The effectiveness of fiscal policy is an issue that divides macroeconomists. “Tinkerers” believe that aggregate demand can be stimulated by federal deficit spending and cutting taxes. Larry Summers is a well respected economists that supports active fiscal policy to improve economic outcomes. In an interview with Charlie Rose, he describes the policies he believes that are or would be helpful in today’s economy. Please keep in mind that Summers was an important policy maker in both the Clinton and Obama administrations and that he has acquired a tendency to blame Republicans for bad outcomes rather than stick strictly to the economics of policy options. While the tendency is natural and appropriate for a policymaker, it is sometimes a distraction. Please ignore the politics and stick to the economics.
Another group of macroeconomists believe in “rules” and doubt the effectiveness of tinkering. These rules are largely attempt to build stability and predictability and abandon stimulus policies. John Taylor argues for rules and against discretionary fiscal and monetary policy in an EconTalk interview with Russ Roberts. Rather than increase deficit spending to stimulate aggregate demand, he argues that cutting deficits would create a more stable governmental fiscal environment allowing market participants to operate with less risk.
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