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C2a6 H, R


Listening in on a Discussion of Economists

Five distinguished professors of economics are discussing current economic
policy at a luncheon press conference attended by leading reporters of business
news. Lets listen in.
Professor Jude: Lets talk about the issues. On the fiscal policy side, this administrations
budget proposal is not extravagant or inflationary. The tax cuts are critical to stimulating
work effort and business investment in an economy just emerging from recession, and they
are partly balanced by spending cuts. With so many people still unemployed and so many
factories still closed, a policy of this kind cannot rekindle inflation. We must let people keep
the fruits of their labor and savings as incentives to produce and invest more. The spending
cuts will prevent government from continuing to receive ever- increasing pieces of the
nations economic pie. In addition, government intrusions into economic activity must be
scaled back, beginning with the repeal of unnecessary regulations.
Professor Maynnerd: Excuse me, Dr. Jude. But that position makes little sense. Its
inadequate demand, not supply that we should be most worried about. Our economy does not
automatically return to full employment, so when business and consumer spending is not
enough, discretionary government policies are needed to stimulate the economy. But let me
say that this administrations tax cuts have been and are grossly unfair. The tax cuts have
favored the rich, and the spending cuts have reduced programs that help maintain economic
security for Americans with low incomes. Moreover, the spending cuts are not policies aimed
at correcting the inadequate level of demand in the economy. Taxes should be raised, but only
on the wealthy, and the revenues raised can be used to restore the original funding levels for
government programs that help low-income people.
Professor Miltie: Let me just comment, Professor Maynnerd that you completely leave out
the monetary approaches that the administration should pursue. Fiscal policy can do only so
much to stimulate demand in the economy, because when the government borrows money for
its spending it crowds out spending by firms and consumers, especially for interest sensitive
purchases such as houses, cars, and business capital expenditures. This is where monetary
policy comes in. If the Fed expands the money available, there will be less pressure for
interest rates to rise. Well be able to sustain the recovery in housing, autos, and other sectors.
And businesses will be able to get loans for investments at affordable interest rates. Ideally,
we should encourage steady economic growth by pursuing an increase in the money supply
consistent with the non-inflationary growth of economic activity.

C2a7 H, R


Listening in on a Discussion of Economists (continued)

Professor Lukas: Oh, please Professor Miltie. You test the limits of my rationality! You
forget that the expansion of the money supply were currently witnessing is part of a long
history of bungling by the monetary policymakers. Our most recent recession was brought on
by the Feds jamming on the monetary brakes by an abrupt reduction in the increase of the
money supply in order to bring inflation under control. They overdid it, as they always do,
and because of time lags they produced a recession. Now, theyre overdoing it in the other
direction, stepping on the monetary accelerator and increasing the money supply too rapidly.
That will stimulate the economy all right, but in a year or two those actions will rekindle
inflation. A similar story can be told for fiscal policy. Most people can predict the policy
actions of the government and these expectations alter current behavior and economic
decisions. Thus, it is rarely possible for government policies, monetary or fiscal, to have a
genuine lasting impact because consumer and business decisions neutralize them. At best,
government policies should be predetermined to stabilize the influence of expectations.

Professor Smyth: Well, Professor Lukas, I have finally heard from someone who understands
how the economy really works. I cannot agree with our colleagues who give government and
the central bank such active roles in determining the health of the economy. Although
inadequate demand and recessions might be experienced in the short run, the economy is selfregulating. Wages, prices, and interest rates are flexible, allowing markets to clear if you
given them enough time. In other words, the economy will adjust itself to the full
employment level because supply creates its own demand. Policy interventions cannot
change the real level of economic activity, although they may affect the price level. Except
for national defense and market failures, the proper role of government should be minimal,
and the economy must be free to operate on its own.
Ladies and gentlemen, thats all the time we have. Lets give our distinguished panel a round
of applause.


Economists disagree for the following reasons:

Because they use different time periods.

Because they make different assumptions.
Because they have different theories about how the economy works.
Because they have different values and ideas about which economic goals are most

Analyze your assigned professors comments from Activity C2-1, using the
following format:
Name of professor: _______________________
What is the problem that the professor has identified in the economy? _______________
What is the professors major point or policy regarding this problem? _______________
What time period is being used in this analysis? _________________________________
What assumptions has the professor made in the analysis of the economy? ___________
What theory does he use to support his proposal? _______________________________
What values or goals does the professor support?
What evidence can you identify in the reading that illustrates these values?