Sunday, May 2, 2010

Unit 12 – Five Debates over Macroeconomic Policies

Many countries especially OCED countries use monetary and fiscal policies to stablise their own economies. Yes it can be argued that policymakers have often got is wrong the past and exacerbated the magnitude of economic fluctuations. And yes this will happen in the future again, however there have also been many times where policymakers have reduced the magnitude of fluctuations. When policymakers have managed to mitigate the effects of a recession, it is generally not recognized, for two reasons;

1. Often when there is a recession people will blame policy for not working even because they are in recession or economic downtown even though the downturn may not of been as bad as it could have been without any polices. I.e. people will always look at the negative of the situation rather than the positive and if people do recognize the country got out of the recession lightly they often do not give the credit to policymakers, rather find another reason. For example, the 2008 GFC it is more accepted amongst the public that Australia was not hit hard by the recession due to its large demand for mining from China, which could be true. However, the general public give little credit to the Rudd government for its fiscal stimulous package or the Reserve Bank of Australia (RBA) for its handling of monetary policy.

2. Due to the lag time in most polices, a lot of people in the public have difficulties linking polices with the effects of the polices. Therefore, people will not recognize the fiscal and monetary polices is working during downtimes as the polices may have been put in place 6 months or more before the downturn.

In New Zealand the Reserve Bank of New Zealand (RBNZ) has a certain policy that it must abide to (set by the New Zealand government), which is that it must keep inflation between 1% and 3%. Yes this limit abuses of power and political influence from the RBNZ via monetary policy. The government role in setting the RBNZ objective does give it more grounding in peoples believe that the RBNZ will try to keep inflation between that target.

Even though the RBNZ is effectively controlled by the government’s policy, the RBNZ does still allow some flexibility in their decision of money supply. The can change their monetary policy during or prior to any large external economic effect. Also they often do not change the official cash rate (OCR) in the lead up to an election (often the whole election year) to mitigate any theories of political influence RBNZ may have. However, this does cause some risks as RBNZ often changes the OCR level a significant portion before the election year, so they reduce the need to change the OCR during the election year. As mentioned above economic forecasting is highly imprecise so the RBNZ could change the OCR which may actually exacerbate the amount of inflation during the election year. Also the RBNZ may also not change the OCR to reduce the effect the have on the economy during an election year, when there is a need to alter the OCR. This means that there may be an negative effect later, sometime often after the election on the economy.

Should governments have a balance budget or not is often a question often debated in the economic world. Personally I think the answer to this question can often be answered with the following questions: “If the government is running a deficit for the year, why has it running this deficit, if the deficit is occurring because the government is investing in resources/infrastructure, will the benefit/cost ratio be an adequate figure to justify the risk of the borrowing?” For example, Sydney borrowed money off the British Government to build the Harbour Bridge. I am under the understanding that Sydney is still paying the government for this borrowings. Without looking at any figures, I would imagine Sydney has benefit from this bridge many times over for what it cost them in borrowing this money. I would imagine Sydney would of not developed as fast as it did or be as prosperous as it has become if the bridge was not constructed. The bridge I would imagine right from when it was constructed increase productivity of Sydney’s economy, by cutting down travelling time from North Sydney to the City. And in recent times I believe the bridge would have hold a major part of the responsibility of making Sydney a tourist hub of Australia, making the Australian economy billions of dollars. The bridge I would imagine increase the citizens incomes more substantially than the increase tax for the interest on the loan from the British Government. Therefore, it depends on what the government borrowing is for whether it is good for an economy or not. Also another thing a government should consider before borrow money is the size of their current deficit, to make sure they can pay back debt easily.

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