stuart Birks, 8 September 2014