A Discussion Between Economists" Four distinguished professors of economics are discussing current economic policy at a luncheon press conference attended by leading reporters of business news. Dropping in on their conversations, we hear: Professor Cutter Tax: Let's separate issues. On the fiscal side, this administration's budget proposal is not extravagant or inflationary. The tax cuts are partly balanced by spending cuts. With so many people still unemployed and many factories still closed, a policy of this kind cannot rekindle inflation. The tax cuts will stimulate consumer spending, work effort, and business investment in an economy just emerging from a recession. We must let people keep the fruits of their labor and sustain as incentive to produce and invest more. The spending cuts will prevent government from continuing to receive an ever-increasing piece of the nation's economic pie. Professor Seamore Action: Excuse me, Dr. Tax, but that position makes little sense. First of all, let me say that this administration's tax cuts and spending 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. The present deficit- and the deficits projected for the future- are so large that they threaten our recovery from the recession. Here's why: All deficits must be paid for by government borrowing, and because the government is borrowing so much money, there is less available for consumers and businesses. With government borrowing now threatening to increase, interest rates will rise and this will reduce spending for houses and cars and, in fact, spending on anything bought with a loan, as well as business investment that must be financed by borrowing. In other words, some important private borrowing will be crowded out. Sometime next year, the recovery will therefore weaken, and we'll move back into recession. Taxes should be raised, especially on the wealthy, and at least some government programs that help low-income people should be restored to the original funding levels. Professor N. Creez Mon: Let me just comment, Seamore, on your point about federal spending and borrowing crowding out private consumer spending and business investment. This is where monetary policy comes in. The Federal Reserve must continue to allow relatively free expansion of money and credit. If the Fed makes more money available, there will be less pressure for interest rates to rise. We'll 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. Continuing our economic growth by sustaining this recovery is the most important task we have before us. Increasing taxes now would only reduce total spending and thus threaten the recovery. Professor Fred Critic: Excuse me, Dr. Mon, but you forget that the expansion of the money supply we are currently witnessing is part of a long history of bungling by the monetary policy makers. Our most recent recession was brought on by the Fed's jamming on the monetary brakes by an abrupt reduction in the increase in money supply in order to bring inflation under control. They overdid it, as they always do, and produced a recession. Now, they're overdoing it in the other direction: stepping on the monetary accelerator and increasing the monetary supply too rapidly. This will stimulate the economy all right, but in a year or two these actions will rekindle inflation. The Fed then will again jam on the monetary brakes and produce yet another recession. Everyone knows this. Interest rates right now are higher than they should be because everyone expects more inflation later. Only moderate growth in the money supply can bring interest rates down in the long run. The only way to get back on the long-term, stable economic growth path is to reduce money growth to a steady, predictable, noninflationary level. Announcer- Ladies and gentlemen, that's all the time we have. Let's give our distinguished panel a round of applause. Part A: 1) Please analyze each Professor's position to earn 1-point for each aspect so that the entire analysis will earn a total of 20 points: Professor Cutter Tax- Major Point: Time Period: Assumptions: Theoretical Support: Values: Professor Seamore Action- Major Point: Time Period: Assumptions: Theoretical Support: Values: Professor N. Creez Mon- Major Point: Time Period: Assumptions: Theoretical Support: Values: Professor Fred Critic- Major Point: Time Period: Assumptions: Theoretical Support: Values: Part B: The president has become discouraged with his current economic advisory team. He has searched the colleges and your name keeps coming up as one of the very best macroeconomic analysts in the country. After summoning you to the White House for a personal chat, you are convinced to take the offer and join the team. Your challenge is to design a three-point macroeconomic program to improve the economy of the United States within the next two years. It will include the monetary and fiscal policies you hope to implement. You will earn a total of 35 points in by following the following format: Paragraph 1 - General narrative (5 points) Summarize the problems being faced by our economy that your policies will address. o It is okay if the problems identified are hypothetical and do not currently exist in our actual economy. Paragraph 2 - 1st policy (9 points) Describe policy, identify as fiscal or monetary, explain why it was chosen (which problem it will help solve) and statistical results expected Paragraph 3 - 2nd policy (9 points) Describe policy, identify as fiscal or monetary, explain why it was chosen (which problem it will help solve) and statistical results expected Paragraph 4 - 3rd policy (9 points) Describe policy, identify as fiscal or monetary, explain why it was chosen (which problem it will help solve) and statistical results expected Paragraph 5 - Conclusion (3 points) Briefly summarize how your three-point plan will solve the problems mentioned in your opening paragraph